AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal
year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 333-8925
AMERICOMM DIRECT MARKETING, INC.
5775 PEACHTREE DUNWOODY ROAD
SUITE C-150
ATLANTA, GEORGIA 30342
(404) 256-1123
INCORPORATED IN DELAWARE IRS EMPLOYER
IDENTIFICATION NO. 23-2574778
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON: NONE
11 5/8% $100,000,000 SENIOR UNSECURED NOTES
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT : NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. X YES NO.
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. ( )
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS $46,178,412 BASED UPON THE PRICE AT WHICH THE OUTSTANDING COMMON
STOCK WAS ORIGINALLY ISSUED.
AS OF DECEMBER 31, 1997, THERE WERE 283,807 SHARES OF THE REGISTRANT'S COMMON
STOCK, PAR VALUE $0.01 PER SHARE OUTSTANDING.
<PAGE>
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933. DISCUSSIONS
CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN ITEMS 1, 3 AND 7
HEREOF, AS WELL AS WITHIN THIS REPORT GENERALLY. IN ADDITION, WHEN USED IN THIS
REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT
TO A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS IN THE FUTURE COULD
DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF FLUCTUATIONS IN THE COST OF PAPER AND OTHER RAW MATERIALS USED BY THE
COMPANY, CHANGES IN THE ADVERTISING AND PRINTING MARKETS, THE FINANCIAL
CONDITION OF THE COMPANY'S CUSTOMERS, THE CONDITION OF THE UNITED STATES ECONOMY
AND OTHER MATTERS SET FORTH IN THE REPORT. THE COMPANY DOES NOT UNDERTAKE ANY
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT ANY FUTURE EVENTS OR
CIRCUMSTANCES.
GENERAL
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this Form
10-K. Unless otherwise stated in this document, references to (a) "the Company"
shall mean AmeriComm Direct Marketing, Inc., a Delaware corporation, (b)
"Transkrit" shall mean the former Transkrit Corporation, and its subsidiaries
which were acquired on June 28, 1996, (c) "LAI" shall mean the former Label
America, Inc., which was acquired on February 21, 1997,(d) "ADMI" shall mean the
former AmeriComm Direct Marketing, Inc., which was acquired on April 24, 1997.
The Company believes it provides a comprehensive offering of products and
services that encompass each stage of the direct mail marketing process,
including the identification of target audiences, information processing and
database management, printing, production and lettershop services and
fulfillment and response analysis. In addition, the Company produces a broad
range of products which are customized to target direct mail customers,
including custom pressure sensitive labels, custom envelopes and impact and
non-impact mailers. The Company's products are grouped into four principal
business areas that accounted for the following percentages of 1997 net sales:
direct mail products and services (21%), impact and non-impact mailers (26%),
custom pressure sensitive labels (27%) and custom envelopes (26%).
HISTORY
AmeriComm Direct Marketing, Inc. (the Company) was formed in 1989 as
National Fiberstok Acquisition Co. ("NFAC") by McCown De Leeuw, a private
investment firm specializing in buying and building middle market businesses. On
September 18, 1989, NFAC purchased the assets and assumed the liabilities of
National Fiberstok Corporation ("NFC"), a manufacturer of custom file folders.
NFAC was organized solely for the purpose of acquiring the net assets of NFC.
Subsequent to the acquisition, NFAC changed its name to NFC. Since its
inception, the Company has pursued an acquisition strategy aimed at creating a
leading manufacturer of custom paper-based communication products targeting the
direct mail and transaction processing industries. In 1992, the Company acquired
Diversified Assembly, Inc., a manufacturer of expanding envelopes, pockets,
wallets and other products for the professional office, and also acquired Double
Envelope Corporation, a manufacturer and distributor of custom envelopes,
catalog bind-in order forms and pressure sensitive labels. The Company,
simultaneous with the acquisition of Double Envelope Corporation, became the
sole subsidiary of DEC International, Inc., the former name of its holding
company. In 1996, the Company purchased Transkrit Corporation and its subsidiary
Label Art. Transkrit, founded in 1938, is a manufacturer and distributor of
direct marketing products, mailer forms and systems, as well as custom pressure
sensitive labels. In 1997, the Company expanded its pressure sensitive label
product line and geographic coverage with the purchase of Label America, Inc., a
producer of custom thermal and laser labels. Later in 1997, the Company acquired
AmeriComm Direct Marketing, Inc., a direct mail marketing products and service
provider with national coverage.
The Company has four principal product lines: direct mail products and
services, mailers, custom pressure sensitive labels and custom envelopes. The
following table summarizes the company's historical net sales by product line
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
1995 1996 1997
<S> <C> <C> <C>
Direct Mail Products and Services $13,087 $16,829 $39,172
Mailers - 23,396 50,139
Custom Pressure Sensitive Labels 3,643 21,276 51,049
Custom Envelopes 54,527 49,841 50,731
================ ================= =================
$71,257 $111,342 $191,091
================ ================= =================
</TABLE>
MARKET BACKGROUND
MARKET DATA USED THROUGHOUT THIS REPORT WAS OBTAINED FROM INDUSTRY
PUBLICATIONS AND INTERNAL COMPANY ESTIMATES. WHILE THE COMPANY BELIEVES SUCH
INFORMATION IS RELIABLE, THE ACCURACY OF SUCH INFORMATION HAS NOT BEEN
INDEPENDENTLY VERIFIED AND CANNOT BE GUARANTEED.
DIRECT MAIL INDUSTRY
Direct marketing has become an increasingly important marketing,
advertising and sales promotion medium and an integral component of many
companies' overall marketing programs. Direct marketing programs are delivered
to a targeted audience through a variety of channels, including direct mail,
telemarketing, print, radio and television. As consumer data and marketing
analyses have become more sophisticated, advertisers have been able to precisely
target specific audiences using database marketing techniques. As a result,
advertisers have used a greater number of more customized, feature-oriented
marketing campaigns. Manufacturers and fulfillment providers, such as the
Company, have capitalized on this industry trend as marketers have demanded more
specialized products and have outsourced the execution of these campaigns.
Direct mail is the second largest direct marketing segment (after
telemarketing) with 1996 revenues of approximately $36.5 billion, representing
approximately 24% of total industry expenditures. Over the past five years,
direct mail expenditures have grown at a compound annual rate of approximately
6%.
The Company competes in the highly fragmented direct mail segment, where
the majority of industry participants are small, specialized firms formed to
capitalize on the industry's growth. Most competitors offer customers a range of
services including strategic and creative design, information and data base
management and tracking and fulfillment production. Large corporations often
undertake direct mail campaigns internally and represent the other component of
the direct mail segment.
The Company offers a selection of products, including catalog bind-in order
forms, advertising inserts and self mailers, which are sold exclusively to the
direct mail segment of the direct marketing industry. The Company also provides
direct mail services, which include personalization, addressing and mailing. To
complement these direct marketing products and services, mailers, envelopes and
labels produced by the Company are customized and sold for use in direct
marketing applications.
MAILER INDUSTRY
The Company competes in the U.S. mailer market, which includes both impact
mailers and non-impact mailer systems ("laser forms"). Mailers are used by a
wide variety of businesses and organizations as a substitute for the most
commonly used mailing method, a printed flatsheet which is folded and inserted
into an envelope. Because of their convenience and cost advantages, mailers are
widely used for the preparation and mailing of invoices, payroll checks, account
and direct deposit statements, W-2 forms and university grade reports.
Management believes that mailers are also popular with direct marketers due to
the cost effectiveness of this form of solicitation.
The introduction of laser and other non-impact printer compatible mailers,
which have numerous advantages relative to traditional spot carbon impact
mailers, has expanded the range of potential applications for customers who are
willing to substitute mailers for traditional fold and insert methods.
Management believes that the growth of the overall mailer market has been
relatively flat over the past five years as a decline in impact mailer sales
during that period has been largely offset by rapid growth in sales of
non-impact mailers.
Impact mailers are an integrated mailing package with addresses and other
data printed inside the package using built-in carbonized paper and an impact
printer. With management estimated annual revenues of $160 million, this market
has a core group of customers who use impact mailers for the preparation and
mailing of payroll checks, vendor payments, direct deposit statements,
collection notices, medical and utility bills and tax notices. Since the early
1990's, the impact mailer market has decreased in size due to the rapid growth
of laser, inkjet and other non-impact printers which are not compatible with
impact mailers. This contraction in the impact mailer market has resulted in
industry consolidation. Management believes that the decline in this market will
continue, and that the exit of certain manufacturers provides further
consolidation opportunities for focused competitors such as the Company.
Responding to the changes in office printing technology, a small number of
manufacturers, including the Company, have developed mailers which are
compatible with laser and other non-impact printer systems. Unlike impact
mailers, non-impact mailers are typically sold as an integrated system that
combine mailer forms and dedicated and patented folding and sealing equipment.
The non-impact mailer offers the cost advantages and convenience of a mailer
form and the versatility and image quality of a laser printed product.
Non-impact mailers have experienced rapid acceptance for the preparation and
mailing of payroll checks, vendor payments, direct deposit statements and
university grade reports. Management believes that non-impact mailer technology
provides an attractive alternative to traditional mailing methods.
PRESSURE SENSITIVE LABEL INDUSTRY
Management estimates that the total U.S. label market (excluding
non-customized labels sold primarily in office supply stores) had 1996 revenues
of approximately $8.2 billion. The pressure sensitive label segment had
estimated 1996 revenues of $3.7 billion, representing approximately 45% of the
overall U.S. label market. The Company competes in this segment and according to
an October 1996 survey contained on Business Forms, Labels and Systems, the
Company is the largest manufacturer selling custom pressure sensitive labels to
independent distributors. The other major segment, glue-applied labels, had
estimated 1996 revenues of $4.1 billion, representing approximately 50% of the
overall market. Management estimates that the more mature glue applied label
segment is growing at approximately 2% annually, while the pressure sensitive
label market is growing at approximately 7% annually. The rapid growth in this
market is believed to be attributable to several advantages pressure sensitive
labels have over traditional glue-applied labels, such as reduced wrinkling and
superior adhesion and durability.
A number of other factors are believed to have contributed to the rapid
growth of pressure sensitive labels including: (i) new government regulations
requiring an increase in the amount of information displayed on consumer and
industrial products, including food, bulk chemicals, household appliances and
automobiles; (ii) increased use of bar-coding to track retail sales of consumer
products and business inventories in a wide variety of manufacturing industries;
(iii) continued demand from businesses of all types for targeted promotional
material; and (iv) continued need for manufacturers to reduce potential product
liabilities by providing consumers with more information on the proper usage of
products. Pressure sensitive labels are used by virtually all industries,
including airlines (baggage tags), automotive (warning labels), consumer
durables (operating instructions and warnings), food and beverage (product
labeling), health and beauty (product labeling), household chemicals (product
labeling and warnings), industrial chemicals (hazard warnings), pharmaceutical
(dosage information), retail (price and inventory data) and transportation and
distribution (logistics).
The pressure sensitive label industry is served by approximately 2,000
manufacturers, most of whom operate one production facility and maintain close
relationships with local and regional customers. The fact that many pressure
sensitive label customers are accustomed to conducting business with local
manufacturers has contributed to the fragmentation of the industry. Due to
significant economies of scale achieved through consolidation, however, national
manufacturers have acquired small regional firms and integrated them into
national networks.
CUSTOM ENVELOPE INDUSTRY
In 1996, the custom envelope market accounted for 59%, or $1.9 billion, of
the overall $3.2 billion U.S. envelope market. Custom envelopes are
distinguished from commodity envelopes by design, printing and other finishing
features which are tailored to specific customer needs. Custom envelope features
include special shapes, labels, multiple windows and flap lengths, often
designed for comparability with specific direct-mail insertion equipment, and a
large variety of paper and printing options designed to meet specific customer
needs. Major customers in the custom envelope segment include direct mail firms,
financial institutions, publishers, utilities and businesses using the mail for
billing and advertising purposes. Due to the specific value-added features of
custom envelopes, including complex graphics and envelope enhancements, products
generally have a higher average selling price, higher gross margins and are sold
to customers under one to three year fixed term contracts.
Manufacturers of custom and specialty envelopes are generally separated
into two groups. The first group is composed of a small number of large
multi-plant companies with sales in excess of $50 million who produce both
commodity and custom envelopes for the national market or large regional
markets. The rest of the market consists of smaller one-plant manufacturers with
sales ranging from $5 million to $25 million and which produce custom envelopes
for local and regional customers.
PRODUCTS AND SERVICES
DIRECT MAIL PRODUCTS AND SERVICES.
The Company provides customers with direct mail products and services
including mail list preparation, name selection, marketing data base warehousing
and maintenance, demographic modeling and mining of marketing databases, art and
copy preparation, prepress services, printing, printed personalization,
addressing, stuffing, labeling and mail sorting, bundling and logistic services.
The Company also offers a selection of products sold exclusively to the direct
mail industry, which include catalog bind-in order forms, advertising inserts
and self mailers. The Company's mailers, envelopes and labels are also
extensively customized and sold for use in direct mail applications.
The primary end use markets for the Company's direct mail products and
services are retail, catalog merchandisers, financial services and publishing.
The Company's direct mail customers include Macy's, Harris Publishing, Cox
Communications, Bear Creek Direct (Harry & David), Frederick's of Hollywood,
Inc., the American Red Cross and American Bankers Insurance Group. The Company
believes that its array of products and services to the direct mail industry is
extensive.
MAILER PRODUCTS.
The Company believes that it is a leading U.S. manufacturer of spot carbon
impact mailers and believes it has the largest installed base of laser and other
non-impact printer compatible mailer systems with approximately 1,800 units.
Impact mailers are ready-to-mail, multi-part forms, which are widely used to
print correspondence such as account statements, invoices, tax notices, utility
bills and medical bills without opening or sealing the envelope. Non-impact
mailers are laser printer compatible self-mailer forms which are printed,
folded, sealed and mailed as payroll checks, direct deposit statements and
vendor remittances. Sales of the Company's non-impact mailers are experiencing
rapid growth due to the proliferation of laser and inkjet printers and the cost
effectiveness of mailers versus traditional fold and insert mailing methods.
Since 1968, when the Company began manufacturing impact mailers, the
Company has been a leader in the development of mailer technology and, at
December 31, 1997, held patents valued at approximately $16.3 million. In 1987,
the Company introduced the patented InfoSeal(R) self-mailer system, which led
the industry in the development of laser printer compatible mailers. InfoSeal(R)
is an integrated, turn-key mailer system utilizing a patented form which is
printed and then processed by dedicated equipment that moistens an adhesive and
folds the form into a one-piece mailer. The Company believes that the
InfoSeal(R) system has the largest installed base of dedicated self-mailer
office equipment with over 1,800 units installed. Competitive mailer systems are
available in the market which utilize more expensive pressure seal or more
maintenance intensive glue vat systems. The Company's ability to produce mailers
in all popular sizes and with a wide variety of custom features enables it to
offer a broad line of high quality stock and custom mailers.
CUSTOM PRESSURE SENSITIVE LABELS.
According to an October 1996 survey contained in Business Forms, Labels and
Systems (the "1996 Survey"), the Company is the largest U.S. manufacturer of
custom pressure sensitive labels sold through independent distributors, as
measured by revenues. In this segment, the Company competes with other larger
national manufacturers who are dominant in other channels, particularly in the
direct sales distribution channel. The Tag and Label Manufacturers Institute
estimates that the pressure sensitive label market is growing at a compound
annual rate of approximately 7%, and the Company's custom pressure sensitive
label products, including the acquisition of LAI, achieved compound annual net
sales growth of 9%, over the past five years.
The Company believes it differentiates itself from its competitors by
offering a variety of customized value-added label products aimed at short and
medium-run customers. Operating out of four strategically located manufacturing
facilities, the Company offers a variety of value-added products aimed at short
and medium-run customer orders. Management believes that the Company is
recognized in the industry for its high quality products, excellent customer
service and an ability to respond quickly to time-sensitive customer orders. The
Company introduced Label Launch(TM) service in 1996, an online software
application which enables pressure sensitive label customers to electronically
process orders and transfer artwork directly to the Company's facilities,
thereby reducing pre-press set up time, order entry and shipping costs. The
Company also provides national 24-hour order processing for short production
runs requiring rapid turnaround.
The Company's custom pressure sensitive label products are used by a wide
range of businesses and institutions in numerous end-use applications, including
mailing labels, promotional literature, inventory routing, packaging and retail
pricing. The Company's largest end-user markets are the retail, food and
beverage, health and beauty, toy manufacturing and chemical industries. The
Company's customers include distributors such as Bank-N-Business Forms, Taylor
Business Products and Standard Forms, Inc. Direct customers include the
Paralyzed Veterans of America, Boston Scientific Corporation, Sterilite, Inc.
and USA Today. No single customer represented greater than 10% of the Company's
1997 custom pressure sensitive label net sales.
CUSTOM ENVELOPES.
According to the Envelope Manufacturers Association (the "EMA"), the
Company is the second largest U.S. supplier of custom envelopes in the growing
Southeastern regional market (which currently represents approximately 13% of
the overall custom envelope market) as measured by revenues. The Company has
focused on the high value-added specialty segments of the envelope market,
placing particular emphasis on the direct mail and photo-finishing industries,
where management believes the Company has established a leadership position.
Almost all of the Company's envelope products are specially printed or
manufactured to end-user specifications and have higher margins than plain
commodity envelopes. The Company also produces custom expanding envelopes,
pockets, wallets and other products for the professional office. These products
are hand assembled, medium to large sized folders used to file legal documents
or store and carry artwork.
From its four production facilities, the Company manufactures in excess of
2.5 billion envelopes per year. Net sales of the Company's custom envelopes have
increased at a compound annual growth rate of approximately 2% over the past
five years. The Company competes in this market with many small regional
suppliers and several larger national manufacturers.
SALES, DISTRIBUTION AND MARKETING
DIRECT MAIL PRODUCTS AND SERVICES
The Company sells its direct mail products and services primarily through a
direct sales force consisting of 30 sales representatives and eight sales
managers, which are allocated amongst three operating divisions. In addition to
these divisional resources, the Company has recently initiated the creation of a
national sales force which will be responsible for selling multi-component
direct mail packages from across the Company's four business units to national
accounts. As of December 31, 1997, this national sales force included a Vice
President of Sales and Marketing and one national account representative. The
Company expects to add between two and four additional account representatives
in the next twelve months.
In addition to these direct selling resources, the Company operates a
centralized customer service hub in Roanoke, Virginia for direct mail sales
quotation and order processing. This customer service hub is comprised of two
managers and thirteen customer service representatives.
The Company had in excess of 1,400 active direct mail customers as of
December 31, 1997.
MAILER PRODUCTS
The Company markets mailers to approximately 5,000 independent distributors
across the U.S. through seven regional sales managers. Distributors, in turn,
sell these products to the end user. In 1997 independent distributors accounted
for approximately 90% of the Company's mailer product net sales with the balance
sold directly to major direct manufacturers and end-use customers. In addition
to the independent distributor network, the Company benefits from the marketing
efforts of its corporate partners--the Xerox Corporation, Wallace Computer
Services, Inc. and Tab Products Co. The Xerox Corporation's Supplies Group has
selected the Company's InfoSeal(R) system as the only non-impact mailer system
to be marketed by its sales force. Likewise, Wallace Computer Services Inc.
introduced the product as their exclusive one-piece laser compatible mailer
system. InfoSeal(R) equipment for high and medium volume users is marketed by
Tab Products Co. which manufactures the machines.
CUSTOM PRESSURE SENSITIVE LABELS
The Company markets its custom pressure sensitive labels to both
independent distributors and directly to end-users. Over the past 24 months the
Company has conducted business with approximately 26,000 independent
distributors, such as business forms companies, printing brokers, printers and
quick printers. Sales to independent distributors collectively accounted for 54%
of 1997 net sales with the top 20 distributor accounts accounting for 9% of 1997
custom pressure sensitive label net sales. Direct sales customers constitute the
remaining 46%.
CUSTOM ENVELOPES
Due to the exacting specifications and high volume requirements of the
custom envelope customer, the Company sells these products directly to
end-users. The Company maintains a 28 person sales force which primarily covers
the Southeastern U.S. and averages 12 years of industry experience. These sales
people receive commissions determined by the relationship between selling price
and estimated full production cost. The Company maintains a diverse customer
base with the top 20 envelope accounts providing 48% of total 1997 envelope net
sales. Expanding envelopes, pockets and wallets are sold primarily through
independent distributors due to the smaller order size, which is typical of
sales of these products.
MANUFACTURING
DIRECT MAIL PRODUCTS AND SERVICES
Direct mail products and services are supplied from seven facilities
located strategically near major originators of direct mail campaigns. Three of
these facilities, in Kentucky, Colorado and Virginia, are full-service plants
with database, lettershop, mailing and fulfillment capabilities. A fourth
facility in New Jersey, houses a large data management and analysis center as
well as senior sales executives responsible for key New York City accounts. The
other three plants are all located in Roanoke and Salem, Virginia, and produce
custom and specialized direct mail pieces in a variety of formats.
Equipment utilized by this business unit includes mainframe computers and
client/server networks for database management and analysis, hot and cold
sheet-fed and continuous laser printers for variable imaging of letters, letter
mail package inserts and personalized labels, Electron Beam Imaging for collated
mailer products, impact printers for collated mail personalization, sheet and
web offset high-color printing presses, collators and off-line finishing
equipment capable of producing value-added features, ink-jet printers for
address personalization of letters and other mail pieces, applicators for
addressed and pre-sorted labels, and multistation inserters for letter mail
packages.
CUSTOM PRESSURE SENSITIVE LABELS
Pressure sensitive labels are produced in four facilities located in Fort
Smith, Arkansas, San Carlos, California, Wilton, New Hampshire and Tucker,
Georgia, which are strategically positioned throughout the U.S. These plants
incorporate 29 traditional high speed flexographic presses ranging in web width
from 6.5" to 18", which produce a full complement of label graphics, including
process printing and foil stamping. All but one of these plants is equipped to
meet quick response label orders and utilize 10 highly customized letter presses
designed to cost effectively produce labels in small order quantities with fewer
colors. The Company believes its manufacturing expertise and high quality
standards allow it to serve highly prestigious customers with rigorous quality
specifications and manufacturing tolerance.
MAILER PRODUCTS
Mailers are produced in three facilities located in Roanoke, Virginia, Fort
Smith, Arkansas and Sparks, Nevada, thereby allowing cost-effective national
distribution. In total, these facilities utilize 20 web offset presses ranging
in width from 20.5" to 30.5" to create rolls of printed materials. This printed
material is then further converted on 18 highspeed collators into multiple ply
mailer sets. Additional major pieces of equipment in these plants include three
MICR encoders, two integrated self label converting lines and five InfoSeal(R)
converting lines, one of which is a fully integrated printing and converting
line.
CUSTOM ENVELOPES
Custom envelopes are produced in three plants located throughout the
Company's core Southeastern U.S. regional market in Gainesville, Florida,
Louisville, Kentucky, and Roanoke, Virginia. Production equipment at the three
envelope plants includes eight high-speed web folding machines with in-line
flexographic printing capacity which can produce finished, customized envelopes
in one pass. In addition, these plants house 43 folding machines which convert
die-cut blanks into finished envelopes. Other equipment includes computer
controlled high-speed die-cutters and a variety of off-line printing equipment,
including pressure sensitive label applicators.
Custom expanding envelopes, pockets, wallets and other products fir the
professional office are produced at the Diversified Assembly facility in
Austell, Georgia, which incorporates a wide array of specialized die-cutters and
assembly equipment. At the end of 1996, the Company entered into an outsourcing
manufacturing arrangement with one of the largest envelope producers in Mexico.
The Company provides the technology and ships material to the partner in Mexico,
which manufactures over one million expanding envelopes for the Company for sale
in the U.S. market.
All of the Company's direct mail, mailer and pressure sensitive label
facilities are supported by state of the art, electronic pre-press capabilities.
These services are also available to the Company's custom envelope plants via
electronic file transfer on the Company's frame relay based intranet. The
Company's pre-press design capability is composed of Apple MacIntosh and Mecca
hardware architecture.
SUPPLIERS
The Company has a broad base of high quality, national suppliers. The
primary raw materials used by the Company are uncoated and coated papers,
plastic films, inks and adhesives.
Paper is the Company's single largest raw material, representing
approximately one half of the Company's costs of products sold in 1997. Union
Camp Corp., International Paper Co., Georgia-Pacific Corp., Kimberly-Clark Corp.
and Appleton Paper are the largest paper suppliers for the Company's
transactional mailers, direct mail products and custom envelopes. In 1997, the
Company purchased paper from more than eleven major suppliers and several major
paper merchants. The Company's custom pressure sensitive label business
purchases paper and other key substrates from Fasson and Flexcon Inc.
Paper has a historical pattern of cyclical price change based upon industry
capacity versus market demand. Supply has historically been available; however,
during periods of increased economic activity and resultant low inventory
levels, paper companies tend to place customers on allocation, which limits the
short term supply available. Prices during these periods tend to increase. The
Company maintains multiple sources of supply in all grades of paper which limits
the risk of paper shortage due to isolated paper plant shut-downs and which
provides alternate sources during allocation periods. Because the Company's
customer quotations are honored for a period of 30 days from quotation, the
Company historically has been able to pass paper price increases to its
customers. In addition, the Company's sales contracts generally contain
provisions permitting escalation of prices based upon increases in the
underlying paper cost.
COMPETITION
The markets for the Company's products are highly fragmented and
competitive. Competition is based upon product breadth, geographic reach,
delivery time, product quality and customer service. Customer relationships in
the markets in which the Company competes tend to be long-term, and service and
familiarity with a customer's needs, as well as personal factors, are important
in building and maintaining such relationships. Competitors range from large
manufacturers to regional and local firms.
DIRECT MAIL PRODUCTS AND SERVICES
Direct mail products and services are sold primarily directly to end-users.
Competitors range from smaller, single-plant operations that provide individual
products or services (such as data processing, printing, binding or lettershop
capabilities), to larger companies which offer greater breadth. Included in this
latter group are MetroMail, Harte Hanks, Webcraft Technologies (Big Flower
Press), Communicolor (the Standard Register Company) and ColorForms (Wallace
Computer Services, Inc.). While these larger competitors offer several direct
mail products and services, each typically competes with the Company on only a
segment of the Company's extensive product line. Furthermore, management
believes that many of the Company's larger competitors are organized to process
larger volumes and are, therefore, less competitive in the medium-size runs
which are the focus of the Company's strategy.
