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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-21737
------------------------
ZIMMERMAN SIGN COMPANY
(Exact name of Registrant as specified in its charter)
TEXAS 75-0864498
(State of Incorporation) (I.R.S. Employer Identification
No.)
9846 HIGHWAY 31 EAST, TYLER, TEXAS 75705
(Address of Principal Executive Offices) (Zip Code)
903-535-7400
(Telephone Number)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
------------------------
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. Yes /X/ 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 the 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 the common stock held by non-affiliates of the
Registrant computed by reference to the average bid and asked prices of such
stock as of February 26, 1999 was $2,516,380.
1,269,549 shares of common stock were outstanding as of March 16, 1999.
The Exhibit Index is located on page 35 of this filing.
DOCUMENTS INCORPORATED BY REFERENCE. PORTIONS OF THE PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS SCHEDULED FOR MAY 19, 1999 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FILING.
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PART I
ITEM 1. BUSINESS
BUSINESS
GENERAL
Zimmerman Sign Company (hereinafter, "Zimmerman" or the "Company") operates
as a leading manufacturer of site identification products with a primary focus
on serving large, national and regional retailers. From its plant locations in
Texas, Zimmerman manufactures and sells a variety of signage products which
range from large highway-located site identification signs to medium-sized brand
and product identification signs and building fascia, and smaller signs for
automatic teller machines, gasoline pump toppers, and other specialty purposes.
Zimmerman also provides installation services. A majority of Zimmerman's revenue
is derived from sales to customers in the petroleum marketing industry.
Zimmerman also supplies customers in other industries of which the automotive,
general retail and financial services groupings are the most significant.
Zimmerman's typical customer is a United States based retailer which
operates at least several hundred branded locations; however, many customers
have company-owned and/or independently-owned facilities numbering in the
several thousands. In addition to new store openings, demand for Zimmerman's
products and services is driven by same store maintenance, obsolescence,
facilities upgrading, and brand expansion. Most of Zimmerman's sales have been
to United States based customers; however, Zimmerman has sold product to and
managed installation for international customers.
Zimmerman's principal manufactured product is an exterior site and/or brand
identification sign which is double-faced, pole-mounted, and internally
illuminated. In addition, Zimmerman provides a full complement of related
services, including graphics design, production engineering, expedited
manufacturing and delivery, installation management and maintenance.
Zimmerman is a Texas based company with corporate headquarters in Tyler,
production facilities in Longview and Jacksonville, and a small office in
Dallas. Zimmerman began business as a partnership in 1901, was incorporated in
Texas in 1953, and has operated under its current name, Zimmerman Sign Company,
since 1987. The Company was a subsidiary of Independence Holding Company ("IHC")
from April, 1982 until December 31, 1996 at which time it became a public
company through IHC's distribution of its ownership of Zimmerman to IHC's
shareholders.
PRODUCTS AND SERVICES
Zimmerman's products include exterior illuminated signs, which vary from
high-rise site identification signs (100-250 square feet) to medium-sized,
on-site identification signs (40-100 square feet), as well as specialty products
such as building fascia, building mounted letters, gasoline pump toppers and
spandrels, and automatic teller machine signage. Zimmerman also produces steel
poles for certain of its sign products. Typically, Zimmerman's products carry
underlying warranties from paint, plastic and electrical component manufacturers
together with a Zimmerman one-year warranty covering workmanship defects.
Zimmerman has not experienced any material expense as a result of warranty
claims.
Zimmerman provides design, engineering, and prototype development services,
as well as site survey and installation management services.
The Company carries product liability insurance and has not experienced any
material product liability claims.
2
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INDUSTRY OVERVIEW
The United States sign and related products industry is large and highly
fragmented, consisting of over 4,000 participants. Management believes that,
depending on the amount of point of purchase product display and point of
purchase signage included, market size ranges from $4.5 billion to $7.0 billion
in sales per annum.
Zimmerman's management believes that its target market, which consists of
large national and regional retailers requiring either long run or short run
production quantity signage, generates sales of approximately $1.1 billion
annually. In addition, Zimmerman pursues special re-identification projects
driven by one-time corporate name changes; this business is often caused by an
acquisition or consolidation, involves very short lead times, and requires high
volume production sign applications.
In the high unit volume production market, customers generally demand
several hundred or more identical units annually. The Company's target market
retailing organizations also have custom production signage requirements which
normally entail delivery of much lower quantities of a specific sign product
over a given year, sometimes as low as five to ten units. Specifications
governing graphics and engineering consistency are equally demanding in both the
high unit volume production and the lower unit volume custom-production markets.
Most of Zimmerman's customers have annual site identification requirements that
span both market components.
COMPETITION
In serving the above markets, Zimmerman frequently competes with
approximately four larger firms, two to three firms of about the same size and
approximately ten smaller firms (compared on the basis of estimated annual net
sales). In general, these competitors and Zimmerman are the only domestic sign
manufacturers that have the capacity or manufacturing applications to satisfy
the structural or graphics consistency demanded by production quantity sign
users. Zimmerman's principal competitors are Chandler Signs Incorporated,
Collins Sign Company, Inc., Cummings Incorporated, Dualite, Inc., Everbrite,
Inc., Federal Sign Company, Milwaukee Sign Company, Inc., Heath and Company,
Inc., Plasti-Line, Inc., Plastolite, Inc. and Young Electric Sign Company.
Zimmerman's competitors for the business of large, national and regional
retailing organizations each have estimated annual sales of up to $140 million,
and some have greater financial and manufacturing resources than Zimmerman.
However, Zimmerman believes that its products, contracts, terms, and warranty
are consistent with those standard in the industry and that it has the ability
and resources to compete effectively and expand in its markets. Management of
Zimmerman believes that sales growth will result from a combination of market
expansion, new customers and extension of product lines.
CUSTOMERS
In order to evaluate marketing effectiveness, customer service requirements,
and monitor other internal results, Zimmerman tracks its customers by industry
groupings. These industry groupings include petroleum retailers, automobile
manufacturers, general retailers, convenience stores and financial services
organizations. In 1998, the petroleum retailing industry constituted the
Company's single largest industry grouping, as it has for many years.
As a general rule, the Company's petroleum customers primarily rely on the
Company for product engineering, product production and delivery services. Sign
installation and maintenance services are most often provided by independent
contractors selected by the customer. Despite this general rule, the Company
does provide significant installation services to some of its petroleum
customers. Zimmerman believes its non-petroleum customers outsource more of
their facilities identification requirements than its petroleum customers and,
therefore, rely upon Zimmerman to manage sign installation through
subcontractors employed by Zimmerman.
3
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PRINCIPAL CUSTOMERS
In 1998, the Company had two petroleum industry customers which accounted
for more than 10% of net sales: Citgo, which accounted for approximately 16% of
net sales, and Conoco, which accounted for approximately 12% of net sales. The
Company has provided sign products to Citgo since the 1970's and to Conoco since
1997 and believes that, in all material respects, it is these customers' sole
sign supplier. The Company also had one automotive manufacturing customer, Ford
Motor Company, which accounted for approximately 12% of net sales in 1998.
Although no other major customer accounted for more than 10% of sales in 1998,
one petroleum retail customer accounted for approximately 9% of net sales.
The Company contracts with its major customers under a variety of
arrangements which range from one to three year contracts. Many contracts have
thirty-day cancellation provisions.
MARKETING
Zimmerman sells its products and services to large national and regional
retailers through its five person direct sales force. When appropriate,
Zimmerman's design, engineering, and prototyping services are utilized to
support sales and marketing efforts. Zimmerman believes that its customers
purchase Zimmerman's products and services on the basis of competitive pricing,
product quality, delivery schedules, and support services.
MANUFACTURING
Zimmerman's manufacturing operations generally involve metal working,
plastic screening and molding, and electrical component installation and sign
assembly. Primary processes include metal cutting, bending, and welding. Plastic
face fabrication operations incorporate distortion screening of sign graphics
onto sheet plastic and vacuum molding of prescreened sign faces. Electrical
components are installed during sign assembly.
MATERIALS
The principal materials utilized in Zimmerman's manufacturing operations are
aluminum, plastic, steel, and electrical components. Most plastic and aluminum
components are customer specific. As a result, the majority of Zimmerman's
inventory purchases are made in conjunction with firm purchase orders from its
customers. Zimmerman believes that its sources of supply and the availability of
raw materials are adequate.
RESEARCH AND DEVELOPMENT
Sign advancements are made at each of Zimmerman's plants. Product
development and improvement involves periodic experimental work with new paints,
painting applications, plastics and composites, and electrical apparatuses.
