SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___ to ___
Commission File Number
333-23519
VESTCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3477425
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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 office)
Securities registered pursuant to Section 12(b) of the Act: none.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, no par value
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates as of March
1, 1998 was approximately $60.7 million.
Number of shares of Common Stock outstanding as of March 1, 1998:
8,483,811.
Documents incorporated by reference: Definitive Proxy Statement for the
registrant's 1998 Annual Meeting of Shareholders (Part III).
<PAGE>
VESTCOM INTERNATIONAL, INC.
TABLE OF CONTENTS
Part I
PAGE
Item 1 Business............................................................ 3
Item 2 Properties.......................................................... 16
Item 3 Legal Proceedings................................................... 16
Item 4 Submission of Matters to a Vote of Security Holders................. 16
Item 4A Executive Officers of the Registrant................................ 16
Part II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................................. 18
Item 6 Selected Financial Data............................................. 20
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition................................ 21
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......... 24
Item 8 Financial Statements and Supplementary Data......................... 24
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 24
Part III
Item 10 Directors of the Registrant......................................... 24
Item 11 Executive Compensation.............................................. 24
Item 12 Security Ownership of Certain Beneficial Owners and
Management........................................................ 24
Item 13 Certain Relationships and Related Transactions...................... 24
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................... 25
Signatures.................................................................. 28
<PAGE>
PART I
Item 1. Business
General
Vestcom International, Inc. ("Vestcom" or the "Company") is an
international provider of computer output and document management services.
Vestcom was founded in September 1996. Concurrently with the consummation of
Vestcom's initial public offering (the "IPO") on August 4, 1997, Vestcom
acquired seven computer output and document management service companies (the
"Founding Companies"), which operated 19 facilities in nine states and in the
Province of Quebec, Canada. Since the IPO, the Company has expanded its
operations through internal growth and by acquiring four additional operating
companies with facilities in five additional states and in Toronto, Ontario,
Canada. The companies acquired by Vestcom since the IPO, along with the Founding
Companies, are referred to herein as the "Operating Companies." 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 refer to the
businesses of the Founding Companies as they were conducted on an independent
basis.
The Company's knowledge of the industry, its technological expertise,
resources and operating efficiencies enable it to provide a broad range of
services from multiple locations at a competitive cost. The Operating Companies
provide a number of value-added services including (i) the production and
distribution of time-sensitive computer-generated documents, including invoices,
statements, reports and point-of-purchase shelf labels, (ii) demand publishing
and marketing materials fulfillment, (iii) commingling, intelligent inserting
and mailing services and (iv) forms management. The Company maintains a website
at vestcomintl.com.
The Company provides services to a broad range of industries, including
financial, telecommunications, pharmaceutical, health care, publishing,
retailing and manufacturing industries. 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:
o Utilize a broad range of computer output services to create documents
for their specific needs
The Company believes that one of its key competitive advantages 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 contain customized or
individualized information. 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.
o 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 cost-effectively.
o Reduce turnaround time and substantially reduce downtime
The Company reduces turnaround time and downtime through its (i)
advanced technology, including direct customer data links which speed processing
time, (ii) distributed processing, by which the Company maximizes equipment
utilization and distributes data received from customers to geographically
dispersed output and production centers, enabling customers to reduce
distribution costs while improving delivery time and (iii) internal equipment
redundancy and multi-site production capabilities, which provide backup
protection for equipment failure.
o 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, (ii) retain the
flexibility to change the equipment and technologies they utilize as their
respective needs change and (iii) select from among a variety of medium, such as
paper, compact disc and microfiche. The Company is planning to introduce a
service to enable customers to distribute documents through the Internet. The
Company shares its technological expertise and resources Company-wide.
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("Forward-Looking Statements"). Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in such Forward-Looking Statements. Certain factors which could
materially affect such results and the future performance of the Company are
described herein under "Risk Factors."
Industry Overview
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 providers. The Company believes
that many of these companies serve local markets and provide a narrow range of
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. The Company 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 and/or 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.
Strategy
The Company believes 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 has implemented the following strategies for
both internal growth and growth through selective acquisitions as it seeks to
pursue this goal:
Strategy for Internal Growth:
Provide a Broad Range of High Quality Services at a Competitive Cost from
Multiple Locations
The Company provides a broad range of high quality computer output and
document management services at a competitive cost from multiple locations. The
Company's experience combined with its size and scope of service offerings
enables it to provide customers with "one stop" computer output shopping at a
competitive cost.
Achieve Cost Savings Through Consolidation and Economies of Scale
The Company intends to achieve 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)
utilizing a communications network to maximize equipment utilization and to
speed delivery.
Capitalize on Cross-Selling Opportunities
The Company has initiated cross-selling efforts and intends to further
capitalize on the expertise of the various Operating Companies to expand the
range of services provided to existing customers as well as to broaden the
Company's customer base. For example, the Company believes that its mailing
services could be marketed to customers for whom the Company presently produces
computer-generated documents, while its output services could be marketed to
customers that presently utilize the Company's mailing services. The Company
further believes that new technologies shared among the Operating Companies will
increase the Company's cross-selling opportunities. In addition, certain of the
Operating Companies have expertise in particular industries and with specific
types of customers, such as financial institutions, supermarket chains and
telecommunications 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. The Company believes that its knowledge of the industry,
technological expertise, resources and operating efficiencies will enhance its
ability to successfully market this service.
Acquisition Strategy:
Concurrently with the consummation of its IPO, Vestcom acquired the
Founding Companies, which operated 19 facilities in nine states and in the
Province of Quebec, Canada. Since the IPO, the Company has expanded its
operations through internal growth and by acquiring four additional operating
companies in five additional states and in Toronto, Ontario, Canada. The Company
plans to acquire additional companies in the highly-fragmented computer output
and document management services industry.
As the Company grows, it will seek to expand into targeted geographic
areas in the United States, Canada and abroad by acquiring companies that have
specified characteristics. 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; (iii) with strong management and customer
relationships; and (iv) that are expected to be accretive to the Company's
earnings per share or otherwise provide strategic value to the Company.
In addition, as opportunities arise, the Company will seek to augment
the operations of the Operating Companies and to capitalize on economies of
scale with "tuck-in" acquisitions in the same or contiguous areas that can be
assimilated into 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."
The Company is regularly engaged in discussions with additional
acquisition candidates and may from time to time enter into letters of intent
with respect to the acquisition of such businesses. No assurance can be given,
however, that the Company will acquire any additional businesses.
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
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 image small or large volumes of
documents with the same high quality, while permitting each document to contain
customized or individualized information. The Company's capabilities also
include the distribution of data received from customers to geographically
dispersed output and production centers, enabling customers to reduce
distribution costs while improving delivery time 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 offers its customers a variety of medium for the production and
distribution of documents, including paper, compact disc, microfiche and
microfilm. Compact disc is primarily used for rapid access to information and in
situations where the user needs to manipulate the data easily. Microfiche and
microfilm are used primarily for archiving and for other purposes which are not
highly time-sensitive. The Company is also planning to introduce a service to
enable customers to distribute documents through the Internet.
Production and Distribution of Computer-Generated Labels
The Company produces and distributes computer-generated point-of-purchase
labels for supermarkets, 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 offers both
vinyl and paper laminated labels to its customers. 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.
Demand Publishing and Marketing Materials Fulfillment
The Company prints, packages and distributes documents that are subject to
frequent revision or unpredictable demand, such as product instruction manuals,
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.
In addition to the electronic storage of data for print on demand
requirements, the Company also receives printed marketing and related materials
from customers, stores them and then ships the materials to various locations
upon the receipt of a customer order. 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.
Commingling, Intelligent Inserting and 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. By maximizing equipment
utilization and distributing data received from customers to geographically
dispersed output and production centers, the Company enables customers to reduce
distribution costs while improving delivery time.
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.
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.
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.
Computer Center Document Outsourcing Services
As contrasted with the Company's individualized applications for customers,
the Company's Computer Center Document Outsourcing Services is a turnkey
document output and distribution service to meet the customer's output
processing needs, and which may also include mailing services. The Company will
typically assume most of the document output and distribution responsibilities
previously performed by the customer's in-house operations. The Company believes
that this service will often enable the customer to close its in-house computer
output printing center. The customer transmits its computer-generated data to
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. The Company intends to increase its marketing
efforts related to this service, and believes that its knowledge of the
industry, technological expertise, resources and operating efficiencies will
enhance its ability to successfully market this service.
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 Operating Companies have increased their document
storage capabilities. While previously offering only microfiche and microfilm
technology, several of the Operating Companies now offer customers compact disc
technologies. In addition, as postal regulations have changed, several of the
Operating 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. The
Company is planning to introduce a service to enable customers to distribute
documents, such as statements and invoices, though the Internet. No assurance
can be given that the Company will be able to provide this service to customers
or that it will be commercially viable for the Company to do so. To remain
competitive, the Company may need to be prepared to offer its customers services
that utilize other technologies. The Company attempts to keep up with
technological advances by attending trade shows and by maintaining close contact
with its principal customers and equipment/technology vendors.
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. The Company has implemented a uniform policy throughout the Company
to protect confidential information, and has an ongoing process of 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 60 people located in 11 states and in the
Provinces of Quebec and Ontario, Canada. 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 point-of-purchase shelf 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.
Vestcom's management augments the work of the local 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. Management also works with local sales personnel to
structure regional sales programs, national accounts programs and cross-selling
programs and to discuss the development of new services.
The Company provides Company-wide marketing support to its sales staff
through the production and distribution of marketing materials, telemarketing
and seminars. The Company's sales and customer service personnel interact
extensively with the customer and the Company's operations staff to address
specific customer needs.
Customers
The Company's customer's include financial institutions, telecommunications
companies, pharmaceutical companies, health care institutions, publishing
companies, supermarkets and other retailers, and manufacturing firms. No one
customer presently accounts for over 3% of the Company's revenues.
The Operating 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 Operating Companies have contributed to this record of successful
customer retention. No assurance can be given that the Company will be able to
retain these customers, or the customers of other companies that the Company may
acquire in the future. The Company may also lose customers or have difficulty in
acquiring new customers as a result of the highly competitive industry in which
the Company operates or a customer deciding to discontinue outsourcing certain
applications.
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. 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 companies, many of which have greater financial
resources than the Company. A number of the Company's current suppliers of
equipment and services are also a source of competition. 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), IKON Office Solutions and Lason, as
well as smaller local providers.
Certain of the Company's competitors operate in broader geographic areas
than the Company, and others may choose to enter the Company's areas of
operation in the future. In addition, the Company intends to enter new
geographic areas through internal growth and by acquiring existing companies,
and expects to encounter significant competition from established competitors in
each of these new areas. As a result of this highly competitive environment, the
Company may lose customers or have difficulty in acquiring new customers and new
companies and its results of operations may be adversely affected.
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. The Company believes that it competes favorably
with respect to these factors, although there can be no assurance that it will
continue to do so.
Employees
At December 31, 1997, the Company had approximately 885 full-time and 130
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.
RISK FACTORS
Absence of Combined Operating History; Risks of Integration
Prior to the consummation of the IPO and the acquisitions of the Founding
Companies on August 4, 1997, Vestcom conducted no operations other than in
connection with the IPO and the acquisitions of the Founding Companies. The
Company has acquired four additional operating companies since the IPO. These
companies, together with the Founding Companies, are referred to herein as the
"Operating Companies." Prior to their respective acquisitions, the Operating
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. The Company is
in the process of establishing centralized accounting and other administrative
systems. Until this centralization is complete, the Company will rely on the
separate systems of the Operating 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 Operating 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.
A number of the Operating 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 goal of becoming a leading provider
of computer output and document management services will be attained, 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 Operating Companies prior to their respective acquisitions.
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.
The Company is regularly engaged in discussions with additional acquisition
candidates and may from time to time enter into letters of intent with respect
to the acquisition of such businesses. No assurance can be given, however, that
the Company will acquire any additional businesses.
No Assurance of Sustained Internal Growth
A key element of the Company's strategy is to generate internal growth by
capitalizing on cross-selling opportunities, generating new clients through
aggressive marketing and expanding its service offerings. Internal growth will
depend upon factors including the effective initiation, development and
maintenance of client relationships; the expansion of marketing operations; the
Company's ability to maintain the high quality of the services it offers and to
expand such services; and the recruitment, motivation and retention of qualified
management and other personnel. Sustaining growth will also require continued
access by the Company to capital, the successful cross-selling of products and
services among the Operating Companies and realization by the Company of
economies of scale. There can be no assurance that the Company's strategies will
continue to generate internal growth or that it will be able to generate cash
flow adequate for its operations and to support growth.
Need for Additional Financing
The Company may use its Common Stock as a portion of the consideration to
be paid in connection with future acquisitions. The Company has issued an
aggregate of 134,520 shares of Common Stock since the IPO in connection with
acquisitions, all of which shares were unregistered. The Company has registered
2,000,000 shares of Common Stock which may be used as consideration for
acquisitions by the Company in the future, all of which shares remained
available as of March 1, 1998. The extent to which the Company will be able or
willing to use its Common Stock as consideration for acquisitions in the future
will depend on the market value of the Common Stock 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. The market price of the
Common Stock may be subject to significant fluctuations from time to time in
response to numerous factors. See "Possible Volatility of Stock Price" and
"Effect of Potential Fluctuations in Quarterly Operating Results." To the extent
the Company is unable or unwilling to use its Common Stock in connection with
future acquisitions, it would be required to use more of its cash resources, if
available, to 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 to
successfully implement or manage its acquisition strategy, which may have an
adverse effect on the business or future prospects of the Company.
The Company expects to pay $277,000 in cash and issue 54,779 unregistered
shares of Common Stock as payment of the deferred purchase price for one of the
Founding Companies, subject to final review. Up to an additional $3,630,000 in
cash and up to an additional 624,614 shares of the Company's Common Stock plus
up to another 125,000 shares of Common Stock (based on current market prices)
may be used by the Company to pay deferred purchase prices for certain of the
other Operating Companies which may be earned during various periods ending no
later than June 30, 1999 if the applicable gross margins and operating earnings
thresholds of certain of the Operating Companies are achieved. Any earn-outs
will increase goodwill recorded for these 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. 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). As of March 1, 1998, the entire line of credit was
available. 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.
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.
Certain of the Company's competitors operate in broader geographic areas
than the Company, and others may choose to enter the Company's areas of
operation in the future. In addition, the Company intends to enter new
geographic areas through internal growth and by acquiring existing companies,
and expects to encounter significant competition from established competitors in
each of these new areas. As a result of this highly competitive environment, the
Company may lose customers, may need to reduce prices to retain customers or
have difficulty in acquiring new customers and new companies and its results of
operations may be adversely affected.
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
Operating 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.
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.
Impact of the Year 2000 Issue
The Year 2000 Issue is primarily the result of computer programs being
written using two digits rather than four to define the applicable year. Certain
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activity.
Based on a recent internal assessment, the Company has determined that the
cost to modify its existing software and/or to convert to new software will not
be significant. However, if customers, suppliers or others with whom the Company
does business experience problems relating to the Year 2000 Issue, the Company's
business, financial condition or results of operations could be materially
adversely affected.
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.
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.
Control by Certain Stockholders
As of March 1, 1998, the directors and executive officers of the Company,
and entities affiliated with them, beneficially owned approximately 30.2% of the
outstanding shares of Common Stock. Such amount does not include shares of
Common Stock that were issued to other former shareholders of the Operating
Companies and shares which may be issued to such persons in the future pursuant
to certain earnout provisions. 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.
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
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, the addition or loss of
customers, 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 Company's Common Stock.
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. While the Company is
planning to introduce a service to enable customers to distribute documents
through the Internet, there can be no assurance that the Company will be able to
provide this service, that it will be commercially viable for the Company to do
so, or that other technologies (whether now existing or developed in the future)
may not in the future reduce or supplant the demand for the Company's services,
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 Volatility 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 Company's Common
Stock. See "Effect of Potential Fluctuations in Quarterly Operating Results."
Potential Effects of Shares Eligible for Future Sale on Price of Common Stock
As of March 16, 1998, 8,483,811 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 but have agreed not to exercise such rights until two years
following the consummation of the IPO.
As of March 16, 1998, the Company had outstanding under its Stock Option
Plan options to purchase an aggregate of 507,850 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.
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 IPO unless they obtain the prior written consent of Vestcom.
CIBC Oppenheimer Corp. (formerly named Oppenheimer & Co., Inc. and referred to
herein as "Oppenheimer"), one of the Representatives of the Underwriters in the
IPO, 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
shareholders of the companies which the Company acquired in November and
December 1997, have agreed in their respective acquisition agreements not to
sell or transfer the 134,520 shares of Common Stock in the aggregate which they
received for a period of two years following the consummation of their
respective acquisitions by the Company.
