<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1999 or
[ ] 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
incorporation or organization) Identification No.)
5 Henderson Drive
West Caldwell, New Jersey 07006
(Address of principal executive office, including zip code)
973-882-7000
(Registrant's telephone number, including area code)
1100 Valley Brook Avenue
Lyndhurst, NJ 07071
- --------------------------------------------------------------------------------
(former address)
Indicate by check mark whether 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 [ ]
The number of shares of common stock outstanding as of November 1, 1999 was
9,056,806 shares.
<PAGE>
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I: Financial Information
Page(s)
-------
Item 1: Financial Statements
- -----------------------------
Condensed Consolidated Balance Sheets - as of December 31, 1998 and
September 30, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1998 (unaudited) and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1998 (unaudited) and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
- ----------------------------------------------------------------------------------------------
Overview; Disclosures Regarding Forward Looking Statements 8
Results of Operations 9
Liquidity and Capital Resources 11
Impact of the Year 2000 Issue 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
- -------------------------------------------------------------------
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 14
- ----------------------------------------
Signature 14
</TABLE>
2
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and September 30, 1999
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
1998 1999
(note 1) (unaudited)
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,887,971 $ 3,221,475
Marketable securities 360,480 25,268
Accounts receivable, net 21,190,379 25,342,013
Other current assets 9,552,929 12,129,026
------------- -------------
Total current assets 34,991,759 40,717,782
PROPERTY AND EQUIPMENT, net 27,576,892 34,312,628
GOODWILL, net 79,192,856 78,835,353
OTHER ASSETS 782,729 1,069,911
------------- -------------
Total assets $ 142,544,236 $ 154,935,674
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations 2,331,545 3,545,195
Accounts payable 10,761,607 11,402,497
Other liabilities 18,153,399 16,550,918
------------- -------------
Total current liabilities 31,246,551 31,498,610
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 16,592,754 29,842,462
OTHER NONCURRENT LIABILITIES 4,793,591 5,318,080
------------- -------------
Total liabilities $ 52,632,896 $ 66,659,152
============= =============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock
Class B, 1 share authorized, issued and outstanding at
December 31, 1998 and September 30, 1999 2,651,867 2,651,867
Class C convertible, 100 shares authorized, issued and
outstanding at December 31, 1998 and 0 shares issued and -- --
outstanding at September 30, 1999
Common stock, no par value; 20,000,000 shares authorized;
8,788,590 and 9,056,806 shares issued and outstanding at
December 31, 1998 and September 30, 1999, respectively 86,782,015 88,888,863
Retained earnings (deficit) 857,367 (2,929,936)
Accumulated other comprehensive income (379,909) (334,272)
------------- -------------
Total stockholders' equity $ 89,911,340 $ 88,276,522
------------- -------------
Total liabilities and stockholders' equity $ 142,544,236 $ 154,935,674
============= =============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months
Ended September 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 27,066,068 $ 31,786,369 $ 78,364,313 $ 95,102,991
COST OF REVENUES 16,918,761 22,393,606 49,779,001 63,986,689
------------ ------------ ------------ ------------
Gross profit 10,147,307 9,392,763 28,585,312 31,116,302
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,752,193 10,381,668 22,086,845 29,192,999
RESTRUCTURING AND OTHER NON-
RECURRING CHARGES -- 1,930,144 -- 5,918,024
------------ ------------ ------------ ------------
Income (loss) from operations 2,395,114 (2,919,049) 6,498,467 (3,994,721)
OTHER INCOME (EXPENSE)
Interest expense (291,280) (773,853) (771,902) (1,600,623)
Interest and other income 95,015 (8,528) 357,530 88,426
------------ ------------ ------------ ------------
Income (loss) before provision for
(benefit from) income taxes 2,198,849 (3,701,430) 6,084,095 (5,506,918)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
1,015,974 (1,400,000) 2,968,965 (1,719,615)
------------ ------------ ------------ ------------
Net income (loss) $ 1,182,875 $ (2,301,430) $ 3,115,130 $ (3,787,303)
============ ============ ============ ============
Net income (loss) per share - basic $ .13 $ (.25) $ .35 $ (.42)
============ ============ ============ ============
Net income (loss) per share - diluted $ .13 $ (.25) $ .34 $ (.42)
============ ============ ============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,115,130 $ (3,787,303)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 4,593,366 6,308,626
Loss on disposal of equipment -- 5,995
Restructuring charges -- 1,099,100
Changes in operating assets (increase) decrease in-
Accounts receivable (1,877,725) (3,377,652)
Other current assets (1,440,114) (2,009,217)
Other assets 4,999 (268,580)
Changes in operating liabilities increase (decrease) in-
Accounts payable 2,369,858 (998,651)
Other current liabilities 421,151 (1,790,559)
Other non-current liabilities (739,353) 249,491
------------ ------------
Net cash provided by (used in) operating activities 6,447,312 (4,568,750)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (6,676,965) (9,452,837)
Acquisition of businesses, net of cash acquired (20,481,152) (1,781,349)
Sale of marketable securities 13,138,609 335,212
Proceeds from sale of assets -- 29,825
------------ ------------
Net cash used in investing activities (14,019,508) (10,869,149)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt 3,761,337 12,618,918
Issuance of common stock 2,552,418 2,106,848
------------ ------------
Net cash provided by financing activities 6,313,755 14,725,766
------------ ------------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (260,674) 45,637
------------ ------------
Net decrease in cash and cash equivalents (1,519,115) (666,496)
------------ ------------
CASH, beginning of period 4,092,000 3,887,971
------------ ------------
CASH, end of period $ 2,572,885 $ 3,221,475
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ 24,717 $ 1,844,440
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
financial statements include the accounts of Vestcom International, Inc.
(a New Jersey corporation) ("Vestcom" or the "Company"), seven document
management service companies acquired simultaneously with the Company's
initial public offering (collectively, the "Founding Companies"), and all
subsequent acquisitions since their respective acquisition dates. The
balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the three-month and nine-month periods ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company and the related notes thereto contained in
Vestcom's Annual Report on Form 10-K for the year ended December 31,
1998.
(2) NATURE OF BUSINESS
Vestcom was formed in September 1996 to create an international document
management service provider focusing on the creation, management and
distribution of business critical documents. The Company's primary
strategy is to acquire, integrate and facilitate the growth of similar
and complementary companies in the highly fragmented document management
services industry.
(3) EARNINGS PER SHARE
Basic EPS is calculated by dividing income (loss) available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. The weighted average number of shares of
common stock used in determining basic EPS was 9,056,806 and 8,968,356
for the three months ended September 30, 1999 and 1998, respectively; and
9,056,806 and 8,849,829 for the nine months ended September 30, 1999 and
1998, respectively.
Diluted EPS is calculated by dividing income (loss) available to common
shareholders, adjusted to reflect the effects of earnouts and stock
options, by the weighted average number of shares of common stock
outstanding, plus additional common shares that could be issued in
connection with potentially dilutive securities. The weighted average
number of shares of common stock used in determining diluted EPS was
9,056,806 and 9,079,537 for the three months ended September 30, 1999 and
1998, respectively; and 9,056,806 and 9,037,782 for the nine months ended
September 30, 1999 and 1998, respectively, and reflects 111,181 and
187,953 additional shares issuable in connection with earnouts and stock
options, for the three months and nine months ended September 30, 1998,
respectively.
Options to purchase approximately 953,618 and 227,935 shares of common
stock were not included in the computation of diluted earnings per share
for the three months ended September 30, 1999 and 1998, respectively and
options to purchase 572,015 and 177,299 shares of common stock were not
included in the computations of diluted earnings per share for the nine
months ended September 30, 1999 and 1998, respectively, because the
effects would have been antidilutive.