Typically, product advancements entailing more than engineering or structural
improvements are made in a coordinated effort among the raw material producer,
Zimmerman and the end user. Historically, amounts spent by Zimmerman on product
development, which have not been charged directly to the customer, have been
immaterial.
EMPLOYEES
During 1998, Zimmerman had, on average, 555 employees of which 448 employees
were covered under collective bargaining agreements.
BACKLOG
As of December 31, 1998, Zimmerman's backlog of unshipped orders totaled
$26.4 million compared to $23.9 million as of December 31, 1997. Customer
commitments to order signs for shipment under
4
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blanket orders constitute a major component of Zimmerman's backlog. Generally,
management anticipates all backlog will be shipped within twelve months.
Zimmerman's customers typically place orders for very large dollar amounts;
therefore, backlog statistics can change significantly within short periods of
time. This fact, coupled with project scheduling changes, decreases the
reliability of backlog as a business indicator.
SEASONALITY
Seasonal influences tend to negatively impact Zimmerman's sales in the first
and last quarters of the calendar year. Zimmerman ships its product nationally
and adverse weather typically impedes outside sign installation in the first
quarter. Adverse weather conditions and holidays often negatively impact fourth
quarter shipments, particularly in the month of December. Normal seasonal trends
in Zimmerman's business are sometimes offset, however, by large, special
projects involving corporate identification and/or brand name changes.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information relating to the executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David E. Anderson......................... 54 Chairman and Director
Tom E. Boner.............................. 60 President, Treasurer and Director
Michael W. Coppinger...................... 52 Vice President, Sales
John T. Griggs............................ 41 Vice President, Manufacturing
Jeffrey P. Johnson........................ 37 Vice President, Chief Financial Officer
and Secretary
Michael St. Onge.......................... 52 Vice President, Corporate Services
</TABLE>
David E. Anderson has been Chairman of Zimmerman since November 1996 and a
Director since 1982. Mr. Anderson was Chairman of Zimmerman Holdings, Inc.
(formerly the immediate parent company of Zimmerman) for more than five years
prior to November 1996. From 1981 until 1986, he was Executive Vice President
and a Director of Independence Holding Company. Previously, Mr. Anderson was a
Vice President of The Dyson-Kissner-Moran Corporation and a Vice President of
Continental Illinois National Bank and Trust Company of Chicago.
Tom E. Boner has been President, Treasurer and a Director of Zimmerman since
1984, having joined Zimmerman in 1981 as Director of Sales and Marketing. From
1970 to 1975, he was in sales with American Sign and Indicator, and from 1976
until 1981, was with American Bank Equipment Company. Mr. Boner served as a
Director of the International Sign Association from 1986 until 1995 and was
Chairman thereof in 1993.
Michael W. Coppinger has been Vice President, Sales of Zimmerman since 1987,
having joined Zimmerman in 1982 as a Regional Sales Manager. From 1973 to 1981,
he was with State Sign of Houston as a sales representative and was a Branch
Manager for Bajon Sign of Corpus Christi from 1981 to 1982. He is a past
President of the Texas Sign Association.
John T. Griggs has been Vice President, Manufacturing of Zimmerman since
1987. Previously, he was a National Sales Manager for Tenncon, Inc. and held
manufacturing and inventory management positions with Aladdin Industries.
Jeffrey P. Johnson has been Vice President and Chief Financial Officer of
Zimmerman since 1990 and Secretary of Zimmerman since December 1996. He joined
Zimmerman in 1985 as Controller. Previously, Mr. Johnson was employed with Price
Waterhouse. Mr. Johnson is a CPA and a member of the AICPA and
5
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the Texas Society of CPAs. He is a Director and Officer of the Texas Sign
Association and a Director of the Southwest Sign Council of the International
Sign Association.
Michael F. St. Onge has been Vice President, Corporate Services of Zimmerman
since January 1996. Mr. St. Onge was with Jim Pattison Sign Group for more than
five years prior to joining Zimmerman and most recently served 5 years as
Executive Vice President and General Manager of the Group's Pacific Northwest
Region. He is a former Director and past Chairman of the International Sign
Association.
ENVIRONMENTAL MATTERS
Compliance with Federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, nor is it expected to have, a material effect upon
Zimmerman's capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The following table sets forth certain information with respect to
Zimmerman's properties, all of which are located in Texas.
<TABLE>
<CAPTION>
LOCATION FUNCTION SQUARE FEET OWNED OR LEASED
- ---------------------------- --------------------------- ----------- ---------------
<S> <C> <C> <C>
Jacksonville................ Sign manufacturing 102,000 Leased
Pole manufacturing 10,000 Owned
Longview.................... Sign manufacturing 75,000 Owned
Sign manufacturing 160,000 Leased
Tyler....................... Corporate Headquarters and
Customer Service 15,000 Leased
Dallas...................... Sales and Administrative 1,400 Leased
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Zimmerman is party to various legal proceedings, all of which are of an
ordinary or routine nature incidental to the operations of the Company.
Management believes that the final resolution of all matters currently pending
will not have a materially adverse effect on the Company's financial position or
result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Zimmerman's shareholders during the
fourth quarter of 1998.
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Zimmerman's common stock ("Common Stock") is traded under the symbol ZSCO on
the National Association of Securities Dealers, Inc. Over the Counter Bulletin
Board. The Company was a majority owned subsidiary of Independence Holding
Company until December 31, 1996 when Independence Holding Company distributed
all its investment in the Company to Independence Holding Company's common
shareholders. Accordingly, there was no public market for the Company's Common
Stock until January 1997.
Based on information available from the NASDAQ Trading and Market Services
OTC Bulletin Board Daily Trade and Quote Summary Report, the Company believes
that the table below sets forth the range of high and low bid prices for the
Company's Common Stock:
<TABLE>
<CAPTION>
BID PRICE
--------------------
FOR THE QUARTER ENDED: HIGH LOW
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
March 31, 1997.......................................................... $ 3.3750 $ 2.7500
June 30, 1997........................................................... 3.6250 3.3750
September 30, 1997...................................................... 3.6875 3.6250
December 31, 1997....................................................... 3.7500 3.6875
March 31, 1998.......................................................... 3.7500 3.5625
June 30, 1998........................................................... 4.0000 3.5625
September 30, 1998...................................................... 3.9375 3.7500
December 31, 1998....................................................... 3.7500 3.5625
</TABLE>
The above OTC market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
The Company had approximately 2,510 holders of record of its common stock as
of March 16, 1999. A dividend of $19,701,000 was declared in 1996 in conjunction
with the Company's spin-off from its former parent, Independence Holding
Company. No further dividends are anticipated in the foreseeable future. The
Company has determined that it will utilize any earnings to expand its business
and to reduce its indebtedness.
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ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of selected financial data with respect to the
Company for each of the last five fiscal years. The selected financial data
below should be read in conjunction with the accompanying Financial Statements
and notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operation (see Item 7, below).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Net sales......................................................... $ 48,619 $ 44,047 $ 41,275 $ 41,667 $ 36,427
Costs and Expenses:
Cost of goods sold.............................................. 38,076 34,692 32,415 32,529 28,227
Selling, general and administrative expenses.................... 5,722 5,470 4,428 4,155 4,024
Management fees................................................. -- -- 600 600 600
Interest expense, net........................................... 2,299 2,419 996 782 433
Stock distribution costs........................................ -- -- 1,106 -- --
--------- --------- --------- --------- ---------
Total costs and expenses...................................... 46,097 42,581 39,545 38,066 33,284
--------- --------- --------- --------- ---------
Income before federal income taxes and extraordinary item..... 2,522 1,466 1,730 3,601 3,143
Federal income taxes.............................................. 896 517 588 1,224 1,069
Extraordinary item (net of income taxes).......................... 369 -- -- -- --
--------- --------- --------- --------- ---------
Net income.................................................... 1,257 949 1,142 2,377 2,074
Preferred stock dividend and accretion............................ 129 -- -- -- --
--------- --------- --------- --------- ---------
Net income applicable to common stock......................... $ 1,128 $ 949 $ 1,142 $ 2,377 $ 2,074
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets...................................................... $ 31,307 $ 29,481 $ 28,154 $ 25,957 $ 22,287
Current liabilities............................................... 10,225 11,856 9,462 7,839 8,129
Long-term debt, excluding current installments.................... 23,235 26,011 28,555 9,422 7,839
Redeemable preferred stock........................................ 4,506 -- -- -- --
Stockholders' equity (deficit)(1)................................. (6,660) (8,386) (9,863) 8,696 6,319
PER SHARE DATA(2)
Cash dividends declared per common share.......................... -- -- $ 10.62 -- $ 1.54
Net income per common share--basic and diluted
Income before extraordinary item................................ $ 0.81 $ 0.51 $ 0.62 $ 1.28 $ 1.12
Extraordinary item(3)........................................... (0.20) -- -- -- --
--------- --------- --------- --------- ---------
Net income.................................................... $ 0.61 $ 0.51 $ 0.62 $ 1.28 $ 1.12
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Book value per common share....................................... $ (3.59) $ (4.52) $ (5.32) $ 4.69 $ 3.41
</TABLE>
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(1) Dividends of $2,850,000 and $19,701,000 were declared in 1994 and 1996,
respectively.