MAILER PRODUCT
Impact mailers are sold through two principal distribution channels, direct
to customers and to independent distributors. The Company's primary competitors
in the distributor channel include Poser Business Forms (Mail Well, Inc.),
Goodwin Graphics and Perry Printing Company. The direct channel is dominated by
large manufacturers, which include Wallace Computer Services, Inc., Moore
Corporation Limited, Uarco Business Forms and the Standard Register Company.
These manufacturers generally maintain long term relationships and tend to offer
a full range of business form products, with mailers generally representing a
small percentage of total sales to customers.
The non-impact mailer market is comprised of three primary competitors: the
Company, Moore Corporation Limited and the Standard Register Company. These
three competitors offer self-mailer systems, that consist of one piece forms and
dedicated folder/sealer equipment All three companies target medium and
high-volume customers.
Management believes that the Company, through its patented InfoSeal(R)
system, has the largest number of non-impact self-mailer installations with over
1,800. The Company has recently developed a patented low cost desktop
folder/sealer machine to specifically address the low volume small business
segment. Management believes that it is the first manufacturer to develop a
self-mailer system targeting small businesses and satellite offices of large
companies.
CUSTOM PRESSURE SENSITIVE LABELS
Competitors in the custom label market sell their products either directly
to end-use customers or to independent distributors. These companies primarily
produce stock labels but also compete in the market for custom labels. The
Company is recognized as the market leader in the independent distribution
channel. Major competitors in this highly fragmented channel include Discount
Labels, Inc. (American Business Products), Data Labels, Inc., Continental
Datalabel, Inc., Rittenhouse, Inc. and Lancer Labels, Inc. Competitors in this
channel are typically small regional, privately-owned operators with a single
production facility. Those competitors that sell directly to end-users include
the Standard Register Company, Moore Corporation Limited, Uarco Business Forms
and Wallace Computer Services, Inc.
CUSTOM ENVELOPES
Due to the high bulk and weight characteristics of envelopes,
transportation and freight costs are generally an important component of the
total cost of envelope production. With transportation costs typically
accounting for 3% of total envelope production costs, long distance trade is
often limited to high value-added products. As a result, envelope manufacturers
generally focus production facilities on immediate regional markets. According
to the EMA, the Company had approximately 13% market share of the custom
envelope market in the Southeastern U.S during 1997. The Company's major
competitors in this region are Atlantic Envelope Co. (National Service
Industries, Inc.), Tri State Envelope Corp., Oles Envelope Corp. and, to a
lesser extent, Mail-Well, Inc. and Westvaco Corp. Like the Company, most of
these competitors maintain an in-house sales force.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,834 people,
of which 1,309 work in manufacturing facilities, 310 work in sales/service
functions, 208 work in administration and 7 work in corporate functions. None of
the Company's employees are unionized, and the Company believes relations with
employees are good.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Like similar companies, the Company's operations and properties are subject
to a wide variety of federal, state and local laws and regulations. These laws
and regulations govern the use, storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials, substances and
wastes, the remediation of contaminated soil and groundwater, and the health and
safety of employees. As such, the nature of the Company's operations exposes it
to the risk of claims with respect to environmental protection and health and
safety matters and there can be no assurance that material costs or liabilities
will not be incurred in connection with such claims.
In January 1988, the Company was notified by the United States
Environmental Protection Agency ("EPA") that it and 11 other parties are
potentially liable for costs incurred by the EPA in responding to the cleanup of
the Dixie Caverns Landfill Superfund Site in Roanoke County, Virginia.
Subsequently, Roanoke County expended $2.0 million to clean up a portion of the
Dixie Cavern Landfill Site and has filed suit against the Company and the 11
other potentially responsible parties ("PRPs") for reimbursement of these
cleanup costs. Although, under Superfund, the PRPs may be jointly and severally
liable for cleanup costs, management believes that the Company's potential
liability in connection with the County's claim is de minimis, based upon the
amount of waste attributable to it in relation to the other parties. Management
believes that the Company will have no liability in connection with the
remaining portion of the site, and that the ultimate outcome of this matter will
not have a material adverse impact on the financial position or results of
operations of the Company.
ITEM 2. PROPERTIES
As of December 31, 1997 the Company operated manufacturing, warehouse and
distribution facilities in the US with a total floor area of approximately
998,000 square feet. Of this footage, approximately 492,000 square feet are
leased and approximately 506,000 square feet are owned.
The following table describes the manufacturing, warehouse and
distribution facilities of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF BUSINESS OWNED/ EXPIRATION SQUARE FEET / $SF
LOCATION EMPLOYEES UNIT1 LEASED2 OF LEASE (IN THOUSANDS)
- - - ------------------------ --------------------- -------------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
ARKANSAS
Fort Smith 220 M, D O 125 /Owned
Fort Smith 15 L L 12/31/1999 20 / $1.68 S.F.
CALIFORNIA
San Carlos 62 L L 8/11/98 24 / $6.00 S.F.
COLORADO
Denver 55 D L 4/30/2000 40 / $3.20 S.F.
FLORIDA
Gainesville 108 E O 52 / Owned
GEORGIA
Atlanta 14 A L 8/31/2000 6 / $17.17 S.F.
Austell 90 E L 9/1/2001 39 / $3.22 S.F.
Tucker 108 L L 10/31/2003 48 / $4.29 S.F.
KENTUCKY
Louisville 85 E L 3/31/2000 70 / $1.77 S.F.
Louisville 125 D L 3/31/1999 98 / $2.12 S.F.
NEVADA
Sparks 32 M L 11/30/1998 42 / $3.76 S.F.
NEW HAMPSHIRE
Wilton 225 L O 79 / Owned
Amherst 15 L O 2 / Owned
NEW JERSEY
Mountainside 30 D L 9/14/1999 11 / $11.97 S.F.
PENNSYLVANIA
Norristown 7 E L 4/30/2001 15 / $7.16 S.F.
VIRGINIA
Norfolk 162 D L 11/30/2000 52 / $3.35 S.F.
Roanoke 243 E, D O 137 / Owned
Roanoke 231 M, D O 111 / Owned
Salem 7 D, L L 1/31/1998 27 / $3.25 S.F.
</TABLE>
- - - -------------------------------------
1. D=Direct Mail; E=Envelopes; L=Labels; M=Mailers; A=Administrative
2. O=Owned L=Leased
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OR SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
None.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
selected financial data as of and for each of the five fiscal years in the
period ended December 31, 1997 were derived from the audited financial
statements of the Company (in thousands except share data):
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................ $ 64,545 $ 65,998 $ 71,257 $ 111,342 $ 191,091
Gross profit......................... 13,161 13,388 15,549 31,127 57,492
Selling, general and administrative.. 12,930 12,428 13,410 25,200 44,490
Operating income (loss).............. (2,020) 960 2,139 5,927 13,002
Interest expense, net................ 2,873 2,975 3,179 8,126 13,765
Loss before income taxes............. (4,893) (2,015) (1,040) (2,199) (762)
Income (loss) before
extraordinary item................. (3,550) (2,015) 860 (1,572) (1,350)
Extraordinary item................... - - - (798) -
Net income (loss).................... (3,550) (2,015) 860 (2,370) (1,350)
Average shares outstanding........... 284 284 284 284 284
Per share of common stock:
Net income (loss) before
extraordinary item............. $ (12.50) $ (7.10) $ 3.03 $ (5.54) $ (4.75)
Extraordinary item............... - - - (2.81) -
Net income (loss)................ (12.50) (7.10) 3.03 (8.35) (4.75)
Dividends declared................... - - - - -
OTHER DATA:
EBITDA (a)........................... $ 3,610 $ 4,308 $ 5,159 $ 12,495 $ 25,456
Depreciation and amortization........ 6,345 6,776 6,024 7,409 13,050
Capital expenditures................. 1,179 940 2,308 3,490 4,563
Ratio of Earnings to Fixed
Charges (b)........................ - - - - -
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 7,190 $ 7,202 $ 7,182 $ 18,840 $ 26,620
Net property, plant and equipment.... 11,285 9,881 10,302 47,367 51,194
Total assets......................... 39,607 37,837 38,116 133,374 177,685
Long-term debt, net of...............
current portion.................... 22,541 21,776 21,412 102,353 115,245
Common stockholder's equity.......... 7,883 5,867 6,727 12,122 34,651
<FN>
(a) EBITDA is defined as operating income plus depreciation, amortization,
non-cash charges related to the defined benefits plans and reduced by gains on
disposal of equipment and the non-cash gain due to change in vacation policy.
(b) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and amortization of deferred financing costs and discounts) to income
or loss before provision for income taxes and dividing that sum by the sum of
fixed charges. Earnings were insufficient to cover fixed charges by $4,893,
$2,015, $1,040, $2,199 and $762 for the years ended December 31, 1993, 1994,
1995, 1996 and 1997, respectively.
</FN>
</TABLE>
On June 28, 1996, the Company acquired all of the issued and outstanding
capital stock of Transkrit Corporation for $86.5 million plus transaction costs.
Subsequent to the acquisition, Transkrit and all of its subsidiaries were merged
into the Company. The results of operations of Transkrit have been included in
the results of operations of the Company since June 29, 1996.
On February 21, 1997, the Company acquired all of the issued and
outstanding capital stock of LAI for $8.5 million, less outstanding indebtedness
and certain capitalization lease obligations, plus transaction costs. Subsequent
to the acquisition, LAI was merged into the Company. The results of operations
of LAI have been included in the results of operations of the Company since
February 22, 1997.
On April 24, 1997, the Company acquired all of the issued and outstanding
stock ADMI for $23.6 million plus transaction costs. Subsequent to the
acquisition, ADMI was merged into the Company. The results of ADMI have been
included in the results of operations of the Company since April 24, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On June 28, 1996, the Company acquired all of the issued and outstanding
capital stock of Transkrit Corporation for $86.5 million plus transaction costs.
Subsequent to the acquisition, Transkrit and all of its subsidiaries were merged
into the Company. On February 21, 1997, the Company acquired all of the issued
and outstanding capital stock of LAI for $8.5 million less outstanding
indebtedness and certain capitalized lease obligations plus transaction costs.
Subsequent to the acquisition, LAI was merged into the Company. On April 24,
1997, the Company acquired all of the issued and outstanding capital stock of
ADMI for $24.6 million plus transaction costs. Subsequent to the acquisition,
ADMI was merged into the Company.
The discussion below relates to the financial condition and results of
operations of the Company, which includes the results of operations of Transkrit
from June 29, 1996, LAI from February 21, 1997 and ADMI from April 24, 1997.
The Company has four principal product lines: direct mail products and
services, mailer systems, custom pressure sensitive labels and custom envelopes.
The following table summarizes the Company's historical net sales by product
line (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
1995 1996 1997
<S> <C> <C> <C>
Direct Mail Products and Services................. $13,087 $16,829 $39,172
Mailer Systems.................................... - 23,396 50,139
Custom Pressure Sensitive Labels.................. 3,643 21,276 51,049
Custom Envelopes.................................. 54,527 49,841 50,731
---------------- ----------------- -----------------
$71,257 $111,342 $191,091
================ ================= =================
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales for the year ended December 31, 1997 increased $79.8 million to
$191.1 million, or 71.6%, from the comparable 1996 period. The overall increase
in net sales was due to the acquisitions of Transkrit, LAI and ADMI. Net sales
for mailer systems products increased 114.7% or $26.8 million from 1996 to 1997
due to the Transkrit acquisition. Net sales for direct mail products and
services increased 133.0% or $22.4 million due to the acquisition of ADMI. Net
sales for customer pressure sensitive labels increased 141.7% or $30.4 million
due to the acquisitions of LAI and Transkrit. Net sales for custom envelopes
increased 2.7%, or $1.3 million from 1996 to 1997.
Gross profit for the year ended December 31, 1997 increased $26.4 to $57.5
million, or 84.9%, from the comparable 1996 period. In addition, gross profit as
a percentage of net sales, increased from 28.0% for 1996 to 30.0%. The increase
in gross profit in dollars and as a percent of net sales is mostly attributable
to the product lines acquired in the acquisitions of LAI and ADMI in 1997 and
Transkrit in 1996.
Selling, general and administrative expenses increased $19.2 million from
1996 to 1997 due to the acquisitions of Transkrit, LAI and ADMI. Selling,
general and administrative expenses, as a percent of net sales, increased to
23.3% from 22.6% from the comparable 1996 period. The increase in selling,
general and administrative expenses, as a percent of net sales, is the result of
the acquisitions of Transkrit, LAI and ADMI which historically incur a higher
percentage of these costs.
Income from operations for the year ended December 31, 1997 was $13.0
million, or 6.8% of net sales as compared to $5.9 million or 5.3% of net sales
for the comparable 1996 period. The increase of $7.1 million is the result of
the acquisitions of Transkrit, LAI and ADMI. The increase in income from
operations as a percent of net sales from 1996 to 1997 is due to the increase in
gross profit from the acquired product lines reduced, to a lesser extent, by the
increase in selling, general and administrative expenses. EBITDA, as a
percentage of net sales, increased to 13.3% for the year ended December 31, 1997
from 11.2% for the comparable 1996 period. EBITDA for the year ended December
31, 1997 increased to $25.5 million from $12.5 million for the comparable 1996
period due to the acquisitions of Transkrit, LAI and ADMI.
Interest expense for the year ended December 31, 1997 increased $5.7
million, or 69.4%, to $13.8 million from $8.1 million for 1996. The weighted
average interest rate for the year ended December 31, 1997 was 12.3% as compared
to 11.7% for the comparable 1996 period. The increase in interest expense and
the weighted average interest rate from 1996 to 1997 is due to the issuance of
the $100.0 million Senior Unsecured Notes on June 28, 1996.
Income tax expense (benefit) for the years ended December 31, 1997 and 1996
was $.6 million and $(.6) million, respectively, resulting in effective tax
rates of 77% and 28%, respectively. The income tax expense recorded for the year
ended December 31, 1997 is primarily based upon benefiting the net loss before
taxes offset by non-deductible amortization and other expenses and certain
minimum state income taxes.
As of December 31, 1997, $7.3 million of cumulative net operating loss
carryforward benefits have been recognized based upon the expected reversals of
temporary differences into taxable income and management's estimate of taxable
income within the period prior to the expiration of the net operating loss
carryforwards. The Company expects to generate taxable income prior to the
expiration of the net operating loss carryforward. Taxable income of $7.3
million would have to be realized prior to the year ended December 31, 2011 to
ensure realizability of the net operating loss carryforward prior to their
expiration for federal income tax purposes. The cumulative net operating loss
carryforward, generated from 1989 through 1996, will begin to expire in 2004 and
continue through 2011.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales for the year ended December 31, 1996 increased $40.1 million to
$111.3 million, or 56.3%, from the comparable 1995 period. Net sales of custom
envelopes decreased 8.6%, or $4.7 million from 1996 to 1995. While the average
unit price for envelope sales increased .8%, the total number of units shipped
decreased 11.2%. The decrease in the number of envelope units shipped is the
result of a managed change in the mix of products sold and, to a lesser extent,
weak industry conditions. The Company has changed the mix of products sold in
the envelope business units toward value-added, higher margin products (see
discussion regarding envelope gross profits below). The increase in mailer
systems, direct mail products and services and custom pressure sensitive label
net sales is the result of the acquisition of Transkrit Corporation. Net sales
for direct mail products and services increased 20.5% or $2.7 million from 1995
to 1996. Net sales for custom pressure sensitive labels increased 484.0% or
$17.6 million from 1995 to 1996.
Gross profit for the year ended December 31, 1996 increased $15.6 million
to $31.1 million, or 100.7%, from the comparable 1995 period. In addition, gross
profit, as a percent of net sales, increased from 21.9% for the year ended
December 31, 1995 to 28.0% for the comparable 1996 period. The increase in gross
profit in absolute dollars and as a percent of net sales is mostly attributable
to the product lines acquired from the acquisition of Transkrit. The acquired
product lines of mailer systems, direct mail products and services and custom
pressure sensitive labels generate higher gross profit margins than the
historical product lines of the Company. Gross profit for custom envelopes
remained relatively unchanged from 1995 to 1996 even though net sales decreased
8.6%.
Selling, general and administrative expenses, as a percentage of net sales,
increased by $11.8 million from 18.8% of net sales for the year ended December
31, 1995 to 22.6% of net sales for the comparable 1996 period. The $11.8 million
increase in these expenses is due to the acquisition of Transkrit at June 28,
1996. The acquired product lines from the Transkrit acquisition historically
incur a higher percentage of selling, general and administrative expenses as a
percent of net sales.
Income from operations for the year ended December 31, 1996 was $5.9
million, or 5.3% or net sales as compared to $2.1 million or 3.0% of net sales
for the comparable 1995 period. The increase of $3.8 million of income from
operations is the result of the acquisition of Transkrit. The increase in income
from operations as a percent of revenues from 1995 to 1996 is due to the
increase in gross profit from the acquired product lines reduced by, to a lesser
extent, the increase in selling, general and administrative expenses. EBITDA, as
a percentage of net sales, increased to 11.2% for the year ended December 31,
1996 from 7.3% for the comparable 1995 period. EBITDA for the year ended
December 31, 1996 increased to $12.5 million from $5.2 million for the
comparable 1995 period. The increase in EBITDA from 1995 to 1996 is the result
of the acquisition of Transkrit.
Interest expense for the year ended December 31, 1996 increased $5.0
million, or 157.2%, to $8.2 million from $3.2 million for the year ended
December 31, 1995 on significantly higher average debt balances for the period
ended December 31, 1996. The weighted average interest rate for the year ended
December 31, 1996 was 11.7% as compared to 13.8% for the comparable 1994 period.
The increase in the average debt balances from 1995 to 1996 is due to the
issuance of $100,000,000 Senior Unsecured Notes issued to purchase Transkrit
partially offset by the payoff and termination of the revolving line of credit,
bank long-term debt and subordinated outstanding as of June 28, 1996. The
weighted average interest rate decreased from 1995 to 1996 due to the lower
borrowing rate of the Senior Unsecured Notes of 11 5/8% versus 1995 long-term
debt and subordinated debt stated interest rates ranging from 10.25% to 14%.
Income tax benefit for the year ended December 31, 1996 and 1995 was $.6
million and $1.9 million, respectively, resulting in an effective tax rate of
28% and 183%, respectively. The income tax benefit recorded in 1995 is the
result of benefiting the cumulative net operating loss as of December 31, 1995
previously not recognized.
As of December 31, 1996, $10.9 million of cumulative net operating loss
carryforward benefits have been recognized based upon the expected reversals of
temporary differences into taxable income and management's estimate of taxable
income within the period prior to the expiration of the net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.0 million and $7.1 million
for the years ended December 31, 1997 and 1996, respectively. The decrease in
net cash provided by operating activities for the year ended December 31, 1997
is mostly attributable to the increase in net operating assets, reduced, to a
lesser extent, by a lower net loss and higher depreciation and amortization when
compared to the year ended December 31, 1996.
Net cash used in investing activities was $38.9 million and $79.8 million
for the years ended December 31, 1997 and 1996, respectively. The decrease in
net cash used in investing activities is mostly due to the acquisitions of LAI
for $9.5 million and ADMI for $25.0 million in 1997 as compared to the
acquisition of Transkrit for $79.4 million in 1996.
Capital expenditures, excluding acquisitions (but including purchases under
capital leases), were $7.6 million and $6.3 million for the years ended December
31, 1997 and 1996, respectively.
Net cash provided by financing activities was $36.2 million and $74.2
million for the years ended December 31, 1997 and 1996, respectively. The net
cash provided by financing activities for the year ended December 31, 1997 is
primarily attributable to the $10.8 increase on the revolving loan facility to
fund the acquisition of LAI and the $23.9 million capital contribution from
AmeriComm Holdings, Inc. ("AHI") to fund the acquisition of ADMI.
INFORMATION SYSTEMS AND THE YEAR 2000
The Company's four major business segments have analyzed their exposure
related to year 2000 dysfunctional coding in all software and firmware utilized.
The Company expects to incur an immaterial amount of costs in 1998 to fully
ensure the functional integrity of all systems by the year 2000. In addition,
management believes there are no mission critical systems which would be
compromised at the year 2000. The four business segments primarily rely on
packaged software applications which use commercially available databases that
have current software releases which are year 2000 compliant. The Company has
either implemented these releases or has scheduled to implement these releases
in the normal maintenance cycle during 1998.
INFLATION AND PRICE CHANGES
The Company believes that inflation, exclusive of paper price increases,
has not had a material impact on its results of operations for the three years
ended December 31, 1997. The Company currently does not nor does it plan to
engage in hedges to offset potential changes in the cost of paper or changes in
interest rates.
Paper is the Company's primary raw material, accounting for approximately
50% of the Company's cost of goods sold. Generally, when the price of paper
decreases, the Company has a short-term opportunity to improve its operating
margins due to delays in passing price reductions through to customers. However,
since paper price declines tend to occur in a weak economy, net sales and
operating margins may be negatively affected in the short-term since it
generally takes from 30 to 90 days to realize such price declines in its pricing
from vendors. In the longer-term, however, since paper price increases tend to
occur in a strong economy, the Company is generally able to pass through
increases in its cost of paper to customers and therefore maintain or improve
operating margins.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements on page F-1 for
AmeriComm Direct Marketing, Inc.'s financial statements and notes thereto
included herein. All schedules have been omitted as they are not required or
they are not applicable or because the information required to be presented is
included in the financial statements and the related notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers and directors of the Company at
December 31, 1997:
TERM OF
NAME OFFICE AGE POSITION
- - - ----------------- ------- --- -------------------------------------------
Robert M. Miklas 1 46 Director, President and CEO
Robert B. Webster 1 50 Executive Vice President and CFO
Thomas J. Cobery 1 51 Senior Vice President/President-Label Art
Jack Resnick 1 50 Executive Vice President/President-Transkrit
Robert D. Oliver 1 46 Senior Vice President/General Manager-Envelopes
John D. Weil 1 50 Chairman of the Board of Directors
David E. De Leeuw 1 54 Director
David E. King 1 39 Director
Glenn S. McKenzie 1 45 Director
Calvin Ingram 1 64 Director
Martin R. Lewis 1 68 Director
Timothy Beffa 1 46 Director
TIMOTHY BEFFA (46), Director of the Company since January, 1997. Mr. Beffa has
been President and Chief Executive Office of Outsourcing Solutions, Inc. (OSI
Holdings Corp.), a receivables management company in which McCown De Leeuw has
invested, since August, 1996. From May, 1989 to August, 1996 Mr. Beffa served as
president and Chief Operating Officer of DIMAC Marketing, a publicly owned
direct marketing company. Mr. Beffa joined DIMAC as Senior Vice President and
Chief Financial Officer. From April, 1981 to May, 1989 he was Vice President of
Finance for the International Division of Pet, Inc. Prior to April, 1981, Mr.
Beffa was employed by Ernst & Young.
THOMAS J. COBERY (51), Senior Vice President of the Company since June 1996. Mr.
Cobery has been President of Label Art, Inc. since November 1987 till June 28,
1996 (the acquisition date of Transkrit Corporation and subsidiary by the
Company). Mr. Cobery is currently President of the Tag and Label Manufacturers
Institute, the major trade association for the label industry in the United
States.
DAVID E. DE LEEUW (54), Director of the Company since September 1989. Mr. De
Leeuw is a managing general partner of MDC Management Company II, LP, which is
the general partner of McCown De Leeuw & Co. II, LP, McCown De Leeuw Associates,
LP, MDC Management Company IIE, LP, McCown De Leeuw & Co. Offshore (Europe), LP,
MDC Management Company IIA, LP, and McCown De Leeuw & Co. Offshore (Asia), LP He
currently serves as a director of American Residential Investment Trust, Inc.,
Vans, Inc., Pelican Companies, MBW Holdings, Inc., OSI Holdings Corp., Nimbus CD
International, Inc. and Tiara Motorcoach Corporation.
CALVIN INGRAM (64), Director of the Company since January 1995. Mr. Ingram has
served as Chairman of ADMI since January 1991. Mr. Ingram also currently serves
as a director of AmeriMarketing Group and Associated Premium.
DAVID E. KING (39), Director of the Company since April 1991. Mr. King is a
general partner of MDC Management Company II, LP. Mr. King has been associated
with McCown De Leeuw & Co. since 1990. He currently serves as a director of OSI
Holdings Corp., International Data Response Corporation, Nimbus CD
International, Inc., Fitness Holdings, Inc. and ASC Networks, Inc.
MARTIN R. LEWIS (68), Director of the Company since January, 1997. Mr. Lewis is
the former CEO of Williamhouse-Regency, Inc. After two years with New York law
firm Thayer & Gilbert and teaching at the NYU School of Law, Mr. Lewis joined
the Uptown Paper & Envelope Corp., the predecessor company to The Williamhouse
of Fine Converting. Mr. Lewis took the company public in 1961, and in 1967
presided over the merger with Regency Thermographers. In 1982, Mr. Lewis led a
private buy out of the company and subsequently, after a recapitalization in
1986, shepherded the sale of the business to American Pad & Paper in October of
1995.
GLENN S. MCKENZIE (45), Director of the Company since October 1992. Mr. McKenzie
has been President of Alpha Investments, Inc., a management consulting firm,
since October 1991. He currently serves as a director of Specialty Paperboard,
Inc., Nimbus CD International, Inc., Exeter Health Resources, Inc. and Tiara
Motorcoach Corporation.
ROBERT M. MIKLAS (46), Director, President and Chief Executive Officer of the
Company since June 1990. Mr. Miklas has been Director, President and Chief
Executive Officer of AHI since June 1990. Prior to joining AHI, Mr. Miklas
worked for 15 years with the consumer packaging division of the Boise Cascade
Corporation and its successor owner, Sonoco Products Company.
ROBERT D. OLIVER (46), Senior Vice President. Mr. Oliver joined the Company in
December 1993 as Vice President/Manufacturing. Previously Mr. Oliver was an area
manufacturing manager with Graham Packaging Company, a HDPE blow molding
manufacturer. Prior to joining Graham, Mr. Oliver held several operational
positions with Sonoco Products Company and Boise Cascade Corporation.
