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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998.
[ ] 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
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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, 1999 was approximately $38.6 million.
Number of shares of Common Stock outstanding as of March 1, 1999:
8,788,590
Documents incorporated by reference: Definitive Proxy Statement for the
registrant's 1999 Annual Meeting of Shareholders (Part III).
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VESTCOM INTERNATIONAL, INC.
TABLE OF CONTENTS
Part I
PAGE
Item 1 Business....................................................... 3
Item 2 Properties..................................................... 14
Item 3 Legal Proceedings.............................................. 15
Item 4 Submission of Matters to a Vote of Security Holders............ 15
Item 4A Executive Officers of the Registrant........................... 15
Part II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 16
Item 6 Selected Financial Data........................................ 17
Item 7 Management's Discussion and Analysis of Results of
Operations and Financial Condition......................... 17
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 22
Item 8 Financial Statements and Supplementary Data.................... 23
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................................................ 24
Signatures................................................................ 26
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PART I
Item 1. Business
This Annual Report on Form 10-K contains forward-looking statements
based on current expectations, estimates and projections about Vestcom's
industry, management's beliefs and certain assumptions made by management. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosures Regarding Forward-Looking Statements."
General
Vestcom International, Inc. ("Vestcom") is a consolidator and operator
of companies that create, manage and distribute business critical documents
including (i) statements, invoices and confirms, (ii) product pricing and usage
information, and (iii) sales generation and product fulfillment materials.
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 companies in the document services industry (the "Founding
Companies"). Since the IPO, Vestcom has expanded its operations through internal
growth and by acquiring eight additional operating companies, and now has 36
facilities in 19 states and in the Provinces of Quebec and 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
Vestcom's business prior to the IPO refer to the businesses of the Founding
Companies as they were conducted on an independent basis. Vestcom maintains a
website at vestcomintl.com.
Vestcom's knowledge of the industry, 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 to customers. For example, in the financial
services industry, Vestcom works with its customers to create, manage and
distribute statements, invoices and confirms. Vestcom provides added value by
producing these business critical documents in a cost-effective, timely manner,
with enhanced graphics, and by also providing customers with database services
where requested. As an additional example, in the retail industry, Vestcom works
with its customers to create, manage and distribute product pricing and
merchandising support materials. Vestcom not only produces pricing labels and
point-of purchase displays, but also provides its customers with value-added
services such as the production and distribution of frequent shopper and
personalized ID cards, price books, database services, equipment and supplies
for onsite production of product pricing materials and other merchandising
support needs.
Vestcom provides services to customers in a broad range of industries.
In addition to the financial services and retail industries, Vestcom provides
services to customers in the pharmaceutical, telecommunications, utilities,
health care, travel and leisure and manufacturing industries. Vestcom provides
its customers with solutions to meet their business critical document
requirements. Vestcom's services enable customers to:
o Obtain customized business critical documents to meet their
specific needs
Vestcom believes that one of its key competitive advantages is
its significant data processing and programming capabilities. Vestcom's
technical staff designs and implements the software and systems to
produce customized business critical documents for customers. These
documents not only communicate business critical data, but may also
provide personalized and focused marketing messages and may be
supplemented through selective insertion of marketing materials.
Vestcom's capabilities provide customers with the flexibility to
produce small or large volumes of business critical documents with the
same high quality, while permitting each document to contain customized
or individualized information. Vestcom produces documents for most of
its customers on a regular basis, either daily, weekly, monthly,
quarterly or as otherwise required by the customer.
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o Fulfill multiple business critical document needs from one
source, at a competitive cost
Vestcom's advanced data processing and distribution
capabilities permit customers to fulfill many of their business
critical document needs from a single source, at a competitive cost. By
using Vestcom's services, customers can reduce their production,
distribution and mailing costs. They can also reduce their overhead and
fixed costs by decreasing or eliminating their investments in
technology and the need for expensive equipment, floor space,
personnel, utilities and other related expenses.
o Reduce production turnaround time and equipment downtime
Vestcom's advanced computer network shifts production to
various locations, thereby increasing efficiency, productivity, cost
effectiveness and timely delivery. Vestcom reduces turnaround time and
downtime through its:
o direct customer data links, which speed processing
time;
o distributed processing, by which Vestcom maximizes
equipment utilization and distributes data received
from customers to geographically dispersed
production and distribution centers, enabling
customers to improve delivery time; and
o internal equipment redundancy and multi-site
production capabilities, which provide backup
protection for equipment failure.
o Gain access to the newest technologies and key business
services
Vestcom keeps abreast of frequent changes in technology and
continually upgrades its production capabilities and services,
enabling its customers to:
o receive the benefits of technological advances without
making significant investments in hardware and software;
o retain the flexibility to change the equipment and
technologies that Vestcom utilizes to produce their work;
and
o select from among a variety of medium, such as paper,
compact disc, microfiche and electronic formatting via the
Internet for the production of their documents.
In 1998, primarily through an acquisition, Vestcom expanded
its capabilities in various aspects of creative marketing design and
direct response marketing. As an internal development activity, Vestcom
formed Vestcom's Internet Solutions Group and developed an Internet
suite of products which includes web-based fulfillment services,
electronic document delivery and electronic bill presentment and
payment.
Industry Overview
The business of creating, managing and distributing business critical
documents is highly fragmented and is characterized by many small companies,
which typically serve local markets and provide a narrow range of services, and
by numerous in-house operations and several national service providers, some of
whom serve specialized market niches. As a result of the increased complexity
and volume of business critical documents and the increased costs of producing
these documents in-house, a growing number of companies have looked to
outsourcing as an alternative to creating, managing and distributing business
critical documents in-house. Vestcom believes that many companies offering
outsourcing services comparable to Vestcom's services:
o have insufficient capital for expansion;
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o do not invest sufficiently in rapidly changing technologies;
and
o are unable to meet the needs of large and/or geographically
dispersed clients.
Vestcom believes that the growth of its market is being driven by
several factors, including:
o the increasing trend of businesses to outsource their non-core
functions;
o the growth of the companies and industries in Vestcom's
customer base, which has resulted in an increase in the volume
and variety of business critical documents which these
companies need to generate;
o the increased demand of managers, employees and customers for
business critical documents as a result of recent advances in
information technology; and
o government regulations that require the reporting and
retention of, and access to, a broad range of information.
Strategy
Vestcom has implemented the following business strategy:
Strategy for Internal Growth:
Provide Technological Leadership and Value-Added Solutions
Vestcom's technological expertise combined with its size and scope of
service offerings enables it to provide customers with "one stop" shopping at a
competitive cost for many of their business critical document requirements.
Using a focused sales approach, driven by a customer intimate strategy, Vestcom
provides a broad range of high quality services at a competitive cost from
multiple locations.
Achieve Cost Savings and Promote Name Recognition Through Integration
Vestcom believes that by integrating its business units it can improve
both its national and local marketing opportunities and increase resource
utilization. During 1998, while maintaining individual operating unit
performance responsibilities, Vestcom continued integrating its acquired
companies and resources. As part of the integration process and to enhance its
market recognition or branding, Vestcom formed regional operating units: Vestcom
New England, Vestcom Canada and Vestcom Mid-Atlantic. Vestcom also formed a
market focused operating unit: Vestcom Retail Solutions Group. The companies
comprising the regional units serve multiple markets and may serve customers
outside of their respective regions. Additionally, such units may share
production resources and technical capabilities. The companies comprising the
Retail Solutions Group have a coordinated sales force and provide vinyl and
laminated paper pricing labels, laser printed price books, customer
communications material and database and other services for the retail industry.
During 1998, Vestcom took the initial steps to consolidate certain executive,
administrative, sales and financial functions within these units. By the end of
1998, each unit had an integrated sales function. During 1999, Vestcom intends
to continue its program to consolidate production facilities and functions.
Vestcom believes that this integration will improve cost-effectiveness
and brand recognition by:
o consolidating a number of executive and administrative functions;
o reducing or eliminating redundant functions and facilities;
o increasing equipment utilization; and
o creating common sales and marketing materials and approaches.
Leverage technical know-how and production resources
Vestcom's operating units share a common technical expertise, which
includes data management skills, programming know-how, and expertise related to
image/document transmission, formatting, presentation, production and
distribution. The units also operate similar laser printing and related
production equipment. To leverage its technical know-how and production
resources, Vestcom is continuing its program to transfer industry specific
application expertise among its various operating units. For example,
applications marketed to customers in the retail industry are produced at
operating units not comprising Vestcom's Retail Solutions Group, and production
locations comprising Vestcom's Retail Solutions Group may produce work for
customers in markets other than retail.
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Capitalize on Cross-Selling Opportunities
Vestcom 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 Vestcom's
customer base. As examples, Vestcom believes that its direct marketing and
database services could be marketed to certain customers for whom Vestcom
presently produces business critical documents, and its fulfillment services
could be marketed to certain customers for whom Vestcom presently provides laser
printing and document distribution services. Vestcom further believes that new
technologies shared among the Operating Companies, such as the ability to
electronically distribute data received from customers to geographically
dispersed locations, will increase Vestcom'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,
retail chains and telecommunications companies. Vestcom believes that this
expertise will enhance its ability to obtain and service customers.
New Products and Services
Vestcom intends to supplement the selling efforts of its operational
units by corporate-sponsored internal product development, acquisition of new
products and services and sales and marketing efforts.
Provide Outsourcing Solutions for Clients
Vestcom's Management Solutions Group targets customers desiring to
outsource a significant portion of their laser printing and document
distribution processes. Vestcom provides a turnkey service for the creation,
management and distribution of business critical documents in which it assumes
most of the responsibilities previously performed by the customer's in-house
operations on either a facilities management basis or on an outsourced basis.
Vestcom believes that, in most cases, it can perform these services more
cost-effectively than the customer can perform them internally. Vestcom believes
that its knowledge of the industry, technological expertise, resources and
operating efficiencies will enhance its ability to successfully market this
service.
For a discussion of certain risks associated with Vestcom's internal
growth strategy, see "Risk Factors - There Are Various Risks Related to
Integrating Vestcoms Operating Companies", " - Vestcom May Not Be Able to
Successfully Manage Its Growth" and "- Vestcom May Not Be Able to Sustain
Internal Growth".
Acquisition Strategy:
Concurrently with the consummation of its IPO, Vestcom acquired the
Founding Companies. Since the IPO, Vestcom has expanded its operations through
internal growth and by acquiring eight additional Operating Companies, and now
has 36 facilities in 19 states and in the Provinces of Quebec and Ontario,
Canada. Vestcom plans to acquire additional companies that create, manage and
distribute business critical documents in the highly-fragmented business
services industry.
As Vestcom 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, business
critical document requirements. In identifying potential acquisition candidates,
Vestcom will look for companies:
o that are expected to be accretive to Vestcom's earnings per share;
o with services that are similar or complementary to those provided by
Vestcom;
o serving geographic markets targeted by Vestcom; and
o with strong management and customer relationships.
In addition, as opportunities arise, Vestcom will seek to augment the
operations of the Operating Companies and to capitalize on economies of scale
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with "tuck-in" acquisitions in the same or contiguous areas that can be
assimilated into existing operations. Vestcom 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.
For a discussion of certain risks associated with Vestcom's acquisition
strategy, see "Risk Factors--Vestcom Faces Risks Related to its Acquisition
Strategy" and "--Vestcom May Not Be Able to Obtain Adequate Financing to Fund
its Acquisition Program".
Vestcom 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
Vestcom will acquire any additional businesses.
Services
Vestcom provides a variety of services for its customers based on their
specific needs for business critical documents. These services include the
following:
Production and Distribution Services
Production and Distribution of Time-Sensitive Business Critical
Documents
Vestcom converts electronic data received from its customers into
informative, accurate and customized business critical documents such as
brokerage statements, transaction confirms, bank statements, invoices, pension
reports, credit union statements, product pricing labels and management reports
(including sales reports, financial and accounting reports and inventory
reports). Upon receipt of computer data from its customers, the data is
processed through specialized systems and software generally developed by or
licensed to Vestcom to provide, among other things, customized formatting of
data, document production and printing, cost-effective and expedited postal
delivery, intelligent insertion of supplementary marketing material into
envelopes, selective distribution and quality control. Vestcom's processing of
its customers' data enables Vestcom to create personalized and focused business
critical documents, which may include selective marketing messages, specialized
graphics and highlight color. Vestcom'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. Vestcom's
capabilities also include receipt of data from customers in a central location
and the electronic distribution of this data to geographically dispersed
production and distribution centers, enabling customers to improve delivery
time. Vestcom produces documents for most of its customers on a regular basis,
either daily, weekly, monthly, quarterly or as otherwise required by the
customer.
Vestcom offers its customers a variety of medium for the production and
distribution of business critical documents, including paper, compact disc,
microfiche, microfilm, and electronic formatting via the Internet. 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. Vestcom also offers Internet delivery of documents for
customers.
Production and Distribution of Computer-Generated Labels
Vestcom's Retail Solutions Group provides vinyl and laminated paper
pricing labels, laser printed price books, customer communications material and
database services for the retail industry. Vestcom produces and distributes
point-of-purchase displays, frequent shopper and personalized ID cards,
equipment and supplies for onsite production of product pricing materials and
other merchandising support materials. For example, major grocery and drug-store
chains rely on Vestcom to manage product pricing information. Promotions and
price changes are transmitted weekly to Vestcom for the creation of
point-of-purchase shelf labels, which are laser printed and ready for
distribution to retail stores throughout North
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America generally within 24 hours of receipt of data. These labels typically
display the product's price (including unit price), a bar-code for scanning and
information about the product such as its size and weight. Vestcom utilizes
high-speed laser printers and specialized finishing equipment to produce these
labels. Vestcom 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
Vestcom prints, packages and distributes business critical 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. Vestcom's print
on demand system permits the customer to revise the instruction manual,
cost-effectively producing the number of copies required at the time the
information is needed. The flexibility of Vestcom'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. Vestcom 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, Vestcom also receives printed marketing and related materials from
customers, retains the material in inventory and then ships the materials to
various locations upon the receipt of a customer order. Vestcom receives orders
to ship materials by telephone, phone mail, fax, mail and electronic mail via
the Internet. Vestcom'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.
Vestcom also produces customized computer reports which track the volume and
frequency of shipments of materials to various locations.
Direct Response Marketing
In October 1998, Vestcom acquired Manus Services Corporation, with its
principal place of business in Seattle, Washington. This acquisition expanded
Vestcom's capabilities in various aspects of creative marketing design and
direct response marketing. Through this acquisition and Vestcom's other
capabilities, Vestcom is able to assist its customers by:
o identifying and targeting potential new customers;
o developing and creating promotional marketing materials and
direct mail marketing programs aimed at these customers;
o distributing the marketing materials; and
o determining the effectiveness of direct marketing programs by
performing database response analyses.
Vestcom also fulfills requests for marketing materials from customer inquiries.
Vestcom believes that direct response marketing is an important addition to its
product and service offerings.
Commingling, Intelligent Inserting and Mailing Services
Vestcom provides cost-effective and rapid distribution of completed
documents and is able to obtain postal discounts off the current U.S. first
class single piece postage rate. By maximizing equipment utilization and
electronically distributing data received from customers to geographically
dispersed production and distribution centers, Vestcom enables customers to
reduce distribution costs while improving delivery time.
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Commingling
By combining volumes of mail from a number of customers and adding
postal bar-codes, Vestcom is able to generate postal discounts for customers
that do not produce sufficient volume to obtain these benefits on their own.
Insertion
Vestcom provides both selective (intelligent) and non-selective
insertion services. Vestcom's insertion equipment folds and inserts reports,
bills, invoices and other marketing materials into envelopes.
Presorting
Vestcom 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 Business Critical Document Outsourcing Services
As contrasted with Vestcom's individualized applications for customers,
Vestcom's Management Solutions Group targets customers desiring to outsource a
significant portion of their laser printing and document distribution processes.
Vestcom provides a turnkey service that encompasses document creation,
management and distribution services to meet the customer's needs for business
critical documents, which may also include mailing services. Vestcom will
typically assume most of the responsibilities previously performed by the
customer's in-house operations either on a facilities management basis or on an
outsourced basis. Vestcom believes that outsourcing will often enable the
customer to close its in-house computer output printing center. The customer
transmits its computer-generated data to one of Vestcom's production and
distribution centers, which then processes, produces and distributes the
reports, invoices, statements and other business critical documents needed by
the customer.
Forms Management
Vestcom's services include the purchase, storage and inventory
management of printed forms, envelopes, letterhead and marketing materials for
customers. Vestcom also offers limited offset printing services to print forms,
stationery and other marketing materials.
Development of New Services
Vestcom 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 1998,
Vestcom's Internet Solutions Group began to offer a suite of Internet-enabled
products that include web-based fulfillment services, electronic document
delivery and electronic bill presentment and payment. As an additional example,
Vestcom has expanded its direct response marketing services since its
acquisition of Manus Services Corporation in October 1998.
Sales and Marketing
Vestcom's sales efforts are handled principally through its in-house
direct sales staff of approximately 68 people. Vestcom's sales representatives
generally have expertise in specific industries, such as the financial services,
retail, pharmaceutical and telecommunications industries, and in specific
services, such as statements, computer-generated point-of-purchase pricing
labels, direct response marketing and demand publishing. Vestcom employs
customer service representatives to provide on-going support to existing
customers and to oversee the implementation of new customer projects.
Local sales efforts are augmented by corporate supported participation
in industry trade shows and conferences, articles and advertisements in trade
journals and seminars sponsored by Vestcom for customers and prospective
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customers. Vestcom provides marketing support to its sales staff through the
production and distribution of marketing materials, telemarketing and seminars.
Vestcom's sales and customer service personnel interact extensively with the
customer and Vestcom's operations staff to address specific customer needs.
Customers
Vestcom provides services to customers in a broad range of industries,
including the financial services, retail, pharmaceutical, telecommunications,
utilities, health care, travel and leisure and manufacturing industries. No one
customer presently accounts for over 5% of Vestcom's revenues.
Competition
Vestcom operates in a highly competitive industry. There can be no
assurance that Vestcom's targeted customer base will outsource more of their
needs for business critical documents or that such businesses will not bring
in-house services that they currently outsource. In addition, with respect to
those services that are outsourced, Vestcom competes with a variety of
companies, many of which have greater financial resources than Vestcom. A number
of Vestcom's current suppliers of equipment and services are also a source of
competition. Vestcom's major competitors include Xerox Business Services, Pitney
Bowes Management Services, Anacomp, Output Technologies (a division of DST
Systems), IKON Office Solutions, Moore Corporation Ltd., F.Y.I. Incorporated and
Lason, Inc., as well as smaller local, regional and national providers.
Certain of Vestcom's competitors operate in broader geographic areas
than Vestcom, and others may choose to compete in Vestcom's areas of operation
in the future. In addition, Vestcom 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, Vestcom may lose
customers or have difficulty in acquiring new customers and new companies and
its results of operations may be adversely affected.
Vestcom believes that the principal competitive factors in providing
one-stop solutions to meet customers' business critical document requirements
include technological expertise, quality and accuracy, turnaround time, price,
reliability and security of service, reputation, client industry expertise,
capacity back-up and redundancy capabilities and customer support and service.
Vestcom 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, 1998, Vestcom had approximately 950 full-time and 120
part-time employees. No employees of Vestcom are represented by a labor union.
Vestcom considers its relations with its employees to be good.
RISK FACTORS
Vestcom Has Limited Combined Operating History
Prior to the consummation of the IPO and the acquisitions of the
Founding Companies on August 4, 1997, Vestcom conducted no operations and
generated no revenues. Vestcom has acquired eight additional operating companies
since the IPO. These companies, together with the Founding Companies, are
referred to as the "Operating Companies." Prior to their acquisition by Vestcom,
the Operating Companies operated as separate, independent businesses. Vestcom
cannot be certain that the Operating Companies or the companies it may acquire
in the future will achieve sales and profitability justifying Vestcom's
investment in them.
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There are Various Risks Related to Integrating Vestcom's Operating Companies
The process of integrating the operations of the businesses Vestcom
acquires into Vestcom's business may involve unforeseen difficulties and may
require a significant amount of Vestcom's financial and other resources,
including management time. In connection with the integration process, Vestcom
may experience:
o the loss of customers;
o the loss of personnel;
o increased costs related to recruitment and termination payments;
o operating interruptions;
o moving and relocation costs;
o abandonment costs related to the termination of leases; and
o increased expenditures for leasehold improvements and fit up costs
for new facilities.
Vestcom cannot be certain that it will be able to integrate the operations of
these businesses successfully into its operations. In addition, to improve
operating efficiencies, Vestcom must conform all acquired companies into certain
necessary common systems and procedures, including certain production and
accounting systems. Vestcom cannot be certain that it will successfully
institute these common systems and procedures for all acquired companies or
accomplish this without substantial costs, delays or other operational or
financial difficulties. Vestcom's inability to integrate or successfully manage
the companies it has acquired or may acquire in the future could have a material
adverse effect on Vestcom's business, financial condition and results of
operations.
Vestcom May Not Be Able to Successfully Manage Its Growth
Vestcom expects to expend significant time and effort in expanding its
business and acquiring other businesses. This growth may place a significant
strain on Vestcom's resources. Vestcom cannot be certain that its systems,
procedures and controls will be adequate to support its operations as they
expand. Any future growth also will impose significant additional
responsibilities on members of Vestcom's senior management, including the need
to identify, recruit and integrate new senior level managers and executives.
Vestcom cannot be certain that it will be able to identify and retain such
additional managers and executives. As a result, Vestcom cannot be certain that
it will be able to expand its business or manage any future growth effectively
and profitably.
Vestcom Faces Risks Related to its Acquisition Strategy
Vestcom intends to expand its operations through the acquisition of
additional businesses which create, manage and distribute business critical
documents. There can be no assurance that Vestcom will be able to identify,
acquire or profitably manage additional businesses or successfully integrate
acquired businesses, if any, into Vestcom without substantial costs, delays or
other operational or financial difficulties. Further, acquisitions may involve a
number of special risks, including:
o adverse effects on Vestcom's operating results;
o diversion of management's attention;
o failure to retain key personnel or customers of an acquired company;
o risks associated with unanticipated events; and
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o amortization of acquired intangible assets.
Some or all of these risks could have a material adverse effect on
Vestcom's business, financial condition or results of operations. In addition,
if competition for acquisition candidates increases, the cost of acquiring
businesses could increase materially. Changes in accounting requirements
relating to acquisitions could make it more difficult for Vestcom to structure
accretive acquisitions. Unfavorable developments at a single acquired company
could have a material adverse impact on the reputation and business of Vestcom
as a whole. In addition, there can be no assurance that acquired businesses, if
any, will achieve anticipated revenues and earnings. The inability of Vestcom to
implement and manage its acquisition strategy successfully may have an adverse
effect on the business or future prospects of Vestcom.
