Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
VESTCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of
(incorporation or organization)
7389
(Primary Standard Industrial
Classification Code Number)
22-3477425
(I.R.S. employer
identification number)
1100 Valley Brook Avenue, Lyndhurst, New Jersey 07071
(201) 935-7666
(Address, including ZIP Code, and telephone number,
including area code, of registrant's principal executive offices)
Joel Cartun
President
Vestcom International, Inc.
1100 Valley Brook Avenue, Lyndhurst, New Jersey 07071
(201) 935-7666
(Name and address, including ZIP Code,
and telephone number, including
area code, of agent for service)
Copy to:
Alan Wovsaniker, Esq.
Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
65 Livingston Avenue
Roseland, New Jersey 07068
(201) 992-8700
Approximate date of commencement of proposed sale to the public: From time
to time after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
Calculation of Registration Fee
- ------------------------- ---------------------------- -------------------------
Title of Proposed Proposed Amount of
Securities to Amount to be Maximum Offering Maximum Aggregate Registration
be Registered Registered Price per Share (1) Offering Price (1) Fee
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Common Stock, 2,000,000
no par value shares $17.1875 $34,375,000 $10,417
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933 on the basis of the
average of the high and low sales prices for a share of Common Stock on the
NASDAQ National Market on October 23, 1997.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 24, 1997
2,000,000 Shares
VESTCOM INTERNATIONAL, INC.
Common Stock
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This Prospectus covers 2,000,000 shares of Common Stock, no par value (the
"Common Stock"), of Vestcom International, Inc. (the "Company"), which the
Company may issue from time to time in connection with merger or acquisition
transactions entered into by the Company. The Company expects that the terms
upon which it may issue the shares of Common Stock covered hereby will be
determined through negotiations with the shareholders or principal owners of the
businesses whose securities or assets are acquired. It is expected that the
shares of Common Stock covered hereby that are issued in connection with such
acquisitions will be valued at prices reasonably related to market prices for
the Common Stock prevailing either at the time the terms of an acquisition are
agreed upon or at or about the time the shares are delivered.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"VESC." Application will be made to include the shares of Common Stock offered
hereby for quotation on the Nasdaq National Market. The last reported sale price
of the Common Stock on the Nasdaq National Market on October 28, 1997 was
$17-1/8 per share.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of the
shares of Common Stock covered hereby, although finder's fees may be paid with
respect to specific acquisitions. Any person receiving a finder's fee may be
deemed to be an underwriter within the meaning of the Securities Act of 1933, as
amended (the "Securities Act").
See "Risk Factors" beginning on page 8 for a discussion of certain risk
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is ______________, 1997.
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ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These reports, proxy statements
and other information, once filed, may be inspected, without charge, at the
public reference facilities of the SEC at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and its
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any portion of these documents can be obtained at
prescribed rates from the Public Reference Section of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The SEC maintains an Internet web site that contains such reports, proxy
statements and other information regarding issuers (including the Company) filed
electronically with the SEC. The address of that site is http://www.sec.gov.
The Company has filed a Registration Statement on Form S-4 under the
Securities Act of 1933 with the SEC with respect to this offering. This
Prospectus, filed as a part of the Registration Statement, does not contain all
the information set forth in the Registration Statement, or the exhibits and
schedules thereto, in accordance with the rules and regulations of the SEC, and
reference hereby is made to that omitted information. The statements made in
this Prospectus concerning documents filed as exhibits to the Registration
Statement accurately describe the material provisions of those documents and are
qualified in their entirety by reference to those exhibits for complete
statements of their provisions. The Registration Statement and the exhibits and
schedules thereto may be inspected and copied at the principal office of the SEC
in Washington, D.C., as described above, and are also available at the SEC's
Internet web site described above.
TABLE OF CONTENTS
PAGE
Additional Information...................................... 1
Prospectus Summary.......................................... 2
Risk Factors................................................ 8
The Company................................................. 13
Price Range of Common Stock................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Selected Financial Data..................................... 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 19
Business.................................................... 29
Management.................................................. 37
Principal Stockholders...................................... 43
Certain Transactions........................................ 44
Description of Capital Stock................................ 49
Shares Eligible for Future Sale............................. 51
Plan of Distribution........................................ 52
Legal Matters............................................... 53
Experts..................................................... 53
Index to Financial Statements............................... F-1
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer contained herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of any securities other
than those to which it relates or an offer to sell, or a solicitation of an
offer to buy, in any state to any person to whom it is not lawful to make such
offer in such state. The delivery of this Prospectus at any time does not imply
that the information herein is correct as of any time subsequent to its date.
<PAGE>
PROSPECTUS SUMMARY
Concurrently with the consummation of its initial public offering (the
"IPO") on August 4, 1997, Vestcom acquired in separate transactions
(collectively, the "Acquisitions," and with the IPO, the "Consolidation"), in
exchange for consideration including shares of its Common Stock, seven companies
which provide computer output and document management services (collectively,
the "Founding Companies"). Prior to the consummation of the IPO and the
Acquisitions, Vestcom had no business operations other than activities relating
to the IPO and the Acquisitions.
Unless otherwise indicated, all references herein to the "Company" include
the Founding Companies, and references herein to "Vestcom" mean Vestcom
International, Inc. prior to the consummation of the Acquisitions.
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial
information, share and per share data in this Prospectus assume no exercise of
stock options to purchase shares of the Company's Common Stock which have been
or may be granted under the Company's stock option plan. In addition, all
earnings per share and pro forma book value per share calculations contained in
this Prospectus assume that none of the 844,997 shares of Common Stock which may
be issued pursuant to certain earn-out provisions contained in the acquisition
agreements pertaining to four Founding Companies will have been issued. See
"Certain Transactions--Organization of the Company--Acquisitions" and
"--Canadian Acquisition."
The Company
Vestcom was incorporated in September 1996 to create an international
provider of computer output and document management services. The Company plans
to achieve this goal by acquiring companies that provide similar and
complementary services in the highly fragmented computer output and document
management services industry. Upon the consummation of the IPO on August 4,
1997, Vestcom concurrently acquired seven computer output and document
management services companies servicing various markets in the Northeast,
Midwest and Southeast regions of the U.S. and in the Province of Quebec, Canada.
The Company intends to operate on a decentralized basis with each acquired
company's local management continuing to exercise responsibility for customer
relationships and day-to-day operating decisions. Each acquired company will be
supported by marketing and product development programs, financial controls and
operating systems provided by the Company.
The Company provides a number of value-added services including (i) the
production and distribution of time-sensitive computer-generated documents on
paper, compact disc, microfiche, microfilm and labels, (ii) demand publishing,
(iii) mailing services, (iv) marketing materials fulfillment and (v) forms
management. Applications of the Company's services include printing and mailing
of computer-generated brokerage statements, invoices, cellular telephone bills,
management reports and supermarket point-of-purchase shelf labels. These
services are primarily offered to large corporations on a repetitive (e.g.,
daily, weekly, monthly, quarterly) basis and typically result in a recurring
source of revenue.
The Company believes that the computer output and document management
market that the Company services was over $20 billion in 1996. Industry sources
have estimated that the North American market for outsourcing of the production
and distribution of computer-generated documents was $5 billion in 1996 and will
grow to approximately $14 billion by the year 2000. The Company further believes
that over 5,000 companies currently are in the computer output and document
management services industry with fewer than 150 companies having revenues in
excess of $10 million. By consolidating several regional companies, the Company
believes it will be positioned to gain a greater market share through the
provision of cost-effective, technologically advanced computer output services
in the U.S. and portions of Canada (and eventually on a broader international
scale).
The Company's strategy of becoming a leading international provider of
computer output and document management services includes the following:
Provide a broad range of high quality computer output and document
management services at competitive costs from multiple locations
Capitalize on cross-selling opportunities to expand the range of
services provided to existing customers as well as to broaden the
Company's customer base
Provide complete outsourcing solutions for customers by assuming most
of the document output and distribution responsibilities previously
performed by the customers' in-house operations
Operate with a decentralized management philosophy to provide
personalized customer service and a motivating environment for
employees
Achieve cost savings through consolidation and economies of scale
by: (i) consolidating a number of administrative functions; (ii)
combining the purchasing of such items as materials and supplies,
equipment maintenance and employee benefits; (iii) reducing or
eliminating redundant functions and facilities; and (iv) sharing
production through a communications network to maximize equipment
utilization and to speed delivery
The Company intends to grow through the acquisition of companies with
similar or complementary businesses in new geographic markets, by making tuck-in
acquisitions within its existing markets, by cross-selling its various services
among the clients of the Founding Companies and of other acquired companies and
by acquiring the in-house computer output centers of targeted corporations. The
Company believes that it will be an attractive acquiror of other computer output
and document management services companies due to its strategy of retaining the
management of acquired companies and offering members of such management the
opportunity to become stockholders of the Company.
The Company believes that the consolidation of computer output and document
management services businesses will provide it with a significant competitive
advantage over existing smaller competitors and will permit it to take advantage
of the significant increase in outsourcing of computer output and document
management services. As the Company increases its presence in certain geographic
markets, it expects to be able to capitalize on its existing client
relationships, technical expertise, additional operating efficiencies, enhanced
marketing initiatives and national account programs.
Risk Factors
An investment in the Shares being offered by this Prospectus involves a
high degree of risk. See "Risk Factors."
Recent Developments
On August 4, 1997, the Company consummated the IPO and the Acquisitions.
The Company issued 4,427,500 shares (including 577,500 shares issued pursuant to
the exercise of the Underwriters' over-allotment option) in the IPO at a price
of $13.00 per share (less underwriting discounts and commissions of 7%).
The aggregate consideration paid by Vestcom in the Acquisitions consisted
of approximately $18.4 million in cash and 2,852,111 shares of Common Stock for
an aggregate value of approximately $55.5 million. The terms of each Acquisition
were negotiated with the shareholders of each Founding Company based on past
earnings history and trends. For a more detailed description of these
transactions, see "Certain Transactions."
<PAGE>
Summary Pro Forma Financial Data
(Dollars in thousands, except per share data)
Vestcom acquired the Founding Companies concurrently with the consummation
of the IPO. Vestcom has been identified as the accounting acquiror for financial
statement purposes. The effective date of the IPO and the Acquisitions was
August 4, 1997. The following summary unaudited pro forma financial data present
certain data for the Company, as adjusted for (i) the effects of the
Acquisitions on an historical basis, (ii) the effects of certain pro forma
adjustments to the historical financial statements and (iii) the consummation of
the IPO and the application of the net proceeds therefrom. See "Selected
Financial Data" and the Unaudited Pro Forma Financial Statements and the notes
thereto included elsewhere in this Prospectus.
Pro Forma(1)
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Year Ended Six Months
December 31, Ended June 30,
1996 1996 1997
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Statements of Operations Data (Unaudited):
Revenues $ 65,287 $32,319 $36,064
Gross profit 21,865 11,463 13,195
Selling, general and administrative
expenses (15,516) (7,623) (8,255)
Goodwill amortization(3) (1,488) (743) (743)
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Income from operations 4,861 3,096 4,197
Other, net(2) 190 84 37
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Income before provision for income taxes 5,051 3,180 4,234
Provision for income taxes 2,615 1,569 1,991
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Net income $ 2,436 $ 1,611 $ 2,243
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Net income per share $ .29 .19 $ .27
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Shares used in computing pro forma
net income per share(4) 8,349,631 8,349,631 8,349,631
========= ======== =========
June 30, 1997
Pro Forma(5)
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Balance Sheet Data (Unaudited):
Working capital $ 23,716
Total assets 103,967
Total debt, including current portion 6,530
Stockholders' equity 79,837
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(1) The pro forma statements of operations data and the pro forma balance
sheet data assume that the Acquisitions and the IPO were consummated on
January 1 of each period presented and June 30, 1997, respectively, and
are not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's
future results.
(2) The pro forma statements include the effect of certain reductions in
compensation to the former owners of the Founding Companies to which
they have agreed commencing on the consummation of the IPO. See Note 5
to the Unaudited Pro Forma Financial Statements. Vestcom recorded a
non-recurring, non-cash charge to compensation and interest expense of
$5.1 million (the "Charge") in 1996, representing the difference
between the amount paid for shares issued by Vestcom in December 1996
and the fair value of the shares on the date of sale as estimated for
accounting purposes. The Charge of $5.1 million is not included in pro
forma net income.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described
in Note 5 to the Unaudited Pro Forma Financial Statements.
(4) Consists of (i) 1,069,680 shares issued to the initial investors in
Vestcom, (ii) 2,852,111 shares issued as consideration in the
Acquisitions, (iii) the 4,427,500 shares sold in the IPO and (iv) 340
shares assumed for accounting purposes only to have been issued to
compensate for the issuance of shares for consideration lower than the
initial public offering price. See Note 5 to the Unaudited Pro Forma
Financial Statements.
(5) Reflects the consummation of the Acquisitions and the IPO and the
Company's application of the estimated net proceeds from the IPO,
including the repayment of certain indebtedness. See "Use of Proceeds."
<PAGE>
Summary Individual Founding Company Financial Data
(In thousands)
The following table presents summary data for each of the Founding
Companies (see "The Company" for the complete names of each Founding Company)
for the three most recent fiscal years and the six months ended June 30, 1996
and 1997.
Six Months Ended
Year Ended December 31, (1)(2)(3) June 30, (1)(2)
--------------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
Comvestrix
Revenues $16,606 $19,298 $21,447 $10,763 $12,081
Income from operations 280 1,635 1,834 1,102 1,569
DMS
Revenues $8,504 $9,423 $13,360 $ 6,815 $ 7,016
Income from operations 425 1,080 687 805 798
Image
Revenues $8,628 $8,062 $9,034 $ 4,506 $ 5,119
Income (loss)
from operations 186 (52) 339 168 443
EIS
Revenues $4,454 $5,259 $7,624 $ 3,465 $ 4,401
Income (loss) from
operations 102 178 (489) (91) 287
COS Information
Revenues $3,365 $3,914 $4,987 $ 2,484 $ 2,138
Income (loss) from
operations (11) 168 441 215 162
Computer Output
Revenues $2,192 $3,542 $4,855 $ 2,368 $ 3,476
Income from operations 51 117 528 301 561
Mystic
Revenues $3,040 $3,393 $4,065 $ 1,917 $ 2,256
Income from operations 221 315 310 183 430
(1) Does not reflect the effects of pro forma adjustments, including
certain reductions in compensation to the former owners of the Founding
Companies to which they have agreed commencing on the consummation of
the IPO.
(2) The following Summary Individual Founding Company Financial Data are
unaudited: all data for Mystic; 1994 data for EIS and COS Information;
1995 data for EIS; and all data for the six months ended June 30, 1996
and 1997.
(3) Data for COS Information are presented for the twelve months ended July
31, 1994, 1995 and 1996.
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In addition, this Prospectus contains forward-looking statements which
involve risks and uncertainties. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Industry Overview," "Business--Services,"
"Business--Business Strategy," "Business--Acquisition Strategy,"
"Business--Sales and Marketing" and "Business--Customers," as well as in this
Prospectus generally. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. Accordingly, prospective investors should consider carefully
the following risk factors, in addition to the other information concerning the
Company and its business contained in this Prospectus, before purchasing the
Common Stock.
Absence of Combined Operating History; Risks of Integration
Prior to the consummation of the IPO and the Acquisitions on August 4,
1997, Vestcom conducted no operations other than in connection with the IPO and
the Acquisitions of the Founding Companies. See "The Company" and "Certain
Transactions." Prior to such date, the Founding Companies operated as separate,
independent businesses. Consequently, the historical and pro forma financial
information herein may not be indicative of the Company's financial condition
and future operating results. Until the Company establishes centralized
accounting and other administrative systems, it will rely on the separate
systems of the Founding Companies. The success of the Company will depend, in
part, on the extent to which the Company is able to centralize these functions,
eliminate the unnecessary duplication of other functions and otherwise integrate
the Founding Companies and such additional businesses as the Company may acquire
into a cohesive, efficient enterprise. No assurance can be given that the
Company's senior management group, which has been recently formed, will be able
to manage effectively the combined entity or implement the Company's acquisition
or operating strategy. See "Reliance on Key Personnel."
A number of the Founding Companies offer different services, utilize
different capabilities and technologies and target different geographic markets.
While the Company believes that there are substantial potential opportunities as
a consequence of integrating these businesses, these differences increase the
difficulties involved in successfully completing such integration. Further,
there can be no assurance that the Company's strategy to become a leading
provider of computer output and document management services will be successful,
or that the Company's target customer segments will accept the Company as a
provider of such services. In addition, there can be no assurance that the
operating results of the Company will match or exceed the combined individual
operating results achieved by the Founding Companies prior to their acquisition.
Risks Related to the Company's Acquisition Strategy
The Company intends to expand its operations through the acquisition of
additional businesses which provide computer output and document management
services. There can be no assurance that the Company will be able to identify,
acquire or profitably manage additional businesses or successfully integrate
acquired businesses, if any, into the Company without substantial costs, delays
or other operational or financial difficulties. Further, acquisitions may
involve a number of special risks, including adverse effects on the Company's
operating results, diversion of management's attention, failure to retain key
personnel, risks associated with unanticipated events and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's business, financial condition or results of operations.
In addition, if competition for acquisition candidates develops or increases,
the cost of acquiring businesses could increase materially. Unfavorable
developments at a single acquired company could have a material adverse impact
on the reputation and business of the Company as a whole. In addition, there can
be no assurance that acquired businesses, if any, will achieve anticipated
revenues and earnings. The inability of the Company to implement and manage its
acquisition strategy successfully may have an adverse effect on the business or
future prospects of the Company. See "Business--Acquisition Strategy."
Need for Additional Financing
The Company currently intends to use its Common Stock for a portion of the
consideration to be paid in future acquisitions. The extent to which the Company
will be able or willing to use its Common Stock for this purpose will depend on
its market value from time to time and the willingness of potential acquisition
candidates to accept Common Stock as part of the consideration for the sale of
their businesses. If the Company is unable to use its Common Stock to make
future acquisitions, the Company may be required to use more of its cash
resources, if available, to initiate and maintain its acquisition program. If
the Company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through additional debt or equity
financing. There can be no assurance that the Company will be able to obtain
such financing if and when it is needed or that, if available, it will be
available on terms the Company deems acceptable. As a result, the Company might
be unable successfully to implement or manage its acquisition strategy, which
may have an adverse effect on the business or future prospects of the Company.
See "Business--Acquisition Strategy."
Approximately $18.4 million of the net proceeds of the IPO were used by the
Company to pay the cash portion of the acquisition prices for the Founding
Companies and approximately $12.5 million of such net proceeds were used to
repay existing debt of the Founding Companies and Vestcom as well as certain
other obligations incurred in connection with the Consolidation. Additionally,
up to $2.8 million in cash and up to 844,997 shares of the Company's Common
Stock may be used to pay deferred purchase prices which may be earned over the
next one to two years if the applicable revenue and earnings thresholds of
certain of the Founding Companies are achieved. Any earn-outs will increase
goodwill recorded for the Acquisition transactions. The amortization of any
additional goodwill and the increased number of shares issued if the earn-outs
are achieved will negatively affect the Company's future earnings per share. See
"Certain Transactions--Organization of the Company--Acquisitions." The Company
has agreed to pay Oppenheimer & Co., Inc. up to $1.8 million for advisory
services. The Company will also need additional funds to implement its
acquisition and internal growth strategies. The Company entered into an
Equipment Loan and Revolving Credit Agreement in August 1997 with Summit Bank in
the amount of $30 million (which includes a $5 million line to be used solely
for equipment financing). The Company intends to use this credit facility for
working capital and other general corporate purposes, which may include future
acquisitions. There can be no assurance, however, that this or any other line of
credit will be sufficient for the Company's needs or that, if any other line is
offered, it will be on terms that are acceptable to the Company. See "Use of
Proceeds" and "Business--Acquisition Strategy."
Competition
The services provided by the Company are highly competitive. A significant
source of competition is the in-house capability of the Company's target
customer base. There can be no assurance that these businesses will outsource
more of their computer output and document management needs or that such
businesses will not bring in-house services that they currently outsource. In
addition, with respect to those services that are outsourced, the Company
competes with a variety of competitors, many of which have substantially greater
financial resources than the Company. A number of the Company's current
suppliers of equipment and services are also a source of competition. There can
be no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures will not have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Competition."
The Company also competes for acquisition candidates in the computer output
and document management services industry. The Company's ability to grow through
acquisitions could be adversely affected by such competition.
Reliance on Key Personnel
The Company's operations are dependent on the continued efforts of its
executive officers and technical staff and on the senior management of the
Founding Companies. Furthermore, the Company will likely be dependent on the
senior management of companies that may be acquired in the future. If any of
these individuals elect not to continue in their roles with the Company, or if
the Company is unable to attract and retain senior management and other skilled
employees, including computer programmers and other technical personnel, the
Company's business could be adversely affected. The Company maintains key
executive life insurance for Joel Cartun, its President and Chief Executive
Officer, in the amount of $1 million. See "Management" and "Business--Business
Strategy."
Dependence on Technology
The success of the Company will be highly dependent on its ability to
acquire and utilize competitive computer output and document production
technologies that are not readily available on a cost-effective basis to the
Company's existing and potential customers, thereby creating the need to
outsource. The Company's services could be rendered noncompetitive or obsolete
by technological advances made by the Company's current or potential
competitors. In addition, the Company could make a significant investment in
equipment or technology which quickly becomes obsolete. There can be no
assurance that the Company will be able to obtain the rights to use any such
technologies, that it will be able to implement effectively such technologies on
a cost-effective basis or that such technologies will not render noncompetitive
or obsolete the Company's role as a provider of computer output and document
management services. See "Business--Services."
Development of New Services
The Company believes that its future success depends on its ability to
enhance its current services and develop new services that address the
increasingly sophisticated needs of its customers. The introduction of services
incorporating new technologies and the emergence of new technical standards
could render some or all of the Company's services unmarketable. The failure of
the Company to develop and introduce enhancements and new services in a timely
and cost-effective manner in response to changing technologies or customer
requirements could have a material adverse effect on the Company's business,
financial condition or results of operations. See
"Business--Services--Development of New Services."
Potential Liability for Breach of Confidentiality
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information. There can be
no assurance that unauthorized disclosure will not result in liability to the
Company. It is possible that such liabilities could have a material adverse
effect on the Company's reputation and results of operations. See
"Business--Services--Confidentiality of Customer Information."
Control by Certain Stockholders
The former stockholders of the Founding Companies and the directors and
other executive officers of the Company, and entities affiliated with them,
beneficially own approximately 46.7% of the outstanding shares of Common Stock,
which percentage will increase if additional shares of Common Stock are issued
to the former stockholders of four of the Founding Companies in connection with
the Acquisitions pursuant to certain earn-out provisions. Accordingly, the
stockholders of the Founding Companies are likely to continue to exercise
substantial control over the Company's affairs. These stockholders acting
together would be able to elect a sufficient number of directors to control the
Company's Board of Directors and would likely be able to approve or disapprove
any matter submitted to a vote of stockholders. See "Principal Stockholders."
Risk of Business Interruptions and Dependence on Single Facilities for
Certain Services; Insurance
The Company believes that its future results of operations will be
dependent in large part upon its ability to provide prompt and efficient
services to its customers. Certain of the Company's operations are performed at
a single location and are dependent on continuous computer, electrical and
telephone service. As a result, any disruption of the Company's day-to-day
operations could have a material adverse effect upon the Company. There can be
no assurance that a fire, flood, earthquake, power loss, phone service loss or
other event affecting one or more of the Company's facilities would not disable
these services. Any significant damage to any such facility or other failure
that causes significant interruptions in the Company's operations may not be
covered by insurance. Any uninsured or underinsured loss could have a material
adverse effect on the Company's business, financial condition or results of
operations.
Effect of Potential Fluctuations in Quarterly Operating Results; Prior Losses
The Company may experience significant quarter to quarter fluctuations in
its results of operations. Quarterly results of operations may fluctuate as a
result of a variety of factors, including, but not limited to, the size and
timing of customer jobs, changes in customer budgets, variations in the cost of
paper and other materials, the opening of new facilities, the size and timing of
acquisitions, the integration of acquired businesses into the Company's
operations, the number and timing of new hires, the demand for the Company's
services, the timing of the introduction of new services and service
enhancements by the Company or its competitors, the market acceptance of new
services, competitive conditions in the industry and general economic
conditions.
As a result, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and not necessarily
indicative of the results that the Company may achieve in any subsequent quarter
or a full year. Such fluctuations may result in volatility in the price of the
Common Stock, and it is possible that in future quarters the Company's results
of operations could be below the expectations of public market analysts and
investors. Such an event could have a material adverse effect on the market
price of the Common Stock.
One of the Founding Companies recorded a net loss for 1996. No assurance
can be given that this company will become profitable in the future.
Fluctuations in the Price of Supplies; Alternative Technologies
Prices for paper, film, compact discs, postage and other materials used by
the Company may increase from time to time in the future. Any significant
increases in the prices of these materials that cannot be passed on to customers
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, increases in the prices of
supplies and other materials might cause some of the Company's customers to
utilize alternative technologies in their respective businesses that do not
involve the use of paper or the mail, such as the Internet. There can be no
assurance that one or more non-paper-based technologies (whether now existing or
developed in the future) may not in the future reduce or supplant the mailing of
documents as a preferred medium for the Company's customers, which could in turn
adversely affect the Company's business.
Regulatory Compliance
As a public company, the Company is subject to continuing compliance with
federal securities laws and may also be subject to increased scrutiny with
respect to laws applicable to all businesses, such as employment, safety and
environmental laws. The Company's management group has limited experience in
managing a public company. There can be no assurance that management will be
able to effectively and timely implement programs and policies that adequately
respond to such increased legal and regulatory compliance requirements.
Possible Volalitity of Stock Price
The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock market has, from time to time, experienced extreme price
and volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are publicly traded. Market
fluctuations may adversely affect the market price of the Common Stock.
Potential Effects of Shares Eligible for Future Sale on Price of Common Stock
As of October 15, 1997, 8,349,291 shares of Common Stock were outstanding.
The 4,427,500 shares of Common Stock sold in the IPO (other than shares held by
affiliates of the Company) are freely tradeable. The remaining shares
outstanding may be sold publicly only following their effective registration
under the Securities Act of 1933, as amended (the "Securities Act"), or pursuant
to an available exemption (such as provided by Rule 144 following a holding
period for previously unregistered shares) from the registration requirements of
the Securities Act. The holders of 278,334 of those remaining shares have
certain rights to have their shares registered in the future under the
Securities Act (see "Shares Eligible for Future Sale") but have agreed not to
exercise such rights until two years following the consummation of the IPO.
As of October 15, 1997, the Company had outstanding under its Stock Option
Plan options to purchase an aggregate of 401,550 shares of Common Stock.
Generally, such options vest in 25% annual increments commencing one year after
the date of grant. The Company has registered the shares issuable upon exercise
of options granted under the Stock Option Plan, and, accordingly, such shares
are eligible for resale in the public market. See "Management--Stock Option
Plan."
The Company, all of the former stockholders of the Founding Companies, the
existing stockholders of the Company immediately prior to the IPO and the
officers and directors of the Company have agreed for a period of 180 days from
the consummation of the IPO (the "Lockup Period") not to offer, sell or
otherwise dispose of any shares of Common Stock (or any securities convertible
into or exercisable or exchangeable for Common Stock) or grant any options or
warrants to purchase any shares of Common Stock without the prior written
consent of Oppenheimer & Co., Inc., one of the Representatives of the
Underwriters in the IPO, except that the Company may grant options pursuant to
the Stock Option Plan and may issue Common Stock in connection with acquisitions
and pursuant to the Company's Stock Option Plan. See "Shares Eligible For Future
Sale."
The former Founding Company shareholders have agreed in their respective
Acquisition agreements not to sell or transfer any of the 2,852,111 shares of
Common Stock acquired in the Acquisitions for a period of two years after the
consummation of the Consolidation unless they obtain the prior written consent
of Vestcom. Oppenheimer & Co., Inc. and its affiliates have agreed not to sell
or transfer the 100,000 shares of Common Stock which they acquired as part of
the initial capitalization of Vestcom for a period of two years after the
consummation of the IPO.
The 2,000,000 shares of Common Stock offered hereby will generally be
freely tradeable after their issuance, unless the sale thereof is contractually
restricted or the shares are acquired by affiliates of the Company.
Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock.
Effect of Certain Charter Provisions
The Board of Directors of the Company is empowered to issue common stock
and preferred stock without stockholder action. The existence of this
"blank-check" common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise and may adversely affect the
prevailing market price of the Common Stock. In addition, the New Jersey
Shareholders Protection Act prohibits certain persons from engaging in business
combinations with the Company. See "Description of Capital Stock."
No Future Dividends
The Company does not anticipate paying any cash dividends on shares of the
Common Stock in the foreseeable future and intends to retain future earnings, if
any, for use in its business. See "Dividend Policy" and "Description of Capital
Stock--Common Stock."
<PAGE>
THE COMPANY
Vestcom was incorporated in September 1996 under the laws of the State of
New Jersey to create a leading provider of computer output and document
management services. On August 4, 1997, the Company acquired the Founding
Companies concurrently with the consummation of the IPO. For a description of
the transactions pursuant to which these businesses were acquired, see "Certain
Transactions." The Company, through the Founding Companies, currently provides
the services listed below to customers in a variety of industries, including
financial, telecommunications, pharmaceutical, health care, publishing and
retail and manufacturing firms. For a description of these services, see
"Business--Services."
Comvestrix Corp. ("Comvestrix"), founded in 1969, is headquartered in
Lyndhurst, New Jersey. Its primary businesses are (i) the production and
distribution of documents on paper, microfiche, microfilm and compact disc, (ii)
computer center document outsourcing services, (iii) mailing services and (iv)
forms management. Comvestrix had revenues of $21.4 million for the year ended
December 31, 1996.
Direct Mail Services ("DMS"), consisting of Morris County Direct Mail
Services, Inc., founded in 1965, Quality Control Printing, Inc., founded in
1987, and First Class Presort, Inc., founded in 1990, is headquartered in Dover,
New Jersey. Its primary businesses are (i) marketing materials fulfillment, (ii)
mailing services and (iii) forms management. DMS had revenues of $13.4 million
for the year ended December 31, 1996.
Image Printing Systems, Inc. ("Image"), founded in 1980, is headquartered
in Milwaukee, Wisconsin. Its primary businesses are (i) the production and
distribution of documents on paper, microfiche, microfilm and compact disc, (ii)
marketing materials fulfillment, (iii) demand publishing, (iv) mailing services
and (v) forms management. Image had revenues of $9.0 million for the year ended
December 31, 1996.
Electronic Imaging Services, Inc. ("EIS"), founded in 1985, is
headquartered in Little Rock, Arkansas, and has branch offices in Houston,
Texas, Nashville, Tennessee, Greenville, South Carolina and Columbus, Ohio. Its
primary businesses are (i) the production and distribution of computer-generated
labels, (ii) the production and distribution of documents on paper, microfiche,
microfilm and compact disc and (iii) forms management. EIS had revenues of $7.6
million for the year ended December 31, 1996.
COS Information Inc. ("COS Information"), founded in 1974, is headquartered
in Montreal, Quebec, Canada. Its primary businesses are (i) the production and
distribution of computer-generated labels, (ii) the production and distribution
of documents on paper, microfiche, microfilm and compact disc, (iii) demand
publishing, (iv) mailing services and (v) forms management. COS Information had
revenues of $5.0 million for the year ended July 31, 1996.
Computer Output Systems, Inc. ("Computer Output"), founded in 1994, is
headquartered in Stamford, Connecticut. Its primary businesses are (i) the
production and distribution of documents on paper, (ii) computer center document
outsourcing services, (iii) marketing materials fulfillment, (iv) mailing
services and (v) forms management. Computer Output had revenues of $4.9 million
for the year ended December 31, 1996.
Mystic Graphic Systems, Inc. ("Mystic"), founded in 1981, is headquartered
in Woburn, Massachusetts. Its primary businesses are (i) demand publishing, (ii)
marketing materials fulfillment and (iii) forms management. Mystic had revenues
of $4.1 million for the year ended December 31, 1996.
The Company's executive offices are located at 1100 Valley Brook Avenue,
Lyndhurst, New Jersey 07071, and its telephone number is 201-935-7666.
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market since
July 30, 1997. On October 23, 1997, the last sale price of the Common Stock was
$20.00 per share, as published in The Wall Street Journal. The following table
sets forth the range of high and low sales prices for the Common Stock on the
Nasdaq National Market for the periods indicated:
High Low
Year ending December 31, 1997:
3rd quarter (July 30-September 30) $21-1/8 $ 14-3/4
4th Quarter (October 1-October 28) 22-5/8 16-3/8
As of October 15, 1997, there were 52 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its Common Stock. The
Company currently intends to retain earnings to support its growth strategy and
does not anticipate paying dividends in the foreseeable future. Payment of
future dividends, if any, will be at the discretion of the Company's Board of
Directors after taking into account various factors, including the Company's
financial condition, results of operations, current and anticipated cash needs
and plans for expansion and any restrictions that may be imposed by the
Company's future credit facilities. The Company's credit facility with Summit
Bank restricts the Company's ability to pay cash dividends on its Common Stock.
The credit facility provides that the Company may declare and pay quarterly cash
dividends on its Common Stock only if after giving effect to any such payment
the Company would not be in default under any of the provisions of such credit
facility.
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of June 30, 1997 of the Company
on a pro forma combined basis to give effect to the Acquisitions and the IPO and
the application of the estimated net proceeds therefrom (including the repayment
of certain existing indebtedness). This table should be read in conjunction with
the Unaudited Pro Forma Financial Statements of the Company and the related
notes thereto included elsewhere in this Prospectus.
June 30, 1997
-----------------------
Pro Forma
------------------------
(In Thousands)
Short-term debt and current maturities of
long-term obligations................................. $ 1,126
Long-term obligations, net of current maturities........... 5,404
Pro forma cash due to Founding Companies(1)................ --
Stockholders' equity:
Undesignated Stock, 10,000,000 shares authorized:
Class A and Class C Convertible Preferred Stock
300 shares issued and outstanding pro forma(2) --
Class B Preferred Stock, 1 share issued and
outstanding pro forma(3)....................... 2,652
Common Stock, 20,000,000 shares authorized; 8,349,291
shares issued and outstanding pro forma; (4)(5)..... 82,647
Retained earnings....................................... (5,462)
------
Total stockholders' equity.......................... 79,837
------
Total capitalization...........................$ 86,367
======
(1) Excludes up to an additional $2.8 million which may be paid by Vestcom in
connection with the Acquisitions of Computer Output, EIS and Image. See
"Certain Transactions."
(2) An aggregate of 200 shares of Class A Convertible Preferred Stock were
issued in connection with the Acquisition of EIS, and are convertible into
up to 332,307 shares of Common Stock, depending on the pre-tax earnings of
EIS for the two year period beginning on July 1, 1997. An aggregate of 100
shares of Class C Convertible Preferred Stock were issued in connection
with the Acquisition of Image and are convertible into up to 292,307 shares
of Common Stock, depending on the pre-tax earnings of Image for the one
year period beginning on July 1, 1997.
(3) One share of Class B Preferred Stock was issued in connection with the
Acquisition of COS Information, the Canadian Founding Company, and has
voting rights equal to the 239,988 shares of Common Stock which the Company
is required to issue upon conversion of the exchangeable shares of
Vestcom's Canadian subsidiary.
(4) For purposes of this table, (i) the number of exchangeable shares of
Vestcom's Canadian subsidiary issued in the Acquisition of COS Information
are deemed to have been converted into 239,988 shares of Common Stock and
(ii) none of the additional 844,997 shares of Common Stock which may be
issued in connection with the Acquisitions of Computer Output, COS
Information, EIS and Image upon the attainment of specified revenue or
earnings thresholds are deemed to have been issued.
(5) Excludes an aggregate of 401,550 shares subject to options outstanding
under the Company's Stock Option Plan on October 15, 1997 and reflects an
aggregate of 225,512 shares which were returned to Vestcom in May and
July, 1997. See "Certain Transactions."
<PAGE>
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Vestcom acquired the Founding Companies on August 4, 1997 concurrently with
the consummation of the IPO. For financial statement presentation purposes,
Vestcom has been identified as the accounting acquiror. The following selected
historical financial data of Vestcom as of December 31, 1996 and for the period
from inception to December 31, 1996 have been derived from the audited financial
statements of Vestcom included elsewhere in this Prospectus. The following
selected historical financial data for Vestcom as of and for the six months
ended June 30, 1997 have been derived from the unaudited financial statements of
Vestcom, which have been prepared on the same basis as the audited financial
statements and, in the opinion of Vestcom, reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of such data.
The following summary unaudited pro forma financial data present certain data
for the Company, as adjusted for (i) the effects of the Acquisitions on an
historical basis, (ii) the effects of certain pro forma adjustments to the
historical financial statements and (iii) the consummation of the IPO. See the
Unaudited Pro Forma Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<PAGE>
<TABLE>
<CAPTION>
Vestcom Historical Vestcom Pro Forma (1)(2)
------------------------------------------ --------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the For the
Period Six For the
from Months Year
Inception Ended Ended For the Six Months
to December 31, June 30, December 31, Ended June 30,
1996 1997 1996 1996 1997
-------------- ---------- ------------ ---- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues..................... $ -- $ -- $ 65,287 $ 32,319 $ 36,064
Gross profit................. -- -- 21,865 11,463 13,195
Selling, general and
administrative
expenses(1)(3)............. (1,633) (347) (15,516) (7,623) (8,255)
Goodwill
amortization(4)............ -- -- (1,488) (743) (743)
------- ------ -----
Income (loss) from
operations................. (1,633) (347) 4,861 3,096 4,197
Other, net(1)(3)............. (3,445) (38) 190 84 37
------- ------ -------
Income before
provision for
income taxes(5)........... -- -- 5,051 3,180 4,234
Provision for
income taxes.............. -- -- 2,615 1,569 1,991
------ ---- ----- ----- -------
Net income (loss)........... $(5,078) $(385) $ 2,436 $1,611 $ 2,243
====== ===== ===== ====== =======
Net income per share -- $ .29 $ .19 $ .27
===== ====== ======
Shares used in
computing pro
forma net
income per
share(6).............. -- -- 8,349,631 8,349,631 8,349,631
====== ====== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Vestcom
June 30, 1997
Historical Pro Forma(7)
(Unaudited) (Unaudited)
Balance Sheet Data:
<S> <C> <C>
Working capital................................. $ 19 $ 23,716
Total assets.................................... 2,404 103,967
Total debt, including current portion........... 1,293 6,530
Stockholders' equity............................ 19 79,837
</TABLE>
(1) Includes the non-recurring, non-cash Charge to compensation and interest
expense of $5.1 million for the historical period ended December 31, 1996.
(2) The pro forma statements of operations data and the pro forma balance sheet
data assume that the Acquisitions were consummated on January 1 of each
period presented and June 30, 1997, respectively, and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. The pro forma
financial information treats Vestcom as the accounting acquiror for
financial statement purposes, and should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
(3) The pro forma combined statements include the effect of certain reductions
in compensation to the owners of the Founding Companies to which they have
agreed commencing on the consummation of the IPO, and do not include the
Charge to compensation and interest expense of $5.1 million recorded in
1996. See Note 5 to the Unaudited Pro Forma Financial Statements.
(4) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 30-year period and computed on the basis described in
Note 5 to the Unaudited Pro Forma Financial Statements.
(5) Assuming a corporate income tax rate of 40% and the non-deductibility of
goodwill.
(6) Consists of (i) 1,069,680 shares issued to the initial investors in
Vestcom, (ii) 2,852,111 shares issued as consideration in the Acquisitions,
(iii) the 4,427,500 shares sold in the IPO and (iv) 340 shares assumed for
accounting purposes only to have been issued to compensate for the issuance
of shares for consideration lower than the initial public offering price.
See Note 5 to the Unaudited Pro Forma Financial Statements.