JACK RESNICK (50), Executive Vice President of the Company since June 1996. Mr.
Resnick was Chief Operating Officer of Transkrit from January 1991 until June
1996. Prior to joining Transkrit, Mr. Resnick worked in the direct mail
marketing and business forms industry with Wallace Computer Services, Uarco
Business Forms and Torrington Product Ventures, where he served as President and
Vice Chairman.
ROBERT B. WEBSTER, CPA (50), Executive Vice President and Chief Financial
Officer of the Company since June 1995. Mr. Webster has been the Executive Vice
President and Chief Financial Officer of AHI since June 1995. Mr. Webster served
as Vice President and Chief Financial Officer of Sunds Defibrator, Inc., from
March 1991 to November 1994. Prior, Mr. Webster worked in the business forms and
computer industry with Burroughs Corp. and Wang Laboratories, Inc.
JOHN D. WEIL (50), Chairman of the Board of Directors of the Company since
October 1995. In 1995, Mr. Weil joined McCown De Leeuw & Co. as an operating
affiliate to assist in portfolio management. From 1991 to 1994, Mr. Weil served
as President and Chief Executive Officer of American Envelope Company. Between
1983 and 1994, Mr. Weil served as a director of the Envelope Manufacturers
Association (the "EMA"), as Chairman of the EMA's Public Affairs Committee and
has served on its Technical, Training, Plant Operations and Finance Committees.
Mr. Weil also serves as a director of Specialty Paperboard, Inc., Tiara
Motorcoach Corporation, International Data Response Corporation and Sage
Enterprises, Inc.
DIRECTOR COMPENSATION
Non-employee directors (excluding Mr. Weil, Mr. De Leeuw, Mr. King and Mr.
McKenzie) of the Company receive $2,000 per meeting of the Board of Directors,
$1,000 per special meeting of the Board of Directors and $500 per Committee
meeting plus, in each case, reimbursement for travel and out-of-pocket expenses
incurred in connection with attendance at all such meetings. Mr. Weil was an
employee of the Company during 1997 and received compensation.
LATE FILINGS
None.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the years ended December 31, 1997 and 1996 for the Chief
Executive Officer of the Company and each of the four other most highly
compensated executive officers of the Company. The compensation of Messrs.
Miklas, Webster and Oliver was paid entirely by the Company and the compensation
of Messrs. Resnick and Cobery was paid by Transkrit and the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------- -------------
Annual Compensation Awards Payouts
-------------------------------------- --------------------------- -------------
Restricted Securities All
Other Annual Stock Underlying LTIP Other
Bonus Compensation Award(s) Options/ Payouts Compensation
Name and Principal Position Year Salary ($) ($) (1) ($) ($) SARs (#) (4) ($) ($) (2)
- - - ---------------------------- ------- ----------- ---------- --------------- ------------ -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert M. Miklas
President & CEO 1997 222,754 - - - - - 639(3)
1996 190,144 - - - - - 625(3)
Robert B. Webster
Executive Vice President
and CFO 1997 156,840 - - - 28,868 - 1,358(3)
1996 153,000 - - - 57,736 - 567(3)
Thomas J. Cobery (5)
Senior Vice President 1997 195,936 57,431 - - 47,763 - -
1996 184,626 27,431 - - 47,763 1,518,300 -
Jack Resnick (6)
Executive Vice President 1997 230,409 55,072 55,250 - 58,495 - -
1996 205,792 67,249 - - 58,485 329,039 -
Robert D. Oliver
Senior Vice President 1997 119,226 8,638 - - - - 294
1995 118,242 5,233 - - - - 464
<FN>
(1) Includes amounts earned and accrued.
(2) Represents the dollar value of annual compensation not properly
characterized as salary or bonus. Following Commission rules, perquisites
and other personal benefits which do not exceed 25% of the total
perquisites and other personal benefits for each of the named executive
officers have been omitted from these footnotes.
(3) Consists of the taxable portion of group term life insurance premiums for
paid by the Company.
(4) Certain employees of the Company are participants in the amended and
restated AmeriComm Holdings, Inc. 1996 stock option plan.
(5) Includes bonus payments to Mr. Cobery under the Label Art, Inc. Equity
Share Plan (the "Equity Share Plan"). Pursuant to the Equity Share Plan,
Mr. Cobery has received 138,468 equity shares ("Equity Shares") simulating
ownership in Label Art, Inc. The Equity Share Plan provides that if Label
Art, Inc. declares a dividend on its common stock at any time during which
a participant has been allocated Equity Shares, the participant shall
receive a bonus, equal to the dividend he or she would have received if his
or her Equity Shares were common stock of Label Art, Inc. The Equity Share
Plan was terminated concurrently with the consummation of the acquisition
of Transkrit. Mr. Cobery sold 4,898 Equity Shares back to Label Art, Inc.
in February, 1994 for which he received $22,114.
(6) Includes $27,416 representing dividends on 220.5 equity shares ("Stock
Credits") simulating economic ownership in Transkrit issued to Mr. Resnick
under his employment agreement with Transkrit, dated January 9, 1991 (the
"Employment Agreement"). As holder of Stock Credits, Mr. Resnick is
entitled to receive amounts equal to the cash dividends that he would have
received had he owned a number of shares of common stock of Transkrit equal
to the number of Stock Credits then credited to Mr. Resnick's account. The
Employment Agreement was terminated concurrently with consummation of the
acquisition of Transkrit. Also includes $15,984 representing reimbursement
for relocation expenses.
</FN>
</TABLE>
<PAGE>
STOCK OPTION PLAN AND OTHER BENEFIT PLANS AND ARRANGEMENTS
The Company does not have any stock option plans. AHI has a stock option
plan in which several the Company employees participate.
AMENDED AND RESTATED AMERICOMM HOLDINGS, INC. 1996 STOCK OPTION PLAN
AHI adopted the AmeriComm Holdings, Inc. 1996 Stock Option Plan (the "1996
Plan") on June 28, 1996, and was amended and restated by AHI on January 28,
1997. The 1996 Plan is administered by the Compensation Committee of the Board
of Directors (the "Board") of AHI (or such other Board committee as may be
designated by the Board) (the "Committee"). Under the 1996 Plan, the Committee
may grant or award (a) stock options (which may be either incentive stock
options ("ISOs"), within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, or stock options other than ISOs), (b) stock appreciation
rights granted in conjunction with stock options or independently, (c)
restricted stock, (d) bonuses or other compensation payable in stock and/or (e)
other stock-based awards to executive and other key salaried employees,
including officers, as well as to consultants of the Company and its
subsidiaries and affiliates designated by the Committee, but excluding non
employee directors and members of the Committee.
AMERICOMM HOLDINGS, INC. 1997 STOCK OPTION PLAN FOR DIRECTORS
The AmeriComm Holdings, Inc. 1997 Stock Option Plan For Directors (the
"1997 Plan") was adopted by AHI on January 28, 1997. The 1997 Plan is
administered by the Board. Stock options, which are not ISO's, were granted
under the 1997 Plan as of January 28, 1997, to certain members of the Board who
are not eligible to participate in any plan entitling participants to acquire
securities or derivative securities of the Company (and who otherwise qualify as
"eligible directors" within the meaning of the 1997 Plan), who are designated in
the 1997 Plan (or in a Board resolution). Such stock options may be granted by
the Board under the 1997 Plan from time to time after such date to eligible
directors designated by the Board to receive such options.
<TABLE>
<CAPTION>
Potential
Realizable Value
Individual Grants At Assumed
------------------------------------------------------- Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Participants Price Expiration -----------------
Granted (#) in 1996 ($/share) Date 5% ($) 10% ($)
----------- ------------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Miklas - - - - - -
Jack Resnick 58,485 21 4.33 6/28/2006 412,501 656,839
Thomas J. Cobery 47,763 17 4.33 6/28/2006 336,878 536,422
Robert B. Webster 57,736 21 2.62(a) 6/28/2006 407,219 648,428
Robert D. Oliver - - - - - -
<FN>
(a) The exercise price of $2.62 is an average exercise price for the 57,736
stock options granted to Mr. Webster per the terms of Mr. Webster's
employment agreement dated June 8, 1995 of which 28,868 were immediately
vested on June 28, 1996 and exercised at $0.91 per share and the remaining
28,868 currently unvested options for shares of common stock of AHI with an
exercise price of $4.33 per share.
</FN>
</TABLE>
RETIREMENT PLANS
The Company sponsors two defined benefit plans, the Transkrit Corporation
Employees' Pension Plan, which covers Mr. Resnick, and the Employees' Retirement
Plan of National Fiberstok Corporation.
Transkrit Corporation Employees' Pension Plan. The Transkrit Corporation
Employees' Pension Plan (the "Transkrit Plan") provides an annual benefit equal
to .4% of "average final compensation" multiplied by benefit service completed
before July 15, 1971, plus .7% of "average final compensation" multiplied by
benefit service completed after July 15, 1971, plus an additional .3% of
"average final compensation" multiplied by benefit service earned while an
employee of Short Run Labels, Inc., if any. Average final compensation is
determined by averaging a participant's compensation for the five consecutive
calendar years during the ten years immediately preceding retirement,
termination of employment, or death that give the highest average. The following
table gives the estimated annual benefit payable upon retirement for
participants in the Transkrit Plan:
TRANSKRIT PLAN TABLE
Years of Service
--------------------------------------------------
REMUNERATION 15 20 25 30 35
- - - ------------ -- -- -- -- --
100,000 10,500 14,000 17,500 21,000 24,500
125,000 13,100 17,500 21,900 26,300 30,600
150,000 15,800 21,000 26,300 31,500 36,800
175,000 18,000 24,200 30,300 36,400 42,500
200,000 20,300 27,300 34,300 41,300 48,300
225,000 22,000 29,700 37,400 45,100 52,700
250,000 22,000 29,700 37,400 45,100 52,700
275,000 22,000 29,700 37,400 45,100 52,700
300,000 22,000 29,700 37,400 45,100 52,700
325,000 22,000 29,700 37,400 45,100 52,700
350,000 22,000 29,700 37,400 45,100 52,700
375,000 22,000 29,700 37,400 45,100 52,700
400,000 22,000 29,700 37,400 45,100 52,700
425,000 22,000 29,700 37,400 45,100 52,700
450,000 22,000 29,700 37,400 45,100 52,700
475,000 22,000 29,700 37,400 45,100 52,700
500,000 22,000 29,700 37,400 45,100 52,700
Compensation covered by the Transkrit Plan is equal to the annual amount
paid to a participant by Transkrit which includes base salary, overtime and
commissions, as shown in the Summary Compensation Table, but excluding bonuses
as shown in the Summary Compensation Table; provided, however, compensation in
excess of $150,000 is disregarded.
The estimated years of credited service for purposes of calculating
benefits for Mr. Resnick is five. The current amount of compensation covered by
the Transkrit Plan for Mr. Resnick is $197,687.
Benefits shown above are computed as a single life annuity beginning at age
65 and are not subject to any offset amounts.
<PAGE>
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Company and Robert M. Miklas entered into an agreement dated as of June
28,1996 which sets forth certain terms of the employment of Mr. Miklas as
President and CEO of the Company and AHI. This agreement provides for an annual
base salary which may be increased pursuant to an agreed upon plan subject to
the approval of the Compensation Committee of the Board of Directors of AHI and
the Company. Mr. Miklas is eligible to receive bonus compensation as determined
from time to time by the Board of Directors of the Company and AHI. In the event
that the Company terminates Mr. Miklas' employment under certain circumstances,
Mr. Miklas shall be entitled to continuation of his base compensation for a
period of one year.
The Company and Jack Resnick entered into an agreement dated as of June 28,
1996 which sets forth certain terms of the employment of Mr. Resnick as
Executive Vice President of the Company and AHI and President of Chief Executive
Officer--Transkrit. This agreement provides for an annual base salary which may
be increased pursuant to an agreed upon plan subject to the approval of the
Compensation Committee of the Board of Directors of the Company or AHI. The
agreement also provides a plan under which bonus compensation is to be awarded.
In the event that the Company terminates Mr. Resnick's employment under certain
circumstances, Mr. Resnick shall be entitled to continuation of his base
compensation for a period of one year.
The Company and Thomas J. Cobery entered into an agreement dated as of June
28, 1996 which sets forth certain terms of the employment of Mr. Cobery as
Senior Vice President of the Company and AHI and President--Label Art. This
agreement provides for an annual base salary which may be increased pursuant to
an agreed upon plan subject to the approval of the Compensation Committee of the
Board of Directors of the Company or AHI. The agreement also provides a plan
under which bonus compensation is to be awarded. In the event that the Company
terminates Mr. Cobery's employment under certain circumstances, Mr. Cobery shall
be entitled to continuation of his base compensation for a period of six months.
The Company and AHI and Robert B. Webster entered into an agreement on June
8, 1995 which sets forth certain terms of employment of Mr. Webster as Executive
Vice President and Chief Financial Officer of the Company and AHI. The agreement
provides for an annual base salary that is subject to annual upward adjustment
at the discretion of the Board of Directors of the Company and AHI. The
agreement also provides for bonus compensation and stock options based upon an
agreed upon plan. In the event that the Company or AHI terminates Mr. Webster's
employment for any reason under certain circumstances, Mr. Webster shall be
entitled to his base compensation for a period of nine months.
The Company and Robert D. Oliver entered into an agreement on March 15,
1997 which sets forth certain terms of employment of Mr. Oliver as Senior Vice
President of the Company and AHI. The agreement provides for an annual base
salary that is subject to annual upward adjustment at the discretion of the
Board of directors of the Company and AHI. The agreement also provides for bonus
compensation based upon an agreed upon plan. In the event that the Company
terminates Mr. Oliver's employment for any reason under certain circumstances,
Mr. Oliver shall be entitled to his base compensation for a period of six
months.
<PAGE>
ITEM 12. SECURITY OWNERSHIP
The authorized capital stock of the Company as of December 31, 1997
consists of 300,000 shares of common stock, par value $.01 per share, of which
283,807 shares are issued and outstanding, all of which have voting rights and
are presently held by AHI.
The authorized capital stock of AHI as of December 31, 1997 consists of (i)
4,000,000 shares of Class A common stock, par value $.0001 per share, of which
2,752,284 shares are issued and 2,690,464 shares are outstanding, and which have
voting rights. In addition, AHI has issued options to purchase 265,636 shares of
Class A common stock to the management and directors of AHI and the Company
pursuant to the 1996 Plan and the 1997 Plan and warrants to purchase 143,589
shares of Class A common stock to certain investors, all of which are
outstanding; (ii) 300,000 shares of Class B common stock, par value $.0001 per
share, of which no shares are issued and outstanding, and which have no voting
rights.
The following table sets forth, as of December 31, 1997, the number and
percentage of shares of AHI Class A Common Stock capital stock beneficially
owned by (i) each person known to the Company to be the beneficial owner of more
than 5% of any class of AHI's equity securities, (ii) each director of the
Company or AHI, and (iii) all directors and executive officers of AHI as a
group.
<TABLE>
<CAPTION>
PERCENTAGE
AMOUNT AND OF AHI
NATURE OF CLASS A
BENEFICIAL OWNERSHIP COMMON
OF AHI CLASS A STOCK
COMMON STOCK OUTSTANDING
<S> <C> <C>
McCown De Leeuw & Co. II, LP(2)..................... 1,403,104 52.15%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
McCown De Leeuw Associates, LP(2)................... 755,603 28.08%
c/o McCown De Leeuw & Company
30M Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
MDC/JAFCO Ventures, LP(3)........................... 52,174 1.94%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
David E. De Leeuw(4)................................ 2,210,881 82.17%
c/o McCown De Leeuw & Company
3000 Sand Hill Road
Building 3, Suite 290
Menlo Park, CA 94025
Glenn McKenzie...................................... 9,294 0.35%
24 Beach Plum Way
Hampton, NH 03842
Linchmen & Co....................................... 202,433 7.52%
c/o TCW / Crescent Mezzanine, L.L.C.
11100 Santa Monica Boulevard, Suite 2000
Los Angeles, CA 90025
TCW Shared Opportunity Fund II, LP ................. 8,435 0.31%
c/o TCW / Crescent Mezzanine, L.L.C.
11100 Santa Monica Boulevard, Suite 2000
Los Angeles, CA 90025
Robert Miklas....................................... 57,736 2.15%
4982 Carol Lane
Atlanta, GA 30327
All directors and executive officers as a group..... 123,219 4.58%
<FN>
(1) Class A Common Stock is the only class of capital stock of AHI which has
voting rights. Beneficial ownership is determined in accordance with the
rules of the Commission. Shares of capital stock subject to options,
warrants and convertible securities currently exercisable or convertible,
or exercisable or convertible within 60 days, are deemed outstanding for
computing the percentage of the person holding such options but are not
deemed outstanding for computing the percentage of any other person. Except
as indicated by footnote, the persons named in the table above have sole
voting and investment power with respect to all shares of capital stock
indicated as beneficially owned by them.
(2) MDC Management Company II, LP ("MDC II") is the general partner of both
McCown De Leeuw & Co. II, LP and McCown De Leeuw Associates, LP George E.
McCown, David E. De Leeuw, Robert B. Hellman, Charles Aires, Steven A.
Zuckerman and David E. King are the general partners of MDC II. Mr. De
Leeuw is the managing general partner of MDC II.
(3) MDC Management Company ("MDC") is the general partner of MDC/JAFCO
Ventures, LP George E. McCown and David E. De Leeuw are the general
partners of MDC. Mr. De Leeuw is the managing general partner of MDC.
(4) Represents shares of AHI Class A Common Stock held by McCown De Leeuw & Co.
II, LP, McCown De Leeuw Associates, LP and MDC/JAFCO Ventures, LP Mr. De
Leeuw, a director of the Company, may be deemed to own beneficially all of
the shares held by McCown De Leeuw & Co. II, LP, McCown De Leeuw
Associates, LP and MDC/JAFCO Ventures, LP because of his position as
managing general partner of MDC II and MDC. Mr. De Leeuw has no direct
ownership of any Class A Common Stock of AHI and disclaims beneficial
ownership as to all of such shares, except to the extent of his
proportional partnership interests.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ADVISORY SERVICES AGREEMENT
The Company maintains a Advisory Services Agreement (the "Advisory Services
Agreement") with MDC Management Company II, LP ("MDC Management"), an affiliate.
Under the Advisory Services Agreement, MDC Management provides certain
consulting, financial, and managerial functions to the Company for a fee
initially in an amount not to exceed $350,000 in any fiscal year, which amount
may be increased to an amount not to exceed $500,000 in any fiscal year with the
approval of the members of the Board of Directors of the Company who do not have
a direct financial interest in any person receiving such payments under the
Advisory Services Agreement. MDC Management has agreed to subordinate its right
to receive such fees in the event of an acceleration of maturity of the Senior
Unsecured Notes or a bankruptcy, liquidation or insolvency proceeding involving
the Company. In 1997 and 1996, the Company paid $350,000 and $862,000 (of which
$562,000 was accrued as of December 31, 1995), respectively, for such services.
The Advisory Services Agreement expires December 31, 2000 and is renewable
annually thereafter, unless terminated by the Company for justifiable cause, as
defined.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS - Reference is made to the Index to Financial
Statements on page F-1 included herein.
(a)(2) FINANCIAL STATEMENT SCHEDULES - Reference is made to Note 2 of the Notes
to Financial Statements on page F-8. All schedules have been omitted as not
required or not applicable or because the information required to be
presented is included in the financial statements and related notes.
(a)(3) EXHIBITS
2 - Stock Purchase Agreement, dated as of March 16, 1998, by and among
AmeriComm Direct Marketing, Inc., Cardinal Marketing, Inc., Cardinal
Marketing of New Jersey, Inc. and James Smith, Christopher Smith and
Douglas Smith.
12 - Statement Re : Ratio of Earnings to Fixed Charges
23 - Consent of Independent Public Accountants
27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICOMM DIRECT MARKETING, INC.
Date : March 31, 1998 John D. Weil
-------------- ------------
Director
Date : March 31, 1998 Robert M. Miklas
-------------- ----------------
President and Chief Executive Officer
(Principal Executive Officer)
Date : March 31, 1998 David E. De Leeuw
-------------- -----------------
Director
Date : March 31, 1998 David E. King
-------------- -------------
Director
Date : March 31, 1998 Glenn S. McKenzie
-------------- -----------------
Director
Date : March 31, 1998 Timothy Beffa
-------------- -------------
Director
Date : March 31, 1998 Calvin Ingram
-------------- -------------
Director
Date : March 31, 1998 Martin R. Lewis
-------------- ---------------
Director
Date : March 31, 1998 Robert B. Webster
-------------- -----------------
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AMERICOMM DIRECT MARKETING, INC.
PAGE
Report of Independent Public Accountants.............................. F-2
Balance Sheets at December 31, 1996 and 1997 ......................... F-3
Statements of Operations for the years ended December 31, 1995,
1996 and 1997...................................................... F-5
Statements of Stockholder's Equity for the years ended December 31,
1995, 1996 and 1997................................................ F-6
Statements of Cash Flows for the years ended December 31, 1995
1996 and 1997...................................................... F-7
Notes to Financial Statements......................................... F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AmeriComm Direct Marketing, Inc.:
We have audited the accompanying balance sheets of AMERICOMM DIRECT
MARKETING, INC. (a Delaware Corporation, formerly known as National Fiberstok
Corporation) as of December 31, 1996 and 1997 and the related statements of
operations, stockholder's equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriComm Direct Marketing,
Inc. as of December 31, 1996 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 27, 1998
(except with respect to the
matter discussed in Note 9,
as to which the date is
March 16, 1998)
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................ $ 1,979,493 $ 1,313,618
Accounts receivable, net of allowance for doubtful...................
accounts of $611,170 and $963,130, respectively.................... 17,384,354 27,943,109
Income taxes receivable.............................................. 547,944 497,565
Inventories.......................................................... 11,261,155 13,330,921
Deferred income taxes................................................ 304,599 508,664
Other ............................................................... 1,835,674 3,037,262
-------------- --------------
Total current assets.......................................... 33,313,219 46,631,139
-------------- --------------
Property and Equipment:
Land ............................................................... 1,852,686 1,852,686
Buildings............................................................ 12,020,573 12,149,009
Machinery and equipment.............................................. 36,970,991 45,571,274
Office equipment, furniture and fixtures............................. 2,993,039 5,375,241
Leasehold improvements............................................... 1,045,565 1,201,024
Vehicles............................................................. 166,677 219,703
Construction in progress............................................. 1,809,007 1,708,944
-------------- --------------
56,858,538 68,077,881
Less accumulated depreciation and amortization....................... (9,491,356) (16,884,196)
-------------- --------------
Net property and equipment.................................... 47,367,182 51,193,685
-------------- --------------
Other Assets:
Goodwill, net of accumulated amortization of $1,290,028,
and $2,253,195, respectively....................................... 25,079,097 46,172,983
Patents, net of accumulated amortization of $1,038,940 and
$3,119,740, respectively........................................... 18,405,060 16,324,260
Resident address lists, net of accumulated amortization
of $0 and $971,471, respectively................................... - 6,314,552
Deferred financing costs, net of accumulated amortization
of $478,283 and $1,448,587, respectively........................... 5,260,429 4,390,045
Covenants not to compete, net of accumulated amortization
of $5,703,213 and $6,050,824, respectively........................ 487,304 1,840,000
Prepaid pension cost ................................................ 1,931,101 2,078,067
Due from parent...................................................... 875,931 1,807,464
Other ............................................................... 655,056 932,815
-------------- --------------
Total other assets............................................ 52,693,978 79,860,186
-------------- --------------
Total assets.................................................. $ 133,374,379 $ 177,685,010
============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt.................................... $ 446,037 $ 864,487
Bank overdraft....................................................... 1,505,703 4,624,033
Accounts payable..................................................... 4,337,366 4,898,701
Accrued employee compensation........................................ 2,873,080 4,872,591
Other accrued expenses............................................... 5,310,772 4,751,522
-------------- --------------
Total current liabilities..................................... 14,472,958 20,011,334
-------------- --------------
Noncurrent Liabilities................................................. 4,426,790 7,777,250
-------------- --------------
Long-Term Debt:
Senior unsecured notes .............................................. 100,000,000 100,000,000
Revolving loan facility.............................................. - 10,761,083
Long-term debt....................................................... 2,352,881 4,484,145
-------------- --------------
Total long-term debt.......................................... 102,352,881 115,245,228
-------------- --------------
Commitments and Contingencies (Note 8)
Stockholder's Equity:
Common stock, $.01 par value, 300,000 shares authorized,
283,807 shares issued and outstanding.............................. 2,838 2,838
Additional paid-in capital........................................... 22,296,581 46,175,574
Accumulated deficit.................................................. (10,177,669) (11,527,214)
-------------- ---------------
Total stockholder's equity.................................... 12,121,750 34,651,198
-------------- --------------
Total liabilities and stockholder's equity.................... $ 133,374,379 $ 177,685,010
============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales............................................ $ 71,257,112 $ 111,342,230 $ 191,090,864
Cost of products sold................................ 55,708,018 80,215,498 133,598,403
-------------- -------------- --------------
Gross profit......................................... 15,549,094 31,126,732 57,492,461
-------------- -------------- --------------
Operating expenses:
Selling............................................ 6,760,438 10,716,599 18,194,512
General and administrative......................... 4,833,618 11,949,210 22,903,698
Amortization:
Goodwill......................................... 236,113 459,560 963,167
Patents.......................................... - 1,038,940 2,080,800
Covenants not to compete......................... 1,439,607 1,035,472 347,611
Other............................................ 140,000 - -
-------------- -------------- --------------
Total operating expenses......................... 13,409,776 25,199,781 44,489,788
-------------- -------------- --------------
Income from operations............................... 2,139,318 5,926,951 13,002,673
Interest expense..................................... 3,179,328 8,125,767 13,764,549
-------------- -------------- --------------
Net loss before income taxes and
extraordinary item................................. (1,040,010) (2,198,816) (761,876)
Income tax expense (benefit)......................... (1,900,000) (626,739) 587,669
-------------- -------------- --------------
Net income (loss) before extraordinary item.......... 859,990 (1,572,077) (1,349,545)
Extraordinary loss on retirement
of debt, net of tax benefit of $460,864............ - (797,903) -
-------------- -------------- --------------
Net income (loss).................................... $ 859,990 $ (2,369,980) $ (1,349,545)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994. 283,807 $2,838 $14,532,070 $ (8,667,679) $ 5,867,229
Net income................. - - - 859,990 859,990
------- ------ ----------- ------------- -----------
Balance, December 31, 1995. 283,807 2,838 14,532,070 (7,807,689) 6,727,219
Capital contribution....... - - 7,764,511 - 7,764,511
Net loss................... - - - (2,369,980) (2,369,980)
------- ------ ----------- ------------- -----------
Balance, December 31, 1996. 283,807 2,838 22,296,581 (10,177,669) 12,121,750
Capital contribution....... - - 23,878,993 - 23,878,993
Net loss................... - - - (1,349,545) (1,349,545)
------- ------ ----------- ------------- -----------
Balance, December 31, 1997. 283,807 $2,838 $46,175,574 $(11,527,214) $34,651,198
======= ====== =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 859,990 $ (2,369,980) $ (1,349,545)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Extraordinary loss on early retirement of debt,
net of income tax benefit.................... - 797,903 -
Depreciation and amortization.................. 4,004,992 7,409,137 13,049,541
Deferred income tax (benefit) expense.......... (1,900,000) (626,739) 381,350
Net (gain) loss on disposal of property and
equipment.................................... (173,646) (294,000) 440,898
Amortization of prepaid pension asset.......... (180,310) (45,865) (149,699)
Imputed interest............................... 130,172 60,414 -
Changes in operating assets and liabilities:
Accounts receivable.......................... 216,782 2,045,704 (5,747,677)
Income taxes receivable...................... - - 717,202
Inventories.................................. 141,682 1,017,917 (610,123)
Other assets................................. (7,436) (226,946) (948,157)
Accounts payable............................. (2,143,754) 534,704 (1,560,048)
Accrued expenses and other................... (1,165,768) (1,154,287) (2,189,159)
-------------- -------------- --------------
Net cash (used in) provided by operating
activities................................ (217,296) 7,147,962 2,034,583
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (2,308,105) (3,490,447) (4,562,731)
Proceeds from sale of property and equipment....... 369,194 423,428 106,123
Proceeds from investment securities ............... - 2,620,000 -
Payment for the purchase of the outstanding stock of
Transkrit Corporation, net of cash acquired ..... - (79,390,682) -
Payment for the purchase of the outstanding stock of
Label America, Inc., net of cash acquired........ - - (9,469,418)
Payment for the purchase of the outstanding stock of
AmeriComm Direct Marketing, Inc., net of cash
acquired......................................... - - (24,954,538)
-------------- -------------- --------------
Net cash used in investing activities....... (1,938,911) (79,837,701) (38,880,564)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdraft, net......... 2,354,437 (2,758,170) 3,118,330
Payments on term loans............................. (50,000) (16,900,000) -
Due from parent.................................... - (875,931) (931,533)
Payments on capital leases......................... (37,130) (216,888) (546,767)
Net borrowings (payments) on revolving loan
facilities....................................... 50,000 (7,050,000) 10,761,083
Increase in deferred financing costs .............. - (5,738,712) (100,000)
Proceeds from issuance of senior unsecured notes .. - 100,000,000 -
Additional capital contribution.................... - 7,764,511 23,878,993
-------------- -------------- --------------
Net cash provided by financing activities... 2,317,307 74,224,810 36,180,106
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................... 161,100 1,535,071 (665,875)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......... 283,322 444,422 1,979,493
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR............... $ 444,422 $ 1,979,493 $ 1,313,618
============== ============== ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ............................ $ 2,821,000 $ 7,744,000 $ 12,835,000
============== ============== ==============
Cash paid for income taxes......................... $ - $ - $ 107,000
============== ============== ==============
Assets acquired by assuming liabilities ........... $ - $ 11,038,000 $ 8,324,000
============== ============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Capital lease obligations of $2,799,000 and $3,085,000 were incurred when
the Company entered into leases for new equipment during 1996 and 1997,
respectively.