Vestcom May Not Be Able to Obtain Adequate Financing to Fund its Acquisition
Program
Vestcom cannot readily predict the timing, size and success of its
acquisition efforts or the capital it will need for these efforts. Vestcom
currently intends to finance future acquisitions by using a combination of its
Common Stock, notes and cash. As a result of the decrease in the market value of
Vestcom's Common Stock since the IPO, it currently is more difficult and
dilutive for Vestcom to use stock in structuring acquisitions. If the Common
Stock does not maintain a sufficient market value, or if the owners of the
businesses Vestcom wishes to acquire are unwilling to accept Common Stock as
part of the purchase price, Vestcom will be required to use more of its cash
resources, if available, to maintain its acquisition program. Using cash for
acquisitions limits Vestcom's financial flexibility and makes Vestcom more
likely to seek additional capital through borrowing money or selling stock.
Vestcom may not be able to obtain cash if and when it is needed on acceptable
terms, or at all. This could have a material adverse effect on Vestcom's
business, financial condition and results of operations.
Vestcom May Not Be Able to Sustain Internal Growth
A key element of Vestcom'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:
o the effective initiation, development and maintenance of client
relationships;
o the expansion and coordination of sales functions;
o the development and success of new products and services;
o Vestcom's ability to maintain the high quality of the services it
offers; and
o the recruitment, motivation and retention of qualified management
and other personnel.
Sustaining growth will also require continued access by Vestcom to
capital, the successful cross-selling of products and services among the
Operating Companies and realization by Vestcom of economies of scale. Vestcom
cannot be certain that its 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.
Vestcom Depends on Certain Technology
Vestcom's success is dependent on its ability to acquire and utilize
competitive production technologies on a more cost-effective basis than
Vestcom's existing and potential customers can utilize them in-house. Vestcom's
services could be rendered noncompetitive or obsolete by technological advances
made by its current or potential production technology suppliers, some of whom
may be competitors. In addition, Vestcom could make a significant investment in
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<PAGE>
equipment or technology which quickly becomes obsolete. Vestcom cannot be
certain that it will be able to obtain the rights to use any of these
technologies, that it will be able to implement effectively these technologies
on a cost-effective basis or that these technologies will not render
noncompetitive or obsolete Vestcom's role as a consolidator and operator of
companies that create, manage and distribute business critical documents.
Vestcom May Be Affected by Consolidation in the Industries of Certain Customers
A significant portion of Vestcom's customers are in the financial
services and retail industries. These industries have experienced consolidation
in recent years and may experience additional consolidation in the future.
Vestcom cannot predict the effects that such consolidation, or the possible
consolidation in other industries which Vestcom serves, such as the healthcare
industry, may have on its business or future prospects. For example, in
connection with such consolidation, Vestcom may either lose or gain additional
customers or experience variations in the volume of work received from its
customers.
The Price of Vestcom's Common Stock May Be Volatile
In recent years the stock market has experienced significant price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of particular companies. These fluctuations, as well as a
shortfall in sales or earnings compared to public market analysts' expectations,
changes in analysts' recommendations or projections, and general economic,
industry specific and market conditions, may adversely affect the market price
of Vestcom's Common Stock. Vestcom's quarterly results of operations may vary
materially as a result of factors which include: timing and structure of
Vestcom's acquisitions, the gain or loss of material customers, the costs of
integrating acquired companies, changes in Vestcom's operating cost structure
and variations in the prices charged for Vestcom's services. Fluctuations in
Vestcom's stock price may adversely affect Vestcom's business and acquisition
opportunities.
Shares of Common Stock Eligible for Future Sale May Affect Market Price
By August 1999, 3,430,327 shares of Common Stock issued to the former
holders of the Founding Companies at the time of the IPO and in connection with
certain earnouts and to certain other investors will be freely tradable, unless
held by affiliates of Vestcom. Also in August 1999, the holders of 278,334
shares of Common Stock will have the right to exercise registration rights with
respect to these shares. Shares issued upon the exercise of stock options also
will be eligible for resale in the public market. Sales of a substantial number
of shares of Common Stock in the public market could adversely affect the market
price of the Common Stock.
Vestcom May Be Adversely Affected by the 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, Vestcom believes 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 Vestcom
does business experience problems relating to the Year 2000 Issue, Vestcom's
business, financial condition or results of operations could be materially
adversely affected. In addition, Vestcom could be affected by a systematic
failure beyond its control, such as a prolonged telecommunications or electrical
failure, the failure of other utility companies or a failure of governmental
systems including the U.S. postal service. Such failures could interrupt
Vestcom's operations, including its ability to receive and process data from its
customers, and could have a material adverse effect on Vestcom's business,
results of operations or financial condition.
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Vestcom May Face Potential Liability for Breach of Confidentiality
A substantial portion of Vestcom'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
Vestcom or damage Vestcom's reputation. In addition, in connection with
providing its Internet suite of products, Vestcom transmits information about
third parties over the Internet. Vestcom may be exposed to liability with
respect to the transmission of such third party information.
Vestcom May Have Business Interruptions
Vestcom believes that its future results of operations are dependent in
large part upon its ability to provide prompt and efficient services to its
customers. Certain of Vestcom's operations are performed at a single location
and are dependent on continuous computer, electrical and telephone service. As a
result, any disruption of Vestcom's day-to-day operations could have a material
adverse effect upon Vestcom. There can be no assurance that a fire, flood,
earthquake, power loss, phone service loss or other event affecting one or more
of Vestcom's facilities would not disable these services. Any significant damage
to any such facility or other failure that causes significant interruptions in
Vestcom's operations may not be covered by insurance. Any uninsured or
underinsured loss could have a material adverse effect on Vestcom's business,
financial condition or results of operations.
Vestcom's Business May Be Affected By Fluctuations in the Price of Supplies and
other Costs or Alternative Technologies
Prices for paper, equipment maintenance, delivery services and labor
costs may increase from time to time in the future. Any significant increases in
the prices of these materials and services that cannot be passed on to customers
could have a material adverse effect on Vestcom's business, financial condition
or results of operations. In addition, increases in the prices of supplies and
other materials and services might cause some of Vestcom'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 Vestcom presently offers
electronic distribution services via the Internet, there can be no assurance
that these services will be accepted by Vestcom's customers, or that other
technologies (whether now existing or developed in the future) may not in the
future reduce or supplant the demand for Vestcom's services, which could in turn
adversely affect Vestcom's business.
Effect of Certain Charter Provisions and New Jersey Law
The Board of Directors of Vestcom 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 Vestcom by means of a tender offer,
merger, proxy contest or otherwise and may adversely affect the prevailing
market price of Vestcom's Common Stock. In addition, the New Jersey Shareholders
Protection Act prohibits certain persons from engaging in business combinations
with Vestcom.
Item 2. Properties
Vestcom currently has 36 facilities, aggregating approximately
1,102,000 square feet. These facilities are located in 19 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. Leases vary in
term remaining from month-to-month to 15 years and in some cases, include
options to extend the lease term. Vestcom has entered into a 15 year lease
commencing June 1, 1999, for executive office, production and warehouse space,
aggregating approximately 210,000 square feet (which is included in the
aggregate square footage amount referred to above).
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Item 3. Legal Proceedings
Vestcom 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
Vestcom's business, financial position 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, 1998, no
matters were submitted to a vote of Vestcom's security holders.
Item 4A. Executive Officers of the Registrant
Vestcom's executive officers are as follows:
<TABLE>
<CAPTION>
Name Age* Positions with Vestcom
- ---- --- ----------------------
<S> <C> <C>
Joel Cartun 59 Chairman of the Board and Chief Executive Officer
Brendan Keating 44 President and Chief Operating Officer
Harvey Goldman 52 Executive Vice President, Chief Financial Officer and
Treasurer
Peter J. McLaughlin 60 Executive Vice President
Sheryl Bernstein Cilenti 30 Vice President, General Counsel and Secretary
</TABLE>
- --------------------
* Ages are as of March 1, 1999.
Joel Cartun has been the Chief Executive Officer and a director of
Vestcom since its incorporation in September 1996 and Chairman of the Board
since August 1997. He served as President of Vestcom from its incorporation
until March 1999. Mr. Cartun founded Comvestrix Corp. (now known as Vestcom
Mid-Atlantic, Inc. ("VMA")), one of the Founding Companies, in 1969, and has
served as Chief Executive Officer and a director of that corporation since its
incorporation and as President until October 1998. Mr. Cartun was a founder of
Xplor International, a trade association for the electronic printing industry.
Brendan Keating has served as President of Vestcom since March 1999, as
a director since May 1998, and as Chief Operating Officer of Vestcom since
October 1997. He served as Executive Vice President of Vestcom from October 1997
until March 1999. He has served as President of VMA since October 1998, and as
Chief Operating Officer of VMA from October 1997 until April 1998. 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).
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
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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. He was a partner from 1994 to 1996 in the
merger and acquisition firm of McLaughlin & Tonra. Prior thereto, he was 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.
Sheryl Bernstein Cilenti has served as Vice President and General
Counsel of Vestcom since October 1997 and as Secretary of Vestcom since November
1997. From September 1993 until joining Vestcom, 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Vestcom's Common Stock has traded on the Nasdaq National Market since
July 30, 1997, under the symbol "VESC". Vestcom'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
Year ended December 31, 1998:
First quarter 21.50 6.50
Second quarter 11.75 8.625
Third quarter 11.00 6.063
Fourth quarter 9.00 5.813
- -----------------
*Represents the initial public offering price.
As of March 24, 1999, there were 89 holders of record of the Common
Stock.
Vestcom has not declared or paid any dividends on its Common Stock.
Vestcom 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 Vestcom's Board of
Directors after taking into account various factors, including Vestcom's
financial condition, results of operations, current and anticipated cash needs
and plans for expansion and any restrictions that may be imposed by Vestcom's
future credit facilities. Vestcom's credit facility with Summit Bank restricts
Vestcom's ability to pay cash dividends on its Common Stock. The credit facility
provides that Vestcom may declare and pay quarterly cash dividends on its Common
Stock only if after giving effect to any such payment Vestcom would not be in
default under any of the provisions of such credit facility.
During the year ended December 31, 1998, Vestcom issued an aggregate of
304,779 shares of Common Stock which were not registered under the Securities
Act of 1933 (the "Securities Act"). All of the shares were issued on April 29,
1998, as earnout payments in connection with Vestcom's acquisitions of two of
the Founding Companies. All of the unregistered shares issued by Vestcom during
1998 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.
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<PAGE>
Item 6 SELECTED FINANCIAL DATA
Vestcom acquired the Founding Companies on August 4, 1997 concurrently
with the consummation of the Company's IPO. Prior to the consummation of the
IPO, Vestcom conducted no activities, other than those related to the IPO and
the acquisition of the Founding Companies. For financial statement presentation
purposes, Vestcom has been identified as the accounting acquirer. The following
selected historical financial data of Vestcom as of December 31, 1998 and 1997
and for the years ended December 31, 1998 and 1997 and for the period from
inception (September 19, 1996) to December 31, 1996 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)
<TABLE>
<CAPTION>
For the Period from
For the Year Ended For the Year Ended Inception (September 19, 1996)
December 31, 1998 December 31, 1997 to December 31, 1996
------------------ ------------------ ------------------------------
Statement of Operations Data:
<S> <C> <C> <C>
Revenues......................................... $ 108,676 $ 29,777 $ --
Income (loss) from Operations.................... 8,927 2,671 (1,633)
Net Income (loss) - Basic........................ $ 4,627 $ 1,308 $ (5,078)
Net Income (loss) - Diluted...................... $ 4,623 $ 1,249 $ (5,078)
Net Income per share - Basic..................... $ .52 $ .31
Net Income per share - Diluted................... $ .52 $ .29
Additional Information:
EBITDA $ 15,228 $ 4,681
Balance Sheet Data: December 31, 1998 December 31, 1997
----------------- -----------------
Working capital $ 3,745 $ 17,147
Total assets $ 142,544 $ 114,346
Long term obligations $ 21,386 $ 10,802
Stockholders' equity $ 89,911 $ 83,028
</TABLE>
Item 7. 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 Vestcom should be read in conjunction with Vestcom's Consolidated
Financial Statements and the related notes thereto appearing elsewhere herein.
Disclosures Regarding Forward Looking Statements
This Annual Report on Form 10-K 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 Vestcom's management as well as assumptions made by and
information currently available to Vestcom's management. Such statements reflect
the current views of Vestcom with respect to future events based on currently
available information and are subject to risks and uncertainties that could
cause actual
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results to differ materially from those contemplated in such forward-looking
statements. Factors that could cause actual results to differ materially from
Vestcom's expectations include, but are not limited to, the following:
acceptance of Vestcom's new products in the marketplace, the entry of new
competitors, changes in the business document outsourcing industry, the
availability of suitable acquisition candidates, the assimilation of new
acquisitions with existing business, the ability to execute and manage its
growth strategy, the ability to successfully consolidate production facilities
and functions as part of the Company's integration program, and the results of
its investment spending. Other factors are described from time to time in
Vestcom'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.
Vestcom 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.
Introduction
Vestcom International, Inc. was incorporated in September 1996.
Concurrently with the consummation of Vestcom's initial public offering (the
"Offering") on August 4, 1997, Vestcom acquired seven companies that create,
manage and distribute business critical documents (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 Vestcom as the acquirer.
Since the Offering, Vestcom has acquired additional companies that create,
manage and distribute business critical documents, as detailed below
(collectively with the Founding Companies referred to herein as "Acquired
Companies").
Vestcom acquired substantially all of the assets of New England Laser
Printing, Inc. (now known as Vestcom Rhode Island, Inc.) in November, 1997, and
the stock of Moreau Promotional Services, Inc. (now known as Vestcom Canada) in
December 1997. As of January 20, 1998 Vestcom acquired substantially all of the
assets of Creative Data Services, Inc. ("CDS") and D.B. Acquisition Inc. (doing
business as Business Mail Express) ("BME"), a wholly owned subsidiary of CDS,
and on April 14, 1998 Vestcom acquired substantially all of the assets of Dee
Cee Graphics Inc. ("Dee Cee"). The operations of Dee Cee were consolidated into
Vestcom Massachusetts' operations. On August 4, 1998, Vestcom, acquired
substantially all of the assets of Graphic Technology Systems, Inc. ("GTS"). The
operations of GTS were consolidated into Vestcom's Retail Solutions' operations.
On October 30, 1998, Vestcom acquired substantially all of the assets of Manus
Services Corporation ("Manus"), a company based in Seattle, Washington. The
Acquired 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. Acquired Companies),
which have influenced, among other things, the Acquired Companies historical
levels of owners' compensation. In connection with the acquisition of the
Acquired Companies, these owners and certain key employees agreed to certain
reductions in their compensation which commenced as of the date of acquisition.
Vestcom's Consolidated Balance Sheet as of December 31, 1998 includes
the Founding Companies and Vestcom Rhode Island, Inc., Vestcom Canada, CDS, BME,
Dee Cee, GTS and Manus. The results of operations and statement of cash flows
for the year ended December 31, 1998, include the results of Vestcom and all of
the companies acquired in 1997 for the entire period, and the companies acquired
in 1998 from their respective dates of acquisition.
In connection with Vestcom's acquisitions, Vestcom has made certain
earnout payments and may be required to pay an additional earnout if specified
revenue thresholds, margins or earnings are attained during the period ending
July 31, 1999. In connection with a determination of earnouts for two of the
Founding Companies, in April 1998, Vestcom paid $1,278,000 in cash, incurred an
obligation to pay $1,160,000 in cash and issued an aggregate of 304,779 shares
of Common Stock. The Company paid $580,000 of the $1,160,000 obligation in
September 1998 and the remaining $580,000 in March 1999.
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<PAGE>
In February 1999, Vestcom paid $375,984 and in March 1999, issued an
aggregate of 228,216 shares of Common Stock in connection with the determination
of an earnout for another Founding Company. In March 1999, Vestcom paid
$325,000, issued a note payable for $612,500 at 5% interest due in January, 2000
and issued an aggregate of 40,000 shares of Common Stock in connection with the
determination of an earnout of an acquired company. After the April 1998,
September 1998, February 1999 and March 1999 payments, the aggregate maximum
earnout payments which Vestcom may be required to make going forward are
$650,000 in cash. Any payments of earnouts will increase the goodwill recorded
for the acquisition of the applicable company. The amortization of any
additional goodwill and the increased number of shares issued in connection with
earnouts will negatively affect Vestcom's future earnings per share.
Vestcom, which conducted no operations prior to the consummation of the
Offering other than in connection with the acquisitions of the Founding
Companies and the financing activities related thereto, including the Offering,
had no revenues and limited corporate expenses in the first seven months of
1997. Therefore, Management's Discussion and Analysis based on actual results
would compare twelve months of operating activity in 1998 to five months of
operating activity in 1997 to no operating activity in 1996. Accordingly,
management believes that Management's Discussion and Analysis would only be
meaningful based on a comparison of the audited Results of Operations of Vestcom
for the year ended December 31, 1998, to the unaudited Pro Forma Results of
Operations of Vestcom for the years ended December 31, 1997 and December 31,
1996. The unaudited pro forma data give effect to: (i) the acquisitions of the
Founding Companies and Vestcom Rhode Island and Vestcom Canada; and (ii)
compensation and other adjustments for all transactions as if the transactions
had occurred on January 1, 1997 and January 1, 1996, respectively.
The following discussion of Pro Forma Results of Operations is not
necessarily indicative of the results Vestcom would have obtained had all of
these acquisitions actually then occurred or of Vestcom's actual or future
results.
<TABLE>
<CAPTION>
Actual Unaudited Pro Forma
(Audited) Results of Operations
(in thousands) (in thousands)
-------------- ---------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 108,676 $ 79,273 $ 71,201
Gross profit $ 39,882 $ 29,531 $ 24,511
Selling, general & administrative expenses $ 30,955 $ 18,984 $ 17,008
Income from operations $ 8,927 $ 8,418 $ 5,524
</TABLE>
Results of Operations
Year Ended December 31, 1998 Compared to Unaudited Pro Forma
Year Ended December 31, 1997 ($ in 000's)
Revenues increased $29,403, or 37.1%, from pro forma $79,273 for the
year ended December 31, 1997 to $108,676 for the year ended December 31, 1998.
This increase was primarily attributable to acquisitions which accounted for
$22,173 or 28% of 1998 revenues and $7,230 or 9% internal growth over 1997
revenues. This internal growth was due to increased sales to new and existing
customers primarily in the financial services and retail markets.
Vestcom's gross profit increased $10,351, or 35.1%, from pro forma
$29,531 for the year ended December 31, 1997 to $39,882 for the year ended
December 31, 1998. This increase was primarily attributed to acquisitions which
accounted for approximately $8,242 with the remaining increase relating to the
increased volume of business. The gross profit margin decreased from 37.3% in
1997 to 36.7% in 1998 primarily due to the renegotiation of certain capital
lease obligations with one of Vestcom's vendors which reclassified certain of
the obligations from capital leases to operating leases. This transaction
resulted in expense being moved from Interest Expense to Cost of Revenue thereby
reducing the gross profit in 1998.
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<PAGE>
Selling, general and administrative expenses increased $11,971, or
63.1%, from pro forma $18,984 for the year ended December 31, 1997 to $30,955
for the year ended December 31, 1998. As a percentage of revenues, selling
general and administrative expenses increased from 23.9% in 1997 to 28.5% in
1998. The increase was attributable in part to acquisitions which accounted for
approximately $4,900, or 41% of the total increase. The remaining increase in
selling, general and administrative expenses was primarily due to increased
compensation expense including increased commissions on higher sales, increased
staffing for new technical and administrative personnel to support the greater
volume of business, increased spending in sales and marketing programs and the
costs associated with the increased Vestcom corporate management staff. The
majority of the expenses of the Vestcom corporate staff operations did not come
into existence until after the consummation of the initial public offering in
August of 1997. In addition, the Company incurred costs in connection with its
efforts to integrate its acquired companies. These costs included redundant
overhead and facility costs. The Company expects that it will continue to incur
such costs in future periods in connection with its integration process.
Pro Forma Year Ended December 31, 1997 Compared to
the Pro Forma Year Ended December 31, 1996 ($ in 000's)
Pro forma revenues increased $8,072 or 11.3% from $71,201 for the year
ended December 31, 1996 to $79,273 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 or 20.5% from $24,511 for the
year ended December 31, 1996 to $29,531 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
or 11.6% from $17,008 for the year ended December 31, 1996 to $18,984 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 or 52.4% from $5,524
for the year ended December 31, 1996 to $8,418 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
Vestcom's actual results of operations and financial position for the periods
discussed.
On August 4, 1997 Vestcom consummated its 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 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
$35,000,000 was used for the cash portion of Vestcom's acquisitions and
approximately $12,000,000 was used for the repayment of debt and capital leases.
At December 31, 1998, Vestcom had working capital of approximately
$3,745,000 as compared to $17,147,000 at December 31, 1997. The decrease is
primarily attributed to acquisitions. Net cash provided by operating activities
for the year ended December 31, 1998, was approximately $15,264,000 and was
generated primarily from net income and depreciation and amortization charges.
Net cash used in investing activities for the year ended December 31, 1998, was
approximately $28,731,000 which consisted of approximately $13,134,000 generated
from the sale of marketable securities, approximately $30,422,000 of cash used
for acquisitions, and approximately $11,605,000 used for the purchase of
property and equipment. Net cash provided by financing activities for the year
ended December 31, 1998, was approximately $13,559,000 which included
approximately
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<PAGE>
$11,006,000 from net borrowings and $2,552,000 from the issuance of Common Stock
to former stockholders of certain of the Founding Companies in connection with
earnout provisions.
On August 13, 1997, Vestcom and Summit Bank entered into an Equipment
Loan and Revolving Credit Agreement ("the Credit Facility") in the amount of
$30,000,000. On December 31, 1998, approximately $12,300,000 was outstanding and
$17,700,000 remained available under the Credit Facility.
Vestcom incurs postage costs on behalf of customers of approximately
$4,000,000 to $6,000,000 each month. Vestcom seeks to collect such postage costs
from its customers in advance. At December 31, 1998, Vestcom had postage
advances from customers in the amount of approximately $5,200,000 and had
prepaid postage and postage receivables of approximately $3,200,000. To the
extent Vestcom 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 $11,605,000 for property and
equipment and leasehold improvements were made in 1998. These investments, which
were financed primarily by working capital and vendor financing, relate to the
facility consolidations of certain of the Acquired Companies and the purchase of
supplemental production equipment to meet customer demands for business critical
documents. There are anticipated requirements for future capital expenditures in
1999 for 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 equipment needs of the business.