(2) 1,854,692 common shares are outstanding in all periods for basic earnings
per share.
(3) See Note 4 to the Financial Statements
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of Zimmerman's financial condition and results of
operations should be read in conjunction with the financial statements of
Zimmerman and the notes thereto included elsewhere herein.
GENERAL
Zimmerman began operations as a sign manufacturer in 1901. Privately owned
until its acquisition by IHC in 1982, Zimmerman was, throughout most of the
1980's, generally regarded as a regional manufacturer of custom signs which had
also established a small amount of national account business.
In the 1980's, Zimmerman refocused its business to concentrate almost
exclusively on satisfying the site identification needs of large national and
regional retailers in the United States. It concentrated its marketing efforts
on several major retailing sectors and broadened its product line to provide
both standard long-production-run site identification products and more
specialized shorter-run items. During this period, Zimmerman also began to
restructure and expand its product design and installation service capabilities.
In the 1980's, sales to petroleum marketing companies produced much of
Zimmerman's growth and at times accounted for over 90% of Zimmerman's annual
sales.
From 1991 through 1996, Zimmerman's sales grew significantly. This growth
was internally generated and resulted from expansion of several customer
relationships established in earlier periods, plus the addition of several new
large customers. Project delays had some negative impact on sales growth in
1997, yet sales increased 6.7% in 1997, from $41.3 million in 1996 to $44.0
million in 1997, primarily because of continued volume strength in the petroleum
marketing and automotive retailing companies, along with a significant new
account and a project for an existing customer. Sales increased 10.4% in 1998,
from $44.0 million in 1997 to $48.6 million in 1998. This increase is
attributable to continued volume strength in the petroleum marketing companies
and growth in the automotive and general retailing companies, which sectors were
enhanced by sales volume from several new customers which were added in late
1997.
In the 1990's, approximately 50% of Zimmerman's sales growth is attributable
to the petroleum retailing market. The other half is spread among several
retailing groupings, foremost of which are the automotive and financial services
groups. Most of Zimmerman's sales have been to United States based customers;
however, Zimmerman has sold product to and managed installation for
international customers. Sales to customers with headquarters located outside of
the United States accounted for less than 1% of total sales in 1998 and 1997,
and accounted for approximately 1% of total sales in 1996. Since 1994,
substantially all international sales have been to financial institutions in
Mexico. Management of Zimmerman intends to pursue international opportunities
and continue to expand sales of products and services to its domestic customers.
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RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net sales of
certain statement of operations items for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 78.3 78.8 78.5
Selling, general and administrative expenses...................... 11.8 12.4 10.7
Management fees................................................... -- -- 1.5
Interest expense, net............................................. 4.7 5.5 2.4
Stock distribution costs.......................................... -- -- 2.7
--------- --------- ---------
Total costs and expenses...................................... 94.8 96.7 95.8
Income before federal income taxes and extraordinary
item............................................................ 5.2 3.3 4.2
Federal income taxes.............................................. 1.8 1.2 1.4
Extraordinary item................................................ 0.8 -- --
--------- --------- ---------
Net income........................................................ 2.6% 2.1% 2.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
1998 COMPARED TO 1997
Net sales for 1998 increased $4.6 million, or 10.4%, from $44.0 million in
1997 to $48.6 million in 1998. The increase in net sales resulted primarily from
an increase in sales to general retail customers of approximately $2.4 million
and an increase in sales to automotive retailers of approximately $1.3 million.
Increased sales to current customers, along with sales to a significant new
customer and brand expansion activities with several customers contributed to
increased sales to general retailers. Increased sales to a significant new
customer accounted for the increase in sales to automotive retailers.
Cost of goods sold increased $3.4 million, or 9.8% from $34.7 million in
1997 to $38.1 million in 1998. The increase was a result of the net sales
increase as noted above. As a percentage of net sales, cost of goods sold
decreased from 78.8% in 1997 to 78.3% in 1998. Manufacturing costs decreased
slightly as a percentage of net sales in 1998 because the mix of sales volume in
1998 had slightly better direct cost margins.
Selling, general, and administrative expenses increased $0.2 million, or
4.6%, from $5.5 million in 1997 to $5.7 million in 1998. The increase was
primarily a result of higher payroll and benefit costs associated with office
and customer service personnel, which were partially offset by amortization
costs related to the 1996 spin-off being charged to income as an extraordinary
item instead of as an administrative expense.
Interest expense decreased $0.1 million or 5.2% from $2.4 million in 1997 to
$2.3 million in 1998. Lower interest expense was incurred primarily as a result
of lower average interest rates in 1998, along with the Refinancing Transaction
(as defined below) completed on September 30, 1998 which replaced outstanding
subordinated debt with new subordinated debt and preferred stock. See
"Liquidity; Capital Resources."
Income before federal income taxes and extraordinary item increased $1.0
million or 72.0% from $1.5 million in 1997 to $2.5 million in 1998. This
increase was primarily the result of the significant sales volume increase,
explained above, leveraging the fairly constant costs also explained above.
The extraordinary item of $0.4 million in 1998 was related to certain debt
issuance costs associated with retired borrowings which were formerly being
amortized over the life of the borrowings. This debt was
10
<PAGE>
retired as part of the September 30, 1998 Refinancing Transaction and the
unamortized expense was charged to income as an extraordinary item.
Preferred Stock dividend and accretion of $0.1 million was related to the
8.0% Series A Redeemable Preferred Stock which was issued on September 30, 1998
as part of the Refinancing Transaction.
The Company's net income applicable to common shares was $1.1 million, or
$0.61 per share for the year ended December 31, 1998 compared to $0.9 million,
or $0.51 per share in 1997, an increase of 19.6% per share on a basic and
diluted basis. The increase is attributable to the sales volume increase and
cost stability as described above.
1997 COMPARED TO 1996
Net sales for 1997 increased $2.7 million, or 6.7%, from $41.3 million in
1996 to $44.0 million in 1997. The increase in net sales resulted primarily from
an increase in sales to petroleum marketing customers of approximately $1.3
million and an increase in sales to automotive retailers of approximately $1.5
million. A broadened product line, increased sales to current customers, along
with sales to a significant new customer, and brand expansion activities with
several petroleum marketing customers contributed to increased sales to the
petroleum sector of Zimmerman's business. Increased sales to a significant
customer accounted for the increase in sales to automotive retailers.
Cost of goods sold increased $2.3 million, or 7.0% from $32.4 million in
1996 to $34.7 million in 1997. The increase was primarily a result of the net
sales increase as noted above. As a percentage of net sales, cost of goods sold
increased from 78.5% in 1996 to 78.8% in 1997. Manufacturing costs increased
slightly as a percentage of net sales in 1997 because of higher overhead expense
related to labor and benefits for direct plant employees.
Selling, general, and administrative expenses (including management fees for
1996), increased $0.5 million, or 8.8%, from $5.0 million in 1996 to $5.5
million in 1997. The increase was primarily a result of amortization of certain
costs associated with the Company's 1996 recapitalization, ongoing costs of
being a public company and general inflation.
The Company's management fee arrangement terminated at December 31, 1996,
when the Company was spun-off from IHC. Services previously provided to the
Company by the former parent are now performed by the Company. The costs
associated with these services are reflected in selling, general and
administrative expenses in 1997.
Interest expense increased $1.4 million or 142.8% from $1.0 million in 1996
to $2.4 million in 1997. Higher interest expense was incurred primarily as the
result of higher debt balances associated with the Company's restructuring and
spin-off from IHC on December 31, 1996.
Income before federal income taxes decreased $0.2 million or 15.2% from $1.7
million in 1996 to $1.5 million in 1997. This decrease was primarily the result
of causes explained above, most notably expenses related to the Company's
restructuring and spin-off from IHC, particularly increased interest expense.
The Company's net income applicable to common shares was $0.9 million or
$0.51 per share for the year ended December 31, 1997 compared to $1.1 million or
$0.62 per share in 1996. In 1997, the Company incurred additional interest
expense and amortization of deferred financing costs of approximately $1.7
million or, on an after tax basis, $0.59 per share, in conjunction with its
spin-off from IHC on December 31, 1996. In 1997, the Company incurred additional
interest expense and stock distribution costs of approximately $1.4 million or,
on an after tax basis, $0.48 per share, in conjunction with the above noted
spin-off.