(7) Reflects the consummation of the Acquisitions and the IPO and the Company's
application of the net proceeds from the IPO, including the repayment of
certain indebtedness.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations of certain Founding
Companies should be read in conjunction with the Financial Statements of the
Founding Companies and the related notes thereto and the "Selected Financial
Data" appearing elsewhere in this Prospectus. The discussion of the results of
COS Information, a Founding Company headquartered in Montreal, Quebec, Canada,
is presented in U.S. dollars.
Introduction
Vestcom International, Inc. was incorporated in September 1996.
Concurrently with the consummation of the IPO, the Company acquired the Founding
Companies, each of which had been operating as a separate independent entity.
The Founding Companies have been managed throughout the periods presented
as independent private companies, and their results of operations reflect
different tax structures (S corporations and C corporations for the U.S.
Founding Companies), which have influenced, among other things, their historical
levels of owners' compensation. In connection with the organization of the
Company, these owners and certain key employees have agreed to certain
reductions in their compensation commencing on the consummation of the IPO.
Vestcom, which conducted no operations prior to the consummation of the IPO
and the Acquisitions other than in connection with the Acquisitions and the
financing activities related thereto, including the IPO, intends to integrate
these businesses and their operations and administrative functions over a period
of time. This integration process may present opportunities to reduce costs
through the elimination of duplicative functions and through economies of scale,
particularly in obtaining greater volume discounts from suppliers, but will also
necessitate additional costs and expenditures for corporate management and
administration (including costs related to the hiring of additional management
personnel), corporate expenses related to being a public company, systems
integration and facilities expansion. These various costs and possible
cost-savings may make comparison of historical operating results not comparable
to, or indicative of, future performance. In addition, Vestcom may make payments
of up to $2.8 million and may issue up to an additional 844,997 shares of Common
Stock in connection with the Acquisitions of four Founding Companies if
specified revenue or earnings thresholds are attained during various periods
ending no later than two years after the first day of the fiscal quarter in
which the IPO was consummated. Any earn-outs will increase goodwill recorded for
the Acquisition transactions. The amortization of any additional goodwill and
the increased number of shares issued if the earn-outs are achieved will
negatively affect the Company's future earnings per share. See "Certain
Transactions--Organization of the Company--Acquisitions" for a discussion of the
terms of such earn-outs.
This discussion contains forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Statements"), which involve risks and uncertainties. The
Company's actual results may differ form the results discussed in the
Forward-Looking Statements. Factors that might cause such a difference include
the risks described above under the caption "Risk Factors". Such factors may
also cause substantial volatility in the market price of the Company's Common
Stock.
Results of Operations--Comvestrix
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased $1,318,000, or 12.2%, from $10,763,000 for the six
months ended June 30, 1996 to $12,081,000 for the six months ended June 30,
1997. This increase was primarily attributable to an increase in the volume of
Comvestrix's production of statements, although revenues also increased in most
other areas of Comvestrix's business.
Comvestrix's gross profit increased $859,000, or 18.3%, from $4,699,000 for
the six months ended June 30, 1996 to $5,558,000 for the six months ended June
30, 1997. The gross profit margin increased from 43.7% in 1996 to 46.0% in 1997
primarily due to improved capacity utilization resulting from the increase in
the volume of business.
Selling, general and administrative expenses increased $392,000, or 10.9%,
from $3,597,000 for the six months ended June 30, 1996 to $3,989,000 for the six
months ended June 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 33.4% in 1996 to 33.0% in 1997. The
increase in the dollar amount of selling, general and administrative expenses
was primarily attributable to increased compensation expense for new technical
personnel, increased commissions and increased administrative expenses to
support the greater volume of business.
Net income increased from $1,034,000 for the six months ended June 30, 1996
to $1,222,000 for the six months ended June 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased $2,149,000, or 11.1%, from $19,298,000 in 1995 to
$21,447,000 in 1996. This increase was primarily attributable to an increase in
the volume of Comvestrix's production of statements, although revenues also
increased in all other areas of Comvestrix's business. The 1996 revenues also
reflect enhanced value-added services provided by Comvestrix, such as the
utilization of highlight color on laser printed documents and the production and
distribution of documents on compact disc. Comvestrix introduced its compact
disc service in October 1995, and, accordingly, the year ended December 31, 1996
was the first full year in which revenues were generated from Comvestrix's
production and distribution of documents on compact disc.
During 1996, one of Comvestrix's major customers lost one of its customers,
which loss resulted in approximately $500,000 of lost revenue to Comvestrix in
1996. Comvestrix anticipates that this loss will result in approximately
$1,500,000 of additional lost revenue to Comvestrix in 1997. Comvestrix does not
currently anticipate receiving any additional business from this customer after
its current contract expires in the summer of 1997. Comvestrix believes that
such loss in revenues will be substantially offset by revenues derived from new
business from existing customers and business from new customers.
Comvestrix's gross profit increased $429,000, or 4.9%, from $8,688,000 in
1995 to $9,117,000 in 1996. The gross profit margin decreased from 45.0% in 1995
to 42.5% in 1996. Compensation expense and equipment maintenance and supply
costs increased in 1996 in connection with the expansion of Comvestrix's
operating facilities and to support the increased volume of business. The
increase in expenses, which affected 1996 more significantly than 1995, resulted
in the decrease in Comvestrix's gross profit margin.
Selling, general and administrative expenses increased $229,000, or 3.2%,
from $7,053,000 in 1995 to $7,282,000 in 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 36.5% in 1995 to
34.0% in 1996. The increase in selling, general and administrative expenses was
primarily attributable to increased compensation expense for new technical
personnel, increased commissions and increased administrative expenses to
support the greater volume of business.
Net income decreased from $2,017,000 in 1995 to $1,747,000 in 1996. Net
income for 1995 included a non-recurring payment of $475,000 to Comvestrix by a
former customer in connection with the early termination of a contract.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues increased $2,692,000, or 16.2%, from $16,606,000 in 1994 to
$19,298,000 in 1995. Increased revenues were recorded in most areas of
Comvestrix's business, particularly in the statement and computer outsourcing
business. The increase in revenues primarily reflected an increase in the volume
of business from both new and existing customers.
Comvestrix's gross profit increased $1,984,000, or 29.6%, from $6,704,000
in 1994 to $8,688,000 in 1995. The gross profit margin increased from 40.4% in
1994 to 45.0% in 1995, primarily as a result of the growth of Comvestrix's
business. Increases in compensation expense related to new personnel were offset
by the increase in revenues.
Selling, general and administrative expenses increased $629,000, or 9.8%,
from $6,424,000 in 1994 to $7,053,000 in 1995. As a percentage of revenues,
selling, general and administrative expenses decreased from 38.7% in 1994 to
36.5% in 1995. The increase in selling, general and administrative expenses was
primarily attributable to increased compensation expense for new personnel and
increased commissions as a result of the greater volume of business.
Net income increased from $361,000 in 1994 to $2,017,000 in 1995. Net
income for 1995 included a non-recurring payment of $475,000 to Comvestrix by a
former customer in connection with the early termination of a contract.
Liquidity and Capital Resources--Comvestrix
At June 30, 1997, Comvestrix had working capital of $417,000 and total cash
and cash equivalents of $108,000, as compared to $860,000 and $107,000,
respectively, at December 31, 1996. Comvestrix has historically funded its
operations with cash flow from operations and limited borrowings from bank
lenders. Net cash provided by operating activities for the six months ended June
30, 1997 was $3,367,000 as compared with $2,218,000 for the six months ended
June 30, 1996. At June 30, 1997, Comvestrix had a $2,550,000 bank line of
credit, which includes a $300,000 line to be utilized solely for equipment
financing. An aggregate of $2,550,000 was available under this line of credit at
June 30, 1997. Historically, Comvestrix has been able to fund its equipment
purchase needs through secured loans or equipment leases. During the six months
ended June 30, 1997, Comvestrix entered into a $6,250,000 five year capital
lease for production equipment. This lease replaced existing operating leases,
upgraded production equipment to the latest available technology and increased
production capacity. The net annual cost of the new capital lease was lower than
the cost of the operating leases which were replaced.
Comvestrix incurs postage costs on behalf of customers of approximately
$1,000,000 to $2,000,000 each month. Comvestrix's policy is to collect such
postage costs from its customers in advance. To the extent Comvestrix is
unsuccessful in doing so, cash flow is negatively affected, and Comvestrix may
be required to utilize its bank credit line. Particularly in light of the
consummation of the IPO and Vestcom's $30 million credit facility, management of
Comvestrix believes it has adequate cash flow and financing alternatives
available to it to fund its operations and capital requirements for the
foreseeable future.
Results of Operations--DMS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased $201,000, or 2.9%, from $6,815,000 for the six months
ended June 30, 1996 to $7,016,000 for the six months ended June 30, 1997. A
portion of this increase was attributable to DMS' acquisitions in May 1996 of a
four-color printing and processing company and a presorting company to support
DMS' core operations. DMS' revenue growth is currently constrained by physical
space limitations. DMS has entered into a lease for a new and larger facility,
which it believes will allow for increased revenues and improved production
efficiencies.
DMS' gross profit decreased $236,000, or 9.4%, from $2,505,000 for the six
months ended June 30, 1996 to $2,269,000 for the six months ended June 30, 1997.
The gross profit margin decreased from 37.0% in 1996 to 32.0% in 1997. Revenues
from the increased volume of business were offset by the costs associated with
the businesses acquired in May 1996, compensation expense related to the hiring
of new personnel to support the increased volume of business and expenses
related to DMS' telemarketing service.
Selling, general and administrative expenses decreased $229,000, or 13.5%,
from $1,700,000 for the six months ended June 30, 1996 to $1,471,000 for the six
months ended June 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 24.9% in 1996 to 21.0% in 1997. The
decrease in selling, general and administrative expenses was primarily
attributable to the expenses incurred in 1996 relating to the acquisitions made
in May 1996.
Net income decreased from $768,000 for the six months ended June 30, 1996
to $705,000 for the six months ended June 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased $3,937,000, or 41.8%, from $9,423,000 in 1995 to
$13,360,000 in 1996. Approximately $2,500,000 of this increase was attributable
to DMS' acquisitions in May 1996 of Stuyvesant Press, Inc., a four-color
printing and processing company, and Regal Mail Service, Inc., a presorting
company to support DMS' core operations. The remainder of the increase was
primarily attributable to an increase in the volume of DMS' mailing and
marketing materials fulfillment business and, to a lesser extent, to price
increases.
DMS' gross profit increased $850,000, or 28.4%, from $2,993,000 in 1995 to
$3,843,000 in 1996. The gross profit margin decreased from 31.8% in 1995 to
28.8% in 1996. Revenues from the increased volume of business offset the costs
associated with the acquired businesses described above, compensation expense
related to the hiring of new personnel to support the increased volume of
business and expenses related to DMS' telemarketing service. DMS introduced its
telemarketing service in the fourth quarter of 1996 in order to enhance its
marketing materials fulfillment business. During 1996, management of DMS decided
to explore the feasibility of DMS moving to alternative space. As a result, net
leasehold improvements of $497,000 were written off, resulting in a decrease in
the gross profit margin.
Selling, general and administrative expenses increased $1,242,000, or
64.9%, from $1,913,000 in 1995 to $3,155,000 in 1996. As a percentage of
revenues, selling, general and administrative expenses increased from 20.3% in
1995 to 23.6% in 1996. The increase in selling, general and administrative
expenses was primarily attributable to increased compensation expense for new
personnel who were hired in connection with DMS' two acquisitions.
Net income decreased from $865,000 in 1995 to $613,000 in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues increased $919,000, or 10.8%, from $8,504,000 in 1994 to
$9,423,000 in 1995. Increased revenues were recorded in most areas of DMS'
business. The increase in revenues reflected increased business from both new
and existing customers and, to a lesser extent, price increases.
DMS' gross profit increased $1,028,000, or 52.3%, from $1,965,000 in 1994
to $2,993,000 in 1995. The gross profit margin increased from 23.1% in 1994 to
31.8% in 1995. The increase in the gross profit margin was primarily
attributable to improved productivity through automating functions which were
previously performed manually.
Selling, general and administrative expenses increased $373,000, or 24.2%,
from $1,540,000 in 1994 to $1,913,000 in 1995. As a percentage of revenues,
selling, general and administrative expenses increased from 18.1% in 1994 to
20.3% in 1995. The increase in selling, general and administrative expenses was
primarily attributable to the hiring of two new salespersons, increased
commissions paid to new and existing salespersons and increased administrative
expenses to support the growth in DMS' business.
Net income increased from $328,000 in 1994 to $865,000 in 1995.
Liquidity and Capital Resources--DMS
At June 30, 1997, DMS had working capital of $1,049,000 and total cash and
cash equivalents of $266,000, as compared with $447,000 and $573,000,
respectively, at December 31, 1996. DMS had accounts receivable of $2,647,000 at
December 31, 1996 and $3,183,000 at June 30, 1997. The increase in accounts
receivable was primarily attributable to the increased volume of business and
the acquisitions which were consummated during 1996. DMS has historically funded
its operations with cash flow from operations and limited borrowings from bank
lenders. Net cash provided by (used in) operating activities for the six months
ended June 30, 1997 and 1996 was $54,000 and ($116,000), respectively. At June
30, 1997, DMS had a $425,000 line of credit, which includes a $200,000 line to
be utilized solely for equipment financing. An aggregate of $275,000 was
available under this line of credit at June 30, 1997. Historically, DMS has been
able to fund its equipment purchase needs through secured loans or equipment
leases. During 1996, DMS utilized approximately $762,000 to acquire two
companies.
DMS incurs postage costs on behalf of customers of approximately $1,000,000
to $2,000,000 each month. DMS' policy is to collect such postage costs from its
customers in advance. To the extent that DMS is unsuccessful in doing so, cash
flow is negatively affected, and DMS may be required to utilize its bank credit
line. Particularly in light of the consummation of the IPO and Vestcom's $30
million credit facility, management of DMS believes it has adequate cash flow
and financing alternatives available to it to fund its operations and capital
requirements for the foreseeable future.
Results of Operations--Computer Output
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased $1,108,000, or 46.8%, from $2,368,000 for the six months
ended June 30, 1996 to $3,476,000 for the six months ended June 30, 1997.
Approximately $939,000 of the additional revenue was attributable to one new
customer. The remainder of the increase was attributable to an increase in
volume from new and existing customers.
Computer Output's gross profit increased $360,000, or 42.9%, from $839,000,
for the six months ended June 30, 1996 to $1,199,000 for the six months ended
June 30, 1997. The gross profit margin decreased from 35.4% in 1996 to 34.5% in
1997. This decrease was primarily attributable to costs associated with the
hiring of additional management personnel and production staff to support the
increased sales volume and the acquisition of equipment to position Computer
Output to perform additional services.
Selling, general and administrative expenses increased $100,000, or 18.6%,
from $538,000 in 1996 to $638,000 in 1997. As a percentage of revenues, selling,
general and administrative expenses decreased from 22.7% in 1996 to 18.4% in
1997. The increase in the dollar amount of selling, general and administrative
expenses was primarily attributable to increased commissions of approximately
$45,000, while the percentage decrease was attributable to the increase in
revenues discussed above.
Net income increased from $262,000 for the six months ended June 30, 1996
to $482,000 for the six months ended June 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased $1,313,000, or 37.1%, from $3,542,000 in 1995 to
$4,855,000 in 1996. This increase was primarily attributable to an increase in
the volume of all areas of Computer Output's business. The increased revenues
reflected increased business from both new and existing customers.
Computer Output's gross profit increased $627,000, or 57.2%, from
$1,096,000 in 1995 to $1,723,000 in 1996. The gross profit margin increased from
30.9% in 1995 to 35.5% in 1996. The increase in the gross profit margin was
primarily attributable to the fact that fixed costs remained relatively stable
while Computer Output's volume of business increased.
Selling, general and administrative expenses increased $216,000, or 22.1%,
from $979,000 in 1995 to $1,195,000 in 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 27.6% in 1995 to
24.6% in 1996. The increase in selling, general and administrative expenses was
primarily attributable to increased compensation expense as a result of the
hiring of additional personnel and increased commissions resulting from the
increased volume of business.
Net income increased from $60,000 in 1995 to $437,000 in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues increased $1,350,000, or 61.6%, from $2,192,000 in 1994 to
$3,542,000 in 1995. This increase was primarily attributable to an increase in
the volume of all areas of Computer Output's business. Approximately $500,000 of
the revenue growth was attributable to one customer.
Computer Output's gross profit increased $363,000, or 49.5%, from $733,000
in 1994 to $1,096,000 in 1995. The gross profit margin decreased from 33.4% in
1994 to 30.9% in 1995. The decrease in the gross profit margin was primarily
attributable to Computer Output meeting its need for additional production
equipment through operating leases and, to a lesser extent, purchases of
equipment. In addition, a significant portion of the increased sales volume in
1995 was the result of an increase in Computer Output's preprinted forms and
envelope business, which has a lower profit margin than Computer Output's other
businesses.
Selling, general and administrative expenses increased $297,000, or 43.5%,
from $682,000 in 1994 to $979,000 in 1995. As a percentage of revenues, selling,
general and administrative expenses decreased from 31.1% in 1994 to 27.6% in
1995. The increase in the dollar amount of selling, general and administrative
expenses was primarily attributable to increased commissions as a result of the
increased volume of business.
Net income increased from $1,000 in 1994 to $60,000 in 1995.
Liquidity and Capital Resources--Computer Output
At June 30, 1997, Computer Output had working capital of $7,000 and total
cash and cash equivalents of $247,000, as compared with $156,000 and $0,
respectively, at December 31, 1996. Computer Output has historically funded its
operations with cash flow from operations and limited borrowings from bank
lenders. Net cash provided by operating activities for the six months ended June
30, 1997 was $859,000, as compared with $362,000 for the six months ended June
30, 1996. At June 30, 1997, Computer Output had a $300,000 bank line of credit,
of which $50,000 was available. Historically, Computer Output has been able to
fund its equipment purchase needs through secured loans or equipment leases.
Particularly in light of the consummation of the IPO and Vestcom's $30 million
credit facility, management of Computer Output believes it has adequate cash
flow and financing alternatives available to it to fund its operations and
capital requirements for the foreseeable future.
Results of Operations--Image
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased $613,000, or 13.6%, from $4,506,000 for the six months
ended June 30, 1996 to $5,119,000 for the six months ended June 30, 1997. This
increase was primarily attributable to increases in the volume of Image's print
and mail and micrographics businesses.
Image's gross profit margin increased $247,000, or 18.9%, from $1,308,000
for the six months ended June 30, 1996 to $1,555,000 for the six months ended
June 30, 1997. The gross profit margin improved from 29.0% in 1996 to 30.4% in
1997. The increase in the gross profit margin was primarily attributable to
improved cost control and increased volume.
Selling, general and administrative expenses decreased $28,000, or 2.5%,
from $1,140,000 for the six months ended June 30, 1996 to $1,112,000 for the six
months ended June 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.3% in 1996 to 21.7% in 1997 which was
primarily attributable to the sales volume increase noted above.
Image recorded a net loss of $8,000 for the six months ended June 30, 1996
and net income of $234,000 for the six months ended June 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues increased $972,000, or 12.1%, from $8,062,000 in 1995 to
$9,034,000 in 1996. This increase was primarily attributable to an increase in
the volume of Image's microfiche and compact disc business. Revenues also
increased in other areas of Image's business other than presorting, which
recorded a $69,000 decrease in revenues from 1995 to 1996. As a result of
competitive pressures in Image's local markets, Image was unable to achieve its
desired volume of presorting business. Accordingly, in the third quarter of
1995, Image began to outsource its presorting service and to focus internally on
the other areas of its business.
Image's gross profit increased $576,000, or 27.9%, from $2,068,000 in 1995
to $2,644,000 in 1996. The gross profit margin increased from 25.7% in 1995 to
29.3% in 1996. The increase in the gross profit margin was primarily
attributable to operating efficiencies resulting from Image's decision to
outsource its presorting service and to focus on the other more profitable areas
of its business.
Selling, general and administrative expenses increased $185,000, or 8.7%,
from $2,120,000 in 1995 to $2,305,000 in 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 26.3% in 1995 to
25.5% in 1996. The increase in the dollar amount of selling, general and
administrative expenses was primarily attributable to increased compensation
expense.
Image recorded a loss of $348,000 in 1995 and net income of $87,000 in
1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues decreased $566,000, or 6.6%, from $8,628,000 in 1994 to $8,062,000
in 1995. This decrease was primarily attributable to the loss of a major portion
(approximately $600,000) of one client's business, plus a reduction in revenues
from Image's presorting business, as a result of Image's decision to outsource
such business beginning in the third quarter of 1995.
Image's gross profit decreased $249,000, or 10.7%, from $2,317,000 in 1994
to $2,068,000 in 1995. The gross profit margin decreased from 26.9% in 1994 to
25.7% in 1995. The decrease in the gross profit margin was primarily
attributable to the lost business from the major customer discussed above (which
business had a relatively high profit margin) plus losses during the first eight
months of 1995 in connection with Image's presorting business.
Selling, general and administrative expenses decreased $11,000, or less
than 0.5%, from $2,131,000 in 1994 to $2,120,000 in 1995. As a percentage of
revenues, selling, general and administrative expenses increased from 24.7% in
1994 to 26.3% in 1995.
Image recorded a loss of $88,000 in 1994 and a loss of $348,000 in 1995.
Liquidity and Capital Resources--Image
At June 30, 1997, Image had a working capital deficit of $965,000 and total
cash and cash equivalents of $202,000, as compared with a deficit of $986,000
and cash and cash equivalents of $61,000, respectively, at December 31, 1996.
Image has historically met its working capital requirements by borrowing from
bank lenders and by managing its accounts receivable. Net cash provided by
operating activities for the six months ended June 30, 1997 was $547,000, as
compared with $481,000 for the six months ended June 30, 1996. At June 30, 1997,
Image had a $850,000 bank line of credit, of which $205,000 was available.
Historically, Image has been able to fund its equipment purchase needs through
secured loans or equipment leases. During the six months ended June 30, 1997,
Image entered into a $762,000 five year capital lease for production equipment.
The lease replaced existing operating leases, upgraded production equipment to
the latest available technology and increased production capacity. The net
annual cost of the new capital lease was lower than the cost of the operating
leases which were replaced.
Image incurs postage costs on behalf of customers of approximately
$1,000,000 to $1,500,000 each month. Image's policy is to collect such postage
costs from its customers in advance. To the extent Image is unsuccessful in
doing so, cash flow is negatively affected, and Image may be required to utilize
its bank credit line. Particularly in light of the consummation of the IPO and
Vestcom's $30 million credit facility, management of Image believes that with
the financing alternatives available to it and by managing its accounts
receivable, it will be able to fund its operations and capital requirements for
the foreseeable future.
Results of Operations--COS Information
Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
Revenues decreased $346,000, or 13.9%, from $2,484,000 for the six months
ended June 30, 1996 to $2,138,000 for the six months ended June 30, 1997. This
decrease was primarily attributable to a decrease in the volume of COS
Information's label and laser printing business and also to delays in the start
of new contracted business.
COS Information's gross profit decreased $164,000, or 19.3%, from $848,000
for the six months ended June 30, 1996 to $684,000 for the six months ended June
30, 1997. The gross profit margin decreased from 34.0% in 1996 to 32.0% in 1997.
The decrease in the gross profit margin was primarily a result of COS
Information's increased costs related to the move to its new premises and the
decreased volume of business.
Selling, general and administrative expenses decreased $111,000, or 17.5%,
from $633,000 for the six months ended June 30, 1996 to $522,000 for the six
months ended June 30, 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 25.5% in 1996 to 24.4% in 1997 due to
decreased volume.
Net income decreased from $155,000 for the six months ended June 30, 1996
to $109,000 for the six months ended June 30, 1997.
Year Ended July 31, 1996 Compared to Year Ended July 31, 1995
Revenues increased $1,073,000, or 27.4%, from $3,914,000 in fiscal 1995 to
$4,987,000 in fiscal 1996. This increase was primarily attributable to an
increase in the volume of business in COS Information's microfiche, microfilm
and laser printing business. The increased revenues in fiscal 1996 also
reflected enhanced value-added services, such as the utilization of highlight
color on laser printed documents.
COS Information's gross profit increased $510,000, or 40.6%, from
$1,257,000 in fiscal 1995 to $1,767,000 in fiscal 1996. The gross profit margin
increased from 32.1% in fiscal 1995 to 35.4% in fiscal 1996. The improvement in
the gross profit margin was primarily a result of COS Information's fixed
expenses remaining relatively stable or decreasing as revenues increased.
Selling, general and administrative expenses increased $236,000, or 21.7%,
from $1,089,000 in fiscal 1995 to $1,325,000 in fiscal 1996. As a percentage of
revenues, selling, general and administrative expenses decreased from 27.8% in
fiscal 1995 to 26.6% in fiscal 1996. The increase in the dollar amount of
selling, general and administrative expenses was primarily attributable to
increased equipment maintenance and rental cost and increased sales commissions.
Net income increased from $98,000 in fiscal 1995 to $337,000 in fiscal
1996.
Five Months Ended December 31, 1996 Compared to Five Months Ended
December 31, 1995 (Unaudited)
Revenues decreased $84,000, or 4.1%, from $2,058,000 for the five months
ended December 31, 1995, compared to $1,974,000 for the five months ended
December 31, 1996. This decrease was primarily attributable to a decrease in the
volume of business from a single customer for whom COS Information provides high
speed laser printing services.
COS Information's gross profit decreased $45,000, or 6.5%, from $688,000
for the five months ended December 31, 1995 to $643,000 for the five months
ended December 31, 1996. The gross profit margin decreased from 33.4% for the
five months ended December 31, 1995 to 32.6% for the comparable period in 1996.
The decrease in gross profit was primarily attributable to the decreased volume
of business.
Selling, general and administrative expenses increased from $535,000 for
the five months ended December 31, 1995 to $536,000 for the five months ended
December 31, 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 26.0% for the five months ended December
31, 1995 to 27.2% for the five months ended December 31, 1996. The increase in
selling, general and administrative expenses was primarily a result of increased
compensation expense.
Net income decreased from $111,000 for the five months ended December 31,
1995 to $50,000 for the five months ended December 31, 1996.
Liquidity and Capital Resources--COS Information
At June 30, 1997, COS Information had working capital of $452,000 and
$2,000 of cash and cash equivalents as compared with $290,000 and $88,000,
respectively, at December 31, 1996. COS Information has historically funded its
operations with cash flow from operations and limited borrowings from bank
lenders. Net cash provided by operating activities for the six months ended June
30, 1996 was $504,000 and net cash used by operating activities for the six
months ended June 30, 1997 was $65,000. Historically, COS Information has been
able to fund its equipment purchase needs through secured loans or equipment
leases. Particularly in light of the consummation of the IPO and Vestcom's $30
million credit facility, management of COS Information believes it has adequate
cash flow and financing alternatives available to it to fund its operations and
capital requirements for the foreseeable future.
Results of Operations--EIS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased $936,000, or 27.0%, from $3,465,000 for the six months
ended June 30, 1996 to $4,401,000 for the six months ended June 30, 1997. This
increase was primarily attributable to additional EIS facilities in Nashville,
Tennessee, and Greenville, South Carolina (which were opened in 1996) and
business from a new customer at the existing facility in Little Rock, Arkansas.
EIS' gross profit increased $463,000, or 80.5%, from $573,000 for the six
months ended June 30, 1996 to $1,036,000 for the six months ended June 30, 1997.
The gross profit margin increased from 16.5% in 1996 to 23.5% in 1997, primarily
as a result of EIS' expenses remaining relatively stable or decreasing as
revenues increased.
Selling, general and administrative expenses increased $85,000, or 12.8%,
from $664,000 for the six months ended June 30, 1996 to $749,000 for the six
months ended June 30, 1997. As a percent of revenues, selling, general and
administrative expenses decreased from 19.1% in 1996 to 17.0% in 1997. The
increase in the dollar amount of selling, general and administrative expenses
was primarily attributable to compensation for additional personnel while the
percentage decrease was attributable to the increase in revenues discussed
above.
EIS recorded a net loss of $102,000 for the six months ended June 30, 1996
and net income of $103,000 for the six months ended June 30, 1997.
Liquidity and Capital Resources--EIS
At June 30, 1997, EIS had a working capital deficit of $936,000 and no cash
and cash equivalents, as compared with a working capital deficit of $1,108,000
and cash and cash equivalents of $45,000 at December 31, 1996. EIS's expansion
of its operations and ownership restructuring primarily contributed to the
deficit. EIS has historically funded operations from existing cash flow and the
use of a $750,000 bank line of credit. An aggregate of $206,000 was available
under this line of credit at June 30, 1997. Historically, EIS has been able to
fund its equipment purchase needs through secured loans or equipment leases.
Particularly in light of the consummation of the IPO and Vestcom's $30 million
credit facility, management of EIS believes it has adequate cash flow and
financing alternatives available to it to fund its operations and capital
requirements for the foreseeable future.
<PAGE>
BUSINESS
The Company provides computer output and document management services to a
broad range of industries. Concurrently with the consummation of the IPO on
August 4, 1997, Vestcom acquired the seven Founding Companies. These companies
provide a number of value-added services including (i) the production and
distribution of time-sensitive computer-generated documents on paper, compact
disc, microfiche, microfilm and labels, (ii) demand publishing, (iii) mailing
services, (iv) marketing materials fulfillment and (v) forms management. See
"The Company." Prior to the IPO, Vestcom did not conduct any operations. Unless
otherwise indicated, all references to the business of the Company prior to the
IPO and the Acquisitions refer to the businesses of the Founding Companies as
they were conducted on an independent basis.
The Company believes that it is well-positioned to pursue its goal of
becoming a leading provider of computer output and document management services,
initially in the U.S. and portions of Canada, and eventually on a broader
international scale. The Company believes that its enhanced capital resources,
technological expertise and operating efficiencies will enable it to provide a
broad range of services from multiple locations. The Company intends to grow
through acquisitions to enhance its geographic penetration and to augment its
existing services and customer base. The Company will operate with a
decentralized management philosophy which permits local management to make most
day-to-day operating decisions. The Company believes that this approach will
enable its acquired businesses to maintain their high level of customer service
and contact, while allowing them to draw upon the collective resources of the
Company as a whole.
The Company currently provides services to a broad range of industries,
including financial, telecommunications, pharmaceutical, health care, publishing
and retail and manufacturing firms. The Company believes that its services
afford its customers an opportunity to obtain improved quality, reliability and
turnaround of documents, at a reduced cost. The Company's services enable
customers to:
Utilize a broad range of computer output services to create documents
for their specific needs
The Company believes that a key competitive advantage is its significant
computer processing and programming capabilities. The Company's technical staff
designs and implements the software and systems to produce customized output for
customers. The Company's capabilities provide customers with the flexibility to
obtain small or large volumes of documents with the same high quality, while
permitting each document to be different from the next. The Company produces
documents for most of its customers on a regular basis, either daily, weekly,
monthly, quarterly or as otherwise required by the customer.
Obtain computer output and document management services at a reduced
cost
The Company's advanced computer processing and distribution
capabilities permit customers to reduce their production, distribution
and mailing costs. Customers can also reduce their overhead and fixed
costs by decreasing or eliminating equipment, floor space, personnel,
utilities and other related expenses. The Company's specialized
equipment can be utilized 24 hours a day, seven days a week, to meet
customers' needs. In contrast, in order to perform many computer output
and document management services in-house, customers are required to
make significant capital expenditures for equipment which may not be
utilized to capacity on a daily basis.
Reduce turnaround time and substantially reduce downtime
The Company's advanced technology and equipment, internal
equipment redundancy and multi-site production capabilities reduce
turnaround time and maximize capacity utilization.
Gain access to the newest technologies
The Company keeps abreast of frequent changes in technology
and equipment in the computer output and document management services
industry, enabling its customers to (i) receive the benefits of
technological advances without making significant investments in
hardware and software and (ii) retain the flexibility to change the
equipment and technologies they utilize as their respective needs
change. The Company's technological expertise and equipment will be
shared Company-wide.
Industry Overview
The Company believes that the computer output and document management
market that the Company services was over $20 billion in 1996, which includes
over $5 billion for the production and distribution of statements and invoices,
approximately $8 billion for demand publishing and approximately $5 billion for
microfiche, microfilm, compact discs and other imaging services. The Company
further believes that there is a significant market for the production and
distribution of computer-generated documents other than statements and invoices
(including point-of-purchase labels), marketing materials fulfillment and
mailing services.
As a result of the increased complexity and volume of computer-generated
documents and the increased costs of producing these documents in-house, a
growing number of companies have looked to outsourcing as an alternative to
performing computer output and document management services in-house. Gartner
Group, an information technology consulting firm, has estimated that the North
American market for outsourcing of the production and distribution of
computer-generated documents was $5 billion in 1996 and will grow to
approximately $14 billion by the year 2000. Gartner Group also has estimated
that in the United States and Europe document outsourcing will grow at a
compound annual growth rate of 30% per year through 2000.
The computer output and document management services business is highly
fragmented and is characterized by many small companies, numerous in-house
operations and several national service bureaus. The Company believes that there
are over 5,000 companies in this business, of which fewer than 150 have revenues
in excess of $10 million. The Company believes that for the most part, these
5,000 companies serve local markets and provide a narrow range of services. The
Company further believes that many computer output and document management
services businesses: (i) have insufficient capital for expansion; (ii) do not
invest sufficiently in rapidly changing technologies; and (iii) are unable to
meet the needs of large, geographically dispersed clients.
The Company believes that the growth of the computer output and document
management services market is being driven by several factors, including: (i)
the increasing trend of businesses to outsource their non-core functions; (ii)
the growth of the companies and industries in the Company's customer base, which
has resulted in an increase in the volume and variety of documents which these
companies need to generate; (iii) the increased demand of managers, employees
and customers for time-sensitive computer-generated documents as a result of
recent advances in information technology; and (iv) government regulations that
require the reporting and retention of, and access to, a broad range of
information.
Business Strategy
The Company's goal is to become a leading provider of computer output and
document management services, initially in the U.S. and portions of Canada, and
eventually on a broader international scale. To achieve this goal, the Company
intends to implement the following strategy:
Provide a Broad Range of High Quality Services at a Competitive Cost from
Multiple Locations
The Company intends to provide a broad range of high quality computer
output and document management services at a competitive cost in targeted
geographic locations through selective acquisitions and the expansion of its
existing businesses. The Company intends to market its services to customers
with a geographically-dispersed presence throughout the United States and Canada
and to customers with strong ties to local markets.
Capitalize on Cross-Selling Opportunities
The Company intends to capitalize on the expertise of the various Founding
Companies to expand the range of services provided to existing customers as well
as to broaden the Company's customer base. For example, while certain of the
Founding Companies presently provide compact disc, microfiche, microfilm and
demand publishing services to customers, the Company believes that these
services could be marketed to additional customers that are presently obtaining
other services from the Company. In addition, certain of the Founding Companies
have expertise in particular industries and with specific types of customers,
such as credit unions, supermarket chains and pharmaceutical companies. The
Company believes that this expertise will enhance its ability to obtain and
service customers in the same industries in additional geographic areas.
Provide Complete Outsourcing Solutions for Clients
The Company intends to provide a turnkey document output and distribution
service in which the Company assumes most of the document output and
distribution responsibilities previously performed by the customer's in-house
operations. The Company believes that, in most cases, it can perform these
services more cost-effectively than the customer can perform them internally.
Operate with a Decentralized Management Philosophy
The Company intends to operate with a decentralized management structure to
provide personalized customer service and a motivating environment for its
staff. The Company intends to permit local management to have continued
responsibility and accountability and to make most day-to-day operating
decisions. The Company intends to provide financial, marketing, planning and
administrative support on a centralized basis. The Company believes that this
approach will enable acquired businesses to maintain their high level of
customer service and contact, while allowing them to draw upon the collective
resources of the Company as a whole.
Achieve Cost Savings Through Consolidation and Economies of Scale
The Company intends to achieve significant economies of scale by (i)
consolidating a number of administrative functions; (ii) combining the
purchasing of such items as materials and supplies, equipment maintenance and
employee benefits; (iii) reducing or eliminating redundant functions and
facilities; and (iv) sharing production through a communications network to
maximize equipment utilization and speed delivery.
Acquisition Strategy
The Company plans to acquire additional companies in the highly-fragmented
computer output and document management services industry. The Company intends
to expand to targeted geographic areas in the United States, Canada and abroad
by acquiring companies that have specified characteristics in order to create a
multi-site, multi-service company. Targeted geographical areas include those
areas which have a high concentration of potential customers with high-volume,
computer-generated output. In identifying potential acquisition candidates, the
Company will look for companies (i) with services that are similar or
complementary to those provided by the Company; (ii) serving geographic markets
targeted by the Company; and (iii) with strong management and customer
relationships.
The Company intends to further augment its acquisitions with "tuck-in"
acquisitions in the same or contiguous areas that can then be assimilated into
one or more of the Company's existing operations. The Company believes that it
can increase market share through tuck-ins by adding additional customers and
leveraging operational efficiencies through the sharing of capacities and
capabilities and the elimination of duplicate overhead. The Company also intends
to grow by acquiring the in-house computer output centers of targeted
corporations.
For a discussion of certain risks associated with the Company's acquisition
strategy, see "Risk Factors--Risks Related to the Company's Acquisition
Strategy" and "--Need for Additional Financing."
Services
The Company provides a variety of computer output and document management
services for its customers based on their specific needs. These services include
the following:
Output Services
Production and Distribution of Time-Sensitive Documents on Paper
The Company converts electronic data received from its customers into
informative, accurate and customized documents such as brokerage statements,
bank statements, invoices, pension reports, credit union statements and
management reports (including sales reports, financial and accounting reports
and inventory reports). The Company's technical staff develops specialized
systems and software to meet its customers' needs. Upon receipt of computer data
from its customers, the data are processed through the specialized systems and
software generally developed by the Company to provide, among other things,
customized formatting of output, cost-effective and speedy postal delivery,
intelligent insertion, selective distribution and quality control. The Company's
processing of its customers' data enables the Company to create customized
output, such as selective marketing messages and highlight color on invoices.
The Company's capabilities enable it to print small or large volumes of
documents with the same high quality, while permitting each document to be
different from the next. The Company produces documents for most of its
customers on a regular basis, either daily, weekly, monthly, quarterly or as
otherwise required by the customer. The Company produces approximately 57
million impressions (pages) per month.
Production and Distribution of Documents on Compact Disc
The Company converts electronic data onto compact disc. Compact disc is
primarily used for rapid access to information and in situations where the user
needs to manipulate the data easily, such as meeting customer service
requirements, for archiving, and as an alternate method of distributing various
documents such as sales reports. The Company produces approximately 5 million
images (pages) per month on compact disc.
Production and Distribution of Documents on Microfiche and Microfilm
The Company converts electronic data onto microfiche and microfilm.
Microfiche and microfilm are used primarily for archiving, to meet customer
service requirements and for other purposes which are not highly time-sensitive.
The Company produces approximately 100 million images (pages) per month on
microfiche and microfilm.
Production and Distribution of Computer-Generated Labels
The Company produces and distributes computer-generated point-of-purchase
labels for grocery stores, drug stores and discount and retail department
stores. These labels generally display the product's price (including unit
price), a bar-code for scanning and information about the product such as its
size and weight. The Company utilizes high-speed laser printers and specialized
finishing equipment to produce such labels. The Company provides rapid
turnaround of labels to its customers' stores and distribution centers daily,
weekly or as otherwise required to reflect changes in the information contained
on the labels. The Company prints approximately 2 million sheets of
computer-generated labels per month, with each sheet containing from one to up
to 120 labels.