The 2,000,000 shares of Common Stock registered by the Company for possible
use in connection with future acquisitions 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.
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.
Item 2. Properties
The Company currently operates 36 computer output and document management
service facilities, aggregating approximately 685,600 square feet. These
facilities are located in 14 states and in the Provinces of Quebec and Ontario,
Canada. All of these facilities are leased and are used for operations,
administrative and storage functions. The Company leases an additional
approximately 165,000 square foot facility which it may occupy in the future
depending on its needs. Leases vary in term remaining from month-to-month to six
years and in some cases, include options to extend the lease term.
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 1997, no matters
were submitted to a vote of the Company's security holders.
Item 4A. Executive Officers of the Registrant
The Company's executive officers are as follows:
Name Age* Positions with the Company
Joel Cartun 58 President, Chief Executive Officer and
Director of Vestcom; President of Comvestrix
Brendan Keating 43 Executive Vice President and Chief Operating
Officer of Vestcom; Chief Operating Officer of
Comvestrix
Harvey Goldman 51 Executive Vice President, Chief Financial Officer
and Treasurer of Vestcom
Peter J. McLaughlin 59 Executive Vice President 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, General Counsel and Secretary of
Vestcom
Robert R. Rogus 56 Vice President--Sales of Vestcom
Cynthia Ward 37 Vice President--Marketing and Product Development
of Vestcom
____________________
* Ages are as of March 1, 1998.
<PAGE>
Joel Cartun has been the President, Chief Executive Officer and a director
of Vestcom since its incorporation in September 1996. Mr. Cartun founded
Comvestrix Corp. ("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.
Brendan Keating has served as Executive Vice President and Chief Operating
Officer of Vestcom and as Chief Operating Officer of Comvestrix 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.
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.
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.
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 since 1986.
Sheryl Bernstein Cilenti has served as Vice President and General Counsel
of Vestcom since October 1997 and as Secretary of the Company since November
1997. From September 1993 until joining the Company, Ms. Cilenti was an
associate at Lowenstein Sandler PC in Roseland, New Jersey, where she practiced
law primarily in the areas of mergers and acquisitions and securities.
Robert R. Rogus has served as Vice President--Sales of Vestcom since
February 1998. Prior thereto, he served as Vice President of Sales of Comvestrix
for in excess of five years.
Cynthia Ward has served as Vice President--Marketing and Product
Development of Vestcom since February 1998. Prior thereto, she served as
Director of Marketing of Comvestrix for in excess of five years.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has traded on the Nasdaq National Market since
July 30, 1997, under the symbol "VESC". The Company's initial public offering
price to the public was $13.00 per share. 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 ended December 31, 1997:
Third quarter (from July 30) $ 21.125 $ 13.00*
Fourth quarter 22.625 17.00
_________________
*Represents the initial public offering price.
The last reported sale price of the Common Stock on the Nasdaq National
Market on March 24, 1998 was $10.0625. As of March 1, 1998, there were 78
holders of record of the Common Stock.
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.
The Company's initial public offering was effected pursuant to a
registration statement on Form S-1 (No. 333-23519) declared effective by the
Securities and Exchange Commission (the "C" on July 29, 1997. The offering
commenced on July 30, 1997 and terminated after all securities were sold.
Pursuant to Rule 463 promulgated by the SEC, the Company provides the following
information regarding its initial public offering:
(a) The managing underwriters were Oppenheimer and Prudential Securities
Incorporated.
(b) The title of the class of stock registered was Common Stock, no par
value. The Company sold all 4,427,500 shares that were registered (including
577,500 shares which were sold pursuant to the exercise of the Underwriters'
over-allotment option). There were no selling security holders. The aggregate
price of the offering amount registered and sold was $57,557,500.
(c) From July 30, 1997 through March 1, 1998, the Company's reasonable
estimate of the amount of expenses incurred for the Company's account in
connection with the issuance and distribution of the securities registered for
underwriting discounts and commissions was $4,029,025, for finders' fees was $
0, for expenses paid to or for underwriters was $ 0 and for other expenses was
$4,308,897. Thus, the total amount of such expenses was $8,337,922 and the net
proceeds to the Company was $49,219,578. Except as set forth below, none of the
above-mentioned expenses represented direct or indirect payments to directors or
officers of the Company or their associates, to persons owning ten percent or
more of any class of equity security of the Company or to affiliates of the
Company. As set forth in the above-mentioned registration statement, one of the
Company's directors (Richard D. White) is a Managing Director at CIBC Capital
Partners and was a Managing Director at Oppenheimer, one of the managing
underwriters of the Company's initial public offering.
(d) From July 30, 1997 through March 1, 1998, the Company used the
following amount of such net proceeds for the following categories enumerated by
the SEC:
Reasonable Estimated
Category Amount
Construction of plant, building and facilities 0
Purchase and installation of machinery and
equipment $ 2,130,356
Purchases of real estate 0
Acquisition of other businesses $ 22,987,378
Repayment of indebtedness $ 11,061,087
Working capital 0
Short term investments $ 13,040,757
Other purposes for which at least $100,000
has been used 0
None of the above-mentioned uses of proceeds represented direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity security of the Company or to
affiliates of the Company other than as set forth below. As described in the
Company's registration statement, simultaneously with the consummation of the
Company's initial public offering, the Company acquired the Founding Companies.
The following directors and executive officers of the Company received the
following cash payments as part of the consideration paid to them as
stockholders of their respective Founding Companies: Joel Cartun (the Company's
President and Chairman of the Board) received $4,129,610, Gary Marcello (a
director of the Company) received $3,271,303, Howard April (a director of the
Company) received $502,640 and Leslie Abcug (an executive officer of the
Company) received $90,813. As of March 1, 1998, the Company paid an aggregate of
$1.3 million to Oppenheimer for advisory services and has agreed (pursuant to an
agreement entered into with Oppenheimer in May 1997) to pay Oppenheimer an
additional $800,000 for advisory services in four quarterly installments
beginning April 1, 1998.
None of the uses described above represents a material change in the use of
proceeds described in the above-mentioned registration statement.
During the year ended December 31, 1997, the Company issued an aggregate of
2,986,631 shares of Common Stock which were not registered under the Securities
Act of 1933 (the "Securities Act"). Of such amount, an aggregate of 2,852,111
shares of Common Stock were issued to the shareholders of the Founding Companies
in connection with the acquisition of such companies, which occurred on August
4, 1997, simultaneously with the closing of the Company's IPO. An aggregate of
134,520 shares were issued on November 14, 1997 and December 15, 1997, in
connection with the Company's acquisitions of New England Laser Printing, Inc.,
and Campbell Abbot Laser Mail. All of the unregistered shares issued by the
Company during 1997 were issued in reliance upon the exemption provided by
Section 4(2) of the Securities Act. None of the unregistered issuances of Common
Stock described above involved an underwriter.
Item 6. Selected Financial Data
Vestcom acquired the Founding Companies on August 4, 1997 concurrently with
the consummation of the Company's IPO. For financial statement presentation
purposes, Vestcom has been identified as the accounting acquiror. Vestcom
acquired two additional Operating Companies in November and December 1997,
respectively. The following selected historical financial data of Vestcom as of
December 31, 1996 and 1997 and for the period from inception to December 31,
1996 and the year ended December 31, 1997 have been derived from the audited
financial statements of Vestcom included elsewhere in this Annual Report on Form
10-K. The Statements of Operations Data included below reflect the operations of
the acquired companies from the respective dates of their acquisition.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
For the
For the Period
Year from
Ended Inception to
December 31, December 31,
1997 1996
Statement of Operations Data:
Revenues........................... $ 29,777 $ --
Income (loss) from
operations....................... 2,671 (1,633)
Net income (loss) - Basic.......... $1,308 $(5,078)
Net income (loss) - Diluted $1,249 $(5,078)
Net income per share - Basic $ .31
Net income per share - Diluted $ .29
December 31, 1997
Balance Sheet Data:
Working capital................................. $ 17,628
Total assets.................................... 114,346
Long term obligations........................... 11,282
Stockholders' equity............................ 83,028
__________________
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto appearing
elsewhere herein. All dollar amounts are presented in U.S. dollars.
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 could cause or contribute to such
differences include, without limitation, those discussed in this Annual Report
on Form 10-K under "Business," including "Business - Risk Factors," and this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-K. Such factors may also cause substantial volatility in the market price of
the Company's Common Stock.
Introduction
Vestcom International, Inc. was incorporated in September 1996.
Concurrently with the consummation of the Company's initial public offering (the
"Offering") on August 4, 1997, the Company acquired seven computer output and
document management service companies (the "Founding Companies") each of which
had been operating as a separate independent entity.
For accounting purposes, the acquisitions of the Founding Companies were
deemed to be made August 1, 1997, using purchase accounting, with the Company as
the acquiror. The Founding Companies were managed prior to their acquisition 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, the Founding Companies'
historical levels of owners' compensation. In connection with the acquisition of
the Founding Companies, these owners and certain key employees agreed to certain
reductions in their compensation which commenced as of the date of acquisition.
The Company acquired New England Laser Printing, Inc. (NEL) and Campbell Abbot
Laser Mail (CALM) in November and December 1997, respectively, and such
acquisitions also were accounted for as purchases.
The Company's Consolidated Balance Sheet as of December 31, 1997, includes
the Founding Companies and NEL and CALM. The results of operations for the year
ended December 31, 1997, and the statement of cash flows for the year ended
December 31, 1997 includes the results of Vestcom for the entire period, the
results of the acquired Founding Companies from August 1, 1997, the NEL
acquisition from November 14, 1997 and the CALM acquisition from December 15,
1997.
Vestcom, which conducted no operations prior to the consummation of the
Offering other than in connection with the acquisitions of the Founding
Companies (the "Acquisitions") and the financing activities related thereto,
including the Offering, had no revenues or operating expenses in 1996.
Therefore, Management's Discussion and Analysis based on actual results would
compare five months of operating activity in 1997 to no operating activity in
1996. For this and other reasons discussed above, management believes that
Management's Discussion and Analysis would only be meaningful based on the
unaudited Pro Forma Results of Operations of Vestcom for 1997 and 1996, which
assumes that all of the companies owned at December 31, 1997 were acquired on
January 1, respectively of 1996 and 1997.
The following discussion of Pro Forma Results of Operations is not
necessarily indicative of the results the Company would have obtained had all of
these acquisitions actually then occurred or of the Company's actual or future
results.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Results of Operations
(in thousands)
1997 1996
<S> <C> <C>
Net sales...............................................$79,273 $71,201
Gross profit............................................$29,531 $24,511
Selling, general & administrative expenses..............$18,984 $17,008
Income from operations..................................$ 8,418 $ 5,524
</TABLE>
Pro Forma Results of Operations
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Pro forma revenues increased $8,072,000 or 11.3% from $71,201,000 for the
year ended December 31, 1996 to $79,273,000 for the year ended December 31,
1997. This increase was primarily attributable to increased volume of production
of statements, point of purchase labels and other imaging services, although
revenues also increased in other areas.
Pro forma gross profit increased $5,020,000 or 20.5% from $24,511,000 for
the year ended December 31, 1996 to $29,531,000 for the year ended December 31,
1997. The pro forma gross profit margin increased from 34.4% in 1996 to 37.3% in
1997 primarily due to improved capacity utilization resulting from the increased
volume of business and the refinancing through capital leases of certain
existing production equipment which resulted in reduced lease and maintenance
costs.
Pro forma selling, general and administrative expenses increased
$1,976,000, or 11.6% from $17,008,000 for the year ended December 31, 1996 to
$18,984,000 for the year ended December 31, 1997. As a percentage of revenues,
selling, general and administrative expenses remained constant at approximately
23.9% in 1996 and 1997.
Pro forma income from operations increased $2,894,000 or 52.4% from
$5,524,000 for the year ended December 31, 1996 to $8,418,000 for the year ended
December 31, 1997 for the reasons discussed above.
Liquidity and Capital Resources
The following discussion of liquidity and capital resources reflects the
Company's actual results of operations and financial position for the periods
discussed.
On July 30, 1997, the Company 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, of which
approximately $23,000,000 was used for the cash portion of the Company's
acquisitions and approximately $11,000,000 was used for the repayment of debt
and capital leases.
At December 31, 1997, Vestcom had working capital of approximately
$17,628,000. Net cash provided by operating activities for the twelve months
ended December 31, 1997, was approximately $8,272,000. Cash used in investing
activities for the year ended December 31, 1997, was $76,228,000 which consisted
of $60,600,000 of cash and stock for acquisitions, $13,500,000 in short term
investments and $2,100,000 for the purchase of property and equipment. Net cash
provided by financing activities for the year ended December 31, 1997, was
approximately $70,703,000, which included $78,700,000 for the issuance of common
stock relating to the initial public offering and the acquisition of the
Founding Companies and $2,700,000 for the issuance of preferred stock, offset by
debt repayment of approximately $11,000,000.
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. At December
31, 1997, there were no outstanding borrowings under this credit line.
The Company incurs postage costs on behalf of customers of approximately
$4,000,000 to $6,000,000 each month. The Company seeks to collect such postage
costs from its customers in advance. At December 31, 1997 the Company had
postage advances from customers in the amount of $4,878,000 and had prepaid
postage and postage receivables of approximately $2,700,000. To the extent the
Company is unsuccessful in obtaining postage costs in advance, cash flow is
negatively affected and Vestcom may be required to utilize its working capital
or credit facility to cover the expense. Capital expenditures of approximately
$6,000,000 to $8,000,000 for plant and equipment and leasehold improvements are
anticipated in 1998. This investment, which is expected to be financed primarily
by working capital and vendor financing, relates to the anticipated facility
consolidations of certain of the Operating Companies and the purchase of
supplemental production equipment to meet customer output processing demands.
There are no other significant commitments for future capital expenditures,
although it is likely that cash outflows for business acquisitions and leases
will continue. While no assurance can be given, management believes that its
cash flow from operations combined with existing cash and marketable securities
and the availability of funds under the Equipment Loan and Revolving Credit
Agreement will be sufficient to meet its working capital, capital expenditure
and debt service requirements and its current plans to acquire additional
related businesses for the foreseeable future.
Year 2000 Issue
The Year 2000 Issue is primarily the result of computer programs being
written using two digits rather than four to define the applicable year. Certain
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activity.
Based on a recent internal assessment, the Company has determined that the
cost to modify its existing software and/or to convert to new software will not
be significant. However, if customers, suppliers or others with whom the Company
does business experience problems relating to the Year 2000 Issue, the Company's
business, financial condition or results of operations could be materially
adversely affected.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements:
Page
Report of Independent Public Accountants F-1
Vestcom International, Inc. and Subsidiaries
Consolidated Balance Sheets at December 31, 1997 and 1996 F-2
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Operations for the year ended
December 31, 1997 and for the period from inception
(September 19, 1996) to December 31, 1996 F-4
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Stockholders'
Equity for the period from inception (September 19, 1996)
to December 31, 1996 and the year ended December 31, 1997 F-5
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows for the
year ended December 31, 1997 and the period
from inception (September 19, 1996) to December 31, 1996 F-6
Vestcom International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vestcom International, Inc.