The accompanying notes are an integral part of these statements.
<PAGE>
AMERICOMM DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. BACKGROUND
AmeriComm Direct Marketing, Inc. (the "Company", formerly known as National
Fiberstok Corporation), a wholly-owned subsidiary of AmeriComm Holdings, Inc.
("AHI" or "Parent", formerly known as DEC International, Inc.), is a leading
provider of products and services focused primarily on the direct marketing
industry. The Company's principal strategy is to offer a comprehensive line of
direct marketing products and services while continuing to participate in the
rapidly growing markets for custom pressure sensitive labels and non-impact
self-mailers. The Company markets its products to customers throughout the
United States through operations in Norfolk, Roanoke and Salem, Virginia;
Austell and Tucker, Georgia; Louisville, Kentucky; Gainesville, Florida; Wilton,
New Hampshire; Sparks, Nevada; San Carlos, California; Fort Smith, Arkansas;
Mountainside, New Jersey and Denver, Colorado.
On June 28, 1996, the Company acquired all of the issued and outstanding
capital stock of Transkrit Corporation ("Transkrit") for $86,500,000 plus
transaction costs. Subsequent to the acquisition, Transkrit and all of its
subsidiaries were merged into the Company. The Transkrit acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations of Transkrit have been included in the results of
operations of the Company since June 29, 1996. The purchase price was allocated
to assets and liabilities based on their estimated fair value as of the date of
the acquisition. The excess of the consideration paid over the estimated fair
value of net assets acquired of $17,542,000 has been recorded as goodwill and is
being amortized on the straight-line basis over 40 years.
On February 21, 1997, the Company acquired all of the issued and
outstanding capital stock of Label America, Inc. ("LAI") for $8,500,000, less
outstanding indebtedness plus transaction costs. Additional consideration of
$700,000 was paid to the principal stockholder for a noncompete agreement. Upon
consummation of the acquisition, LAI was merged into the Company. The LAI
acquisition has been accounted for using the purchase method of accounting and,
accordingly, the results of operations of LAI have been included in the results
of operations of the Company since February 22, 1997. The excess of the
consideration paid over the estimated fair value of net assets acquired of
$6,636,000 has been recorded as goodwill and is being amortized on the
straight-line basis over 40 years.
On April 24, 1997 the Company acquired all of the issued and outstanding
stock of AmeriComm Direct Marketing, Inc. ("ADMI") for $23,635,000 plus
transaction costs. Additional consideration of $1,000,000 was paid to the
principal stockholder for a noncompete agreement. Upon consummation of the
acquisition, ADMI was merged into the Company. The ADMI acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
results of operations of ADMI have been included in the results of operations of
the Company since April 25, 1997. The excess of the consideration paid over the
estimated fair value of net assets acquired of $15,273,000 has been recorded as
goodwill and is being amortized on the straight-line basis over 40 years.
The acquisition of ADMI was financed by a capital contribution from AHI of
$23,878,993. To provide funds for the capital contribution, AHI issued
$35,000,000 aggregate principal amount of 12.5% Notes (the "Notes") due April
24, 2003. A portion of the Notes were used to redeem AHI redeemable cumulative
preferred stock. The Notes place certain restrictions on the Company's ability
to incur additional indebtedness or make future acquisitions. In addition,
future interest and principal payments by AHI are dependent primarily on the
operations of the Company through payments to AHI as permitted under the Senior
Notes. Interest is due quarterly commencing June 30, 1997. As a result, AHI may
pay a portion or all of any six quarterly interest installments prior to April
24, 1999 by issuing additional notes ("PIK Notes") with interest ranging from
12.5% to 13.0%. The initial interest installments due June 30, 1997, September
30, 1997 and December 31, 1997 were paid by the issuance by AHI of PIK Notes at
12.5% interest. The PIK Notes must be redeemed prior to April 24, 2003.
The following presents, on an unaudited pro forma basis, the Company's
results of operations for the years ended December 31, 1995, 1996 and 1997 as
though the acquisition of Transkrit and related transactions had occurred on
January 1, 1995 and the acquisitions of LAI and ADMI and related transactions
had occurred on January 1, 1996 (in thousands) :
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales............................................ $168,760 $202,033 $201,500
Operating income..................................... 12,347 11,740 13,667
Net income (loss) before extraordinary item.......... 2,364 (489) (979)
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Revenue Recognition
Sales are recorded as products are shipped, except for certain sales for
which revenue is recognized when the customer is billed based on passage of
legal title at the date of billing. Such `bill and hold' sales are not material
to the Company's results of operations.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as during the reporting period.
Actual results could differ from these estimates.
Cash Equivalents
For purposes of the reporting of cash flows, the Company considers all
highly liquid debt instruments with a maturity at date of purchase of three
months or less to be cash equivalents.
The Company does not believe it is exposed to any significant credit risk
on money market funds with commercial banks because its policy is to make such
deposits only with highly rated institutions.
Accounts Receivable
A summary of changes in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of period......................... $ 141,841 $ 171,950 $ 611,170
Acquired balance from Transkrit (Note 1)............. - 495,154 -
Acquired balance from ADMI (Note 1).................. - - 209,789
Acquired balance from LAI (Note 1)................... - - 47,176
Provisions........................................... 78,089 215,455 385,282
Recoveries........................................... 18,679 75,028 40,148
Write-offs........................................... (66,659) (346,417) (330,435)
-------------- -------------- --------------
Balance, end of period............................... $ 171,950 $ 611,170 $ 963,130
============== ============== ==============
</TABLE>
Inventories
Inventories are stated at the lower of cost or market. Costs of raw
materials are determined using the first-in, first-out (FIFO) method. Costs (net
of an obsolescence reserve) of work in process, finished goods, and customized
stock (consisting of products which have been produced and held for certain
customers under short-term delayed-shipping arrangements) are determined using
the average cost (which approximates FIFO), or FIFO method.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Raw materials.......................................................... $ 5,837,794 $ 7,351,264
Work in process........................................................ 1,288,685 1,585,171
Finished goods......................................................... 2,834,589 3,350,315
Customized stock....................................................... 1,300,087 1,044,171
-------------- --------------
Balance, end of period................................................. $ 11,261,155 $ 13,330,921
============== ==============
</TABLE>
Property and Equipment
Property and equipment are recorded at cost or at estimated fair value at
date of acquisition (Note 1), if acquired as part of a business combination, and
are depreciated using the straight-line method over the following lives:
Buildings....................................................25 to 30 years
Machinery and equipment........................................3 to 7 years
Office equipment, furniture and fixtures.......................3 to 7 years
Vehicles.......................................................3 to 5 years
Leasehold improvements are depreciated over the lesser of the useful lives
of the assets or the lease term.
The Company's policy is to remove the cost and accumulated depreciation of
retirements from the accounts and recognize the related gain or loss upon the
disposition of assets. Depreciation expense in 1995, 1996 and 1997 was
approximately $2,020,000, $4,313,000 and $7,717,000, respectively.
Goodwill
Goodwill is stated at cost, less accumulated amortization, and is amortized
over 15 to 40 years using the straight-line method. The recoverability of
goodwill is periodically reviewed by management based on current and anticipated
conditions. The amount of goodwill considered realizable, however, could be
reduced in the near term if changes occur in anticipated conditions. Based upon
a review of projected undiscounted cash flow from operations and other pertinent
information, management is of the opinion that there has been no diminution in
the value assigned to goodwill.
Patents
The Company has been granted several patents related to certain products
manufactured by the Company. Patents acquired through the acquisition of
Transkrit were recorded at their estimated fair value at date of acquisition.
These amounts are being amortized on a straight-line basis over the life (four
to twelve years) of the patents.
Covenants Not to Compete
Covenants not to compete have been recorded at cost and are being amortized
on a straight-line basis over the terms (three to five years) of the agreements.
Resident Address Lists
The Company has purchased and maintains national residential address lists
used by its customers in making saturation or targeted mailings. Resident
address lists acquired through the acquisition of ADMI were recorded at their
estimated fair value at the date of acquisition. These amounts are being
amortized on a straight-line basis over the life (six years) of the resident
address lists.
Amortization expense for 1997 of $971,471 is included in costs of products sold
in the accompanying statement of operations.
Deferred Financing Costs
Deferred financing costs represent costs incurred to raise financing and
are amortized over the related terms of the borrowings (Note 3).
Due from parent
Due from parent represents funds borrowed by AHI to fund certain
transactions as allowed by the Senior Notes and revolving loan facility (Note
3). Such amounts are not expected to be repaid within one year and no interest
is charged on such borrowings.
Income Taxes
The Company accounts for income taxes using the asset and liability method
for recognition of deferred tax consequences of temporary differences, net
operating losses, and tax credits by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Concentration of Risk
During 1995, 1996, and 1997, the Company's ten largest customers accounted
for 25%, 18% and 16%, respectively, of total Company sales. No individual
customer accounted for more than 6% of sales in any year. In management's
opinion, a loss of any one individual customer would not have a material impact
on the Company's financial position or results of operations.
The Company's largest purchased raw material is paper. While the Company
utilizes multiple paper suppliers, two suppliers provided 67%, 30% and 41% of
its paper requirements in 1995, 1996, and 1997, respectively. Further, the
supply and price of paper are cyclical in nature. As a result, the Company is
subject to the risk that pricing may significantly impact results of operations
and that it may be unable to purchase sufficient quantities of paper to meet
production requirements during times of tight supply. While the Company believes
that it could obtain other suppliers of paper, paper industry conditions may
have a material effect on the Company's results of operations.
Vacation Policy
In 1995, the Company revised its vacation policy for certain locations,
whereby employees must take vacation earned during the year prior to January 1
or forfeit the balance. As a result of this change in policy, a vacation accrual
is no longer required as of December 31, 1995 and approximately $575,000 of
accrued vacation was reversed and is reflected as a reduction in cost of
products sold in 1995.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable and debt. The carrying amounts of cash, accounts
receivable and accounts payable approximate their fair values because of the
short-term maturity of such instruments. The fair value of the Senior Notes
(Note 3) at December 31, 1996 and 1997 was approximately $106,000,000 which was
estimated using a quote from a broker. At December 31, 1996 and 1997, the
carrying value of the other long-term debt approximated its fair value, because
interest rates on such debt are periodically adjusted and approximated current
market rates.
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1997,
respectively:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
11 5/8% Senior Unsecured Notes, interest payable
semi-annually commencing December 15, 1996................................... $ 100,000,000 $ 100,000,000
Revolving loan facility with Heller Financial, Inc., principal payable in full
upon the earlier of termination, as defined, or June 28, 2001, bearing
interest at the 30 to 180 day London Interbank Offered Rate plus 2.25% or
Prime plus 1% (8.35% and 9.50% at December 31, 1997,
respectively)................................................................ - 10,761,083
Capital lease payable to The CIT Group/Equipment Financing, Inc. ("CIT"),
monthly principal and interest payments of $48,250 commencing July 1996
through June 2001 with a balloon payment of $513,485 due
July 2001, interest at 10.2%................................................. 2,405,831 2,056,883
Capital leases payable to General Electric Capital Corporation ("GE"), monthly
principal and interest payments of $53,867 commencing December 1997 through
November 1999, declining to $44,073 commencing December 1999 through October
2001 with a balloon payment of $1,615,077
due November 2001, interest at 9.36%......................................... - 3,025,154
Other.......................................................................... 393,087 266,595
-------------- --------------
102,798,918 116,109,715
Less current portion........................................................... (446,037) (864,487)
-------------- --------------
$ 102,352,881 $ 115,245,228
============== ==============
</TABLE>
Maturities of long-term debt and capital lease obligations at December
31,1997 are as follows:
1998.......................................... $ 864,487
1999.......................................... 985,265
2000.......................................... 819,774
2001.......................................... 13,440,189
2002.......................................... 100,000,000
--------------
$ 116,109,715
==============
Prior to the issuance of the 11 5/8% Senior Unsecured Notes (the "Senior
Notes"), the Company maintained agreements under which the Company had certain
term loans and a revolving line-of-credit facility (the "Line"). Concurrent with
the issuance of the Senior Notes on June 28, 1996 discussed below, the Company
repaid the term loans and the Line and paid a prepayment penalty, all of which
aggregated to approximately $25,100,000. As a result of the early retirement of
debt, the Company incurred an extraordinary loss of $797,903, net of income tax
benefit of $460,864, during 1996. Subsequently, the agreements were terminated.
Concurrent with the consummation of the acquisition of Transkrit discussed
in Note 1, the Company issued $100,000,000 aggregate principal amount of Senior
Notes due June 15, 2002. Interest is payable semi-annually commencing December
15, 1996. The Senior Notes are senior obligations of the Company and will be
pari passu in right of payment to all future senior indebtedness. The indenture
to the Senior Notes limits the incurrence of additional debt by the Company,
does not allow the Company to pay any common stock dividends and limits the
Company's ability to redeem any capital stock and to sell its assets, as
defined. The Company may incur additional indebtedness, as defined, as long as
its fixed charge coverage ratio, as defined, is greater than certain minimum
levels.
Concurrent with the consummation of the acquisition of Transkrit, the
Company entered into a revolving loan facility with Heller. The facility
provides borrowings based on the lesser of qualified accounts receivable and
inventories, as defined, or $25,000,000. Borrowings under the revolving loan
facility are subject to certain financial covenants that include, among others,
minimum fixed charge coverage and total indebtedness to operating cash flow
ratio, as defined. The Company was in compliance with each covenant as of
December 31, 1997. As of December 31, 1997, $14,238,917 was available on the
revolving loan facility.
Under the CIT capital lease payable, CIT has a first-perfected security
interest in certain equipment. At the end of the lease term, the Company will
have the option to purchase the equipment for $513,485. Under the GE capital
leases payable, GE has a first-perfected security interest in certain equipment.
At the end of each lease term, the Company will have the option to purchase the
equipment for an aggregate of $1,615,077. The capital leases are cross-defaulted
with other loan agreements if such default is not cured within 90 days following
the default.
Interest expense on long-term debt and capital leases in 1995, 1996 and
1997 was approximately $3,179,000, $8,126,000 and $13,765,000 respectively,
including approximately $231,000, $564,000 and $971,000, respectively, of
deferred finance cost amortization.
4. INCOME TAXES
The income tax benefits for the years ended December 31, 1995 and 1996
represent the income tax benefit from operating losses. As a result, income tax
benefits for 1995 and 1996 consist of deferred tax benefits.
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the 1995 and 1996 benefit and the 1997
expense for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal tax benefit at statutory rate................ $(353,600) $(747,597) $(259,038)
State, net of federal benefit........................ (34,000) (58,049) 206,669
Change in valuation allowance........................ (1,485,000) - -
Non-deductible amortization ......................... - 164,139 367,460
Non-deductible expenses ............................. - 42,854 69,920
Other, net........................................... (27,400) (28,086) 202,658
------------ ---------- ---------
Actual income tax (benefit) expense.................. $(1,900,000) $(626,739) $ 587,669
============ ========== =========
Effective tax rate................................... 183% 29% (77%)
==== === =====
</TABLE>
Significant components of the Company's net deferred tax liabilities as of
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.......................................... $ 4,127,000 $ 2,773,000
Book basis in property over tax basis..................................... (6,703,000) (6,932,000)
Resident address lists.................................................... - (2,400,000)
Patents................................................................... (1,457,000) (998,000)
Inventories............................................................... (712,000) (497,000)
Goodwill.................................................................. (185,000) (261,000)
Prepaid pension cost...................................................... (692,000) (774,000)
Covenant not-to-compete................................................... 1,556,000 1,413,000
Employee benefit accruals................................................. 903,000 917,000
Liabilities not currently deductible...................................... 548,000 402,000
Allowance for doubtful accounts........................................... 155,000 309,000
Other, net................................................................ 2,377 (1,954)
------------ ------------
Net deferred tax liabilities.................................................. $(2,457,623) $(6,049,954)
============ ============
</TABLE>
The net operating loss carryforwards will be used to offset future taxable
income, subject to their expirations, beginning in 2004 and continuing through
2011. Any future issuance of stock by the Company could result in an ownership
change, as defined by the Tax Reform Act of 1986, and could limit utilization of
net operating loss carryforwards. Also, benefits derived from using net
operating loss carryforwards to offset any taxes calculated as alternative
minimum tax could be less than the recorded amount of the net operating loss
carryforwards. Although realization is not assured, management believes all net
operating loss carryforwards will be realized.
5. CAPITAL STOCK
Concurrent with the acquisition of Transkrit and ADMI (Note 1), AHI made
capital contributions in 1996 and 1997 of $7,764,511 and $23,878,993,
respectively.
Effective June 28, 1996, the board of directors of the Parent adopted the
AmeriComm Holdings, Inc. 1996 Stock Option Plan. During 1996 and 1997, the board
of directors granted options to purchase 244,889 and 39,265 shares,
respectively, of AHI Class A common stock at an exercise price ranging from
$2.62 to $5.38 per share, the estimated fair value at the date of grant, to
certain employees and directors of the Company. As of December 31, 1997, there
are 255,286 options outstanding. The options vest based upon time and based upon
the profitability and the liquidation value of the Company if it is sold to a
third party. During 1996 and 1997, 28,868 and 0 options vested and were
exercised, respectively.
Effective January 28, 1997, the board of directors of the Parent adopted
the AmeriComm Holdings, Inc. 1997 Stock Option Plan for Directors. During 1997,
the board of directors granted options to purchase 10,350 shares of AHI Class A
common stock at an exercise price of $5.38 per share, the estimated fair value
at the date of grant, to certain directors of the Company. The options vest
based upon time or in the event of a change in control of the Parent, as
defined. As of December 31, 1997, 2,898 options were vested and are exercisable.
The Parent accounts for its stock option plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," under which no compensation was recognized during 1996 and 1997.
In 1996, AHI adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for disclosure purposes. In accordance with the disclosure requirements of SFAS
No. 123, AHI is required to calculate pro forma compensation cost of all stock
options granted using an option pricing model. Accordingly, the fair value of
the stock option grants has been estimated as of the grant dates under the
minimum value method using the following weighted average assumptions for 1996
and 1997: a risk-free interest rate of approximately 6.4%, dividend yield of
0.0%, volatility of 0.0% and expected life of 4.5 years. Using these
assumptions, the fair value of the stock options at the dates of grant was $0.
As a result, there is no pro forma compensation expense.
6. RELATED-PARTY TRANSACTIONS
Fees to Affiliate
The Company maintains an Advisory Services Agreement (the "Agreement") with
MDC Management Company II, L.P. ("MDC"), an affiliate. Under the Agreement, MDC
provides certain consulting, financial, and managerial functions for a $250,000
annual fee through June 28, 1996 and a $350,000 annual fee thereafter. In 1995,
1996 and 1997, $187,500, $862,000 (of which $562,000 was accrued as of December
31, 1995) and $350,000, respectively, were paid. No payments shall be made by
the Company to MDC under the Agreement if there is an event of default, as
defined, under the revolving loan facility or the Senior Notes (Note 3). As of
December 31, 1997, there are no such events of default. The Agreement expires
December 31, 2000 and is renewable thereafter, unless terminated by the Company
for justifiable cause, as defined.
During 1996, for services related to the acquisition of Transkrit (Note 1)
and the issuance of the Senior Notes (Note 3), the Company paid MDC $500,000 of
which $350,000 has been recorded as deferred financing costs. In addition, for
services related to the acquisition of ADMI in 1997 (Note 1), the Company paid
MDC $552,000.
Stockholder's Agreement
Certain officers and former officers of the Company purchased and own as of
December 31, 1996 and 1997, an aggregate of 236,947 and 259,421, respectively,
shares of AHI common stock, representing 10% of the outstanding voting common
stock of AHI for 1996 and 1997. The stock was purchased at a price ranging from
$4.33 to $4.63 per share, the fair value at the date of such purchases. Such
stock was purchased through cash payments and the issuance of 6% nonrecourse
notes by MDC in 1996 and prior and by AHI in 1997. During 1997, AHI purchased
from MDC the outstanding 6% nonrecourse notes and accrued but unpaid interest of
$493,132. As of December 31, 1997, the outstanding principal and interest
balance on the notes was approximately $587,000.
All stockholders of AHI are subject to the terms of a stockholders
agreement. This agreement restricts the stockholders' ability to sell, transfer,
and assign the AHI common stock, with AHI having the first right of purchase.
The holders of the stock may be forced to sell the shares to AHI under certain
conditions. In addition, on expiration of a stockholder's employment with the
Company, the Company has the option to buy back the stockholder's common stock
at a specified price primarily based upon either the cost of the shares or the
book value of AHI.
7. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
The Company has a defined benefit pension plan ("The Employees' Retirement
Plan of National Fiberstok Corporation") covering certain employees. On December
20, 1993, the Company amended the plan, freezing future participation by any new
employee of the Company effective December 31, 1993. Effective December 31,
1994, the Company again amended the plan, freezing future accrual of benefits
for all participants. In conjunction with this agreement, all participants of
the plan were retroactively vested.
The funded status of the plan as of December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated projected benefit obligation............................. $ (16,991,377) $ (18,292,100)
Plan assets at fair value............................................ 17,320,422 19,510,900
-------------- --------------
Plan assets greater than projected benefit obligation.................. 329,045 1,218,800
Unrecognized net loss from past experience............................. 784,056 209,300
-------------- --------------
Prepaid pension cost................................................... $ 1,113,101 $ 1,428,100
============== ==============
</TABLE>
The weighted average discount rates used to measure the accumulated
projected benefit obligation were 7.50% and 7.25% for 1996 and 1997,
respectively. The expected long-term rates of return on assets were 8.75% and
9.00 % for 1996 and 1997, respectively.
Net periodic pension costs for 1995, 1996, and 1997 include the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.... $ - $ - $ -
Interest cost on projected benefit obligation........ 1,230,610 1,266,209 1,242,200
Actual return on plan assets........................ (1,772,831) (1,252,658) (1,556,899)
Net amortization on plan assets...................... 361,915 (204,216) -
-------------- -------------- --------------
$ (180,306) $ (190,665) $ (314,699)
============== ============== ==============
</TABLE>
The Company has another defined benefit pension plan ("The Transkrit
Corporation Employees' Pension Plan") covering certain employees. Effective
April 30, 1997, the Company amended the plan, freezing future benefits for
participants at certain locations. In conjunction with this agreement, the
participants with frozen future benefits were retroactively vested. Normal
retirement age is 65, but a provision is made for early retirement. Benefits are
based on the employee's compensation level and years of service. The Company
makes annual contributions to the plan equal to the maximum amount that can be
deducted for income tax purposes.