Demand Publishing
The Company prints, packages and distributes documents that are subject to
frequent revision or unpredictable demand, such as product instruction manuals,
management training manuals and technical materials. For example, a software
company that provides instruction manuals to its customers may need to update
the manuals frequently to reflect changes in its product. The Company's print on
demand system permits the customer to revise the instruction manual and
cost-effectively produces the number of copies the customer requires at the time
the information is needed. The flexibility of the Company's system enables the
customer to make product enhancements (such as corrections or improvements to
product manuals) without maintaining costly inventories of documents which might
quickly become outdated. The Company provides complete assembly of software
packages, including coordination of software duplication and production of the
applicable documentation. The Company prints approximately 8 million impressions
(pages) per month.
Computer Center Document Outsourcing Services
As contrasted with the Company's individualized services described under
"Output Services," the Company's Computer Center Document Outsourcing Services
is a turnkey document output and distribution service. The Company typically
assumes most of the document output and distribution responsibilities previously
performed by the customer's in-house operations. This service often enables the
customer to close its in-house computer output printing center. The customer
transmits its computer-generated data to one of the Company's output and
production centers, which then processes, produces and distributes all of the
reports, invoices, statements and other computer output documents needed by the
customer.
Mailing Services
The Company provides cost-effective and rapid distribution of completed
documents and is able to obtain postal discounts of up to approximately 25% off
the current U.S. first class single piece postage rate.
Insertion
The Company provides both selective (intelligent) and non-selective
insertion services. The Company's insertion equipment folds and inserts reports,
bills, invoices and other marketing materials into envelopes. The Company's
automated insertion equipment inserts approximately 13 million pieces per month.
Presorting
The Company sorts mail to United States and Canadian Postal Service
specifications and adds postal bar-codes in order to obtain the greatest
available discount and speed delivery. The Company sorts approximately 6 million
pieces of mail per month.
Commingling
By combining volumes of mail from a number of customers and adding postal
bar-codes, the Company is able to generate postal discounts for customers that
do not produce sufficient volume to obtain these benefits on their own. The
Company commingles approximately 13 million pieces of mail per month.
Marketing Materials Fulfillment
The Company's fulfillment operations provide an efficient mechanism for its
customers to distribute marketing materials and instruction manuals to
geographically dispersed locations on demand, in a timely, cost-effective
manner. The Company receives marketing and related materials from customers,
stores them and then ships the materials to various locations upon the receipt
of a customer order. For example, a candy manufacturer uses the Company's
services to distribute advertising displays and related materials to
supermarkets, and a watch manufacturer uses the Company's services to distribute
instruction manuals to consumers who have misplaced their original instruction
booklets. The Company receives orders to ship materials by telephone, computer,
phone mail, fax, mail, electronic mail and Electronic Data Interchange (EDI).
The Company's inbound telemarketing service includes customer service
representatives who take orders and provide information concerning inventory
availability, anticipated delivery and the status of previously placed orders.
The Company also produces customized computer reports which track the volume and
frequency of shipments of materials to various locations. As an additional
service, the Company produces specialized computer reports for pharmaceutical
companies which track the distribution of drug samples and provide detailed
information as required by law. The Company ships approximately 52,000 packages
of marketing and related materials per month.
Forms Management
The Company's services include the purchase, storage and maintenance of
printed forms, envelopes, letterhead and marketing materials for customers. The
Company also offers limited offset printing services to print forms, stationery
and other marketing materials.
Development of New Services
The Company believes that its future success depends on its ability to
enhance its current services and develop new services that address the
increasingly sophisticated needs of its customers. For example, during the last
five years, several of the Founding Companies have increased their document
storage capabilities. While previously offering only microfiche and microfilm
technology, several of the Founding Companies now offer customers compact disc
technologies. In addition, as postal regulations have changed, several of the
Founding Companies have improved and updated their software capabilities in
order to process nine digit zip codes and use bar coding to take advantage of
new postal discounts.
The Company continually faces challenges in keeping abreast of new
technologies. As an example of a future challenge, many companies may increase
their use of the Internet to transmit information to employees or customers. To
remain competitive, the Company may need to be prepared to offer its customers
services that utilize Internet technology. The Company attempts to keep up with
technological advances by attending trade shows and by maintaining close contact
with its principal customers.
Confidentiality of Customer Information
A substantial portion of the Company's business involves the handling of
documents containing confidential and other sensitive information of its
customers. Certain of the Founding Companies already take steps to protect such
information, such as requiring employees to enter into confidentiality
agreements as a condition of employment and restricting access to certain areas
within the Founding Company's premises to certain employees with the need for
such access. The Company is currently in the process of implementing uniform
policies throughout the Company to protect confidential information, including
requiring all new employees and, to the extent practical, existing employees, to
execute confidentiality agreements to the extent not previously executed. In
addition, the Company has obtained printer's error insurance to attempt to
reduce the economic impact of any breach. A breach of confidentiality would also
have collateral damaging effects on the Company's business reputation.
Sales and Marketing
The Company's sales efforts are handled principally through its in-house
direct sales staff of approximately 35 people located in five states and the
Province of Quebec. The Company's sales representatives generally have expertise
in specific industries, such as the pharmaceutical, telecommunications and
financial services industries, and in specific output services, such as
statements, computer-generated labels, compact discs and demand publishing. The
Company employs customer service representatives to provide on-going support to
existing customers and to oversee the implementation of new customer projects.
The Company augments the work of its sales personnel through a variety of
direct marketing techniques, including direct mail, regular participation in
industry trade shows and conferences, articles and advertisements in trade
journals and Company-sponsored seminars for customers and prospective customers.
The Company intends to provide Company-wide marketing support to its sales
staff through the production and distribution of marketing materials,
telemarketing and seminars. The Company plans to augment local sales and
marketing efforts through the implementation of a national account program for
large customers. The Company's sales and customer service personnel will
continue to interact extensively with customer and Company operations staff to
address specific customer needs.
Customers
The Company currently has approximately 1,200 customers, including
financial institutions, telecommunications companies, pharmaceutical companies,
health care institutions, publishing companies and retail and manufacturing
firms. No one customer presently accounts for over 5% of the Company's sales.
The Founding Companies have demonstrated the ability to retain customers
over the long-term under short-term contracts, and in many instances, without
written contracts. The Company believes that quality of performance, on-going
customer support and the technologically advanced customized services provided
by the Founding Companies have contributed to this record of successful customer
retention.
Competition
The Company operates in a highly competitive industry. A significant source
of competition is the in-house document handling capability of the Company's
target customer base. In addition, with respect to those services that are
outsourced, the Company competes with a variety of companies, many of which have
greater financial resources than the Company. The Company's major competitors
include Xerox Business Services, Pitney Bowes Management Services, Anacomp,
First Image (a subsidiary of First Data Corporation), Output Technologies (a
division of DST Systems, a subsidiary of Kansas City Southern Industries), IKON
Office Solutions and Lason, as well as smaller local providers.
The Company believes that the principal competitive factors in providing
computer output and document management services include technological
expertise, quality and accuracy, turnaround time, price, reliability and
security of service, reputation, client industry expertise, capacity and
customer support and service.
Litigation
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of the legal
proceedings currently outstanding will have a material adverse effect on the
Company's business, financial condition or results of operations.
Facilities
The Company currently operates 19 computer output and document management
service facilities, aggregating approximately 624,000 square feet. These
facilities are located in nine states and in the Province of Quebec, Canada. All
of these facilities are leased and are used for operations, administrative and
storage functions. Leases vary in term remaining from month-to-month to seven
years and in some cases, include options to extend the lease term. See "Certain
Transactions" for further information relating to these leases.
Employees
At June 30, 1997, the Company had approximately 670 full-time and 230
part-time employees. No employees of the Company are represented by a labor
union. The Company considers its relations with its employees to be good.
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
Name Age* Position
Joel Cartun 58 President, Chief Executive Officer and
Director of Vestcom; President of
Comvestrix
Peter J. McLaughlin 59 Executive Vice President of Vestcom
Harvey Goldman 51 Executive Vice President, Chief Financial
Officer and Treasurer of Vestcom
Brendan Keating 43 Executive Vice President and Chief
Operating Officer of Vestcom
Leslie M. Abcug 50 Vice President--Finance and Administration
of Vestcom; Vice President of Finance and
Administration of Comvestrix
Sheryl Bernstein Cilenti 29 Vice President and General Counsel of
Vestcom
Howard April 66 Director of Vestcom; Chairman of the Board
of COS Information
Gary J. Marcello 53 Director of Vestcom; President of DMS
Stephen R. Bova 50 Director of Vestcom
Leonard J. Fassler 66 Director of Vestcom
Fred S. Lafer 68 Director of Vestcom
Richard D. White 43 Director of Vestcom
* Ages are as of October 15, 1997.
Members of the Board of Directors will serve until the next annual meeting
of stockholders and thereafter until their successors are elected and qualified.
The Company has established an Audit Committee and a Compensation Committee
of the Board of Directors. Leonard J. Fassler and Richard D. White are the
current members of the Audit Committee and Stephen R. Bova and Fred S. Lafer are
the current members of the Compensation Committee.
Joel Cartun has been the President, Chief Executive Officer and a director
of Vestcom since its incorporation in September 1996. Mr. Cartun founded
Comvestrix, one of the Founding Companies, in 1969, and has served as President,
Chief Executive Officer and a director of that corporation since its
incorporation. Mr. Cartun was a founder of Xplor International, a trade
association for the electronic printing industry.
Peter J. McLaughlin has served as Executive Vice President of Vestcom since
March 1997 and as a consultant to Vestcom from July 1996 to March 1997. He
served as Chief Financial Officer and Treasurer of Vestcom from March 1997 to
May 1997. Mr. McLaughlin also served as a director of Vestcom from its inception
through the consummation of the IPO, at which time he resigned as a director. He
was a partner from 1994 to 1996 in the merger and acquisition firm of McLaughlin
& Tonra. Prior thereto, he held several positions, most recently as Senior Vice
President of the Eastern Region, with Zytron (a Dun & Bradstreet subsidiary
specializing in computer output services) and its successor company, First Image
Management, from 1986 to 1993. He was the founder and Chief Executive Officer of
Micrographics Systems, a computer output microfilm service bureau that was sold
to Dun & Bradstreet in 1986.
Harvey Goldman has served as Executive Vice President, Chief Financial
Officer and Treasurer of Vestcom since May 1997. He served as President, Chief
Executive Officer and Chairman of the Board of Conversion Technologies
International, Inc. (a publicly traded specialty materials company) from 1994 to
May 1997. From June 1991 to March 1994, Mr. Goldman served as Executive Vice
President and as a director of Air & Water Technologies Corporation, a publicly
held environmental technologies company (and successor to Research-Cottrell,
Inc.), and as its Chief Financial Officer from June 1987 through June 1991.
Prior to joining Research Cottrell, Inc. in 1985, Mr. Goldman was a partner at
Arthur Young & Co. (now Ernst & Young LLP), where he served as Director of
Financial Consulting in New York City and National Director of Environmental
Consulting.
Brendan Keating has served as Executive Vice President and Chief Operating
Officer of the Company since October 1997. He served as Vice President of Bowne
& Co., Inc. (a financial printing company) from 1991 until October 1997. He also
served as Vice President of Operations of Bowne of New York City, Inc. from 1985
to 1991, and as President of Bowne Business Communications from 1993 to 1995.
Leslie M. Abcug has served as Vice President--Finance and Administration of
Vestcom since January 1997 and as Vice President of Finance and Administration
of Comvestrix, one of the Founding Companies, since 1986.
Sheryl Bernstein Cilenti has served as Vice President and General Counsel
of the Company since October 1997. From September 1993 until joining the
Company, Ms. Cilenti was an associate at Lowenstein, Sandler, Kohl, Fisher &
Boylan, P.A. in Roseland, New Jersey, where she practiced law primarily in the
areas of mergers and acquisitions and securities.
Howard April became a director of Vestcom upon the consummation of the
Offering. Mr. April founded COS Information, one of the Founding Companies, in
1972 and has served as its Chairman of the Board since 1995. He also served as
its President from 1972 to 1995. Mr. April has also served as President of
Lirpaco Inc., COS Information's parent, since 1972. Mr. April's son, Leonard
April, is President of COS Information.
Gary J. Marcello became a director of Vestcom upon the consummation of the
IPO. Mr. Marcello has served as the President of the largest of the three
companies constituting DMS (see "The Company"), one of the Founding Companies,
since 1975.
Stephen R. Bova became a director of Vestcom upon the consummation of the
Offering. Mr. Bova has served as President of the Global Banking Division of
Electronic Data Systems Corporation (a provider of technical and information
services) since November 1996. Prior thereto, he served as President of the
Global Financial Division of Alltel Information Services, Inc. (a provider of
software and information services) for in excess of five years.
Leonard J. Fassler became a director of Vestcom upon the consummation of
the IPO. Mr. Fassler has served as a consultant to GE Capital Information
Technology Systems, Inc. (an international computer reselling and integration
company affiliated with General Electric) since August 1996. Mr. Fassler served
as Co-Chairman of AmeriData Technologies, Inc. (an international computer
integration and support company) for in excess of five years until GE's
acquisition of that company in July 1996.
Fred S. Lafer became a director of Vestcom upon the consummation of the
Offering. Mr. Lafer has served as President of the Taub Foundation (a charitable
foundation) since 1994. Mr. Lafer served as Senior Vice President and Secretary
of Automatic Data Processing, Inc. (a provider of employer, financial and data
services) for in excess of five years, until 1996.
Richard D. White became a director of Vestcom upon the consummation of the
IPO. Mr. White has been a Managing Director of Oppenheimer & Co., Inc., one of
the Representatives of the Underwriters of the IPO, for in excess of five years.
Mr. White is also a director of Midway Games Inc.
Directors' Compensation
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives an annual retainer of $6,000 and an additional fee of
$1,000 for each day's attendance at a Board of Directors meeting and/or
committee meeting. Under the Company's Stock Option Plan, each non-employee
director will also receive options to acquire 10,000 shares of Common Stock at
the beginning of his or her first year of service as a director, and options
covering 5,000 shares of Common Stock for each year of service thereafter. See
"Stock Option Plan." Directors of the Company are reimbursed for out-of-pocket
expenses incurred in their capacity as directors of the Company. Gary J.
Marcello and Howard April, who became directors of the Company upon the
consummation of the IPO, have entered into employment agreements with DMS and
COS Information, respectively, each of which commenced on the consummation date
of the IPO. For a description of their respective employment agreements, see
"Employment Agreements."
Executive Compensation
Vestcom was incorporated in September 1996 and prior to the IPO, did not
conduct any operations other than in connection with its formation, the
negotiation of the Acquisitions and the IPO. The Company anticipates that
subject to the hiring of additional executive officers, during 1997 its five
most highly compensated executive officers and their annualized base salaries
will be as follows: Mr. Cartun--$200,000, Mr. Marcello--$200,000, Mr.
Keating--$200,000 (plus a guaranteed annual bonus of 35-50% of his annual
salary, based on performance), Mr. Goldman--$180,000 and Mr.
McLaughlin--$144,000. Each of Messrs. Cartun, Marcello, Keating, Goldman and
McLaughlin have entered into an employment agreement with the Company or a
subsidiary thereof. See "Employment Agreements." Neither Joel Cartun, Gary
Marcello, Harvey Goldman nor Brendan Keating received any compensation from
Vestcom or from any of the Founding Companies for services rendered to Vestcom
during the year ended December 31, 1996. For amounts paid to Mr. McLaughlin, see
"Certain Transactions."
Employment Agreements
Mr. Cartun, Mr. McLaughlin and Mr. Keating have each entered into an
employment agreement with the Company, Mr. Marcello has entered into an
employment agreement with DMS, and Mr. Howard April has entered into an
employment agreement with COS Information, each of which commenced on August 4,
1997 upon the consummation of the IPO and the Acquisitions (other than Mr.
McLaughlin's agreement, which commenced on March 1, 1997 and Mr. Keating's
agreement, which commenced on October 13, 1997). Mr. Keating's employment
agreement will continue for a term of two years and the employment agreements
with Messrs. Cartun, McLaughlin, Marcello and April will continue for a term of
three years.
Pursuant to their respective agreements, Mr. Cartun will serve as President
and Chief Executive Officer of the Company at an annual base salary of $200,000,
Mr. McLaughlin will serve as Executive Vice President of the Company at an
annual base salary of $144,000, Mr. Keating will serve as Executive Vice
President and Chief Operating Office of the Company at an annual base salary of
$200,000 (plus a guaranteed annual bonus of 35-50% of his annual salary, based
on performance), Mr. Marcello will serve as President of DMS at an annual base
salary of $200,000 and Mr. Howard April will serve as Chairman of the Board of
COS Information at an annual base salary of CDN $100,000 (approximately U.S.
$75,188). Each of Messrs. Cartun, McLaughlin, Keating, Marcello and April will
be entitled to participate in all compensation and employee benefit plans
maintained by the Company and its subsidiaries, including such bonuses as may be
authorized by the Board of Directors from time to time. Pursuant to Mr.
Keating's employment agreement, he was granted options to purchase 100,000
shares of Common Stock at an exercise price of $21-5/8 per share.
Each of the employment agreements provides that, in the event of a
termination of employment by the Company without cause, such employee will be
entitled to receive from the Company an amount in cash equal to the employee's
then-current annual base salary for the remainder of the term. In the event of a
Change in Control (as defined) of the Company, the employment agreements for
Messrs. Cartun, McLaughlin, Marcello and April provide that if the employee has
not received sufficient prior notice that such employee's employment will be
continued following the Change in Control, such Change in Control will be deemed
to be a termination without cause. Further, in the event of any Change in
Control, the employee may also elect to treat the Change in Control as a
termination without cause by giving appropriate notice to the Company.
Mr. Keating's employment agreement provides that in the event of a Change
in Control of the Company, if he has not received sufficient prior notice that
his employment will be continued, he will be entitled to receive a lump-sum
severance payment of $300,000 if the Change in Control occurs during the first
12 months after Mr. Keating's employment with the Company commences and $200,000
if the Change in Control occurs after such first twelve months. Mr. Keating's
employment agreement also provides that in the event of a Change in Control, Mr.
Keating may elect to terminate his employment, in which case he will be entitled
to receive a lump-sum severance payment of $200,000.
The employment agreements for Messrs. Cartun, McLaughlin Marcello and April
also provide that, in the event of a termination of employment as a result of
death or disability, such employee (or his heirs or legal representatives, as
the case may be) will be entitled to receive a lump-sum amount in cash equal to
the employee's then-current base salary, offset by any payments made by the
Company pursuant to any life insurance or disability policies. If employment
terminates for cause or the employee terminates his employment for reasons other
than death or permanent disability, the employee will only be entitled to
receive earned but unpaid salary as of the date of termination.
Each employment agreement described above also contains certain
non-competition covenants which will continue for a period equal to the longer
of five years after the consummation of the IPO or one year following
termination of employment (except for the covenant in Mr. Keating's agreement,
which will continue for one year following termination). Each employment
agreement also contains certain anti-solicitation, anti-raiding and
confidentiality provisions.
Mr. Goldman has entered into an at-will employment agreement with Vestcom,
dated May 21, 1997, pursuant to which he will serve as Executive Vice President
and Chief Financial Officer of the Company at an annual base salary of $180,000.
Mr. Goldman's agreement provides that in the event of a Change in Control, if he
does not receive sufficient prior notice of continued employment, he will be
entitled to receive severance pay of $180,000, in 12 monthly installments. Mr.
Goldman also has the right in the event of a Change in Control to terminate his
employment, in which case he will be entitled to receive the $180,000 of
severance pay. Mr. Goldman's agreement also contains certain non-competition
covenants which will continue for one year following termination of employment.
Pursuant to his employment agreement, upon consummation of the IPO, Mr. Goldman
was granted options to purchase 50,000 shares of Common Stock at an exercise
price of $13.00 per share. See "Stock Option Plan."
Stock Option Plan
In March 1997, the Board of Directors and stockholders of Vestcom approved
the Company's 1997 Equity Compensation Program (the "Stock Option Plan"). The
purpose of the Stock Option Plan is to provide directors, officers, key
employees and consultants with additional incentives by increasing their
ownership interests in the Company. Directors, officers and other key employees
of the Company and its subsidiaries are eligible to participate in the Stock
Option Plan. Awards may also be granted to consultants providing valuable
services to the Company. In addition, individuals who have agreed to become a
key employee or consultant, and key employees and consultants of entities that
are expected to become subsidiaries, are eligible for option grants, conditional
in each case on actual employment, consultant or subsidiary status. The Stock
Option Plan authorizes the granting of incentive stock options, non-qualified
stock options, stock appreciation rights, performance shares and stock bonus
awards.
The Stock Option Plan also provides for automatic option grants to
directors who are not otherwise employed by Vestcom or its subsidiaries. Upon
commencement of service, a non-employee director will receive a non-qualified
option to purchase 10,000 shares of Common Stock, and continuing non-employee
directors will receive annual options to purchase 5,000 shares of Common Stock.
Options granted to non-employee directors become fully exercisable one year
after the date of grant. Non-employee directors' options have a term of ten
years from the date of grant.
The maximum number of shares of Common Stock that may be subject to
outstanding options and awards under the Stock Option Plan, determined
immediately after the grant of any option or award, is the greater of 700,000
shares or 10% of the aggregate number of shares of the Company's Common Stock
outstanding, provided, however, that options to purchase no more than 700,000
shares of Common Stock may be granted as incentive stock options. No one person
may receive options or awards for more than 100,000 shares of Common Stock per
calendar year.
The Stock Option Plan will be administered by the Board of Directors or by
a committee of the Board (in either case, the "Plan Administrator"). Options and
awards granted under the Stock Option Plan will have an exercise or payment
price as established by the Plan Administrator, provided that the exercise price
of incentive stock options may not be less than the fair market value of the
underlying shares on the date of grant and the exercise price of stock options
granted to non-employee directors will be equal to the fair market value of the
underlying shares on the date of grant. Upon exercise or payment of an option or
award, the participant will be required to provide the payment price in full in
cash or in shares of Common Stock valued at fair market value on the date of
exercise. In connection with any exercise of options or awards, the Company will
have the right to collect or withhold from any payments under the Stock Option
Plan all taxes required to be withheld under applicable law.
Unless otherwise provided by the Plan Administrator, options and awards
granted under the Stock Option Plan to persons other than non-employee directors
are exercisable in 25% increments commencing one year after the date of grant.
The Stock Option Plan provides that all stock options granted to non-employee
directors will become immediately exercisable upon the occurrence of a "Change
in Control Event" (as defined in the Stock Option Plan). The Stock Option Plan
further provides that the Plan Administrator may accelerate the vesting of any
other option or award upon the occurrence of a Change in Control Event.
Options and awards granted under the Stock Option Plan generally will be
nontransferable, except by will or by the laws of descent and distribution.
During the lifetime of a participant, an option generally may be exercised only
by the participant. The Stock Option Plan contains various termination
provisions for options and awards in the event of termination of employment or
status as a director for various reasons.
The Stock Option Plan may be amended or terminated at any time by the Board
of Directors, except that no amendment may be made without stockholder approval
if such approval is required by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, or other applicable law and no amendment or
revision may alter or impair an option or award without the consent of the
holder thereof. The Stock Option Plan will terminate on March 1, 2007, unless
earlier terminated by the Board of Directors. No options or awards may be
granted after termination, although such termination will not affect the status
of any option or award outstanding on the date of termination.
As of October 15, 1997, options covering an aggregate of 401,550 shares of
Common Stock were outstanding under the Stock Option Plan, including (i) options
to purchase 10,000 shares of Common Stock which were granted to each of Stephen
R. Bova, Leonard J. Fassler, Fred S. Lafer and Richard D. White at an exericse
price of $13.00 per share, (ii) options to purchase 15,000 shares of Common
Stock which were granted to Howard April at an exercise price of $13.00 per
share, and (iii) options to purchase an additional 346,550 shares of Common
Stock which were granted to other employees of Vestcom and its subsidiaries
(including options to purchase 50,000 shares which were granted to Harvey
Goldman, the Company's Executive Vice President and Chief Financial Officer, at
an exercise price of $13.00 per share, and options to purchase 100,000 shares
which were granted to Brendan Keating, the Company's Executive Vice President
and Chief Operating Officer, at an exercise price of $21-5/8 per share). All of
these will expire ten years after the date of grant (except for Mr. April's
options, which will expire on January 2, 2001) and have an exercise price,
subject to adjustment, equal to the fair market value on the date of grant. Such
options will be exercisable annually in 25% increments beginning with the first
anniversary of the date of grant, except for the options granted to Messrs.
April, Bova, Fassler, Lafer and White, each of which becomes fully exercisable
on August 4, 1998. See "Certain Transactions--Organization of the
Company--Canadian Acquisition."
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 15, 1997, information with
respect to beneficial ownership of the Common Stock by (i) all persons known to
the Company to be the beneficial owner of 5% or more thereof, (ii) each
director, (iii) each executive officer who is expected to be one of the five
most highly compensated executive officers during 1997 and (iv) all executive
officers and directors as a group. The address of each such person is c/o
Vestcom International, Inc., 1100 Valley Brook Avenue, Lyndhurst, New Jersey
07071. All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
Shares Beneficially Owned(1)
----------------------------------------------
Name Number ` Percent
Joel Cartun 1,446,198(2) 17.3%
Peter J. McLaughlin 172,837 2.2
Harvey Goldman 5,000 *
Brendan Keating -- --
Howard April 141,464(3) 1.7
Gary J. Marcello 566,210(4) 6.8
Stephen R. Bova 5,000 *
Leonard J. Fassler 3,500(5) *
Fred S. Lafer 2,100(6) *
Richard D. White 100,000(7) 1.2
All executive officers and directors
as a group (12 persons) 2,473,937 29.6
* Less than one percent.
(1) Does not include shares underlying options which have been granted to the
indicated persons, none of which are exercisable within 60 days after
October 15, 1997.
(2) Includes 200,000 shares held by trusts for the benefit of Mr. Cartun's
children. As trustee of such trusts, Mr. Cartun's wife has the right to
vote and dispose of such shares.
(3) Includes 127,746 Exchangeable Shares of Vestcom's Canadian subsidiary which
are convertible into 127,746 shares of Common Stock. For purposes of this
table, all of such 127,746 Exchangeable Shares are deemed to have been
converted. Mr. April also has a beneficial interest in one share of
Vestcom's Class B Preferred Stock, which entitles him to vote on any matter
submitted to a vote of the holders of the Common Stock as though he owned
127,746 shares of Common Stock. See "Certain Transactions."
(4) Includes 27,436 shares held by a family limited partnership controlled by
Mr. Marcello.
(5) Includes 1,000 shares held by Mr. Fassler's wife. Mr. Fassler disclaims
beneficial ownership of such 1,000 shares.
(6) Includes 1,200 shares held by family trusts of which Mr. Lafer is trustee.
(7) Includes 61,704 shares held in the aggregate by Oppenheimer & Co., Inc. and
an affiliate of Oppenheimer & Co., Inc. Mr. White is a Managing Director of
Oppenheimer & Co., Inc. Mr. White disclaims beneficial ownership of these
61,704 shares.
<PAGE>
CERTAIN TRANSACTIONS
Organization of the Company
Initial Capitalization. The Company was initially capitalized with $1.7
million, $200,000 of which was funded in September 1996 and the remaining $1.5
million of which was funded in December 1996. The $200,000 was comprised of
$160,035 of loans provided by Comvestrix and Peter J. McLaughlin, Executive Vice
President and Chief Financial Officer of Vestcom (represented by promissory
notes in the aggregate principal amount of $160,035) and $39,965 of equity
(791,346 shares of Common Stock) provided by the stockholders of Comvestrix and
Mr. McLaughlin. The 791,346 shares include 593,509 shares issued to the
stockholders of Comvestrix proportionately to their Comvestrix stockholdings
(including 512,446 shares which were issued to Joel Cartun (President, Chief
Executive Officer and a director of Vestcom), 11,127 shares which were issued to
Leslie M. Abcug (Vice President--Finance and Administration of Vestcom) and
69,936 shares which were issued to other stockholders of Comvestrix) and 197,837
shares which were issued to Mr. McLaughlin. All shares were issued at a price of
approximately $.05 per share, which the Board determined was fair market value
at such time. The notes, which bore interest at the prime rate, as it may change
from time to time, were paid in full upon the consummation of the IPO.
The $1.5 million was raised in a private placement of stock and notes to
Oppenheimer & Co., Inc. ("Oppenheimer"), Opco Senior Executive Partnership, L.P.
("OSEP") (an Oppenheimer affiliate), Richard D. White (a managing director of
Oppenheimer who became a director of Vestcom upon the consummation of the IPO),
Comvestrix, the stockholders of Comvestrix (including Joel Cartun and Leslie M.
Abcug), an entity controlled by Gary J. Marcello and Howard April. Mr. Marcello
and Mr. April became directors of Vestcom upon the consummation of the IPO. The
$1.5 million was comprised of 503,846 shares of Common Stock of Vestcom, sold at
a price of approximately $.73 per share, and notes in the aggregate principal
amount of $1,132,697 bearing interest at the prime rate, as it may change from
time to time. The notes were paid in full upon the consummation of the IPO. The
price for the stock was the subject of arms' length negotiations. In such $1.5
million financing, Vestcom issued (i) notes payable to Oppenheimer, OSEP, Mr.
White, Comvestrix, Mr. Marcello's entity and Mr. April in the principal amounts
of $432,495.53, $108,123.88, $72,082.59, $399,996.26, $79,999.16 and $39,999.58,
respectively, and (ii) 229,773, 57,443, 38,296, 118,444, 27,436, 13,718, 2,572
and 16,164 shares of Common Stock to Oppenheimer, OSEP, Mr. White, Mr. Cartun,
Mr. Marcello's entity, Howard April, Mr. Abcug and the other stockholders of
Comvestrix, respectively. As the issuance price was less than the initial public
offering price, the Company recorded a non-recurring non-cash charge to
compensation of approximately $1.6 million, attributable to Mr. Cartun
($1,193,000), Mr. Abcug ($25,000), Mr. Marcello ($276,000) and Mr. April
($138,000). In May and July 1997, Oppenheimer returned to Vestcom an aggregate
of 225,512 shares of Common Stock.
Mr. McLaughlin received $74,400 from Vestcom in 1997 for consulting
services rendered to Vestcom during 1996. In addition, upon the consummation of
the Acquisitions, Vestcom paid McLaughlin & Tonra, a partnership in which Mr.
McLaughlin held a 50% interest, the sum of $75,000 in payment of consulting
services rendered by that firm in connection with the Acquisitions.
Vestcom has agreed to pay Oppenheimer up to $1.8 million for advisory
services rendered. Up to $1.0 million is payable on January 1, 1998 and the
remainder is payable in quarterly installments during 1998. In addition, Vestcom
reimbursed Oppenheimer for up to $75,000 of out-of-pocket expenses related to
such services.
Acquisitions. Concurrently with the consummation of the IPO, Vestcom
acquired by merger with Vestcom subsidiaries all of the issued and outstanding
capital stock of the Founding Companies (except that COS Information was
acquired by a stock purchase of its holding company rather than a merger), at
which time each Founding Company became a wholly-owned subsidiary of the
Company. (See "Canadian Acquisition" below.) The aggregate consideration that
was required to be paid by Vestcom to acquire the Founding Companies consisted
of (i) approximately $18.4 million in cash and (ii) 2,852,111 shares of Common
Stock (or 34.2% of the outstanding shares after completion of the Acquisitions
and the IPO), for an aggregate value of approximately $55.5 million. In
connection with the Acquisitions, the Company assumed all of the indebtedness of
the Founding Companies. Portions of such debt had been guaranteed by certain
stockholders of the Founding Companies in the aggregate amount of $1.3 million.
All of these guarantees have been released or the loans repaid. The Company has
repaid substantially all long-term bank debt, capital lease obligations incurred
prior to December 31, 1996 and related party indebtedness of the Founding
Companies and Vestcom, in the aggregate amount of approximately $12.5 million.
Such amount includes sums which were repaid to stockholders of the Founding
Companies, including approximately $1,126,000 which was repaid to Gary J.
Marcello and companies he controls.
The Company consented to the distribution of approximately $2.4 million in
cash to certain Founding Companies that were S Corporations, namely Comvestrix,
Computer Output and Image, which was equal to the balance of such Founding
Companies' Accumulated Adjustment Accounts ("AAA") as of the consummation of the
Acquisitions. This $2.4 million distribution was a reduction of the cash portion
of the purchase price. The Founding Companies that were S Corporations
(Comvestrix, DMS, Computer Output, Image and Mystic) also distributed 45% of the
net income of the Founding Company for 1996 (to the extent not previously
distributed) and 1997 (estimated through the consummation date), to enable the
stockholders of such Founding Companies to pay income taxes on such corporate
income.
The terms of each Acquisition were negotiated with the shareholders of each
Founding Company based on past earnings history and trends. The following table
sets forth for each Founding Company the aggregate consideration paid to the
holders of its common stock in (i) cash and (ii) shares of Common Stock:
Shares of
Common Cash
Founding Company Stock (1) (In thousands)(2)
Computer Output(3) 297,028 $1,592
Comvestrix 943,643 4,780
COS Information(4) 239,988 1,036
DMS 1,049,760 5,307
EIS(5) 114,000 1,018
Image(6) 76,923 3,000
Mystic 130,769 1,700
(1) Does not include 730,689, 27,436 and 13,718 shares issued to all of the
stockholders of Comvestrix, one stockholder of DMS and one stockholder of
COS Information, respectively, in connection with the initial
capitalization of Vestcom.
(2) Does not include reductions for AAA distributions described above.
(3) An additional earn-out of up to $1,500,000 may be paid, $420,012 of which
would be paid in cash and the remainder of which would be paid in Common
Stock (83,076 shares), depending on Computer Output's 1997 revenues and net
income before interest and taxes ("EBIT"), except for interest on any
capital equipment purchases made after the beginning of the earn-out
period.
(4) The stockholders of Lirpaco Inc. (COS Information's parent) received
239,988 shares of a Canadian subsidiary of Vestcom, which are exchangeable
into 239,988 shares of Vestcom Common Stock. The cash payment in the chart
is presented in U.S. dollars. An additional earn-out of up to $2.1 million
Canadian dollars may be paid, all of which would be payable in shares of
Vestcom's Canadian subsidiary valued at $13.00 per share. Such shares would
be exchangeable into up to 137,307 shares of Common Stock (assuming a
maximum .85 Canadian dollar conversion rate), depending on COS
Information's calendar 1997 EBIT, except for interest on any capital
equipment purchases made after the beginning of the earn-out period. See
"Canadian Acquisition."
(5) An additional earn-out of up to $6,000,000 may be paid, $1,680,009 of which
would be paid in cash and the remainder of which would be paid in stock. On
the consummation date of the Acquisitions, the Company delivered shares of
a class of the Company's Preferred Stock convertible into up to 332,307
shares of Common Stock. The amount of cash and the conversion ratio are
based on EIS' EBIT, except for interest on any capital equipment purchases
made after the beginning of the earn-out period, for the two year period
beginning on the first day of the fiscal quarter within which the IPO was
consummated.
(6) An additional earn-out of up to $4,499,997 may be paid, $700,007 of which
would be paid in cash and the remainder of which would be paid in stock. On
the consummation date of the Acquisitions, the Company delivered shares
of a class of the Company's Preferred Stock convertible into up to 292,307
shares of Common Stock. The amount of cash and the conversion ratio are
based on Image's EBIT, except for interest on any capital equipment
purchases made after the beginning of the earn-out period, for the one year
period beginning on the first day of the fiscal quarter within which the
IPO was consummated.
Joel Cartun, a principal stockholder of Comvestrix, Gary Marcello, a
principal stockholder of DMS, and Howard April, a principal stockholder of COS
Information, are directors of Vestcom. Leslie M. Abcug, a stockholder of
Comvestrix, is an executive officer of Vestcom. Of the consideration described
above, Joel Cartun received $4,129,610 and 815,308 shares of Common Stock for
his ownership interest in Comvestrix, Mr. Marcello received $3,271,303 and
538,774 shares of Common Stock for his ownership interest in DMS, Mr. April
received $502,640 and 127,746 shares of Vestcom's Canadian subsidiary which are
exchangeable into 127,746 shares of Common Stock for his ownership interest in
COS Information and Mr. Abcug received $90,813 and 17,929 shares of Common Stock
for his ownership interest in Comvestrix. Mr. April may receive up to an
additional 73,075 shares of Vestcom's Canadian subsidiary which would be
exchangeable into an equal number of shares of Common Stock pursuant to certain
earn-out provisions if specified earnings thresholds of COS Information are
attained. See "Principal Stockholders" for the total number of shares of Common
Stock held by the Company's executive officers and directors.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of five years commencing on the consummation date of the
Acquisitions (except for two minority stockholders of Computer Output who have
agreed not to compete for the longer of one year following the consummation date
of the Acquisitions or one year following termination of their employment). A
total of 17 of the stockholders of the various Founding Companies entered into
three year employment agreements with Vestcom or its subsidiaries effective upon
the consummation of the IPO and the Acquisitions. For a description of certain
employment agreements entered into by the Company and its executive officers and
directors, see "Management--Employment Agreements."
Subsequent to the consummation of the Acquisitions, the Company has
continued to lease property from various entities in which the stockholders of
Image, Joel Cartun and Gary J. Marcello have interests. The Company believes
that the rent it pays for each of these properties is equal to the fair market
rental value of each respective property. See "Real Estate Transactions."
Canadian Acquisition A subsidiary of Vestcom was organized under the laws
of the Province of New Brunswick, Canada. This subsidiary acquired all of the
issued and outstanding stock of Lirpaco Inc., the holding company for COS
Information, in exchange for U.S. $1,036,000 cash and 239,988 shares of a class
of non-voting stock of such New Brunswick corporation (the "Exchangeable
Shares") which is convertible into 239,988 shares of Common Stock at any time at
the option of the holders of the Exchangeable Shares or, under certain limited
conditions, by Vestcom. In addition, the former Lirpaco stockholders received
one share of Vestcom Preferred Stock which has voting rights equal to the
239,988 shares of Common Stock into which the Exchangeable Shares can be
converted. If COS Information's EBIT for calendar 1997 meets specified
thresholds, up to 137,307 additional Exchangeable Shares may be issued, which
shares would be convertible into a like number of shares of Common Stock. In
such event, the voting rights of the one share of Vestcom Preferred Stock which
was issued to the former Lirpaco stockholders would be increased to equal the
total number of shares of Common Stock into which the total number of
outstanding Exchangeable Shares can be converted. In addition, in connection
with the Acquisition of COS Information, Howard April received an option to
purchase 15,000 shares of Common Stock at the initial public offering price. Mr.
April's option, which expires on January 2, 2001, becomes fully exercisable one
year after the date of grant.
Each of the stockholders of the Founding Companies agreed to indemnify
Vestcom and the Underwriters of the IPO against certain liabilities, including
liabilities under the Securities Act.
Real Estate Transactions
Mr. Joel Cartun has a 50% interest in the partnership which owns the
property used by the Company and Comvestrix in Lyndhurst, New Jersey. The
partnership leases the property to Comvestrix. The current lease expires in
2001. Comvestrix's related party rent expense for this property for the fiscal
years ended December 31, 1994, 1995 and 1996 was $661,635, $363,472 and
$628,083, respectively. The current annual rent is $454,632 per year, which the
Company believes to be the fair market rental value of the property. See Note 11
of the Notes to Financial Statements of Comvestrix.
Mr. Gary Marcello (either alone or with his wife) owns interests ranging
from 75% to 100% in the partnerships which own the four properties used by DMS
in Dover, New Jersey and Scranton, Pennsylvania and which lease such property to
DMS. The current leases expire at various times from 1998 through 2004. DMS'
related party rent expense for these properties for the fiscal years ended
December 31, 1994, 1995 and 1996 was $760,468, $639,768 and $777,112,
respectively. The current annual rent for all of these properties is $824,583
per year (inclusive of real estate taxes), which the Company believes to be the
fair market rental value of the property. The Company has entered into a lease
for alternative space to certain of the space currently utilized by DMS and
leased from Mr. Marcello. In connection with the move, the Company has agreed to
pay Mr. Marcello's partnerships 80% of the base rent in effect after
consummation of the Acquisitions (the "Reduced Rent") in exchange for early
termination of the existing leases. The Reduced Rent shall be further reduced by
the amount of rent to be paid under any new leases which may be entered into by
Mr. Marcello's partnerships with new tenants. The obligation to pay the Reduced
Rent will terminate on the earlier of the sale of any vacated property or two
years after payment of the Reduced Rent begins. See Note 7 of the Notes to
Combined Financial Statements of DMS.