6
<PAGE>
(4) COMPREHENSIVE INCOME (LOSS):
The following represents comprehensive income (loss) (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 1,183 $ (2,301) $ 3,115 $ (3,787)
Foreign Currency Translation
Adjustment (99) (48) (261) 46
------------- -------------- ---------------- ---------------
Comprehensive Income (Loss) $ 1,084 $ (2,349) $ 2,854 $ (3,741)
============= ============== ================ ===============
</TABLE>
(5) RESTRUCTURING AND OTHER NON-RECURRING CHARGES
In the second and third quarters of 1999, the Company recorded an
aggregate restructuring charge of $5.9 million. The Company's
restructuring plan is comprised of the consolidation of certain
facilities and the integration of operations in three of the Company's
operating locations, the Mid-Atlantic area, the New England area and
Canada. The restructuring plan is aimed at reducing the Company's
operating cost structure by reducing the number of locations,
consolidating facilities and reducing personnel costs. The restructuring
charge includes the facility closure and consolidation costs from these
facilities of $3,338,000 (including the net write-down of fixed assets of
$628,000), personnel costs of $1,438,000 relating to the termination of
employees and incurred moving expenses of $1,142,000 related to the
various relocations during the second and third quarters.
The restructuring plan does not contemplate the Company eliminating any
of its current products or services; the consolidations are designed to
make the Company's existing businesses more efficient.
The components of the restructuring reserves as of September 30, 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------- ---------------- ------------------------ -------------------
1999 Reserves Personnel Facility Closure & Total
Costs (1) Consolidation Costs
(2)
---------------------------------------------------- ---------------- ------------------------ -------------------
<S> <C> <C> <C>
Restructuring Reserve at June 30, 1999 $ 486 $ 2,239 $ 2,725
Third Quarter 1999 Additional Reserve 787 507 1,294
Third Quarter 1999 Spending (441) (694) (1,135)
-------- ------------ -----------
Restructuring Reserve
at September 30, 1999 $ 832 $ 2,052 $ 2,884
======= =========== ==========
---------------------------------------------------- ---------------- ------------------------ -------------------
</TABLE>
In addition to the reserve, $636,000 was expensed by the Company during
the third quarter of 1999 for moving related costs.
(1) Personnel Costs - consist of severance costs related to the
closing and/or relocation of certain operating facilities.
7
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
(2) Facility Closure and Consolidation Costs - consist of the
estimated costs to close redundant facilities, lease costs and
other costs associated with closed facilities.
(6) SUBSEQUENT EVENT
As of November 5, 1999, the Company and Summit Bank entered into the
Fourth Amendment to the Equipment Facility and Revolving Credit Agreement
(the "Credit Facility"), which among other things, extends the term of
the Credit Facility through January 1, 2002.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Condensed
Consolidated Financial Statements and the related notes thereto appearing
elsewhere herein. The Company's Condensed Consolidated Balance Sheet as of
September 30, 1999 includes all of the companies acquired by Vestcom. The
results of operations and the statement of cash flows for the nine months ended
September 30, 1999, include the results of Vestcom and all of the companies
acquired in 1997 and 1998 and the company acquired in 1999 from its date of
acquisition.
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended that are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's expectations include, but are not limited to, the
following: the ability of the Company to execute and manage the Company's growth
strategy, the results of the Company's investment spending, the ability to
effectively consolidate and integrate its production facilities and functions as
part of the Company's integration program, the ability to realize reduced
overhead costs, increased operating efficiencies and enhanced services at the
newly consolidated facilities, acceptance of the Company's new products in the
marketplace, the entry of new competitors into the marketplace, changes in the
business document outsourcing industry, the availability of suitable acquisition
candidates and of acquisition financing, the assimilation of new acquisitions
with existing business, the ability to attract and retain key customers, the
ability to improve its business pipeline, the ability to positively modify its
revenue mix, variations in quarterly results and the sufficiency of the
Company's working capital. Other factors are described from time to time in the
Company's public filings with the Securities and Exchange Commission, news
releases and other communications. Also, when Vestcom uses the words "believes,"
"expects," "anticipates," "estimates," "plans," "intends," "objectives,"
"goals," "aims," "projects" or similar words or expressions, Vestcom is making
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
8
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues increased $4,720,000, or 17%, from $27,066,000 for the three months
ended September 30, 1998 to $31,786,000 for the three months ended September 30,
1999. This increase was primarily attributable to acquisitions which accounted
for approximately $3,700,000 of such increase. The remainder of the increase, or
approximately $1,020,000, was attributable to internal growth. This internal
growth was due to increased sales to new and existing customers primarily in the
financial services and retail markets. The Company's internal growth rate during
the quarter was 4%.
Gross profit decreased $755,000, or 7%, from $10,147,000 for the three months
ended September 30, 1998 to $9,393,000 for the three months ended September 30,
1999. The decrease in gross profit was primarily attributable to increased costs
and additional and duplicate expenses related to the continuing consolidations
occurring in the period. The gross profit margin decreased from 37% for the
three months ended September 30, 1998 to 30% for the same period in 1999. The
gross profit margin decrease was due to costs incurred as the Company continued
consolidating its operations, excess capacity in the Company's fulfillment
operations and the effects of the prior year's renegotiations of certain of the
capital lease obligations with one of Vestcom's vendors which reclassified
certain of the obligations from capital leases to operating leases. This
renegotiation resulted in expense being moved from interest expense to cost of
revenue thereby reducing gross profit.
Selling, general and administrative expenses increased $2,629,000, or 34%, from
$7,752,000 for the three months ended September 30, 1998 to $10,382,000 for the
three months ended September 30, 1999. As a percentage of revenues, selling
general and administrative expenses increased from 29% in 1998 to 33% in 1999.
The increase was attributable in part to acquisitions which accounted for
approximately $566,000 or 21% of the total increase. The remaining increase in
selling, general and administrative expenses was primarily due to increased
compensation expense including increased commissions on higher sales, increased
staffing for new technical and administrative personnel to support the greater
volume of business, increased spending in sales and marketing programs and the
costs associated with increased corporate business development programs. In
addition, the Company incurred costs in connection with its efforts to integrate
its acquired companies. These costs included redundant overhead and facility
costs and other integration costs. The Company expects that it will continue to
incur such costs in connection with its ongoing integration process which the
Company expects to continue during the remainder of 1999.
In the third quarter of 1999, the Company recorded a restructuring charge of
$1.9 million. The Company's restructuring plan is comprised of the consolidation
of certain facilities and the integration of operations in three of the
Company's operating locations, the Mid-Atlantic area, the New England area and
Canada. The restructuring plan is aimed at reducing the Company's operating cost
structure by reducing the number of locations, consolidating facilities and
reducing personnel costs. The restructuring charge includes $507,000 of facility
closure and consolidation costs, $787,000 relating to the termination of
employees and incurred moving expenses of $636,000 related to the various
relocations during the third quarter. The restructuring plan does not
contemplate the Company eliminating any of its current products or services; the
consolidations are designed to make the Company's existing businesses more
efficient.
Interest expense increased $483,000, from $291,000 for the three months ended
September 30, 1998 to $774,000 for the three months ended September 30, 1999.
This increase was attributable to increased borrowings on the Company's credit
facility to finance acquisitions, equipment purchases, leasehold improvements
and payments relating to earnout agreements which offset the effects of the
capital lease renegotiations discussed above.