We have audited the accompanying consolidated balance sheets of Vestcom
International, Inc. (a New Jersey corporation) and Subsidiaries, as of December
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1997 and for the period
from inception (September 19, 1996) through December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
repsonsibility 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vestcom
International, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
results of its operations and its cash flows for the year ended December 31,
1997 and for the period from inception (September 19, 1996) through December 31,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,092,000 $ 1,344,758
Marketable securities 13,494,886 -
Accounts receivable, net of allowance for
doubtful accounts of $354,952 and $0 in 1997 and 1996,
respectively 13,999,511 -
Supplies inventory 2,221,725 -
Prepaid expenses and other current assets 3,855,122 392,664
----------------- ----------
Total current assets 37,663,244 1,737,422
PROPERTY AND EQUIPMENT, at cost, net of depreciation and
amortization 21,684,918 -
GOODWILL, net 54,336,937 -
OTHER ASSETS 660,660 -
----------------- -------------
Total assets $ 114,345,759 $ 1,737,422
----------------- ------------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
<S> <C> <C>
LIABILITIES & STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 191,184 $ -
Current portion of capital lease obligations 2,435,994 -
Accounts payable 4,780,082 -
Accrued expenses 11,698,803 320,230
Notes payable to related parties - 1,292,732
Income taxes payable 1,210,235 -
Other current liabilities 199,653 -
--------------- -------------
Total current liabilities 20,515,951 1,612,962
LONG-TERM DEBT 38,835 -
CAPITAL LEASE OBLIGATIONS 7,894,737 -
DEFERRED CHARGES & OTHER LIABILITIES 1,427,037 -
DEFERRED INCOME TAXES 1,441,373 -
--------------- ------------
Total liabilities 31,317,933 1,612,962
STOCKHOLDERS' EQUITY:
Preferred stock
Class A convertible, 200 shares authorized,
issued and outstanding at December 31, 1997; no shares
issued and outstanding at December 31, 1996 - -
Class B, 1 share authorized, issued and outstanding at
December 31, 1997; no shares issued and outstanding at
December 31, 1996 2,651,867 -
Class C convertible, 100 shares authorized,
issued and outstanding at December 31, 1997; no shares
issued and outstanding at December 31, 1996 - -
Common stock, no par value; 20,000,000 shares authorized;
8,483,811 shares issued and outstanding at December 31, 1997; 84,229,597 5,481,501
1,295,192 shares issued and outstanding at December 31, 1996
Subscription receivable - (279,082)
Accumulated deficit (3,770,054) (5,077,959)
Cumulative translation adjustment (83,584) -
---------------- -------------
Total stockholders' equity 83,027,826 124,460
---------------- -------------
Total liabilities & stockholders' equity $ 114,345,759 $ 1,737,422
=============== ==============
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31, 1996
1997 1996
---- ----
<S> <C> <C>
REVENUES $ 29,777,283 $ -
COST OF REVENUES
18,317,401 -
------------------- ---------------
Gross Profit 11,459,882 -
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES 8,789,000 1,633,042
------------------- ----------------
Income (loss) from operations 2,670,882 (1,633,042)
OTHER INCOME (EXPENSE)
Interest expense (660,607) (3,444,917)
Interest income and other, net 603,685 -
------------------- ----------------
(56,922) (3,444,917)
------------------- -----------------
Income (loss) before provision 2,613,960 (5,077,959)
for income taxes
PROVISION FOR INCOME TAXES 1,306,055 -
-------------------- -----------------
Net income (loss) $ 1,307,905 $ (5,077,959)
========= ===========
Net income per share-basic $ 0.31
====
Net income per share - diluted $ 0.29
====
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31,1996
AND THE YEAR ENDED DECEMBER 31, 1997
CUMULATIVE TOTAL
COMMON STOCK PREFERRED STOCK SUBSCRIPTIONS ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT ADJUSTMENT EQUITY
<S> <C> <C> <C>
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
SHARES RETURNED (170,856)(1,363,745) - - - - - (1,363,745)
SHARES RETURNED ( 54,656)( 436,255) - - - - - (436,255)
INITIAL PUBLIC OFFERING
NET OF UNDERWRITING
DISCOUNTS 4,427,500 53,528,475 - - - - - 53,528,475
ISSUANCE OF STOCK TO
FOUNDING
COMPANIES, NET OF
DISCOUNT 2,852,111 24,555,061 301 2,651,867 - - - 27,206,928
PAYMENT OF SUBSCRIPTIONS
RECEIVABLE - - - - 279,082 - - 279,082
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH ACQUISITIONS,
NET OF DISCOUNT 134,520 2,464,560 - - - - - 2,464,560
TRANSLATION ADJUSTMENT - - - - - - (83,584) (83,584)
NET INCOME - - - - - 1,307,905 - 1,307,905
--------- ---------- -------- --------- ---------- ----------- --------- ---------
BALANCE AT
DECEMBER 31, 1997 8,483,811 $84,229,597 301 $2,651,867 $ - $(3,770,054)$(83,584) $83,027,826
--------- ----------- -------- --------- ---------- ----------- --------- ----------
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE PERIOD
FROM INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31, 1996
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 1,307,905 $(5,077,959)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 1,926,638 -
Provision for losses on accounts receivable 16,000 -
Discount on issuance of stock - 5,074,233
Changes in operating assets (increase) decrease in-
Accounts receivable (1,287,591) -
Supplies inventory (257,568) -
Prepaid expenses and other current assets 942,222 (392,664)
Other assets (277,160) -
Changes in operating liabilities increase (decrease) in-
Accounts payable (382,210) -
Accrued expenses 3,848,609 320,230
Income taxes payable and other current liabilities 753,590 -
Deferred charges & other liabilities 1,681,842 -
-------------- --------
Net cash provided by (used in)
operating activities 8,272,277 (76,160)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (2,130,356) -
Acquisition of businesses, net of cash acquired (60,602,754) -
Net increase in marketable securities (13,494,886) -
-------------- ----------
Net cash provided by (used in)
investing activities (76,227,996) -
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of subscriptions receivable 279,082 -
Net (payments) proceeds on borrowings (10,892,500) 1,292,732
Issuances of common stock 78,748,096 128,186
Issuances of preferred stock 2,651,867 -
Cumulative translation adjustment (83,584) -
--------------- ----------
Net cash provided by (used in)
financing activities 70,702,961 1,420,918
-------------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,747,242 1,344,758
CASH AND CASH EQUIVALENTS, beginning of period 1,344,758 -
CASH AND CASH EQUIVALENTS, end of period $ 4,092,000 $ 1,344,758
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligation incurred $ 1,155,456 $ -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 638,179 -
Cash paid for income taxes 729,224 -
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
</TABLE>
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:
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 acquire, integrate and facilitate the growth of similar and complementary
companies in the highly fragmented computer output and document management
industry.
On July 30, 1997, Vestcom 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
$53,528,475 net of underwriting discounts.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated. The results of operations for the twelve
months ended December 31, 1997 are not indicative of the results for a full year
because the results of operations of the acquired Founding Companies (as defined
below) included herein are for the period from August 1, 1997 (the effective
date of acquisition for financial statement purposes) to December 31, 1997.
2. ACQUISITIONS:
Concurrently with the consummation of the Company's initial public
offering, it acquired seven companies in the computer output and document
services industry - Comvestrix Corp., Morris County Direct Mail Services, Inc.
and related companies, Image Printing Systems, Inc., Electronic Imaging
Services, Inc., COS Information, Computer Output Systems, Inc. and Mystic
Graphic Systems, Inc. ("Founding Companies"). The aggregate consideration paid
by the Company to acquire the Founding Companies was, subject to working capital
adjustments and earnouts, approximately $16.6 million in cash and 2,852,111
shares of Vestcom Common Stock. The Acquisitions were accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon the fair
values at the date of acquisition. For purposes of computing the estimated
purchase price for accounting purposes, the value of the shares was determined
using an estimated fair value of $11.05 per share, which represents a discount
of fifteen percent from the initial public offering price of $13.00 due to
restrictions on the sale and transferability of the shares issued. Included in
accrued expenses are approximately $2.9 million of additional acquisition costs.
The acquisitions resulted in goodwill of approximately $46.8 million which is
being amortized over 30 years, and is based on preliminary allocations of the
purchase price to the net assets acquired. The following unaudited Pro Forma
Statements of Operations for Vestcom assumes that the acquisitions of the
Founding Companies were consummated on January 1 of the periods presented. This
information is not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's future
results:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Year Ended
December 31, 1997 December 31, 1996
(Unaudited, in thousands,
except per share data)
<S> <C> <C>
Net sales............................................ $ 71,651 $ 65,287
Income from operations............................... $ 7,580 $ 4,861
Net income........................................... $ 3,906 $ 2,436
Earnings per share: basic....................... $ .46 $ .31
diluted..................... $ .45 $ .31
</TABLE>
F-7
<PAGE>
On November 14, 1997, the Company acquired substantially all of the assets
of Rhode Island based New England Laser Printing, Inc. ("NEL"). On December 15,
1997, the Company acquired the stock of Moreau Promotional Services, Inc., doing
business as Campbell - Abbot Laser Mail ("CALM"), an Ontario corporation located
in Toronto, Canada. The aggregate price paid for these acquisitions was
approximately $7,000,000 in cash and 134,520 unregistered shares of Vestcom
Common Stock, the fair market value of which was based on a fifteen percent
discount from the fair market value due to length and type of restrictions in
the purchase agreements. The estimated goodwill associated with these
acquisitions aggregated approximately $8,200,000.
The above acquisitions were accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon the fair values at the date of
acquisition. The estimated goodwill values reflected above are based on
preliminary estimates and assumptions and are subject to revision. In
management's opinion the preliminary allocations are not expected to be
materially different than the final allocations.
Set forth below is unaudited pro forma financial information for the twelve
months ended December 31, 1997 and December 31, 1996. The unaudited pro forma
data give effect to: (i) the acquisitions of the Founding Companies and NEL and
CALM; and (ii) compensation and other adjustments for all transactions as if the
transactions had occurred on January 1, 1997 and January 1, 1996, respectively.
This information is not necessarily indicative of the results the Company would
have obtained had these events actually then occurred or of the Company's future
results:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Ended Year Ended
December 31, 1997 December 31, 1996
(Unaudited, in thousands,
except per share data)
<S> <C> <C>
Net sales............................................ $79,273 $71,201
Income from operations............................... $ 8,418 $ 5,524
Net income........................................... $ 4,270 $ 2,695
Earnings per share: basic....................... $ .52 $ .33
diluted..................... $ .48 $ .30
</TABLE>
3. 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
Restricted cash of $850,000 was held in escrow at December 31, 1996 only to
be used to pay expenses associated with the formation of the Company, the
acquisitions, and the Company's initial public offering (the "Offering").
Deferred Offering Costs
At December 31, 1996, the Company had deferred all costs of raising
capital. These costs were offset against the capital generated by the Offering.
Supplies Inventory
Supplies inventory consists of paper, toner, developer and other disposable
chemicals, film, compact discs 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.
Revenue Recognition
Revenues are recognized when the services are rendered.
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.
Earnings per Share
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 and also includes certain
shares that are contingently issuable. 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 which is effective for financial statements
for both interim and annual periods ending after December 15, 1997 requires
retroactive restatement of all EPS data presented. The Company has adopted the
statement on December 31, 1997. The following is the computation of earnings per
share:
<TABLE>
<CAPTION>
For the year ended December 31, 1997
-----------------------------------
Per-Share
Income Shares Amount
------ ------ ---------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income/weighted average
shares outstanding $1,307,905 4,157,891 $.31
========== ========= ===
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 1,307,905
Goodwill adjustment on earnouts (59,284)
Assumed earned shares
by Founding Companies 149,383
Options 34,092
----------- ------------
Net income/average weighted shares
outstanding adjusted for assumed
conversions to common stock $1,248,621 4,341,366 $.29
========== ============ ===
</TABLE>
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 adjustment was $83,584 for the year
ended December 31, 1997.
Intangible Assets
Intangible assets consist primarily of excess purchase price over net
assets acquired (goodwill), which is being amortized over its estimated useful
life of 30 years. In conformance with 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", the Company's management
continually evaluates whether events and circumstances indicate that the
remaining estimated useful life of intangible assets may warrant revisions or
that the remaining balance of intangibles or other long-lived assets may not be
recoverable. To make this evaluation, management uses an estimate of
undiscounted net income over the remaining life of the intangibles or other
long-lived assets. Accumulated amortization at December 31, 1997 was $688,641.
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 North America, primarily in the
financial, telecommunications, pharmaceutical, health care, publishing,
retailing, and manufacturing industries. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued two new statements.
Statements of Financial Accounting Standards Numbers 130, "Reporting
Comprehensive Income" (SFAS 130), and 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131).
SFAS 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
The objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the period
other than transactions with owners ("comprehensive income"). Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS 130 is effective for fiscal years beginning after December 15, 1997, with
earlier application allowed but not required. Upon adoption, reclassification of
comparative financial statements provided for prior periods is required.
SFAS 131 introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way that the
chief operating decision maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure - any
manner in which management disaggregates a company. The management approach
replaces the notion of industry and geographic segments in current FASB
standards. SFAS 131 is effective for fiscal periods beginning after December 15,
1997 and requires restatement of all prior period information reported.
Management believes that adoption of SFAS 131 will not have an impact on its
method of reporting since it believes that its business operates in one
reportable segment.
4. MARKETABLE SECURITIES
Marketable securities classified as available-for sale securities are
carried at fair market value with unrealized gains and losses excluded from
income and recorded, net of income tax, as a separate component of stockholders'
equity. The Company has no securities classified as trading or held-to maturity.
Gains and losses on investment transactions are recognized when realized
based on trade dates. Dividends are recorded in income based on payment dates.
Interest is recognized when earned.
Marketable securities consist of the following at December 31:
1997 1996
Commercial paper $ 1,540,439 $--
Money market funds 4,454,447 --
Taxable auction rate
securities with maturities
of 1 to 28 days 7,500,000 --
--------- ----------
$13,494,886 $--
========== ==========
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Balance Costs and End of
of Period Acquired Expenses Write-offs Period
<S> <C> <C> <C> <C> <C>
Twelve Months Ended December 31, 1997
Allowance for doubtful accounts $-- $342,900 $16,000 $3,948 $354,952
Period From Inception (September 19,1996)
to December 31, 1996 $-- $-- $-- $-- $--
</TABLE>
<PAGE>
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following at
December 31:
1997 1996
----------- --------
Prepaid postage $ 2,340,522 $--
Postage receivable 345,088 --
Prepaid offering costs -- 392,664
Other 1,169,512 --
----------- --------
$ 3,855,122 $392,664
=========== ========
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives
1997 1996 (Years)
<S> <C> <C>
Software............................................. $ 217,142 $-- 3-5
Machinery and equipment.............................. 20,333,332 -- 5-10
Furniture and fixtures............................... 745,875 -- 10
Leasehold improvements............................... 1,626,566 -- 2-7
----------- ----
22,922,915 --
----------- ----
Less - Accumulated depreciation and amortization..... ( 1,237,997) --
------------ ----
Property and equipment, net.......................... $ 21,684,918 $ --
=========== ====
</TABLE>
Leased equipment under capital leases (included above) consists of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment........................................................ $13,028,202 $--
Less - Accumulated amortization.................................. (961,952) --
------------ -----
$ 12,066,250 $--
=========== =====
</TABLE>
Depreciation and amortization expense on property and equipment charged to
operations for the period from inception (September 19, 1996) to December 31,
1996 and the year ended December 31, 1997 was $0 and $1,237,997, respectively.
At December 31, 1997 minimum annual payments under capital leases are as
follows:
1998....................................................$ 2,435,994
1999.................................................... 2,519,695
2000.................................................... 2,489,027
2001.................................................... 2,442,798
2002 and thereafter..................................... 443,217
-----------
Total minimum payments excluding interest............. 10,330,731
Less - Current portion of capital lease obligations..... 2,435,994
-----------
Long-term portion of capital lease obligations........ 7,894,751
===========
Interest payments for term of capital leases............$ 2,025,311
===========
The interest rates on the capitalized leases range from 4.8% up to 15.6%
and are imputed based on the fair market value of the equipment at the inception
of the lease. Subsequent to the acquisitions of the Founding Companies, capital
leases aggregating approximately $1,000,000 were repaid.
<PAGE>
8. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31:
<TABLE>
1997 1996
<S> <C> <C>
Accrued payroll and payroll related expenses...................... $ 1,476,526 $ --
Accrued professional fees......................................... 815,670 --
Acquisition related liabilities................................... 2,890,764 --
Accrued deferred offering costs................................... -- 320,230
Advanced postage.................................................. 4,877,691 --
Other accruals.................................................... 1,638,152 --
---------- -------
$11,698,803 $320,230
========== =======
</TABLE>
9. DEBT:
Long-term obligations
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
<S> <C> <C>
Equipment notes payable to a bank and
an equipment manufacturer at interest
rates ranging from 7% - 14% with
monthly payments of $10,979 through
December 1998.....................................$117,183 --
Notes payable to an equipment manufacturer
at interest rates ranging from 1%-4.8% with a
final payment due in June 1999......................... 112,836
--------
230,019
Less current maturities........................... 191,184
--------
$ 38,835
========
</TABLE>
Maturities of Long-Term Obligations
As of December 31, 1997, maturities of long-term obligations are as follows
(in thousands):
Years Ending December 31:
1998..................................................$191,184
1999.................................................. 38,835
-------
Total........................................$230,019
========
On August 13, 1997, the Company and Summit Bank entered into a three year
Equipment Loan and Revolving Credit Agreement in the amount of $30,000,000. The
interest rate is based on certain financial performance ratios plus a rate equal
to LIBOR or a Summit Bank alternate base rate. The Agreement is subject to
various covenant restrictions, the most restrictive of which requires tangible
net worth to be a minimum of 25% of stated net worth. At December 31, 1997 there
were no outstanding borrowings under this line of credit.