Mr. James Horst and Mr. Frank Capozzi, the stockholders, officers and
directors of Image, own the property leased to and used by Image Printing in
Milwaukee, Wisconsin. Image's rent expense for this property is $120,000 per
year. Under the current lease, the lessor has the option to increase the rent by
the lesser of 4% per year or the percentage increase in the Consumer Price
Index. See Notes 3 and 8 of the Notes to Financial Statements of Image. Upon
consummation of the Acquisition of Image, the current lease was terminated and
replaced by a new lease agreement between Image, as lessee, and Mr. James Horst
and Mr. Frank Capozzi, as lessors. The new lease expires five years after the
consummation of the IPO, subject to an option to renew the lease for an
additional five years. The rent payable by Image under the new lease is $80,000
per year, triple net, which the Company believes is fair market rental.
Other
Gary Marcello and two other officers and shareholders of DMS previously
made loans to DMS in the form of demand notes bearing interest at a rate of 6.5%
per annum. Subsequent to the consummation of the IPO, the Company repaid such
loans, including $441,000 which was repaid to Gary Marcello, $685,000 which was
repaid to companies affiliated with Mr. Marcello and $62,000 and $115,000,
respectively, which were repaid to the two other officers. See Note 7 of the
Notes to Combined Financial Statements of DMS.
During 1996, EIS forgave a $100,000 note receivable from Steven R.
Bardwell, a stockholder and President of EIS. See Note 12 of the Notes to
Financial Statements of EIS.
Company Policy
In the future, transactions with affiliates of the Company are anticipated
to be minimal, will be required to be approved by the Fairness Committee of the
Board of Directors and by a majority of the full Board of Directors, and will be
made on terms no less favorable to the Company than those that could be obtained
from unaffiliated third parties.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, no par value (the "Common Stock"), and 10,000,000 shares of
undesignated stock, which may be issued from time to time by the Board of
Directors as shares of one or more classes or series of common stock or
preferred stock. As of October 15, 1997, the Company had outstanding 8,349,291
shares of Common Stock and 301 shares of Preferred Stock. In addition, the
Company had 810,000 shares of Common Stock reserved for issuance under the
Company's Stock Option Plan. See "Management--Stock Option Plan." As of October
15, 1997, there were 52 holders of record of Common Stock.
Common Stock
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors.
Subject to the rights of any then outstanding shares of Preferred Stock,
the holders of the Common Stock are entitled to such dividends as may be
declared at the discretion of the Board of Directors out of funds legally
available therefor. Holders of Common Stock are entitled to share ratably in the
net assets of the Company upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no pre-emptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be issued pursuant to this Prospectus will be upon payment therefor,
fully paid and nonassessable.
Undesignated Stock
The undesignated stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series of preferred stock or
common stock. Subject to the provisions of the Company's Certificate of
Incorporation and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, to fix the number
of shares and to change the number of shares constituting any series or class,
and to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of
preferred stock or common stock, in each case without any further action or vote
by the stockholders.
One share of Class B Preferred Stock was issued in connection with the
Acquisition of COS Information and has voting rights equal to the 239,988 shares
of Common Stock that the Company is obligated to issue upon conversion of the
Exchangeable Shares of Vestcom's Canadian subsidiary. (The number of outstanding
shares of Common Stock referred to above includes the 239,988 shares of Common
Stock issuable upon conversion of such Exchangeable Shares.) The voting rights
of the share of Class B Preferred Stock will increase if additional Exchangeable
Shares are issued based on COS Information's earnings before interest and taxes
for 1997. See "Certain Transactions--Organization of the Company--Canadian
Acquisition." An aggregate of 200 shares of Class A Convertible Preferred Stock
were issued in connection with the Acquisition of EIS, and are convertible into
up to 332,307 shares of Common Stock based on EIS' pre-tax earnings for the two
year period beginning on the first day of the fiscal quarter within which the
IPO was consummated. An aggregate of 100 shares of Class C Convertible Preferred
Stock were issued in connection with the Acquisition of Image, and are
convertible into up to 292,307 shares of Common Stock based on Image's pre-tax
earnings for the one year period beginning on the first day of the fiscal
quarter within which the IPO was consummated. (The number of outstanding shares
of Common Stock referred to above excludes an aggregate of 624,614 shares of
Common Stock issuable upon conversion of such shares of Preferred Stock.) See
"Certain Transactions."
One of the effects of undesignated stock may be to enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of the Company by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of the Company's management. The issuance
of shares of preferred stock or common stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, preferred stock or common stock issued by the Company
may rank prior to the Common Stock as to dividend rights, liquidation preference
or both, may have full or limited voting rights and may be convertible into
shares of Common Stock. Accordingly, the issuance of shares of such stock may
discourage bids for the Common Stock at a premium or may otherwise adversely
affect the market price of the Common Stock.
Statutory Business Combination Provisions
The New Jersey Business Corporation Act provides that in determining
whether a proposal or offer to acquire a corporation is in the best interest of
the corporation, the Board may, in addition to considering the effects of any
action on stockholders, consider any of the following: (a) the effects of the
proposed action on the corporation's employees, suppliers, creditors and
customers, (b) the effects on the community in which the corporation operates
and (c) the long-term as well as short-term interests of the corporation and its
stockholders, including the possibility that these interests may best be served
by the continued independence of the corporation. The statute further provides
that if, based on these factors, the Board determines that any such offer is not
in the best interest of the corporation, it may reject the offer. These
provisions may make it more difficult for a stockholder to challenge the Board's
rejection of, and may facilitate the Board's rejection of, an offer to acquire
the Company.
The Company is subject to the New Jersey Shareholders Protection Act (the
"Protection Act"), which prohibits certain New Jersey corporations from engaging
in business combinations (including mergers, consolidations, significant asset
dispositions and certain stock issuances) with any interested shareholder
(defined to include, among others, any person that becomes a beneficial owner of
10% or more of the affected corporation's voting power) for five years after
such person becomes an interested shareholder, unless the business combination
is approved by the Board of Directors prior to the date the shareholder became
an interested shareholder. In addition, the Protection Act prohibits any
business combination at any time with an interested shareholder other than a
transaction that (i) is approved by the Board of Directors prior to the date the
interested shareholder became an interested shareholder, or (ii) is approved by
the affirmative vote of the holders of two-thirds of the voting stock not
beneficially owned by the interested shareholder, or (iii) satisfies certain
"fair price" and related criteria.
Limitation of Directors' Liabilities
Pursuant to the provisions of the Company's Certificate of Incorporation,
directors of the Company are not personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or any transaction in which a director has derived an improper
personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of October 15, 1997, the Company had outstanding 8,349,291 shares of
Common Stock. The 4,427,500 shares of Common Stock sold in the IPO are freely
tradeable without restriction unless purchased by affiliates of the Company.
None of the remaining 3,921,791 outstanding shares of Common Stock
(collectively, the "Restricted Shares") have been issued in transactions
registered under the Securities Act, which means that they may be resold
publicly only in future transactions registered under the Securities Act, or in
compliance with an exemption from the registration requirements of the
Securities Act, including the exemption provided by Rule 144 thereunder.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of Common Stock from either the
Company or any affiliate of the Company, the acquiror or subsequent holder
thereof may sell, within any three-month period commencing 90 days after the
effective date of the Registration Statement pertaining to the Company's IPO, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock (approximately 81,000 currently) or the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Under Rule 144, if
two years have elapsed since the later of the date of the acquisition of
restricted shares of Common Stock from the Company or any affiliate of the
Company, a person who is not deemed to have been an "affiliate" of the Company
at any time during the 90 days preceding a sale would be entitled to sell such
shares under Rule 144(k) without regard to the limitations described above. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
The holders of 278,334 of the Restricted Shares issued or connected with
the Company's $1.5 million private placement (See "Certain
Transactions--Organization of the Company--Initial Capitalization") have certain
registration rights. During the period from the first anniversary of the
consummation of the IPO through the seventh anniversary of such consummation,
such holders will have one demand registration right, exercisable by the holders
of a majority of such 278,334 shares, pursuant to which the Company is required
to file a registration statement under the Securities Act to register the sale
of shares by those requesting stockholders and any other holders of Common Stock
with such registration rights who desire to sell pursuant to such registration
statement. The holders of such shares have agreed not to exercise such rights
until two years following the consummation of the IPO. In addition, subject to
certain conditions and limitations, the holders of such 278,334 shares also have
piggyback registration rights at any time prior to December 31, 2003, pursuant
to which they have the right to participate in registrations by the Company of
its equity securities. The Company will pay the registration fees and expenses
in connection with any requested registration, except that the stockholders
exercising such registration rights will pay any underwriting discounts and
commissions relating to the shares owned by them and included in any such
registration. The number of shares of Common Stock that must be registered on
behalf of these selling stockholders is subject to limitation if the managing
underwriter determines that market conditions require such a limitation. The
Company will indemnify the selling stockholders, and such stockholders will
indemnify the Company, against certain liabilities in respect of any
registration statement filed pursuant to the exercise of such registration
rights.
The Company, all of the former stockholders of the Founding Companies, the
stockholders of the Company immediately prior to the IPO and the officers and
directors of the Company have agreed for a period of 180 days from the
consummation of the IPO (the "Lockup Period") not to request or demand the
filing of a registration statement to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock (or any securities convertible into or
exercisable or exchangeable for Common Stock) or grant any options or warrants
to purchase any shares of Common Stock without the prior written consent of
Oppenheimer & Co., Inc., on behalf of the Underwriters of the Company's IPO,
except for (i) any such options granted, and any such shares of Common Stock
issuable upon any options granted, pursuant to the Stock Option Plan, (ii) the
filing by the Company of this shelf registration statement to register an
additional 2,000,000 shares of Common Stock with the Commission under the
Securities Act for use by the Company as consideration to be paid in future
mergers and acquisitions (and not for sales by selling stockholders of the
Company), (iii) the issuance of shares of Common Stock in connection with future
acquisitions and (iv) the filing by the Company of a Registration Statement on
Form S-8 to register the shares of Common Stock reserved for issuance under the
Stock Option Plan (which Registration Statement was filed in September 1997).
The former Founding Company shareholders have agreed in their respective
Acquisition agreements not to sell or transfer any of the 2,852,111 shares of
Vestcom Common Stock acquired in the Acquisitions for a period of two years
after the consummation of the IPO unless they obtain the prior written consent
of Vestcom. Any decision to grant such consent will be made by the directors of
Vestcom who are not Founding Company shareholders. While the Company does not
anticipate giving its consent to a transfer of such restricted shares prior to
two years from the consummation of the IPO, it would consider permitting such a
transfer in the event that the individual making the request demonstrated that
it would not have an adverse impact on the tax-free nature of the stock portion
of the Acquisitions, that it would not adversely affect Vestcom's rights to
indemnification under the Acquisition agreements and that it was otherwise in
the best interests of Vestcom. Oppenheimer & Co., Inc. and its affiliates have
agreed not to sell, transfer, pledge or hypothecate the 100,000 shares of Common
Stock which they acquired as part of the initial capitalization of Vestcom for a
period of two years after the consummation of the IPO.
The shares covered by this Registration Statement will generally be freely
tradeable after their issuance, unless the sale thereof is contractually
restricted or the shares are acquired by certain related parties, in which case
they may be sold pursuant to Rule 145 under the Securities Act. Rule 145
permits, in part, certain persons to resell immediately securities acquired in
transactions covered under the Rule, provided such securities are resold in
accordance with the public information requirements, volume limitations and
manner of sale requirements of Rule 144. Pursuant to Rule 145, if a period of
one year has elapsed since the date such securities were acquired in such
transaction and if the issuer meets the public information requirements of Rule
144, Rule 145 permits a person who is not an affiliate of the issuer to freely
resell such securities.
No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price of the
Common Stock prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect
prevailing market prices and the Company's ability to raise equity capital in
the future.
At October 15, 1997, the Company had outstanding under the Stock Option
Plan options to purchase an aggregate of 401,550 shares of Common Stock.
Generally, such options vest in 25% annual increments commencing one year after
the date of grant. The Company has registered the shares issuable upon exercise
of options granted under the Stock Option Plan and, accordingly, such shares are
eligible for resale in the public market. See "Management--Stock Option Plan."
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 2,000,000 shares of
Common Stock, which the Company may issue from time to time in connection with
future direct and indirect acquisitions of other businesses, properties or
securities in business combination transactions.
The Company expects that the terms on which it may issue the shares of
Common Stock covered hereby will be determined by direct negotiations with the
owners or controlling persons of the businesses or assets to be acquired and
that the shares of Common Stock issued will be valued at prices reasonably
related to market prices prevailing either at the time an acquisition agreement
is executed or at or about the time of delivery of shares.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A., Roseland, New
Jersey.
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Pro Forma Financial Statements
<S> <C>
Basis of Presentation.............................................................................F-4
Pro Forma Balance Sheet as of June 30, 1997 (unaudited)...........................................F-5
Pro Forma Statement of Operations for the Year Ended
December 31, 1996 (unaudited)...................................................................F-6
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1996 (unaudited).......................................................................F-7
Pro Forma Statement of Operations for the Six Months Ended
June 30, 1997 (unaudited).......................................................................F-8
Notes to Unaudited Pro Forma Combined Financial Statements .......................................F-9
Historical Financial Statements
Vestcom International, Inc.
Report of Independent Public Accountants..........................................................F-14
Balance Sheet--As of December 31, 1996............................................................F-15
Statement of Operations--For the Period from Inception
(September 19, 1996) to December 31, 1996.......................................................F-16
Statement of Stockholders' Equity--For the Period From
Inception (September 19, 1996) to December 31, 1996.............................................F-17
Statement of Cash Flows--For the Period From Inception
(September 19, 1996) to December 31, 1996.......................................................F-18
Notes to Financial Statements.....................................................................F-19
Condensed Balance Sheets--As of December 31, 1996 and
June 30, 1997 (unaudited).......................................................................F-23
Condensed Statement of Operations--For the Six Months
Ended June 30, 1997 (unaudited).................................................................F-24
Condensed Statement of Cash Flows--For the Six Months
Ended June 30, 1997 (unaudited).................................................................F-25
Notes to Condensed Financial Statements (unaudited)...............................................F-26
Comvestrix Corp.:
Report of Independent Public Accountants..........................................................F-29
Balance Sheets--As of December 31, 1995 and 1996..................................................F-30
Statements of Income--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-31
Statements of Stockholders' Equity--For the Years Ended
December 31, 1994, 1995 and 1996................................................................F-32
Statements of Cash Flows--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-33
Notes to Financial Statements.....................................................................F-34
Condensed Balance Sheets--As of December 31, 1996 and
June 30, 1997 (unaudited).......................................................................F-40
Condensed Statements of Income--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-41
Condensed Statements of Cash Flows--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-42
Notes to Condensed Financial Statements (unaudited)...............................................F-43
Morris County Direct Mail Services, Inc. and related companies:
Report of Independent Public Accountants..........................................................F-44
Combined Balance Sheets--As of December 31, 1995 and 1996.........................................F-45
Combined Statements of Income--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-46
Combined Statements of Stockholders' Equity--For the Years
Ended December 31, 1994, 1995 and 1996..........................................................F-47
Combined Statements of Cash Flows--For the Years Ended December
31, 1994, 1995 and 1996.........................................................................F-48
Notes to Combined Financial Statements............................................................F-49
Condensed Combined Balance Sheets--As of December 31, 1996
and June 30, 1997 (unaudited)...................................................................F-55
Condensed Combined Statements of Income--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-56
Condensed Combined Statements of Cash Flows--For the Six
Months Ended June 30, 1996 (unaudited) and 1997 (unaudited).....................................F-57
Notes to Condensed Combined Financial Statements (unaudited)......................................F-58
Lirpaco Inc. and Subsidiary:
Report of Independent Public Accountants..........................................................F-59
Consolidated Balance Sheets--As of July 31, 1995 and 1996 and
December 31, 1996...............................................................................F-60
Consolidated Statements of Income--For the Years Ended July 31,
1995 and 1996 and the Five Months Ended December 31, 1995
(Unaudited) and 1996............................................................................F-61
Consolidated Statements of Stockholders' Equity--For the Years
Ended July 31, 1995 and 1996 and the Five Months Ended
December 31, 1996...............................................................................F-62
Consolidated Statements of Cash Flows--For the Years Ended
July 31, 1995 and 1996 and the Five Months Ended December 31,
1995 (Unaudited) and 1996.......................................................................F-63
Notes to Consolidated Financial Statements........................................................F-64
Condensed Consolidated Balance Sheets--As of December 31, 1996
and June 30, 1997 (unaudited)...................................................................F-70
Condensed Consolidated Statements of Income--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-71
Condensed Consolidated Statements of Cash Flows--For the Six
Months Ended June 30, 1996 (unaudited) and 1997 (unaudited).....................................F-72
Notes to Condensed Consolidated Financial Statements (unaudited)..................................F-73
Computer Output Systems, Inc.:
Report of Independent Public Accountants..........................................................F-74
Balance Sheets--As of December 31, 1995 and 1996..................................................F-75
Statements of Income--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-76
Statements of Stockholders' Equity--For the Years Ended
December 31, 1994, 1995 and 1996................................................................F-77
Statements of Cash Flows--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-78
Notes to Financial Statements.....................................................................F-79
Condensed Balance Sheets--As of December 31, 1996 and
June 30, 1997 (unaudited).......................................................................F-84
Condensed Statements of Income--For the Six Months Ended
June 30, 1996 (unaudited) and 1997 (unaudited)..................................................F-85
Condensed Statements of Cash Flows--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-86
Notes to Condensed Financial Statements (unaudited)...............................................F-87
Electronic Imaging Services, Inc.:
Report of Independent Public Accountants..........................................................F-88
Balance Sheet--As of December 31, 1996............................................................F-89
Statement of Operations--For the Year Ended December 31, 1996.....................................F-90
Statement of Changes in Stockholders' Deficit--For the Year
Ended December 31, 1996.........................................................................F-91
Statement of Cash Flows--For the Year Ended December 31, 1996.....................................F-92
Notes to Financial Statements.....................................................................F-93
Condensed Balance Sheets--As of December 31, 1996 and
June 30, 1997 (unaudited).......................................................................F-98
Condensed Statements of Operations--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-99
Condensed Statements of Cash Flows--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-100
Notes to Condensed Financial Statements (unaudited)...............................................F-101
Image Printing Systems, Inc.:
Report of Independent Public Accountants..........................................................F-102
Balance Sheets--As of December 31, 1995 and 1996..................................................F-103
Statements of Operations--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-104
Statements of Stockholders' Equity--For the Years Ended
December 31, 1994, 1995 and 1996................................................................F-105
Statements of Cash Flows--For the Years Ended December 31,
1994, 1995 and 1996.............................................................................F-106
Notes to Financial Statements.....................................................................F-107
Condensed Balance Sheets--As of December 31, 1996 and
June 30, 1997 (unaudited).......................................................................F-112
Condensed Statements of Income--For the Six Months Ended
June 30, 1996 (unaudited) and 1997 (unaudited)..................................................F-113
Condensed Statements of Cash Flows--For the Six Months
Ended June 30, 1996 (unaudited) and 1997 (unaudited)............................................F-114
Notes to Condensed Financial Statements (unaudited)...............................................F-115
</TABLE>
<PAGE>
VESTCOM INTERNATIONAL, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(unaudited)
The following unaudited pro forma financial statements give effect to the
acquisitions by Vestcom International, Inc. ("Vestcom") of substantially all of
the net assets of Comvestrix Corp. ("Comvestrix"), Direct Mail Services ("DMS"),
Computer Output Systems, Inc. ("Computer Output"), COS Information Inc. ("COS
Information"), Electronic Imaging Services, Inc. ("EIS"), Image Printing
Systems, Inc. ("Image") and Mystic Graphic Systems, Inc. ("Mystic") (together,
the "Founding Companies"). Vestcom and the Founding Companies are hereinafter
referred to as the Company. These acquisitions (the "Acquisitions") occurred
concurrently with the closing of Vestcom's initial public offering (the
"Offering") and were accounted for using the purchase method of accounting.
Vestcom has been identified as the acquiror for financial statement presentation
purposes. The unaudited pro forma financial statements also give effect to the
issuance of Common Stock which was issued by Vestcom to the sellers of the
Founding Companies upon the consummation of the Offering. These statements are
based on the historical financial statements of the Founding Companies and the
estimates and assumptions set forth below and in the notes to the unaudited pro
forma financial statements.
In December 1996, Vestcom sold 503,846 shares of Common Stock to investors.
As a result, Vestcom recorded a non-recurring, non-cash charge (the "Charge") to
compensation and interest expense of $5.1 million in 1996, representing the
difference between the amount paid for the shares and the fair value of the
shares on the date of sale as estimated for accounting purposes. This Charge of
$5.1 million is not included in pro forma net income in the accompanying
unaudited pro forma financial statements.
The unaudited pro forma combined balance sheet gives effect to these
transactions (the Acquisitions and the Offering) as if they had occurred on June
30, 1997. The unaudited pro forma combined statements of operations give effect
to the transactions as if they had occurred at the beginning of the periods
presented.
In July 1996, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 97 ("SAB 97") relating to business combinations
immediately prior to an initial public offering. SAB 97 requires that these
combinations be accounted for using the purchase method of acquisition
accounting. Under the purchase method, one of the companies must be designated
as the accounting acquiror. For the remaining companies, $43.6 million,
representing the excess of the fair value of the consideration received over the
fair value of the net assets to be acquired, will be recorded as "goodwill" on
the Company's balance sheet. Goodwill will be amortized as a non-cash charge to
the income statement over a 30-year period. The pro forma impact of this
amortization expense, which is non-deductible for tax purposes, is $1.5 million
per year on an after-tax basis. See "Certain Transactions--Organization of the
Company."
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate.
Management has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries and certain benefits to the former shareholders of
the Founding Companies. To the extent the former shareholders of the Founding
Companies have agreed prospectively to reductions in salary, bonuses and
benefits, these reductions have been reflected in the pro forma statements of
operations. With respect to other potential cost savings, management has not and
cannot currently quantify these savings. It is anticipated that these savings
will be offset by costs related to the Company's new corporate management and by
the costs associated with being a public company. However, because these costs
cannot be accurately quantified at this time, they have not been included in the
pro forma financial information. The unaudited pro forma financial data
presented herein do not purport to represent what the Company's financial
position or results of operations would have actually been had such events
occurred at the beginning of the periods presented, as assumed, or to project
the Company's financial position or results of operations for any future period
or the future results of the Founding Companies. The unaudited pro forma
financial statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus. Also see
"Risk Factors" included elsewhere herein.
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC. AND FOUNDING
COMPANIES
PRO FORMA BALANCE SHEET
As of June 30, 1997
(unaudited)
<CAPTION>
Post Pro Forma
Founding Pro Forma Merger For
Vestcom Companies Total Adjustments Pro Forma Adjustments Offering
Current Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $238,376 $ 1,097,721 $1,336,097 -- $ 1,336,097 $ 21,547,631 $22,883,728
Accounts receivable, net -- 11,837,752 11,837,752 -- 11,837,752 -- 11,837,752
Due from related parties -- 799,291 799,291 $ (602,863) 196,428 -- 196,428
Postage receivable -- 656,374 656,374 -- 656,374 -- 656,374
Notes receivable -- 75,473 75,473 -- 75,473 -- 75,473
Supplies inventory -- 1,929,557 1,929,557 -+ -- 1,929,557 -- 1,929,557
Prepaid postage -- 1,325,592 1,325,592 -- 1,325,592 -- 1,325,592
Prepaid expenses and
other 914,947 914,947 -- 914,947 -- 914,947
------- -- -------- -- ---------
Total current assets 238,376 18,636,707 18,875,083 (602,863) 18,272,220 21,547,631 39,819,851
======= ========== =========== ========== ========== ========== ==========
Property and Equipment, net 16,560 19,029,224 19,045,784 -- 19,045,784 -- 19,045,784
Goodwill -- 284,222 284,222 44,320,428 44,604,650 -- 44,604,650
Other 2,149,194 496,426 2,645,620 2,645,620 (2,149,194) 496,426
--------- ---------- ---------- ---------- --------- ----------- -----------
Total assets $2,404,130 $38,446,579 $40,850,709 $ 43,717,565 $84,568,274 $ 19,398,437 $103,966,711
========= ========== ========== ========== ========== ========== ===========
Current Liabilities:
Short-term borrowings -- $ 1,614,154 $ 1,614,154 -- $ 1,614,154 $ (1,614,154) --
Current portion of long-
term debt and capital
lease obligations -- 4,244,874 4,244,874 -- 4,244,874 (3,118,945) 1,125,929
Due to related parties $ 1,292,732 906,746 2,199,478 $ (602,863) 1,596,615 (1,596,615) --
Accounts payable and
accrued expenses 1,092,363 7,899,214 8,991,577 1,900,000 10,891,577 (1,092,363) 9,799,214
Pro forma cash due
Founding Companies -- -- -- 18,432,403 18,432,403 (18,432,403) --
Postage advance -- 2,858,279 2,858,279 -- 2,858,279 -- 2,858,279
Deferred income taxes -- -- -- 1,854,512 1,854,512 -- 1,854,512
Other liabilities -- 466,330 466,330 -- 466,330 -- 466,330
--------- ---------- ----------- ----------- ----------- ------------ ----------
Total current liabilities 2,385,095 17,989,597 20,374,692 21,584,052 41,958,744 (25,854,480) 16,104,264
Long-Term Debt and Capital
Lease Obligations -- 10,679,250 10,679,250 -- 10,679,250 (5,275,558) 5,403,692
Pledged Stock -- 375,000 375,000 (375,000) -- -- --
Deferred Income taxes -- 218,158 218,158 -- 218,158 -- 218,158
Deferred Charges and
Other Liabilities -- 578,329 578,329 1,825,000 2,403,329 -- 2,403,329
---------- ----------- ----------- --------- ---------- ---------- ----------
Total liabilities 2,385,095 29,840,334 32,225,429 23,034,052 55,259,481 (31,130,038) 24,129,443
Stockholders Equity:
Common stock 5,481,501 44,206 5,525,707 26,593,685 32,119,392 50,528,475 82,647,867
Preferred stock -- 170,206 170,206 2,481,661 2,651,867 -- 2,651,867
Additional paid-in capital -- 1,272,299 1,272,299 (1,272,299) -- -- --
Subscriptions receivable -- (93,335) (93,335) 93,335 -- -- --
Retained earnings (5,462,466) 9,352,880 3,890,414 (9,352,880) (5,462,466) -- (5,462,466)
----------- --------- --------- ----------- ----------- ----------- -----------
19,035 10,746,256 10,765,291 18,543,502 29,308,793 50,528,475 79,837,268
Less-treasury stock -- (2,216,613) (2,216,613) 2,216,613 -- -- --
Cumulative translation
adjustments -- 76,602 76,602 (76,602) -- -- --
----------- ----------- --------- ----------- ----------- ----------- -------------
Total stockholders'
equity 19,035 8,606,245 8,625,280 20,683,513 29,308,793 50,528,475 79,837,268
---------- ----------- ---------- ---------- ---------- ------------ ----------
Total liabilities
and stockholder's
equity $2,404,130 $38,446,579 $40,850,709 $43,717,565 $84,568,274 $ 19,398,437 $103,966,711
========= ========== ========== ========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC. AND FOUNDING COMPANIES
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(unaudited)
<CAPTION>
Founding Pro Forma Pro Forma
Vestcom Companies Total Adjustments Combined
<S> <C> <C> <C> <C> <C>
Revenues -- $65,287,014 $65,287,014 -- $65,287,014
Cost of revenues -- 43,422,326 43,422,326 -- 43,422,326
--------------- ----------- ----------- ----------- -----------
Gross profit -- 21,864,688 21,864,688 -- 21,864,688
Selling, general
and
administrative
expenses $1,633,042 18,260,881 19,893,923 $(4,377,545)(e) 15,516,378
Goodwill amortization -- -- -- 1,486,822(f) 1,486,822
---------- ---------- ---------- ------------- ----------
Income (loss) from
operations (1,633,042) 3,603,807 1,970,765 2,890,723 4,861,488
Other income (expense):
Interest expense (3,444,917) (895,218) (4,340,135) 4,340,135(g) --
Interest and other
income -- 190,339 190,339 -- 190,339
---------------- ----------- ----------- ----------- ----------
Income before
provision for
income taxes (5,077,959) 2,898,928 (2,179,031) 7,230,858 5,051,827
Provision for income
taxes -- 162,339 162,339 2,453,121(h) 2,615,460
--------------- ----------- ----------- ----------- ----------
Net income (5,077,959) 2,736,589 (2,341,370) 4,777,737 2,436,367
========== =========== =========== =========== ==========
Net income per share (j) $ .29
============
Weighted average
shares used in
computing pro
forma net income
per share (j) 8,349,631
See accompanying notes to unaudited pro forma financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND FOUNDING COMPANIES
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996
(unaudited)
Founding Pro Forma Pro Forma
Vestcom Companies Adjustments Combined
<S> <C> <C> <C> <C>
Revenues -- 32,318,506 -- $ 32,318,506
Cost of revenues -- 20,855,581 20,855,581
------- ---------- -------- ----------
Gross profit -- 11,462,925 -- 11,462,925
Selling general and
administrative expenses -- 8,778,761 (1,155,651) 7,623,110
Goodwill amortization -- -- 743,411 743,411
------- --------- --------- ----------
Income (loss) from operations -- 2,684,164 412,240 3,096,404
Other income (expense):
Interest expense -- (404,359) 404,359(g) --
Interest and other income -- 83,673 -- 83,673
------- --------- --------- ----------
Income before provision
for income taxes -- 2,363,478 816,599 3,180,077
Provision for income taxes -- 122,347 1,447,048(h) 1,569,395
-------- ------------ ------------ ---------
Net income -- 2,241,131 (630,449) $1,610,682
====== === ========= ========= =========
Net income per share (j) $ .19
===============
Weighted average shares used
in computing pro forma net
income per share (j) 8,349,631
</TABLE>
See accompanying notes to unaudited pro forma financial statements
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC. AND FOUNDING COMPANIES
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(unaudited)
<CAPTION>
Founding Pro Forma Pro Forma
Vestcom Companies Total Adjustments Combined
<S> <C> <C> <C> <C> <C>
Revenues -- $36,486,717 $36,486,717 $(423,013)(i) $36,063,704
Cost of revenues -- 23,291,662 23,291,662 (423,013)(i) 22,868,649
-------- ----------- ----------- --------- ----------
Gross profit -- 13,195,055 13,195,055 -- 13,195,055
Selling, general and
administrative
expenses $ 346,691 9,063,685 9,410,376 (1,155,651)(e) 8,254,725
Goodwill amortization -- -- -- 743,411(f) 743,411
-------- ----------- ----------- --------- -------
Income (loss) from
operations (346,691) 4,131,370 3,784,679 412,240 4,196,919
Other income (expense):
Interest expense (54,694) (846,690) (901,384) 901,384(g) -
Interest and other
income 16,878 20,048 36,926 -- 36,926
-------- ----------- ------------ ------------ -----------
Income before provision
for income taxes (384,507) 3,304,728 2,920,221 1,313,624 4,233,845
Provision for income
taxes -- 201,184 201,184 1,789,719(h) 1,990,903
----------- ------------ ------------ ----------- ---------
Net income $ (384,507) $ 3,103,544 $ 2,719,037 $ (476,095) $2,242,942
======== ========== ========== ========== ==========
Net income per share (j) $ .27
============
Weighted average shares
used in computing
pro forma net
income per share (j) 8,349,631
See accompanying notes to unaudited pro forma financial statements
</TABLE>
<PAGE>
VESTCOM INTERNATIONAL, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(unaudited)
1. VESTCOM INTERNATIONAL, INC. BACKGROUND:
Vestcom International, Inc. (Vestcom) was incorporated to create an
international provider of computer output and document management services.
Prior to the consummation of the Offering, Vestcom conducted no operations.
Vestcom acquired the Founding Companies concurrently with the consummation of
the Offering.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective financial statements where indicated. All Founding Companies have a
December 31 year-end or they have been converted to a December 31 year-end. The
historical financial statements have been included in accordance with Securities
and Exchange Commission (SEC) Staff Accounting Bulletin No. 80.
3. ACQUISITION OF FOUNDING COMPANIES:
Concurrent with the consummation of the Offering, Vestcom acquired
substantially all of the net assets of the Founding Companies. All of the
acquisitions of the Founding Companies were accounted for using the purchase
method of accounting, with Vestcom being treated as the accounting acquiror for
financial statement purposes.
The following table sets forth for each Founding Company the consideration
paid its common stockholders in (i) cash and (ii) shares of Common Stock. For
purposes of computing the estimated purchase price for accounting purposes, the
value of the shares is determined using an estimated fair value of $11.05 per
share (or $31.5 million), which represents a discount of fifteen percent from
the initial public offering price of $13 due to restrictions on the sale and
transferability of the shares issued. In the event that the utilization of such
a fifteen percent discount, as compared with a ten percent discount, would be
material to Vestcom's financial statements in the future, Vestcom would utilize
a ten percent discount in the preparation of its financial statements at such
time and may be required to restate certain of its financial statements to
reflect a ten percent discount. Any such change from a fifteen percent to a ten
percent discount in the future would result in an increase in the amount of
goodwill and annual goodwill amortization, which would have a comparable
negative impact on net income. Based on Vestcom's Pro Forma Statement of
Operations for the year ended December 31, 1996, a change from a fifteen percent
to a ten percent discount would result in an increase in annual goodwill
amortization of $90,000.
Shares of
Founding Company Common Stock(1) Cash
(In thousands)
Computer Output(2) 297,028 $1,592
Comvestrix 943,643 4,780
COS Information(3) 239,988 1,036
DMS 1,049,760 5,307
EIS(4) 114,000 1,018
Image(5) 76,923 3,000
Mystic 130,769 1,700
(1) Does not include 730,689, 27,436 and 13,718 shares issued to all of the
stockholders of Comvestrix, one stockholder of DMS and one stockholder of
COS Information, respectively, in connection with the initial
capitalization of Vestcom.
(2) An additional earn-out of up to $1,500,000 may be paid, $420,012 of which
would be paid in cash and the remainder of which would be paid in Common
Stock (83,076 shares), depending on Computer Output's calendar 1997
revenues and net income before interest and taxes ("EBIT"), except for
interest on any capital equipment purchases made after the beginning of the
earn-out period.
(3) The stockholders of Lirpaco Inc. (COS Information's parent) received
239,988 shares of a Canadian subsidiary of Vestcom, which are exchangeable
into 239,988 shares of Vestcom Common Stock. The cash payment in the chart
is presented in U.S. dollars. An additional earn-out of up to $2.1 million
Canadian dollars may be paid, all of which would be payable in shares of
Vestcom's Canadian subsidiary valued at $13.00 per share. Such shares would
be exchangeable into up to 137,307 shares of Common Stock (assuming a
maximum .85 Canadian dollar conversion rate), depending on COS
Information's calendar 1997 EBIT, except for interest on any capital
equipment purchases made after the beginning of the earn-out period. See
"Canadian Acquisition."
(4) An additional earn-out of up to $6,000,000 may be paid, $1,680,009 of which
would be paid in cash and the remainder of which would be paid in stock.
Upon the consummation of the Acquisitions, Vestcom delivered shares of a
class of the Company's Preferred Stock which are convertible into up to
332,307 shares of Common Stock. The amount of cash and the conversion ratio
are based on EIS' EBIT, except for interest on any capital equipment
purchases made after the beginning of the earn-out period, for the two year
period beginning on the first day of the fiscal quarter within which the
Offering was consummated.
(5) An additional earn-out of up to $4,499,997 may be paid, $700,007 of which
would be paid in cash and the remainder of which would be paid in stock.
Upon consummation of the Acquisitions, Vestcom delivered shares of a class
of the Company's Preferred Stock which are convertible into up to 292,307
shares of Common Stock. The amount of cash and the conversion ratio are
based on Image's EBIT, except for interest on any capital equipment
purchases made after the beginning of the earn-out period, for the one year
period beginning on the first day of the fiscal quarter within which the
Offering was consummated.
The estimated purchase price for the Acquisitions is subject to certain
purchase price adjustments at and following consummation. See "Certain
Transactions".
Of the estimated total purchase price of $47.5 million (based on the fair
value of the cash and the shares to be issued, net of the $2.4 million cash
distribution to the shareholders of certain subchapter S Founding Companies
representing their AAA accounts) in the Acquisitions, $3.9 million has been
allocated to the assets acquired and liabilities assumed. See "Certain
Transactions".
Based upon management's analysis, it is anticipated that the historical
carrying value of the Founding Companies' assets and liabilities will
approximate fair value. The amount allocated to goodwill is $43.6 million.
Management has not identified any other material tangible or identifiable
intangible assets of the Founding Companies to which a portion of the purchase
price could reasonably be allocated.
<PAGE>
4. UNAUDITED PRO FORMA BALANCE SHEET ADJUSTMENTS:
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
Post- Post- Post- Post-
Pro Forma Merger Merger Merger Merger
Adjustment Adjustment Adjustment Adjustment Adjustments
(a) (b) (c) (d) (Total)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents -- 51,585,306 (11,605,272) (18,432,403) 21,547,631
Due from related parties (602,863) -- -- -- --
Goodwill 44,320,428 -- -- -- --
Other assets -- (2,149,194) -- -- (2,149,194)
Short-term borrowings -- -- 1,614,154 -- 1,614,154
Current portion of long-term
debt and capital lease
obligations -- -- 3,118,945 -- 3,118,945
Due to related parties 602,863 -- 1,596,615 -- 1,596,615
Pro forma cash due Founding
Companies (18,432,403) -- -- 18,432,403 18,432,403
Accounts payable and
accrued expenses (1,900,000) 1,092,363 -- -- 1,092,363
Deferred income taxes (1,854,512) -- -- -- --
Long-term debt and
capital lease obligations -- -- 5,275,558 -- 5,275,558
Pledged stock 375,000
Other liabilities (1,825,000) -- -- -- --
Common stock (26,593,685) (50,528,475) (50,528,475)
Preferred stock (2,481,661) -- -- -- --
Additional paid-in capital 1,272,299 -- -- -- --
Subscriptions receivable (93,335) -- --
Retained earnings 9,352,880 -- -- -- --
Treasury stock (2,216,613) -- -- -- --
Cumulative translation
adjustments 76,602 -- -- -- --
------------- ------------ ---------- ------------ -----------
0 0 0 0 0
================ ============ ========== ============ ===========
</TABLE>
(a) Records the purchase of the Founding Companies, including the
elimination of inter-company balances, and the estimated S Corporation
distributions of $1.0 million and the accrual of advisory fees payable
to Oppenheimer & Co., Inc.
Other liabilities have been provided for the termination of the DMS
leases pursuant to the contractual terms of the Acquisition of DMS.
Common Stock includes the stock to be issued to the Founding Companies
and elimination of the original common stock of the Founding Companies.
Preferred Stock includes the stock to be issued to Lirpaco (239,988
shares at $11.05 per share) and elimination of the original preferred
stock on Lirpaco's books.
(b) Records the proceeds from the issuance of 4,427,500 shares of Vestcom
Common Stock (including 577,500 shares which were issued upon exercise
of the Underwriters' over-allotment option), net of underwriting
discounts of $4.0 million and estimated offering costs of $4.3 million.
Offering costs primarily consist of accounting fees, legal fees and
printing expenses.
(c) Records the repayment of all debt, including related party debt,
and certain capital lease obligations with proceeds from the Offering.
(d) Records the cash portion to be paid to the Founding Companies in
connection with the Acquisitions.
5. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS:
(e) Adjusts compensation to the level the owners of certain of the Founding
Companies have agreed to receive subsequent to the Acquisitions.
Amounts include:
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
December 31, 1996 Historical Contractual Adjustment
----------------- ---------- ----------- ----------
<S> <C> <C> <C>
Salaries $4,283,932 $2,206,188(i) $2,077,744
Perks 185,700 -- 185,700
Rent adjustments 963,223 683,612(ii) 279,611
Life insurance 101,448 -- 101,448
Forgiveness of debt 100,000 -- 100,000
Consideration lower than initial
public offering price for shares
issued in December 1996(iii) 1,633,042 -- 1,633,042
---------- ---------- ----------
$7,267,345 $2,889,800 $4,377,545
========== ========== ==========
Pro Forma
June 30, 1996 Historical Contractual Adjustment
------------- ---------- ----------- ----------
Salaries $1,975,365 $1,103,094(i) $872,271
Perks 92,850 -- 92,850
Rent adjustments 481,612 341,806(ii) 139,806
Life insurance 50,724 -- 50,724
---------- ---------- ---------
$2,600,551 $1,444,900 $1,155,651
========== ========== ==========
Pro Forma
June 30, 1997 Historical Contractual Adjustment
------------- ---------- ----------- ----------
Salaries $ 1,975,365 $ 1,103,094(i) $ 872,271
Perks 92,850 -- 92,850
Rent adjustments 481,612 341,806(ii) 139,806
Life insurance 50,724 -- 50,724
---------- --------- ----------
$2,600,551 $1,444,900 $ 1,155,651
========== ========== ===========
</TABLE>
(i) Amounts to be paid as salaries to Founding Company
shareholders pursuant to employment agreements to be executed
at the closing of the Acquisitions of the Founding Companies.
(ii) Amounts to be paid pursuant to amended leases to be executed
at the closing of the Acquisitions between entities controlled
by Founding Company shareholders and the Company.
(iii) Reflects the reduction in compensation expense related to the
non-recurring non-cash Charge recorded by Vestcom related to
Common Stock issued to management and consultants of the
Company. The issuances of Common Stock were made in
contemplation of the Consolidation and no future issuances of
this nature are anticipated.
(f) Records pro forma goodwill amortization expense using a 30-year estimated
life.
(g) Records the decrease in interest expense based on pro forma adjustments to
debt and capital leases, including a $3.4 million reduction related to the
non-recurring, non-cash charge recorded by Vestcom for the Common Stock
issued in December 1996.
(h) Records the incremental provisions for federal and state income taxes
relating to the compensation differential and other pro forma adjustments
as well as the conversion from an S-Corp to a C-Corp of Comvestrix, DMS,
Image, Computer Output, and Mystic.
(i) Eliminates inter-company sales.
<PAGE>
(j) Upon completion of the Offering, the number of shares to be used in
computing pro forma income per share from continuing operations consists of
(i) 1,069,680 shares issued to the initial investors in Vestcom, (ii)
2,852,111 shares issued as consideration in the Acquisitions (including
239,988 shares which may be issued upon the conversion of an equal number
of shares of Vestcom's Canadian subsidiary issued in connection with the
Acquisition of a Founding Company located in Canada), (iii) the 4,427,500
Shares sold in Vestcom's initial public offering (including 577,500 shares
issued upon exercise of the underwriters' over-allotment option), and (iv)
340 shares assumed to have been issued for consideration lower than the
initial public offering price. Such number excludes (y) 810,000 shares of
Common Stock reserved for issuance under the Company's 1997 Equity
Compensation Program (the "Stock Option Plan") and (z) up to an aggregate
of 844,997 additional shares which may be issued in connection with the
Acquisitions of four Founding Companies pursuant to certain earn-out
provisions if specified revenue and earnings thresholds are achieved.
Shares issued to initial investors 1,069,680
Shares issued in initial public offering
(including over-allotment) 4,427,500
Shares issued to acquire Founding Companies 2,852,111
Shares assumed to have been issued for consideration
lower than the initial public offering price,
as per SAB No. 83 340
----------
Shares estimated to be outstanding 8,349,631
===========
6. STOCKHOLDERS' EQUITY
Total stockholders' equity reconciles to pro forma stockholders' equity
as follows:
Total stockholders' equity $ 8,625,280
Acquisition of Founding Companies 31,089,758
Less: Founding Companies' equity (8,606,245)
Less: Organization costs (1,800,000)
-----------
Pro forma stockholders' equity before Offering $29,308,793
============
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vestcom International, Inc.:
We have audited the accompanying balance sheet of Vestcom International,
Inc. (a New Jersey corporation), as of December 31, 1996, and the related
statements of operations, stockholders' equity and cash flows from inception
(September 19, 1996) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vestcom International, Inc.
as of December 31, 1996 and the results of its operations and its cash flows
from inception (September 19, 1996) through December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey February 25, 1997
(except with respect to Note 3 as to
which the date is March 17, 1997)
<PAGE>
VESTCOM INTERNATIONAL, INC.
BALANCE SHEET
As of December 31, 1996
ASSETS
CASH AND CASH EQUIVALENTS, (including
restricted cash of $850,000) $ 1,344,758
DEFERRED OFFERING COSTS 392,664
-----------
Total assets $ 1,737,422
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable to related parties $ 1,292,732
Accrued expenses 320,230
-----------
Total liabilities 1,612,962
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; 20,000,000 shares authorized;
1,295,192 shares issued and outstanding 5,481,501
Preferred stock, no par value; 3,000,000 shares authorized;
no shares issued or outstanding --
Subscriptions receivable (279,082)
Accumulated deficit (5,077,959)
-----------
Total stockholders' equity 124,460
-----------
Total liabilities and stockholders' equity $ 1,737,422
===========
The accompanying notes to financial statements
are an integral part of this balance sheet.
<PAGE>
VESTCOM INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
For the Period from Inception (September 19, 1996) to December 31, 1996
REVENUES $ --
COST OF REVENUES --
---------
Gross profit --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,633,042
----------
Loss from operations (1,633,042)
OTHER EXPENSES--Interest expense 3,444,917
-----------
Net loss $(5,077,959)
============
The accompanying notes to financial statements
are an integral part of this statement.
<PAGE>
VESTCOM INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Period from Inception (September 19, 1996) to December 31, 1996
<TABLE>
<CAPTION>
Total
Common Stock Subscriptions Accumulated Stockholders'
Shares Amount Receivable Deficit Equity
BALANCE AT
<S> <C> <C> <C> <C> <C>
SEPTEMBER 19, 1996 -- $ -- $ -- $ -- $ --
Issuance of
common stock 791,346 39,965 -- -- 39,965
Issuance of
common stock 503,846 5,441,536 (279,082) -- 5,162,454
Net loss -- -- -- (5,077,959) (5,077,959)
-------------- --------------- -------------- ----------- -----------
BALANCE AT
DECEMBER 31,
1996 1,295,192 $5,481,501 $(279,082) $(5,077,959) $ 124,460
========= ========== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are
an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
For the Period from Inception (September 19, 1996) to December 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $(5,077,959)
Adjustments to reconcile net income to net cash used in
operating activities--
Discount on issuance of stock 5,074,233
Changes in operating assets (increase) decrease in--
Deferred offering costs (392,664)
Changes in operating liabilities increase (decrease) in--
Accrued expenses 320,230
--------
Net cash used in operating activities (76,160)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,292,732
Sale of common stock 128,186
---------
Net cash provided by financing activities 1,420,918
---------
Net increase in cash and cash equivalents 1,344,758
CASH AND CASH EQUIVALENTS, beginning of period --
------------
CASH AND CASH EQUIVALENTS, end of period $ 1,344,758
============
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
<PAGE>
VESTCOM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
Vestcom International, Inc. (a New Jersey corporation) ("Vestcom" or the
"Company"), was formed in September 1996 to create an international provider of
computer output and document management services. The Company's primary strategy
is to consolidate similar and complementary companies in the highly fragmented
computer output and document management services industry through acquisitions.
Vestcom intends to acquire seven companies (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock and, subsequent
to the Offering, continue to acquire, through merger or purchase, similar
companies to expand its operations. In March 1997, Vestcom filed a registration
statement on Form S-1 for the initial public offering of its common stock.
Vestcom's primary assets at December 31, 1996, are cash, receivables and
deferred offering costs. Vestcom has not conducted any operations, and all
activities to date have related to the Acquisitions and the Offering. Cash was
generated from related parties for the initial capitalization of the Company
(see Note 4). There is no assurance that the Acquisitions discussed above will
be completed and that Vestcom will be able to generate future operating
revenues. Funding for the deferred offering costs has been provided by the
parties described in Note 4. Vestcom is dependent upon the Offering to fund the
amounts due to such parties, the pending acquisitions and future operations.
(2) Summary of Significant Accounting Policies
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 amount 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Restricted
cash of $850,000 is held in escrow at December 31, 1996 and may only be used to
pay expenses associated with the formation of the Company, the Acquisitions, and
the Offering.
Deferred Offering Costs
The Company has deferred all costs of raising capital. These costs will be
offset against the capital generated by the Offering.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefits have been recorded for current year losses.
New Accounting Pronouncements
Effective September 19, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
As of September 19, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but does
not require, a fair value-based method of accounting for employee stock option
plans which results in compensation expense recognition when stock options are
granted. As permitted by SFAS No. 123, the Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated financial statements.
(3) Notes Payable
On September 19, 1996, the Company issued Promissory Notes to related
parties in the aggregate amount of $160,035. The principal and interest are due
on the earlier of the Offering, or June 30, 1997. On December 31, 1996, the
Company issued Senior Notes to related parties in the aggregate amount of
$1,132,697. The principal and interest are due and payable on the earlier of the
Offering, or June 30, 1997. All notes bear interest at a rate equal to the
fluctuating interest rate announced by a certain bank as its prime rate (8% at
December 31, 1996). The Senior Notes include notes payable to Oppenheimer & Co.,
Inc. ("Oppenheimer"), Opco Senior Executive Partnership, L.P. ("OSEP") (an
Oppenheimer affiliate), Richard D. White (a managing director of Oppenheimer who
will become a director of Vestcom upon consummation of the Offering), Comvestrix
Corp. ("Comvestrix") (one of the Founding Companies), an entity controlled by
Gary J. Marcello (president of a Founding Company), and Mr. Howard April
(president of a Founding Company) in the principal amounts of $432,495.53,
$108,123.88, $72,082.59, $399,996.26, $79,999.16 and $39,999.58, respectively.
In the event the Company is unable to pay the notes in full when due, the
noteholders have agreed to extend the due date of the notes to the earlier of
the Offering or December 31, 1998. In addition, to the extent the Company's net
assets are inadequate to satisfy the notes in full at December 31, 1998, the
noteholders have agreed not to take any action to collect on such notes.
(4) Initial Capitalization
The Company was initially capitalized with $1.7 million, $200,000 of which
was funded in September 1996 and the remaining $1.5 million of which was funded
in December 1996. The $200,000 was comprised of $160,035 of promissory notes
provided by Comvestrix and Peter J. McLaughlin (Executive Vice President of
Vestcom) and $39,965 of equity, represented by 791,346 shares of common stock,
provided by the stockholders of Comvestrix and Mr. McLaughlin. The 791,346
shares include 512,446 shares which were issued to Joel Cartun (President, Chief
Executive Officer and a director of Vestcom and Comvestrix), 11,127 shares which
were issued to Leslie M. Abcug (Vice President--Finance and Administration of
Vestcom and Comvestrix) and 197,837 shares which were issued to Mr. McLaughlin.
The $1.5 million was raised in a private placement of stock and notes to
Oppenheimer, OSEP, Mr. White, Comvestrix, the stockholders of Comvestrix
(including Mr. Cartun and Mr. Abcug), Mr. Marcello's company and Mr. April's
company. Mr. Marcello and Mr. April will become directors of Vestcom upon the
consummation of the Offering.
The $1.5 million was comprised of 503,846 shares of common stock of
Vestcom, and notes in the aggregate principal amount of $1,132,697. Shares
issued included 229,773, 57,443, 38,296, 118,444, 27,436, 13,718 and 2,572
shares of Common Stock to Oppenheimer, OSEP, Mr. White, Mr. Cartun, Mr.
Marcello's entity, Mr. April and Mr. Abcug, respectively. In connection with the
sale of the 503,846 shares of common stock, the Company recorded a
non-recurring, non-cash charge to compensation and interest expense of $5.1
million, representing the difference between the amount paid for the shares and
the estimated fair value of the shares at the date of sale.
(5) Related Party Transaction
The Company has signed a definitive agreement to acquire Comvestrix, a
related company through common ownership, to be effective with the Offering.
Comvestrix will be acquired for a total consideration consisting of 943,643
shares of common stock and approximately $4.8 million in cash which will be paid
out of the net proceeds of the Offering.
Mr. McLaughlin received $74,400 from Vestcom in 1997 for consulting
services rendered to Vestcom during 1996, which is included in deferred offering
costs in the accompanying balance sheet. In addition, upon the consummation of
the Offering, Vestcom has agreed to pay McLaughlin & Tonra, a partnership in
which Mr. McLaughlin held a 50% interest, the sum of $75,000 in payment of
consulting services rendered by that firm in connection with the Acquisitions
and the Offering.
(6) Events Subsequent to Date of Report of Independent Public Accountants
(unaudited)
Merger Agreements
Vestcom and separate wholly-owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the Founding Companies) to be
effective with the Offering. The Founding Companies are Comvestrix Corp., Morris
County Direct Mail Services, Inc. and related companies, Computer Output
Systems, Inc., Electronic Imaging Services, Inc., Image Printing Systems Inc.,
Lirpaco and subsidiary and Mystic Graphic Systems, Inc. The aggregate
consideration that was required to be paid by Vestcom to acquire the Founding
Companies is, subject to working capital adjustments and earnouts, approximately
$18.4 million in cash and 2,852,111 shares of Vestcom common stock.
Credit Facility
In March 1997, the Company received a commitment letter from a bank
providing for a $30 million bank credit facility to be used for acquisitions,
working capital and other corporate purposes. This credit facility is contingent
upon the Offering occurring.
Acquisition and Offering Costs
Subsequent to December 31, 1996, the Company has incurred additional costs,
including professional fees and travel, associated with the acquisition of the
Founding Companies and the Offering. Accordingly, accrued liabilities have
increased to approximately $1.2 million as of February 28, 1997.
Stock Option Plan
In March 1997, the Company approved the 1997 Equity Compensation Program
(the "Stock Option Plan") which provides for the granting or awarding of stock
options and stock appreciation rights to nonemployee directors, officers and
other key employees and consultants (including officers of the Founding
Companies). The number of shares authorized and reserved for issuance under the
Plan is limited to the greater of 700,000 shares or 10 percent of the number of
shares of common stock outstanding. In general, the terms of the option awards
(including vesting schedules) will be established by the Company's Board of
Directors or a Compensation Committee.
The Stock Option Plan also provides for automatic option grants to
directors who are not otherwise employed by Vestcom or its subsidiaries. Upon
commencement of service, a nonemployee director will receive a nonqualified
option to purchase 10,000 shares of common stock, and continuing nonemployee
directors will receive annual options to purchase 5,000 shares of common stock.
Options granted to nonemployee directors become fully exercisable one year after
the date of grant. Nonemployee directors' options have a term of ten years from
the date of grant.
Upon consummation of the Acquisitions and the Offering, options covering an
aggregate of 286,550 shares of common stock will be outstanding under the Stock
Option Plan, including (i) options to purchase 10,000 shares of common stock
which will have been granted to each of Mr. White, Fred S. Lafer, Stephen R.
Bova and Leonard J. Fassler, (ii) options to purchase 15,000 shares of common
stock which will have been granted to Mr. April and (iii) options to purchase an
additional 231,550 shares of common stock which will have been granted to other
employees of Vestcom and its subsidiaries. All of these options will expire ten
years after the date of grant (except for Mr. April's options, which will expire
on January 2, 2001) and have an exercise price, subject to adjustment, equal to
the initial public offering price of the Common Stock in the Offering. Such
options will be exercisable annually in 25% increments beginning with the first
anniversary of the date of grant, except for the options granted to Messrs.
White, April, Lafer, Bova and Fassler, which become fully exercisable one year
after the date of grant.
Employment Agreements
Mr. Cartun and Mr. McLaughlin have each entered into an employment
agreement with the Company. Mr. Cartun's will commence on the consummation of
the Offering and the Acquisitions and Mr. McLaughlin's agreement commenced on
March 1, 1997. Both agreements will continue for a term of three years following
the consummation of the Offering. Pursuant to their respective agreements, Mr.
Cartun will serve as President and Chief Executive Officer of the Company at an
annual base salary of $200,000 and Mr. McLaughlin will serve as Executive Vice
President of the Company at an annual base salary of $144,000.
Each of the employment agreements provides that, in the event of a
termination of employment by the Company without cause, such employee will be
entitled to receive from the Company an amount in cash equal to the employee's
then current annual base salary for the remainder of the term.
Undesignated Stock
In March, 1997, the Company filed a restated Certificate of Incorporation,
to eliminate the Preferred Stock and create a class of 10,000,000 shares of
Undesignated Stock.
New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". This statement supersedes APB Opinion No. 15,
"Earnings per Share" and simplifies the computation of earnings per share
("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted- average number of common shares outstanding for
the period. Fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects
the potential dilution if certain securities are converted. SFAS No. 128
requires dual presentation of basic and diluted EPS by entities that issue any
securities other than ordinary common stock. SFAS No. 128 will be effective for
financial statements for both interim and annual periods ending after December
15, 1997, and requires retroactive restatement of all EPS data presented. The
Company plans to adopt the statement on December 31, 1997. The Company does not
expect the effect of adopting SFAS No. 128 to have a material impact on its EPS
calculations, and, if adopted currently, SFAS No. 128 would not have a material
impact on the Company's reported EPS.
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC.
<CAPTION>
CONDENSED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
Historical Pro Forma
December 31, June 30, June 30,
1996 1997 1997
---- ---- ----
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,344,758 $ 238,376 $ 238,376
PROPERTY AND EQUIPMENT, net -- 16,560 16,560
DEFERRED OFFERING COSTS 392,664 2,149,194 2,149,194
----------- ----------- -----------
Total assets $ 1,737,422 $ 2,404,130 $ 2,404,130
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable to related parties $ 1,292,732 $ 1,292,732 $ 1,292,732
Pro forma cash due to Founding Companies -- -- 18,432,403
Accrued expenses 320,230 1,092,363 1,092,363
------------ --------- -------------
Total liabilities 1,612,962 2,385,095 20,817,498
---------- --------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 5,481,501 5,481,501 5,481,501
Pro forma distributions to
Founding Companies -- -- (18,432,403)
Subscriptions receivable (279,082) -- --
Accumulated deficit (5,077,959) (5,462,466) (5,462,466)
------------ ----------- -----------
Total stockholders' equity 124,460 19,035 (18,413,368)
------------ ------------- -----------
Total liabilities and
stockholders' equity $1,737,422 $ 2,404,130 $2,404,130
========== =========== ==========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these balance sheets
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC.
CONDENSED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
<S> <C>
REVENUES $ --
COST OF REVENUES --
-------
Gross profit --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 346,691
--------
Loss from operations (346,691)
OTHER INCOME (EXPENSE)
Interest expense (54,694)
Interest and other income 16,878
--------
Net loss $(384,507)
==========
The accompanying notes to condensed financial
statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC.
CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1997
1997
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (384,507)
Adjustments to reconcile net income to
net cash used in operating activities--
Depreciation and amortization 878
Changes in operating assets (increase) decrease in--
Deferred offering costs (1,756,530)
Changes in operating liabilities increase (decrease) in--
Accrued expenses 772,133
----------
Net cash used in operating activities (1,368,026)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (17,438)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection of subscriptions receivable 279,082
-----------
Net cash provided by financing activities 279,082
-----------
Net decrease in cash and cash equivalents (1,106,382)
CASH AND CASH EQUIVALENTS, beginning of period 1,344,758
-----------
CASH AND CASH EQUIVALENTS, end of period $ 238,376
===========
</TABLE>
The accompanying notes to condensed financial statements are
an integral part of these statements.
<PAGE>
VESTCOM INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto for the period ended December 31, 1996, included elsewhere in this
Registration Statement.
The pro forma balance sheet as of June 30, 1997, reflects a distribution of
the cash consideration of $18,423,390 to be received by the Founding Company
stockholders in connection with the Acquisitions (as defined below). The cash
consideration of $18,423,390 is to be funded from the proceeds of the Offering
discussed below.
(2) Nature of Business
Vestcom International, Inc. (a New Jersey corporation) ("Vestcom" or the
"Company"), was formed in September 1996 to create an international provider of
computer output and document management services. The Company's primary strategy
is to consolidate similar and complementary companies in the highly fragmented
computer output and document management services industry through acquisition.
Vestcom intends to acquire seven companies (the "Acquisitions"), complete
an initial public offering (the "Offering") of its common stock (taken together
"the Consolidation") and, subsequent to the Consolidation, continue to acquire,
through merger or purchase, similar companies to expand its operations. In March
1997, Vestcom filed a registration statement on Form S-1 for the initial public
offering of its common stock.
Vestcom's primary assets at June 30, 1997, are cash, and deferred offering
costs. Vestcom has not conducted any operations, and all activities to date have
related to the Acquisitions and the Offering. Cash was generated from related
parties for the initial capitalization of the Company. There is no assurance
that the Acquisitions discussed above will be completed and that Vestcom will be
able to generate future operating revenues. Vestcom is dependent upon the
Offering to fund the amounts due to related parties, the pending Acquisitions
and future operations.
(3) Merger Agreement
Vestcom and separate wholly-owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the "Founding Companies") to be
effective with the Offering. The Founding Companies are Comvestrix Corp., Morris
County Direct Mail Services, Inc. and related companies, Computer Output
Systems, Inc., Electronic Imaging Services, Inc., Image Printing Systems Inc.,
Lirpaco and subsidiary and Mystic Graphic Systems, Inc. The aggregate
consideration that will be paid by Vestcom to acquire the Founding Companies is,
subject to working capital adjustments and earnouts, approximately $18.4 million
in cash and 2,852,111 shares of Vestcom common stock.
(4) Credit Facility
In March 1997, the Company received a commitment letter from a bank
providing for a $30 million bank credit facility to be used for acquisitions,
working capital and other corporate purposes. This credit facility is contingent
upon the Offering occurring.
(5) Stock Option Plan
In March 1997, the Company approved the 1997 Equity Compensation Program
(the "Stock Option Plan") which provides for the granting or awarding of stock
options and stock appreciation rights to nonemployee directors, officers and
other key employees and consultants (including officers of the Founding
Companies). The number of shares authorized and reserved for issuance under the
Plan is limited to the greater of 700,000 shares or 10 percent of the number of
shares of common stock outstanding. In general, the terms of the option awards
(including vesting schedules) will be established by the Company's Board of
Directors or a Compensation Committee.
(6) Employment Agreements
Certain executives of the Company have entered into employment agreements
with the Company. Mr. Cartun's will commence on the consummation of the Offering
and the Acquisitions and Mr. McLaughlin's agreement commenced on March 1, 1997.
Both agreements will continue for a term of three years following the
consummation of the Offering. Pursuant to their respective agreements, Mr.
Cartun will serve as President and Chief Executive Officer of the Company at an
annual base salary of $200,000 and Mr. McLaughlin will serve as Executive Vice
President of the Company at an annual base salary of $144,000. Mr. Goldman has
entered into an at-will employment agreement with Vestcom, dated May 21, 1997,
pursuant to which he will serve as Executive Vice President and Chief Financial
Officer of the Company at an annual base salary of $180,000. Mr. Goldman's
agreement provides that in the event of a Change in Control, if he does not
receive sufficient prior notice of continued employment, he will be entitled to
receive severance pay of $180,000, in 12 monthly installments. Mr. Goldman also
has the right in the event of a Change in Control to terminate his employment,
in which case he will be entitled to receive the $180,000 of severance pay. Mr.
Goldman's agreement also contains certain non-competition covenants which will
continue for one year following termination of employment. Upon consummation of
the Offering, Mr. Goldman's agreement provides that he will be granted options
to purchase 50,000 shares of Common Stock at an exercise price equal to the
initial public offering price.
Each of the employment agreements provides that, in the event of a
termination of employment by the Company without cause, such employee will be
entitled to receive from the Company an amount in cash equal to the employee's
then current annual base salary for the remainder of the term.
(7) Capital Stock
In March, 1997, the Company filed a restated Certificate of Incorporation,
to eliminate the Preferred Stock and create a class of 10,000,000 shares of
Undesignated Stock.
In May and July 1997, Oppenheimer returned to Vestcom an aggregate of
225,512 shares of common stock.
(8) New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". This statement supersedes APB Opinion No. 15,
"Earnings per Share" and simplifies the computation of earnings per share
("EPS"). Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Fully diluted EPS is replaced with diluted EPS. Diluted EPS reflects the
potential dilution if certain securities are converted. SFAS No. 128 requires
dual presentation of basic and diluted EPS by entities that issue any securities
other than ordinary common stock. SFAS No. 128 will be effective for financial
statements for both interim and annual periods ending after December 15, 1997,
and requires retroactive restatements of all EPS data presented. The Company
plans to adopt the statement on December 31, 1997. The Company does not expect
the effect of adopting SFAS No. 128 to have a material impact on its EPS
calculations, and, if adopted currently, SFAS No. 128 would not have a material
impact on the Company's reported EPS.
(9) Prepaid Expenses
In connection with the filing of the Registration Statement discussed in
Note 2, the Company has recorded Deferred Offering Costs of approximately
$2,149,194 as of June 30, 1997. Such amount, which represents fees of the
Company's professionals and consultants in connection with the Offering, will be
charged against equity upon successful completion of the Offering. If the
Offering is not successful such amounts will be expensed.
(10) Commitments and Contingencies
In May, 1997 the Company entered into an agreement with Oppenheimer & Co.,
Inc. ("Oppenheimer") pursuant to which the Company agreed to pay Oppenheimer an
aggregate amount of up to $1.8 million for advisory services provided by
Oppenheimer. Such amount is payable only upon the successful completion of the
Consolidation. In addition, Vestcom has agreed to reimburse Oppenheimer for up
to $75,000 of out-of-pocket expenses related to such services.
(11) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per share.
The Company's underwriters exercised in full an option to purchase an additional
577,500 shares of the Company's Common Stock at $13.00 per share to cover over
allotments of the initial public offering. The initial public offering was
consummated on August 4, 1997. The capital raised by this offering was
approximately $54,000,000, net of underwriting discounts.
Concurrently with the consummation of the Company's initial public
offering, Vestcom International, Inc. acquired seven companies in the computer
output and document management services industry - Comvestrix Corp., Morris
County Direct Mail Services, Inc. and related companies, Image Printing Systems,
Inc., Electronic Imaging Services, Inc., COS Information Inc., Computer Output
Systems, Inc. and Mystic Graphic Systems, Inc.
The net proceeds of the offering are being used to pay the cash portion of
the purchase price for the seven Founding Companies, and are being used to repay
certain indebtedness of Vestcom and of the Founding Companies, to pay certain
fees in connection with the acquisitions of the Founding Companies and for
general corporate purposes, which are expected to include future acquisitions.
On August 13, 1997, the Company and Summit Bank entered into an Equipment Loan
and Revolving Credit Agreement in the amount of $30,000,000.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Comvestrix Corp.:
We have audited the accompanying balance sheets of Comvestrix Corp. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1994, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comvestrix Corp. as of
December 31, 1995 and 1996 and the results of its operations and its cash flows
for the years ended December 31, 1994, 1995 and 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 12, 1997
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
BALANCE SHEETS
As of December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 150,832 $ 106,610
Accounts receivable, net of
allowance for doubtful accounts
of $103,548 and $111,724 in 1995
and 1996, respectively 3,258,311 4,135,168
Postage receivable 130,448 832,303
Due from Vestcom -- 527,056
Supplies inventory 401,375 417,869
Prepaid postage 920,937 885,123
Prepaid expenses and other
current assets 235,920 126,761
--------- ---------
Total current assets 5,097,823 7,030,890
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 4,061,339 4,385,047
OTHER ASSETS 132,875 105,750
--------- ----------
Total assets $9,292,037 $11,521,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 1,000,000 $1,900,000
Current portion of long-term debt 626,315 785,472
Current portion of capital lease obligations 255,657 --
Accounts payable and accrued expenses 1,752,836 2,461,042
Advanced postage 397,182 888,809
Other current liabilities 150,345 135,810
---------- ----------
Total current liabilities 4,182,335 6,171,133
LONG-TERM DEBT 1,017,380 682,611
DEFERRED LEASE EXPENSES 324,176 380,297
DEFERRED INCOME TAXES 35,000 3,157
---------- ----------
Total liabilities 5,558,891 7,237,198
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.00125 par value; 6,500,000
shares authorized; 5,900,000 and
6,000,000 shares issued; 3,634,000
and 3,734,000 shares outstanding
in 1995 and 1996, respectively 7,375 7,500
Additional paid-in capital 232,988 355,863
Subscriptions receivable (4,500) (106,297)
Retained earnings 4,935,663 5,465,803
----------- -----------
5,171,526 5,722,869
Less--Treasury stock, 2,266,000 shares at cost (1,438,380) (1,438,380)
----------- -----------
Total stockholders' equity 3,733,146 4,284,489
----------- -----------
Total liabilities and
stockholders' equity $ 9,292,037 $11,521,687
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $16,605,558 $19,298,468 $21,446,745
COST OF REVENUES 9,902,000 10,610,825 12,329,784
---------- ----------- -----------
Gross profit 6,703,558 8,687,643 9,116,961
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,423,696 7,052,765 7,282,491
----------- ----------- -----------
Income from operations 279,862 1,634,878 1,834,470
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (44,025) (58,515) (140,804)
Interest and other income 3,626 44,890 63,051
Contract settlement income -- 475,250 --
-------- ----------- -----------
(40,399) 461,625 (77,753)
Income before provision
(benefit) for
income taxes 239,463 2,096,503 1,756,717
----------- ----------- -----------
PROVISION (BENEFIT) FOR
INCOME TAXES (122,000) 79,277 9,298
----------- ----------- ----------
Net income $ 361,463 $ 2,017,226 $ 1,747,419
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
Total
Additional Stock-
Common Stock Paid-in Subscriptions Retained Treasury Stock holders'
Shares Amount Capital Recievable Earnings Shares Amount Equity
BALANCE AT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994 590,000 $7,375 $232,988 $(39,610) $3,865,219 197,600 ($1,200,000) $ 2,865,972
Purchase of treasury stock -- -- -- -- -- 29,000 (238,380) (238,380)
Collection of subscriptions receivable -- -- -- 30,430 -- -- -- 30,430
Net income -- -- -- -- 361,463 -- -- 361,463
---------- ------ -------- --------- ----------- -------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 590,000 7,375 232,988 (9,180) 4,226,682 226,600 (1,438,380) 3,019,485
Recapitalization of common stock 5,310,000 -- -- -- -- 2,039,400 -- --
Collection of subscriptions receivable -- -- -- 4,680 -- -- -- 4,680
Net income -- -- -- -- 2,017,226 -- -- 2,017,226
Distributions to
stockholders -- -- -- -- (1,308,245) -- -- (1,308,245)
---------- ------ -------- --------- ---------- --------- --------- ----------
BALANCE AT DECEMBER 31, 1995 5,900,000 7,375 232,988 (4,500) 4,935,663 2,266,000 (1,438,380) 3,733,146
Issuance of common stock 100,000 125 122,875 (123,000) -- -- -- --
Collection of subscriptions receivable -- -- -- 21,203 -- -- -- 21,203
Net income -- -- -- -- 1,747,419 -- -- 1,747,419
Distributions to
stockholders -- -- -- -- (1,217,279) -- -- (1,217,279)
--------- ------ -------- --------- ---------- --------- ----------- ----------
BALANCE AT DECEMBER 31, 1996 6,000,000 $7,500 $355,863 $(106,297)$5,465,803 2,266,000 ($1,438,380) $ 4,284,489
======== ====== ======== ========= ========== ========= ========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 361,463 $ 2,017,226 $ 1,747,419
Adjustments to reconcile
net income to net cash provided
by operating activities--
Depreciation and amortization 898,606 1,004,901 1,143,391
Provision for doubtful accounts 6,352 16,875 8,176
Deferred income tax provision -- 35,000 (31,843)
Gain on sale of property -- -- (2,598)
Changes in operating assets
(increase) decrease in--
Accounts receivable (271,441) (204,876) (885,033)
Postage receivable (92,560) 53,599 (701,855)
Supplies inventory (20,575) (157,406) (16,494)
Prepaid postage (104,396) (601,788) 35,814
Prepaid expenses and other assets (107,372) (78,664) 136,284
Changes in operating
liabilities increase
(decrease) in--
Accounts payable and accrued expenses 937,583 (97,085) 708,206
Advanced postage 252,917 (279,438) 491,627
Other current liabilities (121,954) 17,818 (14,535)
Deferred charges 225,041 99,135 56,121
---------- ------------ ---------
Net cash provided by
operating activities 1,963,664 1,825,297 2,674,680
---------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (928,338) (1,983,186) (1,473,761)
Proceeds from sale of equipment -- -- 9,260
------- ---------- ----------
Net cash used in investing activities (928,338) (1,983,186) (1,464,501)
-------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (225,000) 500,000 900,000
Proceeds from long-term borrowings 355,000 1,524,000 507,000
Principal payments on long-term
debt and capital leases obligations (909,888) (528,077) (938,269)
Due from Vestcom -- -- (527,056)
Collection of subscriptions receivable 30,430 4,680 21,203
Repurchase of common stock (238,380) -- --
Distributions to stockholders -- (1,308,245) (1,217,279)
---------- ------------ -----------
Net cash provided by
(used in) financing activities (987,838) 192,358 (1,254,401)
---------- - ----------- -----------
Net increase(decrease)
in cash and cash equivalents 47,488 34,469 (44,222)
CASH AND CASH EQUIVALENTS, beginning of year 68,875 116,363 150,832
---------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 116,363 $ 150,832 $ 106,610
========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest $ 44,025 $ 49,858 $ 137,399
========== =========== ===========
State income tax $ 50 $ 28,332 $ 42,712
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITY:
Issuance of common stock evidenced
by subscriptions receivable -- -- 123,000
========== ============ ===========
The accompanying notes to financial statements are an integral part of
these statements.
</TABLE>
<PAGE>
COMVESTRIX CORP.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
Comvestrix Corp. (the "Company") is a Delaware corporation. The Company's
primary businesses are (i) the production and distribution of documents on
paper, microfiche, microfilm and compact disc, (ii) computer center document
outsourcing services, (iii) mailing services and (iv) forms management.
The Company and its stockholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of Vestcom.
(2) Summary of Significant Accounting Policies
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 periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are
presented net of postage charges in the income statement as customers advance
the Company cash to be used to purchase postage for related projects.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly
liquid debt instruments purchased with original maturities of three months or
less.
Supplies Inventory
Supplies inventory consists of paper, toner, developer and other disposable
chemicals, film and micrographic chemicals, and packaging materials. Supplies
are valued at cost, which approximates market, with cost determined using the
first-in-first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
principally using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are capitalized and amortized over the
shorter of the estimated useful lives of the assets or the terms of the related
leases.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
Federal corporate income taxes on its taxable income. Instead, the stockholders
are liable for individual Federal income taxes on their respective shares of the
Company's taxable income. Accordingly, no provision for Federal corporate income
taxes has been made in the accompanying financial statements.
The Company was subject to state corporate income tax for 1994, but elected
S corporation status for 1995 state income tax purposes. The Company's state
taxable income is included in each stockholder's individual state income tax
return. The Company is liable for a limited state income tax.
Deferred state income tax results from the Company filing its tax returns
on the cash basis and its financial statements on the accrual basis, as well as
the use of different methods of depreciation for financial statement and income
tax reporting purposes.
For purposes of preparing these financial statements, a pro forma provision
for Federal and state income taxes has been provided on the income statement as
if the Company was a C corporation for the year ended December 31, 1996.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk," consist primarily of trade accounts receivable.
The Company's customers are concentrated in the United States, primarily in the
financial, pharmaceutical and telecommunication industries. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
(3) Property and Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful
Lives
1995 1996 (Years)
---- ---- -------
<S> <C> <C> <C>
Software $ 570,979 $ 662,059 3-5
Machinery and equipment 8,218,062 9,126,941 5-7
Furniture and fixtures 955,085 1,095,725 10
Leasehold improvements 499,195 955,904 8-10
Construction in progress 223,219 --
----------- -----------
10,446,540 11,840,629
Less--Accumulated depreciation
and amortization (6,405,201) (7,455,582)
----------- -----------
Property and equipment, net $ 4,061,339 $ 4,385,047
=========== ===========
</TABLE>
Leased equipment under capital leases (included above) consists of the
following at December 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C>
Equipment $ 642,902 --
Less--Accumulated amortization (183,686) --
--------- ---
$ 459,216 $--
========= ===
</TABLE>
The equipment previously under capital lease was purchased by the Company
during 1996.
Depreciation and amortization expense on property and equipment charged to
operations for the years ended December 31, 1994, 1995 and 1996 was $898,606,
$1,004,901 and $1,143,391, respectively.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following at December
31:
<PAGE>
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Accounts payable $ 444,939 $1,292,925
Accrued salary and bonuses 726,239 794,143
Accrued production, rent and maintenance 360,588 199,349
Other accruals 221,070 174,625
---------- ----------
$1,752,836 $2,461,042
========== ==========
</TABLE>
(5) Short-Term Borrowings
The Company has a revolving line of credit with a bank, that provides for
borrowings of up to $300,000 for equipment purchases, which is secured by the
specific equipment, and an additional $2,250,000 for working capital
requirements, which is secured by accounts receivable. Borrowings under the line
of credit bear interest at the bank's prevailing prime rate (8 1/4% at December
31, 1996) and are repayable and renewable on May 31, 1997. The unused line was
$650,000 at December 31, 1996.
(6) Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
1995 1996
---- ----
<S> <C> <C>
Equipment loan payable to a financial institution, bearing interest at the prime
rate (8 1/4% at December 31, 1996) plus 1/2%, not to exceed 8 1/2%. Principal
is payable in monthly installments of $9,861 beginning November 1, 1994;
collateralized by specific equipment. Final payment is
due in October 1997. $ 226,806 $ 108,472
Equipment loan payable to a financial
institution, bearing interest at the prime rate (8 1/4% at December 31, 1996),
not to exceed 12%. Principal is payable in monthly installments of $6,500
beginning April 1, 1995; collateralized by specific
equipment. Final payment is due February 7, 1998. 175,500 97,500
Various equipment loans payable to a financial
institution bearing interest from 7 3/4% to 8 1/4%.
Principal amounts are payable in aggregate monthly
installments of $49,916 maturing July 1998
through November 1999. 1,241,389 1,262,111
---------- ---------
1,643,695 1,468,083
Less--Current maturities (626,315) (785,472)
---------- ---------
$1,017,380 $ 682,611
========== =========
</TABLE>
At December 31, 1996 the aggregate amounts of annual principal maturities
of long-term obligations are as follows:
1997 $ 785,472
1998 569,889
1999 112,722
----------
Total $1,468,083
==========
The Company's debt agreements require the maintenance of certain ratios
related to working capital, debt compared to equity, and retained earnings. The
Company was in compliance with all such ratios as of December 31, 1996.
(7) Subscriptions Receivable from Stockholders
Subscriptions receivable from stockholders at December 31, 1995 were
evidenced by a 9% promissory note which matured in December 1996. Subscriptions
receivable from stockholders at December 31, 1996 were evidenced by 6%
promissory notes from various stockholders with aggregate annual principal
installments totaling $26,525 maturing in January 2001.
(8) Income Taxes
During 1994, the Company utilized a $178,000 state net operating loss
carryforward. Accordingly, the 1994 current state tax provision has been reduced
by approximately $16,000 which reflects the tax benefit of such net operating
loss carryforward.