11
<PAGE>
PRICING; VOLUME
Zimmerman believes that increases in costs have generally been recovered by
a combination of price and unit volume increases during each of the years
presented. Price increases have been small over the past several years; however,
changes in the cost of raw materials, which constitutes Zimmerman's largest cost
element, have not materially impacted manufacturing costs over the periods
presented.
LIQUIDITY; CAPITAL RESOURCES
Zimmerman's net sales have increased from $23.9 million in 1992 to $48.6
million in 1998. During periods of sales growth, Zimmerman typically experiences
increases in accounts receivable, inventories, trade payables and backlog and,
as a result, increases its investment in operating working capital (defined as
accounts receivable plus inventories, less accounts payable, including accrued
expenses and customer deposits).
In 1998, while backlog and sales each increased by over 10.0%, operating
working capital increased $2.3 million from $15.8 million in 1997 to $18.2
million in 1998, or 14.6%. This increase was almost entirely attributable to
inventory, which increased $2.2 million due to 1999 sales requirements for
several customers. Customer deposits declined by $0.6 million in 1998, while
accounts receivable declined by $0.2 million and accruals increased by $0.3
million.
Zimmerman's backlog, which consists primarily of blanket purchase orders
from customers for sign products which the customer has not yet released for
shipment to retail locations, increased from $23.9 million at December 31, 1997
to $26.4 million at December 31, 1998. Approximately 6% of backlog consists of
orders for sign installation services, while most of the remainder consists of
orders for manufactured products covered by blanket purchase orders for which
the customer has not yet requested delivery.
During 1998, cash flows used in operating activities were less than $0.1
million. Zimmerman also utilized $0.5 million on capital expenditures, paid $1.0
million in dividends related to the 1996 spin-off, paid $0.1 million in
preferred dividends and made net repayments of $3.4 million of long-term debt.
These cash requirements were provided by $5.0 million from preferred stock
issued and resulted in cash remaining unchanged at $0.1 million.
In 1998, capital projects to reduce product costs, improve product quality,
increase manufacturing efficiency and operating flexibility and expand
production capacity resulted in expenditures of $0.5 million, compared with $0.4
million in 1997 (net of $0.1 million in proceeds from the sale of land). At
December 31, 1998, there were no material commitments for capital expenditures,
although management expects similar or greater projects in the future. Capital
expenditures related to environmental projects have not been significant in the
past and are not expected to be significant in the foreseeable future.
On September 30, 1998, the Company entered into new credit facilities with
its existing lender totaling $23.5 million (consisting of a $17.0 million
revolving credit facility and $6.5 million of senior term loans) to replace an
existing credit facility with a revolving credit line and term loan totaling
$20.6 million of available credit, of which $16.5 million was outstanding
immediately preceding the transaction. The terms and conditions of the new
credit facilities are substantially the same as the previous facility except
that the due date was extended and the available credit was increased.
Also, on September 30, 1998, the Company entered into a Senior Subordinated
Note, Preferred Stock and Warrant Purchase Agreement with Bank of America
Capital Investors and certain members of Company management pursuant to which
the Company issued $4.0 million of senior subordinated notes ("Notes") and
52,500 shares of preferred stock, 8% Series A ("Preferred Stock") which has a
liquidation and redemption value of $5.25 million and is mandatorily redeemable
on September 30, 2006 ("Refinancing Transaction"). The Preferred Stock is also
redeemable at the option of the Company and if redeemable prior to September 30,
2003, the redemption value would increase between 1% and 5%. In connection with
12
<PAGE>
the issuance of the Notes and Preferred Stock, the Company issued warrants
representing the right to purchase up to 37% of the Company's common stock
(161,880 warrants related to the Notes and 1,036,034 warrants related to the
Preferred Stock) at an exercise price of $3.79 per share, the approximate market
price of the common stock at the transaction date. The carrying values of the
Notes and Preferred Stock were reduced to reflect the estimated fair value of
the warrants, $0.70 per share, which has been included in additional paid in
capital. Additionally, Preferred Stock issuance costs of $0.3 million were
netted against the proceeds received upon issuance and the subordinated debt
issuance costs of $0.2 million are included in other assets and are being
amortized over the term of the related debt. The Notes and Preferred Stock are
being accreted from their current carrying values to their redemption values
over the lives of the respective instruments using the interest method.
On September 30, 1998, the Company repaid its existing $10.0 million
subordinated loan maturing in 2001 and paid the $1.0 million dividend payable.
As part of the Refinancing Transaction described above, debt issuance costs of
$0.4 million (net of related tax effects) associated with the retired borrowings
were charged to income as an extraordinary item. These costs were formerly being
amortized over the life of the subordinated notes.
At December 31, 1998, the Company had borrowed $15.2 million under its $17.0
million revolving credit facility. At December 31, 1998, $5.3 million of the
$6.5 million senior term loans and $4.0 million of the subordinated term loan
were outstanding. Zimmerman believes that its credit facilities will satisfy its
planned operational requirements for 1999. As it indicated in the Form 10A/2
filed with the Securities and Exchange Commission on December 16, 1996, which
document is referenced as Exhibit 99.1 to this Form 10-K, the Company intended
to explore the possibility of obtaining equity from public or private
financings. The Company completed a refinancing transaction, described above, on
September 30, 1998. Further, the Company has examined and continues to explore
alternative capital sources in addition to the transaction described above;
however, there can be no assurance that any further equity financing can be
obtained on terms acceptable to the Company.
The Company is assessing the reporting and disclosure requirements of
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. This statement requires that all derivatives be recognized as either
assets or liabilities in the balance sheet and measured at fair value. The
accounting for changes in fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and resulting designation. This
statement amends and supersedes a number of existing SFAS's, and nullifies or
modifies a number of the consensuses reached by the Emerging Issues Task Force.
This statement is effective for financial statements for fiscal years beginning
after June 15, 1999. At the present time, the Company has not quantified the
effect of adoption or the continuing impact of such adoption. The Company will
adopt the provisions of SFAS No. 133 in the first quarter of fiscal year 2000.
INFLATION
During the periods presented, inflation did not have a material effect on
Zimmerman's results of operations. In recent years, the U.S. rate of inflation
has been relatively low.
YEAR 2000 CONSIDERATIONS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer programs
that have date-sensitive software may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. To become Year 2000 compliant, the Company
has implemented a comprehensive study of its information technology systems.
13
<PAGE>
Because many of its systems were outdated and no longer supported, ordinary
replacement with Year 2000 compliant systems has addressed most of the Company's
needs in those areas. However, the Company found it necessary to upgrade its
production scheduling and management software outside of the ordinary
replacement cycle to be Year 2000 compliant at a cost of approximately $50,000.
In addition, the Company is currently conducting a review of all PCs, HVAC,
plant equipment and similar systems and acting on them accordingly. The Company
does not expect future costs to address its internal Year 2000 matters to exceed
$100,000.
Because the Company's products are not date sensitive, the Company does not
believe that they will be affected by the Year 2000 issue.
Further, the Company has requested from all of its suppliers, and has
received from approximately 85% of its suppliers, written questionnaires and
assurances that they are taking the necessary measures to avoid any significant
disruptions from Year 2000 noncompliance. The Company is continuing its efforts
to identify any exposures from failure of any significant supplier to provide
goods or services required by the Company.
The Company anticipates being fully Year 2000 compliant in all of its
information systems by June 30, 1999. Although the Company is committed to a
successful and timely Year 2000 conversion and funds are dedicated and available
for this project, no assurance can be given that it will be fully and timely
implemented. Failure of the Company's equipment or software to operate properly
with regard to the Year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on the Company's business, operating results and financial
condition. Furthermore, the purchasing patterns of customers or potential
customers may be affected by Year 2000 issues if their systems malfunction or
they expend significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company believes the least controllable and therefore most
probable exposure specifically related to its business would be the failure of a
supplier to timely provide goods or services required by the Company. The
Company has obtained assurances of Year 2000 compliance from most of its
suppliers, as noted above, and intends to continue canvassing critical suppliers
concerning the compliance of their systems. In addition, the Company has in many
instances sought to identify and qualify alternate suppliers, where feasible.
However, if notwithstanding these measures the Company does not receive required
goods or services as a result of the failure of one or more suppliers, such
failure could have a material adverse effect upon the company's business
operating results and financial condition.