10. STOCKHOLDERS' EQUITY:
The Company initially issued 791,346 shares of its Common Stock in
September 1996 for $39,965. In December 1996, an additional 503,846 shares of
its Common Stock were issued for $367,303. In connection therewith the Company
recorded a non-recurring non-cash charge to compensation and interest expense of
approximately $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.
In March, 1997, the Company filed a Restated Certificate of Incorporation
which modified the capital stock structure of the Company to provide for 30
million shares, divided into 20 million shares of Common Stock and 10 million
shares of undesignated stock.
In May and July, 1997, CIBC Oppenheimer Corp. (formerly named Oppenheimer &
Co., Inc. and referred to herein as Oppenheimer) returned to Vestcom an
aggregate of 225,512 shares of common stock which was previously issued.
In July 1997, the Company filed an amendment to its Restated Certificate of
Incorporation which created 200 shares of Class A Convertible Preferred Stock,
one share of Class B Preferred Stock and 100 shares of Class C Convertible
Preferred Stock, with each share having a liquidation value of $.10 per share.
The Class A shares were issued to certain former shareholders of Electronic
Imaging Services, Inc. and the Class C shares were issued to certain former
shareholders of Image Printing Systems, Inc. The shares of Class A and Class C
Convertible Preferred Stock were issued pursuant to the earnout provisions of
the applicable acquisition agreements. The one share of Class B Preferred Stock
was issued to a Canadian Founding Company and is equal to 239,988 shares of
Common Stock valued at $11.05 per share and has equal voting rights.
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.
11. 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 non-employee 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 Compensation Committee
of the Board of Directors.
The Stock Option Plan also provides for automatic option grants to
directors who are not employed by Vestcom or its subsidiaries. Upon commencement
of service, a non-employee director will receive a nonqualified 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, all at
fair market value on the date of the grant. 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.
Upon consummation of the acquisitions and the Offering, options covering an
aggregate of 289,050 shares of Common Stock were outstanding under the Stock
Option Plan including (i) options to purchase 10,000 shares of common stock
which have been granted to each non-employee director, (ii) options to purchase
15,000 shares of common stock which have been granted to Mr. April, a director
and employee of the Company, and (iii) options to purchase an additional 231,550
shares of Common Stock which have been granted to other employees of the Company
and its subsidiaries. All of these options 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 non-employee directors
which become fully exercisable one year after the date of grant. In October 1997
an additional 115,000 options were granted to officers of the Company.
At December 31, 1997, 404,050 options were outstanding.
<TABLE>
<CAPTION>
Options Outstanding
Exercise
Shares Price Per Share
<S> <C> <C>
Balance at inception.................................... -- $ --
Granted................................................. -- --
Balance, December 31, 1996.............................. -- --
Granted................................................. 404,050 $13-$21.625
---------- --------------
Exercised................................................. -- --
---------- --------------
Balance, December 31, 1997.............................. 404,050 $13-$21.625
========== ==============
Exercisable, December 31, 1997.......................... 0 $--
========== ==============
</TABLE>
As of September 19, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," was 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 has provided pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
consolidated financial statements.
The weighted average fair value of options granted in 1997 at market value
was $9.72. The weighted average exercise price of options granted in 1997 at
market value was $15.38.
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
1997
Risk-Free Interest Rate 6.5 %
Expected Lives 10.0 years
Expected Volatility 23.0%
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
Number of Weighted
Options Average
Outstanding Remaining Weighted
at December 31, Contractual Average
Range of Exercise Price 1997 Life Exercise Price
------------------------------------------------------------------------------
$ 13.00 - $18.75 304,050 9.59 $ 13.33
$ 21.625 100,000 9.75 $ 21.625
--------------- ------- ---- ------
$ 13.00 - $21.625 404,050 9.63 $ 15.38
Had compensation expense for all stock options granted in 1997 been determined
consistent with SFAS No. 123, the Company's net income and income per share
would have been as follows:
1997
-----
Net Income: As Reported $ 1,307,905
Pro Forma $ 1,116,821
Net Income Per Share: As Reported - basic $ .31
Pro Forma - basic $ .27
As Reported - diluted $ .29
Pro Forma - diluted $ .24
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts and additional awards in future years are
anticipated.
12. EMPLOYEE BENEFIT PLANS:
Certain of the acquired U.S. companies had qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allowed for
voluntary pretax contributions by employees. The operating companies paid all
general and administrative expenses of the Plans and in some cases, the
operating companies made matching and discretionary contributions to the Plans.
The operating companies offer no post-employment or post-retirement benefits.
The expense incurred related to the Plans by the Company was approximately
$49,218 for the period from August 1, 1997 to December 31, 1997.
Effective on January 1, 1998, the Company established a new defined
contribution profit sharing 401K plan. The Plan is available to all U.S.
operating companies of Vestcom.
13. INCOME TAXES:
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
Period From Inception
Twelve Months Ended (September 19, 1996) to
December 31, 1997 December 31, 1996
------------------- ------------------------
<S> <C> <C>
Federal $ 1,012,191 $ -
State 293,864 -
---------- ----------
$ 1,306,055 $ -
========== ==========
</TABLE>
<PAGE>
The differences in income taxes provided and the amounts determined by
applying the federal statutory tax rate (34%) to income before income taxes
result from the following:
<TABLE>
<CAPTION>
Period From Inception
Twelve Months Ended (September 19,1996) to
December 31, 1997 December 31, 1996
<S> <C> <C>
Tax at statutory rate $ 888,746 $ -
Add (deduct) --
State income taxes 193,950 -
Nondeductible expenses 223,359 -
---------- ------------
$1,306,055 $ -
========= ============
</TABLE>
Deferred taxes result primarily from cash to accrual differences and
differences in the reporting of depreciation, the allowance for doubtful
accounts and other non-deductible accruals.
<PAGE>
14. LEASE COMMITMENTS
The Company and its subsidiaries lease various office buildings, machinery,
equipment, and vehicles under operating leases expiring at various dates through
2004. Most of the real property leases have escalation clauses related to
increases in real property taxes. Future minimum lease payments under operating
leases are as follows:
Years Ending December 31 Operating
Leases
1998....................................................$ 4,232,000
1999.................................................... 3,651,000
2000.................................................... 2,949,000
2001.................................................... 2,079,000
2002.................................................... 1,357,000
Thereafter.............................................. 2,376,000
---------
Total minimum lease payments............................$ 16,644,000
==========
Rent expense for all operating leases for the twelve months ended December
31, 1997 and the period from inception (September 19, 1996) to December 31, 1996
was approximately $1,436,000 and $5,000, respectively.
15. RELATED-PARTY TRANSACTIONS:
Leasing Transactions
Certain of the Operating Companies lease their operating facilities from
selling parties who remained employees or directors of the Company. The
Company's chairman 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 period from
August 1, 1997 to December 31, 1997 was $232,000. The current annual rent is
$394,000 per year (exclusive of building operating expenses and real estate
tax) which the Company believes to be the fair market rental value of the
property.
A director and employee of the Company owns interests ranging from 75% to
100% in the partnerships which own the 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 period from August 1, 1997
through December 31, 1997 was $286,000. The current annual rent for all of these
properties is approximately $825,000 per year (inclusive of real estate taxes),
which the Company believes to be the fair market rental value of the property.
Two officers of Image Printing Systems, Inc. ("IPS"), own the property
leased to and used by IPS, in Milwaukee, Wisconsin. The lease will expire in
2002 subject to an option to renew the lease for an additional five years. IPS'
related party rent expense for these properties for the period from August 1,
1997 to December 31, 1997 was $94,000 inclusive of building operating costs. The
rent payable by IPS under the lease is $80,000 per year, triple net, which the
Company believes to be the fair market rental value of the property.
<PAGE>
Consulting Agreement
An executive vice president of the Company 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 at December 31,
1996. In addition, upon consummation of the Offering, Vestcom paid a partnership
in which that executive vice president 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.
Notes payable
On September 19, 1996 and December 31, 1996, the Company issued Promissory
Notes and Senior Notes to related parties in the aggregate amount of $1,292,732.
The principal and interest were initially due on the earlier of the Offering, or
June 30, 1997. The due date of the notes were extended to the earlier of the
Offering or December 31, 1997. All notes bore 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). In August, 1997, the Notes were repaid in full out of the
proceeds of the Offering.
16. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes that none of these actions
will have a material adverse effect on the financial position or results of
operations of the Company.
Contracts
In May 1997, the Company entered into an agreement with 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. In addition,
Vestcom reimbursed Oppenheimer $75,000 for out-of-pocket expenses related to
such services.
Certain executives of the Company have each entered into employment
agreements with the Company. In general, the employment agreements provide 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.
Earnouts
Certain of the Founding Companies are eligible to earn additional amounts,
consisting of a combination of cash and securities, as adjustments to the
purchase prices paid for those companies. At December 31, 1997, the Company
recorded an accrual for the estimated earnout for Computer Output Systems whose
earnout period ended at December 31, 1997, of $277,000 payable in cash and
54,779 shares of common stock of the Company. The maximum additional earnouts
which could be paid if certain of the other Founding Companies attained their
revenue and profit goals would be approxinmately $2,400,000 in cash and 625,000
shares of common stock.
17. SUBSEQUENT EVENT:
As of January 20, 1998, the Company acquired substantially all of the
assets of Creative Data Services, Inc. ("CDS") which specializes in retail shelf
label printing and related services and Business Mail Express ("BME") which
specializes in expedited print and mail services. The acquisitions were
accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the assets acquired and the liabilities
assumed based upon the fair values at the date of acquisition. The combined
purchase price was $9,500,000 million in cash plus the potential to receive an
earnout of up to $2,500,000 million payable 50% in cash and 50% in shares of
common stock. The estimated fair value of the assets purchased was $4,705,000
and the estimated goodwill was $4,795,000. The estimated fair market values
reflected above are preliminary estimates and assumptions and are subject to
revision. In management's opinion, the preliminary allocations are not expected
to be materially different than the final allocations. In connection with those
acquisitions, CIBC Oppenheimer was paid an advisory service fee of $300,000.
Set forth below is unaudited pro forma financial information for the twelve
months ended December 31, 1997. The unaudited pro forma data give effect to the
acquisitions of CDS and BME as well as compensation and other adjustments as if
<PAGE>
all the acquisitions had occurred on January 1, 1997. This information is not
necessarily indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results:
Pro Forma
Year Ended
December 31, 1997
(Unaudited, in thousands,
except per share data)
Net sales............................................ $101,153
Income from operations............................... $ 9,050
Net income........................................... $ 4,657
Earnings per share: basic....................... $ .55
diluted..................... $ .52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors of the Registrant
The registrant incorporates by reference herein information set forth in
its definitive proxy statement for its 1998 annual meeting of shareholders that
is responsive to the information required with respect to this Item.
Item 11. Executive Compensation
The registrant incorporates by reference herein information set forth in
its definitive proxy statement for its 1998 annual meeting of shareholders that
is responsive to the information required with respect to this Item.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The registrant incorporates by reference herein information set forth in
its definitive proxy statement for its 1998 annual meeting of shareholders that
is responsive to the information required with respect to this Item.
Item 13. Certain Relationships and Related Transactions.
The registrant incorporates by reference herein information set forth in
its definitive proxy statement for its 1998 annual meeting of shareholders that
is responsive to the information required with respect to this Item.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
For the financial statements filed as part of this Annual Report on Form
10-K refer to "Index to Financial Statements" included in "Item 8 - Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not required
or the required information is shown in the Company's consolidated financial
statements or the notes thereto.
(3) The following exhibits are incorporated by reference herein or filed
with this Annual Report on Form 10-K.
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).
2.8 Asset Purchase Agreement, dated as of January 20, 1998, by and among
Vestcom International, Inc., Creative Data Services, Inc., DB
Acquisition, Inc., d/b/a Business Mail Express and certain other
parties, is incorporated by reference to the Company's Current Report
on Form 8-K dated February 4, 1998.
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).
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, is incorporated by reference
to Exhibit 10.10 to the Company's Registration Statement on Form S-4
(no. 333-39077).
21.1 List of subsidiaries of Vestcom International, Inc.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney.
27.1 Financial Data Schedule
99.1 Audited Financial Statements for certain of the Founding Companies
as of August 1, 1997 and for the seven months then ended.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the Company filed a Current
Report on Form 8-K, dated November 17, 1997, pertaining to its acquisition of
substantially all of the assets of New England Laser Printing, Inc., and a
Current Report on Form 8-K, dated December 17, 1997, pertaining to its
acquisition of Campbell Abbot Laser Mail. On February 4, 1998, the Company filed
a Current Report on Form 8-K pertaining to its acquisition of a substantial
portion of the assets and a substantial portion of the liabilities of Creative
Data Services, Inc. ("CDS") and of DB Acquisition, Inc., d/b/a Business Mail
Express, a wholly-owned subsidiary of CDS. The latter Current Report on Form 8-K
contained certain historical consolidated financial statements of CDS and pro
forma financial statements of the Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1998 VESTCOM INTERNATIONAL, INC.
By: /s/Harvey Goldman
___________________________
Harvey Goldman
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities indicated on the date indicated.
Signatures Title Date
*/s/ Joel Cartun President, Chief Executive March 31, 1998
________________ Officer and Director
Joel Cartun
*/s/ Howard April Director March 31, 1998
________________
Howard April
*/s/ Gary J. Marcello Director March 31, 1998
_________________
Gary J. Marcello
*/s/ Stephen R. Bova Director March 31, 1998
__________________
Stephen R. Bova
Director March 31, 1998
___________________
Leonard J. Fassler
*/s/Fred S Lafer Director March 31, 1998
__________________
Fred S. Lafer
*/s/ Richard D, White Director March 31, 1998
___________________
Richard D. White
/s/Harvey Goldman Executive Vice President, March 31, 1998
__________________ Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
Harvey Goldman Officer)
*By:/s/Harvey Goldman
______________________________
Harvey Goldman, Attorney-in-Fact
Exhibit 21.1
Subsidiaries of the Registrant
Name of Subsidiary State or Jurisdiction of Incorporation
3013439 Nova Scotia Company Province of Nova Scotia
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
Lirpaco, Inc. Canadian (federal)
Moreau Promotional Services, Inc. Province of Ontario
Mystic Graphic Systems, Inc. Massachusetts
Quality Control Printing, Inc. New Jersey
Vestcom Investments, Inc. New Jersey
Vestcom Rhode Island Corp. Rhode Island
Vestcom St. Louis, Inc. Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vestcom International, Inc.
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (File No. 333-35027).
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 31, 1998
EXHIBTI 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 the
registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
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 the registrant's Annual Report on Form 10-K for the
year ended December 31, 1997, including any and all amendments 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 30th day of March, 1998.
Signatures Title
/s/Joel Cartun
______________________________ President, Chief Executive Officer
Joel Cartun and Director
/s/Howard April
______________________________ Director
Howard April
/s/Gary J. Marcello
______________________________ Director
Gary J. Marcello
/s/Stephen R. Bova
______________________________ Director
Stephen R. Bova
______________________________ 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, Chief
Harvey Goldman Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,092,000
<SECURITIES> 13,494,886
<RECEIVABLES> 14,354,463
<ALLOWANCES> (354,952)
<INVENTORY> 2,221,725
<CURRENT-ASSETS> 37,663,244
<PP&E> 22,922,915
<DEPRECIATION> (1,237,997)
<TOTAL-ASSETS> 114,345,759
<CURRENT-LIABILITIES> 20,035,493
<BONDS> 0
0
2,651,867
<COMMON> 84,229,597
<OTHER-SE> (3,853,638)
<TOTAL-LIABILITY-AND-EQUITY> 114,345,759
<SALES> 29,777,283
<TOTAL-REVENUES> 29,777,283
<CGS> 18,317,401
<TOTAL-COSTS> 8,789,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 660,607
<INCOME-PRETAX> 2,613,960
<INCOME-TAX> 1,306,055
<INCOME-CONTINUING> 1,307,905
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,307,905
<EPS-PRIMARY> .31
<EPS-DILUTED> .29
</TABLE>
EXHIBIT 99.1
AUDITED FINANCIAL STATEMENTS FOR THE FOLLOWING FOUNDING
COMPANIES THROUGH THE ACQUISITION DATE (AUGUST 1, 1997):
COMVESTRIX CORP.
COMPUTER OUTPUT SYSTEMS, INC.
DIRECT MAIL SERVICES, INC.
ELECTRONIC IMAGING SERVICES, INC.
IMAGE PRINTING SYSTEMS, INC.