9
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Interest and other income decreased $104,000, from $95,000 of income for the
three months ended September 30, 1998 to $9,000 of expense for the three months
ended September 30, 1999. This decrease was due to reduced interest income
resulting from the utilization of cash to finance acquisitions.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues increased $16,739,000, or 21%, from $78,364,000 for the nine months
ended September 30, 1998 to $95,103,000 for the nine months ended September 30,
1999. This increase was primarily attributable to acquisitions which accounted
for approximately $10,909,000 of such increase. The remainder of the increase,
or approximately $5,830,000 was attributable to internal growth. This internal
growth was due to increased sales to new and existing customers primarily in the
financial services and retail markets. The Company's internal growth rate during
this period was 7%.
Gross profit increased $2,531,000, or 9%, from $28,585,000 for the nine months
ended September 30, 1998 to $31,116,000 for the nine months ended September 30,
1999. The increase in gross profit was primarily attributable to acquisitions
which accounted for approximately $3,857,000. The gross profit margin decreased
from 36% for the nine months ended September 30, 1998 to 33% for the same period
in 1999. The gross profit margin decrease was due to costs incurred as the
Company continued consolidating its operations, excess capacity in the Company's
fulfillment operations and the effects of the prior year's renegotiation of
certain of the capital lease obligations with one of Vestcom's vendors which
reclassified certain of the obligations from capital leases to operating leases.
This renegotiation resulted in expense being moved from interest expense to cost
of revenue thereby reducing gross profit.
Selling, general and administrative expenses increased $7,106,000, or 32%, from
$22,087,000 for the nine months ended September 30, 1998 to $29,193,000 for the
nine months ended September 30, 1999. As a percentage of revenues, selling
general and administrative expenses increased from 28% in 1998 to 31% in 1999.
The increase was attributable in part to acquisitions which accounted for
approximately $1,775,000, or 25% of the total increase. The remaining increase
in selling, general and administrative expenses was primarily due to increased
compensation expense including increased commissions on higher sales, increased
staffing for new technical and administrative personnel to support the greater
volume of business, increased spending in sales and marketing programs and the
costs associated with increased corporate business development programs. In
addition, the Company incurred costs in connection with its efforts to integrate
its acquired companies. These costs included redundant overhead and facility
costs and other integration costs. The Company expects that it will continue to
incur such costs in connection with its ongoing integration process which the
company expects to continue to occur during the remainder of 1999.
In the second and third quarter of 1999, the Company recorded an aggregate
restructuring charge of $5.9 million. The Company's restructuring plan is
comprised of the consolidation of certain facilities and the integration of
operations in three of the Company's operating locations, the Mid-Atlantic area,
the New England area and Canada. The restructuring plan is aimed at reducing the
Company's operating cost structure by reducing the number of locations,
consolidating facilities and reducing personnel costs. The restructuring charge
includes the facility closure and consolidation costs from these facilities of
$3,338,000, (including the net write-down of fixed assets of $628,000) personnel
costs of $1,438,000 relating to the termination of employees and incurred moving
expenses of $1,142,000 related to the various relocations during the second and
third quarter. The restructuring plan does not contemplate the Company
eliminating any of its current products or services; the consolidations are
designed to make the Company's existing businesses more efficient.
Interest expense increased $829,000, from $772,000 for the nine months ended
September 30, 1998 to $1,601,000 for the nine months ended September 30, 1999.
This increase was attributable to increased borrowings on the Company's credit
facility to finance acquisitions, equipment purchases, leasehold improvements
10
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
and payments relating to earnout agreements which offset the effects of the
capital lease renegotiations discussed above.
Interest and other income decreased $270,000, from $358,000 for the nine months
ended September 30, 1998 to $88,000 for the nine months ended September 30,
1999. This decrease was due to reduced interest income resulting from the
utilization of cash to finance acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, Vestcom had working capital of approximately $9,219,000
compared to approximately $3,745,000 at December 31, 1998. The increase was
primarily attributable to increased accounts receivable and of other assets and
the reduction other current liabilities. Net cash used in operating activities
for the nine months ended September 30, 1999, was approximately $4,569,000 which
consisted of approximately $2,522,000 generated primarily from depreciation and
amortization charges minus the net loss, offset by approximately $3,378,000
representing an increase in accounts receivable and approximately $2,009,000
representing an increase in other current assets, approximately $999,000 used in
reducing accounts payable and approximately $1,791,000 used in reducing other
current liabilities. Net cash used in investing activities for the nine months
ended September 30, 1999, was approximately $10,869,000 which consisted of
approximately $1,781,000 of cash used for acquisitions, and approximately
$9,453,000 used for the purchase of property and equipment and leasehold
improvements. Net cash provided by financing activities for the nine months
ended September 30, 1999, was approximately $14,726,000 which included
approximately $12,619,000 from net borrowings of long term debt and $2,107,000
from the issuance of common stock in connection with earnout provisions.
On August 13, 1997, the Company and Summit Bank entered into an Equipment Loan
and Revolving Credit Agreement ("the Credit Facility") in the amount of
$30,000,000. On September 30, 1999, $25,190,000 was outstanding and $4,810,000
remained available under the Credit Facility. As of November 5, 1999 the Company
and Summit Bank entered into an amendment to the Credit Facility, which, among
other items, extends the term of the Credit Facility through January 1, 2002.
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 September 30, 1999, the Company had
postage advances from customers in the amount of approximately $3,716,000 and
had prepaid postage and postage receivables of approximately $1,445,000. 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 cash outlay.
Capital expenditures of approximately $11,000,000 are expected in 1999. The
anticipated expenditures relate to leasehold improvements, furniture and
fixtures, and equipment due to the opening of new facilities to support the
consolidation and integration of production sites and the anticipated production
needs of the business. As of September 30, 1999, the Company had incurred
approximately $9,453,000 of such anticipated expenditures. There are no other
significant commitments for future capital expenditures, although it is likely
that cash outflows for business acquisitions and leases will continue.
In connection with Vestcom's acquisitions, Vestcom has made certain earnout
payments and may be required to pay an additional earnout if specified gross
profit margins are attained during the period ended July 31, 1999. As of
September 30, 1999, Vestcom has accrued the aggregate maximum earnout payments
which the Company may be required to make going forward of $650,000 in cash.
While no assurance can be given, management believes that its anticipated cash
flow from operations combined with existing cash and the availability of funds
under the Credit Facility, and potential additional credit capacity, 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. The immediately preceding sentence constitutes a
11
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
forward-looking statement under the Private Securities Litigation Reform Act of
1995.
IMPACT OF THE YEAR 2000 ISSUE
Vestcom utilizes computer technologies in the form of both software and hardware
(including electronic digital printers) to effectively carry out its day-to-day
operations. In addition to information technology, there is embedded computer
technology in Vestcom's facilities and equipment. Vestcom is utilizing a
multi-phased concurrent approach to determine whether its systems are capable of
recognizing and processing date sensitive information properly as the year 2000
approaches. The phases included in Vestcom's approach are awareness, assessment,
remediation, validation, implementation and contingency planning.
Vestcom has separate plans to complete the year 2000 project for each operating
unit, with central review and audit being performed by the headquarters
organization. All operating units are substantially on plan to complete year
2000 projects. One of Vestcom's operating facilities is moving to a new facility
during the fourth quarter of 1999, and for various reasons, including
efficiencies, new telephone and computer hardware is being upgraded or replaced
simultaneously with this move instead of prior to the move.
Since each Vestcom unit uses many different kinds of computers, procedures to
implement year 2000 corrections vary greatly. Each unit has been following a
plan to test all year 2000 changes during the first nine months of 1999. This
includes upgrades to mainframe hardware and software operating systems, laser
printer software upgrades, microfiche and CD software replacements, PC
replacements and financial software upgrades. These activities are substantially
complete. Since Vestcom processes data prepared by its customers, and does not
have extensive date dependent proprietary software to repair or replace,
management has found that the required changes to Vestcom's systems were not
extensive.