At this time, these expenditures are estimated to be approximately $5,000,000.
While no assurance can be given, management believes that its 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 preceding sentence constitutes a forward looking statement.
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 units have completed the awareness and assessment
phases. Remediation, validation and implementation were near completion in all
units at the end of 1998. Full validation and implementation is scheduled to be
complete by July 1999. Since each Vestcom unit uses many different kinds of
computers, procedures to implement year 2000 corrections vary greatly. Each unit
has a plan to test all year 2000 changes during the first half 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. Since Vestcom processes data
prepared by its customers, and does not have extensive date dependent
proprietary software to repair or replace, management believes that the required
changes to Vestcom's systems will not be 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 all vendors have either repaired, replaced or are in the
process of upgrading hardware and software installed at Vestcom. Most of the
changes are complete, with some work to be completed during the first quarter of
1999. 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
-21-
<PAGE>
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 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 $300,000 for this project
during 1998, of which about $100,000 was incremental expense. Major planned
costs in 1999 are to cover the replacement of billing software and PC hardware.
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. 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, 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
an 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.
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.
Vestcom is currently evaluating the Year 2000 readiness of the business
and assets acquired from Conversion Printing Systems, Inc. ("CPS") as of
February 12, 1999. As such the above discussion does not reflect the impact of
CPS.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Vestcom's major "market risk" exposure is the effect of changing
interest rates. Vestcom manages its interest expenses by using a combination of
fixed and variable rate debt. At December 31, 1998, Vestcom's debt consisted of
approximately $8,924,000 of fixed-rate debt with a weighted average interest
rate of 7.55% and $10,000,000 of variable-rate debt with a weighted average
interest rate of 6.79%. The amount of variable-rate debt fluctuates during the
year based on Vestcom's cash requirements; maximum borrowings at any quarter end
during 1998 were $10,000,000. If interest rates on such variable debt were to
increase by 200 basis points (two-tenths of the rate at December 31, 1998), the
net impact of Vestcom's results of operations and cash flows would be
immaterial.
-22-
<PAGE>
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, 1998 and 1997 F-2
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997, and for the period
from inception (September 19, 1996) to December 31, 1996 F-3
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998 and 1997, and for the
period from inception (September 19, 1996) to December 31, 1996 F-4
Vestcom International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997
and for the period from inception (September 19, 1996)
to December 31, 1996 F-5
Vestcom International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements F-6
-23-
<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, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
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 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 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, 1998 and 1997 and the
results of their operations and their cash flows for the years ended December
31, 1998 and 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
March 1, 1999
F-1
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $3,887,971 $4,092,000
Marketable securities 360,480 13,494,886
Accounts receivable, net of allowance for
doubtful accounts of $1,123,581 and $354,952 in 1998 and 1997,
respectively 21,190,379 13,999,511
Supplies inventory 4,476,122 2,221,725
Prepaid expenses and other current assets 5,076,807 3,855,122
----------------- ----------------
Total current assets 34,991,759 37,663,244
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation and amortization 27,576,892 21,684,918
GOODWILL, net 79,192,856 54,336,937
OTHER ASSETS 782,729 660,660
----------------- ----------------
Total assets $ 142,544,236 $ 114,345,759
================= ================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-2
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
LIABILITIES & STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Current portion of long term debt $ 642,307 $ 191,184
Current portion of capital lease obligations 1,689,238 2,435,994
Accounts payable 10,761,607 4,780,082
Accrued expenses 17,272,370 11,698,803
Income taxes payable 493,394 1,210,235
Other current liabilities 387,635 199,653
------------- -------------
Total current liabilities 31,246,551 20,515,951
LONG-TERM DEBT 12,847,319 38,835
CAPITAL LEASE OBLIGATIONS 3,745,435 7,894,737
DEFERRED CHARGES & OTHER LIABILITIES 457,693 1,427,037
DEFERRED INCOME TAXES 4,335,898 1,441,373
------------- -------------
Total liabilities 52,632,896 31,317,933
STOCKHOLDERS' EQUITY:
Preferred Stock
Class A convertible, no shares issued and outstanding at December 31, 1998; 200
shares authorized, issued and outstanding at December 31, 1997 -- --
Class B 1 share authorized, issued and outstanding at December 31, 1998 and
December 31, 1997 2,651,867 2,651,867
Class C convertible, 100 shares authorized, issued and outstanding at December 31,
1998 and December 31, 1997 -- --
Common stock, no par value; 20,000,000 shares authorized: 8,788,590 shares issued
and outstanding at December 31, 1998; 8,483,811 shares issued and outstanding at
December 31, 1997 86,782,015 84,229,597
Retained earnings (accumulated deficit) 857,367 (3,770,054)
Accumulated Other Comprehensive Income (379,909) (83,584)
------------- -------------
Total stockholders' equity 89,911,340 83,027,826
------------- -------------
Total liabilities & stockholders' equity $ 142,544,236 $ 114,345,759
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND FOR
THE PERIOD FROM INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES $ 108,675,572 $ 29,777,283 $ -
COST OF REVENUES 68,793,382 18,317,401 -
---------------- ---------------- --------------
Gross Profit 39,882,190 11,459,882 -
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 30,955,177 8,789,000 1,633,042
---------------- ---------------- --------------
Income (loss) from operations 8,927,013 2,670,882 (1,633,042)
OTHER INCOME (EXPENSE)
Interest Expense (796,251) (660,607) (3,444,917)
Interest income and other, net 243,432 603,685 -
---------------- ---------------- --------------
(552,819) (56,922) (3,444,917)
Income (loss) before provision for income
taxes 8,374,194 2,613,960 (5,077,959)
PROVISION FOR INCOME TAXES 3,746,773 1,306,055 -
---------------- ---------------- --------------
Net income (loss) $ 4,627,421 $ 1,307,905 $ (5,077,959)
================ ================ ===============
Net income per share-basic $ 0.52 $ 0.31
================ ================
Net income per share - diluted $ 0.52 $ 0.29
================ ================
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND FOR THE PERIOD FROM
INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
--------------------------- ------------------------- --------------
<S> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK 791,346 $ 39,965 $ $
ISSUANCE OF COMMON STOCK 503,846 5,441,536 (279,082)
NET LOSS
TOTAL COMPREHENSIVE INCOME
--------- ----------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 1,295,192 5,481,501 (279,082)
========= =========== ======== =========== ============
SHARES RETURNED (170,856) (1,363,745)
SHARES RETURNED (54,656) (436,255)
INITIAL PUBLIC OFFERING NET OF
UNDERWRITING DISCOUNTS 4,427,500 53,528,475
ISSUANCE OF STOCK TO FOUNDING
COMPANIES, NET OF DISCOUNT 2,852,111 24,555,061 301 2,651,867
PAYMENT OF SUBSCRIPTIONS RECEIVABLE 279,082
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH ACQUISITIONS, NET OF
DISCOUNT 134,520 2,464,560
TRANSLATION ADJUSTMENT
NET INCOME
TOTAL COMPREHENSIVE INCOME
--------- ----------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1997 8,483,811 84,229,597 301 2,651,867 -
========= =========== ======== =========== ============
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH EARNOUTS 304,779 2,552,418 (200)
TRANSLATION ADJUSTMENT
NET INCOME
TOTAL COMPREHENSIVE INCOME
--------- ----------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1998 8,788,590 $86,782,015 101 $ 2,651,867 $ -
========= =========== ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
EARNINGS/ OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
DEFICIT INCOME EQUITY INCOME
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK $ $ $ 39,965
ISSUANCE OF COMMON STOCK 5,162,454
NET LOSS (5,077,959) (5,077,959) (5,077,959)
----------
TOTAL COMPREHENSIVE INCOME (5,077,959)
---------- ------------ ----------- ==========
BALANCE AT DECEMBER 31, 1996 (5,077,959) 124,460
========== ============ ===========
SHARES RETURNED (1,363,745)
SHARES RETURNED (436,255)
INITIAL PUBLIC OFFERING NET OF
UNDERWRITING DISCOUNTS 53,528,475
ISSUANCE OF STOCK TO FOUNDING
COMPANIES, NET OF DISCOUNT 27,206,928
PAYMENT OF SUBSCRIPTIONS RECEIVABLE 279,082
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH ACQUISITIONS, NET OF
DISCOUNT 2,464,560
TRANSLATION ADJUSTMENT (83,584) (83,584) (83,584)
NET INCOME 1,307,905 1,307,905 1,307,905
----------
TOTAL COMPREHENSIVE INCOME 1,224,321
---------- ------------ ----------- ==========
BALANCE AT DECEMBER 31, 1997 (3,770,054) (83,584) 83,027,826
========== ============ ===========
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH EARNOUTS 2,552,418
TRANSLATION ADJUSTMENT (296,325) (296,325) (296,325)
NET INCOME 4,627,421 4,627,421 4,627,421
----------
TOTAL COMPREHENSIVE INCOME 4,331,096
---------- ------------ ----------- ==========
BALANCE AT DECEMBER 31, 1998 $ 857,367 $ (379,909) $89,911,340
========== ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 19, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 4,627,421 $ 1,307,905 $ (5,077,959)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 6,058,897 1,926,638 --
Provision for losses on accounts receivable 276,984 16,000 --
Discount on issuance of stock -- -- 5,074,233
Loss on disposal of equipment 176,796 -- --
Changes in operating assets (increase) decrease in-
Accounts receivable (2,685,871) (1,287,591) --
Supplies inventory (630,508) (257,568) --
Prepaid expenses and other current assets (798,498) 942,222 (392,664)
Other assets (93,408) (277,160) --
Changes in operating liabilities increase (decrease) in-
Accounts payable 4,065,253 (382,210) --
Accrued expenses 3,530,742 3,848,609 320,230
Income taxes payable and other current liabilities (1,188,715) 753,590 --
Deferred charges & other liabilities 1,925,181 1,681,842 --
----------- ----------- ----------
Net cash provided by (used in) operating activities 15,264,274 8,272,277 (76,160)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (11,604,831) (2,130,356) --
Proceeds from sale of assets 161,225 -- --
Acquisition of businesses, net of cash acquired (30,421,549) (60,602,754) --
Sale (purchase) of marketable securities 13,134,406 (13,494,886) --
----------- ----------- ----------
Net cash provided by (used in) investing activities (28,730,749) (76,227,996) --
CASH FLOWS FROM FINANCING ACTIVITIES
Collection of subscriptions receivable -- 279,082 --
Proceeds on borrowings 30,963,889 -- 1,292,732
Repayment of debt (19,957,536) (10,892,500)
Issuances of common stock 2,552,418 78,748,096 128,186
Issuances of preferred stock -- 2,651,867 --
----------- ----------- ----------
Net cash provided by (used in) financing activities 13,558,771 70,786,545 1,420,918
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (296,325) (83,584) --
----------- ----------- ----------
NET (DECREASE) INCREASE IN CASH (204,029) 2,747,242 1,344,758
CASH, beginning of period 4,092,000 1,344,758 --
------------ ------------ ------------
CASH, end of period $ 3,887,971 $ 4,092,000 $ 1,344,758
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligation incurred (renegotiated) $ (4,054,104) 1,155,456 --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest 775,028 638,179 --
Cash paid for income taxes 3,324,054 729,224 --
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<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 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.
On August 4, 1997, Vestcom consummated its 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 $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 document management services
industry (collectively the "Founding Companies"). The aggregate consideration
paid by the Company to acquire the Founding Companies was, subject to working
capital adjustments and certain additional earnouts, approximately $19.1 million
in cash and 3,156,890 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 issued simultaneously with the initial public offering 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. For purposes
of computing the estimated purchase price for accounting purposes, the value of
the shares issued in connection with earnout payments made during 1998 was
determined using a discount factor of 15% from the then current market price at
the date of the earnout determination due to restrictions on the sale and
transferability of the shares issued. The acquisitions resulted in goodwill of
approximately $56.3 million which is being amortized over 30 years, and is based
on allocations of the purchase price to the net assets acquired.
On November 14, 1997, the Company acquired substantially all of the
assets of Rhode Island based New England Laser Printing, Inc. (now known as
Vestcom Rhode Island, Inc.). On December 15, 1997, the Company acquired the
stock of Moreau Promotional Services, Inc., (now doing business as Vestcom
Canada), 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 $9,600,000.
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.
In January 1998, the Company acquired substantially all the assets of
Creative Data Services ("CDS") and D.B. Acquisition, Inc. (doing business as
Business Mail Express, "BME"). In April 1998, the Company acquired
F-6
<PAGE>
substantially all the assets of Dee Cee Graphics, Inc. and in August 1998, the
Company acquired substantially all the assets of Graphic Technology Systems,
Inc. ("GTS"). In October 1998, the Company acquired substantially all the assets
of Manus Services Corporation.
The aggregate price paid for these acquisitions, including certain
earn-out payments made in 1999, was approximately $17,100,000 in cash plus the
Company issued a note payable for $612,500 payable in January, 2000 bearing
interest at 5%, a note payable for $1,150,000 payable in March, 2001 bearing
interest at 5%, and an aggregate of 40,000 shares of Common Stock, plus incurred
a potential future obligation to pay an additional $650,000 in cash due to an
earnout. The estimated goodwill associated with these acquisitions, including
provisions for earnouts, aggregated approximately $16,400,000. All the above
acquisitions have been accounted for as purchases.
Set forth below is unaudited pro forma financial information for the
twelve months ended December 31, 1998 and December 31, 1997. The unaudited pro
forma data give effect to: (i) the acquisitions of the Founding Companies and
all subsequent acquisitions in 1997 and 1998; and (ii) compensation and other
adjustments for all transactions as if the transactions had occurred on January
1, 1998 and January 1, 1997 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, 1998 December 31, 1997
----------------- -----------------
(Unaudited, in thousands, except per share data)
<S> <C> <C>
Revenues..................................... $ 118,453 $ 111,405
Income from operations....................... $ 9,569 $ 8,967
Net income................................... $ 5,030 $ 4,734
Earnings per share: basic.................... $ .56 $ .53
diluted.................. $ .56 $ .53
</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.
Supplies Inventory
Supplies inventory consists of paper, vinyl, laminating materials,
toner, developer and other items including, film, compact discs and micrographic
materials, 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.
<PAGE>
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" ("SFAS 128"). 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
adopted the statement on December 31, 1997. The following is the computation of
earnings per share:
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1998 December 31, 1997
----------------- -----------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income/weighted average
shares outstanding $ 4,627,421 8,904,371 $ .52 $ 1,307,905 4,157,891 $ .31
----------- ----------- ------------- ----------- ----------- -------------
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 4,627,421 8,904,371 1,307,905 4,157,891
Goodwill adjustment on earnouts (4,385) (59,284)
Assumed earned shares
by Acquired Companies 66,245 149,383
Options 3,887 34,092
----------- ----------- ------------- ----------- ----------- -------------
Net income/average weighted shares
outstanding adjusted for assumed
conversions to common stock $ 4,623,036 $ 8,974,503 $ .52 $ 1,248,621 4,341,366 $ .29
=========== =========== ============= =========== =========== =============
</TABLE>
Options on approximately 126,164 and 18,294 shares of Common Stock were
not included in computing diluted earnings per share in 1998 and 1997,
respectively, because their effects were antidilutive.
Foreign Currency
In accordance with Statement of Financial Accounting Standards 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 $296,325 and $83,584 for the years
ended December 31, 1998 and 1997, respectively.
<PAGE>
Comprehensive Income
Statement of Financial Accounting Standards Number 130, "Reporting
Comprehensive Income" ("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. The Company has adopted this standard as
of January 1, 1998.
The following represents comprehensive income:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 4,627,421 $ 1,307,905 $(5,077,959)
Foreign Currency Translation Adjustment (296,325) (83,584) -
------------- ------------ ------------
Comprehensive Income $ 4,331,096 $ 1,224,321 $(5,077,959)
============= ============ ============
</TABLE>
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 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,
1998 and 1997 was $3,122,588 and $688,641 respectively.
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, retail, telecommunications, pharmaceutical,
health care, travel and leisure, publishing 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 Accounting Standards Executive Committee (AcSec) issued SOP 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," in March, 1998. The objective of the SOP is to provide guidance
that specifically addresses the accounting for the costs related to developing,
obtaining, modifying and/or implementing internal use software. SOP 98-1 is
intended to eliminate the diversity in practice that exists in the accounting
for internal use software and improve financial reporting for what has become a
significant unrecorded asset for many companies. AcSec believes that the costs
of computer software developed or obtained for internal use are specifically
identifiable, have determinate lives, relate to probable future economic
benefits, and meet the criteria for recognition as an asset in the financial
statements. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998 and should be applied prospectively to all
costs incurred in connection with internal use software development projects in
those fiscal years including costs incurred subsequent to adopting the SOP on
projects that commenced in earlier years.
<PAGE>
Management believes that upon initial adoption of SOP 98-1 there will
be the effect of increasing gross profit, income from operations, net income and
earnings per share due to the capitalization of certain costs previously charged
to expense. Generally, however, management believes the effect will not be
material due to the increased amortization expense on capitalized costs
consistent with SOP 98-1.
In April 1998, AcSec issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This SOP provides guidance on the financial reporting of
start-up costs and organization costs. It requires the costs of start-up
activities and organization costs to be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. Management believes that the adoption of SOP No. 98-5 will not have a
material impact on its financial statements.
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:
1998 1997
---- ----
Commercial paper.................. $ - $ 1,540,439
Money market funds................ 360,480 4,454,447
Taxable auction rate securities
with maturities at 1-28 days..... - 7,500,000
---------- -----------
$ 360,480 $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
Beginning of Balance Costs and Balance at End of
Period Acquired Expenses Write-offs Period
------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Twelve Months Ended December 31, 1998
Allowance for doubtful accounts $ 354,952 $ 625,413 $ 276,984 $ 133,768 $ 1,123,581
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
Allowance for doubtful accounts $ - $ - $ - $ - $ -
</TABLE>
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following at
December 31:
1998 1997
---- ----
Prepaid postage...................... $ 2,613,644 $ 2,340,522
Postage receivable................... 582,353 345,088
Other ............................ 1,880,810 1,169,512
------------- ------------
$ 5,076,807 $ 3,855,122
============= ============
<PAGE>
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31: Estimated
Useful Lives
1998 1997 (Years)
---- ---- -------
Machinery, equipment and software. 27,389,658 20,550,474 5-10
Furniture and fixtures............ 919,506 745,875 10
Leasehold improvements............ 3,770,685 1,626,566 2-7
----------- -----------
32,079,849 22,922,915
Less - Accumulated depreciation
& amortization.................... (4,502,957) (1,237,997)
----------- -----------
Property and equipment, net....... $27,576,892 $21,684,918
=========== ===========
Leased equipment under capital leases (included above) consists of the following
at December 31:
1998 1997
---- ----
Equipment........................... $ 6,941,155 $ 13,028,202
Less - Accumulated amortization..... (1,383,697) (961,952)
------------- -------------
$ 5,557,458 $ 12,066,250
============= =============
Depreciation and amortization expense on property and equipment charged
to operations for the years ended December 31, 1998 and 1997 was $3,624,950 and
$1,237,997, respectively. Equipment decreased due to the renegotiation of
certain capital lease obligations with one of Vestcom's vendors which
reclassified the leases from capital lease to operating lease status. This had
the effect of removing assets previously capitalized and recording the
obligation payments as rent expense.
At December 31, 1998 minimum annual payments under capital leases are as
follows:
1999.................................................. $ 1,689,238
2000.................................................. 1,583,540
2001.................................................. 1,455,427
2002.................................................. 688,349
2003 and thereafter................................... 18,119
------------
Total minimum payments excluding interest............. 5,434,673
Less - Current portion of capital lease obligations... 1,689,238
------------
Long-term portion of capital lease obligations........ 3,745,435
============
Interest payments for term of capital leases.......... $ 885,688
============
The interest rates on the capitalized leases range from 3.7% to 12.8%
and are imputed based on the fair market value of the equipment at the inception
of the lease.
8. ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31:
1998 1997
---- ----
Accrued payroll and payroll related expenses....$ 2,217,630 $ 1,476,526
Accrued professional fees....................... 387,501 815,670
Acquisition related liabilities................. 5,593,047 2,890,764
Advanced postage................................ 5,201,833 4,877,691
Other........................................... 3,872,359 1,638,152
------------- -------------
$ 17,272,370 $ 11,698,803
============= =============
<PAGE>
9. DEBT:
Long-term obligations
<TABLE>
<CAPTION>
Long-term obligations consist of the following:
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Revolving credit line (a).............................. 10,000,000 -
Equipment notes payable to a bank and 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.................... 38,835 112,836
Equipment loans payable to a bank at interest
rate of 6.53% with monthly payments of
$29,953 through September 2002(a)................. 1,347,877 -
Equipment loans payable to a bank at interest
rate of 6.70% with monthly payments of
$20,337 through November 2002(a).................. 952,914 -
Notes payable to seller of an acquired company at
interest rate of 5% due on March 31, 2001......... 1,150,000 -
------------- ----------
13,489,626 230,019
Less current maturities........................... 642,307 191,184
------------- ----------
$ 12,847,319 $ 38,835
============= ==========
</TABLE>
Maturities of Long-Term Obligations
As of December 31, 1998, maturities of long-term obligations are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Years Ending December 31:
1999................................................... $ 642,307
2000................................................... $ 10,603,472
2001................................................... $ 1,753,472
2002................................................... $ 490,375
2003 and thereafter.................................... -
-------------
Total.................................................. $ 13,489,626
=============
</TABLE>
(a) 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 (6.25% at
December 31, 1998). The Agreement is subject to various covenant restrictions,
the most restrictive of which requires tangible net worth to be a minimum of 10%
of stated net worth. At December 31, 1998 there was approximately $2,300,000
outstanding related to equipment loans, $10,000,000 outstanding on the revolving
credit line and approximately $17,700,000 remained available under this credit
facility.
<PAGE>
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,
as estimated for accounting purposes.
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 (now known as Vestcom
Wisconsin, 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 selling
shareholders of 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. In April
1998, in connection with a determination of the earnout for Electronic Imaging
Services, all of the outstanding shares of Class A Convertible Preferred Stock
were converted into shares of Common Stock.
On August 4, 1997, Vestcom consummated its 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.
In April 1998, the Company issued 304,779 shares of common stock in
connection with a determination of earnouts for two of the Founding Companies.