FORWARD LOOKING INFORMATION
This report and other reports and statements filed by the Company from time
to time with the Securities and Exchange Commission (collectively, "SEC
Filings") contain or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in SEC Filings, the words "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan" and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the industries served by the Company, the
costs of product development and other risks and uncertainties, including, in
addition to any uncertainties specifically identified in the text surrounding
such statements, uncertainties with respect to changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including the Company's stockholders, customers, suppliers, business partners,
competitors,
14
<PAGE>
and legislative, regulatory, judicial and other governmental authorities and
officials. Should one or more of these risks or uncertainties materialize, or
should the underlying assumptions prove incorrect, actual results may vary
significantly from those anticipated, believed, estimated, expected, intended or
planned.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has interest rate collar agreements that are used to reduce the
potential impact of fluctuations in interest rates on floating-rate long-term
debt. A one percent change in interest rates on floating rate long-term debt
above the floor or ceiling rates contained in the interest rate collar
agreements would impact interest expense by approximately $0.2 million. The
Company believes it has no other instruments subject to any significant interest
rate risk, foreign currency exchange risk, commodity price risk or other
significant market risk.
15
<PAGE>
ZIMMERMAN SIGN COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... 17
Financial Statements:
Balance Sheets at December 31, 1998 and 1997............................................................. 18
Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................ 19
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996........ 20
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................ 21
Notes to Financial Statements............................................................................ 22
Financial Statement Schedule for the years ended December 31, 1998, 1997 and 1996
Valuation and Qualifying Accounts........................................................................ 32
</TABLE>
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Zimmerman Sign Company:
We have audited the financial statements of Zimmerman Sign Company as listed
in the accompanying index. In connection with our audits of the financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule 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 Zimmerman Sign Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 5, 1999
17
<PAGE>
ZIMMERMAN SIGN COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................................. $ 126,339 129,678
Accounts receivable, net of allowance for doubtful accounts of $100,000 in 1998 and
1997 (note 11)..................................................................... 10,190,998 10,386,830
Inventories (note 2)................................................................. 16,771,487 14,595,234
Prepaids and other current assets.................................................... 198,083 325,418
Deferred tax assets (note 8)......................................................... 618,927 540,547
------------- -------------
Total current assets............................................................... 27,905,834 25,977,707
Property, plant and equipment, net (note 3)............................................ 2,957,926 3,005,662
Other assets........................................................................... 431,678 463,562
Deferred tax assets (note 8)........................................................... 11,148 34,000
------------- -------------
$ 31,306,586 29,480,931
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current installments of long-term debt (note 4)...................................... $ 1,167,000 1,644,000
Accounts payable..................................................................... 6,607,601 6,593,422
Accrued expenses..................................................................... 1,806,837 1,513,384
Income taxes payable................................................................. 262,070 78,695
Dividend payable (note 5)............................................................ -- 1,000,000
Customer deposits.................................................................... 381,289 1,026,834
------------- -------------
Total current liabilities.......................................................... 10,224,797 11,856,335
------------- -------------
Long-term debt, excluding current installments (note 4):
Bank debt............................................................................ 19,313,500 16,011,000
Subordinated notes................................................................... 3,921,988 10,000,000
------------- -------------
Total long-term debt............................................................... 23,235,488 26,011,000
------------- -------------
Redeemable preferred stock, 8% Series A, $.01 par value, redemption value of
$5,250,000. Authorized 52,500 shares; 52,500 shares issued and outstanding (note
4)................................................................................... 4,505,889 --
Stockholders' deficit:
Common stock, $.01 par value. Authorized 15,000,000 shares; 1,854,692 shares issued
and outstanding.................................................................. 18,547 18,547
Additional paid in capital......................................................... 574,662 --
Accumulated deficit................................................................ (7,252,797) (8,404,951)
------------- -------------
Total stockholders' deficit........................................................ (6,659,588) (8,386,404)
Commitments and contingencies (notes 7 and 12)
------------- -------------
$ 31,306,586 29,480,931
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
ZIMMERMAN SIGN COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (note 11)................................................. $ 48,619,408 44,047,109 41,275,477
Cost of goods sold.................................................. 38,075,791 34,691,459 32,415,051
------------- ------------- -------------
Gross profit.................................................... 10,543,617 9,355,650 8,860,426
Selling, general and administrative expenses........................ 5,722,514 5,469,949 4,427,911
Management fees (note 10)........................................... -- -- 600,000
Interest expense.................................................... 2,298,915 2,419,178 996,253
Stock distribution costs (note 1(a))................................ -- -- 1,105,917
------------- ------------- -------------
Income before federal income taxes and extraordinary item....... 2,522,188 1,466,523 1,730,345
Federal income taxes (note 8)....................................... 896,027 517,186 588,317
------------- ------------- -------------
Income before extraordinary item................................ 1,626,161 949,337 1,142,028
Extraordinary item--debt restructure (net of income tax benefit of
$35,120) (note 4)................................................. 369,007 -- --
------------- ------------- -------------
Net income...................................................... 1,257,154 949,337 1,142,028
Preferred stock dividend and accretion (note 4)..................... 129,003 -- --
------------- ------------- -------------
Net income applicable to common stock........................... $ 1,128,151 949,337 1,142,028
------------- ------------- -------------
------------- ------------- -------------
Basic net income per share (note 1(l)):
Income before extraordinary item.................................. $ 0.81 0.51 0.62
Extraordinary item................................................ (0.20) -- --
------------- ------------- -------------
Net income...................................................... $ 0.61 0.51 0.62
------------- ------------- -------------
------------- ------------- -------------
Diluted net income per share (note 1(l)):
Income before extraordinary item.................................. $ 0.81 0.51 0.62
Extraordinary item................................................ (0.20) -- --
------------- ------------- -------------
Net income...................................................... $ 0.61 0.51 0.62
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
ZIMMERMAN SIGN COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER PAR NUMBER PAR PAID-IN
OF SHARES VALUE OF SHARES VALUE CAPITAL
---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995.................................. -- $ -- 1,854,692 $ 18,547 441,128
Dividends declared............................................. -- -- -- -- (441,128)
Net income..................................................... -- -- -- -- --
---------- --------- ---------- --------- -----------
Balances at December 31, 1996.................................. -- -- 1,854,692 18,547 --
Contribution of deferred tax assets (note 8)................... -- -- -- -- --
Net income..................................................... -- -- -- -- --
---------- --------- ---------- --------- -----------
Balances at December 31, 1997.................................. -- -- 1,854,692 18,547 --
Issuance of warrants (note 4).................................. -- -- -- -- 598,665
Net income..................................................... -- -- -- -- --
Preferred stock dividend....................................... -- -- -- -- --
Accretion of preferred stock (note 4).......................... -- -- -- -- (24,003)
---------- --------- ---------- --------- -----------
Balances at December 31, 1998.................................. -- $ -- 1,854,692 $ 18,547 574,662
---------- --------- ---------- --------- -----------
---------- --------- ---------- --------- -----------
<CAPTION>
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------- -------------
<S> <C> <C>
Balances at December 31, 1995.................................. 8,236,522 8,696,197
Dividends declared............................................. (19,259,873) (19,701,001)
Net income..................................................... 1,142,028 1,142,028
------------- -------------
Balances at December 31, 1996.................................. (9,881,323) (9,862,776)
Contribution of deferred tax assets (note 8)................... 527,035 527,035
Net income..................................................... 949,337 949,337
------------- -------------
Balances at December 31, 1997.................................. (8,404,951) (8,386,404)
Issuance of warrants (note 4).................................. -- 598,665
Net income..................................................... 1,257,154 1,257,154
Preferred stock dividend....................................... (105,000) (105,000)
Accretion of preferred stock (note 4).......................... -- (24,003)
------------- -------------
Balances at December 31, 1998.................................. (7,252,797) (6,659,588)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
ZIMMERMAN SIGN COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 1,257,154 949,337 1,142,028
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Extraordinary item--debt restructure............................ 369,007 -- --
Depreciation and amortization................................... 711,490 862,375 525,988
Credit for losses on accounts receivable........................ -- -- (288)
Deferred income taxes........................................... (55,528) (47,512) --
Changes in operating assets and liabilities:
Accounts receivable........................................... 195,832 (245,927) (856,653)
Inventories................................................... (2,176,253) (987,476) (948,771)
Prepaids and other assets..................................... (159,512) (101,406) (630,900)
Receivable from Holdings...................................... -- 126,453 (51,528)
Customer deposits............................................. (645,545) 268,197 171,536
Accounts payable and accrued expenses......................... 491,007 1,652,421 (451,779)
-------------- ------------- -------------
Net cash provided by (used in) operating activities......... (12,348) 2,476,462 (1,100,367)
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment........................ (520,438) (497,929) (610,281)
Proceeds on sales of property, plant and equipment................ -- 88,662 --
Proceeds from notes receivable.................................... -- -- 400,313
-------------- ------------- -------------
Net cash used in investing activities....................... (520,438) (409,267) (209,968)
-------------- ------------- -------------
Cash flows from financing activities:
Dividends paid.................................................... (1,105,000) -- (18,701,001)
Proceeds from revolving line of credit............................ 4,500,000 21,525,000 5,075,000
Issuance of subordinated debt and related warrants................ 4,000,000 -- 10,000,000
Proceeds from term loans.......................................... 5,500,000 -- 6,000,000
Payments on revolving line of credit.............................. (2,150,000) (22,425,000) --
Payments on term loans............................................ (194,500) -- --
Payments on long-term notes....................................... (14,830,000) (1,170,000) (1,038,937)
Issuance of preferred stock and related warrants.................. 5,250,000 -- --
Issuance costs related to preferred stock......................... (250,310) -- --
Issuance costs related to subordinated debt....................... (190,743) -- --
-------------- ------------- -------------
Net cash provided by (used in) financing activities......... 529,447 (2,070,000) 1,335,062
-------------- ------------- -------------
Net increase (decrease) in cash..................................... (3,339) (2,805) 24,727
Cash at beginning of year........................................... 129,678 132,483 107,756
-------------- ------------- -------------
Cash at end of year................................................. $ 126,339 129,678 132,483
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL INFORMATION
Zimmerman Sign Company (the "Company") became a publicly owned company on
December 31, 1996. Prior to that date the Company was a majority-owned
subsidiary of Zimmerman Holdings, Inc. ("Holdings"). Holdings was a
subsidiary of Independence Holding Company ("IHC"). The Company is a
manufacturer of commercial exterior signs with its manufacturing
operations located in East Texas. The Company's customers, consisting
primarily of petroleum retailers, automotive retailers, general retailers
and financial institutions, are located principally in North America.