In 1994, the deferred state tax provision has been reduced by the effect of
the tax rate differential between C corporation status and S corporation status
for state income tax purposes (see Note 2).
Deferred state taxes primarily relate to property. No valuation allowance
has been recorded as the Company believes it will realize all such assets in
future years.
(9) Stockholders' Equity
Effective December 31, 1995, the Company recapitalized its common stock in
a 10-for-1 stock split. Accordingly, authorized, issued, outstanding and
treasury shares were increased for 1995 in a ratio of 10-to-1 from 1994. Also,
the par value of common stock was decreased for 1995 in a ratio of 10-to-1 from
1994.
During 1996, the Company issued and sold 100,000 shares of stock to five
long-term employees of the Company. The consideration for the stock consisted of
promissory notes (see Note 7).
(10) Commitments and Contingencies:
Operating Leases
The Company leases office premises, warehouse space and a portion of its
machinery and equipment under operating leases expiring at varying dates through
2001. Its offices are leased from an entity that is 50% owned by the Company's
president ("related party lease") (see Note 11).
At December 31, 1996 the minimum annual rental commitment of the Company,
including the required funding of a capital improvements escrow account, under
existing agreements (including related party lease) is as follows:
1997 $ 749,468
1998 687,074
1999 686,960
2000 673,487
2001 217,064
----------
Total minimum payments $3,014,053
==========
Rent expense (including lease escalations) charged to operations for the
years ended December 31, 1994, 1995 and 1996 was $2,282,794, $2,234,340 and
$2,236,280, respectively.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
(11) Related Party Transactions
The Company leases certain office space from an entity that is 50% owned by
its president. This lease requires the Company to make payments into an escrow
account to be used for specific improvements to the premises. Such amounts are
included in other assets in the accompanying financial statements. The minimum
future annual rental payments to related parties are as follows:
1997 $ 454,632
1998 486,286
1999 494,650
2000 511,534
2001 217,064
----------
$2,164,166
==========
Related party rent expense for the years ended December 31, 1994, 1995 and
1996 was $661,635, $363,472 and $628,083, respectively.
On September 19, 1996, the Company loaned Vestcom $120,036 as part of
Vestcom's initial capitalization. Additionally, the Company loaned Vestcom
$399,996 in December 1996. The loans bear interest at a rate equal to the
fluctuating interest rate announced by a certain bank as its prime rate (8 1/4%
at December 31, 1996) and are due and payable on the earlier of the Offering or
June 30, 1997. The Company has unreimbursed advances to Vestcom of $7,024 for
working capital needs which are included in due from Vestcom in the accompanying
balance sheet. In the event Vestcom is unable to pay the notes in full when due,
the Company has agreed to extend the due date of the notes to the earlier of the
Offering or December 31, 1998. In addition, to the extent Vestcom's net assets
are inadequate to satisfy the notes in full at December 31, 1998, the Company
has agreed not to take any action to collect on such notes.
(12) Employee Benefit Plan
The Company maintains a 401(k) deferred compensation plan. The plan
provides for the Company to make a discretionary matching contribution
determined as a percentage of employees' contributions. Contributions to this
plan for the years ended December 31, 1994, 1995 and 1996 were $39,641, $43,477
and $61,465, respectively.
(13) Subsequent Events
Effective January 1, 1997, the Company entered into a capital lease with
Xerox on a portion of its Xerox production equipment. The term of the lease is
for five years and the minimum monthly payments will be $129,744.
(14) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom providing for the Acquisition of the Company
by Vestcom.
Prior to the closing of the Acquisition, the Company will make
distributions in respect of the Company's estimated S Corporation accumulated
adjustment account at the time of closing.
<PAGE>
<TABLE>
COMVESTRIX CORP.
CONDENSED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
<CAPTION>
December 31, 1996 June 30, 1997
----------------- -------------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 106,610 $ 107,562
Accounts receivable, net 4,135,168 4,152,270
Other current assets 2,789,112 2,787,860
----------- -----------
Total current assets 7,030,890 7,047,692
PROPERTY AND EQUIPMENT, net 4,385,047 10,035,927
OTHER ASSETS 105,750 199,412
----------- -----------
Total assets $11,521,687 $17,283,031
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 1,900,000 --
Current portion of long term debt
and capital lease obligation 785,472 2,116,068
Other current liabilities 3,485,661 4,514,420
----------- -----------
Total current liabilities 6,171,133 6,630,488
LONG-TERM DEBT AND CAPITAL LEASES
OBLIGATIONS 682,611 5,117,304
DEFERRED EXPENSES 383,454 613,565
----------- -----------
Total liabilities 7,237,198 12,361,357
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 7,500 7,500
Additional-paid in capital 355,863 355,863
Subscriptions receivable (106,297) (93,335)
Retained earnings 5,465,803 6,090,026
----------- -----------
5,722,869 6,360,0054
Less-Treasury stock (1,438,380) (1,438,380)
----------- -----------
Total stockholders' equity 4,284,489 4,921,674
----------- -----------
Total liabilities and
stockholders' equity $11,521,687 $17,283,031
=========== ===========
The accompanying notes to condensed financial statements are
an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
CONDENSED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(unaudited) (unaudited)
<S> <C> <C>
REVENUES $10,763,261 $12,081,470
COST OF REVENUES 6,064,119 6,523,858
--------- ---------
Gross Profit 4,699,142 5,557,612
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,597,474 3,989,104
--------- ---------
Income from operations 1,101,668 1,568,508
OTHER INCOME (EXPENSE)
Interest Expense (72,542) (336,585)
Interest and other income 30,888 21,065
---------- ----------
Income before provision for
income taxes 1,060,014 1,252,988
PROVISION FOR INCOME TAXES 26,500 31,325
------------ ------------
Net income $1,033,514 $1,221,663
========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an
integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,033,514 $1,221,663
Adjustments to reconcile net income to
net cash provided by operating activities--
Depreciation and amortization 535,850 991,390
Loss on sale of property -- 4,266
Changes in operating assets (increase)
decrease in--
Accounts receivable (733,309) (17,102)
Other current assets (339,951) 1,252
Other assets (453) (93,662)
Changes in operating liabilities
increase (decrease) in--
Other current liabilities 1,698,024 1,028,759
Deferred charges 24,014 230,111
---------- ----------
Net cash provided by operating
activities 2,217,689 3,366,677
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (631,906) (399,015)
Proceeds from sale of equipment -- 2,700
----------- ----------
Net cash used in investing activities (631,906) (396,315)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on borrowings (964,944) (2,384,932)
Collection of subscriptions receivable 5,980 12,962
Distributions to stockholders (672,114) (597,440)
-----------
Net cash used in financing activities (1,631,078) (2,969,410)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (45,295) 952
CASH AND CASH EQUIVALENTS, beginning of period 150,832 106,610
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 105,537 $ 107,562
=========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred -- $6,250,221
=========== ==========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these statements.
<PAGE>
COMVESTRIX CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 1996, included elsewhere in this
Registration Statement.
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom International, Inc. (Vestcom) pursuant to
which the Company will merge with Vestcom. All outstanding shares of the Company
will be exchanged for cash and shares of Vestcom's common stock concurrent with
the consummation of the initial public offering of the common stock of Vestcom.
(2) Acquisition of Equipment
Effective January 1, 1997, the Company entered into a capital lease on a
portion of its production equipment. The term of the lease is for five years and
the minimum monthly payments will be $129,744. In connection therewith the
Company recorded a capital lease liability of $6,250,221.
(3) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per share.
The Company's underwriters exercised in full an option to purchase an additional
577,500 shares of the Company's Common Stock at $13.00 per share to cover over
allotments of the initial public offering. The capital raised by this offering
was approximately $54,000,000, net of underwriting discounts. Concurrently with
the offering, Vestcom acquired all of the outstanding shares of Comvestrix Corp.
Subsequent to June 30, 1997, the Company made distributions to shareholders
of $1,618,382.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Morris County Direct Mail Services, Inc.
and related companies:
We have audited the accompanying combined balance sheets of Morris County
Direct Mail Services, Inc. (a New Jersey corporation) and related companies as
of December 31, 1995 and 1996, and the related combined statements of income,
stockholders' equity, and cash flows for the years ended December 31, 1994, 1995
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Morris County Direct Mail
Services, Inc. and related companies as of December 31, 1995 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1994, 1995 and 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 12, 1997
<PAGE>
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED
COMPANIES
COMBINED BALANCE SHEETS
As of December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 534,459 $ 572,714
Accounts receivable, net of allowance
for doubtful accounts
of $211,000 and $203,000 in 1995 and
1996, respectively 1,336,698 2,647,434
Postage receivable 1,019,560 330,730
Notes receivable -- 100,000
Due from related parties 190,088 266,775
Prepaid expenses and other current assets 115,785 175,594
---------- ----------
Total current assets 3,196,590 4,093,247
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 1,867,808 1,504,158
GOODWILL AND OTHER INTANGIBLE ASSETS -- 396,184
OTHER ASSETS 19,417 131,488
--------- ----------
Total assets $5,083,815 $6,125,077
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ -- $ 160,000
Current portion of long-term debt 227,935 460,709
Current portion of capital lease obligations 20,025 21,098
Due to related parties 685,384 1,231,590
Accounts payable 370,551 686,646
Accrued expenses 400,907 474,354
Advanced postage 1,425,423 612,332
--------- ----------
Total current liabilities 3,130,225 3,646,729
LONG-TERM DEBT 343,686 933,646
CAPITAL LEASE OBLIGATIONS 27,166 15,836
DUE TO RELATED PARTIES 666,001 --
DEFERRED INCOME TAXES 12,200 11,420
--------- ----------
Total liabilities 4,179,278 4,607,631
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock Morris County Direct Mail Services,
Inc., no par value; 2,500
shares authorized; 130 and 1,075 shares issued and
outstanding in 1995 and 1996, respectively 16,000 16,000
First Class Presort, Inc., no par value;
2,000 shares authorized;
199 shares issued and outstanding 1,990 1,990
Quality Control Printing, Inc., no par
value; 2,500 shares authorized;
100 shares issued and outstanding 2,000 2,000
Additional paid-in capital--
Morris County Direct Mail Services, Inc. 59,500 59,500
First Class Presort, Inc. 123,268 123,268
Retained earnings 1,103,279 1,716,188
---------- ----------
1,306,037 1,918,946
Less--Treasury stock, 75 shares at
cost of Morris County Direct
Mail Services, Inc. (401,500) (401,500)
---------- ----------
Total stockholders' equity 904,537 1,517,446
--------- ----------
Total liabilities and stockholders'
equity $5,083,815 $6,125,077
========== ==========
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED
COMPANIES
COMBINED STATEMENTS OF INCOME
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
<S> <C> <C> <C>
REVENUES $8,503,918 $9,422,646 $13,360,125
COST OF REVENUES 6,538,866 6,429,671 9,517,339
---------- ---------- -----------
Gross profit 1,965,052 2,992,975 3,842,786
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,539,973 1,913,391 3,155,486
---------- ---------- ----------
Income from operations 425,079 1,079,584 687,300
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (126,394) (91,042) (159,402)
Interest and other income 8,759 21,918 49,674
Net gain (loss) on sale of
property and equipment -- (114,694) 63,550
---------- ---------- ----------
(117,635) (183,818) (46,178)
---------- ---------- ----------
Income before provision (benefit) for
income taxes 307,444 895,766 641,122
---------- ---------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES (20,310) 30,936 28,213
---------- ---------- ----------
Net income $ 327,754 $ 864,830 $ 612,909
========== ========== ==========
</TABLE>
Theaccompanying notes to financial statements are an
integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
Additional
Common Stock Paid-In Capital
-------------------------------------------- -----------------
Morris
Morris County County
Direct Mail First Class Quality Control Direct First Total
Services, Inc. Presort, Inc Printing, Inc. Mail Class Stock-
-------------- ------------- ------------- Services Presort Retained Treasury Stock holders'
Shares Amount Shares Amount Shares Amount Inc. Inc. Earnings Shares Amount Equity
------ ------ ------ ------ ------ ------ -------- ------ -------- ------ ------ --------
BALANCE AT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994 130 $16,000 199 $1,990 100 $2,000 $59,500 $123,268 $ (52,326) 75 $(401,500) $ (251,068)
Net income -- -- -- -- -- -- -- -- 327,754 -- -- 327,754
Distributions
to stockholders -- -- -- -- -- -- -- -- (14,000) -- -- (14,000)
----- ------- --- ----- --- ------ ------- ------- -------- -- --------- --------
BALANCE AT
DECEMBER 31, 1994 130 16,000 199 1,990 100 2,000 59,500 123,268 261,428 75 (401,500) 62,686
Net income -- -- -- -- -- -- -- -- 864,830 -- -- 864,830
Distributions
to stockholders -- -- -- -- -- -- -- -- (22,979) -- -- (22,979)
----- ------ --- ----- --- -- -- -- --------- -- --------- --------
BALANCE AT
DECEMBER 31, 1995 130 16,000 199 1,990 100 2,000 59,500 123,268 1,103,279 75 (401,500) 904,537
Stock split 945 -- -- -- -- -- -- -- -- -- -- --
Net income -- -- -- -- -- -- -- -- 612,909 -- -- 612,909
----- ------ --- ------ --- ------ ------- ------- --------- -- --------- --------
BALANCE AT
DECEMBER 31, 1996 1,075 $16,000 199 $1,990 100 $2,000 $59,500 $123,268 $1,716,188 75 $ (401,500) $1,517,446
===== ======= === ====== === ====== ======= ======= ========= == =========== =========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE>
F-133
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 327,754 $ 864,830 $ 612,909
Adjustments to reconcile net income
to net cash provided by operating activities--
Depreciation and amortization 334,690 392,397 587,727
Amortization of goodwill -- -- 16,116
Provision for doubtful accounts 46,467 55,260 25,693
Deferred income tax provision (27,837) 566 (780)
(Gain) loss on sale of equipment -- 114,694 (63,550)
Loss on write-off of leasehold
improvements -- -- 496,876
Changes in operating assets (increase)
decrease in--
Accounts receivables 29,024 213,194 (1,336,429)
Postage receivable 5,472 (431,184) 688,830
Prepaid expenses and other assets (33,617) (19,595) (135,273)
Changes in operating liabilities
increase (decrease) in--
Accounts payable 111,364 (418,965) 316,095
Accrued expenses (8,140) (22,263) 73,447
Advanced postage (347,119) 317,309 (813,091)
----------- ---------- -----------
Net cash provided by operating activities 438,058 1,066,243 468,570
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (159,691) (640,692) (482,403)
Proceeds from sale of property and equipment -- -- 175,000
Acquisition of companies -- -- (762,300)
Net cash used in investing activities (159,691) (640,692) (1,069,703)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (50,000) -- 160,000
Proceeds from long-term borrowings 124,990 453,000 1,249,881
Principal payments on long-term debt
and capital lease obligations (493,484) (433,597) (437,404)
Issuance of notes receivable -- -- (175,000)
Collection of notes receivable -- -- 13,393
Net proceeds from affiliates 70,240 (5,153) 48,313
Proceeds from stockholder loans 155,711 143,784 31,015
Payments on stockholder loans (243,991) (251,802) (250,810)
Distributions to stockholders (14,000) (22,979) --
---------- ---------- ----------
Net cash provided by (used in)
financing activities (450,534) (116,747) 639,388
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $(172,167) $ 308,804 $ 38,255
CASH AND CASH EQUIVALENTS, beginning of year 397,822 225,655 534,459
--------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 225,655 $ 534,459 $ 572,714
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
Interest $ 65,647 $ 41,739 $ 118,386
========= ========== ==========
State income tax $ 6,408 $ 14,707 $ 41,121
========= ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred $ 81,949 -- --
========= ========== ==========
</TABLE>
The accompanying notes to financial statements are
an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED COMPANIES
- --------------------------------------------------------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) Nature of Business
The accompanying combined financial statements include the accounts of
Morris County Direct Mail Services, Inc., ("DMS"), Quality Control Printing,
Inc. ("QCP") and First Class Presort, Inc. ("FCP") (all New Jersey corporations)
(collectively, the "Company"). The Company's primary businesses are (i)
marketing materials fulfillment, (ii) mailing services, and (iii) forms
management.
The Company and its stockholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of Vestcom.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The Companies discussed in Note 1 are under the common control of one
stockholder. All significant intercompany transactions have been eliminated in
combination.
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 periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are
presented net of postage incurred as customers advance the Company cash to be
used to purchase postage for related projects.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly
liquid debt instruments purchased with original maturities of three months or
less.
Supplies Inventory
Supplies inventory consists of paper goods, printing items, and packaging
materials. Supplies are valued at cost, which approximates market, with cost
determined using the first-in-first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
principally using an accelerated method which reflects the estimated useful
lives of the assets. Leasehold improvements and assets subject to capital lease
are capitalized and amortized over the shorter of the estimated useful lives of
the assets or the terms of the related leases.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
During 1996, the Company decided to move to a new location. As a result,
net leasehold improvements of $496,876 became impaired and were written off.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code and, where applicable, State of New Jersey tax laws.
Under those provisions, the Company does not pay Federal corporate income taxes
on its taxable income and, where applicable, pays approximately a two percent
tax to the State of New Jersey, and is not allowed a net operating loss
carryover or carryback as a deduction. Instead, the Stockholders are liable for
individual Federal and, where applicable, State of New Jersey income taxes on
their respective shares of the Company's taxable income, or include their
respective shares of the Company's Federal net operating loss on their
individual tax returns. Accordingly, no provision for Federal corporate income
taxes has been made in the accompanying financial statements.
Deferred state income tax results from the Company filing its tax returns
on the cash basis and its financial statements on the accrual basis, as well as
the use of different methods of depreciation for financial statement and income
tax reporting purposes.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
However, impaired leasehold improvements of $496,878 were written off during
1996 due to the application of this standard.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," consist primarily of trade accounts receivable.
The Company's customers are concentrated in the Northeastern United States in
various industries. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends, and other information.
Acquisitions
Effective May 17, 1996, FCP acquired 100% of the outstanding shares of
stock in Regal Mail Service, Inc. ("Regal") for $159,800 in cash. Regal was
consolidated into FCP effective as of the date of acquisition. In connection
with the acquisition, which was accounted for as a purchase, FCP recorded
goodwill of $9,800.
Effective May 23, 1996, QCP acquired 100% of the outstanding shares of
stock in Stuyvesant Press, Inc. ("Stuyvesant") for $602,500. Consideration paid
by QCP included $294,000 in cash and $228,500 in notes payable. Stuyvesant was
consolidated into QCP effective as of the date of acquisition. In connection
with the acquisition, which was accounted for as a purchase, QCP recorded
goodwill and a covenant not to compete of $402,500.
Goodwill and Other Intangible Assets
Goodwill and the covenant not to compete are being amortized over 15 years
using the straight-line method. Accumulated amortization at December 31, 1996
was $16,116.
(3) Property and Equipment
Property and equipment consist of the following at December 31:
<PAGE>
<TABLE>
<CAPTION>
Estimated
Useful
Lives
1995 1996 (Years)
---- ---- -------
<S> <C> <C> <C>
Transportation equipment $ 367,351 $ 401,093 5-7
Machinery and equipment 1,836,615 2,306,921 5-10
Equipment under capital lease 1,132,949 1,132,949 5-10
Leasehold improvements 634,905 --
---------- ---------- ----
3,971,820 3,840,963
Less--Accumulated depreciation
and amortization 2,104,012 2,336,805
---------- ----------
Property and equipment, net $1,867,808 $1,504,158
========== ==========
</TABLE>
Leased equipment under capital leases (included above) consists of the
following as of December 31:
<TABLE>
1995 1996
---- ----
<S> <C> <C>
Equipment $1,132,949 $1,132,949
Less--Accumulated amortization 542,269 663,443
---------- ----------
$ 590,680 $ 469,506
========== ==========
</TABLE>
Depreciation and amortization expense on property and equipment charged to
operations for the years ended December 31, 1994, 1995 and 1996 was $334,690,
$392,397 and $587,727, respectively.
Gross leasehold improvements of $735,233 and accumulated depreciation of
$238,357 were written off in 1996. The loss of $496,876 is included in cost of
revenues.
At December 31, 1996 minimum annual payments under capital lease including
interest are as follows:
1997 $22,598
1998 14,009
1999 3,609
-------
Total minimum payments 40,216
Less--Amounts representing interest 3,282
-------
Net minimum payments 36,934
Less--Current portion of capital lease obligations 21,098
-------
Long-term portion of capital lease obligations
$15,836
=======
The interest rate on the capitalized lease is 5.5% and is imputed based on
the fair market value of the equipment at the inception of the lease.
(4) Short-Term Borrowings
The Company has a $200,000 line of credit with a bank for the purchase of
equipment with interest at the prime rate (8 1/4% at December 31, 1996) plus
.75%. The Company also has a $225,000 working capital line of credit with
interest at prime plus .25%. At December 31, 1996, $160,000 was outstanding
under the equipment line.
(5) Long-Term Debt
Long-term debt consists of the following at December 31:
1995 1996
---- ----
Various notes payable to a financial
institution with monthly installments
totaling $49,251 plus interest between
7.90% and the prime rate (8.25%) plus
.75%, secured by equipment, maturing between
January 1996 and May 2001 $571,621 $1,058,077
Various notes payable to third parties in monthly
installments of $11,145
plus interest between 10.90% and 15% maturing
between June 1997 and June 2003. -- 336,278
-------- ---------
571,621 1,394,355
Less--Current maturities 227,935 460,709
-------- ---------
$343,686 $ 933,646
======== =========
At December 31, 1996 the aggregate amounts of annual principal maturities
of long-term obligations (excluding capital lease obligations) are as follows:
1997 $ 460,709
1998 420,894
1999 194,764
2000 141,954
2001 85,009
Thereafter 91,025
----------
Total $1,394,355
(6) Commitments and Contingencies
Operating Leases
The Company leases office premises, warehouse space and a portion of its
machinery and equipment under operating leases expiring at varying dates through
2004. Its offices are leased from an entity where the controlling interest is
held by the Company's president ("related party lease") (see Note 7).
At December 31, 1996 the minimum annual rental commitment of the Company
under existing agreements (including related party lease) is as follows:
1997 $ 708,966
1998 589,630
1999 500,424
2000 376,000
2001 144,000
Thereafter 240,000
----------
Total minimum payments $2,559,020
Rent expense (including lease escalations) charged to operations for the
years ended December 31, 1994, 1995 and 1996 was $783,326, $668,154 and
$852,570, respectively.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Guarantees
The Company has guaranteed several loans made by various financial
institutions to related parties which are majority owned by its president. The
total amount outstanding on these guaranteed loans at December 31, 1996 was
$4,969,794.
(7) Related Party Transactions
Leased Office Space
The Company leases certain office space from entities in which the
controlling interest is held by its president. The minimum future annual rental
payments to related parties are as follows:
1997 $ 667,000
1998 564,917
1999 492,000
2000 376,000
2001 144,000
Thereafter 240,000
----------
$2,483,917
Related party rent expense for the years ended December 31, 1994, 1995 and
1996 was $760,468, $639,768 and $777,112, respectively.
Notes Receivable
The Company has a note receivable from Regal's former owner as a result of
FCP's acquisition of Regal during 1996 (Note 2). The note bears interest at 5%
and will be repaid over three years, expiring May 17, 1999 through services
provided to FCP by the former owner.
Notes Payable
Three stockholders of the Company have loaned certain amounts to the
Company. The notes are due on demand and bear interest at 6.5%. Interest expense
on such notes for the years ended December 31, 1994, 1995 and 1996 was $60,746,
$49,303 and $41,016, respectively.
(8) Employee Benefit Plan
The Company maintains a 401(k) deferred compensation plan. The plan
provides for the Company to make a discretionary basic contribution determined
as a percentage of eligible employees' salaries and a discretionary matching
contribution determined as a percentage of employees' contributions.
Contributions of $24,555, $25,553 and $10,317 were made by the Company in 1994,
1995 and 1996, respectively.
(9) Major Customers
The Company has one customer which accounted for 14%, 11% and 10% of
revenues for the years ended December 31, 1994, 1995 and 1996, respectively.
Amounts receivable from this customer at December 31, 1995 and 1996 were $52,088
and $151,507, respectively.
(10) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom providing for the Acquisition of the Company
by Vestcom.
Prior to the closing of the Acquisition, the Company will make
distributions in respect of the Company's estimated S Corporation accumulated
adjustment account at the time of closing.
<PAGE>
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, Inc. AND RELATED COMPANIES
CONDENSED COMBINED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
June 30,
December 31, 1996 1997
----------------- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 572,714 $ 266,108
Accounts receivable, net 2,647,434 3,183,239
Other current assets 873,099 927,493
---------- ---------
Total current assets 4,093,247 4,376,840
PROPERTY AND EQUIPMENT, net 1,504,158 1,560,404
GOODWILL 396,184 282,333
OTHER ASSETS 131,488 18,651
---------- ----------
Total assets $6,125,077 $6,401,228
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $160,000 $ 150,000
Current portion of long-term debt and
capital lease obligations 481,807 612,740
Other current liabilities 3,004,922 2,565,462
---------- ----------
Total current liabilities 3,646,729 3,328,202
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 949,482 1,311,745
DEFERRED EXPENSES 11,420 69,889
--------- ----------
Total liabilities 4,607,631 4,709,836
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock 19,990 19,990
Additional paid-in capital 182,768 182,768
Retained earnings 1,716,188 1,890,134
--------- ---------
1,918,946 2,092,892
Less -- Treasury stock (401,500) (401,500)
---------- ---------
Total stockholders' equity 1,517,446 1,691,392
---------- ----------
Total liabilities and stockholders' equity $6,125,077 $6,401,228
========== ==========
The accompanying notes to condensed combined financial
statements are an integral part of these balance sheets
</TABLE>
<PAGE>
<TABLE>
MORRIS COUNTY DIRECT MAIL SERVICES, INC. AND RELATED COMPANIES
<CAPTION>
CONDENSED COMBINED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $6,815,377 $7,015,639
COST OF REVENUES 4,310,177 4,746,303
---------- ----------
Gross Profit 2,505,200 2,269,336
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,699,706 1,471,086
--------- ----------
Income from operations 805,494 798,250
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (59,952) (81,260)
Interest and other income 38,439 4,705
----------- ----------
Income before provision for income taxes 783,981 721,695
---------- ----------
PROVISION FOR INCOME TAXES 15,786 17,188
----------- ----------
Net income $ 768,195 $ 704,507
=========== ==========
</TABLE>
The accompanying notes to condensed combined
financial statements are an integral part of these statements.
<PAGE>
<TABLE>
MORRIS COUNTY DIRECT MAIL SERVICES, INC. AND RELATED COMPANIES
<CAPTION>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 768,195 $ 704,507
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities-
Depreciation and amortization 275,165 299,265
Gain on sale of property -- (17,617)
Changes in operating assets
(increase) decrease in--
Accounts receivable (1,245,008) (535,805)
Other current assets 1,155,680 (78,921)
Other assets 245 63,688
Changes in operating liabilities
increase (decrease) in--
Other current liabilities (745,422) (439,460)
Other liabilities (324,740) 58,470
--------- ------
Net cash provided by (used in)
operating activities (155,885) 54,127
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (607,491) (337,894)
Acquisition of goodwill (412,300) --
---------- ---------
Net cash used in investing activities (1,019,791) (337,894)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings 1,033,150 446,704
Issuance of notes receivable -- 61,019
Distributions to stockholders -- (530,562)
--------- ---------
Net cash provided by (used in ) financing activities 1,033,150 (22,839)
--------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (102,526) (306,606)
CASH AND CASH EQUIVALENTS, beginning of period 534,459 572,714
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 431,933 $ 266,108
========= =========
</TABLE>
The accompanying notes to condensed combined financial
statements are an integral part of these statements.
<PAGE>
MORRIS COUNTY DIRECT MAIL SERVICES, INC.
AND RELATED COMPANIES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of management
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1996, included elsewhere in this Registration Statement.
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom International, Inc. (Vestcom) pursuant to
which the Company will merge with Vestcom. All outstanding shares of the Company
will be exchanged for cash and shares of Vestcom common stock concurrent with
the consummation of the initial public offering of the common stock of Vestcom.
(2) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per share.
The Company's underwriters exercised in full an option to purchase an additional
577,500 shares of the Company's Common Stock at $13.00 per share to cover over
allotments of the initial public offering. The initial public offering was
consummated on August 4, 1997. The capital raised by this offering was
approximately $54,000,000, net of underwriting discounts. Concurrently with the
offering, Vestcom acquired all of the outstanding shares of Morris County Direct
Mail Services, Inc. and related companies.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Lirpaco Inc. and subsidiary:
We have audited the accompanying consolidated balance sheets of Lirpaco
Inc. (a Canadian Corporation) and subsidiary as of July 31, 1995 and 1996 and
December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years ended July 31, 1995 and 1996
and the five-month period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lirpaco Inc. as of July 31,
1995 and 1996 and December 31, 1996 and the results of its operations and its
cash flows for the years ended July 31, 1995 and 1996 and the five-month period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 17, 1997
<PAGE>
- --------------------------------------------------------------------------------
LIRPACO INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
as of July 31, 1995 and 1996, and December 31, 1996
July 31 December 31,
1995 1996 1996
---- ---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ -- $ 86,226 $ 88,198
Accounts receivable, net of allowance
for doubtful accounts of $4,080, $35,015
and $35,132, respectively 1,032,467 729,505 743,380
Due from related party -- 42,963 19,474
Supplies inventory 141,936 130,412 129,439
Prepaid expenses and other current assets 83,600 75,788 73,076
---------- ---------- --------
Total current assets 1,258,003 1,064,894 1,053,567
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 438,698 443,944 661,901
DEFERRED CHARGES 10,379 3,030 --
---------- --------- ----------
Total assets $1,707,080 $1,511,868 $1,715,468
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 42,045 $ 21,495 $ 51,752
Accounts payable and accrued liabilities 1,343,964 824,396 675,274
Income taxes payable 40,562 10,075 36,299
---------- ---------- ----------
Total current liabilities 1,426,571 855,966 763,325
LONG-TERM DEBT 7,693 -- 245,166
DEFERRED INCOME TAXES -- 38,620 26,474
---------- ---------- ----------
Total liabilities 1,434,264 894,586 1,034,965
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common shares, voting, no par
value, unlimited amount authorized,
100 issues and outstanding 102 102 102
Class B common shares, nonvoting, no
par value, unlimited amount
authorized, no shares issued and
outstanding -- -- --
Class C preferred shares, noncumulative,
no par value, nonparticipating,
voting, unlimited amount authorized,
no shares issued and outstanding -- -- --
Class D preferred shares, noncumulative,
no par value, nonparticipating,
nonvoting, unlimited amount
authorized, no shares issued
and outstanding -- -- --
Class E preferred shares, noncumulative,
no par value, nonparticipating,
voting, unlimited amount authorized,
417,082 shares issued and outstanding 102 102 102
Class F preferred shares, noncumulative,
no par value nonparticipating,
nonvoting, unlimited amount authorized,
166,566 shares issued and outstanding 170,104 170,104 170,104
Retained earnings 87,985 424,707 474,943
Cumulative translation adjustments 14,523 22,267 35,252
---------- --------- ---------
Total stockholders' equity 272,816 617,282 680,503
---------- --------- ---------
Total liabilities and
stockholders' equity $1,707,080 $1,511,868 $1,715,468
========== ========== ==========
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
LIRPACO INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended July 31, 1995 and 1996
and the Five Months Ended December 31, 1995 (Unaudited) and 1996
<CAPTION>
Year Ended Five Months Ended
July 31 December 31
------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
REVENUES $3,914,089 $4,987,369 $2,058,250 $1,973,842
COST OF REVENUES 2,657,407 3,220,847 1,370,548 1,331,274
---------- ---------- ---------- ----------
Gross profit 1,256,682 1,766,522 687,702 642,568
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,088,835 1,325,318 534,769 536,019
---------- ---------- ---------- ----------
Income from operations 167,847 441,204 152,933 106,549
OTHER EXPENSES:
Interest expense 47,496 27,516 13,444 4,126
Loss on sale of asset -- -- -- 26,693
---------- ---------- ---------- ----------
Income before provision
for income taxes 120,351 413,688 139,489 75,730
PROVISION FOR INCOME TAXES 22,710 76,966 28,985 25,494
---------- ---------- ---------- ----------
Net income $ 97,641 $ 336,722 $ 110,504 $ 50,236
========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
LIRPACO INC. AND SUBSIDIARY
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1995 and 1996
and the Five Months Ended December 31, 1996
(Accumulated)
Deficit) Cumulative
Preferred Stock Common Stock Retained Translation
Shares Amount Shares Amount Earnings Adjustments Total
------ ------ ------ ------ -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 1, 1994 583,648 $170,206 100 $102 $ (9,656) $12,276 $172,928
Net income -- -- -- -- 97,641 -- 97,641
Translation adjustment -- -- -- -- -- 2,247 2,247
------- -------- --- ---- -------- ------- --------
BALANCE, July 31, 1995 583,648 170,206 100 102 87,985 14,523 272,816
------- -------- --- ---- -------- ------- --------
Net income -- -- -- -- 336,722 -- 336,722
Translation adjustment -- -- -- -- -- 7,744 7,744
------- -------- --- ---- -------- ------- --------
BALANCE, July 31, 1996 583,648 170,206 100 102 424,707 22,267 617,282
Net income -- -- -- 50,236 -- 50,236
Translation adjustment -- -- -- -- -- 12,985 12,985
------- -------- --- ---- -------- ------- --------
BALANCE, December 31, 1996 583,648 $170,206 100 $102 $474,943 $35,252 $680,503
======= ======== === ==== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
LIRPACO INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1995 and 1996
and the Five Months Ended December 31, 1995 (Unaudited) and 1996
Year Ended Five Months Ended
July 31 December 31
------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $ 97,641 $ 336,722 $ 110,504 $ 50,236
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization 118,767 113,074 49,796 59,516
Provision for doubtful accounts -- 35,382 -- --
(Gain) loss on disposal of
fixed assets (2,429) -- -- 26,693
Deferred income tax provision 11,570 59,449 20,158 (12,146)
Changes in operating assets
(increase) decrease in--
Accounts receivable (340,924) 267,580 76,839 (13,875)
Supplies inventory (29,640) 11,524 (34,284) 973
Prepaid expenses and other
current assets (49,959) (4,540) (135,332) (6,021)
Deferred charges 7,332 7,349 3,050 3,030
Changes in operating liabilities
increase (decrease) in--
Accounts payable and accrued liabilities 293,247 (519,568) (121,426) (149,122)
Income taxes payable 40,562 (30,487) 81,754 26,224
--------- --------- --------- ---------
Net cash provided by (used
in) operating activities 146,167 276,485 51,059 (14,492)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and
equipment (114,528) (118,320) (35,740) (304,166)
Proceeds from disposal of
fixed assets 4,396 -- -- 7,349
--------- --------- --------- ---------
Net cash used in
investing activities (110,132) (118,320) (35,740) (296,817)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- -- -- 291,864
Principal payments on
long-term debt (13,616) (28,607) (11,656) (2,072)
Loan to related party -- (42,963) -- --
Collection of loan to
related party -- -- -- 23,489
Payment on loan from related party (22,419) (369) (3,663) --
--------- --------- --------- ---------
Net cash provided by
(used in) financing
activities (36,035) (71,939) (15,319) 313,281
--------- --------- --------- ---------
Net increase in cash and
cash equivalents -- 86,226 -- 1,972
CASH AND CASH EQUIVALENTS,
beginning of period -- -- -- 86,226
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ -- $ 86,226 $ -- $ 88,198
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for--
Interest $ 47,496 $ 27,231 $ 13,309 $ 4,097
========= ========= ========= =========
Income taxes -- $ 32,878 -- --
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
LIRPACO INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
Lirpaco Inc. (the "Company"), a Canadian corporation, is a holding company
with one subsidiary, COS INFORMATION INC., a Quebec Corporation. The Company's
primary businesses are (i) the production and distribution of computer-generated
labels, (ii) the production and distribution of documents on paper, microfiche,
microfilm and compact disc, (iii) demand publishing, (iv) mailing services and
(v) forms management. Its customer base is mainly comprised of businesses in and
around Montreal, Canada.
The Company and its stockholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of Vestcom.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared from records maintained in
Canada. The Company's financial statements are presented in accordance with the
generally accepted accounting principles of the United States of America. All
significant intercompany transactions have been eliminated in consolidation.
Foreign Currency
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Translation," income statement accounts are translated at
the average exchange rates in effect during the period, while assets and
liabilities are translated at the rates of exchange at the balance sheet date.
The resulting balance sheet translation adjustments are $2,247, $7,744 and
$12,985 for the years ended July 31, 1995 and 1996 and the five months ended
December 31, 1996, respectively.
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 periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are
presented net of postage charges in the income statement as customers advance
the Company cash to be used to purchase postage for related projects.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly
liquid debt instruments purchased with original maturities of three months or
less.
Supplies Inventory
Supplies inventory consists of paper, toner, developer and other disposable
chemicals, film and micrographic chemicals, and packaging materials. Supplies
are valued at cost, which approximates market, with cost determined using the
first-in-first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
principally using an accelerated method over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized over the shorter of
the estimated useful lives of the assets or the terms of the related leases.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
Income taxes are provided based on earnings reported for financial
statement purposes. The provision for income taxes differs from the amounts
currently payable because of timing differences in the recognition of certain
income and expense items for financial reporting and tax purposes. In accordance
with SFAS No. 109, the Company accounts for income taxes using an asset and
liability method. The asset and liability method requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of assets
and liabilities, measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risks" consist primarily of trade accounts receivable.
The Company's customers are concentrated in eastern Canada. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends, and other information.
(3) Property and Equipment
Property and equipment consist of the following at July 31, 1995 and 1996
and December 31, 1996:
<TABLE>
<CAPTION>
Estimated
July 31 December 31, Useful
1995 1996 1996 Lives (Years)
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Machinery and equipment $1,926,410 $1,905,968 $1,522,185 10
Furniture and fixtures 117,499 130,074 148,566 10
Leasehold improvements 124,305 126,269 258,794 7
Computer hardware 221,281 284,840 300,282 6
Computer software 15,008 26,955 27,292 5
---------- ---------- ----------
2,404,503 2,474,106 2,257,119
Less--Accumulated
depreciation and
amortization (1,965,805) (2,030,162) (1,595,218)
---------- ---------- ----------
Property and equipment, net $ 438,698 $ 443,944 $ 661,901
========== ========== ==========
Leased equipment under capital leases (included above) consists of the
following at July 31, 1995 and 1996 and December 31, 1996.
July 31 December 31,
1995 1996 1996
---- ---- ----
Equipment $ 32,199 $ 47,430 $ 47,430
Less--Accumulated amortization (8,413) (13,795) (17,574)
-------- -------- --------
$ 23,786 $ 33,635 $ 29,856
======== ======== ========
</TABLE>
Depreciation and amortization expense on property and equipment charged to
operations for the years ended July 31, 1995 and 1996 and the five-month periods
ended December 31, 1995 (unaudited) and 1996 was $118,767, $113,074, $49,796 and
$59,516, respectively.