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 286,150 shares of Common Stock were outstanding under
the Stock Option Plan including (i) options to purchase 10,000 shares of common
stock which were granted to each non-employee director, (ii) options to purchase
15,000 shares of common stock which were granted to a former director and
employee of the Company, and (iii) options to purchase
<PAGE>
an additional 231,150 shares of Common Stock which were granted to employees of
the Company and its subsidiaries. All of these options expire ten years after
the date of grant (except for one grant of an option to purchase 15,000 shares
of Common Stock, 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. In November 1997, an additional 2,900
options were granted to employees.
During 1998, options to purchase 252,800 shares of Common Stock, each
with an exercise price equal to the fair market value of the Common Stock on the
date of grant were granted. All of these options expire ten years after the date
of grant and are exercisable annually in 25% increments beginning with the first
anniversary of the date of grant, except for (i) options to purchase 30,000
shares of Common Stock granted to non-employee directors which become fully
exercisable one year after the date of grant, and (ii) an aggregate of options
to purchase 10,000 shares of Common Stock which were granted in October and
November, 1998, which are exercisable annually in 20% increments beginning with
the first anniversary of the date of grant.
Options Outstanding
-------------------
Shares Weighted Average Exercise
Price Per Share
Balance at Inception - $ -
Granted - -
--------- ------
Balance at December 31, 1996 - $ -
Granted 404,050 14.61
Exercised - -
--------- ------
Balance at December 31, 1997 404,050 $14.61
Granted 252,800 9.49
Cancelled (100,000) 21.63
Forfeited (45,400) 11.60
Exercised - -
--------- ------
Balance, December 31, 1998 511,450 $12.09
========= ======
Exercisable, December 31, 1998 69,188 $13.21
========= ======
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 these notes
to consolidated financial statements.
The weighted average fair value of options granted in 1998 at market
value was $5.24. The weighted average exercise price of options granted in 1998
at market value was $9.49.
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:
1998 1997
---- ----
Risk-Free Interest Rate 5.7% 6.5%
Expected Lives 7-10 years 10 years
Expected Volatility 32.8% 23.0%
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Number of Weighted
Options Average
Outstanding Remaining Weighted
at December 31, Contractual Average
Range of Exercise Price 1998 Life (years) Exercise Price
- ----------------------- ----------------- -------------- ----------------
<S> <C> <C> <C>
$7.38-$8.88 100,000 9.59 $ 8.35
$9.38-$10.13 135,100 9.30 9.90
$13.00-$18.88 276,350 8.60 13.37
-------- ----- ---------
511,450 8.85 $ 12.09
</TABLE>
Had compensation expense for all stock options granted in 1998 and 1997
been determined consistent with SFAS No. 123, the Company's net income and
income per share would have been as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Net Income: As Reported $ 4,627,421 $ 1,307,905
Pro Forma $ 3,928,865 $ 1,116,821
Net Income Per Share: As Reported - basic $ .52 $ .31
Pro Forma - basic $ .44 $ .27
As Reported - diluted $ .52 $ .29
Pro Forma - diluted $ .44 $ .24
</TABLE>
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.
Effective on January 1, 1998, the Company established a new defined
contribution 401K plan and merged all of the U.S. companies' plans into the
newly adopted plan. Substantially all employees are eligible to participate in
the plan and are permitted to contribute between 1% and 15% of their annual
salary. The Company makes matching contributions on behalf of the employees. The
company offers no post-employment or post-retirement benefits. The expense
incurred related to the 401K plan for the year ended December 31, 1998 was
$419,047.
13. INCOME TAXES:
The provision for federal and state income taxes consists of the following:
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
------------------- -------------------
Federal $ 3,060,007 $ 1,012,191
State 686,766 293,864
----------- -----------
$ 3,746,773 $ 1,306,055
=========== ===========
<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>
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Tax at statutory rate $ 2,847,226 $ 888,746
Add (deduct)--
State Income taxes 453,266 193,950
Non deductible expenses
(primarily goodwill) 446,281 223,359
------------ -------------
$ 3,746,773 $ 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, goodwill and other non-deductible accruals.
The components of deferred income tax assets and liabilities, are as follows:
December 31,
------------
1998 1997
---- ----
Deferred tax assets
Allowance for doubtful accounts $ 270,605 $ 141,981
------------ -------------
Total deferred tax assets 270,605 141,981
Deferred tax liabilities
Accumulated depreciation 3,245,979 477,798
Cash to accrual differences 717,542 1,320,500
Goodwill 208,058 14,986
Other 494,444 250,528
------------ -------------
Total deferred liabilities 4,666,023 2,063,812
------------ -------------
Net deferred liability $ 4,395,418 $ 1,921,831
============ =============
Included in other current liabilities at December 31, 1998 and 1997 was
$59,520 and $480,458 respectively, which represented the current portion of
deferred income tax liabilities.
14. LEASE COMMITMENTS
The Company and its subsidiaries lease various office buildings,
machinery, equipment, and vehicles under operating leases expiring at various
dates through 2004. Most of the real property leases have escalation clauses
related to increases in real property taxes. The approximate future minimum
lease payments under operating leases are as follows:
Operating
Years Ending December 31 Leases
- ------------------------ ------------
1999................................................................$ 5,601,000
2000................................................................ 4,442,000
2001................................................................ 3,495,000
2002................................................................ 2,993,000
2003................................................................ 2,403,000
Thereafter.......................................................... 16,361,000
------------
Total minimum lease payments........................................$ 35,295,000
============
Rent expense for all operating leases for the twelve months ended
December 31, 1998 and 1997 and the period from inception (September 19, 1996) to
December 31, 1996 was approximately $5,600,000, $1,436,000, and $5,000
respectively.
<PAGE>
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 (now know as Vestcom Mid-Atlantic, Inc.)
("VMA") in Lyndhurst, New Jersey. The partnership leases the property to VMA.
The current lease expires in 2001. VMA's related party rent expense for this
property for the year ended December 31, 1998 was $397,000 and from August 1,
1997 to December 31, 1997 was $232,000. Due to contractual obligations and
increased space utilization the current annual rent is $450,000 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 former director and employee of the Company owns interests ranging
from 75% to 100% in the partnerships which own the properties leased by VMA in
Dover, New Jersey and previously leased in Scranton, Pennsylvania. The current
leases expire at various times from 1998 through 2004. VMA's related party rent
expense for these properties for the year ended December 31, 1998 was $605,000,
and for the period from August 1, 1997 through December 31, 1997 was $286,000.
Pursuant to a written agreement with the owners, the lease obligations will
cease in August of 1999 if certain conditions are met. Based on the foregoing
agreement, the current annual rent for all these properties for 1999 is expected
to be $365,000 (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. (now known as Vestcom
Wisconsin, Inc.)("Vestcom Wisconsin"), own the property leased to and used by
Vestcom Wisconsin, in Milwaukee, Wisconsin. The lease will expire in 2002
subject to an option to renew the lease for an additional five years. Vestcom
Wisconsin's related party rent expense for these properties for the year ended
December 31, 1998 was $222,000 and for the period from August 1, 1997 to
December 31, 1997 was $94,000 inclusive of building operating costs. The rent
payable by Vestcom Wisconsin under the lease is $225,000 per year, triple net,
which the Company believes to be the fair market rental value of the property.
One officer of Manus Services Corporation ("Manus") owns twelve and
one-half percent of the property leased to Manus through December 1998. The
property is leased to Manus on a month to month basis at $32,000 per month.
Manus' related party rent expense for this property for the two months ended
December 31, 1998 was $65,000.
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
was reflected in deferred offering costs. 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.
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 which has been paid in full. In
addition, Vestcom reimbursed Oppenheimer $75,000 for out-of-pocket expenses
related to such services.
<PAGE>
Certain executives of the Company have each entered into employment
agreements and/or change-in-control 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. In general, the change-in-control
agreements provide that, in the event of a termination of employment, upon the
occurrence of certain events, such employee will be entitled to receive an
amount in cash equal to twice the employee's then current annual base salary and
bonus.
Earnouts
Certain of the Founding Companies were eligible to earn additional
amounts, consisting of a combination of cash and securities, as adjustments to
the purchase prices paid for those companies. In April, 1998, in connection with
the earnouts of two Founding Companies, the Company issued 304,779 shares of
common stock, paid $1,278,000 in cash and incurred a future obligation to pay
$1,160,000 in cash of which $580,000 was paid at September 31, 1998 and $580,000
of which was paid in March 1999. The Company also recorded an accrual at
December 31, 1998 for the estimated earnouts of two additional companies for
approximately $1,315,000 of cash and 268,216 shares of common stock.
17. Subsequent Events
Acquisition
As of February 12, 1999 the Company acquired substantially all of the
assets of Conversion Printing Systems, Inc. ("CPS"). For the twelve months
ending December 31, 1998, CPS' revenues were approximately $8 million, of which
approximately 60% were derived from sales to Vestcom operating units.
Lease
In January, 1999 Vestcom entered into a 15 year lease commencing June
1, 1999, for executive office, production and warehouse space, aggregating
approximately 210,000 square feet.
Earnouts
In February 1999, Vestcom paid $375,984 and in March 1999, issued an
aggregate of 228,216 shares of Common Stock in connection with the determination
of an earnout for another Founding Company. In March 1999, Vestcom paid
$325,000, issued a note payable for $612,500 at 5% interest due in January, 2000
and issued an aggregate of 40,000 shares of Common Stock in connection with the
determination of an earnout of an acquired company.
<PAGE>
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 1999 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 1999 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 1999 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 1999 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 either because
they are not required or the required information is shown in Vestcom'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.
-24-
<PAGE>
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 Vestcom'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 Vestcom'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 Vestcom'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
Vestcom'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 Vestcom'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 Vestcom'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 Vestcom'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 Vestcom'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
Vestcom'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 Vestcom'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
Vestcom'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 Vestcom's Registration
Statement on Form S-1 (no. 333-23519).
-25-
<PAGE>
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 Vestcom'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 Vestcom's Registration Statement on
Form S-1 (no. 333-23519).
10.4 -- 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 Vestcom's Registration Statement on
Form S-1 (no. 333-23519).
10.5 -- Letter Agreement, between Oppenheimer & Co., Inc. and Vestcom
International, Inc., is incorporated by reference to Exhibit 10.8 to
Vestcom's Registration Statement on Form S-1 (no. 333-23519).
10.6 -- Employment Letter Agreement, dated May 21, 1997, between Vestcom
International, Inc. and Harvey Goldman, is incorporated by reference
to Exhibit 10.9 to Vestcom's Registration Statement on Form S-1 (no.
333-23519).
10.7 -- Employment Letter Agreement, dated September 23, 1997, between
Vestcom International, Inc. and Brendan Keating, is incorporated by
reference to Exhibit 10.10 to Vestcom's Registration Statement on
Form S-4 (no. 333-39077).
10.8 -- Change in Control Agreements, dated January 1, 1999, between Vestcom
International, Inc. and each of Joel Cartun, Brendan Keating and
Harvey Goldman.
10.9 -- Equipment Facility and Revolving Credit Agreement, dated as of
August 13, 1997, as amended, between Vestcom International, Inc. and
Summit Bank.
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.
(b) Reports on Form 8-K
None.
-26-
<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 29, 1999 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Signatures Title Date
/s/ Joel Cartun* Chairman, Chief Executive Officer and Director March 29, 1999
- --------------------
Joel Cartun
/s/ Brendan Keating* President, Chief Operating Officer and Director March 29, 1999
- --------------------
Brendan Keating
/s/ Stephen Bova* Director March 29, 1999
- -------------------
Stephen R. Bova
/s/ Leonard Fassler* Director March 29, 1999
- -------------------
Leonard J. Fassler
/s/ Fred Lafer* Director March 29, 1999
- -------------------
Fred S. Lafer
/s/ Robert Levenson* Director March 29, 1999
- -------------------
Robert J. Levenson
/s/ Richard White* Director March 29, 1999
- -------------------
Richard D. White
/s/ Harvey Goldman Executive Vice President, Chief Financial March 29, 1999
- ------------------- Officer and Treasurer (Principal Financial and
Harvey Goldman Accounting Officer)
*By: /s/ Harvey Goldman
-------------------------------
Harvey Goldman, Attorney-in-Fact
</TABLE>
-27-
<PAGE>
EXHIBIT 10.8
VESTCOM INTERNATIONAL, INC.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
January 1, 1999
Mr. Joel Cartun
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
Re: Change in Control Agreement
Dear Mr. Cartun:
We are currently parties to an employment agreement dated March
10, 1997. We believe that it is desirable to amend those provisions of that
agreement governing your rights upon a change in control of Vestcom
International, Inc. ("Vestcom" or the "Company"). It is not intended to change
your employment agreement in any way except as expressly set forth herein.
Accordingly, the change in control benefits under your current employment
agreement are superseded by the following provisions.
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 President and Chief Executive 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 your employment agreement and 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).
<PAGE>
(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.
(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.
(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).
2
<PAGE>
(f) "Good Reason" means (i) a failure of the Company or its
successors without your prior consent to fulfill its obligations under your
employment agreement 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 President and Chief Executive 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 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
letter, "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,
whether due hereunder or otherwise due to you, and you retain counsel to enforce
your rights to payment or other entitlements, 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.
(j) This Agreement shall be effective as of the date first set
forth above and shall continue in full force and effect so long as you are
employed by the Company and upon and through your termination of employment,
unless terminated by mutual consent of both parties in writing.
Kindly sign your name at the end of this letter to signify your
understanding and acceptance of these terms.
Sincerely,
/s/Brendan Keating
Brendan Keating, Chief Operating Officer
Accepted:
/s/Joel Cartun
- ----------------------
Joel Cartun
-3-
<PAGE>
VESTCOM INTERNATIONAL, INC.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
January 1, 1999
Mr. Brendan Keating
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
Re: Change in Control Agreement
Dear Mr. Keating:
We are currently parties to an employment agreement dated
September 23, 1997. We believe that it is desirable to amend those provisions of
that agreement governing your rights upon a change in control of Vestcom
International, Inc. ("Vestcom" or the "Company"). It is not intended to change
your employment agreement in any way except as expressly set forth herein.
Accordingly, the change in control benefits under your current employment
agreement are superseded by the following provisions.
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
Operating 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 your
employment agreement and 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).
<PAGE>
(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.
(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.
(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).
2
<PAGE>
(f) "Good Reason" means (i) a failure of the Company or its
successors without your prior consent to fulfill its obligations under your
employment agreement 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 Operating 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 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
letter, "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,
whether due hereunder or otherwise due to you, and you retain counsel to enforce
your rights to payment or other entitlements, 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.
(j) This Agreement shall be effective as of the date first set
forth above and shall continue in full force and effect so long as you are
employed by the Company and upon and through your termination of employment,
unless terminated by mutual consent of both parties in writing.
Kindly sign your name at the end of this letter to signify your
understanding and acceptance of these terms.
Sincerely,
/s/Joel Cartun
Joel Cartun, Chairman
Accepted:
/s/Brendan Keating
- -----------------------
Brendan Keating
-3-
<PAGE>
VESTCOM INTERNATIONAL, INC.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
January 1, 1999
Mr. Harvey Goldman
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071-3687
Re: Change in Control Agreement
Dear Mr. Goldman:
We are currently parties to an employment agreement dated May 21,
1997. We believe that it is desirable to amend those provisions of that
agreement governing your rights upon a change in control of Vestcom
International, Inc. ("Vestcom" or the "Company"). It is not intended to change
your employment agreement in any way except as expressly set forth herein.
Accordingly, the change in control benefits under your current employment
agreement are superseded by the following provisions.
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 your
employment agreement and 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).
<PAGE>
(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.
(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.
(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).
2
<PAGE>
(f) "Good Reason" means (i) a failure of the Company or its
successors without your prior consent to fulfill its obligations under your
employment agreement 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 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
letter, "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,
whether due hereunder or otherwise due to you, and you retain counsel to enforce
your rights to payment or other entitlements, 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.
(j) This Agreement shall be effective as of the date first set
forth above and shall continue in full force and effect so long as you are
employed by the Company and upon and through your termination of employment
unless terminated by mutual consent of both parties in writing.
Kindly sign your name at the end of this letter to signify your
understanding and acceptance of these terms.
Sincerely,
/s/Joel Cartun
Joel Cartun, Chairman
Accepted:
/s/Harvey Goldman
- -----------------------
Harvey Goldman
3
<PAGE>
================================================================================
$30,000,000.00
EQUIPMENT FACILITY AND REVOLVING CREDIT AGREEMENT
By and Between
SUMMIT BANK,
as Bank
and
VESTCOM INTERNATIONAL, INC.,
as Borrower
Dated as of August 13, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
BACKGROUND 1
AGREEMENT 1
I. THE CREDIT ACCOMMODATIONS 1
1.01 Equipment Facility 1
1.02 Equipment Facility Maximum Principal Amount 2
1.03 Borrowing Procedures Under Equipment
Facility 2
1.04 Interest on Equipment Loans/Term Loan 3
1.05 Equipment Loans Principal Payment Terms 3
1.06 The Revolving Credit Facility 4
1.07 Revolving Credit Facility Maximum Principal
Amount 4
1.08 Letter of Credit Sub-Facility 5
1.09 Interest on Revolving Credit Loans 5
1.10 Revolving Credit Principal Payment Terms 6
1.11 Borrowing Procedures Under the Revolving
Credit Facility 6
1.12 Revolving Credit Interest Conversion and
Continuance Options 6
1.13 Arrangement Fees 7
1.14 Commitment Fee 7
1.15 Computation 8
1.16 Payments Generally; Debiting of Account 8
II. DEFINITIONS 8
2.01 Defined Terms 8
2.02 Principles of Construction 24
III. PREPAYMENT 24
3.01 Prepayment of Revolving Credit Loans 24
3.02 Prepayments of Equipment Loans 24
3.03 Termination 25
IV. YIELD MAINTENANCE PROVISIONS 25
4.01 Inability to Determine Rate 25
4.02 Illegality 25
4.03 Requirement of Law 25
i
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
4.04 Capital Adequacy 26
4.05 Funding Indemnity 27
4.06 Match Funding 28
V. CONDITIONS 28
5.01 Requirements for Initial Funding 28
5.02 Requirements for Any Advance or Conversion 32
5.03 Additional Requirements for Advances
Under Equipment Facility 29
VI. REPRESENTATIONS AND WARRANTIES 30
6.01 Organization; Authority 30
6.02 Subsidiaries 30
6.03 Use of Proceeds; Margin Regulation 31
6.04 Financial Statements 31
6.05 Suits 32
6.06 Burdensome Agreements 32
6.07 Defaults 32
6.08 ERISA 32
6.09 Tax Returns and Taxes 33
6.10 Compliance with Statutes, etc. 33
6.11 Not an Investment Company 33
6.12 No Authorizations or Approvals 33
6.13 Intellectual Property, etc. 33
6.14 Assets and Properties 34
6.15 Labor Matters 34
6.16 Insurance 34
6.17 True and Complete Disclosure 34
VII. AFFIRMATIVE COVENANTS 35
7.01 Financial Statements 35
7.02 Compliance Certificate 36
7.03 Notice of Certain Events 36
7.04 Preservation of Property; Insurance 36
7.05 Taxes 37
7.06 Conduct of Business and Maintenance of Existence 37
7.07 Operation of Business and Properties 37
7.08 Access to Properties, Books and Records 37
7.09 Environmental Liens 38
7.10 Removal of Hazardous Substances 38
ii
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
7.11 Further Assurances 38
VIII. NEGATIVE COVENANTS 39
8.01 Incur Indebtedness 39
8.02 Negative Pledge 40
8.03 Sale of Assets; Liquidation; Merger;
Acquisitions 42
8.04 Intentionally Omitted 43
8.05 Sale-Leaseback Transactions 43
8.06 Prepayment of Other Indebtedness 44
8.07 Investments 44
8.08 Create Subsidiaries 44
8.09 Hazardous Substances 44
8.10 Dividends, Etc 45
8.11 Redemption of Common Stock 45
8.12 Consolidated Stated Net Worth 45
8.13 Consolidated Tangible to Stated Net Worth 45
8.14 Consolidated Funded Debt to EBITDA Ratio 46
8.15 Consolidated Fixed Charges Ratio 46
8.16 Transactions with Affiliates 46
8.17 Use of Proceeds 46
8.18 Change Fiscal Year 46
IX. EVENTS OF DEFAULT 47
9.01 Payment Default 47
9.02 Negative Covenant Breach 47
9.03 Other Covenant Breaches 47
9.04 Default Under Agreements for Borrowed Money 47
9.05 Default Under Other Material Contracts 48
9.06 Voluntary Bankruptcy 48
9.07 Involuntary Bankruptcy 48
9.08 Appointment of Receiver 49
9.09 Insolvency 49
9.10 Reorganization 49
9.11 Material Misstatement 49
9.12 Entry of Judgment 49
9.13 Change of Control 49
iii
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
-----
X. REMEDIES 50
10.01 Acceleration of Obligations; Other Remedies 50
10.02 Right of Set-off 50
10.03 Remedies Cumulative; No Waiver or Impairment 51
XI. MISCELLANEOUS 51
11.01 Notices 51
11.02 Costs and Expenses 52
11.03 Payment Due on a Day Other Than a Business Day 52
11.04 Governing Law 52
11.05 Integration 52
11.06 Amendment; Waiver 53
11.07 Successors and Assigns 53
11.08 Sale, Assignment or Participations 53
11.09 Severability 54
11.10 Consent to Jurisdiction and Service of Process 54
11.11 Indemnification 54
11.12 Inconsistencies 56
11.13 Headings 56
11.14 Schedules 56
11.15 Confidentiality 56
11.16 Judicial Proceeding; Waivers 56
11.17 Counterparts 57
EXHIBIT A FORM OF EQUIPMENT LOAN NOTE
EXHIBIT B FORM OF NOTICE OF BORROWING UNDER EQUIPMENT FACILITY
EXHIBIT C FORM OF REVOLVING CREDIT NOTE
EXHIBIT D FORM OF NOTICE OF BORROWING UNDER REVOLVING CREDIT
EXHIBIT E FORM OF CLOSING DOCUMENT INDEX
EXHIBIT F FORM OF COMPLIANCE CERTIFICATE
EXHIBIT G FORM OF SECURITY AGREEMENT
EXHIBIT H FORM OF LANDLORD CONSENT AND WAIVER
ANNEX I BORROWER DISCLOSURES
iv
<PAGE>
EQUIPMENT FACILITY AND REVOLVING CREDIT AGREEMENT
This EQUIPMENT FACILITY AND REVOLVING CREDIT AGREEMENT (together with
all exhibits hereto and any amendments and modifications hereto in effect from
time to time, this "Agreement") is made as of this 13th day of August, 1997, by
and between SUMMIT BANK (the "Bank") a banking corporation organized under the
laws of the State of New Jersey, and VESTCOM INTERNATIONAL, INC., a New Jersey
corporation (the "Borrower"). All other capitalized terms used herein shall have
the meanings assigned to such terms in Article II hereof.