LIRPACO INC.
<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 August 1, 1997, and the
related statements of income, stockholders' equity, and cash flows for the years
ended December 31, 1994, 1995, and 1996 and the seven months ended August 1,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Comvestrix Corp. as of December
31, 1995, and 1996 and August 1, 1997 and the results of its operations and its
cash flows for the years ended December 31, 1994, 1995, 1996 and the seven
months ended August 1, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND AUGUST 1, 1997
ASSETS 1995 1996 1997
-------------- ---------------- --------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $150,832 $106,610 $107,647
Accounts receivable, net of allowance for doubtful accounts of
$103,548, $111,724 and $86,673 in 1995, 1996 and 1997, respectively 3,258,311 4,135,168 4,699,738
Postage receivable 130,448 832,303 138,754
Due from Vestcom - 527,056 672,821
Supplies inventory 401,375 417,869 376,327
Prepaid postage 920,937 885,123 886,845
Prepaid expenses and other current assets 235,920 126,761 462,970
-------------- ------------- -------------
Total current assets 5,097,823 7,030,890 7,345,102
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization 4,061,339 4,385,047 10,935,659
OTHER ASSETS 132,875 105,750 199,412
---------- ------------ ------------
Total assets $9,292,037 $11,521,687 $18,480,173
============== ================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 1,000,000 $ 1,900,000 $ 1,500,000
Current portion of long-term debt 626,315 785,472 982,111
Current portion of capital lease obligations 255,657 -- 1,276,540
Accounts payable and accrued expenses 1,752,836 2,461,042 3,286,487
Advanced postage 397,182 888,809 1,199,325
Other current liabilities 150,345 135,810 105,283
------- --------- ----------
Total current liabilities 4,182,335 6,171,133 8,349,746
LONG-TERM DEBT 1,017,380 682,611 313,695
CAPITAL LEASE OBLIGATIONS -- -- 5,495,133
DEFERRED LEASE EXPENSES 324,176 380,297 533,243
DEFERRED INCOME TAXES 35,000 3,157 93,702
--------- ------- -----------
Total liabilities 5,558,891 7,237,198 14,785,519
--------- ---------- ----------
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
shares outstanding in 1995, and 3,734,000 in 1996
and 1997, respectively 7,375 7,500 7,500
Additional paid-in capital 232,988 355,863 355,863
Subscriptions receivable (4,500) (106,297) (91,295)
Retained earnings 4,935,663 5,465,803 4,860,966
Less-Treasury stock 2,266,000 shares at cost (1,438,380) (1,438,380) (1,438,380)
----------- ----------- -----------
Total stockholders' equity 3,733,146 4,284,489 3,694,654
--------- ----------- -----------
Total liabilities and stockhodlers' equity $9,292,037 $11,521,687 $18,480,173
========= ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMVESTRIX CORP.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
------------------------------------------------------
1994 1995 1996 1997
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $16,605,558 $19,298,468 $21,446,745 $14,602,784
COST OF REVENUES 9,902,000 10,610,825 12,329,784 7,901,864
---------------- ---------------- --------------- ---------------
Gross profit 6,703,558 8,687,643 9,116,961 6,700,920
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,423,696 7,052,765 7,282,491 4,677,958
---------------- ---------------- --------------- ---------------
Income from operations 279,862 1,634,878 1,834,470 2,022,962
---------------- ---------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (44,025) (58,515) (140,804) (397,842)
Interest and other income 3,626 44,890 63,051 27,172
Contract settlement income - 475,250 - -
---------------- ---------------- --------------- ---------------
(40,399) 461,625 (77,753) (370,670)
---------------- ---------------- --------------- ---------------
Income before provision
(benefit) for income taxes 239,463 2,096,503 1,756,717 1,652,292
PROVISION (BENEFIT) FOR INCOME
TAXES (122,000) 79,277 9,298 41,307
---------------- ---------------- --------------- ---------------
Net income $361,463 $2,017,226 $1,747,419 $1,610,985
================ ================ =============== ===============
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
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
Total
Additional Subscrip- Stock-
Common Stock Paid-in tions Retained Treasury Stock holders'
Shares Amount Capital Receivable Earnings Shares Amount Equity
------ ------ ------- ---------- -------- -------- ------- -------
BALANCE AT JANUARY 1, 1994 590,000 $7,375 $232,988 ($39,610) $3,865,219 197,600 $(1,200,000)$2,865,972
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Collection of subscriptions receivable - - - 15,002 - - - 15,002
Net income - - - - 1,610,985 - - 1,610,985
Distributions to stockholders - - - - (2,215,822) - - (2,215,822)
--------- ------ -------- -------- ----------- -------- ---------- ----------
BALANCE AT AUGUST 1, 1997 6,000,000 $7,500 $355,863 ($91,295) $4,860,966 2,266,000 $(1,438,380)$3,694,654
========== ====== ======== ======== ========== ========= =========== ==========
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
AND THE PERIOD ENDED AUGUST 1, 1997
December 31 August 1,
--------------------------------------------------
1994 1995 1996 1997
------------- --------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $361,463 $2,017,226 $1,747,419 $1,610,985
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 898,606 1,004,901 1,143,391 1,196,387
Provision for doubtful accounts 6,352 10,523 8,176 -
Deferred income tax provision - 35,000 (31,843) 90,545
(Gain) loss on sale of property - - (2,598) 4,266
Changes in operating assets (increase)
decrease in-
Accounts receivable (271,441) (198,524) (885,033) (564,570)
Postage receivable (92,560) 53,599 (701,855) 693,549
Supplies inventory (20,575) (157,406) (16,494) 41,542
Prepaid postage (104,396) (601,788) 35,814 (1,722)
Prepaid expenses and other assets (107,372) (78,664) 136,284 (429,871)
Changes in operating liabilities increase
(decrease) in-
Accounts payable and accrued expenses 937,583 (97,085) 708,206 825,445
Advanced postage 252,917 (279,438) 491,627 310,516
Other current liabilities (121,954) 17,818 (14,535) (30,527)
Deferred charges 225,041 99,135 56,121 152,946
------------- --------------- -------------- ---------------
Net cash provided by operating
activities 1,963,664 1,825,297 2,674,680 3,899,491
------------- --------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (928,338) (1,983,186) (1,473,761) (458,045)
Proceeds from sale of equipment - - 9,260 2,700
------------- --------------- -------------- ---------------
Net cash used in investing activities (928,338) (1,983,186) (1,464,501) (455,345)
------------- --------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (225,000) 500,000 900,000 400,000
Proceeds from long-term borrowings 355,000 1,524,000 507,000 1,500,000
Principal payments on long-term debt and
capital leases obligations (909,888) (528,077) (938,269) (2,996,524)
Due from Vestcom - - (527,056) (145,765)
Collection of subscriptions receivable 30,430 4,680 21,203 15,002
Repurchase of common stock (238,380) - - -
Distributions to stockholders - (1,308,245) (1,217,279) (2,215,822)
------------- --------------- -------------- ---------------
Net cash provided by (used in)
financing activities (987,838) 192,358 (1,254,401) (3,443,109)
------------- --------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 47,488 34,469 (44,222) 1,037
CASH AND CASH EQUIVALENTS, beginning
of year 68,875 116,363 150,832 106,610
------------- --------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $116,363 $150,832 $106,610 $107,647
============= =============== ============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31 August 1,
--------------------------------------------------
1994 1995 1996 1997
------------- --------------- -------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for-
<S> <C> <C> <C>
Interest $44,025 $49,858 $137,399 $397,344
State income tax 50 28,332 42,712 --
============= =============== ============= ==========
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred $ - $ - $ - $6,943,939
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.
In February 1997, the Company and its stockholders entered 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 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.
<PAGE>
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.
Long-Lived Assets-
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, 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.
<PAGE>
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1995,
1996 and August 1, 1997:
<TABLE>
<CAPTION>
Estimated
Useful Lives
1995 1996 1997 (Years)
-------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Software $570,979 $662,059 $679,007 3 -5
Machinery and equipment 8,218,062 9,126,941 16,592,499 5 - 7
Furniture and fixtures 955,085 1,095,725 1,113,107 10
Leasehold improvements 499,195 955,904 965,922 8 - 10
Construction in progress 223,219 - -
-------------- -------------- ----------------
10,446,540 11,840,629 19,350,535
Less- Accumulated depreciation and
amortization (6,405,201) (7,455,582) (8,414,876)
-------------- -------------- ----------------
Property and equipment, net $4,061,339 $4,385,047 $10,935,659
============== ============== ================
Leased equipment under capital leases (included above) consists of the
following at December 31, 1995, 1996 and August 1, 1997:
December 31 August 1,
-------------------------
1995 1996 1997
------------- -------- ----------------
Equipment $642,902 $ - $7,306,430
Less- Accumulated amortization (183,686) - (476,755)
------------- -------- ----------------
$459,216 $ - $6,829,675
============= ======== ================
</TABLE>
The equipment held under capital lease in 1995 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, 1996 and the seven
months ended August 1, 1997 was $898,606, $1,004,901 and $1,143,391 and
$1,196,387, respectively.
(4) ACCOUNTS PAYABLE
AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following at December
31, 1995 and 1996 and August 1, 1997:
<TABLE>
<CAPTION>
December 31 August 1,
-----------------------------------
1995 1996 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Accounts payable $444,939 $1,292,925 $1,713,415
Accrued salary and bonuses 726,239 794,143 678,000
Accrued production, rent and maintenance 360,588 199,349 816,542
Other accruals 221,070 174,625 78,530
--------------- ---------------- ---------------
$1,752,836 $2,461,042 $3,286,487
=============== ================ ===============
</TABLE>
<PAGE>
(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 (8-1/2% at
August 1, 1997). The unused line was $1,050,000 at August 1, 1997. The line
expired on August 7, 1997 at which time the outstanding balance was paid
off.
(6) LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1995 and 1996 and
August 1, 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Equipment loan payable to a financial institution, bearing
interest at the prime rate (8-1/2% at August 1, 1997) 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 $39,444
Equipment loan payable to a financial institution, bearing
interest at the prime rate (8-1/2% at August 1, 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 52,000
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 1,204,362
----------- ----------- -----------
1,643,695 1,468,083 1,295,806
Less- Current maturities (626,315) (785,472) (982,111)
------------ ------------ ------------
$1,017,380 $682,611 $313,695
============ =========== ============
</TABLE>
At August 1, 1997 the aggregate amounts of annual principal maturities of
long-term obligations are as follows:
<TABLE>
<CAPTION>
August 1-
<S> <C> <C>
1998 $982,111
1999 281,473
2000 32,222
---------------
Total $1,295,806
===============
</TABLE>
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 August 1, 1997.
<PAGE>
(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. These
notes were subsequently paid off in August 1997.
(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 August 1, 1997 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:
1998 $712,283
1999 701,096
2000 697,675
2001 594,196
-----------
Total minimum payments $2,705,250
===========
<PAGE>
Rent expense (including lease escalations) charged to operations for
the years ended December 31, 1994, 1995, 1996 and the seven months
ended August 1, 1997 was $2,282,794, $2,234,340, $2,236,280 and
$515,151, 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:
August 1:
1998 $472,309
1999 505,254
2000 514,485
2001 446,966
-------
$1,939,014
===========
Related party rent expense for the years ended December 31, 1994,
1995, 1996 and the seven months ended August 1, 1997 was $661,635,
$363,472, $628,083 and $325,754, 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 and $22,078 in June 1997. The loans
bear interest at a rate equal to the fluctuating interest rate
announced by a certain bank as its prime rate (8-1/2% at August 1,
1997) and are due and payable on the Offering Date. The Company has
unreimbursed advances to Vestcom of $130,711 for working capital needs
which are included in Due from Vestcom in the accompanying balance
sheet.
(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, 1996 and the
seven months ended August 1, 1997 were $39,641, $43,477, $61,465 and
$42,626, respectively.
<PAGE>
(13) SUBSEQUENT EVENTS:
On July 30, 1997, Vestcom announced the initial public offering of
3,850,000 shares of its common stock at a price of $13.00 per share.
Vestcom's underwriters exercised in full an option to purchase an
additional 577,500 shares of the Vestcom'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. Concurrently with the Offering,
Vestcom acquired all of the outstanding shares of the Company. Accordingly,
the accompanying financial statements of the Company do not include a
balance sheet as of December 31, 1997 and reflect the Company's operations
and cash flows up until the date of acquisition by Vesctom (August 1,
1997). See the Vestcom financial statements included elsewhere herein.
<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 August 1, 1997,
and the related statements of income, stockholders' equity, and cash flows for
the years ended December 31, 1994, 1995 and 1996, and the seven months ended
August 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Computer Output Systems, Inc.
as of December 31, 1995 and 1996 and August 1, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996, and the seven months ended August 1, 1997 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND AUGUST 1, 1997
December 31, August 1,
---------------------------------
ASSETS 1995 1996 1997
--------------- -------------- ---------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $95,468 $ - $106,754
Accounts receivable, net of allowance for doubtful
accounts of $5,000 in 1996 and 1997, respectively 721,721 964,035 1,222,789
Supplies inventory 35,191 176,211 179,101
Prepaid postage 90,757 139,458 160,253
Prepaid expenses and other current assets 9,019 25,642 25,273
--------------- -------------- ---------------
Total current assets 952,156 1,305,346 1,694,170
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 459,723 472,003 634,576
OTHER ASSETS 23,906 36,240 37,559
--------------- -------------- ---------------
Total assets $1,435,785 $1,813,589 $2,366,305
=============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $60,000 $150,000 $250,000
Current portion of capital lease obligations 108,235 94,584 117,941
Accounts payable 354,215 566,064 585,219
Accrued expenses 63,870 88,720 208,807
Advanced postage 273,710 249,605 223,640
Distributions payable to shareholders - - 534,000
--------------- -------------- ---------------
Total current liabilities 860,030 1,148,973 1,919,607
LONG-TERM DEBT 207,358 - -
CAPITAL LEASE OBLIGATIONS 227,249 130,072 213,453
--------------- -------------- ---------------
Total liabilities 1,294,637 1,279,045 2,133,060
--------------- -------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.10 par value; 10,000 shares
authorized, 100 shares issued and outstanding 10 10 10
Additional paid-in capital 732,470 732,470 732,470
Retained earnings (591,332) (197,936) (499,235)
--------------- -------------- ---------------
Total stockholders' equity 141,148 534,544 233,245
--------------- -------------- ---------------
Total liabilities and stockholders' equity $1,435,785 $1,813,589 $2,366,305
=============== ============== ===============
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
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
---------------------------------------------------
1994 1995 1996 1997
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
REVENUES $2,192,400 $3,542,048 $4,854,633 $4,238,866
COST OF REVENUES 1,459,472 2,446,078 3,131,997 2,747,232
-------------- -------------- --------------- ----------------
Gross profit 732,928 1,095,970 1,722,636 1,491,634
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 681,638 979,211 1,195,057 780,508
-------------- -------------- --------------- ----------------
Income from operations 51,290 116,759 527,579 711,126
-------------- -------------- --------------- ----------------
OTHER EXPENSE:
Interest expense 34,883 49,482 38,794 29,818
Other expense 15,540 - - -
-------------- -------------- --------------- ----------------
50,423 49,482 38,794 29,818
-------------- -------------- --------------- ----------------
Income before provision for
income taxes 867 67,277 488,785 681,308
-------------- -------------- --------------- ----------------
PROVISION FOR INCOME TAXES 250 7,365 51,353 55,207
-------------- -------------- --------------- ----------------
Net income $617 $59,912 $437,432 $626,101
============== ============== =============== ================
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
Additional Total
Common Stock Paid-in Retained Stockholders'
---------------------------
Shares Amount Capital Earnings Equity
----------- ------------ ---------------- -------------- -----------------
<S> <C> <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
----------- -------- ------------ -------------- --------------
Net income - - - 626,101 626,101
Distributions to
stockholders - - - (927,400) (927,400)
----------- -------- ------------ -------------- --------------
BALANCE AT AUGUST
1, 1997 100 $10 $732,470 ($499,235) $233,245
=========== ======== ============ ============== ==============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPUTER OUTPUT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
----------------------------------------------
1994 1995 1996 1997
------------- ------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $617 $59,912 $437,783 $626,101
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 86,342 105,145 132,812 89,497
Provision for doubtful accounts 5,000 14,373 - -
Loss on the abandonment of leasehold
improvements 9,358 - - -
Changes in operating assets (increase)
decrease in-
Accounts receivable (105,123) (333,798) (242,314) (258,754)
Supplies inventory (27,350) (7,841) (141,020) (2,890)
Prepaid postage (34,549) (49,588) (48,701) (20,795)
Prepaid expenses and other assets 740 (9,075) (28,956) (951)
Changes in operating liabilities increase
(decrease) in-
Accounts payable (23,017) 153,470 211,849 593,103
Accrued expenses 12,345 38,851 24,850 97,866
Advanced postage (66,212) 166,245 (24,105) (25,964)
------------- ------------ ------------- -------------
Net cash provided by (used in)
operating activities (141,849) 137,694 322,198 1,097,213
------------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES --
Acquisition of property and equipment (59,220) (33,927) (145,444) (90,475)
------------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings - 200,000 (50,000) 100,000
Principal payments on capital lease obligations (63,555) (99,040) (110,828) (72,584)
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) (927,400)
------------- ------------ ------------- -------------
Net cash provided by (used in)
financing activities 211,394 (18,624) (272,222) (899,984)
------------- ------------ ------------- -------------
Net (decrease) increase in cash and
cash equivalents 10,325 85,143 (95,468) 106,754
CASH AND CASH EQUIVALENTS, beginning
of year - 10,325 95,468 -
------------- ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $10,325 $95,468 $ $106,754
-
============= ============ ============= =============
The accompanying notes to financial statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31 August 1,
----------------------------------------------
1994 1995 1996 1997
------------- ------------ ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C> <C> <C>
Cash paid during the year for-
Interest $38,871 $44,797 $38,329 $30,066
State income tax 250 250 19,004 50,946
============= ============ ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Capital lease obligations incurred ($330,089) ($143,700) $ - $161,183
============= ============ ============= =============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<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 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 entered into an agreement with Vestcom
International, Inc. ("Vestcom"), pursuant to which all outstanding shares
of the Company's common stock were 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 offering was effective August 1, 1997.