Vestcom has contacted its major software and hardware suppliers to verify that
the systems Vestcom uses are Year 2000 compliant. All major vendors have
replied, and have either repaired, replaced or upgraded hardware and software
installed at Vestcom. There can be no assurances that other companies' systems
on which Vestcom's systems rely will be timely converted or that any such
failure to convert by another company would not have a materially adverse effect
on Vestcom's systems. Certain of Vestcom's customers may need to make
appropriate changes to modify the data that they send to Vestcom to make the
information Year 2000 compliant. Vestcom has assessed the extent to which its
customers may experience Year 2000 issues and has completed testing with certain
major customers. If customers or others with whom Vestcom does business
experience problems relating to the Year 2000 issue, Vestcom's business,
financial condition, liquidity or results of operations could be adversely
affected. A loss of business could result from Vestcom's customers' inability to
implement new work projects while focusing their information technology
resources on Year 2000 issues within their existing systems.
Vestcom estimates that the aggregate cost of its Year 2000 project will be
approximately $1,000,000, including costs already incurred. Significant portions
of these costs are not likely to be incremental costs, but rather will represent
the redeployment of existing resources. This reallocation of resources is not
expected to have a significant impact on the day-to-day operations of Vestcom.
Vestcom incurred total costs of approximately $800,000 for this project during
1998 and the first three-quarters of 1999, on plan with the overall project
estimate. Out of the $800,000, approximately $400,000 was incremental expense.
The majority of the remaining planned costs in 1999 are to cover the replacement
of PC hardware and new telephone equipment in the one remaining facility move.
The anticipated costs of the project, as well as the date on which Vestcom
expects to complete the project are based on management's best estimate using
information currently available and numerous assumptions about future events.
However there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.
During the first quarter of 1999, the Company, with the assistance of an
external year 2000 compliance specialist, performed a review of each of its
12
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
operating companies. The review showed the Company was on schedule with its
validation and implementation phases. As a result of this review the Company was
able to provide additional support in those locations that required greater
assistance and during the third quarter, Vestcom's Year 2000 projects proceeded
on plan.
Based on its current estimates and information currently available Vestcom does
not anticipate that the costs associated with this project will have a material
adverse effect on Vestcom's consolidated financial position, liquidity, results
of operations or cash flows in the future. The preceding sentence constitutes a
forward-looking statement.
In the event that the efforts of Vestcom's Year 2000 project do not address all
relevant problems, Vestcom has developed contingency plans. Vestcom uses
multiple suppliers for most critical processes. Reliance on multiple suppliers
lessens risk to any single critical business process. In the limited cases where
there is a single supplier, Vestcom is performing extensive testing and planning
for onsite support at year-end to minimize the length and impact of a potential
outage. In addition, Vestcom's decentralized operational structure allows for a
single operating unit to have a software or hardware failure, while another unit
can provide backup support. This provides reduced risk if a single unit does not
successfully complete the required changes to become Year 2000 compliant as
planned. As part of its contingency planning, Vestcom has arranged to have
professionals on site at the turn of the century to monitor and support any
potential problems internally or with external vendors.
Vestcom uses the services of many public utilities such as telecommunications
common carriers, both local and long distance, water, gas, electrical power and
municipal services such as fire and security. The Company cannot effectively
test these services for year 2000 readiness. These organizations have made
public statements regarding readiness for year 2000 and the Company is unable to
assess the accuracy of these statements. Since Vestcom is located in many
different geographic areas, and relies on many different public utility
suppliers, the failure of one of these entities could affect the Company.
Vestcom is continuing its efforts to timely address the Year 2000 issues. Actual
results could differ materially from the forward-looking statements contained
herein as a result of a variety of factors, including potential unavailability
of technological resources, increased expenses associated with obtaining such
resources and unanticipated technological difficulties.
Item 3: - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable - no significant change from Annual Report on Form 10-K.
13
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Part II: Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.12 Fourth Amendment to Equipment Facility and Revolving
Credit Agreement dated as of November 5, 1999 between
Vestcom International, Inc. and Summit Bank
10.13 Employment Letter Agreement dated as of September 29,
1999 between Michael D. Helfand and Vestcom
International, Inc.
27.1 Financial Data Schedule (For Electronic Submission
Only)
(b) Reports on Form 8-K:
None
Signature
Pursuant to the requirements 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.
VESTCOM INTERNATIONAL, INC.
By: /s/ Michael D. Helfand
--------------------------------------------
Michael D. Helfand, Chief Financial Officer
Dated: November 15, 1999
14
<PAGE>
FOURTH AMENDMENT TO EQUIPMENT FACILITY
AND REVOLVING CREDIT AGREEMENT
THIS AMENDMENT dated as of November 5, 1999, by and between SUMMIT BANK
(the "Bank") and VESTCOM INTERNATIONAL, INC., a New Jersey corporation
("Borrower").
WHEREAS, the Bank and Borrower are parties to a certain Equipment
Facility and Revolving Credit Agreement dated as of August 13, 1997, as amended
by Amendment Number One dated July 28, 1998, Waiver and Amendment Number Two
dated February 17, 1999 and a certain Memorandum dated as of March 29, 1999 (as
same has been amended from time to time, the "Existing Credit Agreement"),
pursuant to which the Bank has agreed to make certain loans to Borrower;
WHEREAS, Borrower has requested the Bank, and the Bank has agreed, to
extend the term of the Existing Credit Agreement and to amend the Existing
Credit Agreement, all on the terms and conditions contained in this Amendment.
NOW, THEREFORE, in consideration of the mutual premises herein
contained, the parties hereto agree as follows:
1. Definitions.
a. All defined terms used herein and not defined herein shall
have the meanings ascribed thereto in the Existing Credit Agreement.
b. As used herein and hereafter as used in the Credit
Documents, the term "Agreement", "Credit Agreement", and any other term
referring to the Existing Credit Agreement on or after the date hereof, shall
mean the Existing Credit Agreement as amended by this Amendment.
c. As used herein and hereafter as used in the Credit
Documents, the term "Revolving Credit Note" shall mean and refer to the
Revolving Credit Note as defined in the Existing Credit Agreement and as amended
by the Allonge to Revolving Credit Note dated the date hereof (the "Allonge").
d. The definition of each of the following terms contained in
the Existing Credit Agreement is hereby amended and restated to read as follows:
(i) Applicable Margin. The term "Applicable Margin" means
initially the percentage corresponding to the Consolidated
Funded Debt to EBITDA Ratio of the Borrower set forth on the
table set forth below based on the quarterly financial
statements for the fiscal period ending as of June 30, 1997,
provided, however, that from and after the first day of any
Applicable Margin Adjustment Period to and including the last
day of such Applicable Margin Adjustment Period, the
Applicable Margin shall be determined by reference to
percentages corresponding to the
-1-
<PAGE>
Consolidated Funded Debt to EBITDA Ratio of the Borrower for
the Test Period last ended, in accordance with the following
table:
<TABLE>
<CAPTION>
Applicable
Margin for
If Such Ratio Commitment Applicable Margin Alternate Base
Is: Fee for LIBOR Loans Rate Loans
- ------------- ---------- ----------------- --------------
<S> <C> <C>
Less than 25 basis 125 basis points
1.15 to 1.00 points (.25%) (1.25%) -0-
Greater than 25 basis 150 basis points 50 basis points
or equal to points (.25%) (1.50%) (.50%)
1.15 to 1.00,
but less than
1.50 to 1.00
Greater than 30 basis 200 basis points 75 basis points
or equal to points (2.00%) (.75%)
1.50 to 1.00, (.30%)
but less
than 2.00 to
1.00
Greater than 37.5 basis 225 basis points 100 basis points
or equal to points (2.25%) (1.00%)
2.00 to 1.00, (.375%)
but less than
2.50 to 1.00
Greater than 50 basis 265 basis points 150 basis points
or equal to points (2.65%) (1.50%)
2.50 to 1.00 (.50%)
</TABLE>
Notwithstanding the foregoing, at all times during which there
exists an Event of Default, the Applicable Margin as
determined in accordance with the foregoing table (A) with
respect to Alternate Base Rate Loans, shall be an additional
100 basis points (1.00%) and (B) with respect to LIBOR Loans,
shall be an additional 225 basis points (2.25%), added to the
applicable rate of interest to calculate the "Default Rate"
pursuant to the relevant Note.