BACKGROUND
----------
WHEREAS, the Borrower has requested that the Bank make available an
equipment purchase facility in the principal amount of up to $5,000,000 for the
purpose of financing the acquisition from time to time of certain equipment to
be used or useful in the ordinary course of the integrated and related business
of the Borrower and its Subsidiaries as presently conducted (the "Financed
Equipment");
WHEREAS, the Borrower has further requested that the Bank make
available a committed revolving credit facility pursuant to which the Borrower
may request advances from time to time in an aggregate principal amount of up to
$25,000,000 outstanding at any time for the purposes herein specified; and
WHEREAS, the Bank is willing to make available to the Borrower such
equipment purchase facility and committed revolving credit facility upon the
terms and conditions herein stated;
AGREEMENT
---------
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound
hereby, the Bank and the Borrower agree as follows:
I. THE CREDIT ACCOMMODATIONS.
--------------------------
1.01 Equipment Facility. Subject to the terms and conditions herein
set forth, during the Equipment Facility Commitment Period,
the Bank agrees to make available to the Borrower an equipment
finance facility (the "Equipment Facility"), under which the
Bank shall make advances (each an "Equipment Loan" and
collectively the "Equipment Loans") to the Borrower from time
to time to finance the acquisition of the Financed Equipment.
<PAGE>
Amounts borrowed under the Equipment Facility and repaid may
not be reborrowed. The amounts outstanding under each
Equipment Loan shall be evidenced by separate promissory
notes, substantially in the form of Exhibit A hereto (together
with any attachments thereto and amendments or modifications
thereof in effect from time to time, an "Equipment Loan Note"
and collectively the "Equipment Loan Notes"). The Equipment
Loans shall be Fixed Rate Loans.
1.02 Equipment Facility Maximum Principal Amount. The maximum
aggregate principal amount of Equipment Loans outstanding at
any time shall not exceed FIVE MILLION 00/100 DOLLARS
($5,000,000.00), such amount being hereinafter referred to as
the "Maximum Equipment Facility Principal Amount". If the
aggregate principal amount of Equipment Loans outstanding at
any time under the Equipment Facility exceeds the Maximum
Equipment Facility Principal Amount, then the Borrower shall
immediately repay to the Bank the amount of such excess.
1.03 Borrowing Procedures Under Equipment Facility. If the Borrower
desire to borrow under the Equipment Facility, the Borrower
shall give the Bank a notice of the amount and date of such
borrowing by no later than 3 Business Days prior to the
proposed funding of the relevant Equipment Loan. Such notice
shall be in the form of the "Notice of Borrowing Under
Equipment Facility" attached hereto as Exhibit B and shall be
accompanied by (i) true and complete description of the
Financed Equipment to be acquired with the proceeds of the
proposed Equipment Loan, the location (or proposed location)
of such equipment, the identity of the record owner of such
location and if title to such equipment is to be held by a
Subsidiary of the Borrower, the identity of such Subsidiary,
and (ii) a true and correct copy of the vendor's invoice or
bill of sale, as the case may be, rendered in connection with
the purchase of such equipment, which shall be accompanied by
the payment instructions of such vendor to permit the Bank to
fund the proceeds of the relevant Equipment Loan directly to
such vendor. Upon receipt of any such notice, the Bank may, in
its sole discretion, request any documents or instruments
(including, without limitation, additional financing
statements, certificate or documents of title and/or
additional security agreements substantially in the form of
Exhibit G attached hereto that are necessary or advisable in
order to assure the Bank's first priority security interest in
the relevant Financed Equipment and in connection with such
request, the Bank
-2-
<PAGE>
may refuse or postpone the funding of the relevant Equipment
Loan until such time as the relevant Borrower has complied
therewith. Said Notice of Borrowing Under Equipment Facility
shall also specify the desired term of the relevant Equipment
Loan, which shall be either 24, 36 or 48 months in duration
(each such proposed term, an "Equipment Loan Term"). Promptly
upon receipt of said notice, the Bank shall give the Borrower
notice of the Fixed Rate to be applicable to the proposed
Equipment Loan base upon the desired Equipment Loan Term. The
principal amount of any Equipment Loan requested hereunder
shall not exceed one hundred percent (100%) of the purchase
price of the relevant Financed Equipment as stated on the
invoice or bill of sale accompanying the relevant notice of
borrowing, but in no event shall any Equipment Loan be in a
principal amount of less than $100,000. Notwithstanding
anything in this Section 1.03 to the contrary, the obligation
of the Bank to fund any Equipment Loan is subject to the
satisfaction of the conditions set forth in Section 5.03
hereof. The Borrower shall pay to, or reimburse, the Bank on
demand the costs incurred in connection with the preparation,
filing or recordation of any document or instrument requested
pursuant to this Section 1.03 as well as the reasonable costs
and expense of Bank's counsel in connection with legal
services rendered to assure the Bank's first priority security
interest in the relevant Financed Equipment. The
aforementioned payment or reimbursement obligation, as the
case may be, shall survive the funding of any particular
Equipment Loan.
1.04 Interest on Equipment Loans/Term Loan. Interest on each
Equipment Loans shall accrue at the Fixed Rate applicable
thereto and 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.
1.05 Equipment Loans Principal Payment Terms. The outstanding
principal balance of each Equipment Loan shall be repaid in
consecutive monthly installments and payable on each Payment
Date applicable thereto. The amount of each such principal
installment will be equal to the amount necessary to amortize
the original principal amount of such Equipment Loan (on a
straight-line basis) over the Equipment Loan Term applicable
thereto. In any event, the final installment of principal
applicable thereto shall be due and payable on the applicable
Equipment Loan Maturity Date and shall be in an amount equal
to the then remaining unpaid
-3-
<PAGE>
principal balance thereof, together with any accrued and
unpaid interest thereon.
1.06 The Revolving Credit Facility. Subject to the terms and
conditions hereof, the Bank agrees to make available to the
Borrower, a revolving credit facility (the "Revolving Credit
Facility") under which the Bank shall make advances to the
Borrower from time to time during the Revolving Credit
Commitment Period in an aggregate principal amount outstanding
at any one time of up to TWENTY-FIVE MILLION 00/100 DOLLARS
($25,000,000.00) (each a "Revolving Credit Loan" and
collectively the "Revolving Credit Loans"). During the
Revolving Credit Commitment Period, the Borrower may borrow,
repay and reborrow as provided herein. Revolving Credit Loans
may be made as Alternate Base Rate Loans or LIBOR Loans, as
requested by the Borrower pursuant to Section 1.12 hereof. The
Revolving Credit Loans shall be evidenced by a single
promissory note, substantially in the form of Exhibit C hereto
(together with any attachments thereto and/or amendments or
modifications thereof in effect from time to time, the
"Revolving Credit Note"). The Revolving Credit Commitment
Period may be extended for an additional period not to exceed
3 years in the sole and absolute discretion of the Bank. The
Borrower shall be notified of the Bank's decision to so extend
the Revolving Credit Commitment Period by a date occurring no
later than 14 months prior to the Revolving Credit Expiration
Date then in effect. For the avoidance of doubt, it is hereby
acknowledged that the Bank's agreement to so extend the
Revolving Credit Commitment Period may be subject to the
acceptance by the Borrower of such additional terms and
conditions, or the modification of the existing terms and
conditions, of the Revolving Credit Facility as the Bank may
impose in its sole and absolute discretion.
1.07 Revolving Credit Facility Maximum Principal Amount. The
maximum aggregate principal amount of the Revolving Credit
Loans outstanding at any time, when added to the Letter of
Credit Outstanding at such time shall not exceed TWENTY FIVE
MILLION 00/100 DOLLARS ($25,000,000.00) such amount being
hereinafter referred to as the "Maximum Revolving Credit
Principal Amount". If the aggregate outstanding principal
amount of the Revolving Credit Loans plus the Letters of
Credit Outstanding at any time exceed the Maximum Revolving
Credit Principal Amount, the Borrower shall immediately repay
to the Bank the amount of such excess.
-4-
<PAGE>
1.08 Letter of Credit Sub-Facility. Within the limitations of
the Revolving Credit Facility herein set forth, the Borrower
may from time to time request that the Bank issue irrevocable
standby or commercial letters of credit for the account of the
Borrower and in support of any obligation deemed acceptable by
the Bank in its sole discretion (any such letter of credit so
issued, a "Letter of Credit" and collectively the "Letters of
Credit"). Notwithstanding the foregoing (i) no Letter of
Credit shall be issued by the Bank in a Stated Amount which
(x) when added to the Letters of Credit Outstandings at such
time, would exceed $2,000,000.00 or (y) when added to the sum
of the aggregate outstanding principal amount of the Revolving
Credit Loans plus the Letter of Credit Outstandings, at such
time, would exceed the Maximum Revolving Credit Principal
Amount. Each Letter of Credit issued in accordance herewith
shall have an expiration date occurring no later than 1 year
from the date of issuance and in any event no later than (i) 6
months, in the case of commercial letter of credit, or (ii) 1
year, in the case of irrevocable automatically renewable
letter of credit, after the Revolving Credit Expiration Date.
Each Letter of Credit shall be denominated in U.S. dollars.
When a Borrower desires that a Letter of Credit be issued for
its account, it shall give the Bank at least 3 Business Days'
written notice (or such lesser number of days as may be agreed
to by the Bank). Each such request shall be accompanied by a
completed and executed "Letter of Credit Application/
Agreement" (or an amendment to any then effective application)
in the form furnished by the Bank to the Borrower from time to
time. The terms of each such application/agreement are
incorporated herein to the extent not consistent herewith. In
connection with the issuance of any Letters of Credit in
accordance herewith, the Borrower shall pay all letters of
credit fees and other expenses that are customarily charged by
the Bank in connection therewith.
1.09 Interest on Revolving Credit Loans. Interest on each Revolving
Credit Loan that is an Alternate Base Rate Loan shall accrue
at the Alternate Base Rate plus the Applicable Margin, if any,
and shall be payable monthly, in arrears, on each Payment Date
during which such Loan is outstanding, and upon payment in
full of the outstanding balance of such Loan. Interest on each
Revolving Credit Loan that is a LIBOR Loan shall accrue at
LIBOR plus the Applicable Margin and shall be payable, in
arrears, on each Payment Date during which
-5-
<PAGE>
such Loan is outstanding, and upon payment in full of the
outstanding balance of such Loan.
1.10 Revolving Credit Principal Payment Terms. The aggregate
outstanding principal balance of the Revolving Credit Loans,
together with all accrued and unpaid interest thereon, shall
be due and payable on the Revolving Expiration Date.
1.11 Borrowing Procedures Under the Revolving Credit Facility. If
the Borrower desires to borrow under the Revolving Credit
Facility, the Borrower shall give the Bank irrevocable written
notice of the amount and date of such borrowing no later than
1 Business Day prior to the date of such proposed borrowing in
the case of Alternate Base Rate Loans and 2 Business Days
prior to the date of such proposed borrowing in the case of
LIBOR Loans. Such notice shall be in the form of a "Notice of
Borrowing Under Revolving Credit" attached hereto as Exhibit
D. Each borrowing under the Revolving Credit Facility shall be
in an amount equal to $100,000 or any whole multiple thereof.
The Borrower shall not be permitted to request a Revolving
Credit Loan in the form of a LIBOR Loan, if the making of such
Loan would cause the aggregate number of LIBOR Loans
outstanding under the Revolving Credit Facility to exceed 10
at such time.
1.12 Revolving Credit Interest Conversion and Continuance Options.
(a) Subject to the limitation of the last sentence of Section
1.11 hereof, during the Revolving Credit Commitment Period,
the Borrower may elect to convert any Revolving Credit Loan to
a Loan maintained at the other rate of interest available for
Revolving Credit Loans hereunder by giving the Bank
irrevocable notice (which may be telephone notice promptly
confirmed in writing) of such election at least 2 Business
Days prior to the conversion to a LIBOR Loan and at least 1
Business Day prior to the conversion to a Alternate Base Rate
Loan. Said notice shall specify, in the case of a conversion
to a LIBOR Loan, the desired Interest Period with respect
thereto, which shall be either 1, 2, 3 or 6 months in duration
as selected by the Borrower. Conversions of LIBOR Loans to
Alternate Base Rate Loans shall be made only on the last day
of the Interest Period applicable thereto. Conversions of
Alternate Base Rate Loans to LIBOR Loans shall only be made on
a Business Day.
-6-
<PAGE>
(b) During the Revolving Credit Commitment Period, the
Borrower may elect to continue any Revolving Credit Loan that
is a LIBOR Loan as such type of Loan upon the expiration of
the then current Interest Period with respect thereto by
giving the Bank an irrevocable notice (which may be telephone
notice promptly confirmed in writing) of such election at
least 2 Business Days prior to the expiration of the then
current Interest Period with respect thereto. Such notice
shall also specify the desired Interest Period for the Loan so
continued, which may be 1, 2, 3 or 6 months in duration as
selected by the Borrower.
(c) If the Borrower fails to notify the Bank of the conversion
or continuance of any LIBOR Loan within the time specified in
this Section 1.13, then any such Loan shall automatically
convert to an Alternate Base Rate Loan on the last day of the
then expiring applicable Interest Period.
1.13 Arrangement Fees. The Borrower shall pay, or have paid, to the
Bank on or before the Closing Date a one time arrangement fee
in an amount equal to $75,000. The Borrower acknowledges that
such fee is a liquidated sum and, together with the amounts
payable pursuant to Section 11.02 hereof, constitute
reasonable compensation to the Bank for its expenses and
services in connection with the arrangement of the facilities
provided hereunder and the negotiation and preparation of this
Agreement and the other Credit Documents.
1.14 Commitment Fee. The Borrower shall pay to the Bank, quarterly
in arrears, a commitment fee for the period beginning from and
including the date that is 6 months from the Closing Date (the
"Commitment Fee Commencement Date") until the Revolving Credit
Expiration Date, computed for each quarter occurring in said
period at a per annum rate equal to the Applicable Commitment
Fee multiplied by the average daily amount of the Availability
for such quarter. Such commitment fee shall be payable
commencing on May 1, 1998 and continuing quarterly on the
first Business Day of February, May, August, and November
occurring thereafter and on the Revolving Credit Expiration
Date. Any such payment shall be in respect of the immediately
preceding full fiscal quarter then last ended, except for the
initial payment which shall be respect of the period
commencing on the Commitment Fee Commencement Date through the
last day of the fiscal quarter then last ended.
-7-
<PAGE>
1.15 Computation. Interest and any fees or compensation based upon
a per annum rate shall be calculated on the basis of a 360 day
year for the actual number of days elapsed.
1.16 Payments Generally; Debiting of Account. All payments made
hereunder shall be paid in accordance with the payment terms
set forth in the Notes. Without limiting the generality of the
foregoing, the Borrower agrees to maintain a demand deposit
account at the Bank (the "Account") continuously until the
Obligations due hereunder are paid in full. The Bank may, and
the Borrower authorizes the Bank to, debit the Account for the
amount of any payment as and when such payment becomes due
hereunder. At any time during the continuance of an Event of
Default, the Bank may, and the Borrower authorizes the Bank to
debit any other account and/or certificate of deposit
maintained by the Borrower with the Bank for the amount of any
payment, as and when such payment becomes due hereunder,
whether such payment is for accrued interest, principal or
expense, even if debiting such account results in a loss or
reduction of interest to the Borrower or the imposition of a
penalty applicable to the early withdrawal of time deposits.
Such authorization shall not affect the Borrower's obligation
to pay when due all amounts payable hereunder, whether or not
there are sufficient funds in any accounts of the Borrower.
The Borrower agrees to fund the Account from time to time in
amounts sufficient to make any regularly scheduled payments of
principal and interest hereunder as and when such payments
become due. The foregoing rights of the Bank to debit the
Borrower's accounts shall be in addition to, and not in
limitation of, any rights of set-off which the Bank may have
hereunder or under any Credit Document.
II. DEFINITIONS.
------------
2.01 Defined Terms. The following terms used throughout this
Agreement shall have the meanings assigned below:
Affiliate. The term "Affiliate" means, as applied to any
Person, any other Person that directly or indirectly controls,
is controlled by, or is under common control with, that
Person. For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied
to any Person, means the possession, directly or indirectly,
of the power to vote
-8-
<PAGE>
twenty-five percent (25%) or more of the securities or other
ownership interests having voting power for the election of
directors (or other persons performing similar functions) of
such Person or otherwise to direct or cause the direction of
the management and policies of that Person, whether through
the ownership of voting securities or by contract or
otherwise.
Alternate Base Rate. The term "Alternate Base Rate" means the
higher of the Announced Base Rate or the Federal Funds Rate.
Alternate Base Rate Loan. The term "Alternate Base Rate Loan"
means any Loan at all times during which such Loan bears
interest based upon the Alternate Base Rate.
Announced Base Rate. The term "Announced Base Rate" means the
per annum rate of interest established by the Bank as its
reference rate in making loans, and does not reflect the rate
of interest charged to any particular borrower or class of
borrowers. The Borrower acknowledges that the Announced Base
Rate is not tied to any external rate of interest and that the
rate of interest charged hereunder (if any) which is based on
the Announced Base Rate shall change automatically and
immediately as of the date of any change in the Announced Base
Rate, without notice to the Borrower.
Applicable Commitment Fee. The term "Applicable Commitment
Fee" means 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 Commitment
Fee determined by reference to the table appearing in the
definition of "Applicable Margin".
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 Consolidated Funded Debt to
EBITDA Ratio of the Borrower for the Test Period last ended,
in accordance with the following table:
-9-
<PAGE>
<TABLE>
<CAPTION>
Applicable
Applicable Margin for
If Such Ratio Margin for LIBOR Alternate Base
Is: Commitment Fee Loans Rate Loans
- -------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
Less than 1.15 25 basis points 100 basis points
to 1.00 (.25%) (1.00%) -0-
Greater than or 25 basis points 125 basis points -0-
equal to 1.15 to (.25%) (1.25%)
1.00, but less
than 1.5 to 1.00
1.00
Greater than or 30 basis points 150 basis points 25 basis points
equal to 1.50 to (.30%) (1.50%) (.25%)
1.00, but less
than 2.00 to
1.00
Greater than or 37.5 basis points 175 basis points 50 basis points
equal to 2.0 to (.375%) (1.75%) (.50%)
1.00, but less
than 2.5 to 1.00
Greater than or 50 basis points 225 basis points 100 basis points
equal to 2.5 to (.50)% (2.25%) (1.00%)
1.00
</TABLE>
Notwithstanding the foregoing, at all times during which there
exists an Event of Default, the Applicable Margin (A) with
respect to Alternate Base Rate Loans, shall be 100 basis
points (1.00%) and (B) with respect to LIBOR Loans, shall be
225 basis points (2.25%), and said margin shall be in addition
to any margin added to the applicable rate of interest to
calculate the "Default Rate" pursuant to the relevant Note.
Applicable Margin Adjustment Period means (A) with respect to
the determination of the Applicable Commitment Fee, initially
the period commencing 6 months from the Closing Date and
ending on the last day of the then current fiscal quarter and
thereafter each fiscal quarter occurring thereafter and (B)
with respect to the determination of the Applicable Margin,
initially the period commencing October 1, 1997 and ending
December 31, 1997 and thereafter each fiscal quarter occurring
thereafter.
Approved Subordinated Indebtedness. The term "Approved
Subordinated Indebtedness" means any Indebtedness of the
Borrower that (i) is subordinated to the Obligations on
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terms and conditions approved in writing by the Bank and (ii)
does not constitute Guaranteed Indebtedness of the Borrower or
any of its Subsidiaries or Affiliates.
Availability. The Term "Availability" means, as of any
relevant date, the amount by which the Maximum Revolving
Credit Amount exceeds the amount of the aggregate outstanding
principal amount of the Revolving Credit Loan.
Business Day. The term "Business Day" means any day other than
a Saturday, Sunday, or a day on which commercial banks are
authorized or obligated by law or executive order to be closed
in the State of New Jersey.
Capital Expenditures. The term "Capital Expenditure" means,
with respect to any Person, without duplication and for any
period, the aggregate value attributed in accordance with
GAAP, to acquisitions during such period by such Person of any
asset, tangible or intangible, or replacements or
substitutions therefor or additions thereto which such Person
treated as a non-current asset on such Person's financial
statement, including, without limitation, (x) the acquisition
or construction of assets having a useful life of more than 1
year and (y) assets acquired during such period in connection
with Capitalized Leases.
Capitalized Lease. The term "Capitalized Lease" means any
lease with respect to which the obligation to pay rent or
other amounts constitutes Capitalized Lease Obligations.
Capitalized Lease Obligations. The term "Capitalized Lease
Obligations" means obligations to pay rent or other amounts
under a lease of (or other agreement conveying the right to
use) real and/or personal property which obligations are
required to be classified and accounted for as capital leases
on a balance sheet in accordance with GAAP.
Closing Date. The term "Closing Date" means the date on which
the conditions set forth in Section 5.01 hereof have been
fulfilled to the satisfaction of the Bank.
Confidential Information. The term "Confidential Information"
means information furnished to the Bank on a confidential
basis by or on behalf of the Borrower and designated as such,
but does not include any such information that is or becomes
generally available to
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the public (other than through any breach of any
confidentiality undertaking hereunder or in connection
therewith) or that legally is or becomes available to the Bank
from a source other than the Borrower.
Consolidated. The term "Consolidated" means an accounting
presentation which includes the consolidated Subsidiaries of
the Borrower prepared in accordance with GAAP, consistently
applied.
Consolidated EBITDA. The term "Consolidated EBITDA" means the
Borrower's earnings (excluding any extraordinary or
nonrecurring items) before interest expense, taxes,
depreciation and amortization, determined for the relevant
Test Period on a Consolidated basis in accordance with GAAP,
consistently applied.
Consolidated Fixed Charges Ratio. The term "Consolidated Fixed
Charges Ratio" means the ratio of (i) the Borrower's
Consolidated EBITDA less unfinanced Capital Expenditures to
(ii) the Current Maturities of the Borrower's Funded Debt plus
all cash and non-cash interest (including, without limitation,
capitalized interest) payable during the relevant Test Period
on or in connection with any Indebtedness of the Borrower of
any type, in each case determined for the relevant Test Period
on a Consolidated basis in accordance with GAAP, consistently
applied.
Consolidated Funded Debt to EBITDA Ratio. The term
"Consolidated Funded Debt to EBITDA Ratio" means the ratio of
(A) the Borrower's Funded Debt to (B) the Borrower's
Consolidated EBITDA, in each case determined for the relevant
Test Period on a Consolidated basis in accordance with GAAP,
consistently applied.