(4) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following at July 31,
1995 and 1996 and December 31, 1996:
<TABLE>
<CAPTION>
July 31 December 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Accounts payable $ 860,995 $372,399 $420,115
Wages payable 217,247 314,209 156,881
Sales taxes payable 52,908 108,967 91,435
Customer advances 118,443 600 6,843
Other 94,371 28,221 --
---------- -------- --------
$1,343,964 $824,396 $675,274
========== ======== ========
</TABLE>
(5) Long-Term Debt
Long-term debt consists of the
following at July 31, 1995 and 1996
and December 31, 1996:
<TABLE>
<CAPTION>
July 31 December 31,
1995 1996 1996
---- ---- ----
Various noninterest bearing equipment loans
payable to various companies for capital
leases. Principal amounts are payable
in aggregate monthly installments of
$2,225; collateralized by specific
equipment, maturing November 1996
<S> <C> <C> <C>
through June 1997. $19,059 $19,423 $ 5,054
Equipment loan payable to a financial
institution. Final payment was made
in September 1996. 30,679 2,072 --
Leasehold improvement loan payable to a
financial institution, bearing
interest at 1/2% over the Daily
Floating Base interest rate (8 1/2%
at December 31, 1996). The principal
is payable in escalating monthly
installments of $2,554 to $5,472;
collateralized by the assets of the
Company. The final payment is due
in December 2001. -- -- 291,864
------- ------- --------
49,738 21,495 296,918
Less--Current maturities 42,045 21,495 51,752
------- ------- --------
$ 7,693 $ -- $245,166
======= ======= ========
</TABLE>
At December 31, 1996 the aggregate amounts of annual principal maturities
of long-term debt (including capital leases) are as follows:
1997 $ 51,752
1998 56,917
1999 56,917
2000 65,666
2001 65,666
--------
$296,918
=========
(6) Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended Five Months Ended
July 31 December 31
------- -----------
1995 1996 1995 1996
---- ---- ---- ----
(unaudited)
Current tax expense
<S> <C> <C> <C> <C>
Federal $ 67 $ 3,847 $ -- $ 27,077
Provincial 11,073 13,670 8,827 10,563
------- ------- ------- --------
Total current 11,140 17,517 8,827 37,640
------- ------- ------- --------
Deferred tax expense
Federal 15,273 57,931 19,570 (8,533)
Provincial (3,703) 1,518 588 (3,613)
------- ------- ------- --------
Total deferred 11,570 59,449 20,158 (12,146)
------- ------- ------- --------
Total provision $22,710 $76,966 $28,985 $ 25,494
======= ======= ======= ========
</TABLE>
The Canadian statutory tax rate is 18.87% on the first $147,000 of taxable
revenue. The Company pays taxes on its taxable income at this rate except as
modified for certain permanent differences.
(7) Commitments and Contingencies
Operating Leases
The Company leases office premises, warehouse space and a portion of its
machinery and equipment under operating leases expiring at varying dates through
2001.
At December 31, 1996 the minimum annual rental commitment of the Company
under existing agreements are as follows:
1997 $405,260
1998 298,559
1999 138,079
2000 65,597
2001 50,267
--------
Total minimum payments $957,762
=========
Rent expense including lease escalations charged to operations for the
years ended July 31, 1995 and 1996 and the five months ended December 31, 1995
(unaudited) and 1996 was $41,827, $41,135, $22,637 and $17,267, respectively.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
(8) Related Party Transactions
A stockholder had noninterest bearing loans outstanding to the Company in
the amounts of $0, $42,963 and $19,474 at July 31, 1995 and 1996, and December
31, 1996, respectively, included in due from related party in the accompanying
balance sheets. The loans were repaid in January 1997.
(9) Employee Benefit Plan
The Company maintains a profit sharing plan for all employees. The Plan
provides for the Company to contribute 30% of pretax income, net of certain
adjustments. Contributions to this plan for the years ended July 31, 1995 and
1996 and the five months ended December 31, 1995 (unaudited) and 1996 were
$88,605, $179,777, $62,349 and $38,365, respectively.
(10) Major Customers
The Company has one customer which accounted for 15.1% and 12.9% of sales
for the year ended July 31, 1996 and the five months ended December 31, 1996,
respectively, and another customer which represented 10.9% and 10.6% of sales
for the year ended July 31, 1996 and the five months ended December 31, 1996,
respectively.
(11) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In March 1997, the Company and its stockholders entered into a definitive
agreement with Vestcom providing for the Acquisition of the Company by Vestcom.
<PAGE>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
December 31, June 30,
1996 1997
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 88,198 $ 2,049
Accounts receivable, net 743,380 720,706
Other current assets 221,989 250,880
---------- ----------
Total current assets 1,053,567 973,635
PROPERTY AND EQUIPMENT net 661,901 704,030
---------- ----------
Total assets $1,715,468 $1,677,665
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital
lease obligations $ 51,752 $ 14,856
Other current liabilities 711,573 506,797
---------- ----------
Total current liabilities 763,325 521,653
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 245,166 298,717
DEFERRED EXPENSES 26,474 26,294
---------- ----------
Total liabilities 1,034,965 846,664
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock 102 102
Preferred Stock 170,206 170,206
Retained earnings 474,943 584,091
Cumulative translation adjustments 35,252 76,602
---------- ----------
Total stockholders' equity 680,503 831,001
---------- ----------
Total liabilities and stockholders' equity $1,715,468 $1,677,665
========== ==========
</TABLE>
The accompanying notes to condensed financial statements are an
integral part of these balance sheets
<PAGE>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $2,484,121 $2,137,817
COST OF REVENUES 1,636,247 1,454,040
------------ ------------
Gross Profit 847,874 683,777
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 633,189 522,016
---------- ----------
Income from operations 214,685 161,761
---------- -----------
OTHER INCOME (EXPENSE):
Interest Expense (8,659) (16,231)
Interest and other income (expense) -- --
---------- -----------
Income before provision for income taxes 206,026 145,530
---------- -----------
PROVISION FOR INCOME TAXES 51,506 36,383
---------- ----------
Net income $ 154,520 $ 109,147
========== ==========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 154,520 $ 109,147
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation and amortization 29,535 37,000
Changes in operating assets (increase) decrease in-
Accounts receivable 141,442 22,674
Other assets 253,295 (28,891)
Changes in operating liabilities increase
(decrease) in-
Other current liabilities (74,378) (204,775)
Deferred charges (672) (180)
---------- ----------
Net cash provided by (used in) operating
activities 503,742 (65,025)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (38,834) (79,129)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cumulative translation adjustment (4,964) 41,350
Net proceeds from borrowings (460,144) 16,655
------------ ----------
Net cash provided by (used in) financing
activities (465,108) 58,005
------------ ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS -- (86,149)
CASH AND CASH EQUIVALENTS, beginning of period -- 88,198
----------------- ----------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 2,049
---------------- -----------
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE>
LIRPACO INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of management
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For further
information, refer to the financial statements and footnotes thereto for the
year ended December 31, 1996, included elsewhere in this Registration Statement.
In March 1997, the Company and its stockholders entered into a definitive
agreement with Vestcom International, Inc. (Vestcom) pursuant to which the
Company will merge with Vestcom. All outstanding shares of the Company will be
exchanged for cash and shares of Vestcom common stock concurrent with the
consummation of the initial public offering of the common stock of Vestcom.
(2) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per share.
The Company's underwriters exercised in full an option to purchase an additional
577,500 shares of the Company's Common Stock at $13.00 per share to cover over
allotments of the initial public offering. The initial public offering was
consummated on August 4, 1997. The capital raised by this offering was
approximately $54,000,000, net of underwriting discounts. Concurrently with the
offering, Vestcom acquired all of the outstanding shares of Lirpaco, Inc.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Computer Output Systems, Inc.:
We have audited the accompanying balance sheets of Computer Output Systems,
Inc. (a Connecticut corporation) as of December 31, 1995 and 1996, and the
related statements of income, stockholders' equity, and cash flows for the years
ended December 31, 1994, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computer Output Systems,
Inc. as of December 31, 1995 and 1996 and the results of its operations and its
cash flows for the years ended December 31, 1994, 1995 and 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 24, 1997
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
BALANCE SHEETS
As of December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 95,468 $ --
Accounts receivable, net of allowance for doubtful
accounts of $7,500 and $5,000 in 1995 and 1996,
respectively 721,721 964,035
Supplies inventory 35,191 176,211
Prepaid postage 90,757 139,458
Prepaid expenses and other current assets 9,019 25,642
--------- ---------
Total current assets 952,156 1,305,346
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization 459,723 472,003
OTHER ASSETS 23,906 36,240
-------- ----------
Total assets $1,435,785 $1,813,589
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 60,000 $ 150,000
Current portion of capital lease obligations 108,235 94,584
Accounts payable 354,215 566,064
Accrued expenses 63,870 88,720
Advanced postage 273,710 249,605
---------- ----------
Total current liabilities 860,030 1,148,973
LONG-TERM DEBT 207,358 --
CAPITAL LEASE OBLIGATIONS 227,249 130,072
---------- ----------
Total liabilities 1,294,637 1,279,045
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 10,000 shares
authorized, 100 shares issued and outstanding 10 10
Additional paid-in capital 732,470 732,470
Retained earnings (591,332) (197,936)
---------- ----------
Total stockholders' equity 141,148 534,544
---------- ----------
Total liabilities and stockholders' equity $1,435,785 $1,813,589
========== ==========
The accompanying notes to financial statements
are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
STATEMENTS OF INCOME
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $2,192,400 $ 3,542,048 $ 4,854,633
COST OF REVENUES 1,459,472 2,446,078 3,131,997
---------- ---------- ----------
Gross profit 732,928 1,095,970 1,722,636
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 681,638 979,211 1,195,057
---------- ---------- ----------
Income from operations 51,290 116,759 527,579
---------- ---------- ----------
OTHER EXPENSE:
Interest expense 34,883 49,482 38,794
Other expense 15,540 -- --
---------- ---------- ----------
50,423 49,482 38,794
---------- ---------- ----------
Income before provision for
income taxes 867 67,277 488,785
---------- ---------- ----------
PROVISION FOR INCOME TAXES 250 7,365 51,353
---------- ---------- ----------
Net income $ 617 $ 59,912 $ 437,432
========== ========== ==========
The accompanying notes to financial statements
are an integral partof these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
Additional Total
Common Stock Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994
(Note 1) 100 $10 $732,470 $(635,719) $ 96,761
Net income -- -- -- 617 617
--- --- -------- --------- --------
BALANCE AT DECEMBER 31, 1994 100 10 732,470 (635,102) 97,378
Net income -- -- -- 59,912 59,912
Distributions to stockholders -- -- -- (16,142) (16,142)
--- --- -------- --------- --------
BALANCE AT DECEMBER 31, 1995 100 10 732,470 (591,332) 141,148
Net income -- -- -- 437,432 437,432
Distributions to stockholders -- -- -- (44,036) (44,036)
--- --- -------- --------- --------
BALANCE AT DECEMBER 31, 1996 100 $10 $732,470 $(197,936) $534,544
=== === ======== ========= ========
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
COMPUTER OUTPUT SYSTEMS, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 617 $ 59,912 $ 437,432
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization 86,342 105,145 132,812
Provision for doubtful accounts 5,000 14,373 --
Loss on abandonment of leasehold
improvements 9,358 -- --
Changes in operating assets (increase)
decrease in--
Accounts receivable (105,123) (333,798) (242,314)
Supplies inventory (27,350) (7,841) (141,020)
Prepaid postage (34,549) (49,588) (48,701)
Prepaid expenses and other assets 740 (9,075) (28,956)
Changes in operating liabilities
increase (decrease) in--
Accounts payable (23,017) 153,470 212,200
Accrued expenses 12,345 38,851 24,850
Advanced postage (66,212) 166,245 (24,105)
--------- -------- ---------
Net cash provided by (used in)
operating activities (141,849) 137,694 322,198
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Acquisition of property and equipment (59,220) (33,927) (145,444)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings -- 200,000 (50,000)
Principal payments on capital lease
obligations (63,555) (99,040) (110,828)
Proceeds from loans from affiliated company 430,029 -- --
Repayment of loans from affiliated company (185,080) (73,442) (67,358)
Proceeds from (payments on)
stockholder loans 30,000 (30,000) --
Distributions to stockholders -- (16,142) (44,036)
---------- --------- ---------
Net cash provided by (used in)
financing activities 211,394 (18,624) (272,222)
---------- --------- ---------
Net (decrease) increase in cash
and cash equivalents 10,325 85,143 (95,468)
CASH AND CASH EQUIVALENTS, beginning of year -- 10,325 95,468
---------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 10,325 $ 95,468 $ --
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for--
Interest $ 38,871 $ 44,797 $ 38,329
========== ========= =========
State income tax $ 250 $ 250 $ 19,004
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Capital lease obligations incurred $ (330,089) $(143,700) $ --
========== ========= =========
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
COMPUTER OUTPUT SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
The Company was formed pursuant to a "Corporate Reorganization Agreement"
dated December 28, 1994, whereby Computer Output Systems, Inc. (an existing
Connecticut S Corporation) transferred and assigned the assets and liabilities
of its computer printing business to Hall-Cicchese Acquisition Corporation
(hereinafter referred to as "Acquisition Corp."). Computer Output Systems, Inc.
simultaneously surrendered its use of the corporate name "Computer Output
Systems, Inc.," thereby permitting Acquisition Corp. to adopt the use of the
corporate name "Computer Output Systems, Inc." (hereinafter referred to as the
"Company"). The effective date of this agreement, as agreed upon by the parties,
was January 1, 1994. The corporate reorganization essentially represented an
exchange of shares between entities under common control. Accordingly, the
assets and liabilities so transferred were accounted for at historical cost.
The Company's primary businesses are (i) the production and distribution of
documents on paper, (ii) computer center document outsourcing services, (iii)
marketing materials fulfillment, (iv) mailing services and (v) forms management.
The Company and its shareholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of Vestcom.
(2) Summary of Significant Accounting Policies
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 reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are
presented net of postage charges in the income statement as customers advance
the Company cash to be used to purchase postage for related projects.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less.
Supplies Inventory
Supplies inventory consists primarily of paper and toner. Supplies are
valued at cost, which approximates market, with cost determined using the
first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements and assets subject to capital lease are
capitalized and amortized over the lesser of the estimated useful life or the
remaining life of the building lease agreement. The Company accounts for fixed
asset additions under the half-year convention guidelines.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of equipment and leaseholds, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
Federal corporation income taxes on its taxable income. Instead, the
stockholders are liable for individual federal income taxes on their respective
shares of the Company's taxable income. Accordingly, no provision for Federal
corporate income taxes has been made in the accompanying financial statements.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value is necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," consist primarily of trade accounts receivable.
The Company's customers are concentrated in the northeast United States. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends, and other
information.
(3) Property and Equipment
The following is a summary of property and equipment at December 31:
<TABLE>
<CAPTION>
Estimated
Useful
Lives
1995 1996 (Years)
---- ---- -------
<S> <C> <C> <C>
Furniture and fixtures $ 37,622 $ 37,622 7
Computers and equipment 680,805 641,132 5
Leasehold improvements 25,492 96,045 10
--------- ---------
743,919 774,799
Less--Accumulated depreciation and
amortization (284,196) (302,796)
--------- ---------
Property and equipment, net $ 459,723 $ 472,003
========= =========
</TABLE>
Leased equipment under capital leases (included above) consists of the
following at December 31:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computers and equipment $ 500,289 $ 428,789
Less--Accumulated depreciation (130,835) (185,656)
--------- ---------
$ 369,454 $ 243,133
========= =========
</TABLE>
Depreciation and amortization expense was $86,342, $105,145 and $132,812
for the years ended December 31, 1994, 1995 and 1996, respectively.
At December 31, 1996 minimum annual payments under capital leases including
interest are as follows:
1997 $105,473
1998 97,728
1999 47,747
--------
Total minimum payments 250,948
Less--Amounts representing interest (26,292)
---------
Net minimum lease payments 224,656
Less--Current portion of capital lease obligations 94,584
--------
Long-term portion of capital lease obligations $130,072
========
The interest rates on capitalized leases vary from 8% to 13% and are
imputed based on the fair market value of the equipment at the inception of the
lease.
(4) Long-Term Debt
1995 1996
---- ----
Long-term debt consists of the following at December 31:
$300,000 line of credit with a financial institution.
Secured by substantially all of the assets of
the Company. Interest is payable monthly at
prime (8 1/4% at December 31, 1996)
plus 1%. All outstanding balances due on
December 19, 1997. $200,000 $150,000
Unsecured loan from an affiliated company bearing
interest at 10.25%, payable in monthly principal
installments of approximately $7,000. Loan is
subordinated to the line of credit. 67,358 --
-------- --------
267,358 150,000
Less--Current maturities 60,000 150,000
-------- --------
$207,358 $ --
======== ========
The line of credit agreement requires the maintenance of certain ratios
related to net worth and working capital. The Company was in compliance with
these covenants at December 31, 1996.
(5) Commitments and Contingencies
Operating Leases
The Company and its affiliate, Halls Magazine Reports, Inc. ("Halls"), a
company of which Daniel Hall, president and stockholder of the Company is the
owner (see Note 6), share their leased office space. The lease expires on July
31, 2004. The Company has the option to extend the term of the lease for a
period of five years from the date upon which it would otherwise expire. The
rent is fixed for the term of the lease with scheduled increases on August 1,
1997 and August 1, 2000. The Company is responsible for its proportionate share
of all related occupancy costs. The Company allocates 13% of this rental
obligation to Halls.
The Company also leases equipment and vehicles under noncancellable
operating leases expiring through 1999.
At December 31, 1996 the minimum annual rental commitment of the Company
under existing agreements are as follows:
1997 $ 409,473
1998 347,536
1999 323,274
2000 223,593
2001 228,843
Thereafter 338,400
----------
Total minimum payments $1,871,119
==========
Rental expense charged to operations amounted to $136,352, $172,080 and
$280,337 for the years ended December 31, 1994, 1995 and 1996, respectively.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Restrictions on Sale of Common Stock
The common stock of the Company is subject to restrictions on sale,
assignment, pledge, transfer or other disposition pursuant to the stockholders'
agreement dated December 28, 1994.
Employment Contracts
The Company entered into ten year employment contracts dated December 28,
1994 with Daniel Hall and Timothy Cicchese. In addition to providing for base
compensation and bonuses based on profitability, the contracts provide for 24
months continuation of base salary and benefits if termination occurs prior to
the end of the contract. See Note 9 for discussion of termination of such
agreements.
(6) Related Party Transactions
Loan from Affiliated Company
At December 31, 1995, the Company owed $67,358 to Halls. The loan was
repaid by the Company by December 31, 1996 through payments of a portion of
Halls' monthly business expenses such as office space, medical and dental
insurance, general insurance and long distance telephone. In addition, the
Company produced Halls' monthly reports to reduce the outstanding loan balance.
Services billed to Halls were $21,516, $19,253 and $21,433 for the years ended
December 31, 1994, 1995 and 1996, respectively. Interest on this loan amounted
to $14,484, $11,225 and $2,102 for the years ended December 31, 1994, 1995 and
1996, respectively.
At December 31, 1996, Halls owed the Company $26,509, which is included in
accounts receivable.
Loans from Stockholders
During the month of December 1994, Daniel Hall, president and stockholder,
and Timothy Cicchese, vice president and stockholder, each loaned the Company
$15,000. These loans were repaid in May 1995 with no interest.
(7) Employee Benefit Plan
The Company maintains a 401(k) deferred compensation plan. The plan
provides for the Company to contribute amounts equal to 33% of the contributions
made by employees up to 5% of their total annual salary. Company contributions
to this plan for the years ended December 31, 1994, 1995 and 1996 were $12,876,
$14,773 and $15,238, respectively.
(8) Significant Customer
During the years ended December 31, 1994, 1995 and 1996 one customer
accounted for $415,000, $1,077,000 and $1,412,000 of the Company's revenues,
respectively. This customer is a service bureau servicing many different
business accounts. The Company provides subcontracting services for over 70
different accounts for this customer. Accounts receivable from this customer as
of December 31, 1995 and 1996 were approximately $172,000 and $166,000,
respectively. Effective October 1, 1996, the Company and this customer entered
into a one year service agreement whereby the Company will provide document
generation and mailing services at prices specified in the agreement. The
Company intends to renew the contract without significant modification of the
original agreement.
(9) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom providing for the Acquisition of the Company
by Vestcom.
Prior to the closing of the Acquisition, the Company will make
distributions in respect of the Company's estimated S Corporation accumulated
adjustment account at the time of closing.
The employment contracts with Mr. Hall and Mr. Cicchese will be terminated
as part of the Acquisition.
<PAGE>
COMPUTER OUTPUT SYSTEMS, INC.
CONDENSED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
December 31, June 30,
1996 1997
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $247,064
Accounts receivable, net 964,035 962,682
Other current assets 341,311 257,600
----------- ------------
Total current assets 1,305,346 1,467,346
PROPERTY AND EQUIPMENT, net 472,003 627,818
OTHER ASSETS 36,240 37,559
----------- -------------
Total assets $1,813,589 $2,132,723
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ -- $ 250,000
Current portion of long-term debt and capital
lease obligations 244,584 90,128
Other current liabilities 904,389 1,120,009
---------- ---------
Total current liabilities 1,148,973 1,460,137
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 130,072 249,120
DEFERRED EXPENSES -- --
---------- --------
Total liabilities 1,279,045 1,709,257
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 10 10
Additional paid-in capital 732,470 732,470
Retained earnings (197,936) (309,014)
---------- ----------
Total stockholders' equity 534,544 423,466
---------- ----------
Total liabilities and stockholders' equity 1,813,589 $2,132,723
========= ==========
The accompanying notes to condensed financial
statements are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $2,368,427 $3,475,877
COST OF REVENUES 1,529,360 2,276,692
--------- ----------
Gross Profit 839,067 1,199,185
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 537,761 638,326
---------- ----------
Income from operations 301,306 560,859
---------- ----------
OTHER INCOME (EXPENSE):
Interest Expense (11,051) (25,285)
Interest and other income -- 1,952
--------------- -----------
Income before provision for income taxes 290,255 537,526
PROVISION FOR INCOME TAXES 28,555 55,204
---------- ----------
Net income $ 261,700 $ 482,322
========== ==========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 261,700 $ 482,322
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 63,174 76,036
Changes in operating assets (increase) decrease in--
Accounts receivable 147,912 1,353
Other current assets 11,856 83,712
Changes in operating liabilities increase
(decrease) in--
Other current liabilities (122,810) 215,620
--------- ---------
Net cash provided by operating activities 361,832 859,043
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (101,683) (70,668)
Security deposits 700 (1,320)
------------ --------
Net cash used in investing activities (100,983) (71,988)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings (172,183) 53,409
Distributions to stockholders (17,910) (593,400)
----------- ---------
Net cash used in financing activities (190,093) (539,991)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 70,756 247,064
CASH AND CASH EQUIVALENTS, beginning of period 95,468 --
--------- ---------
CASH AND CASH EQUIVALENTS, ending of period $ 166,224 $ 247,064
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred -- $ 161,183
=========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
COMPUTER OUTPUT SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information refer to the financial statements and footnotes
thereto for the year ended December 31, 1996, included elsewhere in this
Registration Statement.
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom International, Inc. ("Vestcom") pursuant to
which the Company will merge with Vestcom. All outstanding shares of the Company
will be exchanged for cash and shares of Vestcom common stock concurrent with
the consummation of the initial public offering of the common stock of Vestcom.
(2) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial
public offering of 3,850,000 shares of its Common Stock at a price of $13.00 per
share. The Company's underwriters exercised in full an option to purchase an
additional 577,500 shares of the Company's Common Stock at $13.00 per share to
cover over allotments of the initial public offering. The initial public
offering was consummated on August 4, 1997. The capital raised by this offering
was approximately $54,000,000, net of underwriting discounts. Concurrently with
the offering, Vestcom acquired all of the oustanding shares of Computer Output
Systems, Inc.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Electronic Imaging Services, Inc.:
We have audited the accompanying balance sheet of Electronic Imaging
Services, Inc. (a Delaware Corporation) as of December 31, 1996 and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Electronic Imaging Services,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficiency and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 17, 1997
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
BALANCE SHEET
As of December 31, 1996
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 45,089
Accounts receivable, net of allowance
for doubtful accounts of $37,017 826,655
Supplies inventory 413,210
Other current assets 112,696
-----------
Total current assets 1,397,650
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization 1,526,992
OTHER ASSETS 54,944
Total assets $ 2,979,586
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 662,575
Current portion of long-term debt 169,393
Current portion of capital lease obligations 232,863
Accounts payable 1,119,316
Accrued expenses 321,200
-----------
Total current liabilities 2,505,347
LONG-TERM DEBT 48,644
CAPITAL LEASE OBLIGATIONS 768,504
DEFERRED INCOME TAXES 86,740
PLEDGED STOCK 375,000
-----------
Total liabilities 3,784,235
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 2,000 shares authorized; 1,261
shares issued; 961 shares outstanding 11
Accumulated deficit (429,660)
(429,649)
Less--Treasury stock, 150 shares at cost (375,000)
-----------
Total stockholders' deficit (804,649)
-----------
Total liabilities and stockholders' deficit $ 2,979,586
===========
</TABLE>
The accompanying notes to financial statements
are an integral part of this balance sheet.
<PAGE>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENT OF OPERATIONS
For The Year Ended December 31, 1996
REVENUES $7,623,870
COST OF REVENUES 6,272,144
----------
Gross profit 1,351,726
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,840,958
-----------
Loss from operations (489,232)
OTHER INCOME (EXPENSE):
Interest expense (157,762)
Other income 11,789
-----------
(145,973)
-----------
Net loss $ (635,205)
==========
The accompanying notes to financial statements are an
integral part of this statement.
<PAGE>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
for the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated Treasury Stock
Shares Amount Capital Deficit) Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 1,261 $ 13 $101,987 $ 478,556 -- $ $ 580,556
Purchase of treasury stock (240) -- -- 240 (600,000) (600,000)
Reissuance of treasury stock 90 -- -- (90) 225,000 225,000
Pledge of common stock (150) (2) (101,987) (273,011) -- -- (375,000)
Net loss -- -- -- (635,205) -- -- (635,205)
-- -- -- --------- -- -- ---------
BALANCE, December 31, 1996 961 $ 11 $ $(429,660) 150 $(375,000) $(804,649)
=== ======= ========== ========== === ========== =========
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $(635,205)
Adjustments to reconcile net loss to net cash provided
by operating activities--
Depreciation and amortization 297,192
Provision for doubtful accounts 33,923
Loss on write-down of property and equipment 21,968
Gain on sale of property (15,629)
Changes in operating assets (increase) decrease in--
Accounts receivable (132,397)
Supplies inventory (137,494)
Other current assets 61,755
Changes in operating liabilities increase (decrease) in--
Accounts payable 530,454
Accrued expenses 217,821
Net cash provided by operating activities 242,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (194,500)
Proceeds from sale of property and equipment 70,296
Net cash used by investing activities (124,204)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 469,000
Payments on long-term debt and capital lease obligations (339,993)
Purchase of treasury stock (225,000)
---------
Net cash used by financing activities (95,993)
Net increase in cash and cash equivalents 22,191
CASH AND CASH EQUIVALENTS, at beginning of year 22,898
---------
CASH AND CASH EQUIVALENTS, at end of year $ 45,089
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest $ 167,051
=========
Income taxes $ 30,893
=========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Capital lease obligations incurred $ 971,975
=========
Purchase of treasury stock through issuance of notes payable $ 375,000
=========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
<PAGE>
ELECTRONIC IMAGING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
Electronic Imaging Services, Inc. ("EIS" or the "Company"), is a
Delaware corporation. The Company's primary businesses are (i) the production
and distribution of computer-generated labels, (ii) the production and
distribution of documents on paper, microfiche, microfilm and compact disc and
(iii) forms management.
The Company and its stockholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering ("the Offering") of the common stock
of Vestcom.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered a loss
from operations, has a working capital deficit and has a net capital deficiency
that raises substantial doubt about its ability to continue as a going concern.
As discussed above, the Company intends to enter into the Acquisition with
Vestcom. However, no assurance can be given that the Acquisition will occur. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(2) Summary of Significant Accounting Policies
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 periods. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when the services are rendered.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly
liquid debt instruments purchased with original maturities of three months or
less.
Supplies Inventory
Inventories consist of paper, film and micrographic chemicals. Supplies
are valued at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
by using the straight-line method over the estimated useful lives of the related
assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
The Company follows the liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all
deferred tax assets due to the uncertainty of ultimate realizability.
Accordingly, no income tax benefits have been recorded for current year losses.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Accordingly, in the event that facts and circumstances indicate
that property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the assets is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk, as defined by SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet-Risk and
Financial Instruments with Concentrations of Credit Risk," consist primarily of
trade accounts receivable. The Company's customers are concentrated in the
southern and eastern United States. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.
(3) Property and Equipment
Property and equipment consists of the following at December 31, 1996:
Estimated
Useful
Lives
(Years)
Furniture and fixtures $ 146,458 10
Production equipment 2,365,483 5-7
Delivery equipment 65,998 5
Leasehold improvements 39,105 7
----------
2,617,044
Less--Accumulated depreciation
and amortization 1,090,052
----------
Property and equipment $1,526,992
===========
Leased equipment under capital leases (included above) consists of the
following at December 31, 1996:
Equipment $1,381,584
Less--Accumulated depreciation 314,672
----------
$1,066,912
==========
Depreciation and amortization expense was $297,192 for the year ended
December 31, 1996. At December 31, 1996 minimum annual payments under capital
leases including interest are as follows:
1997 $ 317,733
1998 317,733
1999 306,874
2000 192,781
2001 62,708
----------
Total minimum payments 1,197,829
Less--Amount representing interest 196,462
----------
Net minimum lease payments 1,001,367
Less--Current portion of capital lease obligation 232,863
----------
Long-term portion of capital lease obligations $ 768,504
==========
The interest rates on capitalized leases vary from 8.6% to 13.3% and are
imputed based on the fair market value of the equipment at the inception of the
lease.
(4) Short-Term Borrowings
The Company has a line of credit with a bank that provides for maximum
borrowings of $750,000. Borrowings bear interest at 9.25% per annum, adjusted
periodically with interest payments only required monthly. The borrowings are
secured by accounts receivable, inventory and the personal guarantee of two
stockholders and are due April 30, 1997.
(5) Long-Term Debt
Long-term debt consists of the following at December 31, 1996:
Note payable to bank; 80% guaranteed by the U.S.
Small Business Administration; interest at 8%;
payable in monthly installments of $6,083,
including interest; secured by fixed assets
and the personal guarantee of two stockholders;
due September 1997 or immediately if the Company
is to merge with another company $ 58,695
Notes payable of $375,000 to two stockholders,
interest at 7.00% per annum, due in semiannual
installments on January 15 and July 15 of
$112,500 on each note through 1998, secured by
Stock Pledge Agreements 375,000
Notes payable to stockholders, interest at a rate of
10% per annum, interest only payable monthly, due
February 28, 1997 66,000
Notes payable of $113,594 original principal to
bank and finance company, interest ranging from
4.8% to 9.75%, due in monthly installments of
$3,600, including interest; secured by accounts
receivable, auto, inventory and personal
guarantees of two stockholders; due January,
1997 to December, 1999 64,946
Note payable to supplier, interest at 7.99%, due in monthly
installments of $1,115, including interest, unsecured,
due April, 1999 28,396
--------
593,037
Less--Current maturities 394,393
--------
$198,644
========
At December 31, 1996, the aggregate amounts of annual principal maturities
of long-term obligations (excluding capitals lease obligations) are as follows:
1997 $394,393
1998 190,753
1999 7,891
2000 --
2001 --
--------
Total $593,037
========
(6) Commitments and Contingencies
Operating Leases
The Company conducts its operations from facilities that are leased
under noncancellable operating leases expiring through March, 2002. The Company
maintains production equipment, office furniture, equipment and two automobiles
under long-term operating leases expiring through 2001.
Net future minimum rental payments required under operating leases for
facilities and equipment as of December 31, 1996, are as follows:
1997 $ 874,885
1998 791,802
1999 412,556
2000 276,702
2001 and thereafter 311,246
----------
Total minimum payments $2,667,191
==========
Rent expense for all leases was $534,555 for the year ended December
31, 1996.
Litigation
The Company is involved in various legal actions arising in the
ordinary course of business. Management does not believe that the outcome of
such legal actions will have a material adverse effect on the Company's
financial position or results of operations.
(7) Employee Benefit Plan
The Company maintains a 401(k) deferred compensation plan. The plan
provides for the Company to make a discretionary matching contribution not to
exceed $1,500 per participant. Contributions to this plan for the year ended
December 31, 1996 were $4,749.
(8) Major Customers
The Company had sales to two customers which exceeded 10% of total
sales, one which accounted for 15.7% of total sales and another which accounted
for 29.5%. Accounts receivable from these two customers at December 31, 1996
were $171,213 and $181,881, respectively.
(9) Stock Repurchase Agreements
The Company repurchased 240 shares of stock from two of the Company's
four stockholders in April 1996. The Company has the option to purchase up to an
additional 334 shares at $2,500 per share. After December 31, 1996, the purchase
price increases at a rate of 7% per year through December 31, 2001. By way of
another agreement, an additional 140 shares at $2,500 per share may be purchased
through December 31, 1996 with an increase of 7% per year thereafter through
December 31, 2002. In connection with the stock repurchase and the option to
repurchase shares of stock, the Company recorded compensation expense of $90,000
in 1996.
(10) Stock Pledge Agreements
The Company entered into two stock pledge agreements with stockholders
on April 24, 1996. One agreement requires the Company to repurchase 30 shares on
January 15 and July 15, 1997 and 1998. The other requires the Company to buy
back 15 shares on January 15 and July 15, 1997. As a result of the potential
Acquisition of the Company, the Stockholders agreed not to require the Company
to repurchase any shares on January 15, 1997. In connection therewith, such
pledged stock has been reclassified outside of stockholders' equity.
See Note 13 for discussion of termination of these agreements.
(11) Stock Bonus Compensation Agreement
The Company has executed a Stock Bonus Compensation Agreement dated
April 24, 1996, for a maximum issuance of 151 shares of the Company's common
stock. As of December 31, 1996, 90 shares had been issued under this agreement.
In connection with this transaction, the Company recorded compensation expense
of $333,200 in 1996.
(12) Related Party Transaction
During 1996, the Company forgave a $100,000 note receivable from a
stockholder. This resulted in a charge to compensation expense which is included
in selling, general, and administrative expenses.
(13) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom providing for the Acquisition of the Company
by Vestcom.
The stock repurchase agreements and stock pledge agreements described
in Notes 9 and 10 will be terminated as part of the Acquisition.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
CONDENSED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
December 31, June 30,
1996 1997
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 45,089 $ --
Accounts receivable, net 826,655 925,140
Other current assets 525,906 624,373
---------- ----------
Total current assets 1,397,650 1,549,513
PROPERTY AND EQUIPMENT; net 1,526,992 1,687,829
OTHER ASSETS 54,944 36,952
--------- ----------
Total assets $2,979,586 $3,274,294
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 662,575 $543,360
Current portion of long-term debt and capital
lease obligations 402,256 422,424
Other current liabilities 1,440,516 1,520,049
---------- ----------
Total current liabilities 2,505,347 2,485,833
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 817,148 1,028,186
DEFERRED EXPENSES 86,740 86,740
PLEDGED STOCK 375,000 375,000
---------- ----------
Total liabilities 3,784,235 3,975,759
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 11 11
Accumulated deficit (429,660) (326,476)
---------- ----------
(429,649) (326,465)
Less-Treasury stock (375,000) (375,000)
---------- ----------
Total stockholders' equity (804,649) (701,456)
---------- ----------
Total liabilities and
stockholders' equity $2,979,586 $3,274,294
========== ==========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these balance sheets
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $3,464,557 $4,400,849
COST OF REVENUES 2,891,308 3,364,379
--------- --------
Gross Profit 573,249 1,036,470
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 663,787 749,257
------- ---------
Income from operations (90,538) 287,213
OTHER INCOME (EXPENSE):
Interest expense (26,187) (107,884)
Interest and other income (expense) 14,346 (15,062)
------- ----------
Income before provision for income taxes (102,379) 164,267
----------- ----------
PROVISION FOR INCOME TAXES -- 61,084
----------- ----------
Net income (loss) $ (102,379) $ 103,183
=========== ==========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(102,379) $103,183
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Depreciation and amortization 77,891 200,389
Provision for doubtful accounts 36,267 16,700
Gain on sale of property -- 12,650
Changes in operating assets (increase) decrease in--
Accounts receivable (170,616) (115,185)
Other current assets (220,631) (98,467)
Changes in operating liabilities increase
(decrease) in--
Other current liabilities 117,366 79,640
-------- --------
Net cash provided by (used
in) operating activities (262,102) 198,910
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (102,468) (8,324)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings 341,672 (235,675)
------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,898) (45,089)
CASH AND CASH EQUIVALENTS, beginning of period 22,898 45,089
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ -- $ --
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligation incurred -- $ 347,589
========== =========
Purchase of treasury stock through
issuance of note $375,000 --
========== =========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
ELECTRONIC IMAGING SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 1996, included elsewhere in this
Registration Statement.
In February 1997, the Company, and its stockholders entered into a
definitive agreement with Vestcom International, Inc. (Vestcom) pursuant to
which the Company will merge with Vestcom. All outstanding shares of the Company
will be exchanged for cash and shares of Vestcom common stock concurrent with
the consummation of the initial public offering of the common stock of Vestcom.
(2) Subsequent Events
On July 30, 1997, Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per share.
The Company's underwriters exercised in full an option to purchase an additional
577,500 shares of the Company's Common Stock at $13.00 per share to cover over
allotments of the initial public offering. The initial public offering was
consummated on August 4, 1997. The capital raised by this offering was
approximately $54,000,000, net of underwriting discounts. Concurrently with the
offering, Vestcom acquired all of the outstanding shares of Electronic Imaging
Services, Inc.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Image Printing Systems, Inc.:
We have audited the accompanying balance sheets of Image Printing
Systems, Inc. (a Wisconsin corporation) as of December 31, 1995 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1994, 1995, and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Image Printing
Systems, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
BALANCE SHEETS
As of December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 61,835 $ 61,137
Accounts receivable, net of allowance for doubtful
accounts of $0 and $63,868 in 1995 and 1996,
respectively 1,002,680 1,422,234
Supplies inventory 149,072 256,729
Prepaid postage 199,205 324,922
Prepaid expenses and other current assets 163,028 77,738
---------- ----------
Total current assets 1,575,820 2,142,760
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization 2,368,263 2,725,129
---------- ----------
Total assets $3,944,083 $4,867,889
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 320,494 $ 795,494
Current portion of long-term debt 597,290 311,812
Current portion of capital lease obligations 29,159 156,282
Accounts payable 780,237 1,022,927
Accrued expenses and other current liabilities 730,309 841,956
---------- ----------
Total current liabilities 2,457,489 3,128,471
---------- ----------
LONG-TERM DEBT 592,702 331,271
CAPITAL LEASE OBLIGATIONS 686,201 1,102,539
---------- ----------
Total liabilities 3,736,392 4,562,281
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $10 par value; 4,400 shares authorized;
1,559.25 shares issued; 1,386 shares outstanding 15,593 15,593
Subscriptions receivable (10,855) --
Retained earnings 204,686 291,748
---------- ----------
209,424 307,341
Less-Treasury stock, 173.25 shares, at par (1,733) (1,733)
---------- ----------
Total stockholders' equity 207,691 305,608
---------- ----------
Total liabilities and stockholders' equity $3,944,083 $4,867,889
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $8,628,330 $8,061,927 $9,033,680
COST OF REVENUES 6,311,170 5,994,010 6,389,208
---------- ---------- ----------
Gross profit 2,317,160 2,067,917 2,644,472
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,130,987 2,119,588 2,305,378
---------- ---------- ----------
Income (loss) from operations 186,173 (51,671) 339,094
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (311,977) (306,304) (259,784)
Other income, net 37,323 9,816 7,752
---------- ---------- ----------
(274,654) (296,488) (252,032)
---------- ---------- ----------
Net income (loss) $ (88,481) $ (348,159) $ 87,062
========== ========== ==========
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
IMAGE PRINTING SYSTEMS, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, 1995 and 1996
Total
Common Stock Subscriptions Retained Treasury Stock Stockholders'
Shares Amount Receivable Earnings Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 1,599.25 $15,593 $(11,155) $ 990,743 173.25 $(1,733) $ 993,448
Net loss -- -- -- (88,481) -- -- (88,481)
Distributions to Stockholders -- -- -- (105,881) -- -- (105,881)
--------- ------ -------- --------- ------ ------- ---------
BALANCE AT DECEMBER 31, 1994 1,599.25 15,593 (11,155) 796,381 173.25 (1,733) 799,086
Collection of subscriptions receivable -- -- 300 -- -- -- 300
Net loss -- -- -- (348,159) -- -- (348,159)
Distributions to stockholders -- -- -- (243,536) -- -- (243,536)
--------- ------- -------- --------- ------ ------- --------
BALANCE AT DECEMBER 31, 1995 1,559.25 15,593 (10,855) 204,686 173.25 (1,733) 207,691
Write-off of subscriptions receivable -- -- 10,855 -- -- -- 10,855
Net income -- -- -- 87,062 -- -- 87,062
--------- ------- -------- --------- ------ ------- --------
BALANCE AT DECEMBER 31, 1996 1,559.25 $15,593 $ -- $ 291,748 173.25 $(1,733) $305,608
========= ======= ======== ========= ====== ======= =========
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (88,481) $ (348,159) $ 87,062
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Depreciation and amortization 796,062 715,497 636,035
Provision for doubtful accounts -- -- 63,868
(Gain) loss on sale of assets -- 52,365 (762)
Loss on write-off of subscriptions
receivable -- -- 10,855
Changes in operating assets
(increase) decrease in--
Accounts receivable 186,772 (2,623) (483,422)
Supplies inventory (42,085) 42,776 (107,657)
Prepaid expenses and other
current assets 36,264 18,514 (40,427)
Changes in operating liabilities
increase (decrease) in--
Accounts payable (20,338) 226,918 242,690
Accrued expenses and other
current liabilities 174,529 2,933 111,647
---------- ----------- ---------
Net cash provided by operating
activities 1,042,723 708,221 519,889
---------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (830,522) (397,256) (374,027)
Proceeds from sale of assets -- 470,000 8,500
---------- ----------- ---------
Net cash provided by (used in)
investing activities (830,522) 72,744 (365,527)
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 10,000 (29,506) 475,000
Proceeds from long-term borrowings 611,684 638,741 --
Principal payments on long-term debt
and capital lease obligations (741,184) (1,119,674) (630,060)
Collection of subscriptions receivable -- 300 --
Distributions to stockholders (105,881) (243,536) --
---------- ----------- ---------
Net cash used in financing activities (225,381) (753,675) (155,060)
---------- ----------- ---------
Net increase (decrease) in cash
and cash equivalents (13,180) 27,290 (698)
CASH AND CASH EQUIVALENTS, beginning
of year 47,725 34,545 61,835
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 34,545 $ 61,835 $ 61,137
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest $ 307,745 $ 306,304 $ 261,812
========== =========== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITY:
Capital lease obligations incurred -- -- $ 626,612
========== =========== =========
</TABLE>
The accompanying notes to financial
statements are an integral part of these statements.