Effective December 31, 1996, IHC's 80.14% investment in the Company was
distributed to holders of record of IHC common stock as of December 20,
1996. The Company's common stock is registered with the Securities and
Exchange Commission and quoted on the National Association of Securities
Dealers Over the Counter Bulletin Board. Costs associated with the stock
distribution aggregated approximately $1,106,000 and were charged to 1996
operations.
(B) INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market (net realizable value).
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements are
capitalized and depreciated over the remaining life of the asset. Repair
and maintenance costs are charged to operations as incurred.
Property, plant and equipment are depreciated and amortized using the
straight-line method over the following estimated useful lives of the
respective assets or lease terms, if shorter:
<TABLE>
<CAPTION>
ESTIMATED
LIFE
(IN YEARS)
-------------
<S> <C>
Building............................................................. 25
Manufacturing equipment.............................................. 5 - 8
Transportation equipment............................................. 3 - 7
Leasehold improvements............................................... 5 - 15
Office furniture and equipment....................................... 3 - 8
</TABLE>
(D) OTHER ASSETS
Other assets are recorded at cost and consist primarily of deposits and
deferred loan costs. Deferred loan costs are amortized over the term of
the related loans using the interest method.
(E) REVENUE RECOGNITION
Revenue is recognized upon the shipment of product unless installation is
required, at which time revenue is recognized when the installation is
complete. Sales returns and allowances are not significant.
22
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Through December 31, 1996, the Company was included in the consolidated
federal income tax return filed by IHC. Under a tax sharing agreement
with Holdings, the Company was required to pay to Holdings total income
taxes (both current and deferred) computed for financial reporting
purposes determined as if the Company had filed a separate income tax
return.
(G) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense would be recorded only if
the current market price of the underlying stock exceeded the exercise
price on the date of grant. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123.
(H) STATEMENTS OF CASH FLOWS
The Company paid $2,321,344, $2,335,890, and $828,594 for interest in
1998, 1997 and 1996, respectively. Additionally, the Company paid
$737,210 and $486,000 for income taxes in 1998 and 1997, respectively,
and $588,316 for income taxes to Holdings in 1996.
(I) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for the impairment of long-lived assets and
long-lived assets to be disposed of in accordance with the provisions of
SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount
23
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties. Financial instruments in the
accompanying financial statements include accounts receivable, accounts
payable and debt. The carrying values of accounts receivable and accounts
payable approximate fair value.
The estimated fair values of the revolving line of credit and term notes
and the previous subordinated notes approximate their carrying values at
December 31, 1998 and 1997. The estimated fair value of the subordinated
notes is $3,796,505 at December 31, 1998. The Company is a party to
interest rate collar agreements which have an estimated fair value of a
net payable of $70,000 at December 31, 1998 (see note 4).
(K) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(L) NET INCOME PER SHARE
Basic earnings per share (EPS) is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in earnings of the entity. Income
applicable to common stock gives effect to preferred stock dividends and
accretion of preferred stock for the difference between carrying value
and liquidation preference.
Shares used in calculating basic and diluted net income per share are as
follows at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding....................... 1,854,692 1,854,692 1,854,692
Dilutive securities--common stock options........................ 9,546 1,200 --
---------- ---------- ----------
Weighted average common and potentially dilutive shares
outstanding.................................................... 1,864,238 1,855,892 1,854,692
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
24
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Stock options and warrants totaling 1,263,714 were excluded from the 1998
net income per share calculation as they were antidilutive. There were no
antidilutive options or warrants during 1997 and 1996.
(M) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
(2) INVENTORIES
A summary of inventories at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Raw materials.................................................... $ 6,395,734 5,756,112
Work in process.................................................. 7,139,441 5,589,542
Finished goods................................................... 3,236,312 3,249,580
------------- ------------
$ 16,771,487 14,595,234
------------- ------------
------------- ------------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Land............................................................... $ 262,930 262,930
Building........................................................... 1,587,312 1,587,312
Manufacturing equipment............................................ 2,733,752 2,316,847
Transportation equipment........................................... 120,549 112,310
Leasehold improvements............................................. 1,474,343 1,425,171
Office furniture and equipment..................................... 1,962,187 1,916,065
------------ ----------
8,141,073 7,620,635
Less accumulated depreciation and amortization..................... 5,183,147 4,614,973
------------ ----------
$ 2,957,926 3,005,662
------------ ----------
------------ ----------
</TABLE>
25
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(4) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Revolving line of credit with a bank, due September 30, 2001, monthly
interest at prime plus .25% or LIBOR plus 2.75% (8.0% to 8.5% at December
31, 1998)................................................................ $ 15,175,000 12,825,000
Secured term notes payable to a bank, due between October 1, 2002, and
October 1, 2005, monthly payments of $97,250 plus interest at prime plus
.25% to 1.5% or LIBOR plus 2.75% to 4.0% (8.0% to 9.25% at December 31,
1998).................................................................... 5,305,500 4,830,000
Subordinated notes, $4,000,000 principal amount, due September 30, 2005,
interest payable quarterly at 12%, quarterly payments of principal of
$500,000 due beginning September 30, 2003 net of discount of $78,012..... 3,921,988 --
Subordinated notes, due October 31, 2001, quarterly payments of interest at
prime plus 0.5% or bank off-shore rate plus 1.6875% (7.5% at December 31,
1997).................................................................... -- 10,000,000
------------- ------------
24,402,488 27,655,000
Less current installments.................................................. 1,167,000 1,644,000
------------- ------------
$ 23,235,488 26,011,000
------------- ------------
------------- ------------
</TABLE>
On September 30, 1998, the Company entered into new credit facilities with
its existing lender totaling $23,500,000 (of which $15,175,000 is
outstanding on the revolving credit line and $5,305,500 is outstanding on
the term notes at December 31, 1998) to replace an existing credit facility
with a revolving credit line and term loan totaling $20,600,000 of available
credit, of which $16,500,000 was outstanding immediately preceding the
transaction. The terms and conditions of the new credit facilities are
substantially the same as the previous facility except that the due date was
extended and the available credit was increased.