(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 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.
<PAGE>
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 method 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 income.
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 statements of income.
Long-Lived Assets-
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 "Concentration 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.
<PAGE>
(3) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment-
<TABLE>
<CAPTION>
Estimated
December 31 Useful
----------------------------- August 1, Lives
1995 1996 1997 (Years)
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Furniture and fixtures $37,622 $37,622 $51,590 7
Computers and equipment 680,805 641,132 847,860 5
Leasehold improvements 25,492 96,045 127,419 10
------------- ------------ -------------
743,919 774,799 1,026,869
Less- Accumulated depreciation and
amortization (284,196) (302,796) (392,293)
------------- ------------ -------------
Property and equipment, net $459,723 $472,003 $634,576
============= ============ =============
</TABLE>
Leased equipment under capital leases (included above) consists of the
following-
<TABLE>
<CAPTION>
December 31 August 1,
---------------------------------
1995 1996 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Computers and equipment $500,289 $428,789 $589,972
Less- Accumulated depreciation (130,835) (185,656) (245,100)
--------------- -------------- --------------
$369,454 $243,133 $344,872
=============== ============== ==============
</TABLE>
Depreciation and amortization expense was $86,342, $105,145, $132,812 and
$89,497 for the years ended December 31, 1994, 1995 and 1996 and the seven
months ended August 1, 1997, respectively.
Minimum annual payments under capital leases, including interest, are as
follows-
<TABLE>
<CAPTION>
August 1-
<S> <C>
1998 $143,385
1999 112,584
2000 58,230
2001 42,132
2002 28,088
--------------
Total minimum payments 384,419
Less- Amounts representing interest (53,025)
--------------
Net minimum lease payments 331,394
Less- Current portion of capital lease obligations (117,941)
--------------
Long-term portion of capital lease obligations $213,453
==============
The interest rates on capitalized leases vary from 8.0% to 13.0% and are
imputed based on the fair market value of the equipment at the inception of
the lease.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(4) LONG-TERM DEBT:
Long-term debt consists of the following- December 31, December 31, August 1,
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
$300,000 line of credit with a financial institution. Secured
by substantially all of the assets of the Company. Interest
payable monthly at prime (8-1/2% August 1, 1997) plus 1%.
All outstanding balances due on December 19, 1997.
$200,000 $150,000 $250,000
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 - -
------------- -------------- --------------
267,358 150,000 250,000
Less- Current maturities 60,000 150,000 250,000
------------- -------------- --------------
$207,358 $ - $ -
============= ============== ==============
</TABLE>
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 August 1, 1997.
The outstanding short-term debt balance was paid-off in full subsequent to
August 1, 1997 by Vestcom.
(5) COMMITMENTS AND CONTINGENCIES:
Operating Leases-
The Company leases equipment and vehicles under noncancellable operating
leases expiring through 1999.
At August 1, 1997 the minimum annual rental commitment of the Company under
existing agreements was as follows (after the allocation to the affiliate)-
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $416,363
1999 401,688
2000 284,454
2001 259,386
2002 126,900
Thereafter 264,375
---------------
Total minimum payments $1,753,166
===============
</TABLE>
Rental expense charged to operations amounted to $136,352, $172,080,
$280,337 and $83,406 for the years ended December 31, 1994, 1995 and 1996
and the seven months ended August 1, 1997, respectively.
<PAGE>
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.
(6) 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 and the seven months ended August 1, 1997 were
$12,876, $14,773, $15,238 and $11,495, respectively.
(7) SIGNIFICANT CUSTOMERS:
During the years ended December 31, 1994, 1995 and 1996, one customer
accounted for $415,000 or 18.9%, $1,077,000 or 30.4% and $1,412,000 or
29.1% 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.
During the seven months ended August 1, 1997, two customers accounted
for more than 10% of the Company's revenues, respectively. The
customers accounted for $1,016,000 or 24.0% and $1,136,000 or 26.8% of
the Company's revenues, respectively. Accounts receivable from these
customers as of August 1, 1997 were approximately $177,000 and
$255,000. Similar to the customer in prior years, the new significant
customer is a service bureau servicing many different business
accounts.
During 1997, the Company and these customers extended their service
agreements whereby the Company will provide document generation and
mailing services at prices specified in the agreement.
<PAGE>
(8) EVENTS SUBSEQUENT TO DATE OF
FINANCIAL STATEMENTS:
On July 30, 1997, Vestcom announced the initial public offering of
3,850,000 shares of its common stock at a price of $13.00 per share.
Vestcom's underwriters exercised in full an option to purchase an
additional 577,500 shares of the Vestcom'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.
Concurrently with the Offering, Vestcom acquired all of the
outstanding shares of the Company. Accordingly, the accompanying
financial statements of the Company do not include a balance sheet as
of December 31, 1997 and reflect the Company's operations and cash
flows up until the date of acquisition by Vestcom (August 1, 1997).
See the Vestcom financial statements included elsewhere herein.
<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 August 1, 1997, and the related combined
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1994, 1995 and 1996 and the seven months ended August 1, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Morris County Direct Mail
Services, Inc. and related companies as of December 31, 1995 and 1996 and August
1, 1997 and the results of their operations and their cash flows for the years
ended December 31, 1994, 1995 and 1996 and the seven months ended August 1, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, INC. AND RELATED COMPANIES
COMBINED BALANCE SHEETS AT DECEMBER 31, 1995 AND 1996 AND AUGUST 1, 1997
December 31 August 1,
--------------------------------
ASSETS 1995 1996 1997
-------------- -------------- --------------
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $534,459 $572,714 $324,409
Accounts receivable, net of allowance for doubtful accounts of
$211,000, $203,000 and $203,000 in 1995, 1996 and 1997, respectively 1,336,698 2,647,434 3,055,632
Postage receivable 1,019,560 330,730 617,665
Notes receivable - 100,000 67,216
Due from related parties 190,088 266,775 333,866
Prepaid expenses and other current assets 115,785 175,594 50,745
-------------- -------------- -------------
Total current assets 3,196,590 4,093,247 4,449,533
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization 1,867,808 1,504,158 1,579,089
GOODWILL AND OTHER INTANGIBLE ASSETS - 396,184 371,140
OTHER ASSETS 19,417 131,488 95,007
-------------- -------------- --------------
Total assets $5,083,815 $6,125,077 $6,494,769
============== ============== ==============
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ - 160,000 150,000
Current portion of long-term debt 227,935 460,709 594,000
Current portion of capital lease obligations 20,025 21,098 21,776
Due to related parties 685,384 1,231,590 1,483,935
Accounts payable 370,551 686,646 570,522
Accrued expenses 400,907 474,354 612,885
Advanced postage 1,425,423 612,332 806,670
--------- --------- ----------
Total current liabilities 3,130,225 3,646,729 4,239,788
LONG TERM DEBT 343,686 933,646 841,978
CAPITAL LEASE OBLIGATIONS 27,166 15,836 8,651
DUE TO RELATED PARTIES 666,001 - -
DEFERRED INCOME TAXES 12,200 11,420 11,422
-------- --------- ---------
Total liabilities 4,179,278 4,607,631 5,101,839
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock-
Morris County Direct Mail, 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 16,000
First Class Presort, Inc., no par value; 2,000
shares authorized; 199 shares issued and outstanding 1,990 1,990 1,990
Quality Control Printing, Inc., no par value; 2,500
shares issued and outstanding 2,000 2,000 2,000
Additional paid-in capital
Morris County Direct Mail Services, Inc. 59,500 59,500 59,500
First Class Presort, Inc. 123,268 123,268 123,268
Retained earnings 1,103,279 1,716,188 1,591,672
--------- --------- ---------
1,306,037 1,918,946 1,794,430
Less Treasury stock, 75 shares at cost of Morris
County Direct Mail Services (401,500) (401,500) (401,500)
---------- ---------- ---------
Total stockholders' equity 904,537 1,517,446 1,392,930
---------- ---------- ----------
Total liabilities and stockholders' equity $ 5,083,815 $ 6,125,077 $ 6,494,769
========== ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets.
</TABLE>
<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
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
---------------------------------------------------
1994 1995 1996 1997
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES $8,503,918 $9,422,646 $13,360,125 $7,892,585
COST OF REVENUES 6,538,866 6,429,671 9,517,339 5,766,816
-------------- -------------- --------------- ---------------
Gross profit 1,965,052 2,992,975 3,842,786 2,125,769
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,539,973 1,913,391 3,155,486 1,584,690
-------------- -------------- --------------- ---------------
Income from operations 425,079 1,079,584 687,300 541,079
-------------- -------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (126,394) (91,042) (159,402) (118,370)
Interest and other income 8,759 21,918 49,674 29,561
Net loss on sale/writeoff of property
and equipment - (114,694) 63,550 (19,796)
-------------- -------------- --------------- ---------------
(117,635) (183,818) (46,178) (108,605)
-------------- -------------- --------------- ---------------
Income before provision
(benefit) for income taxes 307,444 895,766 641,122 432,474
-------------- -------------- --------------- ---------------
PROVISION (BENEFIT) FOR
INCOME TAXES (20,310) 30,936 28,213 17,188
-------------- -------------- --------------- ---------------
Net income $327,754 $864,830 $612,909 $415,286
============== ============== =============== ===============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MORRIS COUNTY DIRECT MAIL SERVICES, INC. AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
Common Stock Additional Paid-In Capital
-----------------------------------------------------------------------------------------------------
Morris County Morris
Direct Mail First Class Quality Control County First Total
Services Presort, Inc. Printing, Inc. Direct Class Stock-
------------- ------------ -------------- Mail Ser- Presort, Retained Treasury Stock holder'
Shares Amount Shares Amount Shares Amount vices, Inc. Inc. Earnings Shares Amount Equity
------ ------ ------ ------ ------ ------ ----------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT 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
Net income - - - - - - - - 415,286 - - 415,286
Distributions to
stockholders - - - - - - - - (539,802) - - (539,802)
--- ------- ---- ------ ---- -------- ------- -------- -------- ---- --------- ---------
BALANCE AT AUGUST 1, 1997 1,075 $16,000 199 $1,990 100 $2,000 $59,500 $123,268 $1,591,672 75 ($401,500)$1,392,930
===== ======= === ====== === ====== ======= ======== ========== ==== ========= =========
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<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
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
--------------------------------------------------
1994 1995 1996 1997
-------------- ------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income $327,754 $864,830 $612,909 $415,286
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 334,690 392,397 587,727 316,586
Amortization of goodwill - - 16,116 25,044
Provision for doubtful accounts 46,467 55,260 25,693 56,736
Deferred income tax provision (27,837) 566 (780) 2
(Gain) loss on sale of equipment - 114,694 (63,550) 19,796
Loss on write-off of leasehold improvements - - 496,876 -
Changes in operating assets (increase)
decrease in-
Accounts receivable 29,024 213,194 (1,336,429) (464,934)
Postage receivable 5,472 (431,184) 688,830 (286,935)
Prepaid expenses and other assets (33,617) (19,595) (135,273) 161,330
Changes in operating liabilities increase
(decrease) in-
Accounts payable 111,364 (418,965) 316,095 (116,124)
Accrued expenses (8,140) (22,263) 73,447 138,531
Advanced postage (347,119) 317,309 (813,091) 194,338
-------------- ------------- --------------- --------------
Net cash provided by
operating activities 438,058 1,066,243 468,570 459,656
-------------- ------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (159,691) (640,692) (482,403) (412,313)
Proceeds from sale of property and equipment - - 175,000 1,000
Acquisition of companies - - (762,300) -
-------------- ------------- --------------- --------------
Net cash used in investing
activities (159,691) (640,692) (1,069,703) (411,313)
-------------- ------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (50,000) - 160,000 (10,000)
Proceeds from long-term borrowings 124,990 453,000 1,249,881 340,000
Principal payments on long-term debt and
capital lease obligations (493,484) (433,597) (437,404) (304,884)
Issuance of notes receivable - - (175,000) -
Collection of notes receivable - - 13,393 32,784
Net proceeds from affiliates 70,240 (5,153) 48,313 (183,600)
Proceeds from stockholder loans 155,711 143,784 31,015 368,854
Payments on stockholder loans (243,991) (251,802) (250,810) -
Distributions to stockholders (14,000) (22,979) - (539,802)
-------------- ------------- --------------- --------------
Net cash provided by (used in)
financing activities (450,534) (116,747) 639,388 (296,648)
-------------- ------------- --------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31 August 1,
--------------------------------------------------
1994 1995 1996 1997
-------------- ------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH
<S> <C> <C> <C> <C>
AND CASH EQUIVALENTS ($172,167) $308,804 $38,255 ($248,305)
CASH AND CASH EQUIVALENTS,
beginning of year 397,822 225,655 534,459 572,714
-------------- ------------- --------------- --------------
CASH AND CASH EQUIVALENTS, end of year $225,655 $534,459 $572,714 $324,409
============== ============= =============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for-
Interest $65,647 $41,739 $118,386 $118,210
State income tax 6,408 14,707 41,121 14,269
============== ============= =============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred 81,949 - - -
============== ============= =============== ==============
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<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.
In February 1997, the Company and its stockholders entered 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 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.
<PAGE>
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 $496,878 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.
Long-Lived Assets-
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.
<PAGE>
Concentration of Credit Risk-
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, 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 and August 1, 1997 was $16,116 and $41,160, respectively.
(3) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1995 and
1996 and August 1, 1997-
<TABLE>
<CAPTION>
Estimated
Useful
Lives
1995 1996 1997 (Years)
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Transportation equipment $367,351 $401,093 $448,990 5-7
Machinery and equipment 1,836,615 2,306,921 2,617,699 5-10
Equipment under capital lease 1,132,949 1,132,949 1,132,949 5-10
Leasehold improvements 634,905 - 30,204
--------------- --------------- --------------
3,971,820 3,840,963 4,229,842
Less- Accumulated depreciation and
amortization 2,104,012 2,336,805 2,650,753
--------------- --------------- --------------
Property and equipment, net $1,867,808 $1,504,158 $1,579,089
=============== =============== ==============
</TABLE>
Leased equipment under capital leases (included above) consists of the
following as of December 31, 1995 and 1996 and August 1, 1997-
<TABLE>
<CAPTION>
December 31 August 1,
---------------------------------
1995 1996 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Equipment $1,132,949 $1,132,949 $1,132,949
Less- Accumulated amortization 542,269 663,443 778,325
-------------- --------------- ---------------
$590,680 $469,506 $354,624
============== =============== ===============
</TABLE>
Depreciation and amortization expense on property and equipment charged to
operations for the years ended December 31, 1994, 1995 and 1996 and the
seven months ended August 1, 1997 was $334,690, $392,397, $587,727 and
$316,586, 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 net
loss on sale/write-off of property and equipment.