The 1996 and 1997 projected benefit obligation was computed using the
projected unit credit method, assuming a discount rate on benefit obligations of
7.50% and 7.25%, respectively. The expected long-term rate of return on plan
assets is 9% for 1996 and 1997 and annual salary increases is 4% over the
remaining service lives of the employees in the plan for 1996 and 1997.
The funded status of the plan as of December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated projected benefit obligation, including vested benefits
of $2,144,000 and $2,679,000......................................... $ (2,243,000) $ (2,817,000)
============== ==============
Projected benefit obligation........................................... (3,924,000) (4,470,000)
Plan assets at fair value.............................................. 5,137,000 5,631,000
-------------- --------------
Plan assets greater than projected benefit obligation.................. 1,213,000 1,161,000
Unrecognized net gain.................................................. (395,000) (508,000)
-------------- --------------
Prepaid pension cost................................................... $ 818,000 $ 653,000
============== ==============
</TABLE>
Net periodic pension costs for 1996 and 1997 include the following:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Service Cost -- benefits earned during the period...................... $ 230,000 $ 415,000
Interest Cost on projected benefit obligation.......................... 143,000 287,000
Actual return on plan assets........................................... (227,000) (444,000)
Recognition of curtailment gain........................................ - (93,000)
Net Amortization on Plan Assets........................................ 52,000 -
-------------- --------------
$ 198,000 $ 165,000
============== ==============
</TABLE>
Deferred Compensation Plans
The Company has unfunded deferred compensation plans that provide
retirement benefits to certain current and former employees. The plans provide
retirement benefits generally based on the service provided by the employees to
the Company. Benefits are vested as service is provided. The Company provides
for these plans during the related service lives of the participants at amounts
sufficient to accrue the present value of benefits earned to their retirement
dates. Effective December 31, 1994, the Company froze future benefit accruals
under certain of these deferred compensation agreements. Included in the
accompanying balance sheets are liabilities of $587,000 and $592,000 for these
plans as of December 31, 1996 and 1997, respectively.
Defined Contribution Plans
The Company sponsors several voluntary 401(k) savings plans covering all
eligible employees at certain locations. The plans include provisions which
allow employees to make pretax contributions ranging from 1% to 15% of the
employee's wages. Maximum pretax contributions are capped at 10% or 15% of the
employee's wages, depending on the location. The Company matches between 15% and
60% of employee contributions up to 4% to 6% of eligible employee's wages, which
varies by location. The Company recorded an expense of approximately $283,000,
$421,000 and $979,000 in 1995, 1996 and 1997, respectively, as a result of
contributions to the plans.
Effective January 1, 1998, the Company consolidated its various 401(k)
savings plans into a single plan. Substantially all of the benefits available to
participants of the plan have been standardized as of January 1, 1998, with the
exception of the Company matching contribution, which varies by location.
Postretirement Benefits
The Company provides certain health care and life insurance benefits for
certain retired individuals. The Company accounts for these benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The plan was frozen in 1993 and all eligible participants
of the plan are retired. The accrued postretirement benefit obligation at
December 31, 1996 and 1997 was $711,000 and $478,000, respectively.
Assumptions used in the computation of postretirement benefit expense and
the related obligation are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
Discount rate used to determine accumulated postretirement
benefit obligation................................................... 8% 7.75%
Initial health care cost trend rate.................................... 13% 13%
Ultimate health care cost trend rate................................... 5% 5%
Year ultimate health care cost trend rate.............................. 2009 2009
</TABLE>
If the health care trend rates increased 1% for all future years, the
accumulated postretirement benefit obligation as of December 31, 1997 would have
increased by 4%. The effect of such a change on the interest cost for 1997 would
have been an increase of approximately $17,000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has certain noncancelable operating leases for office and plant
facilities and office equipment. Total rental expense was $351,000, $826,000 and
$1,669,000 in 1995, 1996, and 1997, respectively. Minimum annual rental payments
remaining under noncancelable operating leases as of December 31, 1997 are as
follows:
1998.................................... $ 1,338,000
1999.................................... 854,000
2000.................................... 674,000
2001.................................... 444,000
2002.................................... 273,000
-------------
$ 3,583,000
Environmental Liabilities
The Company has been notified by the United States Environmental Protection
Agency ("EPA") that it and 11 other parties are potentially liable for costs
incurred by the EPA in responding to the cleanup of the Dixie Caverns Landfill
Superfund Site in Roanoke County, Virginia. Subsequently, Roanoke County
expended $2,000,000 to clean up a portion of the Dixie Cavern landfill site and
has filed suit against the Company and the 11 other potentially responsible
parties ("PRPs") for reimbursement of these cleanup costs. Although the PRPs may
be jointly and severally liable for cleanup costs, management believes that the
Company's claim is de minimis, based upon the amount of waste attributable to it
in relation to the other parties. Management believes that the Company will have
no liability in connection with the remaining portions of the site and that the
ultimate outcome of this matter will not have a material adverse impact on the
financial position or results of operations of the Company.
Litigation
The Company is party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company
9. SUBSEQUENT EVENT
Purchase of Cardinal Marketing, Inc. and Cardinal Marketing of New Jersey, Inc.
On March 16, 1998, the Company acquired all of the issued and outstanding
capital stock of Cardinal Marketing, Inc. and Cardinal Marketing of New Jersey,
Inc. (collectively referred to as "Cardinal") for $4,000,000 plus transaction
costs, which was funded through borrowings on its revolving loan facility.
Additional consideration of $600,000 will be paid to the stockholders of
Cardinal for noncompete agreements, of which $200,000 was paid on March 16, 1998
and the remaining $400,000 will be paid in two equal annual installments
commencing March 16, 1999. Upon consummation of this acquisition, Cardinal was
merged into the Company.
STOCK PURCHASE AGREEMENT
Dated as of March 16, 1998
By and Among
AMERICOMM DIRECT MARKETING, INC.,
CARDINAL MARKETING, INC.,
CARDINAL MARKETING OF NEW JERSEY, INC.
and
THE STOCKHOLDERS OF
CARDINAL MARKETING, INC. AND
CARDINAL MARKETING OF NEW JERSEY, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I DEFINITIONS.................................................. 2
ARTICLE II PURCHASE OF STOCK............................................ 7
ss.2.1 Purchase of Stock............................................ 7
ss.2.2 Price ..................................................... 8
ss.2.3 Working Capital Adjustment................................... 9
ss.2.4 Purchase Price............................................... 13
ss.2.5 Closing...................................................... 14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 14
ss.3. Representations and Warranties of the
Company.............................................. 14
ss.3.1 Existence and Good Standing.................................. 14
ss.3.2 Capital Stock................................................ 15
ss.3.3 Authorization and Validity of this
Agreement............................................ 16
ss.3.4 Subsidiaries and Investments................................. 16
ss.3.5 Financial Statements; No Material Changes.................... 17
ss.3.6 Books and Records............................................ 18
ss.3.7 Title to Properties; Encumbrances............................ 18
ss.3.8 Real Property................................................ 19
ss.3.9 Intellectual Property........................................ 20
ss.3.10 Leases ..................................................... 20
ss.3.11 Material Contracts.......................................... 21
ss.3.12 Consents and Approvals; No Violations....................... 23
ss.3.13 Litigation.................................................. 24
ss.3.14 Taxes ..................................................... 24
ss.3.15 Liabilities................................................. 28
ss.3.16 Insurance................................................... 29
ss.3.17 Compliance with Laws........................................ 29
ss.3.18 Employment Relations........................................ 29
ss.3.19 Employee Benefit Plans...................................... 30
ss.3.20 Interests in Customers, Suppliers, etc...................... 38
ss.3.21 Environmental Laws and Regulations.......................... 38
ss.3.22 Bank Accounts, Powers of Attorney........................... 42
ss.3.23 Compensation of Employees................................... 42
ss.3.24 Conduct of Business......................................... 42
ss.3.25 Customer Relations.......................................... 43
ss.3.26 Condition of Assets......................................... 43
ss.3.27 Broker's or Finder's Fees................................... 43
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLER................. 44
ss.4. Representations and Warranties of the
Seller............................................... 44
ss.4.1 Ownership of Stock........................................... 44
ss.4.2 Authorization and Validity of Agreement...................... 44
ss.4.3 Restrictive Documents........................................ 45
ss.4.4 Broker's or Finder's Fees.................................... 45
ss.4.5 Interests in Customers, Suppliers, etc....................... 46
ss.4.6 Consents and Approvals; No Violations........................ 46
ARTICLE V REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER........................................ 47
ss.5. Representations and Warranties of the Purchaser............... 47
ss.5.1 Existence and Good Standing; Power and
Authority........................................... 47
ss.5.2 Restrictive Documents........................................ 47
ss.5.3 Purchase for Investment...................................... 48
ss.5.4 Broker's or Finder's Fees.................................... 48
ss.5.5 Consents and Approvals; No Violations........................ 48
ARTICLE VI TRANSACTIONS PRIOR TO THE CLOSING DATE....................... 49
ss.6.1 Conduct of Business of the Company........................... 49
ss.6.2 Exclusive Dealing............................................ 51
ss.6.3 Review of the Company........................................ 52
ss.6.4 Reasonable Efforts........................................... 53
ss.6.5 Monthly Financial Statements................................. 53
ARTICLE VII CONDITIONS TO THE PURCHASER'S OBLIGATIONS.................... 54
ss.7. Conditions to the Purchaser's Obligations..................... 54
ss.7.1 Opinions of Counsel.......................................... 54
ss.7.2 Good Standing and Other Certificates......................... 54
ss.7.3 No Material Adverse Change................................... 55
ss.7.4 Truth of Representations and Warranties...................... 55
ss.7.5 Performance of Agreements.................................... 56
ss.7.6 No Litigation Threatened..................................... 56
ss.7.7 Third Party Consents; Governmental Approvals................. 56
ss.7.8 Resignations................................................. 56
ss.7.9 Employment Agreements........................................ 56
ss.7.10 FIRPTA....................................................... 57
ss.7.11 Escrow Agreement............................................ 57
ss.7.12 Non-Competition Agreements.................................. 57
ss.7.13 Broker's or Finder's Fees................................... 58
ARTICLE VIII CONDITIONS TO THE COMPANY'S AND THE
SELLERS' OBLIGATIONS................................. 59
ss.8. Conditions to the Company's and the
Sellers' Obligations................................. 59
ss.8.1 Opinions of Counsel.......................................... 59
ss.8.2 Truth of Representations and Warranties...................... 59
ss.8.3 Third Party Consents; Governmental Approvals................. 59
ss.8.4 Performance of Agreements.................................... 60
ss.8.5 No Litigation Threatened..................................... 60
ss.8.6 Employment Agreements........................................ 60
ss.8.7 Non-Competition Agreements................................... 60
ARTICLE IX TAX MATTERS.................................................. 61
ss.9.1 Tax Returns.................................................. 61
ss.9.2 Apportionment of Taxes....................................... 64
ss.9.3 Controversies................................................ 65
ss.9.4 Transfer Taxes............................................... 67
ss.9.5 Amended Returns.............................................. 68
ss.9.6 Indemnification.............................................. 68
ss.9.7 Section 338 Election......................................... 70
ss.9.8 Valuation and Allocation..................................... 71
ARTICLE X SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION................. 72
ss.10.1 Survival of Representations................................. 72
ss.10.2 Indemnification............................................. 72
ss.10.3 Indemnification Procedure................................... 75
ARTICLE XI TERMINATION................................................. 78
ss.11.1 Termination................................................. 78
ss.11.2 Effect of Termination....................................... 79
ARTICLE XII MISCELLANEOUS............................................... 80
ss.12.1 Knowledge of the Company.................................... 80
ss.12.2 Expenses.................................................... 80
ss.12.3 Governing Law............................................... 80
ss.12.4 Captions.................................................... 80
ss.12.5 Publicity................................................... 81
ss.12.6 Notices..................................................... 81
ss.12.7 Parties in Interest......................................... 82
ss.12.8 Counterparts................................................ 82
ss.12.9 Entire Agreement............................................ 82
ss.12.10 Amendments................................................. 83
ss.12.11 Severability............................................... 83
ss.12.12 Third Party Beneficiaries.................................. 83
ss.12.13 Jurisdiction............................................... 83
EXHIBITS
Exhibit A Form of Opinion of Counsel to Company
Exhibit B Form of Escrow Agreement
Exhibit C Form of Non-Competition Agreement -
James Smith
Exhibit D Form of Non-Competition Agreement -
Chris Smith
Exhibit E Form of Non-Solicitation Agreement -
Doug Smith
Exhibit F Form of Non-Solicitation Agreement -
Other Employees
Exhibit G Form of Opinion of Counsel to Purchaser
ANNEXES
Annex I Stockholders; Stock
Annex II Escrow Account; Percentage Interest
SCHEDULES
Schedule 3.7 Title to Property; Encumbrances
Schedule 3.8 Real Property
Schedule 3.9 Intellectual Property
Schedule 3.10 Leases
Schedule 3.11 Material Contracts
Schedule 3.12 Consents and Approvals; No Violations
Schedule 3.13 Litigation
Schedule 3.14 Other Tax Matters
Schedule 3.16 Insurance
Schedule 3.18 Employment Relations
Schedule 3.19 Employee Benefit Plans
Schedule 3.20 Interests in Customers, Suppliers, etc.
Schedule 3.21 Environmental Laws and Regulations
Schedule 3.22 Bank Accounts, Powers of Attorney
Schedule 3.24 Conduct of Business
Schedule 3.25 Customer Relations
Schedule 4.5 Interests in Customers, Suppliers, etc.
Schedule 4.6 Consents and Approvals; No Violations
Schedule 6.1 Conduct of Business of the Company
Schedule 9.8 Valuation of Assets
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
STOCK PURCHASE AGREEMENT (this "AGREEMENT") dated as of March 16, 1998 by
and among AMERICOMM DIRECT MARKETING, INC., a Delaware corporation (the
"PURCHASER"), CARDINAL MARKETING, INC., a Florida corporation ("CARDINAL"),
CARDINAL MARKETING OF NEW JERSEY, INC., a New Jersey corporation ("AFFILIATE",
Affiliate and Cardinal being referred to herein collectively, as the "COMPANY"),
and the stockholders of the Company listed on Annex I attached hereto (the
"STOCKHOLDERS"). The Stockholders shall be referred to herein individually as a
"SELLER" and collectively, as the "SELLERS."
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, each of the Sellers is the holder of the number of common shares
of stock, $.10 par value, of the Company (collectively, the "STOCK") set forth
opposite such Seller's name in Annex I hereto, which shares of the Sellers
constitute all of the issued and outstanding shares of the capital stock of the
Company;
WHEREAS, the Sellers desire to sell, and the Purchaser desires to purchase,
the Stock pursuant to this Agreement; and
WHEREAS, it is the intention of the parties hereto that, upon consummation
of the purchase and sale of the Stock pursuant to this Agreement, the Purchaser
shall own all of the outstanding shares of capital stock of the Company.
NOW, THEREFORE, IT IS AGREED:
ARTICLE I
DEFINITIONS
-----------
ss.1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement, the following terms shall have the respective meanings specified
therefor below (such meanings to be equally applicable to both the singular and
plural forms of the terms defined).
"Affiliate" shall have the meaning specified in the preamble to this
Agreement.
"Aggregate Closing Payment" shall have the meaning specified in Section
2.2.
"Agreement" shall mean this Agreement, as amended, modified or supplemented
from time to time.
"Balance Sheet" shall have the meaning specified in Section 3.5.
"Balance Sheet Date" shall have the meaning specified in Section 3.5.
"Business Day" shall mean any day other than a Saturday, a Sunday or a day
on which banks located in New York, New York shall be authorized or required by
law to close.
"Cardinal" shall have the meaning specified in the preamble to this
Agreement.
"Claim" shall have the meaning specified in Section 10.3
"Closing" shall have the meaning specified in Section 2.5.
"Closing Date" shall have the meaning specified in Section 2.5.
"Closing Net Working Capital Amount" shall have the meaning specified in
Section 2.3.
"Closing Net Working Capital Statement" shall have the meaning specified in
Section 2.3.
"Code" shall have the meaning specified in Section 3.14.
"Common Stock" shall have the meaning specified in Section 3.2.
"Company" shall have the meaning specified in the preamble to this
Agreement.
"Company Property" shall have the meaning specified in Section 3.21.
"Damages" shall have the meaning specified in Section 10.2.
"Employee Benefit Plans" shall have the meaning specified in Section 3.19.
"Encumbrances" shall have the meaning specified in Section 3.7.
"Environmental Claims" shall have the meaning specified in Section 3.21.
"Environmental Law" shall have the meaning specified in Section 3.21.
"ERISA" shall have the meaning specified in Section 3.19.
"Escrow Account" shall have the meaning specified in Section 2.2.
"Escrow Agent" shall have the meaning specified in Section 2.2.
"Escrow Agreement" shall have the meaning specified in Section 7.11.
"Financial Statements" shall have the meaning specified in Section 3.5.
"Hazardous Materials" shall have the meaning specified in Section 3.21.
"Indemnified Party" shall have the meaning specified in Section 10.3.
"Indemnifying Party" shall have the meaning specified in Section 10.3.
"Intellectual Property" shall have the meaning specified in Section 3.9.
"Material Adverse Effect" shall have the meaning specified in Section 3.1.
"Notice of Objection" shall have the meaning specified in Section 2.3.
"Overlap Period" shall have the meaning specified in Section 9.2.
"Permitted Encumbrances" shall have the meaning specified in Section 3.7.
"Permitted Payments" means: so long as the Closing Net Working Capital
Amount exceeds $300,000, the payment of cash distributions to the Sellers at or
prior to Closing, provided that each of the Sellers shall be expected to pay
their income tax obligations of such Seller resulting from the Company's status
as an "S" corporation.
"Person" shall have the meaning specified in Section 3.11.
"Post-Closing Period" shall have the meaning specified in Section 9.7.
"Pre-Closing Period" shall have the meaning specified in Section 3.14.
"Purchase Price" shall have the meaning specified in Section 2.4.
"Purchaser" shall have the meaning specified in the preamble to this
Agreement.
"Real Property" shall have the meaning set forth in Section 3.8.
"Returns" shall have the meaning specified in Section 3.14.
"Seller" shall have the meaning specified in the preamble to this
Agreement.
"Sellers' Representative" shall have the meaning specified in Section 9.1.
"Stock" shall have the meaning specified in the preamble to this Agreement.
"Tax Matter" shall have the meaning specified in Section 9.2.
"Taxes" means all taxes, assessments, charges, duties, fees, levies or
other governmental charges, including, without limitation, all Federal, state,
local, foreign and other income, franchise, profits, capital gains, capital
stock, transfer, sales, use, occupation, property, excise, severance, windfall
profits, stamp, license, payroll, withholding and other taxes, assessments,
charges, duties, fees, levies or other governmental charges of any kind
whatsoever (whether payable directly or by withholding and whether or not
requiring the filing of a Return), all estimated taxes, deficiency assessments,
additions to tax, penalties and interest and shall include any liability for
such amounts as a result either of being a member of a combined, consolidated,
unitary or affiliated group or of a contractual obligation to indemnify any
person or other entity.
"Working Capital Arbitrator" shall have the meaning specified in Section
2.3.
"Working Capital Assets" shall have the meaning specified in Section 2.3.
"Working Capital Liabilities" shall have the meaning specified in Section
2.3.
ARTICLE II
PURCHASE OF STOCK
-----------------
ss.2.1 Purchase of Stock. Subject to the terms and conditions set forth in
this Agreement, the Purchaser agrees to purchase from each of the Sellers on the
Closing Date and each of the Sellers agrees to sell, assign, transfer and
deliver to the Purchaser on the Closing Date, the shares of Stock so owned by
such Seller. The certificates representing the Stock shall be duly endorsed in
blank, or accompanied by stock powers duly executed in blank, by each such
Seller transferring the same to the Purchaser with all necessary transfer tax
and other revenue stamps, acquired at the Sellers' expense, affixed and
cancelled. Each Seller agrees to cure any deficiencies with respect to the
endorsement of the certificates representing the Stock owned by such Seller or
with respect to the stock power accompanying any such certificates.
ss.2.2 Price. In full consideration for the sale by the Sellers of the
Stock to the Purchaser, the Purchaser shall pay at the Closing to the Sellers an
amount equal to $4,000,000 less (i) $100,000 representing payment for the option
granted pursuant to the Stock Purchase Agreement dated November 12, 1998 by and
among the parties hereto, (ii) any payments required to be made by the Company
after the Closing as a result of the transactions contemplated by this Agreement
pursuant to the terms of the Agreement with Stanton Kane dated December 23, 1987
and the Agreement with Richard Demers dated July 10, 1997 and (iii) any
severance payments required to be paid by the Company to Doug Smith on or after
the Closing (such amount, the "AGGREGATE CLOSING PAYMENT") in the following
manner:
(a) by wire transfer in immediately available funds to the escrow
agent (the "ESCROW AGENT") to be held in an escrow account (the "ESCROW
ACCOUNT") pursuant to the provisions of the Escrow Agreement as contemplated by
Section 10.2(e) hereof, an amount equal to $500,000 representing the sum of that
portion of the Aggregate Closing Payment to be placed and held in the Escrow
Account by the Sellers in accordance with the percentages set forth on Annex II
hereto; and
(b) by wire transfer in immediately available funds to the Sellers the
balance of the Aggregate Closing Payment in accordance with the percentages set
forth opposite such Seller's name on Annex II hereof to the account specified by
each of the Sellers to the Purchaser at least two Business Days prior to the
Closing.
ss.2.3 Working Capital Adjustment. (a) Closing Working Capital Statement.
(i) As soon as practicable (but in no event later than 45 days after the Closing
Date), the Sellers' Representative shall prepare and deliver to the Purchaser a
proposed closing net working capital statement of the Company as of the close of
business on the Closing Date (the "CLOSING NET WORKING CAPITAL STATEMENT"). The
Closing Net Working Capital Statement will reflect the Working Capital Assets,
the Working Capital Liabilities and the Closing Net Working Capital Amount as of
the close of business on the Closing Date and will be prepared on a basis
consistent with the preparation of the Balance Sheet. For purposes hereof,
"WORKING CAPITAL ASSETS" shall mean the current assets of the Company, excluding
cash and short term investments; "WORKING CAPITAL LIABILITIES" shall mean the
current liabilities of the Company; and "CLOSING NET WORKING CAPITAL AMOUNT"
shall mean the excess (or deficiency) of Working Capital Assets over Working
Capital Liabilities as of the close of business on the Closing Date. It is
expressly agreed and understood that amounts that have accrued and will become
due to (a) Mr. J. Stanton Kane pursuant to the Incentive Bonus Agreement by and
between Cardinal and Mr. J. Stanton Kane dated December 29, 1994, (b) Mr.
Richard Demers pursuant to the Incentive Bonus Agreement by and between Cardinal
and Mr. Richard Demers dated December 29, 1994, and (c) Mr. James Branam
pursuant to the Incentive Bonus Agreement by and between Cardinal and Mr. James
Branam dated December 29, 1994 (Mr. J. Stanton Kane, Mr. Richard Demers and Mr.
James Branam collectively the "INCENTIVE BONUS EMPLOYEES") if such Incentive
Bonus Employee remains employed by Cardinal through and including March 31, 1998
shall not be included in the calculation of Working Capital Liabilities.
(ii) If the Purchaser does not object to the determination by the
Sellers' Representative of the proposed Closing Net Working Capital Amount by
written notice of objection (the "NOTICE OF OBJECTION") delivered to the
Sellers' Representative within 30 days after the Purchaser's receipt of such
statement, such Notice of Objection to describe in reasonable detail the
Purchaser's proposed adjustments to the Closing Net Working Capital Amount, the
proposed Closing Net Working Capital Statement shall be deemed final and
binding.
(iii) If the Purchaser delivers a Notice of Objection in respect of
the Closing Net Working Capital Amount, then any dispute shall be resolved in
accordance with paragraph (b) of this Section 2.3.
(iv) During the period that the Purchaser's advisors and personnel are
conducting their review of the determination of the Closing Net Working Capital
Amount, and subsequent to issuance of the Closing Net Working Capital Statement,
the Purchaser and its representatives shall have reasonable access during normal
business hours to the workpapers, schedules, memoranda, and all of the documents
prepared or reviewed by the Sellers' Representative and its representatives and
all other books and records and information, in each case related to or arising
in connection with the preparation of the Closing Net Working Capital Statement
and the determination of the Closing Net Working Capital Amount and in each case
to the extent that such books, records and information are not in Purchaser's
custody and control. The Sellers agree in good faith to use all commercially
reasonable efforts to provide such information and access described in this
Section 2.3(a)(iv). To the extent any of such workpapers, schedules, memoranda
and other documents, books and records are in the control of the Purchaser after
the Closing, the Purchaser agrees to grant the Sellers and their representatives
reciprocal access rights for the purpose of calculating the Closing Net Working
Capital Amount.
(b) Resolution of Disputes. (i) If the Purchaser has delivered a
Notice of Objection pursuant to Section 2.3(a)(ii), then the Purchaser, on the
one hand, and the Sellers' Representative, on the other hand, shall promptly
endeavor to agree upon the Closing Net Working Capital Amount. In the event that
a written agreement as to the Closing Net Working Capital Amount has not been
reached within 30 days after the date of receipt by the Sellers' Representative
from the Purchaser of the Notice of Objection, then the determination of the
Closing Net Working Capital Amount may be submitted by written notice by the
Purchaser or the Sellers' Representative to KPMG Peat Marwick or another
nationally recognized accounting firm mutually acceptable to the Sellers, on the
one hand, and the Purchaser, on the other hand (the "WORKING CAPITAL
ARBITRATOR").
(ii) Within 45 days of the submission of any dispute concerning the
determination of the Closing Net Working Capital Amount to the Working Capital
Arbitrator, the Working Capital Arbitrator shall render a decision in accordance
with this paragraph (b) hereof along with a statement of reasons therefor. The
decision of the Working Capital Arbitrator shall be final and binding upon the
parties hereto.
(iii) The fees and expenses of the Working Capital Arbitrator for any
determination under this paragraph (b) shall be borne equally by the Purchaser,
on the one hand, and the Sellers, on the other hand.