Consolidated Stated Net Worth. The term "Consolidated Stated
Net Worth" means, at any time:
(a) the total assets of the Borrower which would be
shown as assets on a Consolidated balance sheet of
the Borrower, prepared in accordance with GAAP,
consistently applied,
minus
(b) the total liabilities of the Borrower which would
be shown as liabilities on a Consolidated
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balance sheet of the Borrower, prepared in accordance
with GAAP, consistently applied.
Consolidated Tangible Net Worth. The term "Consolidated
Tangible Net Worth" mean, at any time:
(a) the total assets of the Borrower which would be
shown as assets on a Consolidated balance sheet of
the Borrower and its Subsidiaries, prepared in
accordance with GAAP, consistently applied, after
subtracting therefrom the aggregate amount of any
capitalized research and development costs;
capitalized interest; debt discount and expense;
goodwill; patents; trademarks; copyrights;
franchises; licenses; amounts owing from officers;
directors, or other Affiliates of the Borrower; and
any investments in any Affiliate of any of the
foregoing; and such other assets as are properly
classified as "intangible assets" determined in
accordance with GAAP, consistently applied,
minus
(b) the total liabilities of the Borrower which would
be shown as liabilities on a Consolidated balance
sheet of the Borrower, prepared in accordance with
GAAP, consistently applied.
Credit Documents. The term "Credit Documents" means this
Agreement, each Equipment Loan Note, the Revolving Credit
Note, the Security Agreements, the Guaranties, any Letters of
Credits and any letter of credit agreement/application
executed in connection with the issuance thereof, each of the
other documents, referenced in the Closing Checklist attached
hereto as Exhibit E, each of the "Credit Documents" referenced
therein, and all other all credit accommodations, notes, loan
agreements, guaranties, security agreements, mortgages,
instruments, pledge agreements, assignments, acceptance
agreements, commitments, facilities, letters of credit,
reimbursement agreements and any other agreements and
documents, of the Borrower, any Guarantor, with or in favor
of, the Bank, in each case now or hereafter existing,
creating, evidencing, guarantying, securing or relating to any
or all of the Obligations, together with in each case all
amendments, modifications, renewals, or extensions thereof.
Current Maturities. The term "Current Maturities" means with
respect to any item of Indebtedness, the portion of such
Indebtedness which by the terms of such
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Indebtedness or the terms of any instrument or agreement
related thereto was due and payable during the relevant Test
Period, whether such payment is required by a demand which may
be made during such Test Period, regularly scheduled principal
payments, mandatory prepayment, sinking fund requirements or
final payment at maturity.
Environmental Laws. The term "Environmental Laws" means all
applicable laws, regulations and other requirements of
Governmental Authorities relating to pollution or protection
of the environment, including laws relating to emissions,
discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or wastes into
ambient air, surface water, ground weather, or land, or
otherwise relating to the disposal, transport, or handling of
pollutants, contaminants, or hazardous or toxic material or
wastes.
Equipment Facility. The term "Equipment Facility" shall have
the meaning assigned to such term in Section 1.01 hereof.
Equipment Facility Commitment Period. The term "Equipment
Facility Commitment Period" means the period commencing on the
Closing Date and ending on the Equipment Facility Expiration
Date.
Equipment Facility Expiration Date. The term "Equipment
Facility Expiration Date" means the date that is the earlier
to occur of (i) the third anniversary of the Closing Date,
(ii) the date on which the Maximum Equipment Facility Amount
has been funded by the Bank, or (iii) the date on which this
Agreement is terminated pursuant to Section 3.03 hereof.
Equipment Loan and Equipment Loans. The terms "Equipment Loan"
and "Equipment Loans" shall have the meanings assigned to such
terms in Section 1.01 hereof.
Equipment Loan Maturity Date. The term "Equipment Loan
Maturity Date" means, with respect to any particular Equipment
Loan, the date on which the Equipment Loan Term applicable
thereto shall have expired.
Equipment Loan Note and Equipment Loan Notes. The terms
"Equipment Loan Note" and "Equipment Loan Notes" shall have
the meaning assigned to such terms in Section 1.01 hereof.
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Equipment Loan Term. The term "Equipment Loan Term" shall have
the meaning assigned to such term in Section 1.03 hereof.
Event of Default. The term "Event of Default" shall have the
meaning assigned to such term in Article IX hereof.
Facilities Management Arrangements. The term "Facilities
Management Arrangements" means any written contractual
undertaking of the Borrower or any of its Subsidiaries
pursuant to which the Borrower or any of its Subsidiaries is
to perform services substantially similar to the services
rendered by the Borrower or any of its Subsidiary in the
ordinary course of their respective businesses at a facility
that is owned or otherwise operated by a Person other than the
Borrower or any of its Subsidiaries and in connection with the
rendition of such services, the Borrower or any of its
Subsidiaries, as the case may be, acquires title to, or
assumes Indebtedness secured by a Lien upon, the equipment and
machinery located at such facility.
Federal Funds Rate. The term "Federal Funds Rate" means, for
any period, a fluctuating interest rate equal for each day
during such period to 50 basis points (.50%) above the
weighted average of the rates on overnight Federal Funds
transactions with members of the Federal Reserve System
arranged by Federal Funds brokers, as published by the Federal
Reserve Bank of New York on the Business Day next preceding
such day for amounts in immediately available funds comparable
to the principal amount of the relevant indebtedness or, if
such rate is not so published for any day for which the next
preceding day is a Business Day, the average of the quotations
for such day on such transactions received by the Bank from
three (3) Federal Funds brokers of recognized standing
selected by the Bank.
Financed Equipment. The term "Financed Equipment" shall have
the meaning assigned to such term in the first recital clause
of this Agreement.
Fixed Rate. The term "Fixed Rate" means, for each Equipment
Loan, the per annum rate of interest equal to 200 basis points
(2.00%) above the average asked yield for "Govt. Bonds &
Notes", as set forth in the column designated "Treasury Bonds,
Notes & Bills" in The Wall Street Journal most recently
published as of the date that is 2 Business Days prior to the
proposed date of
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funding of the relevant Equipment Loan, having a maturity date
that falls in the same month applicable Equipment Loan
Maturity Date, provided that if no such yield is published for
the relevant month, yields for the published month next
succeeding and the published month next preceding such month
shall be used to determine the Fixed Rate by interpolating
such yields on a straight-line basis. If The Wall Street
Journal at the time determination of the Fixed Rate is no
longer publishing the yields described above, then the Bank
shall determine such yield based on any other nationally
recognized source for such published yields as it may select
in its reasonable discretion.
Fixed Rate Loan. The term "Fixed Rate Loan" means each
Equipment Loan at all time during which such Loan bears
interest based upon the Fixed Rate.
Funded Debt. The term "Funded Debt" means, with respect to any
Person, without duplication, (i) indebtedness of such Person
for borrowed money, (ii) obligations of such Person evidenced
by bonds, debentures, notes, or other similar instruments,
(iii) obligations of such Person to pay the deferred purchase
price of property or services (other than accounts payable to
trade creditors and current operating liabilities incurred in
the ordinary course of business), and (iv) Capitalized Lease
Obligations of such Person, as lessee.
GAAP. The term "GAAP" means generally accepted accounting
principles in effect from time to time in the United States.
Governmental Authority. The term "Governmental Authority"
means any nation or government, any state or other political
subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative functions
of or pertaining to government.
Guaranteed Indebtedness. The term "Guaranteed Indebtedness"
means, as to any Person, all Indebtedness of the type referred
to in clauses (i) through (ix) of the definition of
Indebtedness in this Agreement guaranteed directly or
indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person, or in effect
guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such
Indebtedness, (ii) to purchase, sell or lease (as lessee
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or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (iii) to supply funds to or in any
other manner invest in the debtor (including any agreement to
pay for property or services irrespective of whether or not
such property is received or such services are rendered), or
(iv) otherwise to assure a creditor against loss. For the
avoidance of doubt, it is acknowledged that if the Borrower or
any Guarantor is permitted to incur any Indebtedness
hereunder, it is also permitted to guaranty such Indebtedness
if incurred by the Borrower or any other Guarantor.
Guarantors. The term "Guarantors" means collectively, Computer
Output Systems, Inc., a Connecticut corporation, Comvestrix
Corp., a Delaware corporation, Electronic Imaging Services,
Inc., a Delaware corporation, Image Printing Systems, Inc., a
Wisconsin corporation, Direct Mail Services, Inc., a New
Jersey corporation, Quality Control Printing, Inc., a New
Jersey corporation, First Class Presort, Inc., a New Jersey
corporation, Mystic Graphic Systems, Inc., a Massachusetts
corporation, 504087 N.B. Inc., a New Brunswick (Canada)
corporation, Lirpaco, Inc., a Canadian corporation, Cos
Information Inc., a Canadian corporation, and any Subsidiary
of the Borrower that becomes a guarantor of the Obligations in
accordance with Section 8.08 hereof.
Guaranties. The term "Guaranties" means collectively Guaranty
and Suretyship Agreements executed by the Guarantors in favor
of the Bank on even date herewith and any other guaranty and
suretyship agreement executed and delivered by any other
Subsidiary of the Borrower pursuant to Section 8.08 hereof.
Indebtedness. The term "Indebtedness" means, as to any Person
(i) all indebtedness of such Person for borrowed money, (ii)
all obligations of such Person evidenced by bonds, debentures,
notes, or other similar instruments, (iii) all obligations of
such Person to pay the deferred purchase price of property or
services (other than accounts payable to trade creditors and
current operating liabilities incurred in the ordinary course
of business), (iv) all indebtedness created or arising under
any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the
rights and remedies of the seller or lender under such
agreement in the event of
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default are limited to repossession or sale of such property),
(v) all Capitalized Lease Obligations of such Person, as
lessee, (vi) all obligations, contingent or otherwise, of such
Person under acceptances, letters of credit or similar
facilities, (vii) all obligations of such Person to purchase,
redeem, retire, defease or otherwise acquire for value any
capital stock of such person or any warrants, rights or
options to acquire such capital stock, valued, in the case of
redeemable preferred stock, at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid
dividends, (viii) all obligations of such Person in respect of
interest rate swap agreements (as defined in 11 U.S.C.
ss.101), currency swap agreements and other similar agreements
designed to hedge against fluctuations in interest rates or
foreign exchange rates, (ix) all obligations of production
payments from property operated by or on behalf of such Person
and other similar arrangements with respect to natural
resources, (x) all Guaranteed Indebtedness of such Person, and
(xi) all Indebtedness of the type referred to in clauses (i)
through (x) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise,
to be secured by) any Lien on property (including, without
limitation, accounts and contracts rights) owned by such
Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness.
Interest Period. The term "Interest Period" means, with
respect to any LIBOR Loan:
(a) initially, the period commencing on, as the case may be,
the date of borrowing or conversion with respect to such LIBOR
Loan and ending 1, 2, 3 or 6 months thereafter as selected by
the relevant Borrower in its notice of borrowing as provided
in Section 1.11 hereof or its notice of conversion as provided
in Section 1.12(a) hereof; and
(b) thereafter, each period commencing on the last day of the
next preceding Interest Period applicable to such LIBOR Loan
and ending 1, 2, 3 or 6 months thereafter as selected by the
relevant Borrower in its notice of continuance as provided in
Section 1.12(b) hereof;
provided that the foregoing provisions relating to Interest
Periods are subject to the following:
(i) if any Interest Period pertaining to a LIBOR Loan
would otherwise end on a day which is not a
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Business Day, that Interest Period shall be extended
to the next succeeding Business Day unless the result
of such extension would be to carry such Interest
Period into another calendar month in which even such
Interest Period shall end on the immediately
preceding Business Day;
(ii) any Interest Period pertaining to a LIBOR Loan
that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of
such Interest Period) shall end on the last Business
Day of a calendar month; and
(iii) no Borrower shall select any Interest Period
that would extend such Interest Period beyond the
Revolving Credit Expiration Date.
Investments. The term "Investment" shall have the meaning
assigned to such term in Section 8.07 hereof.
Letter of Credit and Letters of Credit. The terms "Letter of
Credit" and "Letters of Credit" shall have the meanings
assigned to such terms in Section 1.08 hereof.
Letter of Credit Outstanding. The term "Letter of Credit
Outstanding" means, at any time, the sum of, without
duplication (i) the aggregate Stated Amount of all outstanding
Letters of Credit; (ii) the aggregate amount of all
unreimbursed drawing thereunder; and (iii) the Stated Amount
of all Letters of Credit requested in accordance with Section
1.08 hereof but not yet issued.
LIBOR. The term "LIBOR" means, with respect to each day during
each Interest Period, the rate (rounded to the next higher
1/100 of 1%) for U.S. dollar deposits with a maturity equal to
the relevant Interest Period in the London interbank market as
determined by the Bank from a recognized source for quotations
of the London interbank offered rate, on the second London
business day before the relevant Interest Period begins,
adjusted for reserves by dividing that rate by 1.00 minus the
LIBOR Reserve.
LIBOR Loan. The term "LIBOR Loan" means any Revolving Credit
Loan at all times during which such Loan bears interest based
upon LIBOR.
LIBOR Reserve. The term "LIBOR Reserve" means the maximum
percentage reserve requirement (rounded to the
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next higher 1/100 of 1% and expressed as a decimal) in effect
for any day during the relevant Interest Period under the
Federal Reserve Board's Regulation D for Eurocurrency
liabilities as defined therein.
Lien. The term "Lien" means any mortgage, pledge, security
interest, encumbrance, lien or other form of charge or
preferential arrangement of any kind (including, without
limitation, any agreement to give any of the foregoing, any
conditional sale or other title retention or any lease in the
nature thereof).
Loan. The term "Loan" means a Revolving Credit Loan or an
Equipment Loan, as the context shall require, and the term
"Loans" means, collectively, the Revolving Credit Loans and
the Equipment Loans.
Material Adverse Effect. The term "Material Adverse Effect"
means a material adverse effect on (a) the business,
operations, property, condition (financial or otherwise) of
the Borrower and its Subsidiaries taken as a whole, (b) the
ability of the Borrower to perform its obligations under this
Agreement, the Notes or any of the other Credit Documents, or
(c) the validity or enforceability of this Agreement, the
Notes or any of the other Credit Documents, or the rights or
remedies of the Bank hereunder or thereunder.
Maximum Equipment Facility Principal Amount. The term "Maximum
Equipment Facility Principal Amount", shall have the meaning
assigned to such term in Section 1.02 hereof.
Maximum Revolving Credit Principal Amount. The term "Maximum
Revolving Credit Principal Amount" shall have the meaning
assigned to such term in Section 1.08 hereof.
Note. The term "Note" means an Equipment Loan Note or the
Revolving Credit Note, as the context shall require, and the
term "Notes" means, collectively, the Equipment Loan Notes and
the Revolving Credit Note.
Obligations. The term "Obligations" means any and all
obligations and indebtedness of every kind and description of
the Borrower owing to the Bank, whether under the Credit
Documents or other loan documents or agreements, and whether
such debts or obligations are primary or secondary, direct or
indirect, absolute or contingent, sole, joint or several,
secured or
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unsecured, due or to become due, contractual or tortious,
arising by operation of law or otherwise, or now or hereafter
existing, including, without limitation, principal interest,
fees, late fees, expenses, and/or attorneys' fees and costs
(to the extent reimbursable to the Bank by the Borrower
pursuant to Section 11.02), that have been or may hereafter be
contracted or incurred.
OEM Equipment Finance Transactions. The term "OEM Equipment
Finance Transactions" means equipment lease or purchase money
financing with respect to equipment or machinery leased or
acquired by the Borrower or any of its Subsidiaries pursuant
to which the Indebtedness incurred in connection therewith is
held by the original manufacturer of such equipment or
machinery, or an Affiliate of said original manufacturer that,
in the ordinary course of its business, provides such
financing to purchasers of such equipment or machinery.
Payment Date. The term "Payment Date" means (i) in the case of
a LIBOR Loan, the last day of each Interest Period applicable
thereto; provided, however that, if the Interest Period
applicable to any such LIBOR Loan is in excess of 3 months,
then the Payment Date with respect to such Loan shall also
include the date that is 3 months after the initial funding
thereof, (ii) in the case of a Alternate Base Rate Loan, the
first day of each month occurring after the Closing Date, and
(iii) in the case of an Equipment Loan, the date that
corresponds numerically in the next calendar month following
the funding of such Loan to the date of such funding, and the
same date of each successive month occurring thereafter,
unless such funding date is the last day of a calendar month,
in which case, such Payment Date shall be the last day of each
such successive calendar month.
Permitted Investments. The term "Permitted Investments" means
(i) readily marketable direct obligations of the Government of
the United States of America or any agency or instrumentality
thereof or any full faith and credit obligations of the United
States Government or obligations guaranteed by the United
States Government and its agencies, (ii) any investment grade
debt or equity securities issued by any other Person, (iii)
certificates of deposit of any United States commercial bank,
(iv) any investment arranged by the Bank, or an affiliate of
the Bank, on behalf of the Borrower pursuant to cash
management services provided to the Borrower by the Bank or
such affiliate, (v) instruments
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held for collection in the ordinary course of business, (vi)
any equity or debt securities or other form of debt instrument
obtained in settlement of debts previously contracted, and
(vii) any equity or debt security obtained in connection with
an acquisition permitted pursuant to Section 8.03 hereof.
Permitted Liens. The term "Permitted Liens" means those Liens
permitted to exist pursuant to Section 8.02 hereof.
Person. The term "Person" means any individual, partnership,
joint venture, firm, corporation, association, trust or other
enterprise or any government or political subdivision or any
agency, department or instrumentality thereof.
Public Offering. The term "Public Offering" means that certain
initial public offering of no less than 3,850,000 shares of
the common stock, no par value, of the Borrower, as
contemplated in that certain Registration Statement of the
Borrower on Form S-1 (Registration No. 333-23519) on file with
the SEC, together with Amendment No. 1 through 5 thereto, as
the same has been declared effective by the SEC on July 29,
1997 and the 424(b) prospectus filed on July 30, 1997 with the
SEC.
Revolving Credit Commitment Period. The term "Revolving Credit
Commitment Period" mean the period commencing on the Closing
Date and ending on the Revolving Credit Expiration Date.
Revolving Credit Expiration Date. The term "Revolving Credit
Expiration Date" means the earlier to occur of (a) August 12,
2000, as the same may be extended from time to time in the
sole and absolute discretion of the Bank or (b) the date on
which this Agreement is terminated pursuant to Section 3.03
hereof.
Revolving Credit Facility. The term "Revolving Credit
Facility" shall have the meaning assigned to such term in
Section 1.07 hereof.
Revolving Credit Loan and Revolving Credit Loans. The terms
"Revolving Credit Loan" and "Revolving Credit Loans" shall
have the meanings assigned to such term in Section 1.07
hereof.
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Revolving Credit Note. The term "Revolving Credit Note" shall
have the meanings assigned to such term in Section 1.07
hereof.
SEC. The term "SEC" shall mean the Securities and Exchange
Commission or any Governmental Authority which may succeed to
the authority thereof or be substituted therefor.
Security Agreements. The term "Security Agreements" means
collectively each of the security agreements in favor of the
Bank executed and delivered in connection with the funding of
any Equipment Loan.
Stated Amount. The term "Stated Amount" means with respect to
any Letter of Credit, the maximum amount available to be drawn
thereunder, determined without regard to whether any
conditions to drawing could then be met.
Subsidiary. The term "Subsidiary" means, as to any Person, any
corporation or other entity of which securities or other
ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned
or controlled by such Person, one or more of the other
Subsidiaries of such Person or any combination thereof.
Term Loan. The term "Term Loan" shall have the meaning
assigned to such term in Section 1.04 hereof.
Term Loan Maturity Date. The term "Term Loan Maturity Date"
shall have the meaning assigned to such term in Section 1.04
hereof.
Test Period shall mean, with respect to any applicable
determination under this Agreement, a period of twelve (12)
consecutive months (taken as one accounting period) and ending
on the last day of the fiscal quarter of the Borrower then
last ended, provided that during the period immediately
following the consummation of the Public Offering, this term
shall mean the shorter period commencing on such consummation
date and ending on the last day of the latest fiscal quarter
until there has elapsed 4 complete fiscal quarters; provided,
further that for purposes of any computation hereunder during
the period contemplated in the foregoing proviso, such
computation shall be annualized by the Bank in
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accordance with methodologies customarily utilized by the Bank
for such purposes.
2.02 Principles of Construction.
(a) References. All references to articles, Sections,
schedules and exhibits are to articles, Sections, schedules
and exhibits in or to this Agreement unless otherwise
specified. The words "hereof", "herein", and "hereunder" and
words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular
provision of this Agreement.
(b) Accounting Terms. All accounting terms not specifically
defined herein or in any exhibit hereto shall be construed in
accordance with GAAP in conformity with those principles used
in the preparation of the financial statements referred to in
Section 6.04 hereof.
III. PREPAYMENT.
-----------
3.01 Prepayment of Revolving Credit Loans. The Revolving Credit
Loans may be prepaid, in whole or in part, at any time,
provided that any prepayment in respect of a LIBOR Loan shall
be made only on the last day of the Interest Period applicable
thereto, and provided, further, that any partial prepayments
of the Revolving Credit Loans shall be in a principal amount
of not less than $250,000, or any whole multiple thereof. All
prepayments shall include accrued and unpaid interest to the
date of prepayment on the principal amount prepaid. All
partial prepayments received pursuant to this Section 3.01
shall be applied to the Obligations that are in respect of the
Revolving Credit Loans in the manner determined by the Bank in
its reasonable discretion.
3.02 Prepayments of Equipment Loans. Any Equipment Loan may be
prepaid, in whole or in part at any time, without premium or
penalty; provided, that any partial prepayment of an Equipment
Loan shall be in a principal amount of not less than $250,000,
or any whole multiple thereof. All prepayments of an Equipment
Loan shall include accrued and unpaid interest to the date of
prepayment on the principal amount prepaid. All partial
prepayments of the principal balance of any Equipment Loan
shall be applied to the Equipment Loan specified by the
Borrower in inverse order of maturity of such Equipment Loan.
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3.03 Termination. If the Borrower has prepaid the Revolving Credit
Loans and all Equipment Loans in full and has paid or
otherwise discharged all other Obligations, then upon written
notice to the Bank, the Borrower may irrevocably terminate
this Agreement without premium or penalty, whereupon no
further Loans will be made hereunder, such termination to be
effective as of the date set forth in said notice.