(ii) Consolidated Fixed Charge Ratio. The term "Consolidated
Fixed Charge Ratio" means the ratio of (i) the Borrower's
Consolidated EBITDA to (ii) the Current Maturities of the
Borrower's Funded Debt plus all cash and non-cash
-2-
<PAGE>
interest (including, without limitation, capitalized interest)
paid during the relevant Test Period on or in connection with
any Indebtedness of the Borrower of any type, plus net taxes
paid in each case determined for the relevant Test Period on a
Consolidated basis in accordance with GAAP, consistently
applied.
(iii) Guarantors. The term "Guarantors" means, collectively,
all of the Subsidiaries of the Borrower listed on Schedule A
hereto and any Subsidiary of the Borrower that becomes a
guarantor of the Obligations in accordance with Section 8.08
of the Credit Agreement, each of which is also referred to
herein individually as a "Guarantor".
(iv) Guaranties. The term "Guaranties" means, collectively,
the Amended and Restated Guaranty and Suretyship Agreement
dated November 5, 1999 executed by the Guarantors in favor of
the Bank and any other guaranty agreement executed by any
Subsidiary of the Borrower pursuant to or in connection with
the Credit Agreement.
(v) LIBOR Loan. The term "LIBOR Loan" means any Loan at all
times during which such Loan bears interest based upon LIBOR.
(vi) Equipment Facility Expiration Date. The term "Equipment
Facility Expiration Date" means the date that is the earliest
to occur of (a) January 1, 2002, (b) the date on which the
Maximum Equipment Facility Amount has been funded by the Bank,
and (c) the date on which this Agreement is terminated
pursuant to Section 3.03 hereof.
(vii) Revolving Credit Expiration Date. The term "Revolving
Credit Expiration Date" means the earlier to occur of (a)
January 1, 2002, as the same may be extended from time to
time, in the sole and absolute discretion of the Bank and (b)
the date on which this Agreement is terminated pursuant to
Section 3.03 hereof.
e. The definition of the term "Interest Period" contained in
the Existing Credit Agreement is hereby amended by adding thereto a new
paragraph (c), to be inserted between the end of paragraph (b) and before the
proviso paragraphs, and to read as follows:
"(c) If at any time the Borrower fails to select an Interest
Period in connection with a LIBOR Loan, the Borrower shall be
deemed to have selected an Interest Period of 1 month in
duration."
f. The following defined terms (and all references thereto)
contained in the Existing Credit Agreement are hereby deleted in their entirety:
-3-
<PAGE>
(i) Fixed Rate; and
(ii) Fixed Rate Loan.
g. The following defined term is hereby added to the Existing
Credit Agreement:
"Closing Net Worth. The term "Closing Net Worth" means
Consolidated Stated Net Worth determined as of the date of the
initial public offering of stock by the Borrower, August 1,
1997."
2. Amendments to Existing Credit Agreement.
a. The last sentence of Section 1.01 of the Existing Credit
Agreement is hereby deleted in its entirety and is replaced with the following:
"The Equipment Loans funded on or after November 5, 1999 shall
bear interest, at the Borrower's option, at an annual rate of
interest equal to LIBOR plus 225 basis points (i.e. 2.25%).
The Borrower shall give the Bank an irrevocable notice (which
may be by telephone and promptly confirmed in writing) of such
election, together with the desired duration of the Interest
Period for such Loan, at least 2 Business Days prior to the
funding of such Equipment Loan."
b. The fifth sentence of Section 1.03 of the Existing Credit
Agreement is hereby deleted in its entirety and is replaced with the following:
"Promptly upon receipt of said notice, the Bank shall give the
Borrower notice of the interest rates (consistent with Section
1.01) applicable to the proposed Equipment Loan based upon the
desired Equipment Loan Term."
c. Section 1.04 of the Existing Credit Agreement is hereby
amended and restated in its entirety to read as follows:
"Interest on Equipment Loans/Term Loan. Interest on each
Equipment Loan funded on or after November 5, 1997 shall
accrue at the interest rate selected by the Borrower in
accordance with Section 1.01 and shall be payable monthly, in
arrears, on each Payment Date during which such Loan is
outstanding, and upon payment in full of the aggregate
outstanding balance thereof."
-4-
<PAGE>
d. Section 1.12(c) of the Existing Credit Agreement is hereby
amended by deleting the reference to "Section 1.13" contained therein, and
substituting therefor a reference to "Section 1.12".
e. Notwithstanding anything in this Amendment to the contrary,
the interest rate in effect on all LIBOR Loans outstanding as of the date of
this Amendment shall continue unchanged until the expiration of their respective
Interest Periods, at which time the interest rate on such outstanding LIBOR
Loans shall be set in accordance with the provisions of this Amendment.
f. Section 4.05 of the Existing Credit Agreement is hereby
amended by renumbering clause (iv) thereof to be clause (v), deleting the "or"
at the end of clause (iii) and substituting therefor a comma, and inserting
between clauses (iii) and clause (v), a new clause (iv) that shall read as
follows:
"(iv) default by the Borrower in making any Borrowing
of a LIBOR Loan under the Equipment Facility after
the Borrower has given notice thereof in accordance
with Section 1.03 hereof, or"
g. Sections 8.03 (B)(iv) and (v) of the Existing Credit
Agreement are hereby amended and restated in their entirety to read as follows:
"(iv) the aggregate cash and non-cash consideration
paid or exchanged by the Borrower (including, without
limitation, any Indebtedness assumed by the Borrower,
and all amounts payable under or in respect of any
non-compete covenants, earn-outs or similar
agreements) shall not exceed (x) $5,000,000 in any
single acquisition and (y) $15,000,000 in the
aggregate for all acquisitions in any period of 12
consecutive months. For the purposes of determining
the consideration paid or exchanged in any such
acquisition, the value attributed to any capital
stock of the Borrower given or exchanged shall not be
included therein; and
(v) immediately after giving effect to such proposed
acquisition and the incurrence or assumption of
Indebtedness, if any, in connection therewith,
Sections 8.01, 8.02, 8.13, 8.14, 8.15, 8.16 and 8.17
hereof shall not have been violated, and no other
default or Event of Default shall result from such
proposed acquisition."
-5-
<PAGE>
h. Section 8.12 of the Existing Credit Agreement is hereby
amended and restated in its entirety to read as follows:
"Consolidated Stated Net Worth. Permit as at the end
of any Test Period Consolidated Stated Net Worth to
be less than the sum of (A) 90% of Closing Net Worth,
plus (B) 90% of the Borrower's aggregate net income
for all fiscal years subsequent to the Closing Date
in which the Borrower reported positive net income
(excluding any extraordinary items or non-recurring
items), plus (C) 90% of year-to-date earnings for the
Test Period if the Borrower reported positive net
income (excluding any extraordinary items or
non-recurring items), plus (D) 100% of net proceeds
of any equity offerings subsequent to August 1, 1997
(the date of the Borrower's initial public offering
of stock), tested quarterly and determined in each
case on a Consolidated basis in accordance with GAAP,
consistently applied."
i. Section 8.13 of the Existing Credit Agreement is hereby
amended and restated in its entirety to read as follows:
"Consolidated Tangible Net Worth. Permit at any time,
its Consolidated Tangible Net Worth to be less than
10% of the Consolidated Stated Net Worth, tested
quarterly and determined in accordance with GAAP,
consistently applied."