(iv) Nothing herein shall be construed to authorize or permit the
Working Capital Arbitrator to determine (i) any question or matter whatever
under or in connection with this Agreement except the determinations of what
adjustments, if any, must be made in one or more of the items reflected in the
Closing Net Working Capital Statement delivered by the Sellers in order for the
Closing Net Working Capital Amount to be determined in accordance with the
provisions of this Agreement, or (ii) a Closing Net Working Capital Amount that
is not equal to one of, or between, the Closing Net Working Capital Amount as
proposed by the Purchaser and the Closing Net Working Capital Amount as proposed
by the Sellers. Nothing herein shall be construed to require the Working Capital
Arbitrator to follow any rules or procedures of any arbitration association.
ss.2.4 Purchase Price. (a) Upon the final determination of the Closing Net
Working Capital Amount, the parties shall make the following adjustments to the
Aggregate Closing Payment (the Closing Payment, as so adjusted, the "PURCHASE
PRICE"):
(i) If the Closing Net Working Capital Amount exceeds $300,000, then
the Aggregate Closing Payment shall be increased by the amount of such excess.
(ii) If the Closing Net Working Capital Amount is less than $300,000,
then the Aggregate Closing Payment shall be decreased by the amount of such
deficiency. (b) Any adjustment required pursuant hereto shall be paid, if
pursuant to Section 2.4(a)(i), by the Purchaser or, if pursuant to Section
2.4(a)(ii), the Seller (determined for each Seller by multiplying the total
payment by the percentage of the issued and outstanding capital stock of the
Company owned by such Seller immediately prior to Closing) by wire transfer in
immediately available funds together with interest on the amount of such
adjustment from the Closing Date to the date of payment thereof at a per annum
rate equal to the "prime lending rate" as published in The Wall Street Journal
on the Closing Date. Such payment shall be made on such of the following dates
as may be applicable: (A) if the Purchaser shall have not objected to the
preparation of the Closing Net Working Capital Statement, the earlier of (1) 35
days after delivery to the Purchaser of the Closing Net Working Capital
Statement or (2) 5 days after the Purchaser has indicated that it has no
objections to the preparation of the Closing Net Working Capital Statement, or
(B) if the Purchaser shall have objected to such preparation, within 5 days
following final agreement or decision with respect to the Closing Net Working
Capital Statement as provided above.
ss.2.5 Closing. The purchase and sale referred to in Section 2.1 (the
"CLOSING") shall take place at 10:00 A.M. at the offices of Ruden, McClosky,
Smith, Schuster & Russell P.A., Fort Lauderdale, Florida on March 16, 1998. Such
date is herein referred to as the "CLOSING DATE".
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
ss.3. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchaser as follows:
ss.3.1 Existence and Good Standing. Cardinal is A corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida. Affiliate is a corporation duly organized, validly existing and in good
standing under the laws of New Jersey. The Company has the requisite corporate
power and authority to own, lease and operate its properties and to carry on its
business as now being conducted. The Company is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the character or
location of the properties owned, leased or operated by the Company or the
nature of the business conducted by the Company makes such qualification or
license necessary, except where the failure to be so duly qualified or licensed
would not have a material adverse effect on the business, operations, financial
condition or results of operations of the Company (a "MATERIAL ADVERSE EFFECT").
ss.3.2 Capital Stock. Cardinal has an authorized capitalization consisting
of 75,000 shares of common stock, par value $.10 per share (the "COMMON STOCK"),
of which 8,423 shares are issued and outstanding. Affiliate has an authorized
recapitalization consisting of 75,000 shares of Common Stock, no par value per
share, of which 100 shares are issued and outstanding. All outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. There are no outstanding subscriptions,
options, warrants, rights, calls, commitments, conversion rights, rights of
exchange, plans or other agreements of any character providing for the purchase,
issuance or sale of any shares of the capital stock of the Company.
ss.3.3 Authorization and Validity of this Agreement. The Company has the
requisite corporate power and authority to execute and deliver this Agreement
and to perform its obligations hereunder. The execution, delivery and
performance of this Agreement by the Company and the performance of its
obligations hereunder have been duly authorized and approved by its Board of
Directors and by the holders of a requisite amount of the Stock and no other
corporate action on the part of the Company or action by the stockholders of the
Company is necessary to authorize the execution, delivery and performance of
this Agreement by the Company. This Agreement has been duly executed and
delivered by the Company and, assuming due execution of this Agreement by the
Purchaser, is a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
ss.3.4 Subsidiaries and Investments. The Company does not own any capital
stock or other equity or ownership or proprietary interest in any corporation,
partnership, association, trust, joint venture or other entity.
ss.3.5 Financial Statements; No Material Changes. (a) The Company has
heretofore furnished the Purchaser with unaudited combined balance sheets of
Cardinal and Affiliate for the years ended December 31, 1995, December 31, 1996
and December 31, 1997, together with related combined statements of income,
retained earnings and cash flows and related supplementary information for each
of the Florida and New Jersey operations and for the Florida and New Jersey
operations combined for the fiscal years then ended (the "FINANCIAL
STATEMENTS"). The Financial Statements fairly present in all material respects
the financial position of each of Cardinal and Affiliate at the respective dates
thereof, and the results of the operations and cash flows of each of Cardinal
and Affiliate for the respective periods indicated. The Financial Statements of
each of Cardinal and Affiliate dated December 31, 1997, is hereinafter referred
to as the "BALANCE SHEET" and December 31, 1997, is hereinafter referred to as
the "BALANCE SHEET DATE."
(v) Since December 31, 1997, there has been no (i) material adverse change
in the business, operations, financial condition or results of operations of
Cardinal or Affiliate (except for adverse changes resulting from the loss of the
Company's customer "Wachovia Bank Card Services") or (ii) material damage,
destruction or loss to any asset or property, tangible or intangible, of
Cardinal or Affiliate which materially affects the ability of Cardinal or
Affiliate to conduct its business.
ss.3.6 Books and Records. The minute books of the Company, as previously
made available to the Purchaser and its representatives, contain materially
accurate records of all meetings of, and corporate actions taken by (including
action taken by written consent), the respective shareholders and Board of
Directors of the Company. At Closing all of the books and records of the Company
will be in the possession of the Company.
ss.3.7 Title to Properties; Encumbrances. Except as set forth on Schedule
3.7 attached hereto and except for such properties and assets which have been
sold or otherwise disposed of in the ordinary course of business, the Company
has good title to its material properties and assets (real and personal,
tangible and intangible), including, without limitation, the material properties
and assets reflected in the Balance Sheet, subject to no encumbrance, lien,
charge or other restriction of any kind or character ("ENCUMBRANCES"), except
for (i) Encumbrances reflected in the Balance Sheet, (ii) Encumbrances for
current taxes, assessments or governmental charges or levies on property not yet
due and delinquent, (iii) Encumbrances arising by operation of law and (iv)
Encumbrances described on Schedule 3.7 attached hereto (Encumbrances of the type
described in clauses (i), (ii), (iii) and (iv) above are hereinafter sometimes
referred to as "PERMITTED ENCUMBRANCES").
ss.3.8 Real Property. Schedule 3.8 attached hereto contains an accurate
and complete list of all real property owned in whole or in part by the Company
(the "REAL PROPERTY") and identifies the nature of the activities conducted on
such property. With respect to all of the buildings, structures and
appurtenances situated on the Real Property, the Company has adequate rights of
ingress and egress for operation of the business of the Company in the ordinary
course consistent with past practice. None of such buildings, structures or
appurtenances, nor the operation or maintenance thereof, violates any
restrictive covenant or encroaches, on any property owned by others, except for
such violations, encumbrances or encroachments which would not have a Material
Adverse Effect.
ss.3.9 Intellectual Property. The Company possesses all patents, trade
names, trademarks, service marks and copyrights necessary for the ownership of
its properties and the conduct of its business as presently conducted
(collectively, the "INTELLECTUAL PROPERTY"). All Intellectual Property is set
forth on Schedule 3.9 attached hereto. To the best of the Company's knowledge,
all Intellectual Property is valid and subsisting and the Company has received
no written notice of any event, inquiry, investigation or proceeding threatening
the validity of any such Intellectual Property.
ss.3.10 Leases. Schedule 3.10 attached hereto contains a list of all leases
or sub-leases to which the Company is a party requiring an annual aggregate
payment of at least $10,000. Except as otherwise set forth in Schedule 3.10
attached hereto, each lease or sub-lease set forth in Schedule 3.10 is in full
force and effect; all rents and additional rents due to date from the Company on
each such lease or sub-lease have been paid; the Company has not received notice
that it is in material default under any such lease or sub-lease; and, to the
knowledge of the Company, there exists no event, occurrence, condition or act
(including the consummation of the transactions contemplated by this Agreement)
which, with the giving of notice, the lapse of time or the happening of any
further event or condition, would become a material default by the Company under
such lease or sub-lease.
ss.3.11 Material Contracts. Except as set forth on Schedule 3.10 and
Schedule 3.11 attached hereto, the Company neither has nor is bound by (a) any
agreement, contract or commitment that involves the performance of services or
the delivery of goods and/or materials by it of an amount or value in excess of
$10,000 or for a duration in excess of six months in the case of the performance
of services, (b) any agreement, contract or commitment not in the ordinary
course of business, (c) any agreement, indenture or other instrument which
contains restrictions with respect to the payment of dividends or any other
distribution in respect of its capital stock, (d) any agreement, contract or
commitment relating to capital expenditures or dispositions of assets in excess
of $10,000, (e) any agreement, indenture or instrument relating to indebtedness,
liability for borrowed money or the deferred purchase price of property
(excluding trade payables in the ordinary course of business), (f) any loan or
advance to, or investment in, any individual, partnership, joint venture,
corporation, trust, unincorporated organization, government or other entity
(each a "PERSON"), any agreement, contract or commitment relating to the making
of any such loan, advance or investment or any agreement, contract or commitment
involving a sharing of profits (excluding intercompany accounts with Affiliate),
(g) any guarantee or other contingent liability in respect of any indebtedness
or obligation of any Person (other than in the ordinary course of business), (h)
any management service, consulting or any other similar type of contract, (i)
any agreement, contract or commitment limiting the ability of the Company to
engage in any line of business or to compete with any Person, (j) any warranty,
guaranty or other similar undertaking with respect to a contractual performance
extended by the Company other than in the ordinary course of business, or (k)
any amendment, modification or supplement in respect of any of the foregoing.
Except as otherwise set forth on Schedule 3.11, each contract or agreement set
forth on Schedule 3.11 is in full force and effect and there exists no material
default or event of default or to the knowledge of the Company, event,
occurrence, condition or act (including the consummation of the transactions
contemplated hereby) which, with the giving of notice, the lapse of time or the
happening of any other event or condition, would become a material default or
event of default thereunder.
ss.3.12 Consents and Approvals; No Violations. Except as set forth in
Schedule 3.12 attached hereto, the execution and delivery of this Agreement by
the Company and the consummation of the transactions contemplated hereby (a)
will not violate or contravene any provision of the Certificate of Incorporation
or By-laws of the Company, (b) will not violate or contravene any statute, rule,
regulation, order or decree of any public body or authority by which the Company
is bound or by which any of its respective properties or assets are bound, (c)
will not require any filing with, or permit, consent or approval of, or the
giving of any notice to, any governmental or regulatory body, agency or
authority, or any other Person and (d) will not result in a violation or breach
of, conflict with, constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation, payment
or acceleration) under, or result in the creation of any Encumbrance upon any of
the properties or assets of the Company under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, franchise, permit,
agreement, lease, franchise agreement or any other instrument or obligation to
which the Company is a party, or by which it or any of their respective
properties or assets may be bound, except, in the case of clauses (c) and (d),
for such filing, permit, consent or approval, the absence of which, and
violations, breaches, defaults, conflicts and encumbrances which, in the
aggregate would not have a Material Adverse Effect.
ss.3.13 Litigation. Except as set forth on Schedule 3.13 attached hereto,
there is no action, suit, proceeding at law or in equity, arbitration or
administrative or other proceeding by or before (or to the knowledge of the
Company any investigation by) any governmental or other instrumentality or
agency, pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or its properties or rights which could materially and
adversely affect the right or ability of the Company to carry on its business as
now conducted, or which could have a Material Adverse Effect; and the Company
knows of no valid basis for any such action, proceeding or investigation. The
Company is subject to no judgment, order or decree entered in any lawsuit or
proceeding which could reasonably be likely to have a Material Adverse Effect.
ss.3.14 Taxes. (a) Tax Returns. The Company has timely filed or caused to
be timely filed or will timely file or cause to be timely filed with the
appropriate taxing authorities all returns, statements, forms and reports for
Taxes ("RETURNS") that are required to be filed by, or with respect to, the
Company on or prior to the Closing Date. The Returns have accurately reflected
and will accurately reflect all liability for Taxes of the Company for the
periods covered thereby.
(b) Payment of Taxes. All material Taxes and Tax liabilities of the Company
for all taxable years or periods that end on or before the Closing Date and,
with respect to any taxable year or period beginning before and ending after the
Closing Date, the portion of such taxable year or period ending on and including
the Closing Date ("PRE-CLOSING PERIODS") have been timely paid or accrued and
adequately disclosed and fully provided for on the books and records of the
Company in accordance with generally accepted accounting principles consistently
applied.
(c) Other Tax Matters. (i) Schedule 3.14 attached hereto sets forth (A)
each taxable year or other taxable period of the Company for which an audit or
other examination of Taxes by the appropriate tax authorities of any nation,
state, locality or other jurisdiction is currently in progress (or scheduled as
of the Closing Date to be conducted) together with the names of the respective
tax authorities conducting (or scheduled to conduct) such audits or examinations
and a description of the subject matter of such audits or examinations, (B) the
most recent taxable year or other taxable period for which an audit or other
examination relating to Federal income taxes of the Company has been finally
completed and the disposition of such audits or examinations, (C) the taxable
years or other taxable periods of the Company which will not be subject to the
normally applicable statute of limitations by reason of the existence of
circumstances that would cause any such statute of limitations for applicable
Taxes to be extended, (D) the amount of any proposed adjustments (and the
principal reason therefor) relating to any Returns for Tax liability of the
Company which have been proposed or assessed by any taxing authority and (E) a
list of all notices received by the Company from any taxing authority relating
to any issue which could affect the Tax liability of the Company, which issue
has not been finally determined and which, if determined adversely to the
Company, could result in a Tax liability.
(ii) The Company has not been included in any "consolidated,"
"unitary" or "combined" Return provided for under the law of the United States,
any foreign jurisdiction or any state or locality with respect to Taxes for any
taxable period for which the statute of limitations has not
expired.
(iii) All Taxes which the Company is (or was) required by law to
withhold or collect have been duly withheld or collected, and have been timely
paid over to the proper authorities to the extent due and payable.
(iv) The Company is not a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Internal Revenue
Code of 1986, as amended, and the rules and regulations promulgated thereunder
(the "CODE").
(v) There are no tax sharing, allocation, indemnification or similar
agreements or arrangements in effect as between the Company or any predecessor
or affiliate thereof and any other party (including the Sellers and any
predecessor or affiliate thereof) pursuant to which the Purchaser or the Company
could be liable for any Taxes or other claims of any party.
(vi) The Company has not applied for, been granted, or agreed to any
accounting method change for which it will be required to take into account any
adjustment under Section 481 of the Code or any similar provision of the Code or
the corresponding tax laws of any nation, state, locality or other jurisdiction.
(vii) No indebtedness of the Company consists of "corporate
acquisition indebtedness" within the meaning of Section 279 of the Code.
(d) Cardinal has made a valid S election under Section 1361 of the Code.
With respect to Cardinal, such election was made on December 23, 1986 and was
effective as of the year commencing January 1, 1987. Cardinal has also made all
such elections required under any analogous provisions of state or local law.
Cardinal will continue to be a valid S corporation through the Closing Date and
Sellers will be eligible to make an election under Section 338(h)(10) of the
Code with respect to the sale of the stock of Cardinal pursuant to this
Agreement.
(e) Affiliate has made a valid S election under Section 1361 of the Code.
With respect to Affiliate, such election was made on December 19, 1996 and was
effective as of the year commencing January 1, 1997. Affiliate will continue to
be a valid S corporation through the Closing Date for the purposes of federal
income taxation and Sellers will be eligible to make the an election under
Section 338(h)(10) of the Code with respect to the sale of the stock of
Affiliate pursuant to this Agreement. Affiliate has not made any such analogous
election under New Jersey law, therefore, Affiliate is not treated as an S
corporation for New Jersey income tax purposes.
ss.3.15 Liabilities. Other than liabilities incurred subsequent to the
Balance Sheet Date in the ordinary course of business, the Company has no
outstanding material claims, liabilities or indebtedness, contingent or
otherwise, except (i) as set forth in the Balance Sheet and (ii) future
obligations under executory contracts of the Company entered into in the
ordinary course of business which obligations will not have a Material Adverse
Effect.
ss.3.16 Insurance. Schedule 3.16 contains an accurate and complete summary
description of all policies of property, fire and casualty, product liability,
workers compensation and other forms of insurance owned or held by the Company.
The Company has not received (i) any notice of cancellation of any policy
described in such Schedule or refusal of coverage thereunder, (ii) any notice
that any issuer of such policy has filed for protection under applicable
bankruptcy laws or is otherwise in the process of liquidating or has been
liquidated, or (iii) any other indication that such policies are no longer in
full force or effect or that the issuer of any such policy is no longer willing
or able to perform its obligations thereunder. Since the last renewal date of
any insurance policy, there has not been any material adverse change in the
relationship of the Company with its insurers or in the premiums payable
pursuant to such policies.
ss.3.17 Compliance with Laws. The Company is in compliance with all
applicable laws, regulations, orders, judgments and decrees, except where the
failure to so comply would not have a Material Adverse Effect.
ss.3.18 Employment Relations. (a) The Company is in material compliance
with all Federal, state or other applicable laws, domestic or foreign,
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and has not, and is not, engaged in any unfair
labor practice;
(b) no unfair labor practice complaint against the Company is pending
before the National Labor Relations Board;
(c) there is no labor strike, dispute, slowdown or stoppage actually
pending or threatened against or involving the Company;
(d) the Company is not a party to any collective bargaining agreement and
no collective bargaining agreement is currently being negotiated by the Company;
and
(e) except as provided on Schedule 3.18, no claim in respect of the
employment of any employee has been asserted or, to the knowledge of the
Company, threatened, against the Company.
ss.3.19 Employee Benefit Plans. (a) List of Plans. Set forth in Schedule
3.19 attached hereto is an accurate and complete list of all domestic and
foreign (i) "employee benefit plans," within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"); (ii) bonus, stock option, stock purchase,
restricted stock, incentive, profit-sharing, pension or retirement, deferred
compensation, medical, life, disability, accident, salary continuation,
severance, accrued leave, vacation, sick pay, sick leave, supplemental
retirement and unemployment benefit plans, programs, arrangements, commitments
and/or practices (whether or not insured); and (iii) employment, consulting,
termination, and severance contracts or agreements; in each case for active,
retired or former employees or directors, whether or not any such plans,
programs, arrangements, commitments, contracts, agreements and/or practices
(referred to in (i), (ii) or (iii) above) are in writing or are otherwise exempt
from the provisions of ERISA; that have been established, maintained or
contributed to (or with respect to which an obligation to contribute has been
undertaken) or with respect to which any potential liability is borne by the
Company (including, for this purpose and for the purpose of all of the
representations in this Section 3.19, any predecessors to the Company and all
employers (whether or not incorporated) that are by reason of common control
treated together with the Company and/or the Sellers as a single employer (i)
within the meaning of Section 414 of the Internal Revenue Code of 1986, as
amended, and the rules and regulations thereunder (the "CODE") or (ii) as a
result of the Company and/or any of the Sellers being or having been a general
partner of any such employer), since September 2, 1974 ("EMPLOYEE BENEFIT
PLANS").
(b) Status of Plans. Each Employee Benefit Plan complies in form with the
requirements of all applicable laws, including, without limitation, ERISA and
the Code, and has at all times been maintained and operated in substantial
compliance with its terms and the requirements of all applicable laws,
including, without limitation, ERISA and the Code. No complete or partial
termination of any Employee Benefit Plan has occurred or is expected to occur.
The Company has no commitment, intention or understanding to create, modify or
terminate any Employee Benefit Plan. Except as required to maintain the
tax-qualified status of any Employee Benefit Plan intended to qualify under
Section 401(a) of the Code, no condition or circumstance exists that would
prevent the amendment or termination of any Employee Benefit Plan. No event has
occurred and no condition or circumstance has existed that could result in a
material increase in the benefits under or the expense of maintaining any
Employee Benefit Plan from the level of benefits or expense incurred for the
most recent fiscal year ended thereof.
(c) No Pension Plans. No Employee Benefit Plan is an "employee pension
benefit plan" (within the meaning of Section 3(2) of ERISA) subject to Section
412 of the Code or Section 302 or Title IV of ERISA. The Company has never
maintained or contributed to, or had any obligation to contribute to (or borne
any liability with respect to) any "multiple employer plan" (within the meaning
of the Code or ERISA) or any "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA).
(d) Liabilities. The Company does not maintain any Employee Benefit Plan
which is a "group health plan" (as such term is defined in Section 607(1) of
ERISA or Section 5000(b)(1) of the Code) that has not been administered and
operated in all respects in compliance with the applicable requirements of
Section 601 of ERISA and Section 4980B(f) of the Code and the Company is not
subject to any material liability, including, without limitation, additional
contributions, fines, taxes, penalties or loss of tax deduction as a result of
such administration and operation. The Company does not maintain any Employee
Benefit Plan (whether qualified or nonqualified within the meaning of Section
401(a) of the Code) providing for post-employment or retiree health, life and/or
other welfare benefits and having unfunded liabilities, and the Company does not
have any obligation to provide any such benefits to any retired or former
employees or active employees following such employees' retirement or
termination of service. The Company does not maintain any Employee Benefit Plan
which is an "employee welfare benefit plan" (as such term is defined in Section
3(1) of ERISA) that has provided any "disqualified benefit" (as such term is
defined in Section 4976(b) of the Code) with respect to which an excise tax
could be imposed. The Company has no unfunded liabilities pursuant to any
Employee Benefit Plan that is not intended to be qualified under Section 401(a)
of the Code.
The Company has not incurred any liability for any tax or excise tax
arising under Chapter 43 of the Code, and no event has occurred and no condition
or circumstance has existed that could give rise to any such liability.
There are no actions, suits or claims pending, or, to the best knowledge
and belief of the Company and the Sellers, threatened, anticipated or expected
to be asserted against any Employee Benefit Plan or the assets of any such plan
(other than routine claims for benefits and appeals of denied routine claims).
No civil or criminal action brought pursuant to the provisions of Title I,
Subtitle B, Part 5 of ERISA is pending, threatened, anticipated, or expected to
be asserted against the Company or any fiduciary of any Employee Benefit Plan,
in any case with respect to any Employee Benefit Plan. No Employee Benefit Plan
or any fiduciary thereof has been the direct or indirect subject of an audit,
investigation or examination by any governmental or quasi-governmental agency.
(e) Contributions. Full payment has been made of all amounts which the
Company is required, under applicable law or under any Employee Benefit Plan or
any agreement relating to any Employee Benefit Plan to which the Company is a
party, to have paid as contributions or premiums thereto as of the last day of
the most recent fiscal year of such Employee Benefit Plan ended prior to the
date hereof. All such contributions and/or premiums have been fully deducted for
income tax purposes and no such deduction has been challenged or disallowed by
any governmental entity, and to the best knowledge and belief of the Sellers and
the Company no event has occurred and no condition or circumstance has existed
that could give rise to any such challenge or disallowance. The Company has made
adequate provision for reserves to meet contributions and premiums and any other
liabilities that have not been paid or satisfied because they are not yet due
under the terms of any Employee Benefit Plan, applicable law or related
agreements. Benefits under all Employee Benefit Plans are as represented and
have not been increased subsequent to the date as of which documents have been
provided.
(f) Tax Qualification. Each Employee Benefit Plan intended to be qualified
under Section 401(a) of the Code has been determined to be so qualified by the
Internal Revenue Service. Each trust established in connection with any Employee
Benefit Plan which is intended to be exempt from Federal income taxation under
Section 501(a) of the Code has been determined to be so exempt by the Internal
Revenue Service. Since the date of each most recent determination referred to in
this paragraph (f), no event has occurred and no condition or circumstance has
existed that resulted or is likely to result in the revocation of any such
determination or that could adversely affect the qualified status of any such
Employee Benefit Plan or the exempt status of any such trust.
(g) Transactions. Neither the Company nor any of its directors, officers,
employees or, to the best knowledge and belief of the Sellers and the Company,
other persons who participate in the operation of any Employee Benefit Plan or
related trust or funding vehicle, has engaged in any transaction with respect to
any Employee Benefit Plan or breached any applicable fiduciary responsibilities
or obligations under Title I of ERISA that would subject any of them to a tax,
penalty or liability for prohibited transactions or breach of any obligations
under ERISA or the Code or would result in any claim being made under, by or on
behalf of any such Employee Benefit Plan by any party with standing to make such
claim.
(h) Triggering Events. The execution of this Agreement and the consummation
of the transactions contemplated hereby, do not constitute a triggering event
under any Employee Benefit Plan, policy, arrangement, statement, commitment or
agreement, whether or not legally enforceable, which (either alone or upon the
occurrence of any additional or subsequent event) will or may result in any
payment (whether of severance pay or otherwise), "parachute payment" (as such
term is defined in Section 280G of the Code), acceleration, vesting or increase
in benefits to any employee or former employee or director of the Company. No
Employee Benefit Plan provides for the payment of severance, termination, change
in control or similar-type payments or benefits.