At August 1, 1997 minimum annual payments under capital lease including
interest are as follows-
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $23,265
1999 9,020
-------------
Total minimum payments 32,285
Less- Amounts representing interest 1,858
-------------
Net minimum payments 30,427
Less- Current portion of capital lease obligation 21,776
-------------
Long-term portion of capital lease obligation $8,651
=============
</TABLE>
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 $350,000 line of credit with a bank for the purchase of
equipment with interest at the prime rate (8.5% at August 1, 1997) plus
.75%. The Company also has a $225,000 working capital line of credit with
interest at prime plus .25%. At August 1, 1997, $150,000 was outstanding
under the working capital line.
<PAGE>
(5) LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1995 and 1996 and
August 1, 1997-
<TABLE>
<CAPTION>
December 31 August 1,
------------------------------
1995 1996 1997
------------ -------------- --------------
<S> <C> <C> <C>
Various notes payable to a financial institution with monthly
installments totaling $45,915 plus interest between 7.90% and
prime rate (8.5%) at August 1, 1997 plus .75%, secured by
equipment, maturing between September 1997 and May 2001
$571,621 $1,058,077 $1,121,744
Various notes payable to third parties in monthly installments
of $11,245 plus interest between 10.90% and 15% maturing
between December 1997 and June 2003. - 336,278 314,234
------------ -------------- --------------
571,621 1,394,355 1,435,978
Less- Current maturities 227,935 460,709 594,000
------------ -------------- --------------
$343,686 $933,646 $841,978
============ ============== ==============
</TABLE>
At August 1, 1997 the aggregate amounts of annual principal
maturities of long-term obligations (excluding capital lease
obligations) are as follows-
1998 $594,000
1999 408,981
2000 189,929
2001 118,095
2002 64,429
Thereafter 60,544
--------
Total $1,435,978
============
(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 August 1, 1997 the minimum annual rental commitment of the Company under
existing agreements (including related party lease) is as follows-
1998 $1,279,159
1999 1,172,531
2000 1,114,465
2001 791,732
2002 762,732
Thereafter 215,007
----------
Total minimum payments $5,335,626
==========
Rent expense (including lease escalations) charged to operations for the
years ended December 31, 1994, 1995 and 1996 and for the seven months ended
August 1, 1997 was $783,326, $668,154, $852,570 and $512,728, 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 August 1, 1997
was approximately $320,000.
(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-
1998 $637,830
1999 492,000
2000 492,000
2001 173,000
2002 144,000
Thereafter 156,000
----------
$2,094,830
===========
Related party rent expense for the years ended December 31, 1994, 1995 and
1996 and for the seven months ended August 1, 1997 was $760,468, $639,768,
$777,112 and $458,722 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
and the seven months ended August 1, 1997 was $60,746, $49,303, $41,016 and
$23,572, respectively.
<PAGE>
(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, $10,317 and $0
were made by the Company in 1994, 1995 and 1996 and for the seven months
ended August 1, 1997, 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. During 1997, the Company
was informed by this customer that it would not be renewing its contract
with the Company. Such customer accounted for 6% of revenues for the seven
months ended August 1, 1997.
The Company had no customer which accounted for greater than 10% of
revenues for the seven months ended August 1, 1997.
(10) SUBSEQUENT EVENT:
On July 30, 1997, Vestcom announced the initial public offering of
3,850,000 shares of its common stock at a price of $13.00 per share.
Vestcom's underwriters exercised in full an option to purchase an
additional 577,500 shares of the Vestcom'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. Concurrently with the Offering,
Vestcom acquired all of the outstanding shares of the Company. Accordingly,
the accompanying financial statements of the Company do not include a
balance sheet as of December 31, 1997 and reflect the Company's operations
and cash flows up until the date of acquisition by Vestcom (August 1,
1997). See the Vestcom financial statements included elsewhere herein.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Electronic Imaging Services, Inc.:
We have audited the accompanying balance sheets of Electronic Imaging Services,
Inc. (a Delaware Corporation) as of December 31, 1996 and August 1, 1997 and the
related statements of operations, stockholders' deficit and cash flows for the
year ended December 31, 1996 and the seven months ended August 1, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electronic Imaging Services,
Inc. as of December 31, 1996 and August 1, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the seven
months ended August 1, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
BALANCE SHEETS
AT DECEMBER 31, 1996 AND AUGUST 1, 1997
December 31, August 1,
ASSETS 1996 1997
------------ ---------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 45,089 $ 343,808
Accounts receivable, net of allowance for doubtful accounts of
$37,017 and $167,005, respectively 826,655 723,074
Supplies inventory 413,210 529,170
Other current assets 112,696 100,804
--------- ---------
Total current assets 1,397,650 1,696,856
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization
1,526,992 1,656,552
OTHER ASSETS 54,944 21,665
--------- ----------
Total assets $ 2,979,586 $ 3,375,073
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $ 662,575 $ 750,000
Current portion of long-term debt 169,393 159,744
Current portion of capital lease obligations 232,863 299,287
Accounts payable 1,119,316 1,083,099
Accrued expenses 321,200 230,162
Income tax payable - 89,770
---------- ----------
Total current liabilities 2,505,347 2,612,062
LONG-TERM DEBT 48,644 38,844
CAPITAL LEASE OBLIGATIONS 768,504 911,929
DEFERRED INCOME TAXES 86,740 86,740
PLEDGED STOCK 375,000 375,000
--------- ---------
Total liabilities 3,784,235 4,024,575
========= ==========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 2,000 shares authorized; 1,261 shares
issued;
1,111 shares outstanding 11 11
Accumulated deficit (429,660) (274,513)
--------- --------
(429,649) (274,502)
Less- Treasury stock, 150 shares at cost (375,000) (375,000)
--------- --------
Total stockholders' deficit (804,649) (649,502)
-------- --------
Total liabilities and stockholders' deficit $ 2,979,586 $ 3,375,073
========= ===========
The accompanying notes to financial statements are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31, August 1,
1996 1997
<S> <C> <C>
REVENUES $ 7,623,870 $ 5,208,574
COST OF REVENUES 6,272,144 3,963,876
----------- ---------
Gross profit 1,351,726 1,244,698
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,840,958 855,824
----------- ---------
(Loss) income from operations (489,232) 388,874
OTHER EXPENSES (INCOME)
Interest expense 157,762 126,082
Other (income) expense (11,789) 16,219
------------ ---------
145,973 142,301
------------ ---------
(Loss) income before provision for income taxes (635,205) 246,573
PROVISION FOR INCOME TAXES - 91,426
------------ ---------
Net (loss) income $ (635,205) $ 155,147
============= =======
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
SEVEN MONTHS ENDED AUGUST 1, 1997
Retained
Additional Earnings
Common Stock Paid-In Accumulated Treasury Stock
Shares Amount Capital Deficit) Shares Amount Total
------ ------ ------- ------------ --------- ------ ------
<S> <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)
Net income - - - 155,147 - - 155,147
--- --- ------ -------- ---- --------- ---------
BALANCE, August 1, 1997 961 11 $ - $(274,513) 150 (375,000) (649,502)
==== === ======= ========= ===== ========= ========
The accompanying notes to financial statements are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC IMAGING SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31, August 1
1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $ (635,205) 155,147
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 297,192 234,664
Provision for doubtful accounts 33,923 16,700
Loss on write-down of property
and equipment 21,968 -
(Gain) loss on sale of property (15,629) 12,650
Changes in operating assets (increase)
decrease in-
Accounts receivable (132,397) 86,881
Supplies inventory (137,494) (115,690)
Other current assets 61,755 11,892
Other assets - 12,288
Changes in operating liabilities increase
(decrease) in-
Accounts payable 530,454 (36,217)
Accrued payable 217,821 (91,038)
Income taxes payable - 89,770
-------- --------
Net cash provided by operating activities 242,388 377,047
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (194,500) (356,153)
Proceeds from sale of property adn equipment
Net cash used by investing activities 70,296 -
-------- ----------
(124,204) (356,153)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 469,000 87,425
(Decrease) increase in long-term debt and capital
lease obligations (339,993) 190,400
Purchase of treasury stock (225,000) -
--------- ---------
Net cash (used) provided by
financing activities (95,993) 277,825
========= =========
Net increase in cash and cash equivalents 22,191 298,719
CASH AND CASH EQUIVALENTS, beginning of period 22,898 45,089
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 45,089 $ 343,808
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest 167,051 127,250
Income taxes 30,893 -
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
Capital lease obligations incurred 347,559 971,975
Purchase of treasury stock through issuance of notes payable 375,000 -
The accompanying notes to financial statements are an integral part of these statements.
</TABLE>
<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 and (ii) the production and
distribution of documents on paper, microfiche, microfilm and compact disc.
In February 1997, the Company and its stockholders entered 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 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.
<PAGE>
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.
Long-Lived Assets
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.
<PAGE>
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 consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful
December 31, August 1, Lives
1996 1997 (Years)
<S> <C> <C> <C>
Furniture and fixtures $ 146,458 $ 146,458 10
Production equipment 2,365,483 2,706,427 5-7
Delivery equipment 65,998 65,998 5
Leasehold improvements 39,105 36,816 7
-------- ---------- ---
2,617,044 2,955,699
Less - Accumulated depreciation and 1,090,052 1,299,147
amortization
--------- ---------
Property and equipment $ 1,526,992 $ 1,656,552
========= =========
</TABLE>
Leased equipment under capital leases (included above) consisted of the
following
<TABLE>
<CAPTION>
December 31, August 1,
1996 1997
<S> <C> <C>
Equipment $ 1,381,584 $ 1,791,846
Less - Accumulated depreciation 314,672 479,287
--------- ----------
$ 1,066,912 $ 1,312,559
======== =========
</TABLE>
Depreciation and amortization expense was $297,192 and $234,664 for the
year ended December 31, 1996 and the seven months ended August 1, 1997,
respectively. At August 1, 1997 minimum annual payments under capital
leases including interest are as follows:
<TABLE>
<CAPTION>
August 1 -
<S> <C> <C>
1998 $ 401,391
1999 395,358
2000 345,306
2001 186,783
2002 92,258
Thereafter 33,092
---------
Total minimum payments 1,454,188
Less- Amount representing interest 242,972
---------
Net minimum lease payments 1,211,216
Less- Current portion of capital lease obligations 299,287
---------
Long-term portion of capital lease obligations $ 911,929
=========
</TABLE>
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.
<PAGE>
(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.
(5) LONG-TERM DEBT:
Long-term debt consisted of the following -
<TABLE>
<CAPTION>
December 31, August 1,
1996 1997
----------------- -----------
<S> <C> <C> <C>
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 $ 18,008
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 and $2,966, respectively, including interest;
secured by accounts receivable, auto, inventory and personal
guarantees of two stockholders; due January 1997 to December 1999 64,946 45,146
Note payable to supplier, due in monthly installments of $5,888,
unsecured, due June 1999 - 135,434
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 27, 1997 66,000 -
Note payable to supplier, due in monthly installments of $1,115,
including interest, unsecured, due April 1999 28,396 -
-------- -------
593,037 198,588
Less- Current maturities 394,393 159,744
-------- -------
$ 198,644 $ 38,844
======== =======
</TABLE>
At August 1, 1997, the aggregate amounts of future annual principal
maturities of long-term obligations (excluding capital lease obligations) are as
follows-
<TABLE>
<CAPTION>
August 1 -
<S> <C> <C>
1998 $ 159,744
1999 38,844
--------
Total $ 198,588
========
</TABLE>
<PAGE>
(6) COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company conducts its operations from facilities that are leased under
noncancellable operating leases expiring through August 2002. The Company
maintains production equipment, office furniture, equipment and two
automobiles under operating leases expiring through April 2001.
Net future minimum rental payments required under operating leases for
facilities and equipment as of August 1, 1997, are as follows:
August 1 -
1998 $ 836,196
1999 747,403
2000 408,009
2001 274,401
2002 197,475
Thereafter 130,901
---------
Total minimum payments $ 2,594,385
=========
Rent expense for all leases was $534,555 and $495,623 for the year ended
December 31, 1996 and the seven months ended August 1, 1997, 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.
(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 and the seven months ended August 1, 1997 were
$4,749 and $3,625, respectively.
(8) MAJOR CUSTOMERS:
During 1996, the Company had sales to two customers which exceeded 10% of
total sales, one which accounted for 29.5% of total sales and another which
accounted for 15.7%. For the seven months ended August 1, 1997, the Company
had sales to three customers which exceeded 10% of total sales, accounting
for 29.0%, 15.7% and 12.1% of total sales. Accounts receivable from these
three customers at August 1, 1997 were $237,054, $147,178 and $148,034,
respectively.
(9) STOCK REPURCHASE PLAN:
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.
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.
In connection with the above transactions, the Company recorded
compensation expense of $528,000.
In February 1997, the Company entered into an agreement among stockholders
which establishes that stock will be transferred among stockholders at a
price of $1,000 per share if the Acquisition occurs.
See Note 11 for discussion of termination of the above agreements.
(10) EXECUTIVE COMPENSATION:
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.
(11) SUBSEQUENT EVENT:
The stock repurchase agreements and stock pledge agreements described in
Notes 9 and 10 were terminated as part of the Acquisition.
On July 30, 1997, Vestcom announced the initial public offering of
3,850,000 shares of its Common Stock at a price of $13.00 per share.
Vestcom's underwriters exercised in full an option to purchase an
additional 577,500 shares of Vestcom's Common Stock at $13.00 per share to
cover overallotments of the initial public offering. The initial public
offering was consummated on August 4, 1997. Concurrently with the Offering,
Vestcom acquired all of the outstanding shares of the Company. Accordingly,
the accompanying financial statements of the Company do not include a
balance sheet as of December 31, 1997 and reflect the Company's operations
and cash flows up until the date of acquisition by Vestcom (August 1,
1997). See the Vestcom financial statements included elsewhere herein.
<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 August 1, 1997,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1994, 1995 and 1996 and the seven months ended
August 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Image Printing Systems, Inc. as
of December 31, 1995 and 1996 and August 1, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996 and the seven months ended August 1, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND AUGUST 1, 1997
December 31 August 1,
ASSETS 1995 1996 1997
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 61,835 $ 61,137 $82,539
Accounts receivable, net
of allowance for doubtful
accounts of $0, $63,868 and $138,792
in 1995, 1996 and 1997, respectively 1,002,680 1,422,234 1,214,828
Supplies inventory 149,072 256,729 159,373
Prepaid postage 199,205 324,922 180,461
Prepaid expenses and other current assets 163,028 77,738 30,164
--------- --------- ---------
Total current assets 1,575,820 2,142,760 1,667,365
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization 2,368,263 2,725,129 3,503,573
OTHER ASSETS - - 21,606
--------- --------- ---------
Total assets $3,944,083 $4,867,889 $5,192,544
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 320,494 $ 795,494 $ 645,494
Current portion of long-term debt 597,290 311,812 592,489
Current portion of capital lease obligations 29,159 156,282 293,962
Accounts payable 780,237 1,022,927 636,271
Distribution payable to stockholder - - 462,381
Accrued expenses and other
current liabilities 730,309 841,956 696,915
--------- -------- ---------
Total current liabilities 2,457,489 3,128,471 3,327,512
LONG-TERM DEBT 592,702 331,271 276,890
CAPITAL LEASE OBLIGATIONS 686,201 1,102,539 1,574,282
--------- --------- ---------
Total liabilities 3,736,392 4,562,281 5,178,684
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 15,593
Subscriptions receivable (10,855) - -
Retained earnings 204,686 291,748 -
------- ------- --------
209,424 307,341 15,593
Less- Treasury stock, 173.25 shares, at par (1,733) (1,733) (1,733)
------- -------- ---------
Total stockholders equity 207,691 305,608 13,860
Total liabilities and stockholders'
equity $3,944,083 $4,867,889 $ 5,192,544
---------- --------- ----------
</TABLE>
The accompanying notes 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
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
REVENUES $ 8,628,330 $ 8,061,927 $ 9,033,680 $ 5,880,554
COSTS OF REVENUES 6,311,170 5,994,010 6,389,208 4,109,689
--------- ---------- ---------- ----------
Gross profit 2,317,160 2,067,917 2,644,472 1,770,865
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,130,987 2,119,588 2,305,378 1,342,982
--------- --------- --------- ---------
Income (loss) from operations 186,173 (51,671) 339,094 427,883
--------- ---------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense (311,977) (306,304) (259,784) (253,088)
Other income, net 37,323 9,816 7,752 7,485
--------- -------- --------- ---------
(274,654) (296,488) (252,032) (245,603)
--------- -------- --------- ---------
Net income (loss) $ (88,481) $ (348,159) $ 87,062 $ 182,280
========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
IMAGE PRINTING SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
Total
Stock
Common Stock Subscriptions Retained Treasury Stock holders'
Shares Amount Receivable Earnings Shares Amount Equity
BALANCE,
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,
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,
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,
December 31, 1996 1,559.25 15,593 - 291,748 173.25 (1,733) 305,608
Net income - - - 182,280 - - 182,280
Distributions to
stockholders - - - (474,028) - - (474,028)
-------- ------ -------- --------- -------- --------- ----------
BALANCE,
August 1, 1997 1,559.25 $ 15,593 $ - $ -- 173.25 $ (1,733) $ 13,860
======== ======== ======== ========= ====== ======= ========
The accompanying notes are an integral part of these statements.