3. Conditions to Amendment.
a. Unless otherwise agreed to by the Bank in writing,
concurrently with the execution of this Amendment, and as a condition of its
effectiveness:
(i) Borrower shall execute and deliver to the Bank
the Allonge in the form annexed hereto as Exhibit A;
(ii) Borrower and each of the Guarantors shall
execute and deliver to the Bank a Security Agreement in the form annexed hereto
as Exhibit B (the "Security Agreement"), granting to the Bank a valid security
interest in all present and future inventory and accounts receivable of the
Borrower and each of the Guarantors, and all proceeds thereof;
(iii) Borrower and each Guarantor shall execute and
deliver to the Bank UCC-1 financing statements, satisfactory in form and
substance to the Bank, necessary to perfect a first position security interest
in the collateral described in the Security Agreement;
-6-
<PAGE>
(iv) Each Subsidiary of the Borrower shall execute
and deliver to the Bank an Amended and Restated Guaranty and Suretyship
Agreement in the form annexed hereto as Exhibit C, guaranteeing all present and
future obligations of the Borrower to the Bank;
(v) Borrower shall have paid the $15,000 facility fee
due and payable in connection with this Amendment and all costs and expenses
(including, without limitation, reasonable attorneys' fees) incurred by the Bank
in connection with this Amendment;
(vi) Borrower and the Guarantors shall have delivered
to the Bank a Landlord Waiver and Estoppel, in form and substance reasonably
satisfactory to the Bank, from such landlords of Borrower and the Guarantors as
may be reasonably requested by the Bank;
(vii) The Bank shall have received the legal opinion
of counsel to Borrower and the Guarantors, covering such matters reasonably
requested by the Bank and in form and substance reasonably satisfactory to the
Bank; and
(viii) The Bank shall have received all searches,
reports, certificates, corporate resolutions and other documents and instruments
as may reasonably be required by the Bank to verify the accuracy of the
representations and warranties and compliance with the covenants contained in
the Credit Agreement.
5. Borrower's Representations and Warranties. Except as otherwise
stated in Schedule 2 hereto, Borrower hereby represents and warrants to the Bank
as follows:
a. All of the representations and warranties made by Borrower
in the Existing Credit Agreement and in the other Loan Documents remain true,
complete and accurate as of the date hereof and as applied to this Amendment and
the Credit Documents, except to the extent that Borrower has advised the Bank
otherwise in writing.
b. No Event of Default and no default exists, and no event has
occurred which with notice or lapse of time or both would constitute a default
or an Event of Default under the Existing Credit Agreement, except to the extent
that Borrower has previously advised the Bank otherwise in writing and the Bank
has waived such default in writing or except as described on Schedule 2 hereto,
which the Bank hereby waives, and the Bank acknowledges that it is not aware of
any existing defaults under the Loan Documents other than those identified in
Schedule 2 hereto; Borrower has no claims, defenses or set-offs to its
obligations under the Credit Documents.
c. As of the date hereof, there has been no material adverse
change in the financial condition of Borrower from that reflected in the
financial statements of the Borrower dated as of June 30, 1999.
d. The execution and performance by Borrower of this
Amendment, the Security Agreement and the Allonge to Revolving Credit Note, by
the Guarantors of the Guaranty, and the Security Agreement, and by the Borrower
and the Guarantors of all other documents and agreements
-7-
<PAGE>
in connection herewith (collectively, the "Other Modification Documents") have
been duly authorized by all necessary corporate action, will not violate any
provision of law applicable to Borrower or any Guarantor or any provision of
their respective charters or by-laws, will not result in a breach of or
constitute a default or require any consent under, or result in the creation of
any lien, charge or encumbrance upon any property or assets of Borrower or any
Guarantor pursuant to any indenture or other agreement or instrument by which
Borrower or any Guarantor or any of their respective properties may be bound or
affected. This Amendment, the Allonge, the Guaranty, the Security Agreement, and
the Other Modification Documents constitute legal, valid and binding agreements
of Borrower and the Guarantors, as the case may be, enforceable in accordance
with their respective terms, except as enforceability may be affected by
bankruptcy, insolvency, moratorium or other laws affecting creditors' rights
generally.
e. The advent of the year 2000 shall not materially adversely
affect Borrower's or any Guarantor's operations or the performance of its
information technology. Without limiting the generality of the foregoing, (i)
the hardware and software utilized by Borrower and each Guarantor are designed
to be used prior to, during, and after calendar year 2000 A.D. and such hardware
and software will operate during each such time period without material error
relating to date data, specifically including any material error relating to, or
the conduct of, date data which represents or references different centuries or
more than one century, (ii) the hardware and software utilized by Borrower and
each Guarantor will not abnormally end or provide materially invalid or
incorrect results as a result of date data, and (iii) the hardware and software
utilized by Borrower and each Guarantor have been designed to ensure year 2000
A.D. compatibility in all material respects, including date data, century
recognition, leap year, calculations which accommodate same century and
multicentury formulas and date values, and date data interface values that
reflect the century.
5. Events of Default. A breach of any covenant, representation or
warranty set forth in this Amendment by Borrower shall constitute an Event of
Default under the Credit Agreement.
6. Effect of Amendment. Except as expressly amended and supplemented
hereby, the Existing Credit Agreement and all other Loan Documents in effect as
of the date hereof shall remain in full force and effect, unmodified, and are
enforceable against Borrower in accordance with their respective terms.
7. Further Modifications. This Amendment contains all of the
modifications to the Existing Credit Agreement, and no further or other
modifications to the Existing Credit Agreement shall be effective unless in
writing executed by the Bank and Borrower.
8. Binding Effect. This Amendment shall extend to and bind the parties
hereto and their respective successors and assigns.
9. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of New Jersey.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
SUMMIT BANK
By: /s/ Michael Bernal
-----------------------
Name: Michael Bernal
Title: Vice President
ATTEST: VESTCOM INTERNATIONAL, INC.
/s/ Brendan Keating By: /s/ Michael Helfand
- ------------------------- -----------------------
Name: Brendan Keating Name: Michael Helfand
Title: President and COO Title: EVP and CFO
-9-
<PAGE>
EXHIBIT A
ALLONGE TO REVOLVING CREDIT NOTE
November 5, 1999
FOR VALUE RECEIVED, the Revolving Credit Note dated August 13, 1997
(the "Note") of VESTCOM INTERNATIONAL, INC. (the "Borrower") in the original
principal amount of $25,000,000, to which this Allonge is attached, evidencing
advances made by SUMMIT BANK to the Borrower under a certain Equipment Facility
and Revolving Credit Agreement also dated August 13, 1997, is hereby amended by
extending the maturity date thereof from August 12, 2000 until January 1, 2002.
This Allonge is limited precisely as drafted, and except as expressly
stated herein, the Note, and all other terms thereof, shall continue in full
force and effect, unchanged.
Attest: VESTCOM INTERNATIONAL, INC.
By:
- ---------------------------------- ------------------------
Name: Name:
Title: Title:
SUMMIT BANK
By:
------------------------
Michael Bernal
Vice President
-10-
<PAGE>
September 29, 1999
Michael Helfand
616 Shackamaxon Dr.
Westfield, NJ 07090
Dear Mike:
This letter confirms the offer of employment to you and our
previous conversations regarding the employment opportunity available to you
with Vestcom International, Inc. ("Vestcom" or the "Company") and sets forth the
terms and conditions of that employment.