(i) Documents. The Sellers have delivered or caused to be delivered to
Purchaser and its counsel true and complete copies of all material documents in
connection with each Employee Benefit Plan, including, without limitation (where
applicable): (i) all Employee Benefit Plans as in effect on the date hereof,
together with all amendments thereto, including, in the case of any Employee
Benefit Plan not set forth in writing, a written description thereof; (ii) all
current summary plan descriptions, summaries of material modifications, and
material communications; (iii) all current trust agreements, declarations of
trust and other documents establishing other funding arrangements (and all
amendments thereto and the latest financial statements thereof); (iv) the most
recent Internal Revenue Service determination letter obtained with respect to
each Employee Benefit Plan intended to be qualified under Section 401(a) of the
Code or exempt under Section 501(a) of the Code; (v) the annual report on
Internal Revenue Service Form 5500-series for each of the last three years for
each Employee Benefit Plan required to file such form; (vi) the most recently
prepared financial statements for each Employee Benefit Plan for which such
statements are required; and (vii) all contracts and agreements relating to each
Employee Benefit Plan, including, without limitation, service provider
agreements, insurance contracts, annuity contracts, investment management
agreements, subscription agreements, participation agreements, and recordkeeping
agreements and collective bargaining agreements.
ss.3.20 Interests in Customers, Suppliers, etc. Except as set forth on
Schedule 3.20 attached hereto, neither the Sellers nor any officer or director
of the Company possesses, directly or indirectly, any ownership interest in, or
is a director, officer or employee of, any Person which is a supplier, customer,
lessor, lessee, licensor, developer, competitor or potential competitor of the
Company. Ownership of securities of a company whose securities are registered
under the Securities Exchange Act of 1934 of 5% or less of any class of such
securities shall not be deemed to be a financial interest for purposes of this
Section 3.20.
ss.3.21 Environmental Laws and Regulations. Except as set forth on Schedule
3.21 and except for that which would not have a Material Adverse Effect:
(a) Hazardous Materials (as hereinafter defined) have not been generated,
used, treated or stored on, transported to or from, or released or disposed on
any Company Property (as hereinafter defined), by or on behalf of the Company,
or, to the best knowledge of the Company, any property adjoining, adjacent to or
in the vicinity of any Company Property, except in compliance with Environmental
Laws.
(b) The Company is in compliance in all material respects with
Environmental Laws (as hereinafter defined) and the requirements of permits
issued under such Environmental Laws with respect to any Company Property.
(c) There are no pending or, to the knowledge of the Company, threatened
Environmental Claims (as hereinafter defined) against the Company or any Company
Property.
(d) There are no facts, circumstances, conditions or occurrences regarding
the Company's past or present business or operations or any Company Property or
former Company Property, or, to the knowledge of the Company, any property
adjoining or in the vicinity of any Company Property, that could reasonably be
anticipated (i) to form the basis of an Environmental Claim against the Company
or any Company Property or assets, or (ii) to cause the Company Property or
assets to be subject to any restrictions on its ownership, occupancy, use or
transferability under any Environmental Law.
(e) To the knowledge of the Company there are not now and there have never
been any underground storage tanks located on any Company Property or on any
property adjoining or adjacent to any Company Property.
(f) For purposes of this Section 3.21 the following definitions shall
apply:
"COMPANY PROPERTY" means any real property and improvements owned, leased,
used, operated or occupied by the Company.
"HAZARDOUS MATERIALS" means (a) any petroleum or petroleum products,
radioactive materials, asbestos in any form that is friable, urea formaldehyde
foam insulation, transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls, and radon gas; and (b) any
chemicals, materials or substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic
pollutants," or words of similar import, under any applicable Environmental Law.
"ENVIRONMENTAL LAW" means any federal, state or local statute, law, rule,
regulation, ordinance, code, policy or rule of common law in effect and in each
case as amended as of the Closing Date, and any judicial or administrative
interpretation thereof as of the Closing Date, including any judicial or
administrative order, consent decree or judgment, relating to the environment,
health, safety or Hazardous Materials, including the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss. 6901 et seq.;
the Resource Conservation and Recovery Act, 42 U.S.C. ss. 9601 et seq.; the
Federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq.; the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 et seq.; the Clean Air Act, 42 U.S.C.
ss. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. ss. 300f et seq.; the
Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq.; the Emergency Planning
and Community Right-To-Know Act, 42 U.S.C. ss. 1101 et seq.; the Occupational
Safety and Health Act of 1970, 29 U.S.C. ss.651 et seq.; and their state and
local counterparts and equivalents; in each case, as amended.
"ENVIRONMENTAL CLAIMS" means administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or violation, investigations or proceedings relating in any way
to any Environmental Law or any permit issued under any such Law, including (a)
Environmental Claims by any governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law, and (b) Environmental Claims by
any third party seeking damages, contribution, indemnification, cost recovery,
compensation or injunctive relief resulting from Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the environment.
ss.3.22 Bank Accounts, Powers of Attorney. Set forth on Schedule 3.22
attached hereto is an accurate and complete list showing (a) the name and
address of each bank in which the Company has a material account or safe deposit
box, the number of any such account or any such box and the names of all persons
authorized to draw thereon or to have access thereto and (b) the names of all
persons, if any, holding powers of attorney from the Company.
ss.3.23 Compensation of Employees. The Company has previously provided the
Purchaser with an accurate and complete list for fiscal year 1997 showing the
names of all persons employed by the Company who received more than $50,000 in
1997 cash compensation (including, without limitation, salary, commission and
bonus) and who are expected to be employed by the Company on the Closing Date.
Such list sets forth the present salary or hourly wage, total in 1997 and
expected 1998 cash compensation (including, without limitation, salary,
commission and bonus) and fringe benefits, of each such person.
ss.3.24 Conduct of Business. Except as disclosed on Schedule 3.24 attached
hereto and except as expressly contemplated by this Agreement, since June 30,
1997, the Company has taken no action which, if taken subsequent to the
execution of this Agreement and on or prior to the Closing Date, would
constitute a breach of the Company's agreements set forth in Section 6.1.
ss.3.25 Customer Relations. Except as set forth on Schedule 3.25 attached
hereto, the Company has not, since December 31, 1996, received oral or written
notice from any of the top ten customers of the Company (based on 1996 revenues
of the Company) that any such customer intends to reduce the volume or dollar
amount of purchases from the Company.
ss.3.26 Condition of Assets. The assets and properties utilized in and
material to the conduct of the Company's business, whether owned or leased, are
in the aggregate in good operating condition and repair (normal wear and tear
excepted) and, with the exception that the Company believes that the premises on
which the Company operates need to be expanded, are suitable for the purposes
for which they are presently being used.
ss.3.27 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of the Company or the Sellers, including, without limitation, The
Platinum Group, Inc., is, or will be, entitled to any commission or broker's or
finder's fees from the Company, or from any Person controlled by or under common
control with the Company, in connection with any of the transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
---------------------------------------------
ss.4. Representations and Warranties of the Sellers. Each of the Sellers
represents and warrants to the Purchaser as follows:
ss.4.1 Ownership of Stock. Such Seller is the lawful owner of the shares of
Stock listed opposite such Seller's name on Annex I hereto, free and clear of
all liens, encumbrances, restrictions and claims of every kind. Such Seller has
the full legal right, power and authority to enter into this Agreement and to
sell, assign, transfer and convey such shares of Stock so owned by such Seller
pursuant to this Agreement, and the delivery to the Purchaser of such shares of
Stock pursuant to the provisions of this Agreement will transfer to the
Purchaser good title thereto, free and clear of all Encumbrances. The shares of
Stock listed on Annex I hereto constitute all of the outstanding capital stock
of Cardinal and Affiliate.
ss.4.2 Authorization and Validity of Agreement. Such Seller has the
requisite power and authority to execute and deliver this Agreement and the
Escrow Agreement, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated to be performed by such Seller hereby
and thereby. This Agreement has been, and at the Closing the Escrow Agreement
will be, duly executed and delivered by each of the Sellers and, assuming the
due execution of this Agreement and the Escrow Agreement by the Purchaser, this
Agreement is, and at the Closing the Escrow Agreement will be, a valid and
binding obligation of each of the Sellers, enforceable against each of the
Sellers in accordance with its respective terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization and similar laws affecting the enforcement of creditors' rights
generally and to general equitable principles.
ss.4.3 Restrictive Documents. Such Seller is not subject to any mortgage,
lien, lease, agreement, instrument, order, law, rule, regulation, judgment or
decree, or any other restriction of any kind or character which would prevent
consummation by such Seller of the transactions contemplated by this Agreement.
ss.4.4 Broker's or Finder's Fees. Except for The Platinum Group, Inc., no
agent, broker, person or firm acting on behalf of such Seller is, or will be,
entitled to any commission or broker's or finder's fees from such Seller in
connection with any of the transactions contemplated by this Agreement.
ss.4.5 Interests in Customers, Suppliers, etc. Except as set forth on
Schedule 4.5, neither such Seller nor, to the best knowledge of such Seller, any
other officer or director of the Company, possesses, directly or indirectly, any
ownership interest in, or is a director, officer or employee of, any Person
which is a supplier, customer, lessor, lessee, licensor, developer, competitor
or potential competitor of the Company. Ownership of securities of a company
whose securities are registered under the Securities Exchange Act of 1934 of 5%
or less of any class of such securities shall not be deemed to be an ownership
interest for purposes of this Section 4.5.
ss.4.6 Consents and Approvals; No Violations. Except (i) as set forth in
Schedule 4.6 attached hereto and (ii) for any applicable state or federal
securities laws, the execution and delivery of this Agreement by the Sellers and
the consummation of the transactions contemplated hereby (a) will not violate or
contravene any statute, rule, regulation, order or decree of any public body or
authority by which the Sellers are bound, and (b) will not require any filing
with, or permit, consent or approval of, or the giving of any notice to, any
governmental or regulatory body, agency or authority, or any other Person.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
-----------------------------------------------
ss.5. Representations and Warranties of the Purchaser. The Purchaser
represents and warrants to the Company and each of the Sellers as follows:
ss.5.1 Existence and Good Standing; Power and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Purchaser has the requisite corporate power and
authority to enter into, execute and deliver this Agreement and perform its
obligations hereunder. This Agreement has been duly authorized and approved by
the Purchaser and, assuming the due execution of this Agreement by the Company
and each of the Sellers, is a valid and binding obligation of the Purchaser
enforceable against it in accordance with its terms, except to the extent that
its enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
ss.5.2 Restrictive Documents. The Purchaser is not subject to any mortgage,
lien, lease, agreement, instrument, order, law, rule, regulation, judgment or
decree, or any other restriction of any kind or character which would prevent
consummation by it of the transactions contemplated by this Agreement.
ss.5.3 Purchase for Investment. The Purchaser will acquire the Stock for
its own account for investment and not with a view toward any resale or
distribution thereof; provided, however, that the disposition of the Purchaser's
property shall at all times remain within the sole control of the Purchaser.
ss.5.4 Broker's or Finder's Fees. No agent, broker, person or firm acting
on behalf of the Purchaser is, or will be, entitled to any commission or
broker's or finder's fees from the Sellers in connection with any of the
transactions contemplated by this Agreement.
ss.5.5 Consents and Approvals; No Violations. The execution and delivery of
this Agreement by the Purchaser and the consummation of the transactions
contemplated hereby (a) will not violate or contravene any provision of the
Certificate of Incorporation or By-laws of the Purchaser, (b) will not violate
or contravene any statute, rule, regulation, order or decree of any public body
or authority by which the Purchaser is bound, and (c) will not require any
filing with, or permit, consent or approval of, or the giving of any notice to,
any governmental or regulatory body, agency or authority, or any other Person.
ARTICLE VI
TRANSACTIONS PRIOR TO THE CLOSING DATE
--------------------------------------
ss.6.1 Conduct of Business of the Company. During the period from the date
of this Agreement to the Closing Date, the Company shall conduct its operations
only according to its ordinary and usual course of business; use its reasonable
efforts to preserve intact its business organizations, keep available the
services of its officers and employees and maintain its relationships and
goodwill with licensors, suppliers, distributors, customers, landlords,
employees, agents and others having business relationships with it; confer with
the Purchaser concerning operational matters of a material nature and report
periodically to the Purchaser concerning the business, operations and finances
of the Company. Notwithstanding the immediately preceding sentence, prior to the
Closing Date, except as may be first approved in writing by the Purchaser or, in
the case of clause (g) of this Section 6.1, except to the extent dollar amounts
described therein constitute Permitted Payments or as set forth on Schedule 6.1,
and except as is otherwise permitted or required by this Agreement, the Company
shall, (a) refrain from amending or modifying its Certificate of Incorporation
or By-Laws from its form on the date of this Agreement, (b) refrain from paying
or increasing any bonuses, salaries, or other compensation to any director,
officer, employee or stockholder (excluding distributions covered by clause (g)
below) or entering into any employment, severance, or similar agreement with any
director, officer, or employee other than, in each case, in the ordinary course
of business consistent with past practice, (c) refrain from the adopting or
increasing of any profit sharing, bonus, deferred compensation, savings,
insurance, pension, retirement, or other employee benefit plan for or with any
of its employees, (d) refrain from entering into any material contract or
commitment except material contracts and commitments in the ordinary course of
business consistent with past practice, (e) refrain from incurring any
indebtedness for borrowed money or capital leases, (f) refrain from cancelling
or waiving any claim or right of substantial value which individually or in the
aggregate is material, (g) refrain from declaring or paying any dividends or
other distributions in respect of its capital stock or redeeming, purchasing or
otherwise acquiring any of its capital stock, (h) refrain from making any
material change in accounting methods or practices, except as required by law or
generally accepted accounting principles, (i) refrain from issuing or selling
any shares of capital stock or any other securities, or issuing any securities
convertible into, or options, warrants or rights to purchase or subscribe to, or
entering into any arrangement or contract with respect to the issue and sale of,
any shares of its capital stock or any other securities, or making any other
changes in its capital structure, (j) refrain from selling, leasing or otherwise
disposing of any material asset or property, including, without limitation,
entering into any new lease or modifying any existing lease, (k) refrain from
entering into any commitment for the making of a capital expenditure, except in
the ordinary course of business consistent with past practice provided that no
capital expenditure or commitment for the making of a capital expenditure shall
be made for new hardware systems for the Affiliate, (l) refrain from writing off
as uncollectible any notes or accounts receivable, except write-offs in the
ordinary course of business charged to applicable reserves, none of which
individually or in the aggregate is material and (m) refrain from agreeing in
writing to do any of the foregoing.
ss.6.2 Exclusive Dealing. During the period from the date of this Agreement
to the earlier of the termination of this Agreement and the Closing Date, none
of the Sellers, any of the Sellers' respective affiliates, the Company or any
officer or director of the Company shall take any action to, directly or
indirectly, encourage, initiate, solicit or engage in discussions or
negotiations with, or provide any information to, any Person, other than the
Purchaser, concerning any purchase of any capital stock of the Company or any
merger, asset sale or similar transaction involving the Company.
ss.6.3 Review of the Company. The Purchaser may, prior to the Closing Date,
directly or through its representatives, review the properties, books and
records of the Company and its financial and legal condition to the extent the
Purchaser or its representatives deem necessary or advisable to familiarize
themselves with such properties and other matters; such review shall not,
however, affect the representations and warranties made by the Company in this
Agreement or the remedies of the Purchaser for breaches of those representations
and warranties. The Company shall permit the Purchaser and its representatives
to have, after the date of execution of this Agreement, full access to the
premises and to all the books and records of the Company and to cause the
officers of the Company to furnish the Purchaser with such financial and
operating data and other information with respect to the business and properties
of the Company as the Purchaser shall from time to time reasonably request. The
Company shall deliver or cause to be delivered to the Purchaser such additional
instruments, documents, certificates and opinions as the Purchaser may
reasonably request for the purpose of (a) verifying the information set forth in
this Agreement or on any Schedule attached hereto and (b) consummating or
evidencing the transactions contemplated by this Agreement.
ss.6.4 Reasonable Efforts. Each of the Company, the Sellers and the
Purchaser shall cooperate and use their respective reasonable best efforts to
take, or cause to be taken, all appropriate actions, and to make, or cause to be
made, all filings necessary, proper or advisable under applicable laws and
regulations, and to deliver or cause to be delivered such additional
instruments, documents, certificates and opinions as requested, in each case to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, their respective reasonable best efforts to
obtain, prior to the Closing Date, all licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and
parties to contracts with the Company as are necessary for consummation of the
transactions contemplated by the Agreement and to fulfill the conditions to the
sale contemplated hereby.
ss.6.5 Monthly Financial Statements. The Company has furnished the
Purchaser with an unaudited balance sheet of each of Cardinal and Affiliate as
of the last day of each calendar month from July 1, 1997 through December 31,
1997 and shall furnish the Purchaser with an unaudited balance sheet of each of
Cardinal and Affiliate as of the last day each calendar month from January 1,
1998 through the Closing Date as soon as practicable following the end of such
calendar month, in each case together with related statements of income,
retained earnings and cash flows for the month then ended. Each monthly
statement has fairly presented, and shall fairly present, in all material
respects the financial position of each of Cardinal and Affiliate as of the date
indicated and the results of operations and cash flows for the period indicated.
ARTICLE VII
CONDITIONS TO THE PURCHASER'S OBLIGATIONS
-----------------------------------------
ss.7. Conditions to the Purchaser's Obligations. The obligation of the
Purchaser to purchase the Stock contemplated by this Agreement is conditioned
upon satisfaction, at or prior to the Closing, of the following conditions:
ss.7.1 Opinions of Counsel. The Company shall have furnished the Purchaser
with an opinion, dated the Closing Date, of Ruden, McClosky, Smith, Schuster and
Russell, to the effect set forth in Exhibit A hereto.
ss.7.2 Good Standing and Other Certificates. The Purchaser shall have
received (a) copies of the charter, including all amendments thereto, in each
case certified by the Secretary of State or other appropriate official of the
jurisdiction of incorporation of the Company, (b) a certificate from the
Secretary of State or other appropriate official of the jurisdiction of
incorporation of the Company to the effect that the Company is in good standing
and listing all charter documents of the Company on file, (c) a certificate from
the Secretary of State or other appropriate official in each State in which the
Company is qualified to do business to the effect that the Company is in good
standing in such State and (d) a copy of the By-Laws of the Company certified by
the Secretary of the Company as being true and correct and in effect on the
Closing Date.
ss.7.3 No Material Adverse Change. Prior to the Closing there shall have
been no material adverse change in the business, operations, financial
condition, results of operations or prospects of the Company and the Company
shall have delivered to the Purchaser an officer's certificate, dated the
Closing Date, to such effect.
ss.7.4 Truth of Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and the representations
and warranties of the Sellers contained in this Agreement shall be true and
correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date, and the
Company and the Sellers shall have each delivered to the Purchaser a
certificate, dated the Closing Date, to such effect.
ss.7.5 Performance of Agreements. All of the agreements of the Company and
the Sellers to be performed prior to the Closing pursuant to the terms of this
Agreement shall have been duly performed in all material respects, and the
Company and the Sellers shall have each delivered to the Purchaser a
certificate, dated the Closing Date, to such effect.
ss.7.6 No Litigation Threatened. No action or proceedings shall have been
instituted or, to the knowledge of the Company or the Sellers, threatened before
a court or other government body or by any public authority to restrain or
prohibit any of the transactions contemplated hereby.
ss.7.7 Third Party Consents; Governmental Approvals. All consents,
approvals or waivers, if any, disclosed on any Schedule attached hereto or
required in connection with the consummation of the transactions contemplated by
this Agreement shall have been received. All of the consents, approvals,
authorizations, exemptions and waivers from governmental agencies that shall be
required in order to enable the Purchaser to consummate the transactions
contemplated hereby shall have been obtained.
ss.7.8 Resignations. All members of the Board of Directors of the Company
shall have tendered their resignation from such positions effective at the
Closing.
ss.7.9 Employment Agreements. (a) Each of Mr. Chris Smith, Mr. J. Stanton
Kane and Ms. Pilar Grau shall have entered into an employment agreement with the
Company on terms and conditions reasonably satisfactory to the Purchaser and
each such individual.
(b) The Company shall have used its best efforts to ensure that each of Ms.
Lydia Kuhl, Mr. Richard Demers, Mr. James Branam and Ms. Cathy Herrmann have
entered into an employment agreement with the Company on terms and conditions
reasonably satisfactory to the Purchaser and each such individual.
ss.7.10 FIRPTA. Each of the Sellers shall have furnished to the Purchaser,
on or prior to the Closing Date, a non-foreign person affidavit required by
Section 1445 of the Code.
ss.7.11 Escrow Agreement. The Sellers, the Purchaser and the Escrow Agent
shall have entered into an escrow agreement substantially in the form of Exhibit
B hereto (the "ESCROW AGREEMENT").
ss.7.12 Non-Competition Agreements. (a) Mr. Chris Smith shall have executed
a three year non-competition agreement substantially in the form of Exhibit C
hereto for cash consideration of $300,000 payable as follows: (i) $100,000 upon
the Closing, (ii) $100,000 on the first anniversary of the Closing, and (iii)
$100,000 upon the second anniversary of the Closing.
(b) Mr. James Smith shall have executed a three year non-competition
agreement substantially in the form of Exhibit D hereto for cash consideration
of $150,000 payable as follows: (i) $50,000 upon the Closing, (ii) $50,000 on
the first anniversary of the Closing, and (iii) $50,000 upon the second
anniversary of the Closing.
(c) Mr. Doug Smith shall have executed an eighteen month non-solicitation
agreement substantially in the form of Exhibit E hereto for cash consideration
of $150,000 payable as follows: (i) $50,000 upon the Closing, (ii) $50,000 on
the first anniversary of the Closing, and (iii) $50,000 upon the second
anniversary of the Closing.
(d) Each of Mr. J. Stanton Kane and Ms. Pilar Grau shall have executed a
one year non-solicitation agreement substantially in the form of Exhibit F
attached hereto.
(e) The Company shall have used its best efforts to ensure that each of Mr.
Richard Demers, Ms. Lydia Kuhl and Mr. James Branam have executed a one year
non-solicitation agreement substantially in the form of Exhibit F attached
hereto.
ss.7.13 Broker's or Finder's Fees. The Sellers shall have paid all
commission or broker's or finder's fees due from the Sellers or the Company,
including to The Platinum Group, in connection with any of the transactions
contemplated by this Agreement and shall indemnify and hold harmless the Company
from all claims with respect to any such commission or broker's or finder's
fees.
ARTICLE VIII
CONDITIONS TO THE COMPANY'S AND THE SELLERS' OBLIGATIONS
--------------------------------------------------------
ss.8. Conditions to the Company's and the Sellers' Obligations. The
obligations of the Company and the Sellers to effect the transactions
contemplated by this Agreement on the Closing Date are conditioned upon
satisfaction or waiver, at or prior to the Closing, of the following conditions:
ss.8.1 Opinions of Counsel. The Purchaser shall have furnished the Sellers
with an opinion, dated the Closing Date, of White & Case, to the effect set
forth in Exhibit G hereto.
ss.8.2 Truth of Representations and Warranties. The representations and
warranties of the Purchaser contained in this Agreement shall be true and
correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date, and the
Purchaser shall have delivered to the Sellers an officer's certificate, dated
the Closing Date, to such effect.
ss.8.3 Third Party Consents; Governmental Approvals. All consents,
approvals or waivers, if any, required in connection with the consummation of
the transactions contemplated by this Agreement shall have been received. All of
the consents, approvals, authorizations, exemptions and waivers from government
agencies that shall be required in order to permit the consummation of the
transactions contemplated hereby shall have been obtained.
ss.8.4 Performance of Agreements. All of the agreements of the Purchaser to
be performed prior to the Closing pursuant to the terms of this Agreement shall
have been duly performed in all material respects, and the Purchaser shall have
delivered to the Sellers an officer's certificate, dated the Closing Date, to
such effect.
ss.8.5 No Litigation Threatened. No action or proceeding shall be
instituted or, to the knowledge of the Purchaser, threatened before a court or
other government body or any public authority to restrain or prohibit any of the
transactions contemplated hereby, and the Purchaser shall have delivered to the
Sellers an officer's certificate, dated the Closing Date, to such effect.
ss.8.6 Employment Agreements. Each of Mr. Chris Smith and Mr. J. Stanton
Kane shall have entered into an employment agreement with the Company on terms
and conditions reasonably satisfactory to the Company and each such individual.
ss.8.7 Non-Competition Agreements. (a) Mr. Chris Smith shall have executed
a three year non-competition agreement substantially in the form of Exhibit C
hereto for cash consideration of $300,000 payable as follows: (i) $100,000 upon
the Closing, (ii) $100,000 on the first anniversary of the Closing, and (iii)
$100,000 upon the second anniversary of the Closing.
(b) Mr. James Smith shall have executed a three-year non-competition
agreement substantially in the form of Exhibit D hereto for cash consideration
of $150,000 payable as follows: (i) $50,000 upon the Closing, (ii) $50,000 on
the first anniversary of the Closing; and (iii) $50,000 upon the second
anniversary of the Closing.
(c) Mr. Doug Smith shall have executed an eighteen month non-competition
agreement substantially in the form of Exhibit E hereto for cash consideration
of $150,000 payable as follows: (i) $50,000 upon the Closing, (ii) $50,000 on
the first anniversary of the Closing; and (iii) $50,000 upon the second
anniversary of the Closing.
(d) Mr. J. Stanton Kane shall have executed a one year non-solicitation
agreement substantially in the form of Exhibit F attached hereto.
ARTICLE IX
TAX MATTERS
-----------
ss.9.1 Tax Returns. (a) A representative appointed by the Sellers (the
"SELLERS' REPRESENTATIVE") shall have the exclusive authority and obligation to
prepare and timely file, or cause to be prepared and timely filed, all Returns
of the Company that are due with respect to any taxable year or other taxable
period ending on or prior to the Closing Date. Such authority shall include, but
not be limited to, the determination of the manner in which any items of income,
gain, deduction, loss or credit arising out of the income, properties and
operations of the Company shall be reported or disclosed in such Returns;
provided, however, that such returns shall be prepared by treating items on such
Returns in a manner consistent with the past practices with respect to such
items, unless otherwise required by law. The Company shall provide to the
Sellers' Representative such access to the books and records of the Company as
may be reasonably necessary for the Sellers' Representative to prepare the
Returns. The Sellers' Representative shall provide to the Purchaser drafts of
all Returns of the Company required to be prepared and filed by the Sellers'
Representative under this Section 9.1(a) at least sixty (60) days prior to the
due date (including extensions) for the filing of such Returns. At least
forty-five (45) days prior to the due date (including extensions) for the filing
of such Returns, the Purchaser shall notify the Sellers' Representative of the
existence of any objection (specifying in reasonable detail the nature and basis
of such objection) the Purchaser may have to any items set forth on such draft
Returns. The Purchaser and the Sellers through the Sellers' Representative agree
to consult and resolve in good faith any such objection; it being agreed that if
the Sellers' Representative and the Purchaser can not reach an agreement at
least 10 days prior to the due date for the filing of such Return, the matter
shall be referred to KPMG Peat Marwick or another nationally recognized
accounting firm mutually acceptable to the Sellers' Representative, on the one
hand, and the Purchaser, on the other hand, for resolution. The Sellers, on the
one hand, and the Purchaser on the other hand, shall equally share the costs
incurred in retaining such accounting firm.