<PAGE>
IMAGE PRINTING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE SEVEN MONTHS ENDED AUGUST 1, 1997
December 31 August 1,
1994 1995 1996 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income (loss) $ (88,481) $ (348,159) $ 87,062 $182,280
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities-
Depreciation and amortization 796,062 715,497 636,035 396,932
Provision for doubtful accounts - - 63,868 74,924
(Gain) loss on sale of assets - 52,365 (762) (3,800)
Loss on write-off of subscriptions
receivable - - 10,855 -
Changes in operating assets (increase)
decrease in-
Accounts receivable 186,772 (2,623) (483,422) 132,482
Supplies inventory (42,085) 42,776 (107,657) 97,356
Prepaid expenses and other
current assets 36,264 18,514 (40,427) 170,429
Changes in operating assets (increase)
decrease in
Accounts payable (20,338) 226,918 242,690 (386,656)
Accrued expenses and other
current liabilities 174,529 2,933 111,647 (145,041)
--------- -------- ------- ---------
Net cash provided by
operating activities 1,042,723 708,221 519,889 518,906
--------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property
and equipment (830,522) (397,256) (374,027) (540,736)
Proceeds from sale of assets - 470,000 8,500 109,697
---------- -------- -------- ---------
Net cash provided by (used in)
investing activities (830,522) 72,744 (365,527) (431,039)
---------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 10,000 (29,506) 475,000 (150,000)
Proceeds from long-term borrowings 611,684 638,741 - 450,000
Principal payments on long-term
debt and capital lease
obligations (741,184) (1,119,674) (630,060) (354,818)
Collection of subscriptions receivable - - 300 -
Distributions to stockholders (105,881) (243,536) - (11,647)
---------- ---------- -------- ---------
Net cash used in financing
activities (225,381) (753,675) (155,060) (66,465)
--------- ----------- --------- --------
Net increase (decrease)
in cash and cash
equivalents (13,180) 27,290 (698) 21,402
CASH AND CASH EQUIVALENTS, beginning of year 47,725 34,545 61,835 61,137
-------- ------- ------- ------
CASH AND CASH EQUIVALENTS, end of year $ 34,545 $ 61,835 $ 61,137 $ 82,539
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year
for interest $ 307,745 $306,304 $ 261,812 $ 253,088
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITY:
Capital lease obligations incurred $ - $ - $ 626,612 $ 761,894
</TABLE>
The accompanying notes 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 have entered 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 amount 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 statement of operations.
The Company accounts for long-lived assets in accordance with 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.
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.
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.
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
December 31, August 1, Useful Lives
1995 1996 1997 (Years)
----------- ---- --------- ----------
<S> <C> <C> <C> <C>
Land and building $ 756,749 $ 756,749 $ 756,749 19
Machinery and equipment 6,001,691 6,968,637 7,401,613 7
Office equipment, furniture and fixtures 597,761 604,465 687,098 7
Leasehold improvements 339,213 353,702 516,682 7-19
--------- --------- ---------
7,695,414 8,683,553 9,362,142
Less-Accumulated depreciation and
amortization (5,327,151) (5,958,424) (5,858,569)
----------- ----------- -----------
Property and equipment, net $ 2,368,263 $ 2,725,129 $ 3,503,573
----------- ----------- -----------
</TABLE>
The Company leases its principal location under a capitalized lease expiring
July 31, 2008. The property is leased from stockholders of the Company (the
"related party lease") (Note 8). 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, $22,633 and $51,743 for the
years ended December 31, 1994, 1995 and 1996, and the seven months ended August
1, 1997, 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:
December 31 August 1,
1995 1996 1997
---- ---- -----
Land and building $ 756,749 $ 756,749 $ 756,749
Machinery and equipment 90,000 626,612 1,388,506
------- ---------- ---------
846,749 1,383,361 2,145,255
Less- Accumulated depreciation
and amortization (309,062) (372,202) (478,622)
--------- ----------- ---------
$ 537,687 $ 1,011,159 $ 1,666,633
--------- ----------- ----------
Depreciation and amortization expense charged to operations on property and
equipment, including capital leases, totaled $796,062, $715,497, $636,035 and
$396,932 for the years ended December 31, 1994, 1995 and 1996, and the seven
months ended August 1, 1997, respectively.
<PAGE>
At August 1, 1997 minimum annual payments under capital leases including
interest are as follows:
Year ending August 1:
1998 $ 492,727
1999 462,800
2000 426,303
2001 397,062
2002 249,992
Thereafter 720,000
---------
Total minimum payments 2,748,884
Less-Amounts representing interest 880,640
----------
Net minimum payments 1,868,244
Less-Current portion of
capital lease
obligations 293,962
----------
Long-term portion of capital
lease obligations $1,574,282
=========
The interest rates on capitalized leases vary from 7.9% to 14.0% 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:
December 31 August 1,
1995 1996 1997
---- ---- ----
Accrued salary and bonus $ 158,277 $ 180,861 $ 207,599
Postage deposit 531,979 599,929 424,087
Other current liabilities 40,053 61,166 65,229
------- -------- ------
$ 730,309 $ 841,956 $ 696,915
------- -------- --------
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 (8.5% at August 1, 1997) plus .75%.
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31 August 1,
1995 1996 1997
---- ---- ----
Various equipment loans payable to a
financial institution, bearing
interest at 1% above the prime rate
(8.5% at August 1, 1997). Principal
amounts are payable in aggregate monthly
installments of $21,095 maturing
September 1997 through February 2000;
collateralized by specific equipment
and secured by personal guarantees of
stockholders $ 725,024 $ 391,043 $ 696,852
Various equipment loans payable
to vendors bearing interest at
rates between 9.5% and 14%. Principal
amounts are payable in aggregate
monthly installments of $8,717
maturing July 1998 through October
1998; collateralized by specific
equipment 395,028 198,360 133,735
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 38,792
--------- -------- ---------
1,189,922 643,083 869,379
Less- Current maturities (597,290) (311,812) (592,489)
----------- --------- ---------
$ 592,702 $ 331,271 $ 276,890
=========== ========= ========
At August 1, 1997, the aggregate amounts of annual principal maturities of
long-term obligations (excluding capital leases) are as follows:
Year ending August 1:
1998 $ 592,489
1999 221,113
2000 55,777
--------
$ 869,379
=========
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is committed under various operating leases for warehouse and
operating facilities as well as equipment and automobiles. These leases run for
periods of one to five years and have monthly payments ranging from $85 to
$12,108.
<PAGE>
At August 1, 1997 the minimum annual rental commitments of the Company under
existing agreements are as follows:
Year ending August 1:
1998 $ 258,509
1999 152,409
2000 71,381
2001 43,018
2002 30,571
--------
Total minimum payments $ 555,888
===========
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 and the seven
months ended August 1, 1997 was $302,903, $302,999, $267,509 and $179,630,
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.
<PAGE>
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,
$36,613 and $20,433 to the plan for the years ended December 31, 1994, 1995 and
1996 and the seven months ended August 1, 1997, respectively.
10. SUBSEQUENT EVENT:
On July 30, 1997, Vestcom announced the inital public offering of 3,850,000
shraes of its common stock at a price of $13.00 per share. Vestcom's
underwriters exercised in full an option to purchase an additional 577,500
shares of Vestcom's common stock to cover over allotments of the initial public
offering. The initial public offering was consummated on August 4, 1997.
Concurrently, with the Offering, Vestcom acquired all of the outstanding shares
of the Company. Accordingly, the accompanying financial statements of the
Company do not include a balance sheet as of December 31, 1997 and reflect the
Company's operations and cash flows up until the date of acquisition by Vestcom
(August 1, 1997). See the Vestcom Financial Statements included elsewhere
herein.
<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>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1995 AND 1996, AND DECEMBER 31, 1996
July 31 December 31,
ASSETS 1995 1996 1996
---------------- ----------------- -----------------
CURRENT ASSETS:
<S> <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, nonvoting, unlimited
amount authorized, 417,082 shares issued
and outstanding 102 102 102
Class F preferred shares, noncumulative, no par
value, non participating, 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 stockholderws' 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>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
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 December 31
July 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>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
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>
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
======= ======== ===== ====== =========== ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIRPACO INC. AND SUBSIDIARY
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 December 31
July 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 - -
============== ============= =============== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
LIRPACO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 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.
<PAGE>
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.
<PAGE>
Concentration of Credit Risk-
Financial instruments that potentially expose the Company to concentration
of credit risk, as defined by SFAS No. 105, 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
Leaseholds 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
=============== ================ ===============
</TABLE>
Leased equipment under capital leases (included above) 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>
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.
<PAGE>
(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- July 31 December 31, 1995 1996 1996
<TABLE>
<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
------------------------ --------------
<S> <C> <C> <C>
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 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
=========
<PAGE>
(6) INCOME TAXES:
The provision (benefit) for income taxes consists of the following-
<TABLE>
<CAPTION>
Year Ended Five Months Ended December 31
July 31
1995 1996 1995 1996
--------------- -------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Current tax expense-
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 $200,000 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.
<PAGE>
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>
Lirpaco Inc. and Subsidiary
Consolidated Financial Statements
July 31, 1997
Contents
Auditors' report 1
Financial statements
Balance sheet 2
Statement of earnings and retained earnings 3
Statement of changes in financial position 4
Notes to the financial statements 5-8
<PAGE>
AUDITORS' REPORT
To the Shareholders of Lirpaco Inc.
We have audited the consolidated balance sheet of Lirpaco Inc. and Subsidiary as
at July 31, 1997 and the consolidated statements of earnings and retained
earnings and changes in financial position for the seven months then ended.
These consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
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 an audit to obtain reasonable
assurance whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at July 31, 1997 and
the results of its operations and the changes in its financial position for the
seven months then ended in accordance with generally accepted accounting
principles.
LIPPMAN LEEBOSH APRIL
Chartered Accountants
Montreal, Quebec
October 11, 1997
<PAGE>
Lirpaco Inc. and Subsidiary
Consolidated Balance Sheet (In U.S. Dollars)
At July 31, 1997
Assets
Current assets
Cash $ 49,857
Accounts receivable 655,766
Inventories 144,659
Prepaid expenses and other current assets 75,492
-------
925,774
Capital assets [note 2] 687,730
Deposits and deferred charges 22,605
---------
1,636,109
=========
Liabilities
Current liabilities
Accounts payable and accrued liabilities 462,233
Income taxes payable 44,927
Long-term debt - current portion 80,079
---------
587,239
Long-term debt [note 4] 213,314
Deferred income taxes 33,093
---------
833,646
---------
Shareholders' equity
Share capital [note 5] 170,308
Retained earnings 554,009
Cumulative translation adjustments 78,146
-------
802,463
-------
1,636,109
=========
<PAGE>
Lirpaco Inc. and Subsidiary
Consolidated Statement of Earnings and Retained Earnings (In U.S. Dollars)
Seven months ended July 31, 1997
Sales $2,493,385
Cost of sales 1,650,689
---------
Gross profit 842,696
---------
Expenses
Selling, general and administrative 620,473
Interest on long-term debt 13,881
Interest - other 6,457
Amortization 81,033
---------
721,844
---------
Earnings before income taxes 120,852
Income taxes 41,786
---------
Net earnings 79,066
---------
Retained earnings - beginning of period 474,943
Retained earnings - end of period 554,009
---------
<PAGE>
Lirpaco Inc. and Subsidiary
Consolidated Statement of Changes in Financial Position (In U.S. Dollars)
Seven months ended July 31, 1997
Operating activities
Net earnings $ 79,066
Charges to earnings not involving cash:
Amortization of capital assets 81,033
Deferred income taxes 6,619
-------
166,718
Net change in non-cash working capital balances (38,278)
--------
128,440
-------
Investing activities
Acquisition of capital assets (112,324)
Increase in deposits and deferred charges (22,605)
---------
(134,929)
---------
Financing activities
Repayment of long-term debt (31,852)
--------
Decrease in cash (38,341)
Cash -beginning of period 88,198
--------
Cash - end of period 49,857
========
<PAGE>
Lirpaco Inc. and Subsidiary
Notes to the Consolidated Financial Statements (In U.S. Dollars)
July 31, 1997
1. Accounting policies
Principles of consolidation: The consolidated financial statements include the
accounts of the company and its wholly-owned subsidiary. All significant
inter-company transactions and account balances are eliminated on consolidation.
Inventories: Inventories of raw materials are valued at the lower of cost
(first-in, first-out basis) and net replacement cost.
Amortization of capital assets: Amortization is provided for over the estimated
useful lives of the related assets using the following rates and methods:
Machinery and equipment - 20% diminishing balance
Furniture and fixtures - 20% diminishing balance
Leasehold improvements - straight-line over lease term plus
first renewal option
Computer hardware - 30% diminishing balance
Computer software - 33.3% straight-line
Foreign currency: 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 adjustment for the seven months ended July 31, 1997 is
$42,894.
Concentration of credit risk: Financial instruments that potentially expose the
company to concentration of credit risk consist primarily of trade accounts
receivable. The company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends, and other information.
2. Capital assets
Machinery and equipment $ 1,628,289
Furniture and fixtures 155,013
Leasehold improvements 262,422
Computer hardware 260,282
Computer software 39,977
---------
2,345,983
Less: Accumulated amortization 1,658,253
---------
Net 687,730
=========
3. Bank security
Any bank borrowings are secured by a hypothec on moveable property, inventories
and receivables.
<PAGE>
Lirpaco Inc. and Subsidiary
Notes to the Consolidated Financial Statements
July 31, 1997
4. Long-term debt
Bank loan payable, bearing interest at prime plus .5%,
secured by a moveable hypothec on equipment, inventories and
receivables, repayable in 3 monthly instalments of $3,981,
24 monthly instalments of $4,705, 18 monthly instalments of
$5,429 and a final payment of $485, plus interest , due in
2001 223,070
Amount due under conditional sales contract for equipment
with a net book value of $48,994, repayable in 3 monthly
blended instalments of $2,534 and 27 monthly blended
instalments of $2,675 at an interest rate of 10%, due in
1999 70,323
-------
293,393
Current portion 80,079
-------
213,314
Principal repayments are due as follows:
1998 $ 80,079
1999 85,410
2000 78,570
2001 49,334
------
293,393
=======
5. Share capital
Authorized
An unlimited number of no par value shares
Class "A" common shares, voting
Class "B" common shares, non-voting
Class "C" preferred shares, non-cumulative, non-participating, redeemable at
amount paid, voting
continued
<PAGE>
Lirpaco Inc. and Subsidiary
Notes to the Consolidated Financial Statements
July 31, 1997
5. Share capital (cont'd.)
Class "D" preferred shares, non-cumulative, redeemable at amount paid,
non-participating, non-voting
Class "E" preferred shares, non-cumulative, redeemable at amount paid,
non-participating, voting
Class "F" preferred shares, non-cumulative, redeemable at amount paid,
non-participating, non-voting
Issued
100 Class "A" common shares $ 102
417,082 Class "E" preferred shares 102
166,566 Class "F" preferred shares 170,104
-------
170,308
=======
6. Commitments and contingencies
a) 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 July 31, 1997, the minimum annual rental commitment under
existing agreements, excluding an escalation clause covering increases in
property taxes and operating expenses, is as follows: $
1998 416,287
1999 299,020
2000 162,077
2001 84,933
Thereafter 11,081
b) In August 1997, the company entered into an agreement to purchase machinery
and equipment in the amount of $180,000.
c) The company is involved in a legal action arising in the ordinary course of
business. Management does not believe that the outcome of this action will
have a material effect on the company's financial position or results of'
operations.
<PAGE>
Lirpaco Inc. and Subsidiary
Notes to the Consolidated Financial Statements
July 31, 1997
7. Subsequent event
The company and its shareholders entered into an agreement with Vestcom
International, Inc. providing for the acquisition of the company by Vestcom
International, Inc. after the close of business on July 31, 1997.
8. Comparative figures
Comparative figures have not been presented as financial statements have not
been prepared for the seven month period ended July 31, 1996.