Vestcom hereby offers you full-time employment as Executive Vice
President and Chief Financial Officer commencing on or about October 4, 1999
with an annualized salary of $200,000. Your salary will be payable in accordance
with the Company's payroll practices, which currently provides for a bi-weekly
payment. You will also be entitled to earn an incentive compensation bonus of up
to 50% of your annual salary for each of the years 2000 and 2001 (which will be
pro-rated for the calendar year 1999) based on achieving mutually agreed upon
goals and the Company's performance. Such bonuses will be payable in March of
the year following the award period. Notwithstanding the foregoing, you are
entitled to receive a minimum bonus of $50,000 in each of the years 2000 and
2001 (which will also be pro-rated for the calendar year 1999), as long as, at
or prior to the time of the bonus payment, you have not (1) voluntarily
terminated your employment with the Company, or (2) been terminated for Cause
(as defined below). Thereafter, your bonus potential may be increased or
decreased depending upon your performance and the Company's performance, which
bonus potential will be collectively determined by the Chief Executive Officer,
the President and the Compensation Committee of the Board of Directors. During
the period of your employment, you shall devote your entire working time for or
at the direction of Vestcom or its affiliates, use your best efforts to complete
all assignments, and adhere to Vestcom's procedures and policies, including its
Policies and Standards of Business Conduct. You will report to Joel Cartun, the
Chairman and Chief Executive Officer.
During the period of your employment with Vestcom, you initially
will be entitled to receive twenty (20) vacation days per year and all of the
other customary employee benefits of Vestcom (subject to eligibility
requirements), including comprehensive contributory medical insurance for you
and your family (including health, dental and prescription), 401k plan, term
life insurance and a car allowance of $850 per month, plus $0.12 per documented
business mile.
<PAGE>
Subject to ratification by the Compensation Committee of the Board
of Directors, on your first day of employment with the Company, you will be
entitled to receive a stock option pursuant to the Company's 1997 Equity
Compensation Program (the "Program") for 50,000 options at an exercise price
equal to the fair market value of the Company's Common Stock on the day of
grant. The option will vest equally (i.e. 20% per year) over a five-year period
in accordance with the standard conditions of the Company's Program. In
addition, you will remain eligible for additional option grants in the future,
similar to other executive officers of the Company.
Although we hope that your employment with the Company is mutually
satisfactory, employment at Vestcom is "at will." This means that just as you
may resign from the Company at any time with or without cause, Vestcom has the
right to terminate this employment relationship with you with or without cause
at any time. Neither this letter agreement nor any other communication, either
written or oral, should be construed as an employment contract, unless it is
signed by both you and Vestcom and such agreement is expressly acknowledged as
an employment contract.
Notwithstanding that your employment with Vestcom is "at will",
you are entitled to the following benefits. In the event that you are terminated
for "cause" as defined below, or you voluntarily resign your employment, you
shall be entitled only to those benefits you have accrued up to and through your
last day of employment. However, if you are terminated from your employment with
the Company, for any other reason, you shall be entitled to receive an amount
equal to six (6) month's of your then current base salary payable in equal
bi-weekly installments. For purposes of this letter, "cause" means (1)
commission of any crime that constitutes a felony, or any offense involving
moral turpitude or (2) engaging in conduct that is materially injurious to the
Company.
You represent and warrant to the Company that you are not subject
to any covenant against competition or any other restriction on your ability to
become an employee of Vestcom and to perform the services required hereunder,
and that your employment with Vestcom will not breach, or require the breach of,
any obligation to any other party. You also represent that you will not take any
records or other property belonging to your prior employer nor disclose to
Vestcom any confidential information you may possess concerning your former
employer or its business to Vestcom.
This offer of employment with Vestcom is subject to receipt of
satisfactory reference checks from business references to be supplied by you and
your agreeing to the confidentiality and non-compete provisions set forth below.
Confidentiality. (a) You recognize and acknowledge that all
information pertaining to the affairs, business, clients, or customers of the
Company or any of its subsidiaries or affiliates or predecessors or successors
(any or all of such entities being hereinafter referred to as the "Business"),
as such information may exist from time to time, other than information that
-2-
<PAGE>
the Company has previously made publicly available or which has otherwise
entered the public domain through no fault of your own, is confidential and
proprietary information and is a unique and valuable asset of the Business. Such
"Confidential Information" includes, but is not limited to, existence of
Vestcom's acquisition plans and/or the terms thereof, the identity of the
customers of the Business and/or their requirements, any information contained
in documents provided by customers to the Business, software, research and
technical data, equipment and process designs, operating instructions, pricing
or purchasing formulae or methodology, employee lists and salary information,
marketing and cost surveys and marketing data, copyrights, patents and technical
developments, and financial information concerning the Company or its
subsidiaries. You agree that you will not, while employed at Vestcom and for
three (3) years thereafter, divulge to any person, firm, association,
corporation, or governmental agency, any Confidential Information (except such
Confidential Information as is required by law to be divulged to a government
agency or pursuant to subpoena or similar lawful process), or make use of any
Confidential Information for your own purposes or for the benefit of any person,
firm, association or corporation (except the Business) and you shall use your
reasonable best efforts to prevent the disclosure of any such Confidential
Information by others. All records, memoranda, letters, books, papers, reports,
customer lists, accountings or other data, and other records and documents
relating to the Business, whether made by you or otherwise coming into your
possession, are Confidential Information and are, shall be, and shall remain the
property of the Business. No copies thereof shall be made which are not retained
by the Business, and you agree, on termination of your employment, that you will
not retain or make copies of any such documents relating to the Business and, on
demand of the Company, to deliver the same to the Company.
(b) All confidential and proprietary information
and all of your interest in trade secrets, trademarks, computer programs,
customer information, customer lists, employee lists, products, procedures,
copyrights, patents and developments developed by you as a result of, or in
connection with, your employment shall belong to the Company; and without
further compensation, upon the request of the Company, you shall execute any and
all assignments or other documents and take any and all such other action as the
Company may reasonably request in order to vest in the Company all of your
right, title and interest in and to all of foregoing items, free and clear of
all liens, charges and encumbrances of any kind.
Covenant Against Competition. (a) During the period commencing
on the effective date of the termination of your employment (regardless of how
such termination occurs) and ending on the first (1st) anniversary of such
effective date of termination of your employment (the "Restrictive Period"), you
agree, by execution of this letter, that you will not, without express prior
written approval of the Board, as evidenced by a resolution of the Board,
directly or indirectly, for yourself or on behalf of or in conjunction with, any
other person, company, partnership, corporation or business of whatever nature,
own or hold any proprietary interest in, or be employed by or receive
remuneration from, or engage as an officer, director or in a managerial
capacity, whether as an employee, independent contractor, consultant or advisor,
or as a sales representative of, any corporation, partnership, sole
proprietorship or other entity
-3-
<PAGE>
engaged in "direct competition" with the Business of the Company or any of its
subsidiaries or affiliates, or any of their successors or assigns, at the time
of such termination of employment (a "Competitor"), in the "Territory", other
than severance-type or retirement-type benefits from entities constituting your
prior employers. An entity or person that is in "direct competition" with the
Company is one whose principal business is the same as the principal business of
the Company at the time (currently a document management service provider and a
provider of computer and document output and distribution services). You agree
that during such Restrictive Period you will not solicit for yourself or for the
account of any Competitor, any customer or client of the Company or its
subsidiaries or affiliates, or any of their successors or assigns, or any entity
or individual that was such a customer or client during the one year period
immediately preceding the termination of your employment.
In addition, during such Restrictive Period you agree not to
act on behalf of yourself or any Competitor to interfere with the relationship
between the Company or its subsidiaries or affiliates, or any of their
successors or assigns, and their employees, independent contractors, customers
or suppliers. You also agree during such Restrictive Period not to hire an
employee of the Company or any of its subsidiaries or affiliates, or any of
their successors or assigns, or induce any such employee to leave such
employment.