Also, on September 30, 1998, the Company entered into a Senior Subordinated
Note, Preferred Stock and Warrant Purchase Agreement ("the Agreement") with
Bank of America Capital Investors ("B of A") and certain members of Company
management pursuant to which the Company issued $4,000,000 of senior
subordinated notes ("Notes") and 52,500 shares of preferred stock, 8% Series
A ("Preferred Stock") which has a liquidation and redemption value of
$5,250,000 and is mandatorily redeemable on September 30, 2006 ("Refinancing
Transaction"). The Preferred Stock is also redeemable at the option of the
Company and if redeemed prior to September 30, 2003, the redemption value
would increase between 1% and 5%. In connection with the issuance of the
Notes and Preferred Stock, the Company issued warrants representing the
right to purchase up to 37% of the Company's common stock (161,880 warrants
related to the Notes and 1,036,034 warrants related to the Preferred Stock)
at an exercise price of $3.79 per share, the approximate market price of the
common stock at the transaction date. The carrying values of the Notes and
Preferred Stock were reduced to reflect the estimated fair value of the
warrants, $0.70 per share, which has been included in additional paid in
capital. Additionally, Preferred Stock issuance costs of $250,310 were
netted against the proceeds
26
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(4) LONG-TERM DEBT (CONTINUED)
received upon issuance and the subordinated debt issuance costs of $190,743
are included in other assets and are being amortized over the term of the
related debt. The Notes and Preferred Stock are being accreted from their
current carrying values to their redemption values over the lives of the
respective instruments using the interest method. During January 1999, the
Company canceled 343,655 warrants (46,440 and 297,215 warrants relate to the
Notes and Preferred Stock, respectively) in connection with the stock
repurchase described in Note 13. Such warrants were not included in the
determination of the Notes and Preferred Stock carrying values as
cancellation of such warrants was intended under the conditions of the
Agreement.
On September 30, 1998, the Company repaid its existing $10,000,000
subordinated loan maturing in 2001 and paid the $1,000,000 dividend payable
(see note 5). As part of the Refinancing Transaction described above, debt
issuance costs of $369,007 (net of related tax effects) associated with the
retired borrowings were charged to income as an extraordinary item. These
costs were formerly being amortized over the life of the subordinated notes.
The credit agreements related to the revolving line of credit and term notes
and subordinated notes contain certain restrictive covenants, including
restrictions on additional indebtedness, investments in or advances to
others, acquisitions of other businesses, declaration and payment of
dividends and repurchase of capital stock. The term notes payable are
secured by all of the Company's assets including inventory and accounts
receivable.
The Company has limited involvement with derivative financial instruments
and uses them principally to manage well-defined interest rate risks.
Interest rate collar agreements are used to reduce the potential impact of
fluctuations in interest rates on floating-rate long-term debt. At December
31, 1998, the Company has two three-year interest rate collar agreements for
notional amounts aggregating $20,000,000. The agreements entitle the Company
to receive or pay the counterparty (a major bank) on a quarterly basis, the
amount, if any, by which the Company's interest rates on floating-rate
long-term debt exceed or are less than the ceiling or floor rates (reset
quarterly) under the agreements. The net amounts paid by the Company during
the years ended December 31, 1998 and 1997 were not material to the
financial statements.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999....................................... $1,167,000
2000....................................... 1,167,000
2001....................................... 16,342,000
2002....................................... 992,000
2003 and thereafter........................ 4,734,488
----------
Total.................................. $24,402,488
----------
----------
</TABLE>
(5) STOCKHOLDERS' DEFICIT
During the year ended December 31, 1996, the Company declared a dividend to
its shareholders of $19,701,000. At December 31, 1997, $1,000,000 of the
dividend was unpaid due to restrictive
27
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(5) STOCKHOLDERS' DEFICIT (CONTINUED)
covenants of the subordinated notes and, accordingly, was presented as a
payable in the accompanying balance sheet. On September 30, 1998, the
Company paid the dividend as part of the Refinancing Transaction (see note
4).
(6) STOCK OPTIONS
The Company had a stock option agreement which provided for the granting of
incentive stock options to certain key employees. The stock options were
exercisable for a period of eight years from date of grant (December 15,
1990) and became fully vested on December 15, 1995. In connection with the
transactions described in note 5, the options were terminated in November
1996.
In November 1996, Zimmerman adopted a stock option plan (the "New Plan"). In
connection with the establishment of the New Plan, 185,000 shares of common
stock are reserved for issuance at exercise prices which are equal to the
market value of the common stock at the date of grant. The New Plan provides
for the grant of incentive stock options to employees, officers and
directors. During 1998 and 1997, the Company granted options to acquire
63,800 shares and 87,279 shares of common stock at $3.79 and $3.42 per
share, respectively. The options granted during 1998 vest over a period of 4
years and expire 5 years after the date of grant. The options granted during
1997 are fully vested and can be exercised at any time through 2005. No
options were exercised during 1998 and 1997.
The per share weighted-average fair value of stock options granted during
1998 and 1997 was $1.14 and $1.27, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 5.10% in 1998 and 6.59% in 1997, an
expected life of five years in 1998 and eight years in 1997 and an expected
volatility of 21% over the life of the options.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income and diluted earnings per share for the
years ended December 31, 1998 and 1997 would have been reduced to the pro
forma amount indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ---------
<S> <C> <C>
Net income:
As reported........................................................ $ 1,257,154 949,337
Pro forma.......................................................... 1,247,553 876,180
Diluted net income per share:
As reported........................................................ $ .61 .51
Pro forma.......................................................... .60 .47
</TABLE>
(7) LEASES
The Company has noncancelable operating leases, primarily for office and
plant facilities in Dallas, Jacksonville and Tyler, Texas, that expire on
various dates through 2004. The operating leases contain
28
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(7) LEASES (CONTINUED)
options at the end of the lease terms to extend the leases at the then fair
rental value for a period of up to five years.
Future minimum lease payments and sublease receipts under operating lease
commitments with initial or noncancelable terms in excess of one year, at
inception, as of December 31, 1998 follow:
<TABLE>
<CAPTION>
OPERATING OPERATING
LEASE SUBLEASE
PAYMENTS RECEIPTS
------------ -----------
<S> <C> <C>
Year ending December 31:
1999............................................................ $ 595,700 64,800
2000............................................................ 464,900 27,000
2001............................................................ 258,800 --
2002............................................................ 162,600 --
2003 and thereafter............................................. 162,100 --
------------ -----------
Total....................................................... $ 1,644,100 91,800
------------ -----------
------------ -----------
</TABLE>
Total rental expense for operating leases was approximately $574,300 in
1998, $346,000 in 1997 and $313,000 in 1996. Total sublease rental income
for operating leases was approximately $65,000 in 1998, 1997 and 1996.
(8) INCOME TAXES
Through December 31, 1996, the Company was included in the consolidated
federal income tax return filed by IHC. Under the tax sharing agreement with
Holdings, the Company was required to pay to Holdings total income taxes
computed for financial reporting purposes (see note 1) and, accordingly,
deferred tax assets and liabilities were maintained on the financial
accounting records of IHC.
In conjunction with the spin-off of the Company from its former parent,
Holdings, on December 31, 1996, deferred tax assets of $527,035, formerly
recorded by Holdings on their financial statements became available to the
Company and were recorded as reduction of accumulated deficit on January 1,
1997.
Income tax expense for the years ended December 31, 1998, 1997 and 1996
differed from the amounts computed by applying the U.S. federal income tax
rate of 34% to income before federal income taxes and extraordinary item as
a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense............................. $ 857,544 498,618 588,317
Nondeductible meals and entertainment expenses.............. 5,791 8,206 --
Other....................................................... 32,692 10,362 --
---------- --------- ---------
$ 896,027 517,186 588,317
---------- --------- ---------
---------- --------- ---------
</TABLE>
29
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(8) INCOME TAXES (CONTINUED)
The components of federal income tax expense for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Current expense............................................. $ 951,555 564,698 622,456
Deferred benefit............................................ (55,528) (47,512) (34,139)
---------- --------- ---------
$ 896,027 517,186 588,317
---------- --------- ---------
---------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Accounts receivable, principally due to allowance for doubtful
accounts............................................................. $ 34,000 34,000
Inventories, principally due to differences of inventory capitalization
for tax purposes..................................................... 485,771 433,216
Accrued vacation....................................................... 99,156 73,331
Property, plant and equipment, principally due to differences in
depreciation......................................................... 11,148 34,000
---------- ---------
$ 630,075 574,547
---------- ---------
---------- ---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that realization of some portion or all
of the deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences.
(9) EMPLOYEE BENEFITS
The Company makes payments to a multi-employer retirement plan for certain
employees in accordance with the bargaining unit contracts. Under the terms
of the union contracts, the Company is obligated to contribute 3% of gross
wages paid to covered employees. Total expense paid for employees
represented by the bargaining units was approximately $219,600 in 1998,
$180,400 in 1997 and $160,200 in 1996.
In August 1995, the Company began sponsoring a retirement plan in accordance
with Section 401(k) of the Internal Revenue Code which allows substantially
all employees not covered by collective bargaining agreements to
participate. The Company's contribution to the retirement plan is determined
based on 50% of each dollar an employee contributes with a maximum of 3% of
gross wages per employee. Contributions were $57,565 in 1998, $63,291 in
1997 and $52,915 in 1996.