<PAGE>
- --------------------------------------------------------------------------------
IMAGE PRINTING SYSTEMS, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Business
Image Printing Systems, Inc. (the "Company") is a Wisconsin
corporation. The Company's primary businesses are (i) the production and
distribution of documents on paper, microfiche, microfilm and compact disc, (ii)
marketing materials fulfillment, (iii) demand publishing, (iv) mailing services
and (v) forms management.
The Company and its shareholders intend to enter into a definitive
agreement with Vestcom International, Inc. ("Vestcom"), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Vestcom's common stock (the "Acquisition") concurrent with the
consummation of the initial public offering (the "Offering") of the common stock
of Vestcom.
(2) Summary of Significant Accounting Policies
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 these estimates.
Revenue Recognition
Revenues are recognized when the services are rendered. Revenues are
presented net of postage charges in the income statement as customers advance
the Company cash to be used to purchase postage for related projects.
Cash and Cash Equivalents
Cash and cash equivalents include money market accounts and all highly
liquid debt instruments purchased with original maturities of three months or
less.
Supplies Inventory
Inventories consist of paper and other supplies and work in process and
are valued at the lower of cost or market. Cost is determined by the first-in,
first-out method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
utilizing the straight-line method. The assets are depreciated over their
estimated useful lives.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
Federal or state corporation income taxes on its income. Instead, the
stockholders are liable for individual Federal and state income taxes on their
respective shares of the Company's taxable income. Accordingly, no provision for
Federal or state corporate income taxes has been made in the accompanying
financial statements.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to
concentration of credit risk, as defined by SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," consist primarily of
trade accounts receivable. The Company's customers are concentrated in the
Midwestern United States and its primary customers are financial institutions
and local governments and agencies. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.
(3) Property and Equipment
Property and equipment consist of the following at December 31:
Estimated
Useful
Lives
1995 1996 (Years)
---- ---- -------
Land and building $ 756,749 $ 756,749 19
Machinery and equipment 6,001,691 6,968,637 7
Office equipment, furniture
and fixtures 597,761 604,465 7
Leasehold improvements 339,213 353,702 7-19
--------- -----------
7,695,414 8,683,553
Less--Accumulated depreciation
and amortization (5,327,151) (5,958,424)
----------- -----------
Property and equipment, net $ 2,368,263 $ 2,725,129
=========== ===========
The Company leases its principal location under a capitalized lease
expiring July 31, 2008. The property is leased from stockholders of the Company
("related party lease") (see Note 7). The annual rent is $120,000, and the
lessor has the option to increase the rent by the lesser of 4% per year or the
percentage increase in the Consumer Price Index. The lease also requires
contingent rental payments based on the current year real estate taxes levied on
the property. The real estate tax expense totaled $24,918, $22,290 and $22,633
for the years ended December 31, 1994, 1995 and 1996, respectively. The Company
is also obligated to pay all repairs, maintenance and utilities on the property.
In addition, the Company leases certain equipment under capitalized leases.
Capital leases (included above) consist of the following at December 31:
1995 1996
---- ----
Land and building $ 756,749 $ 756,749
Machinery and equipment 90,000 626,612
--------- ----------
846,749 1,383,361
Less--Accumulated depreciation and amortization (309,062) (372,202)
--------- ----------
$ 537,687 $1,011,159
========= ==========
Depreciation and amortization expense charged to operations totaled
$796,062, $715,497 and $636,035 for the years ended December 31, 1994, 1995 and
1996, respectively.
At December 31, 1996 minimum annual payments under capital leases
including interest are as follows:
1997 $ 306,238
1998 306,238
1999 248,672
2000 236,964
2001 207,723
After 2001 790,000
----------
Total minimum payments 2,095,835
Less--Amounts representing interest 837,014
----------
Net minimum payments 1,258,821
Less--Current portion of capital lease obligations 156,282
----------
Long-term portion of capital leases obligations $1,102,539
==========
The interest rates on capitalized leases vary from 7.9% to 17.6% and
are imputed based on the fair market value of the equipment at the inception of
the lease.
(4) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following
at December 31:
1995 1996
---- ----
Accrued salary and bonus $158,277 $180,861
Postage deposit 531,979 599,929
Other current liabilities 40,053 61,166
-------- --------
$730,309 $841,956
======== ========
(5) Short-Term Borrowings
The Company has an $850,000 secured line of credit with a bank which
expires September 30, 1997. The line is secured by a general security agreement
and personal guarantees of the stockholders of the Company totaling $700,000.
The line bears interest at a rate of prime (8 1/4% at December 31, 1996) plus
3/4%.
(6) Long-Term Debt
Long-term debt consists of the following at December 31:
1995 1996
---- ----
Various equipment loans payable to a financial
institution, bearing interest at
1% above the prime rate (8 1/4% at
December 31, 1996). Principal amounts are
payable in aggregate monthly installments
of $33,076 maturing February 1997
through August 1999; collateralized by
specific equipment and secured by
personal guarantees of stockholders $ 725,024 $ 391,043
Various equipment loans payable to vendors bearing
interest at rates between 9.5% and 14%. Principal
amounts are payable in aggregate monthly
installments of $18,802 maturing January 1997
through October 1998; collateralized by specific
equipment 395,028 198,360
Equipment loan payable to a financial institution
bearing interest at 6%. Principal is payable in
monthly installments of $1,939 beginning November
1993 through October 1996 and $2,403 thereafter;
collateralized by specific equipment.
Final payment is due on December 31, 1998 69,940 53,680
-------- -------
1,189,922 643,083
Less--Current maturities (597,290) (311,812)
---------- ---------
$ 592,702 $ 331,271
========== ==========
At December 31, 1996, the aggregate amounts of annual principal
maturities of long-term obligations (excluding capital leases) are as follows:
1997 $311,812
1998 279,055
1999 52,216
--------
$643,083
========
(7) Commitments and Contingencies
Operating Leases
The Company leases warehouse and operating facilities under a month to
month lease, which currently requires monthly payments of $9,545. The Company is
also committed under various operating leases for equipment and automobiles.
These leases run for periods of one to five years and have monthly payments
ranging from $90 to $871.
At December 31 the minimum annual rental commitment of the Company
under existing agreements are as follows:
1997 $34,980
1998 31,408
1999 18,899
2000 6,751
-------
Total minimum payments $92,038
=======
The above building leases also require the lessee to pay for taxes
and/or maintenance, insurance and utilities on the properties.
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$302,903, $302,999 and $267,509, respectively.
Buy Sell Agreements
The Company has the option to purchase all of the shares owned by
certain stockholder employees should the individuals leave the employ of the
Company or cease to be actively involved in the business.
Litigation
The Company is involved in various legal actions arising in the
ordinary course of business. Management does not believe that the outcome of
such legal actions will have a material adverse effect on the Company's
financial position or results of operations.
(8) Related Party Transactions
The Company has a capitalized real estate lease with the stockholders
of the Company for its principal location. The annual rental is $120,000 and the
expiration date is July 31, 2008 (Note 3). The lessor has the option to increase
the rent by the lesser of 4% per year or the percentage increase in the Consumer
Price Index.
The stockholders were indebted to Image Printing Systems, Inc. on
unsecured, noninterest bearing demand notes originally dated September 10, 1984
in the amount of $10,855, which were included in subscriptions receivable as of
December 31, 1995 and written off in 1996.
(9) Employee Benefit Plan
The Company has a profit sharing plan (401(k)) covering all employees
who are at least 19 years of age and have completed at least one year of
service. Contributions are accrued and paid at the discretion of management.
Currently, the Company has elected to match employee contributions at the rate
of 50% for the first 4% of compensation deferred. The Company contributed
$12,059, $44,006 and $36,613 to the plan for the years ended December 31, 1994,
1995 and 1996, respectively.
(10) Events Subsequent to Date of Report of Independent Public
Accountants (Unaudited)
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom providing for the Acquisition of the Company
by Vestcom.
Prior to the closing of the Acquisition, the Company will make
distributions in respect of the Company's estimated S Corporation accumulated
adjustment account at the time of closing.
<PAGE>
IMAGE PRINTING SYSTEMS, INC.
CONDENSED BALANCE SHEETS
As of December 31, 1996 and June 30, 1997
December 31, June 30,
1996 1997
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,137 $ 202,402
Accounts receivable, net 1,422,234 1,346,911
Other current assets 659,389 381,574
---------- ----------
Total current assets 2,142,760 1,930,887
PROPERTY AND EQUIPMENT, net 2,725,129 3,503,244
OTHER ASSETS -- 23,741
---------- ----------
Total assets $4,867,889 $5,457,872
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 795,494 $ 645,494
Current portion of long-term debt and capital
lease obligations 468,094 772,454
Other current liabilities 1,864,883 1,478,039
---------- ----------
Total current liabilities 3,128,471 2,895,987
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 1,433,810 2,022,663
---------- ----------
Total liabilities 4,562,281 4,918,650
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY:
Common stock 15,593 15,593
Retained earnings 291,748 525,362
---------- ----------
307,341 540,955
Less--Treasury stock (1,733) (1,733)
---------- ----------
Total stockholders' equity 305,608 539,222
---------- ----------
Total liabilities and
stockholders' equity $4,867,889 $5,457,872
========== ==========
The accompanying notes to condensed financial
statements are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1996 and 1997
<S> <C> <C>
1996 1997
---- ----
(Unaudited) (Unaudited)
REVENUES $4,506,252 $5,119,013
COST OF REVENUES 3,198,140 3,564,114
---------- ----------
Gross Profit 1,308,112 1,554,899
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,140,056 11,111,869
--------- ----------
Income from operations 168,056 443,030
OTHER INCOME (EXPENSE):
Interest expense (176,230) (215,319)
Interest and other income -- 5,903
-------------- -----------
Loss before provision for income taxes (8,174) 233,614
----------- ----------
PROVISION FOR INCOME TAXES -- --
------------- ---------------
Net income (loss) $ (8,174) $233,614
======== =========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1997
1996 1997
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (8,174) 233,614
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 322,601 358,997
Loss on write-off of subscriptions receivable 5,427 --
Changes in operating assets (increase) decrease in--
Accounts receivable (202,729) 75,323
Other current assets 145,998 265,721
Changes in operating liabilities increase
(decrease) in--
Other current liabilities 217,822 (386,842)
-------- --------
Net cash provided by operating activities 480,945 546,813
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (275,957) (375,210)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings (92,433) (18,691)
Distributions to stockholders -- (11,647)
-------- --------
Net cash used in financing activities (92,433) (30,338)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 112,555 141,265
CASH AND CASH EQUIVALENTS, beginning of period 61,835 61,137
-------- --------
CASH AND CASH EQUIVALENTS, end of period $174,390 $202,402
======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligation incurred $151,702 $761,904
======== ========
</TABLE>
The accompanying notes to condensed financial
statements are an integral part of these statements.
<PAGE>
IMAGE PRINTING SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1996 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 1996, included elsewhere in this
Registration Statement.
In February 1997, the Company and its stockholders entered into a
definitive agreement with Vestcom International, Inc. (Vestcom) pursuant to
which the Company will merge with Vestcom. All outstanding shares of the Company
will be exchanged for cash and shares of Vestcom's common stock concurrent with
the consummation of the initial public offering of the common stock of Vestcom.
(2) Subsequent Events
On July 30, 1997, Vestcom International, Inc, announced the initial
public offering of 3,850,000 shares of its Common Stock at a price of $13.00 per
share. The Company's underwriters exercised in full an option to purchase an
additional 577,500 shares of the Company's Common Stock at $13.00 per share to
cover over allotments of the initial public offering. The initial public
offering was consummated on August 4, 1997. The capital raised by this offering
was approximately $54,000,000, net of underwriting discounts. Concurrently with
the offering, Vestcom acquired all of the outstanding shares of Image Printing
Systems, Inc.
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Subsection (2) of Section 3-5, Title 14A of the New Jersey Business
Corporation Act empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a corporate agent (i.e., a
director, officer, employee or agent of the corporation or a director, officer,
trustee, employee or agent of another related corporation or enterprise),
against reasonable costs (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement incurred by such person in connection
with such action, suit or proceeding if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal proceedings, had no
reasonable cause to believe that such conduct was unlawful.
Subsection (3) of the Section 3-5 empowers a corporation to indemnify a
corporate agent against reasonable costs (including attorneys' fees) incurred by
him in connection with any proceeding by or in the right of the corporation to
procure a judgment in its favor which involves such corporate agent by reason of
the fact that he is or was a corporate agent if he acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim,
issue or matter as to which such person shall have been adjudged to be liable
for negligence or misconduct unless and only to the extent that the Superior
Court of New Jersey or the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Subsection (4) of Section 3-5 provides that to the extent that a
corporate agent has been successful in the defense of any action, suit or
proceeding referred to in subsections (2) and (3) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including fees attorneys') incurred by him in connection therewith; subsection
(8) of Section 3-5 provides that indemnification provided for by Section 3-5
shall not be deemed exclusive of any rights to which the indemnified party may
be entitled; and subsection (9) of Section 3-5 empowers a corporation to
purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or expenses incurred by
him in any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities and
expenses under Section 3-5.
The Registrant's Certificate of Incorporation contains the following
provision regarding indemnification:
"Every person who is or was a director or officer of the corporation
shall be indemnified by the corporation to the fullest extent allowed by
law, including the indemnification permitted by N.J.S. 14A:3-5, against all
liabilities and expenses imposed upon or incurred by that person in
connection with any proceeding in which that person may be made, or
threatened to be made, a party, or in which that person may become involved
by reason of that person being or having been a director or officer or of
serving or having served in any capacity with any other enterprise at the
request of the corporation, whether or not that person is a director or
officer or continues to serve the other enterprise at the time the
liabilities or expenses are imposed or incurred. During the pendency of any
such proceeding, the corporation, shall, to fullest extent permitted by
law, promptly advance expenses that are incurred from time to time, by a
director or officer in connection with the proceeding, subject to the
receipt by the corporation of an undertaking as required by law."
The Registrant's Certificate of Incorporation contains the following
provision regarding certain limitations on the liability of directors and
officers:
"A director or an officer of the corporation shall not be personally
liable to the corporation or its shareholders for the breach of any duty
owed to the corporation or its shareholders except to the extent that an
exemption from personal liability is not permitted by the New Jersey
Business Corporation Act."
The Registrant's has obtained directors' and officers' liability insurance
providing coverage of up to $10.0 million.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description
2.1 -- Agreement and Plan of Reorganization, dated as of February 28,
1997, by and among Vestcom International, Inc., Computer
Output Acquisition Corp., Computer Output Systems, Inc. and
the Stockholders named therein, is incorporated by reference
to Exhibit 2.1 to the Company's Registration Statement on Form
S-1 (no. 333-23519).
2.2 -- Agreement and Plan of Reorganization, dated as of February
28, 1997, by and among Vestcom International, Inc., Comvestrix
Acquisition Corp., Comvestrix Corp. and the Stockholders named
therein, is incorporated by reference to Exhibit 2.2 to the
Company's Registration Statement on Form S-1 (no. 333-23519).
2.3 -- Agreement and Plan of Reorganization, dated as of February
28, 1997, by and among Vestcom International, Inc., Electronic
Imaging Acquisition Corp., Electronic Imaging Services, Inc.
and the Stockholders named therein, is incorporated by
reference to Exhibit 2.3 to the Company's Registration
Statement on Form S-1 (no. 333-23519).
2.4 -- Agreement and Plan of Reorganization, dated as of February 28,
1997, by and among Vestcom International, Inc., Imaging
Printing Acquisition Corp., Image Printing Systems, Inc.
and the Stockholders named therein, is incorporated by
reference to Exhibit 2.4 to the Company's Registration
Statement on Form S-1 (no. 333-23519).
2.5 -- Agreement and Plan of Reorganization, dated as of February
28, 1997, by and among Vestcom International, Inc., Direct
Mail Services Acquisition Corp., Quality Control Printing
Acquisition Corp., First Class Presort Acquisition Corp.,
Morris County Direct Mail Services, Inc., Quality Control
Printing, Inc., First Class Presort, Inc. and the Stockholders
named therein, is incorporated by reference to Exhibit 2.5 to
the Company's Registration Statement on Form S-1
(no. 333-23519).
2.6 -- Agreement and Plan of Reorganization, dated as of February 28,
1997, by and among Vestcom International, Inc., Mystic Graphic
Acquisition Corp., Mystic Graphic Systems, Inc. and the
Stockholders named therein, is incorporated by reference
to Exhibit 2.6 to the Company's Registration Statement on Form
S-1 (no. 333-23519).
2.7 -- Share Purchase Agreement dated March 10, 1997 by and among
Vestcom International, Inc., LIRPACO Acquisition Corp.,
LIRPACO Inc. and the Stockholders named therein, is
incorporated by reference to Exhibit 2.7 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
3.1 -- Restated Certificate of Incorporation of Vestcom International,
Inc., as amended, is incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the
Period Ending June 30, 1997.
3.2 -- By-laws of Vestcom International, Inc. are incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (no. 333-23519).
4.1 -- Form of certificate evidencing ownership of Common Stock of
Vestcom International, Inc., is incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (no. 333-23519).
5.1 -- Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
10.1 -- Vestcom International, Inc. 1997 Equity Compensation Program,
is incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
10.2 -- Employment Agreement, dated as of March 10, 1997, by and
between Vestcom International, Inc. and Joel Cartun, is
incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
10.3 -- Employment Agreement, dated March 1, 1997, by and between
Vestcom International, Inc. and Peter J. McLaughlin, is
incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
10.4 -- Employment Agreement. dated as of March 10, 1997, between
DMS and Gary J. Marcello, is incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (no. 333-23519).
10.5 -- Employment Agreement, dated as of March 10, 1997, between
COS Information and Howard April, is incorporated by reference
to Exhibit 10.5 to the Company's Registration Statement on
Form S-1 (no. 333-23519).
10.6 -- Employment Agreement, dated as of March 10, 1997, between
Comvestrix and Leslie M. Abcug, is incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (no. 333-23519).
10.7 -- Note and Stock Purchase Agreement, dated December 31, 1996,
between Vestcom International, Inc. and certain investors,
is incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
10.8 -- Letter Agreement, between Oppenheimer & Co., Inc. and Vestcom
International, Inc., is incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1
(no. 333-23519).
10.9 -- Employment Letter Agreement, dated May 21, 1997, between
Vestcom International, Inc. and Harvey Goldman, is
incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (no. 333-23519).
10.10 -- Employment Letter Agreement, dated September 23, 1997, between
Vestcom International. Inc. and Brendan Keating.
21.1 -- List of subsidiaries of Vestcom International, Inc.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
(contained in Exhibit 5.1).
24.1 -- Power of Attorney.
(b) Financial Statement Schedules
All schedules are omitted because they are not applicable or because
the required information is contained in the financial statements or notes
thereto.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(7) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Township of
Lyndhurst, State of New Jersey, on October 29, 1997.
VESTCOM INTERNATIONAL, INC.
By: /s/Harvey Goldman
_____________________________
Harvey Goldman
Chief Financial Officer
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the date indicated.
Signatures Title Date
*/s/ Joel Cartun President, Chief Executive October 29, 1997
________________ Officer and Director
Joel Cartun
*/s/ Howard April Director October 29, 1997
----------------
Howard April
*/s/ Gary J. Marcello Director October 29, 1997
- -----------------
Gary J. Marcello
*/s/ Stephen R. Bova Director October 29, 1997
- ------------------
Stephen R. Bova
*/s/ Leonard J. Fassler Director October 29, 1997
- -------------------
Leonard J. Fassler
*/s/ Fred S. Lafter Director October 29, 1997
------------------
Fred S. Lafer
*/s/ Richard D, White Director October 29, 1997
- -------------------
Richard D. White
Executive Vice President, October 29, 1997
/s/Harvey Goldman Chief Financial Officer and
- ------------------ Treasurer (Principal Financial
Harvey Goldman and Accounting Officer)
*By:/s/Harvey Goldman
________________________________
Harvey Goldman, Attorney-in-Fact
Exhibit 5.1
October 29, 1997
Vestcom International, Inc.
1100 Valley Brook Avenue
Lyndhurst, NJ 07071
Gentlemen:
You have requested our opinion, as your securities counsel, in connection
with the registration with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, of 2,000,000 shares of the Common Stock (the
"Common Stock") of Vestcom International, Inc. (the "Company") on a Registration
Statement on Form S-4 (the "Registration Statement"). The shares of Common Stock
covered by the Registration Statement are issuable in connection with future
mergers and acquisitions which may be made by the Company.
We have examined and relied upon originals or copies, authenticated or
certified to our satisfaction, of all such corporate records of the Company,
communications or certifications of public officials, certificates of officers,
directors and representatives of the Company, and such other documents that we
have deemed relevant and necessary as the basis of the opinions expressed
herein. In making such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents tendered to us as originals, and
the conformity to original documents of all documents submitted to us as
certified or photostatic copies.
In connection with this opinion, we have also assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective and (ii) all shares of Common Stock
covered by the Registration Statement will be issued and sold in accordance with
applicable federal and state securities laws and in a manner stated in the
Registration Statement and any prospectus supplement.
Based upon the foregoing and relying upon statements of fact contained in
the documents which we have examined, we are of the opinion that when (i) the
Board of Directors of the Company has taken all necessary corporate action to
approve the issuance of and the terms of the offering of the shares of Common
Stock covered by the Registration Statement and related matters and (ii)
certificates representing the shares of Common Stock have been duly executed,
countersigned, registered and delivered in accordance with the terms of the
applicable purchase or similar agreement approved by the Board upon payment of
the consideration for such shares as described in such agreement, the shares of
Common Stock covered by the Registration Statement will be legally issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto and to all references to this
firm contained in the Registration Statement.
Very truly yours,
LOWENSTEIN, SANDLER, KOHL,
FISHER & BOYLAN, P.A.
Exhibit 10.10
September 23, 1997
Mr. Brendan Keating
Two Garden Place
Chatham, New Jersey 07928
Dear Mr. Keating:
This letter confirms our previous conversations regarding the employment
opportunity available to you with Vestcom International, Inc. ("Vestcom" or the
"Company") and sets forth the terms and conditions of that employment. This
offer shall remain open to you until 4:00 p.m. on Friday, September 26, 1997.
Vestcom hereby offers you full-time employment as Chief Operating Officer
commencing on or about October 13, 1997 with a monthly salary of $16,667 (which
would be equivalent to $200,000 on an annualized basis). You will also be
entitled to a guaranteed bonus of 35-50% of your annual salary each year based
on your performance and Vestcom's performance (or perhaps more if both your
performance and that of the Company is outstanding). During the period of your
employment, you shall devote your entire working time for or at the direction of
Vestcom or its affiliates, use your best efforts to complete all assignments,
and adhere to Vestcom's procedures and policies, including its Policies and
Standards of Business Conduct. You will report to Joel Cartun, the President and
Chief Executive Officer.
The term of this Agreement and your employment shall be two (2) years,
unless earlier terminated for "cause", with such renewals or extensions as may
be agreed upon in writing from time to time by you and the Company. In the event
that the Company decides not to continue your employment at the end of the two
year term or at any time thereafter, it shall give you at least four (4) months
written notice prior to the termination date.
You are entitled to all of the compensation and benefits described herein
for the term of this Agreement unless you are terminated for "cause" or you
voluntarily resign your employment. For purposes of this letter, "cause" means
(1) commission of any crime that constitutes a felony, or any offense involving
moral turpitude or (2) engaging in conduct that is materially injurious to the
Company. In the event that you are terminated for cause or you voluntarily
resign your employment prior to the end of the two year term of this Agreement,
you shall be entitled only to those benefits you have accrued up to and through
your last day of employment.
In the event that the Company believes that there are grounds for
termination for cause, the Company shall (1) give you reasonable time to cure
such conduct (if such conduct is reasonably capable of being cured) and (2)
provide you with notice and an opportunity to challenge the alleged grounds for
termination for cause (provided however that you may be suspended with pay
pending such challenge).
During the period of your employment with Vestcom, you initially will be
entitled to receive twenty (20) vacation days per year and all of the other
customary employee benefits of Comvestrix, including comprehensive contributory
medical insurance for you and your family (including health, dental and
prescription) and a car allowance ($850 per month less $100 for personal use,
plus $0.12 per documented business mile). As the Compensation Committee and the
Board develop an executive compensation plan for Vestcom, which we estimate will
become finalized in the first half of 1998, you will be eligible to receive all
of Vestcom's then executive employee benefits, subject to plan eligibility
requirements, including term life insurance, disability insurance (subject to
possible payment by executives if deemed desirable for tax purposes), and, if
deemed reasonable and appropriate following an industry review, supplemental
retirement benefits.
You will receive a stock option pursuant to the Company's employee stock
option plan for 100,000 options at the market price on your first day of
employment. The option will vest equally (i.e. 25% per year) over a four-year
period in accordance with the standard conditions of the Company's employee
stock option plan.
You represent and warrant to the Company that you are not subject to any
covenant against competition or any other restriction on your ability to become
an employee of Vestcom and to perform the services required hereunder, and that
your employment with Vestcom will not breach, or require the breach of, any
obligation to any other party. You also represent that you will not take any
records or other property belonging to your prior employer nor disclose to
Vestcom any confidential information you may possess concerning your former
employer or its business to Vestcom, or take any other actions prohibited under
your confidentiality and ethical conduct agreement with Bowne, your former
employer, and you acknowledge that Vestcom has not asked you to do so. The
Company acknowledges that you have made it aware that you are a party to an
agreement with respect to confidentiality and ethical conduct with Bowne
(although you have not delivered a copy of that agreement to the Company as such
delivery may be prohibited by the agreement). If notwithstanding the foregoing
representations and warranties, Bowne should commence litigation seeking to
prevent your employment with the Company or your performance under this
Agreement, then the Company shall defend your right to work for the Company in
such litigation, including payment of any necessary attorney's fees.
This offer of employment with Vestcom has received prior verbal approval
from Vestcom's Board of Directors (the "Board"), but is subject to receipt of
satisfactory reference checks from business references to be supplied by you and
your agreeing to the confidentiality and non-compete provisions set forth below.
Confidentiality. (a) You recognize and acknowledge that certain information
pertaining to the affairs, business, clients, or customers of the Company or any
of its subsidiaries or affiliates or predecessors or successors (any or all of
such entities being hereinafter referred to as the "Business"), as such
information may exist from time to time, other than information that the Company
has previously made publicly available or which has otherwise entered the public
domain through no fault of your own, is confidential and proprietary information
and is a unique and valuable asset of the Business. Such "Confidential
Information" consists of the existence of Vestcom's acquisition plans and/or the
terms thereof, the identity of the customers of the Business and/or their
requirements, any information contained in documents provided by customers to
the Business, software, research and technical data, equipment and process
designs, operating instructions, pricing or purchasing formulae or methodology,
employee lists and salary information, marketing and cost surveys and marketing
data, copyrights, patents and technical developments, financial information
concerning the Company or its subsidiaries and any other information designated
by the Business from time to time as confidential or proprietary. You agree that
you will not, while employed at Vestcom and for three (3) years thereafter,
divulge to any person, firm, association, corporation, or governmental agency,
any Confidential Information (except such Confidential Information as is
required by law to be divulged to a government agency or pursuant to subpoena or
similar lawful process), or make use of any Confidential Information for your
own purposes or for the benefit of any person, firm, association or corporation
(except the Business) and you shall use your reasonable best efforts to prevent
the disclosure of any such Confidential Information by others. All records,
memoranda, letters, books, papers, reports, customer lists, accountings or other
data, and other records and documents containing Confidential Information,
whether made by you or otherwise coming into your possession, are, shall be, and
shall remain the property of the Business. No copies thereof shall be made which
are not retained by the Business, and you agree, on termination of your
employment, that you will not retain or make copies of any such documents
containing Confidential Information and, on demand of the Company, to deliver
the same to the Company.
(b) All Confidential Information and all of your interest in trade secrets,
trademarks, computer programs, customer information, customer lists, employee
lists, products, procedures, copyrights, patents and developments developed by
you as a result of, or in connection with, your employment shall belong to the
Company; and without further compensation, upon the request of the Company, you
shall execute any and all assignments or other documents and take any and all
such other action as the Company may reasonably request in order to vest in the
Company all of your right, title and interest in and to all of foregoing items,
free and clear of all liens, charges and encumbrances of any kind.
Covenant Against Competition. (a) During the period commencing on the
effective date of the termination of your employment (regardless of how such
termination occurs) and ending on the first (1st) anniversary of such effective
date of termination of your employment (the "Restrictive Period"), you agree, by
execution of this letter, that you will not, without express prior written
approval of the Board, as evidenced by a resolution of the Board, directly or
indirectly, for yourself or on behalf of or in conjunction with, any other
person, company, partnership, corporation or business of whatever nature, own or
hold any proprietary interest in, or be employed by or receive remuneration
from, or engage as an officer, director or in a managerial capacity, whether as
an employee, independent contractor, consultant or advisor, or as a sales
representative of, any corporation, partnership, sole proprietorship or other
entity engaged in "direct competition" with the Business of the Company or any
of its subsidiaries or affiliates, or any of their successors or assigns, at the
time of such termination of employment (a "Competitor"), in the "Territory",
other than severance-type or retirement-type benefits from entities constituting
your prior employers. An entity or person that is in "direct competition" with
the Company is one whose principal business is the same as the principal
business of the Company at the time (currently a provider of computer and
document output and distribution services). By way of example and not in
limitation, your prior employer, Bowne, would be deemed a financial printer and
therefore not a direct competitor. You agree that during such Restrictive Period
you will not solicit for yourself or for the account of any Competitor, any
customer or client of the Company or its subsidiaries or affiliates, or any of
their successors or assigns, or any entity or individual that was such a
customer or client during the one year period immediately preceding the
termination of your employment.
In addition, during such Restrictive Period you agree not to act on behalf
of yourself or any Competitor to interfere with the relationship between the
Company or its subsidiaries or affiliates, or any of their successors or
assigns, and their employees, independent contractors, customers or suppliers.
You also agree during such Restrictive Period not to hire an employee of the
Company or any of its subsidiaries or affiliates, or any of their successors or
assigns, or induce any such employee to leave such employment.
For purposes of this letter, "Territory" shall mean an area within 100
miles of any place of business, office, warehouse or other facility where the
Company, or any of its affiliates or subsidiaries, or any of their successors or
assigns, then conducts business.
For purposes of the preceding paragraphs, (i) the term "proprietary
interest" means legal or equitable ownership, whether through stockholding or
otherwise, of an equity interest in a business, firm or entity other than
ownership of less than two (2%) percent of any class of equity interest in a
publicly held business, firm or entity and (ii) an entity shall be considered to
be "engaged in competition" if such entity is, or is a holding company for, a
company engaged in any aspect of the Business or providing any other services
competitive with the business then being conducted by the Company and/or its
subsidiaries and/or affiliates, or any of their successors or assigns, at the
date of termination of your employment, in the Territory.
(b) You acknowledge the reasonableness of the restrictions contained
herein. You acknowledge that the Company and its subsidiaries and affiliates,
and their successors and assigns, would be irreparably injured in a manner not
adequately compensated by money damages by a breach or violation (or threatened
breach or violation) of the provisions of this covenant by you. Therefore, in
the event of any such breach or violation (or threatened breach or violation),
in addition to all other rights and remedies which the Company may have, whether
at law or in equity, the Company and its successors and assigns shall be
entitled to obtain injunctive or other equitable relief against you without the
need to post bond or other security in connection therewith and you hereby
consent to the entry of an order for such injunctive or other equitable relief.
(c) If any court determines that the provisions of this covenant, or any
part hereof, is unenforceable because of the duration or geographic scope of
such provisions, such court shall have the power to reduce the duration or scope
of such provisions, as the case may be, so that, as so reduced, such provisions
are then enforceable to the maximum extent permitted by applicable law.
Change in Control. (a) In the event of a pending Change in Control (as
defined below), with respect to which you have not received, at least ten (10)
business days prior to the anticipated closing date of the transaction giving
rise to the Change in Control, written notice from the successor to all or a
substantial portion of the Company's business and/or assets that such successor
is willing as of the closing to retain you as Chief Operating Officer, you shall
be entitled to receive severance pay of $300,000 if the Change of Control occurs
during the first 12 months after the date your employment commences or $200,000
if the Change of Control occurs after such first 12 months, in either case in
one lump sum payment upon termination of your employment following such a Change
in Control.
(b) In the event of any pending Change in Control, you may, at your sole
discretion, elect to terminate your employment by providing written notice to
the Company at least five (5) business days prior to the anticipated closing of
the transaction giving rise to the Change in Control. In such case, you shall
also be entitled to receive $200,000 as severance pay in one lump sum unless you
are otherwise entitled to payment under paragraph (a) above.
(c) A "Change in Control" shall be deemed to have occurred if:
(i) Any person, firm or corporation acquires directly or indirectly the
Beneficial Ownership (as defined in Section 13(d) of the Securities Exchange Act
of 1934, as amended) of any voting security of the Company and immediately after
such acquisition, the acquirer has Beneficial Ownership of voting securities
representing 50% or more of the total voting power of all the then-outstanding
voting securities of the Company;
(ii) The individuals (A) who, as of the date hereof (the "Commencement
Date") constitute the Board of Directors of the Company (the "Original
Directors") or (B) who thereafter are elected to the Board of Directors of the
Company (the "Company Board") and whose election, or nomination for election, to
the Company Board was approved by a vote of at least 2/3 of the Original
Directors then still in office (such Directors being called "Additional Original
Directors") or (C) who are elected to the Company Board and whose election or
nomination for election to the Company Board was approved by a vote of at least
2/3 of the Original Directors and Additional Original Directors then still in
office, cease for any reason to constitute a majority of the members of the
Company Board;
(iii) The stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company or consummation
of any such transaction if stockholder approval is not sought or obtained, other
than any such transaction which would result in at least 75% of the total voting
power represented by the voting securities of the surviving entity outstanding
immediately after such transaction being Beneficially Owned by holders of
outstanding voting securities of the Company immediately prior to the
transaction, with the voting power of each such continuing holder relative to
such other continuing holders being not altered substantially in the
transaction; or
(iv) The stockholders of the Company shall approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or a substantial portion of the Company's assets (i.e. 50% or
more in value of the total assets of the Company).
This Agreement shall be construed in accordance with the laws of the State
of New Jersey, without consideration of its choice of law rules.
Any dispute arising out of this Agreement involving compensation issues
shall be subject to arbitration in Northern New Jersey in accordance with the
rules of the American Arbitration Association then in effect. Any award rendered
in arbitration may be confirmed in any court having jurisdiction thereof. The
foregoing shall not impair nor affect in any way the Company's absolute right to
avail itself of the courts having jurisdiction to bring an action seeking, in
whole or in part, injunctive relief or specific enforcement with respect to the
confidentiality provisions of this Agreement or the covenant against
competition.
This Agreement shall be binding upon the parties and their successors and
assigns.
Brendan, I hope that you elect to accept this offer of employment. Kindly
sign your name at the end of this letter to signify your understanding and
acceptance of these terms and that no one at Vestcom has made any other
representation to you. Your employment would then commence on or about October
6, 1997. Vestcom welcomes you to the management team and looks forward to a
mutually successful relationship.
Sincerely,
/s/Joel Cartun
Joel Cartun, President
Accepted:
/s/Brendan Keating
Brendan Keating
Date: September 29, 1997
Exhibit 21.1
Subsidiaries of the Registrant
State or Jurisdiction
Name of Subsidiary of Incorporation
504087 N.B. Inc. Province of New Brunswick
Comvestrix Corp. Delaware
Computer Output Systems, Inc. Connecticut
Direct Mail Services, Inc. New Jersey
Electronic Imaging Services, Inc. Delaware
First Class Presort, Inc. New Jersey
Image Printing Systems, Inc. Wisconsin
Mystic Graphic Systems, Inc. Massachusetts
Quality Control Printing, Inc. New Jersey
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To Vestcom International, Inc.:
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
October 29, 1997
EXHIBIT 24-1
POWER OF ATTORNEY
WHEREAS, the undersigned officers and directors of Vestcom International,
Inc. desire to authorize Joel Cartun and Harvey Goldman to act as their
attorneys-in-fact and agents, for the purpose of executing and filing a
registration statement on Form S-4, including all amendments thereto,
NOW, THEREFORE,
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joel Cartun and Harvey Goldman, and each of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, to sign a Registration Statement on Form S-4 registering
2,000,000 shares of the Common Stock of Vestcom International, Inc. issuable in
connection with future acquisitions, including any and all amendments and
supplements thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of attorney in
the following capacities on this 13th day of August, 1997.
Signatures Title
/s/Joel Cartun
______________________________ President, Chief Executive
Joel Cartun Officer and Director
/s/Howard April
______________________________ Director
Howard April
/s/Gary J. Marcello
______________________________ Director
Gary J. Marcello
/s/Stephen R. Bova
______________________________ Director
Stephen R. Bova
/s/Leonard J. Fassler
______________________________ Director
Leonard J. Fassler
/s/Fred S. Lafer
______________________________ Director
Fred S. Lafer
/s/Richard D. White
______________________________ Director
Richard D. White
/s/Harvey Goldman
______________________________ Executive Vice President,
Harvey Goldman Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