For purposes of this letter, "Territory" shall mean an area
within 100 miles of any place of business, office, warehouse or other facility
where the Company, or any of its affiliates or subsidiaries, or any of their
successors or assigns, then conducts business.
For purposes of the preceding paragraphs, (i) the term
"proprietary interest" means legal or equitable ownership, whether through
stockholding or otherwise, of an equity interest in a business, firm or entity
other than ownership of less than two (2%) percent of any class of equity
interest in a publicly held business, firm or entity and (ii) an entity shall be
considered to be "engaged in competition" if such entity is, or is a holding
company for, a company engaged in any aspect of the Business or providing any
other services competitive with the business then being conducted by the Company
and/or its subsidiaries and/or affiliates, or any of their successors or
assigns, at the date of termination of your employment, in the Territory.
(b) You acknowledge the reasonableness of the restrictions
contained herein. You acknowledge that the Company and its subsidiaries and
affiliates, and their successors and assigns, would be irreparably injured in a
manner not adequately compensated by money damages by a breach or violation (or
threatened breach or violation) of the provisions of this covenant by you.
Therefore, in the event of any such breach or violation (or threatened breach or
violation), in addition to all other rights and remedies which the Company may
have, whether at law or in equity, the Company and its successors and assigns
shall be entitled to seek injunctive or other equitable relief against you
without the need to post bond or other security in connection therewith and you
hereby consent to the entry of an order for such injunctive or other equitable
relief.
-4-
<PAGE>
(c) If any court determines that the provisions of this
covenant, or any part hereof, is unenforceable because of the duration or
geographic scope of such provisions, such court shall have the power to reduce
the duration or scope of such provisions, as the case may be, so that, as so
reduced, such provisions are then enforceable to the maximum extent permitted by
applicable law.
Change in Control. (a) Upon the occurrence of a "Trigger Event" (as
defined below), you shall be entitled to receive a lump sum payment equal to the
"Two Year Amount".
(b) "Trigger Event" shall mean either (i) termination of your
employment with the Company or any successor at any time during the period
beginning on the effective date of a Change in Control and ending twelve (12)
months after the Change in Control, other than a "Termination for Cause" or
termination of employment by you without "Good Reason" during such 12 month
period, or (ii) failure, upon a Change in Control, of either the Company or any
successor to all or a substantial portion of the Company's business and/or
assets to continue your employment as Executive Vice President and Chief
Financial Officer of the Company or such successor for a period of at least
twelve (12) months after the effective date of the Change in Control, with a
salary at least equal to the Base Amount (as defined below) and a bonus each
year equal to no less than the Bonus Amount (as defined below), or (iii)
failure, upon a Change in Control, of your employer and the entity in which you
hold the position described in (ii) above, to be a public company (defined as a
company (x) whose voting securities are registered with the Securities Exchange
Commission and listed for trading on a national securities exchange or the
NASDAQ National Market and (y) that does not have a "50% Shareholder"), or (iv)
termination of employment by you after failure of the Company or such successor
to acknowledge or assume in writing the obligations to you set forth in this
letter agreement after request by you. Payment of the Two-Year Amount shall be
due in a lump sum in full upon the date of termination of employment. A "50%
Shareholder" is any person, firm, corporation or Group which directly or
indirectly has Beneficial Ownership of 50% or more of the publicly traded voting
securities of the relevant entity (with Group and Beneficial Owner being defined
as in Section 13(d) of the Securities Exchange Act of 1934, as amended).
(c) The "Two Year Amount" shall mean two (2) times the sum of
the Base Amount and the Bonus Amount. The "Base Amount" shall mean the
annualized base salary, which you are earning immediately prior to the Change in
Control. The "Bonus Amount" shall mean the annual bonus you received
attributable to your performance during the full fiscal year immediately prior
to the effective date of the Change in Control; provided, however, that for the
first year of employment, your Bonus Amount shall be equal to $50,000, your
minimum guaranteed bonus for that period.
(d) Upon a Change in Control, all stock options or other
unvested benefits under any compensation or employee benefit plan of the Company
shall immediately become vested and exercisable by you.
-5-
<PAGE>
(e) A "Change in Control" shall be deemed to have occurred if:
(i) Any person, firm or corporation acquires directly
or indirectly the Beneficial Ownership (as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended) of any voting security of the
Company and immediately after such acquisition, the acquirer has Beneficial
Ownership of voting securities representing 40% or more of the total voting
power of all the then-outstanding voting securities of the Company; or
(ii) the individuals (A) who, as of the date hereof
constitute the Board of Directors of the Company (the "Original Directors") or
(B) who thereafter are elected to the Board of Directors of the Company (the
"Company Board") and whose election, or nomination for election, to the Company
Board was approved by a vote of at least 2/3 of the Original Directors then
still in office (such Directors being called "Additional Original Directors") or
(C) who are elected to the Company Board and whose election or nomination for
election to the Company Board was approved by a vote of at least 2/3 of the
Original Directors and Additional Original Directors then still in office, cease
for any reason to constitute a majority of the members of the Company Board; or
(iii) The stockholders of the Company shall approve a
merger, consolidation, recapitalization or reorganization of the Company or
consummation of any such transaction if stockholder approval is not sought or
obtained, other than any such transaction which would result in at least 75% of
the total voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being Beneficially Owned
by holders of outstanding voting securities of the Company immediately prior to
the transaction, with the voting power of each such continuing holder relative
to such other continuing holders being not altered substantially in the
transaction; or
(iv) The stockholders of the Company shall approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a substantial portion of the Company's
assets (i.e. 50% or more in value of the total assets of the Company).
(f) "Good Reason" means (i) a failure of the Company or its
successors without your prior consent to fulfill its obligations under this
employment letter in any material respect (after 15 days written notice to
cure), (ii) a failure of the Company or its successors to maintain your position
as Executive Vice President and Chief Financial Officer of a public company,
(iii) any material change by the Company or its successor at any time in the
offices, functions, duties or responsibilities of your position with the Company
which would materially reduce the ranking, level, dignity, responsibility,
importance or scope of your position, (iv) any decrease in your annual
compensation level or in the value of your benefits, (v) any move of the offices
of the Company or its successor without your consent such that you would be
required to
-6-
<PAGE>
commute more than 25 miles more each way than you currently commute, or (vi) any
failure to pay you any amounts due to you.
(g) "Termination for Cause" means a termination of your
employment by the Company or its successor for "cause". For purposes of this
Change in Control provision only, "cause" means (1) conviction of any crime that
constitutes a felony or a criminal offense involving moral turpitude or (2)
intentionally engaging in conduct that is materially injurious to the Company or
its successor.
(h) The Company shall notify you in writing promptly after the
Company becomes aware or anticipates that a Change in Control is likely to take
place.
(i) If the Company or its successors do not timely make all
payments owed to you and provide you all benefits to which you are entitled as a
result of this Change in Control provision, and you retain counsel to enforce
your rights to payment or other entitlements pursuant to this Change in Control
provision, the Company and its successors shall also be obligated to reimburse
you for all reasonable attorneys fees incurred in collecting amounts or benefits
due to you.
Mike, I hope that you elect to accept this offer of employment. Kindly
sign your name at the end of this letter to signify your understanding and
acceptance of these terms and that no one at Vestcom has made any other
representation to you. Vestcom welcomes you as an employee and looks forward to
a successful relationship.
Sincerely,
/s/ Joel Cartun
-----------------------------
Joel Cartun, Chairman and CEO
Agreed and accepted:
/s/ Michael Helfand
- --------------------
Michael Helfand
Date: September 29, 1999
-7-
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