IV. YIELD MAINTENANCE PROVISIONS.
-----------------------------
4.01 Inability to Determine Rate. If with respect to any Interest
Period, the Bank determines that extraordinary and unforeseen
circumstances beyond the control of the Bank exists with
respect to the relevant market which make it impracticable to
ascertain the interest rate applicable for such Interest
Period, the Bank shall promptly notify the Borrower of such
determination. Upon such determination, no additional LIBOR
Loans shall be permitted under the Revolving Credit Facility
and no conversions to, or continuances of, LIBOR Loans shall
be permitted pursuant to Section 1.12 hereof until the notice
of such determination has been withdrawn. If such notice has
not been withdrawn by the last day of the then current
Interest Period applicable to any then outstanding LIBOR
Loans, the Borrower must elect on the last day of such
Interest Period to either convert such LIBOR Loan to an
Alternate Base Rate Loan or prepay the outstanding principal
balance thereof and accrued interest thereon in full.
4.02 Illegality. Notwithstanding any other provisions herein, if
any law, regulation, treaty or directive or any change therein
or in the interpretation or application thereof, shall make it
unlawful for the Bank to make or maintain any of the Loans as
LIBOR Loans as contemplated by this Agreement, (i) the Bank's
commitment hereunder to make LIBOR Loans under the Revolving
Credit Facility or to permit conversions to, or continuances
of, LIBOR Loans pursuant to Section 1.12 hereof shall
forthwith be suspended until the circumstances surrounding
such unlawfulness shall no longer exit and (ii) any of the
then outstanding LIBOR Loans shall be converted to a Alternate
Base Rate Loan on the last day of the Interest Period
applicable thereto or within such earlier period as may be
required by law.
4.03 Requirement of Law. In the event that any law, regulation,
treaty or directive or any change therein or in the
interpretation or application thereof or
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compliance by the Bank with any request or directive (whether
or not having the force of law) from any central bank or other
Governmental Authority (a "Requirement of Law"):
(a) does or shall subject the Bank to any tax of any kind
whatsoever with respect to this Agreement, the Notes or any
loan made hereunder, or change the basis of taxation of
payments to the Bank of principal, commitment fee, interest or
any other amount payable hereunder (except for changes in the
rate of any tax presently imposed on the Bank);
(b) does or shall impose, modify or hold applicable any
reserve, special deposit, compulsory loan or similar
requirement against assets held by, or deposits or other
liabilities in or for the account of, advances or loans by, or
other credit extended by, or any other acquisition of funds
by, any office of the Bank which are not otherwise included in
the determination of LIBOR hereunder; or
(c) does or shall impose on the Bank any other condition;
and the result of any of the foregoing is to increase the cost
to the Bank of making, renewing or maintaining advances or
extensions of credit to the Borrower or to reduce any amount
receivable from the Borrower hereunder then, in any such case,
the Borrower shall promptly pay to the Bank, upon its demand,
any additional amounts necessary to compensate the Bank for
such additional cost or reduced amount receivable which the
Bank deems to be material as determined by the Bank with
respect to this Agreement, the Notes or the Loans made
hereunder. If the Bank becomes entitled to claim any
additional amounts pursuant to this Section 4.03, it shall
promptly notify the Borrower of the event by reason of which
it has become so entitled. A certificate setting forth
calculations as to any additional amounts payable pursuant to
the foregoing sentence submitted by the Bank to the Borrower
shall be conclusive in the absence of manifest error. The
foregoing shall in no way be construed to permit the Bank to
seek compensation or payment of additional amounts pursuant to
this Section 4.03 in connection with any Requirements of Law
imposed upon the Bank as a result of the Bank's violation of a
Requirement of Law.
4.04 Capital Adequacy. If after the date hereof, the Bank shall
have determined that the adoption of any
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applicable law, rule or regulation regarding capital adequacy
which is generally applicable to banks subject to the
jurisdiction of Governmental Authorities having jurisdiction
over the Bank, or any change therein, or any change in the
interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the
Bank with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on the Bank's
capital as a consequence of its obligations hereunder to a
level below that which the Bank could have achieved but for
such adoption, change or compliance (taking into consideration
the Bank's policies with respect to capital adequacy) by an
amount deemed by the Bank to be material, then from time to
time, within 30 days after demand by the Bank, the Borrower
shall pay to the Bank such additional amount or amounts as
will compensate the Bank for such reduction. The Bank will
promptly notify the Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle
the Bank to compensation pursuant to this Section 4.04, and
such notification of the amount due pursuant to this Section
4.04 shall be conclusive absent manifest error.
4.05 Funding Indemnity. The Borrower agrees to indemnify the Bank
and to hold the Bank harmless from any loss or expense which
the Bank may sustain or incur as a consequence of (i) default
by the Borrower in payment of the principal of or interest on
any LIBOR Loan, including, but not limited to, any such loss
or reasonable expense arising from additional interest or fees
payable by the Bank to lenders of funds obtained by it in
order to maintain any Loan as a LIBOR Loan, (ii) except for
prepayments required pursuant to Section 4.01 or 4.02, any
prepayment of any LIBOR Loan received (from any source) on any
date other than the last day of the Interest Period applicable
thereto, including, but not limited to, any such loss or
expense in connection with the employing of deposits as a
consequence thereof, (iii) default by the Borrower in making
any borrowing of a LIBOR Loan under the Revolving Credit
Facility after such Borrower has given notice thereof in
accordance with Section 1.12 hereof, of a LIBOR Loan or (iv)
default by the Borrower in making any prepayment after the
Borrower has given a notice thereof. This covenant shall
survive termination of this Agreement and payment of the
Notes.
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4.06 Match Funding. The amount payable or indemnifiable under
Sections 4.03, 4.04 and 4.05 hereof shall be determined, in
the Bank's sole discretion, based upon the assumption that the
Bank funded 100% of any affected LIBOR Loan in the applicable
London interbank market.
V. CONDITIONS.
-----------
5.01 Requirements for Initial Funding. The obligation of the Bank
to make the initial advance of any Loan available hereunder is
subject to the Bank's receipt of each of the documents listed
on the Closing Checklist attached hereto as Exhibit E, and
such other documents as the Bank may reasonably request, each,
as appropriate, duly executed and delivered by the parties
thereto and in form and substance satisfactory to the Bank.
The obligation of the Bank to make the initial advance of any
Loan available hereunder is subject to the further condition
that the Borrower shall have consummated the Public Offering
and the "Acquisitions" (as defined in the registration
statement, as amended, referred to in the definition of Public
Offering) and gross proceeds of not less than $42,000,000
shall have been received by the Borrower in connection
therewith and used for the purposes described in said
registration statement.
5.02 Requirements for Any Advance or Conversion. The obligation of
the Bank to (i) make any advance under the Revolving Credit
Facility or the Equipment Facility, or (ii) permit the
conversion of any Revolving Credit Loan to a LIBOR Loan
pursuant to Section 1.12 hereof, is subject to and conditioned
upon the following:
(a) the representations and warranties contained in
Article VI hereof are correct in all material
respects on and as of the date of each such advance,
conversion or continuation, except for
representations and warranties specifically stated to
relate to an earlier date, in which event such
representations and warranties shall be correct in
all material respects as of such earlier date;
(b) no Event of Default, and no event which, with the
giving of notice, or the passage of time, or both,
would become an Event of Default, has occurred and is
continuing; and
(c) all of the Credit Documents then in effect by their
terms remain in full force and effect.
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5.03 Additional Requirements for Advances Under Equipment Facility.
The obligation of the Bank to make any advance under the
Equipment Facility is subject to and conditioned upon, in
addition to satisfaction of the conditions specified in
Section 5.02, the satisfaction of the following conditions:
(a) the Borrower shall have complied with the procedures
set forth in Section 1.03, including, without
limitation, the furnishing of all information
required thereunder;
(b) the Borrower or the relevant Subsidiary Guarantor, as
the case may be, shall have furnished to the Bank
executed originals of (i) a Security Agreement
substantially in the form of Exhibit G attached
hereto (with such modifications thereto as may be
required by the law of the jurisdiction governing the
creation and perfection of the Bank's security
interest in the relevant Financed Equipment in order
to provide the Bank with all the right, benefits and
remedies of a secured creditor with a first priority
lien in such equipment) and (ii) such UCC-1 financing
statements (state and/or local), in each case as may
be reasonably requested by the Bank;
(c) the Borrower or the relevant Subsidiary Guarantor, as
the case may be, shall have caused to be delivered to
the Bank a landlord consent and waiver, in
substantially the form of Exhibit G hereto, from each
landlord of the premises in which the relevant
Financial Equipment is to be located;
(d) the Borrower or the relevant Subsidiary Guarantor as
the case may be, shall have authorized the Bank to
fund the proceeds of the relevant Equipment Loan
directly to the vendor of the relevant Financed
Equipment and, in that connection, the Borrower or
such Subsidiary Guarantor shall have furnished to the
Bank all such information and payment instructions as
the Bank may request to effect such funding;
(e) the Borrower or the relevant Subsidiary Guarantor,
shall have taken all such additional steps and/or, as
the case may be, provided the Bank with all such
other further assurances as the Bank may reasonably
request to assure the Bank that the Lien of the
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Bank in the relevant Financed Equipment is of the
first priority, subject to no other Liens; and
(f) the Borrower shall have caused to be delivered to the
Bank an Equipment Loan Note substantially in the form
of Exhibit A hereto, appropriately completed by the
Bank to reflect the specific terms of the applicable
Equipment Loan in accordance with the terms of this
Agreement.
VI. REPRESENTATIONS AND WARRANTIES.
-------------------------------
The Borrower represents and warrants that:
6.01 Organization; Authority. The Borrower (a) is a corporation
duly organized, validly existing and in good standing under
the laws of the State of New Jersey, is duly qualified as a
foreign corporation and is in good standing under the laws of
each jurisdiction in which it is required to be qualified
because of the business it conducts or the property it owns,
and (b) has the necessary power and authority to enter into
and perform its obligations under the Credit Documents and all
other documents required by the Bank in connection therewith.
The execution and performance of the Credit Documents have
been duly authorized by all necessary proceedings on the part
of the Borrower, and, upon their execution and delivery, they
will be valid, binding, and enforceable in accordance with
their terms. The execution and performance of the Credit
Documents by the Borrower will not violate any orders, laws or
regulations applicable to it, any of its organizational
documents, or any instruments, indentures or agreements
(including any provisions pertaining to subordinated debt) to
which the Borrower is a party or by which the Borrower or any
of its properties are bound, except to the extent that any
such violation would not have a Material Adverse Effect. All
consents, approvals, licenses, franchises, trademarks and
other general intangibles that are necessary or appropriate in
connection with this Agreement, the other Credit Documents or
the operation of the business of the Borrower have been
obtained and are in full force and effect, except to the
extent that any such failure to so obtain and maintain such
general intangibles would not have a Material Adverse Effect.
6.02 Subsidiaries. The corporations listed on Annex I are the only
Subsidiaries of Borrower as of the date hereof and each such
Subsidiary is a corporation, duly organized, valid existing
and in good standing, under
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the law of the jurisdiction of its organization, is duly
qualified as a foreign corporation and is in good standing
under the law of each jurisdiction in which it is required to
be qualified because of the business it conducts or the
property it owns and have all necessary power and authority to
own its property and conduct its business as then conducted.
All consents, approvals, licenses, franchises, trademarks and
other general intangibles that are necessary or appropriate in
connection with the operation of the business of each
Subsidiary, have been obtained and are in full force and
effect, except to the extent that any such failure to so
obtain and maintain such general intangibles would not have a
Material Adverse Effect. Each such Subsidiary is a wholly
owned Subsidiary of the Borrower and no other Person has any
direct or indirect interest in such Subsidiary, other than
such interests which may exist as a result of any stock
ownership interest of any Person in the Borrower.
6.03 Use of Proceeds; Margin Regulation. The proceeds of the
Equipment Loans shall be used exclusively for purchase money
financing of Financed Equipment. The proceeds of borrowings
under the Revolving Credit Facility shall be used by the
Borrower for the following purposes: (i) to fund acquisitions
permitted pursuant to Section 8.03 hereof, (ii) to refinance
certain existing Indebtedness of the Borrower and certain of
its Subsidiaries as and to the extent disclosed in writing to
the Bank prior to the Closing Date, and (iii) working capital
and other general corporate purposes. The Borrower (nor any of
its Subsidiaries) is not engaged in the business of extending
credit for the purpose of buying or carrying "margin stock"
(within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System). Neither the making
of any Loan nor use of the proceeds thereof will violate or be
inconsistent with the provisions of Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System.
6.04 Financial Statements. The financial statements included in the
Borrower's Form S-1 (as amended) as filed with the SEC in
connection with the Public Offering, were prepared in
accordance with GAAP, consistently applied, are true and
correct, and disclose all presently outstanding indebtedness
or obligations of the Borrower as of the date thereof to the
extent required under GAAP, including contingent obligations,
obligations under leases of property from others, and all
liens and encumbrances, including tax liens, against its
properties and assets; and there have been no material
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<PAGE>
adverse changes in the Borrower's financial condition or
business since the date of such statements through the Closing
Date.
6.05 Suits. Other than as disclosed on Annex I hereof, there are no
actions, suits, proceedings, or claims pending or threatened
against the Borrower, any of its Subsidiaries, or any of their
respective properties, which, if adversely determined, would
have a Material Adverse Effect.
6.06 Burdensome Agreements. Neither the Borrower nor any of its
Subsidiaries is a party to any indenture, loan or credit
agreement or any other agreement, contract or instrument, or
subject to any certificate of incorporation, by-law, or
corporate restriction, the compliance with, or the performance
of, which may reasonably be expected to have a Material
Adverse Effect.
6.07 Defaults. Neither the Borrower nor any of its Subsidiaries are
in default under any agreement to which it is a party or by
which it is or any of its properties are bound, or under any
indenture or instrument evidencing any its indebtedness and
neither the execution of nor performance by the Borrower under
the Credit Documents will create a default or any lien or
encumbrance under any such agreement, indenture or instrument
other than a lien or encumbrance in favor of the Bank, except,
in each case, to the extent that the occurrence of any such
defaults or the existence of any such liens would not have a
Material Adverse Effect.
6.08 ERISA. No employee benefit plan established or maintained by
the Borrower which is subject to the Employee Retirement
Income Security Act, 29 U.S.C. ss. 1001 et seq. ("ERISA") has
an accumulated funding deficiency (as such term is defined in
ERISA). No material liability to the Pension Benefit Guaranty
Corporation (or any successor thereto under ERISA) has been
incurred by the Borrower or any of its Subsidiaries with
respect to any such plan and no Reportable Event under ERISA
has occurred. Neither the Borrower nor any of its Subsidiaries
has an actual or anticipated liability under Section 4971 of
the Internal Revenue Code ("Code") (relating to tax on failure
to meet the minimum funding standard of Section 412 of the
Code) with respect to any employee benefit plan to which any
of them contributes but which is not maintained or established
by any of them. No proceedings have been
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instituted to terminate any employee benefit plan of the type
described in this Section 6.08 and no condition exists which
presents a material risk, to the Borrower or any of its
Subsidiaries of incurring liabilities to or on account of any
such plan pursuant to the provisions of ERISA or the
applicable provisions of the Code.
6.09 Tax Returns and Taxes. Each of the Borrower and its
Subsidiaries has filed all federal, state and local tax
returns required to be filed and has paid all taxes,
assessments and governmental charges and levies thereon,
including interest and penalties, except where the same are
being contested in good faith by appropriate proceedings and
for which adequate reserves have been set aside, and no liens
for taxes have been filed by a Governmental Authority with
respect to any taxes. The charges, accruals and reserves on
the books of the Borrower or its Subsidiary, as the case may
be, with respect to taxes or other governmental charges are
adequate.
6.10 Compliance with Statutes, etc. Each of the Borrower and its
Subsidiary is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions
imposed by, any Government Authority, in respect of the
conduct of its business and the ownership of its property
(including, without limitation, any applicable Environmental
Laws), except such instances of noncompliances as would not
have a Material Adverse Effect.
6.11 Not an Investment Company. Neither the Borrower nor any of its
Subsidiaries is an "investment company" or a company
"controlled" by an "investment company", within the meaning of
the Investment Company Act of 1940, as amended.
6.12 No Authorizations or Approvals. No authorization or approval
or action by, and no notice to or filing with, any
Governmental Authority is required for the due execution,
delivery and performance by the Borrower of this Agreement and
the other Credit Documents.
6.13 Intellectual Property, etc. Each of the Borrower and its
Subsidiaries has obtained all material patents, trademarks,
servicemarks, trade names, copyrights, technology, processes,
licenses and other rights ("Intellectual Property"), free from
any burdensome restrictions, that are necessary for the
operation of
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their respective businesses as presently conducted and as
proposed to be conducted. No material claim has been asserted
or threatened questioning the use of such Intellectual
Property, nor does the Borrower or any of its Subsidiaries
know of any valid basis for any such material claim.
6.14 Assets and Properties. Each of the Borrower and its
Subsidiaries has good (and, with respect to real property,
marketable) title to all of its assets and properties
(tangible and intangible) and all such assets and properties
are free and clear of all Liens (except Permitted Liens).
Substantially all of the assets and properties owned by,
leased to or used by each of the Borrower and its Subsidiaries
are in adequate operating condition and repair, ordinary wear
and tear excepted, are free and clear of known defects except
such defects as do not substantially increase with the
continued use thereof in the conduct of normal operation, and
such assets are able to serve the function for which they are
currently being used, except in each case, where the failure
of such asset or property to meet such requirements would not
have a Material Adverse Effect.
6.15 Labor Matters. Except as disclosed on Annex I, neither the
Borrower nor any of its Subsidiaries is a party to a
collective bargaining or union contract. There are no strikes,
lockouts or other disputes relating to any collective
bargaining or similar agreement to which the Borrower of any
of its Subsidiaries is a party.
6.16 Insurance. Annex I hereto lists all material insurance
contracts and binders of the Borrower and its Subsidiaries
which are in full force and effect on the date hereof. Such
contracts and binders provide coverages which are usual and
customary in the business of the Borrower and its Subsidiaries
as to amount and scope. With respect to coverages pertaining
to any Financed Equipment, each such insurance contract and
binder shall contain standard lender's endorsement and loss
payee endorsements in favor of the Bank, and subject to
cancellation or reduction in coverage only upon 30 days' prior
written notice thereto to the Bank.
6.17 True and Complete Disclosure. All factual information (taken
as a whole) heretofore or contemporaneously furnished by the
Borrower to the Bank for the purposes of or in connection with
this Agreement or any transactions contemplated herein is, and
all other such factual information (taken as a whole)
hereafter furnished by or on behalf of the Borrower in writing
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to the Bank will be, true and accurate in all material
respects on the date as of which such information is dated or
certified and does not omit to state any fact necessary to
make such information (taken as a whole) not misleading at
such time in light of the circumstances under which such
information was provided.
VII. AFFIRMATIVE COVENANTS.
----------------------
The Borrower covenants and agrees that for so long as there are any
outstanding Obligations hereunder, or the Bank shall have any obligation
hereunder, the Borrower shall (and, as applicable, shall cause each of its
Subsidiaries (including the Guarantors) to):
7.01 Financial Statements. Furnish to the Bank the following
financial information: (i) as soon as available but in any
event within 90 days (or 105 days, if the Borrower is
operating under an automatic extension afforded pursuant to
the rules and regulations promulgated by the SEC) after the
close of each fiscal year of the Borrower, to the extent
prepared to comply with SEC requirements, a copy of the SEC
Form 10-K (or successor form promulgated by the SEC) filed by
the Borrower with the SEC for such fiscal year, or, if no such
form was so filed for such fiscal year, Consolidated audited
year-end financial statements for the Borrower, including, but
not limited to, statements of financial condition, income and
cash flows, a reconciliation of net worth, notes and other
supporting schedules to such financial statements and any
other information reasonably requested by the Bank that may
assist the Bank in assessing the Borrower's financial
condition (prepared in accordance with GAAP consistently
applied, and accompanied by an opinion, satisfactory in
substance to the Bank, by an independent certified public
accountant acceptable to the Bank, and certified as true,
correct and complete by the Borrower's chief financial
officer); (ii) as soon as available but in any event within 45
days (or 50 days, if the Borrower is operating under an
automatic extension afforded pursuant to the rules and
regulations promulgated by the SEC) after each interim fiscal
quarter, to the extent prepared to comply with SEC
requirements, a copy of the SEC Form 10-Q (or successor form
promulgated by the SEC) filed by the Borrower with the SEC for
such fiscal quarter; or, if no such form was so filed for such
fiscal quarter, unaudited management prepared consolidated
financial statements for the Borrower for such quarter,
including, but not limited to, statements of financial
condition, incoming cash flows, a reconciliation of net worth,
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and supporting schedules (prepared in accordance with GAAP
consistently applied, and certified as true, correct and
complete by the Borrower's chief financial officer); (iii)
promptly upon filing the same with the SEC, copies of any
filings and registrations with, and any reports to, the SEC by
the Borrower, including, but not limited to, any reports on
Form 8-K (or successor term promulgated by the SEC), or any
proxy or registration statement or any other form of public
disclosure prescribed by the SEC; and (iv) such other
information respecting the operations, financial or otherwise,
of the Borrower as the Bank may from time to time reasonably
request.
7.02 Compliance Certificate. Furnish to the Bank, together with
each set of financial statements described in clauses (i) and
(ii) of Section 7.01 hereof, a compliance certificate,
substantially in the form of Exhibit F hereto, signed by the
Borrower's chief financial officer, certifying that: (i) all
representations and warranties set forth in this Agreement and
in the other Credit Documents are true and correct in all
material respects as of the date thereof, except for
representations and warranties specifically stated to relate
to an earlier date in which event such representations and
warranties shall be correct in all material respects as of
such earlier date; (ii) none of the covenants in this
Agreement or in the other Credit Document have been breached
which breach is continuing; and (iii) no event has occurred
which, alone, or with the giving of notice or the passage of
time, or both, would constitute an Event of Default under this
Agreement or the other Credit Documents.
7.03 Notice of Certain Events. Promptly give written notice to the
Bank of: (i) the details of any Reportable Events (as defined
in ERISA) which have occurred, (ii) the occurrence of any
event which alone or with notice, the passage of time, or
both, would constitute an Event of Default, and (iii) the
commencement of any proceeding or litigation which, if
adversely determined, would have a Material Adverse Effect.
7.04 Preservation of Property; Insurance. Keep and maintain, and
require each of its Subsidiaries to keep and maintain, all of
its and their material properties and assets in good order and
repair, ordinary wear and tear excepted; maintain in all
material respects all insurance coverages described in Section
6.16 hereof and such other extended coverage, general
liability, hazard, business interruption, property and other
insurance in
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amounts reasonably satisfactory to the Bank and as is
customary for businesses similar to such corporation's
business and deliver to the Bank certificates of all such
insurance in effect; and cause all such policies covering any
of the Financed Equipment to contain loss payee endorsements
in favor of the Bank and to be subject to cancellation or
reduction in coverage only upon 30 days prior written notice
thereof to the Bank at its address set forth in this
Agreement. The foregoing insurance requirements are in
addition to any insurance requirements set forth in the
Security Agreements.