30
<PAGE>
ZIMMERMAN SIGN COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) RELATED PARTY TRANSACTIONS
Included in long-term debt is approximately $779,000 of subordinated notes
due to certain members of Company management.
Management fees paid to Holdings were $600,000 in 1996. In addition, the
Company paid federal income taxes to Holdings for the year ended 1996 (see
note 8).
On December 15, 1990, the Company entered into agreements to loan an
aggregate of $500,000, to four members of management. Interest charged on
these notes was at rates which approximated the prime rate associated with
the Company's revolving line of credit. Interest earned on these notes was
$25,781 in 1996. The outstanding balances of these notes were repaid on
November 1, 1996.
(11) CONCENTRATIONS OF RISK
The Company has certain customers, primarily in the petroleum retailing and
automotive manufacturing industries, that individually account for greater
than 10% of net sales in 1998, 1997 and 1996. In 1998, the Company had 3
such customers accounting for approximately $7,500,000, $6,000,000 and
$5,600,000 of net sales. In 1997, the Company had two such customers
accounting for approximately $9,500,000 and $5,800,000 of net sales. In
1996, the Company had one such customer accounting for approximately
$9,200,000 of net sales. Additionally, accounts receivable from one customer
exceeded 10% of total accounts receivable at December 31, 1998.
(12) CONTINGENCIES
The Company is a party to various legal proceedings arising in the ordinary
course of business. While any proceeding or litigation has an element of
uncertainty, management believes that the final outcome will not have a
materially adverse effect on the Company's financial position or results of
operations.
(13) SUBSEQUENT EVENTS
During January 1999, the Company purchased 357,143 shares of its common
stock from its largest stockholder at a cost of $625,000 in cash and 6,250
shares of the Company's 6% Series C Preferred Stock, which has a liquidation
and redemption value of $625,000. Additionally, the Company purchased
228,000 shares of its common stock from an officer of the Company at a cost
of $98,000 in cash and 7,000 shares of the Company's 6% Series B Preferred
Stock, which has a liquidation and redemption value of $700,000. The Series
B and Series C Preferred Stock are subordinate to the Company's Series A
Preferred Stock. The Company had 1,269,549 shares of common stock
outstanding immediately following the above stock purchases. In connection
with the above transactions, the Company canceled 343,655 of its outstanding
warrants. Common shares outstanding assuming exercise of the outstanding
options and warrants would be 2,308,808.
31
<PAGE>
ZIMMERMAN SIGN COMPANY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
(REDUCTIONS)
CHARGED
BALANCE (CREDITED) BALANCE AT
BEGINNING TO COSTS AND END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSES DEDUCTIONS (A) PERIOD
- ------------------------------------------------------ ---------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998.......................... $ 100,000 9,176 (9,176) 100,000
Year ended December 31, 1997.......................... 100,000 7,965 (7,965) 100,000
Year ended December 31, 1996.......................... 100,288 95,836 (96,124) 100,000
</TABLE>
- ------------------------
(A) Recovery (write-off) of uncollectible accounts.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is incorporated by reference from the
sections entitled "Election of Directors" and "Executive Officers" in the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
Information about Executive Officers of the Company is included in Item 1 of
Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
section entitled "Principal Stockholders" in the Company's Proxy Statement for
its 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
section entitled "Related Party Transactions" in the Company's Proxy Statement
for its 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: See Index to Financial Statements and Financial
Statement Schedule on page 16.
(a)(2) Financial Statement Schedule: See Index to Financial Statements and
Financial Statement Schedule on page 16.
(a)(3) Exhibits: See Exhibit Index on page 35.
(b) Reports on Form 8-K: No report on Form 8-K was filed during the quarter
ended December 31, 1998.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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, on March
24, 1999.
<TABLE>
<S> <C> <C>
ZIMMERMAN SIGN COMPANY
(REGISTRANT)
By: /s/ DAVID E. ANDERSON
-----------------------------------------
David E. Anderson
CHAIRMAN (PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of the 24(th) day of March, 1999.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ TOM E. BONER
- ------------------------------ Director, President March 24, 1999
Tom E. Boner
CARL A. GOLDMAN
- ------------------------------ Director March 24, 1999
Carl A. Goldman
/s/ ANDREA P. JOSELIT
- ------------------------------ Director March 24, 1999
Andrea P. Joselit
/s/ ROBERT F. PERILLE
- ------------------------------ Director March 24, 1999
Robert F. Perille
</TABLE>
34
<PAGE>
ZIMMERMAN SIGN COMPANY
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of Zimmerman Sign Company.(1)
3.2 Amended and Restated Bylaws of Zimmerman Sign Company, amended and restated as of September 29,
1998.(1)
4.1 Distribution Agreement, dated as of November 26, 1996, by and between Zimmerman Sign Company and
Independence Holding Company.(2)
4.2 Registration Rights Agreement, dated as of September 30, 1998, by and between Zimmerman Sign
Company, Continental Illinois Venture Corporation, MIG Partners VIII and certain
shareholders.(1)
4.3 Stockholders Agreement, dated as of September 30, 1998, by and between Zimmerman Sign Company
and certain shareholders.(1)
10.1 Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of September 30,
1998, by and between Zimmerman Sign Company and Comerica Bank-Texas.(1)
10.2 Senior Subordinated Note, Preferred Stock and Warrant Purchase Agreement, dated as of September
30, 1998, by and between Zimmerman Sign Company, Continental Illinois Venture Corporation, MIG
Partners VIII and certain management purchasers.(1)
10.3 Stock Option Plan of Zimmerman Sign Company, dated as of December 1, 1996.(2)
10.4 Form of Amended & Restated Employment Agreement, dated December 1, 1996, by and between
Zimmerman Sign Company and David E. Anderson.(2)
10.5 Form of Amended and Restated Employment Agreement, dated December 1, 1996, by and between
Zimmerman Sign Company and Tom E. Boner.(2)
10.6 Form of Amended and Restated Employment Agreement, dated December 1, 1996, by and between
Zimmerman Sign Company and Michael W. Coppinger.(2)
10.7 Form of Amended and Restated Employment Agreement, dated December 1, 1996, by and between
Zimmerman Sign Company and Jeffrey P. Johnson.(2)
10.8 Form of Amended and Restated Employment Agreement, dated December 1, 1996, by and between
Zimmerman Sign Company and John T. Griggs.(2)
10.9 Share Option Purchase Agreement, dated as of September 30, 1998, by and between Zimmerman Sign
Company and certain shareholders.(1)
10.10 Purchase Agreement, dated as of September 30, 1998, by and between Zimmerman Sign Company and
David E. Anderson.(1)
10.11 Letter Agreement, dated as of September 30, 1998, by and between Zimmerman Sign Company and
certain shareholders.(1)
10.12 Form of 12% Senior Subordinated Note issued by Zimmerman Sign Company in connection with the
Senior Subordinated Note, Preferred Stock and Warrant Purchase Agreement, dated as of
September 30, 1998.(1)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
10.13 Form of Stock Purchase Warrants issued by Zimmerman Sign Company in connection with the Senior
Subordinated Note, Preferred Stock and Warrant Purchase Agreement, dated as of September 30,
1998.(1)
27.1 Financial Data Schedule.
99.1 Registration Statement on Form 10/A-2 filed by Zimmerman Sign Company with the Securities and
Exchange Commission and declared effective on December 16, 1996.(3)
</TABLE>
- ------------------------
(1) Previously filed as an exhibit to the Company's Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form 10 (No. 000-21737) and incorporated herein by reference.
(3) Previously filed (No. 000-21737).
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 BALANCE SHEET AND YEAR END 1998 INCOME STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 126,339
<SECURITIES> 0
<RECEIVABLES> 10,290,998
<ALLOWANCES> 100,000
<INVENTORY> 16,771,487
<CURRENT-ASSETS> 27,905,834
<PP&E> 8,141,073
<DEPRECIATION> 5,183,147
<TOTAL-ASSETS> 31,306,586
<CURRENT-LIABILITIES> 10,224,797
<BONDS> 23,235,488
4,505,889
0
<COMMON> 18,547
<OTHER-SE> (6,678,135)
<TOTAL-LIABILITY-AND-EQUITY> 31,306,586
<SALES> 48,619,408
<TOTAL-REVENUES> 48,619,408
<CGS> 38,075,791
<TOTAL-COSTS> 43,798,305
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,298,915
<INCOME-PRETAX> 2,522,188
<INCOME-TAX> 896,027
<INCOME-CONTINUING> 1,626,161
<DISCONTINUED> 0
<EXTRAORDINARY> 369,007
<CHANGES> 0
<NET-INCOME> 1,257,154
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
</TABLE>