(b) Except as provided in Section 9.1(a), the Purchaser shall have the
exclusive authority and obligation to prepare and timely file, or cause to be
prepared and timely filed, all Returns of the Company. Such authority shall
include, but not be limited to, the determination of the manner in which any
items of income, gain, deduction, loss or credit arising out of the income,
properties and operations of the Company shall be reported or disclosed on such
Returns; provided, however, with respect to Returns to be filed by the Purchaser
pursuant to this Section 9.1(b) for taxable periods beginning before the Closing
Date and ending after the Closing Date, items set forth on such Returns shall be
treated in a manner consistent with the past practices of the Company with
respect to such items, unless otherwise required by law. The Purchaser shall
provide to the Sellers' Representative copies of all such Returns with respect
to any Overlap Period at least ten (10) days prior to the filing of such
Returns. The Purchaser and the Sellers, through the Sellers' Representative,
agree to consult and resolve in good faith any objection the Sellers'
Representative may have to items set forth on such draft Returns; it being
agreed that if the Sellers' Representative and the Purchaser can not reach an
agreement at least 10 days prior to the due date for the filing of such Return,
the matter shall be referred to KPMG Peat Marwick or another nationally
recognized accounting firm mutually acceptable to the Sellers' Representative,
on the one hand, and the Purchaser, on the other hand, for resolution. The
Sellers, on the one hand, and the Purchaser on the other hand, shall equally
share the costs incurred in retaining such accounting firm.
ss.9.2 Apportionment of Taxes. All Taxes and Tax liabilities with respect
to the income, property or operations of the Company that relate to a taxable
year or other taxable period beginning before and ending after the Closing Date
shall be apportioned between the Pre-Closing Period and the portion of such
taxable year or other taxable period after the Closing Date (the "POST-CLOSING
PERIOD") as follows: (A) in the case of Taxes other than income Taxes and sales
and use Taxes, on a per diem basis, and (B) in the case of income Taxes and
sales and use Taxes, as determined from the books and records of the Company,
between Pre-Closing and Post-Closing Periods as though the taxable year of the
Company terminated at the close of business on the Closing Date, and based on
accounting methods, elections and conventions that do not have the effect of
distorting the timing of income and expenses. The Sellers shall be liable for
the payment of all Taxes of the Company which are attributable to any
Pre-Closing Period to the extent not included in determining the Closing Net
Working Capital Amount. The Company shall be liable for the payment of all Taxes
which are attributable to any Post-Closing Period.
ss.9.3 Controversies. The Purchaser shall promptly notify the Sellers'
Representative in writing upon receipt by the Purchaser or any affiliate of the
Purchaser (including the Company after the Closing Date) of written notice of
any inquiries, claims, assessments, audits or similar events with respect to
Taxes relating to a taxable period ending on or prior to the Closing Date for
which the Sellers may be liable under this Agreement (any such inquiry, claim,
assessment, audit or similar event, a "TAX MATTER"). The Sellers'
Representative, at its sole expense, shall have the authority to represent the
interests of the Company with respect to any Tax Matter before the Internal
Revenue Service, any other taxing authority, any other governmental agency or
authority or any court and shall have the sole right to control the defense,
compromise or other resolution of any Tax Matter, including responding to
inquiries, filing Tax returns and settling audits; provided, however, that the
Sellers' Representative shall not enter into any settlement of or otherwise
compromise any Tax Matter that affects or may affect the Tax liability of the
Purchaser, the Company or any affiliate of the foregoing for any period ending
after the Closing Date, including the portion of a period beginning before the
Closing Date and ending after the Closing Date (the "OVERLAP PERIOD") that is
after the Closing Date, without the prior written consent of the Purchaser,
which consent shall not be unreasonably withheld. The Sellers' Representative
shall keep the Purchaser fully and timely informed with respect to the
commencement, status and nature of any Tax Matter. The Sellers' Representative
shall, in good faith, allow the Purchaser to make comments to the Sellers'
Representative regarding the conduct of or positions taken in any such
proceeding.
Except as otherwise provided in this Section 9.3, the Purchaser shall have
the sole right to control any audit or examination by any taxing authority,
initiate any claim for refund or amend any Return, and contest, resolve and
defend against any assessment for additional Taxes, notice of Tax deficiency or
other adjustment of Taxes of, or relating to, the income, assets or operations
of the Company for all tax- able periods; provided, however, that the Purchaser
shall not, and shall cause its affiliates (including the Company) not to, enter
into any settlement of any contest or otherwise compromise any issue with
respect to the portion of the Overlap Period ending on or prior to the Closing
Date without the prior written consent of the Sellers' Representative, which
consent shall not be unreasonably withheld. The Purchaser shall promptly notify
the Sellers' Representative in writing upon receipt by the Purchaser or any
affiliate of the Purchaser (including the Company after the Closing Date) of
written notice of any inquiries, claims, assessments, audits or similar events
with respect to Taxes relating to an Overlap Period for which the Sellers may be
liable under this Agreement. The Purchaser shall keep the Sellers'
Representative fully and timely informed with respect to the commencement,
status and nature of any tax matter relating to an Overlap Period. The Purchaser
shall, in good faith, allow the Sellers' Representative to make comments to the
Purchaser regarding the conduct of or positions taken in any such proceeding.
ss.9.4 Transfer Taxes. All transfer, sales and use, registration, stamp and
similar Taxes imposed in connection with the sale of the Stock or any other
transaction that occurs pursuant to this Agreement shall be borne by the
Sellers.
ss.9.5 Amended Returns. None of the Sellers, the Sellers' Representative,
or the Company shall file or cause to be filed any amended Return or claims for
refund without the prior written consent of the Purchaser, which consent shall
not be unreasonably withheld. The Company will not file or cause to be filed any
amended Return or claim for refund relating to any period prior to Closing or
any Overlap Period without consent of Sellers' Representative which consent
shall not be unreasonably withheld.
ss.9.6 Indemnification. The Sellers jointly and sever- ally agree to
indemnify, defend and hold harmless the Purchaser, its affiliates (including the
Company) and the successors to the foregoing (and their respective shareholders,
officers, directors, employees and agents) on an after-tax basis against (i) all
Taxes, losses, claims and expenses (including reasonable attorneys' fees and
expenses) resulting from, arising out of, or incurred with respect to, any
claims that may be asserted by any party based upon, attributable to, or
resulting from the failure of any representation or warranty made pursuant to
Section 3.14 to be true and correct as of the Closing Date; (ii) all Taxes
imposed on or asserted against the properties, income or operations of the
Company for all Pre-Closing Periods except to the extent that such Taxes were
included as a current liability accrual in the calculations of Net Working
Capital Amount and Purchaser shall remit to Sellers' Representative any refund
received by Purchaser of any such taxes with respect to any Pre-Closing Period;
(iii) all Taxes imposed on the Company, or for which the Company may be liable,
as a result of any transaction contemplated by this Agreement, including any
Taxes imposed on the Purchaser of the Company pursuant to Section 1374 of the
Code and any comparable provision of state or local law or otherwise as a result
of a joint election under Section 338(h)(10) of the Code to treat the sale of
Stock pursuant to this Agreement as an asset sale for Federal income tax
purposes, and any analogous provisions of state and local law, provided,
however, this indemnification shall not apply to any New Jersey corporate income
tax that results from any election under the provision of New Jersey law
analogous to the provisions of ss.338 of the Code, for which New Jersey
corporate income tax Sellers shall have no liability. The Purchaser shall
promptly give the Sellers' Representative written notice of all Taxes, losses,
claims and expenses which the Purchaser has reasonably determined may give rise
to a right of indemnification under this Section 9.6, including a computation of
the amount of the required indemnification with sufficient detail and
particularity to enable the Sellers' Representative to reasonably determine the
amount of such required indemnification.
ss.9.7 Section 338 Election. The Sellers and the Purchaser agree that at
the election of the Purchaser, the Sellers and the Purchaser shall jointly
complete and make an election under Section 338(h)(10) (with respect to the
Company) of the Code on Form 8023-A or in such manner as may be required by rule
or regulation of the Internal Revenue Service, and shall, at the election of the
Purchaser, jointly make an election in the manner required under any analogous
provisions of Florida law concerning the transactions contemplated by this
Agreement. Purchaser shall, with the assistance and cooperation of the Seller,
prepare all such Section 338(h)(10) forms required as attachments to Form 8023-A
(and all forms under the analogous provisions of Florida law) in accordance with
applicable Tax laws, and the Purchaser shall deliver such forms and related
documents to the Seller at least sixty (60) days prior to the due date of
filing. The Sellers shall deliver to the Purchaser at least thirty (30) days
prior to the due date of filing such completed forms as are required to be filed
under Section 338(h)(10) of the Code (and the analogous provisions of Florida
law). The Purchaser and Sellers shall use their best efforts to agree, as soon
as practicable after Closing but in no event later than 130 days following the
Closing Date, on the computation of the modified aggregate deemed sale price
("MADSP") (as defined under Treasury Regulations).
ss.9.8 Valuation and Allocation. Sellers and Purchaser agree that those
assets set forth on Schedule 9.8 have a fair market value as set forth on such
schedule. If the Purchaser elects to file a ss.338(h)(10) election pursuant to
the provisions of Section 9.7, the Purchaser shall perform a valuation of assets
of those assets of the Company that are not set forth on Schedule 9.8 and an
allocation of the Modified Aggregate Deemed Sale Price ("MADSP") of the Company
among all assets of the Company for purposes of the elections under Section
338(h)(10) of the Code and under the comparable Florida law. Purchaser shall
provide Sellers with drafts of such valuation of assets and allocations of
MADSP, prepared on a basis consistent with the valuation of such assets set
forth on Schedule 9.8, within 15 days after the final determination of the
Closing Net Working Capital Statement as provided in Section 2.3 of this
Agreement. Sellers shall have 15 days to provide the Purchaser with any
objections to such drafts. The valuations and allocations determined pursuant to
this Section 9.8 shall be used for purposes of all relevant Tax Returns, reports
and filings that are filed by Purchaser, the Company and the Sellers. Sellers
shall not be liable to Purchaser for any Taxes incurred by Purchaser or the
Company with respect to any Post-Closing Tax periods that directly or indirectly
are attributable to any challenge by a Tax authority of the computation of
allocation of the MADSP pursuant to this Section 9.8.
ARTICLE X
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
--------------------------------------------
ss.10.1 Survival of Representations. The respective representations and
warranties of the Company, the Sellers and the Purchaser contained in this
Agreement shall survive the Closing for a period of two years except for the
representations and warranties of the Company contained in Sections 3.14 and
3.19, which shall survive for the applicable statute of limitations period, and
the representations and warranties of the Sellers in Article IV which shall
survive indefinitely.
ss.10.2 Indemnification. (a) The Company, and after the Closing, the
Sellers (jointly and severally) hereby agree to indemnify and hold the Purchaser
and its officers, directors, affiliates (including, without limitation, the
Company) and agents, and any successors thereto, harmless from damages, losses,
costs or expenses (including, without limitation, reasonable attorneys' and
consultants' fees and expenses) ("DAMAGES") incurred or suffered as a result of
or arising out of (i) the failure of any representation or warranty made by the
Company in this Agreement (without regard to any "materiality" or any "material
adverse effect" exception contained therein) to be true and correct as of the
Closing Date, (other than a breach of Section 3.14 with respect to Taxes which
shall be governed by Section 9.6), or (ii) the breach of any covenant or
agreement made or to be performed by the Sellers or the Company pursuant to this
Agreement; provided, however, that neither the Company nor the Sellers shall be
liable under clause (i) of this Section unless (A) such liability is caused by a
breach of the representations contained in Section 4.1 or (B) the aggregate
amount of Damages exceeds $125,000 and then only to the extent of such excess;
provided, further, however, that the Company's and the Sellers' liability under
this Section 10.2(a) shall not exceed, in the aggregate (but excluding liability
caused by a breach of the representations contained in Section 4.1), the
Purchase Price.
(b) Following the Closing, each of the Sellers hereby agrees to indemnify
and hold the Purchaser and its officers, directors, affiliates (including,
without limitation, the Company) and agents, and any successors thereto,
harmless from Damages incurred or suffered as a result of or arising out of (i)
the failure of any representation or warranty made by such Seller in this
Agreement to be true and correct as of the Closing Date or (ii) the breach of
any covenant or agreement made or to be performed by any such Seller pursuant to
this Agreement.
(c) The Purchaser hereby agrees to indemnify and hold the Sellers harmless
from Damages incurred or suffered as a result of or arising out of (i) the
failure of any representation or warranty made by the Purchaser in this
Agreement to be true and correct as of the Closing Date or (ii) the breach of
any covenant or agreement made or to be performed by the Purchaser pursuant to
this Agreement; provided, however, that the Purchaser shall not be liable under
clause (i) of this Section unless the aggregate amount of Damages exceeds
$75,000 and then only to the extent of such excess; provided, further, however,
that the Purchaser's liability under this Section 10.2(d) shall not exceed, in
the aggregate, the Purchase Price.
(d) The foregoing indemnification provisions and the indemnification for
Taxes provided in Section 9.6 shall be the exclusive remedy for any breach of
the covenants, obligations, representations or warranties set forth in this
Agreement; provided, however, that the provisions of this Section 10.2(d) shall
not prevent the Sellers or the Purchaser from seeking the remedies of specific
performance or injunctive relief in connection with a breach of a covenant or
agreement of any party contained herein.
(e) As security for the Sellers' indemnity obligations pursuant to this
Section 10.2, but without in any way limiting the amount of such indemnity, the
Sellers agree to enter into the Escrow Agreement.
ss.10.3 Indemnification Procedure. (a) Any party seeking indemnification
(the "INDEMNIFIED PARTY") from any other party (the "INDEMNIFYING PARTY") with
respect to any claim, demand, action, proceeding or other matter pursuant to
this Agreement (the "CLAIM") shall promptly notify the Indemnifying Party of the
existence of the Claim, setting forth in reasonable detail the facts and
circumstances pertaining thereto and the basis for the Indemnified Party's right
to indemnification.
(b) If any third party shall notify any Indemnified Party with respect to
any matter which may give rise to a Claim for indemnification against the
Indemnifying Party under this Agreement, then the Indemnified Party shall
promptly notify each Indemnifying Party thereof; provided, however, that no
delay on the part of the Indemnified Party in notifying any Indemnifying Party
shall relieve the Indemnifying Party from any liability or obligation hereunder
unless (and then solely to the extent) the Indemnifying Party thereby is
materially prejudiced by such failure to give notice. In the event that any
Indemnifying Party notifies the Indemnified Party within 30 days after the
Indemnified Party has given notice of the matter that the Indemnifying Party
would be required to indemnify the Indemnified Party in full against any such
Claim and is assuming the defense thereof:
(i) the Indemnifying Party will defend the Indemnified Party against
the matter with counsel of its choice reasonably satisfactory to the Indemnified
Party;
(ii) the Indemnified Party may retain separate co-counsel at its sole
cost and expense (except that the Indemnifying Party will be responsible for the
fees and expenses of the separate co-counsel (a) to the extent the Indemnified
Party concludes reasonably based upon advice of counsel that a conflict of
interest exists between the Indemnified Party and Indemnifying Party or (b) the
named parties to any such action (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party and such Indemnified Party
shall have been advised by counsel that there may be one or more legal defenses
available to the Indemnified Party which are not available to the Indemnifying
Party, or available to the Indemnifying Party, but the assertion of which would
be adverse to the interest of the Indemnified Party);
(iii) the Indemnified Party will not consent to the entry of any
judgment or enter into any settlement with respect to the matter without the
written consent of the Indemnifying Party (not to be withheld unreasonably); and
(iv) the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement which (A) provides for other than monetary
damages, (B) does not include a provision whereby the plaintiff or claimant in
the matter unconditionally and irrevocably releases the Indemnified Party from
all liability with respect thereto without any further obligation and (C)
contains any admission of liability, without the written consent of the
Indemnified Party (not to be withheld unreasonably); provided that if the
written consent of the Indemnified Party is not required under this clause (iv),
the Indemnifying Party shall give the Indemnified Party notice of its intent to
settle together with the proposed terms of the settlement and the Indemnified
Party shall have the right, exercisable within 10 days of receipt of such
notice, to assume the defense of such action and the Indemnifying Party's
liability to indemnify the Indemnified Party hereunder for such action shall be
capped at the dollar amount of the monetary damages provided for in the offer to
settle such action.
(c) If no Indemnifying Party notifies the Indemnified Party within 30 days
after the Indemnified Party has given notice of the matter that the Indemnifying
Party is assuming the defense thereof, then the Indemnified Party may defend
against, or enter into any settlement with respect to, the matter in any manner
it reasonably may deem appropriate, without prejudice to any of its rights
hereunder.
(d) The Indemnified Party shall be entitled to reimbursement of reasonable
expenses included in Damages with respect to any Claim (including, without
limitation, the cost of defense, preparation and investigation relating to such
Claim) as such expenses are incurred by the Indemnified Party.
ARTICLE XI
TERMINATION
-----------
ss.11.1 Termination. This Agreement may be terminated in writing at any
time prior to the Closing:
(a) by the mutual written consent of the Purchaser and the Sellers;
(b) by the Purchaser, if there has been a material violation or breach by
the Company or the Sellers of any covenant, representation or warranty contained
in this Agreement which has prevented the satisfaction of any condition to the
obligations of the Purchaser at the Closing and such violation or breach has not
been waived by the Purchaser or, in the case of a covenant breach, cured by the
Company or the Sellers within the earlier of ten days after written notice
thereof from the Purchaser or the Closing Date;
(c) by the Sellers, if there has been a material violation or breach by the
Purchaser of any covenant, representation or warranty contained in this
Agreement which has prevented the satisfaction of any condition to the
obligation of the Company at the Closing and such violation or breach has not
been waived by the Sellers or, with respect to a covenant breach, cured by the
Purchaser within the earlier of ten days after written notice thereof by the
Company or the Closing Date.
ss.11.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 11.1, all further obligations of the parties
hereto under this Agreement (other than pursuant to Sections 12.2, 12.3 and
12.5, which shall continue in full force and effect) shall terminate without
further liability or obligation of either party to the other party hereunder;
provided, however, that no party shall be released from liability hereunder if
this Agreement is terminated and the transactions are abandoned by reason of (i)
willful failure of such party to have performed its obligations hereunder or
(ii) any knowing misrepresentation made by such party of any matter set forth
herein.
ARTICLE XII
MISCELLANEOUS
-------------
ss.12.1 Knowledge of the Company. Where any representation or warranty made
by the Company contained in this Agreement is expressly qualified by reference
to its knowledge, such knowledge shall be deemed to exist if the matter is
within the knowledge of any of the Sellers and/or the executive officers of the
Company.
ss.12.2 Expenses. Subject to Section 9.3, the parties hereto shall pay
their own expenses relating to the transactions contemplated by this Agreement,
including, without limitation, the fees and expenses of their respective counsel
and financial advisers, it being understood that all expenses of the Company
incurred in connection with the transactions contemplated by this Agreement
shall be paid by the Sellers prior to the Closing Date.
ss.12.3 Governing Law. THE INTERPRETATION AND CONSTRUCTION OF THIS
AGREEMENT, AND ALL MATTERS RELATING HERETO, SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF FLORIDA APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED SOLELY
WITHIN SUCH STATE.
ss.12.4 Captions. The Article and Section captions useD herein are for
reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
ss.12.5 Publicity. Except as otherwise required by law, none of the parties
(nor any affiliates thereof) hereto shall issue, prior to the Closing, any press
release or make any other public statement, in each case relating to, connected
with or arising out of this Agreement or the matters contained herein, without
obtaining the prior approval of the Sellers, on the one hand, and the Purchaser,
on the other hand, to the contents and the manner of presentation and
publication thereof. Except as otherwise required by law, after the Closing the
Sellers shall not issue any press release or make any other public statement, in
each case relating to, connected with or arising out of this Agreement or the
matters contained herein, without obtaining the prior approval of the Purchaser.
ss.12.6 Notices. Any notice or other communication required or permitted
under this Agreement shall be sufficiently given if delivered in person or sent
by registered or certified mail, postage prepaid, addressed as follows: if to
the Purchaser, to AmeriComm Direct Marketing, Inc., Suite C150, 5775 Peachtree
Dunwoody Road, Atlanta, Georgia 33342 (Facsimile Number (404) 705-9929)
Attention: Robert A. Miklas, with a copy to its counsel, White & Case, 1155
Avenue of the Americas, New York, New York 10036 (Facsimile Number (212)
354-8113), Attention: Frank L. Schiff, Esq.; and if to the Sellers'
Representative, to James Smith, 1050 Seminole Drive, Ft. Lauderdale, FL 33304
(Facsimile Number (954) 486- 9944), with a copy to: Ruden, McClosky, Smith,
Schuster and Russell, 200 East Broward Boulevard, Suite 1500, Ft. Lauderdale, FL
33301 (Facsimile Number (954) 764-4996), Attention: Michael Krul, Esq., or such
other address or number as shall be furnished in writing by any such party, and
such notice or communication shall be deemed to have been given as of the date
so delivered or mailed. Notice delivered by the Purchaser to the Sellers'
Representative shall constitute delivery of such notice to the Sellers.
ss.12.7 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
of law. This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
successors and permitted assigns.
ss.12.8 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
ss.12.9 Entire Agreement. This Agreement (including the schedules hereto),
including the other documents referred to herein and therein which form a part
hereof and thereof, contain the entire understanding of the parties hereto with
respect to the subject matter contained herein and therein. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter (including, without limitation, (i) the Stock
Purchase Agreement dated as of November 12, 1997 by and among the Purchaser,
Cardinal, Affiliate and the Stockholders identified therein, as modified by a
certain letter agreement dated January 12, 1998 from John D. Weil to James
Smith, and as further modified by a certain letter dated February 5, 1998 from
John D. Weil to James Smith, (ii) a certain letter dated February 25, 1998 from
John D. Weil to James Smith and (iii) a certain letter dated March 2, 1998 from
John D. Weil to James Smith).
ss.12.10 Amendments. This Agreement may not be changed orally, but only by
an agreement in writing signed by the Purchaser, the Company and the Sellers.
ss.12.11 Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
ss.12.12 Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person other than the parties hereto.
ss.12.13 Jurisdiction. Any judicial proceeding brought against any of the
parties to this Agreement or any dispute arising out of this Agreement or any
matter related hereto may be brought in the courts of the State of Florida, or
in the United States District Court for the Southern District of Florida, and,
by execution and delivery of this Agreement, each of the parties to this
Agreement accepts the jurisdiction of such courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this Agreement. The
foregoing consent to jurisdiction shall not be deemed to confer rights on any
Person other than the respective parties to this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its respective officer thereunto duly authorized,
all as of the day and year first above written.
AMERICOMM DIRECT MARKETING, INC.
By /s/ Robert B. Webster
----------------------------------
Name: Robert B. Webster
Title: EVP/CFO
CARDINAL MARKETING, INC.
By /s/ Christopher C. Smith
----------------------------------
Name: Christopher C. Smith
Title: President
CARDINAL MARKETING OF
NEW JERSEY, INC.
By /s/ Christopher C. Smith
----------------------------------
Name: Christopher C. Smith
Title: President
/s/ James E. Smith
------------------------------------
James Smith
/s/ Chris Smith
------------------------------------
Chris Smith
/s/ Douglas C. Smith
------------------------------------
Doug Smith
<PAGE>
ANNEX I
Ownership of Stock
------------------
Cardinal Cardinal
Marketing, Marketing of
Inc. New Jersey Inc.
---------- ---------------
James Smith 6,739 shares 80 shares
Christopher Smith 842 shares 10 shares
Douglas Smith 842 shares 10 shares
<PAGE>
ANNEX II
Seller Percentage
- - - ------ ----------
James Smith 80%
Christopher Smith 10%
Douglas Smith 10%
AMERICOMM DIRECT MARKETING, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS EXCEPT RATIO DATA)
AMERICOMM DIRECT MARKETING, INC. -
HISTORICAL DATA
<TABLE>
<CAPTION>
For The Years Ended December 31,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss before income taxes and
extraordinary items $(4,893) $(2,015) $(1,040) $(2,199) $ (762)
Interest expense (a) 2,873 2,975 3,179 8,126 13,765
-------- -------- -------- -------- -------
(Loss) Earnings (2,020) 960 2,139 5,927 13,003
Interest expense (a) 2,873 2,975 3,179 8,126 13,765
-------- -------- -------- -------- -------
Insufficiency $ 4,893 $ 2,015 $ 1,040 $ 2,199 $ 762
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges - - - - -
======== ======== ========= ======== =======
</TABLE>
(a) Interest expense includes amortization of deferred financing costs and debt
discounts.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-4, file number 333-8925.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,313,618
<SECURITIES> 0
<RECEIVABLES> 28,906,239
<ALLOWANCES> (963,130)
<INVENTORY> 13,330,921
<CURRENT-ASSETS> 46,631,139
<PP&E> 68,077,881
<DEPRECIATION> (16,884,196)
<TOTAL-ASSETS> 177,685,010
<CURRENT-LIABILITIES> 20,011,334
<BONDS> 115,245,228
0
0
<COMMON> 2,838
<OTHER-SE> 34,648,360
<TOTAL-LIABILITY-AND-EQUITY> 177,685,010
<SALES> 191,090,864
<TOTAL-REVENUES> 191,090,864
<CGS> 133,598,403
<TOTAL-COSTS> 133,598,403
<OTHER-EXPENSES> 44,489,788
<LOSS-PROVISION> 385,282
<INTEREST-EXPENSE> 13,764,549
<INCOME-PRETAX> (761,876)
<INCOME-TAX> 587,669
<INCOME-CONTINUING> (1,349,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,349,545)
<EPS-PRIMARY> (4.75)
<EPS-DILUTED> (4.75)
</TABLE>