7.05 Taxes. Pay and discharge, and require each of the its
Subsidiaries to pay and discharge, when due, all taxes,
assessments or other governmental charges imposed on them or
any of their respective properties, unless the same are
currently being contested in good faith by appropriate
proceedings and adequate reserves are maintained therefor.
7.06 Conduct of Business and Maintenance of Existence. Continue to
engage in business of the same general type as now conducted,
and preserve, renew and keep in full force and effect its
corporate existence and rights, privileges and franchises
necessary in the normal conduct of business and which are
material to the Borrower and its Subsidiaries, taken as a
whole. For the avoidance of doubt, it is hereby acknowledged
that the foregoing shall not be construed to prohibit the
corporate transactions permitted to occur under Section
8.03(A) hereof.
7.07 Operation of Business and Properties. Operate its business and
properties, and cause those of its Subsidiaries to be
operated, in compliance with all applicable orders, rules,
regulations and other requirements of any Governmental
Authority applicable thereto, and duly file or cause to be
filed such reports and/or information returns as may be
required or appropriate under applicable orders, rules,
regulations or other requirements of any Governmental
Authority, including, without limitation, any Environmental
Laws, except to the extent that such non-compliance would not
have a Material Adverse Effect.
7.08 Access to Properties, Books and Records. Keep adequate books
and records of accounts reflecting all of its financial
transactions and permit the Bank's representatives and/or
agents full and complete access to any or all of the
Borrower's properties and financial records, to make extracts
from and/or audit such records
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and to examine and discuss their properties, business,
finances and affairs with the Borrower's officers and outside
accountants, provided that such access need only be provided
by the Borrower during normal business hours and on not less
than 72 hours' prior notice and the costs incurred in
connection with any such examination conducted prior to the
occurrence of an Event of Default shall be borne by the Bank.
7.09 Environmental Liens. In the event that there shall be filed a
Lien against any property of the Borrower or any of its
Subsidiaries by any Governmental Authority arising from an act
or omission of the Borrower or any of its Subsidiaries,
resulting in the discharge of hazardous substances or wastes
into the atmosphere or waters or onto lands, then, within 60
days from the date that the Borrower or any of its
Subsidiaries is given notice that the Lien has been placed
against such property or within such shorter period of time in
the event that such Governmental Authority has commenced steps
to cause such property to be sold pursuant to the lien, either
(i) pay the claim and remove the Lien from the applicable
property or (ii) furnish to such Governmental Authority with
one of the following: (x) a bond satisfactory to Governmental
Authority in the amount of the claim out of which the Lien
arises, (y) a cash deposit in the amount of the claim out of
which the Lien arises, or (z) other security reasonably
satisfactory to such Governmental Authority in an amount
sufficient to discharge the claim out of which the Lien
arises.
7.10 Removal of Hazardous Substances. Should the Borrower and any
of its Subsidiaries cause or permit any act or omission
resulting in the discharge of hazardous substances or wastes
into the atmosphere or waters, or onto the lands in violation
of any applicable Environmental Law, promptly clean up same in
accordance with all applicable Environmental Laws.
7.11 Further Assurances. Do, execute, acknowledge and deliver or
cause to be done, executed, acknowledged and delivered, all
such further instruments, acts, deeds, and assurances as may
be reasonably requested by the Bank for the purpose of
carrying out the provisions and intent of the Credit
Documents.
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VIII. NEGATIVE COVENANTS.
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So long as any Obligations are outstanding, or the Bank shall have any
obligation hereunder, without the prior written consent of the Bank (which
consent shall not be unreasonably withheld), the Borrower shall not (and shall
not, as applicable, permit any of its Subsidiaries (including the Guarantor)
to):
8.01 Incur Indebtedness. Incur, create, assume, or permit to exist
any Indebtedness at any time, except:
(a) Indebtedness of the Borrower owing to the Bank under
this Agreement and the Notes;
(b) other Indebtedness of the Borrower owing to the Bank;
(c) Indebtedness existing on the date hereof that is
described on Annex I hereof;
(d) Approved Subordinated Indebtedness;
(e) Indebtedness in respect of normal trade debt arising
in the ordinary course of business;
(f) Indebtedness secured by Liens permitted to exist
pursuant to Section 8.02(h); Notwithstanding the
foregoing provisions of this clause (f), before the
Borrower or any of its Subsidiaries incurs Indebtedness
for borrowed money under this clause (f) the Borrower
shall give the Bank written notice of the intention to
borrow, setting forth a description of the proposed
borrowing, and the Bank shall have 5 Business Days to
notify the Borrower that it elects to make the proposed
loan. If the Bank fails to make such election, then the
Borrower and its Subsidiaries shall be free to incur
the proposed Indebtedness on substantially as favorable
terms to the Borrower and its Subsidiaries, as
applicable, as proposed to the Bank free of the right
of the Bank to make such loan under this clause (f). If
the Bank elects to make the proposed loan, then the
Borrower and the Bank shall negotiate in good faith to
consummate the proposed loan within a reasonable time.
If such negotiations do not result in the closing of
the proposed loan, then the Borrower and its
Subsidiaries, as applicable, shall be entitled to
borrow on substantially as favorable terms to the
Borrower and its Subsidiaries, as applicable, as
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proposed free of the right of the Bank to make the
proposed loan under this clause (f);
(g) Indebtedness that constitutes Guaranteed Indebtedness
of the Borrower or any of its Subsidiaries that has
been incurred by the Borrower or any of its
Subsidiaries solely by virtue of an endorsement of
checks or drafts negotiated in the ordinary course of
the business;
(h) Indebtedness incurred or assumed in connection with
acquisitions permitted pursuant to Section 8.03 hereof,
but only to the extent that such Indebtedness would
otherwise be permitted to exist pursuant to clauses
(d), (e), (f)(but without regard to the monetary
threshold set forth in clause (h) of Section 8.02
hereof), (g), (j) or (l) of this Section 8.01;
(i) Indebtedness owing from or to Borrower or any of its
Subsidiaries to or from any other of its Subsidiaries
or Borrower;
(j) Indebtedness arising under any OEM Equipment Finance
Transactions;
(k) Indebtedness convertible into capital stock of the
Borrower, or warrants or other rights to acquire such
capital stock; or
(l) Indebtedness incurred in connection with Facilities
Management Arrangements.
8.02 Negative Pledge. Create, permit to exist, or suffer the
creation of, any Lien, on any of its properties or assets
(real or personal, tangible or intangible), except:
(a) Liens in favor of the Bank;
(b) Liens existing on the date hereof that are listed on
Annex I hereto;
(c) Liens for taxes, assessments or governmental charges or
levies to the extent not required to be paid by Section
7.05 hereof;
(d) Liens imposed by law, such as materialmen's,
mechanics', carrier's, workmen's, and repairmen's
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Liens and other similar Liens arising in the ordinary
course of business securing obligations which are not
overdue for a period of more than 30 days;
(e) pledges or deposits to secure obligations under
workmen's compensation laws or similar legislation or
to secure public or statutory obligations of the
Borrower or any of its Subsidiaries;
(f) Liens with respect to any OEM Equipment Finance
Transaction but only in respect of the equipment
acquired therein;
(g) Liens incurred, assumed or created in connection with
Facilities Management Arrangements, but only as to
equipment and machinery that (i) is pertinent to the
performance by the Borrower or the relevant Subsidiary
of its obligations thereunder and (ii) was not an asset
of the Borrower or such relevant Subsidiary prior to
such arrangement;
(h) Liens for finance leases of equipment leased by the
Borrower or any of its Subsidiaries (including
Capitalized Leases), or purchase money Liens upon or in
equipment acquired or held by the Borrower or any of
its Subsidiaries in the ordinary course of business to
secure the purchase price of such equipment or to
secure Indebtedness incurred solely for the purpose of
financing the acquisition of any such equipment to be
subject to such Liens, or Liens existing on any such
equipment at the time of the leasing, acquisition, or
extensions, renewals or replacements of any of the
foregoing for the same or a lesser amount, provided
that no such Lien shall extend to or cover any
equipment (including, but not limited to, the Financed
Equipment) other than the equipment being leased or
acquired and no such extension, renewal or replacement
shall extend to or cover any equipment not theretofore
subject to the Lien being extended, renewed or
replaced, and provided, further, that (i) the aggregate
principal amount of the Indebtedness at any one time
outstanding secured by Liens permitted pursuant to this
clause (h) shall not exceed $5,000,000 at any one time
outstanding and (ii) any such Indebtedness shall not
otherwise be prohibited by the terms of this Agreement;
or
(i) the replacement, extension or renewal of any Lien
permitted by clauses (a) through (h) above upon or
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in the same property theretofore subject thereto or the
replacement, extension or renewal (without increase of
principal amount) of the Indebtedness secured thereby.
8.03 Sale of Assets; Liquidation; Merger; Acquisitions. (i) Convey,
lease, sell, transfer or assign any assets or properties
presently owned or hereafter acquired by it, except
dispositions of inventory in the ordinary course of business
for value received and such other dispositions of assets and
properties that are not material to the business or operations
of the Borrower or any of its Subsidiaries, if such asset or
property is replaced with reasonable promptness or is
otherwise obsolete or not needed, (ii) liquidate or
discontinue its normal operations with intent to liquidate;
(iii) enter into any merger or consolidation; (iv) acquire all
or substantially all of the assets, stock or other equity
interests of any other Person; or (v) take any action, or
enter into any agreements, to effect any of the foregoing.
Notwithstanding the foregoing or anything to the contrary set
forth in this Agreement, the following transactions shall be
permitted upon the satisfaction of the condition pertaining
thereto set forth below:
(A) The consolidation, merger or liquidation of any
Subsidiary of the Borrower with or into the Borrower or
another Subsidiary of the Borrower, if and only if, the
Borrower or such other Subsidiary shall be the
surviving or resulting entity of any such proposed
transaction.
(B) The acquisition by the Borrower of any other Person or
substantially all of the assets of such Person, if and
only if, the following conditions were fulfilled:
(i) said acquisition is of a Person or of a business or
product of such Person that is related or complimentary
to the business or products of the Borrower and its
Subsidiaries as presently conducted;
(ii) no later than 5 Business Days prior to the
consummation of any such proposed acquisition, the Bank
shall have received a true and correct copy of any and
all contractual undertakings related to the proposed
acquisition together (w) evidence of receipt of
approvals of Governmental Authorities to such
acquisition, if any such approvals are
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required, (x) with full and complete written
description of such proposed acquisition, (y) a pro
forma opening balance sheet and income statement of the
Borrower on a combined and combining basis giving
effect to such proposed acquisition, and (z) such
financial information and computations as the Bank may
deem necessary to demonstrate that, immediately after
giving effect to such proposed acquisition, none of the
covenants set forth in Sections 8.12 through 8.15
hereof shall be violated;
(iii) the Borrower or one of its Subsidiaries shall be
the surviving or resulting entity of any such proposed
acquisition, or the purchaser of any stock or assets
being acquired in such transaction;
(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 or similar agreements shall not
exceed (x) $12,500,000 in any single acquisition and
(y) $30,000,000 in the aggregate for all such
acquisitions, in each cash 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.
8.04 Intentionally Omitted.
8.05 Sale-Leaseback Transactions. Enter into any sale-leaseback
transaction or any transaction howsoever termed which would
have the same or substantially the same result or effect as a
sale-leaseback, except in connection with an acquisition
permitted under Section 8.03(B) hereof for the purpose of
effectively conveying or otherwise transferring real property
of the Person acquired in any such transaction, or to permit
such Person to effectively retain its interest in any real
property which is not being acquired in any such transaction.
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8.06 Prepayment of Other Indebtedness. Prepay any amounts on any
outstanding Indebtedness permitted to exist pursuant to
clauses (d) or (k) of Section 8.01 hereof, which is not
required to be prepaid by the express terms thereof, or cause
or permit the acceleration of any amounts on any outstanding
Indebtedness now existing or hereafter arising.
8.07 Investments. Purchase or make any investment in the stock,
securities or evidences of indebtedness of, or make capital
contributions or loans or advances to, or other forms of
investments in, any Person ("Investments"), except Permitted
Investments. Notwithstanding the foregoing, the Borrowers
shall be permitted to make loans to its employees for
corporate purposes; provided that the aggregate principal
amount of such loans outstanding at any one time shall not
exceed $250,000.
8.08 Create Subsidiaries. Create, permit to exist, or invest or
otherwise participate in any Subsidiaries (other than the
Subsidiaries listed on Annex I hereto) or any partnership or
other separate legal entity; provided that the foregoing shall
not apply to any new Subsidiaries that executes and delivers
in favor of the Bank a guaranty and suretyship agreement (as
well as resolutions authorizing the same), in each case
substantially the same as the guaranty executed and delivered
by the Guarantors in connection with the transactions herein
contemplated.
8.09 Hazardous Substances. Cause or permit to exist a discharge of
hazardous substances or wastes into the atmosphere or waters
or onto lands unless such discharge is pursuant to and in
compliance with the conditions of a permit issued by the
appropriate Governmental Authorities or otherwise in
compliance with applicable Environmental Law or the discharge
does not have a Material Adverse Effect and is properly being
remedied by the Borrower or one of its Subsidiaries.
8.10 Dividends, Etc. Declare or make any dividend payment or other
distribution of assets, properties, cash, rights, obligations
or securities on account of any shares of any class of stock
of the Borrower, or purchase, redeem, or otherwise acquire for
value (or permit any of its Subsidiaries to do so) any shares
of any class of stock of the Borrower or any warrants, rights
or options to acquire any such shares, now or
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hereafter outstanding; except that the Borrower may declare
and pay quarterly cash dividends in respect of its common
stock; provided, however, that if immediately after giving
effect to any such proposed dividend payment, a violation of
any provision of Section 8.12 through 8.17 or any other Events
of Default would exist, then no such dividend payments shall
be permitted hereunder. The Borrower may from time to time
request that the Bank permit the payment of quarterly
dividends in addition to the amount set forth in this Section
8.10 by written notice to the Bank specifying the time and
amount of such additional dividends; provided, however, that
no such additional dividends shall be permitted hereunder
without the prior written consent of the Bank (which consent
may or may not be given in each Bank's sole and absolute
discretion) and any such consent shall be effective only in
the specific instance requested.
8.11 Redemption of Common Stock. Enter into any agreement to, or
purchase or retire shares of the Borrower's common stock or
pay or make other similar payments in respect thereof.
8.12 Consolidated Stated Net Worth. Permit as at the end of any
Test Period the sum of (A) the Consolidated Stated Net Worth
plus (B) if a positive number, the Borrower's net income for
the relevant Test Period (excluding any extraordinary items or
non-recurring items) to be less than 90% of said sum
determined as of the last day of the immediately preceding
Test Period, tested no less frequently than quarterly and
determined in each case on a Consolidated basis in accordance
with GAAP, consistently applied.
8.13 Consolidated Tangible to Stated Net Worth. Permit at any time,
its Consolidated Tangible Net Worth to be any less than 25% of
the Consolidated Stated Net Worth, tested no less frequently
than quarterly and determined in accordance with GAAP,
consistently applied.
8.14 Consolidated Funded Debt to EBITDA Ratio. Permit at any time
the Consolidated Funded Debt to EBITDA Ratio to exceed 3.25 to
1.00, tested no less frequently than quarterly for each Test
Period and determined in each case in accordance with GAAP,
consistently applied.
8.15 Consolidated Fixed Charges Ratio. Permit at any time its
Consolidated Fixed Charges Ratio to exceed 1.50 to 1.00,
tested no less frequently than quarterly for each
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Test Period and determined in each case in accordance with
GAAP, consistently applied.
8.16 Transactions with Affiliates. Except as expressly permitted by
this Agreement, directly or indirectly: (i) make any
Investment in an Affiliate; (ii) transfer, sell, lease, assign
or otherwise dispose of any assets to an Affiliate, (iii)
merge into or consolidate with or purchase or acquire assets
from an Affiliate; (iv) make any payments to any Affiliate or
otherwise suffer to exist any transaction with any Affiliate
or (v) enter into any other transaction directly or indirectly
with or for the benefit of any Affiliate (including, without
limitation, guarantees and assumptions of obligations of an
Affiliate); provided, however, that (a) any Affiliate who is
an individual may serve as an employee, director, consultant
or independent contractor of the Borrower or any of its
Subsidiaries and receive reasonable compensation for services
rendered in such capacity and (b) any of the Borrower's
Subsidiaries or the Borrower may enter into any transaction
with another Subsidiary or the Borrower which is not otherwise
prohibited by this Agreement or any of the other Credit
Documents, provided that the terms of any transaction pursuant
to which any Affiliate (other than Affiliates that are also
Subsidiaries of the Borrower) owes money to the Borrower shall
be at least arms length and the terms of any transaction
pursuant to which the Borrower and/or any Subsidiary owes
money to an Affiliate (other than Affiliates that are also
Subsidiaries of the Borrower) shall not be more onerous than
would obtain in an arms length transaction.
8.17 Use of Proceeds. Use the proceeds of any Loan made hereunder
for any purpose other than the purposes described in Section
6.03 hereof.
8.18 Change Fiscal Year. As to the Borrower only, change its
fiscal year to end on any date other than December 31.
IX. EVENTS OF DEFAULT.
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Each of the following shall constitute an event of default ("Event of
Default") hereunder:
9.01 Payment Default. The Borrower shall (i) fail to pay any
principal of, or interest on, the Loans within 2 Business Days
of the due date thereof or (ii) default in
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the payment any other amounts owing hereunder, under the Notes
or under any other Credit Document and such default shall
continue for a period of 2 Business Days after the Bank
provides notice thereof to the Borrower;
9.02 Negative Covenant Breach. The Borrower shall default in the
due performance or observance by it of any term, covenant or
agreement contained in Article VIII hereof;
9.03 Other Covenant Breaches. The Borrower, or any Subsidiary of
the Borrower, shall default in the due performance or
observance of any term, covenant or agreement (other than
those referred to in Sections 9.01 and 9.02 above) contained
in this Agreement, the Notes or any other Credit Document, and
such default shall continue unremedied for a period of at
least 10 days after the earlier to occur of (i) the date the
Borrower obtains actual knowledge of such default or (ii) the
date notice of such default is given to the Borrower by the
Bank;
9.04 Default Under Agreements for Borrowed Money. (i) The Borrower
or any Subsidiary of the Borrower shall default in any payment
with respect to any Indebtedness in excess of $750,000
(individually or in the aggregate as to the Borrower and its
Subsidiaries) beyond the period of grace, if any, provided in
the instrument or agreement under which such Indebtedness was
created or default in the observance or performance of any
agreement or condition relating to any such Indebtedness or
contained in any instrument or agreement evidencing, securing
or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of
such Indebtedness (or a trustee or agent on behalf of such
holder or holders) to cause (determined without regard to
whether any notice or lapse of time is required), any such
Indebtedness to become due prior to its stated maturity, or
(ii) any such Indebtedness shall be declared to be due and
payable, or required to be prepaid as a mandatory prepayment,
prior to the stated maturity thereof; provided, however, that
there shall not exist an Event of Default under this Section
9.04 if immediately upon obtaining knowledge of any potential
Event of Default under this Section 9.04, the Borrower
provides the Bank written notice of the facts and
circumstances pertaining thereto and the manner in which the
Borrower intends to contest, remedy or otherwise resolve the
same and the Bank consents to such contest, remedial action or
other form of resolution, which consent shall not be
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unreasonably withheld; provided, further that the consent of
the Bank may be limited in duration to any reasonable time
period under the circumstances;
9.05 Default Under Other Material Contracts. The Borrower or any
Subsidiary of the Borrower shall default in the due
performance or observance of any material term, covenant or
agreement contained in any contract, agreement, understanding
or arrangement, beyond the period of grace, if any, provided
in the relevant contract, and such default shall result, or is
reasonably expected to result, in a Material Adverse Effect;
provided, however that there shall not exist an Event of
Default under this Section 9.05 if immediately upon obtaining
knowledge of any potential Event of Default under this Section
9.05, the Borrower provides the Bank written notice of the
facts and circumstances pertaining thereto and the manner in
which the Borrower intends to contest, remedy or otherwise
resolve the same and the Bank consents to such contest,
remedial action or other form of resolution, which consent
shall not be unreasonably withheld; provided, further that the
consent of the Bank may be limited in duration to any
reasonable time period under the circumstances;
9.06 Voluntary Bankruptcy. The Borrower or any Subsidiary of the
Borrower commences any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under the United
States Bankruptcy Code or under any similar foreign, federal,
state, or local statute, or any dissolution or liquidation
proceeding, or makes a general assignment for the benefit of
creditors, or takes any action for the purpose of effecting
any of the foregoing;
9.07 Involuntary Bankruptcy. Any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under the United
States Bankruptcy Code or under similar foreign, federal,
state or local statute, or any dissolution or liquidation
proceeding, is involuntarily commenced against or in respect
of the Borrower or any of its Subsidiaries and such case or
proceeding is not dismissed or stayed within 30 days of such
commencement;
9.08 Appointment of Receiver. The appointment, or the filing of a
petition seeking the appointment of a custodian, receiver,
trustee, or liquidator for any Borrower or any of their
respective property, or the taking of possession of any part
of the property of the Borrower or of any of its Subsidiaries,
at the instance of any Governmental Authority;
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9.09 Insolvency. The Borrower or any of its Subsidiaries becomes
insolvent (however defined), is generally not paying its debts
as they become due, or has suspended transaction of its usual
business (except any suspension incidental to any corporate
transaction permitted pursuant to Section 8.03(A) hereof);
provided however that, with respect to any Subsidiary of the
Borrower, the foregoing shall not be an Event of Default
unless it shall result, or is reasonably expected to result,
in a Material Adverse Effect;
9.10 Reorganization. The dissolution, merger, consolidation, or
reorganization of the Borrower or any Subsidiary of the
Borrower; provide however that, with respect to any Subsidiary
of the Borrower, the foregoing shall not be an Event of
Default unless it shall result, or is reasonably expected to
result, in a Material Adverse Effect;
9.11 Material Misstatement. Any statement, representation or
warranty made in or pursuant to this Agreement or any other
Credit Document shall prove to be untrue or misleading in any
material respect;
9.12 Entry of Judgment. The entry or issuance of judgments, orders,
decrees or fines against the Borrower or any Subsidiary of the
Borrower which, in the aggregate, involve liabilities in
excess of the sum of $250,000 (the discharge of which is not
the obligation of any insurance company) and any such
judgments or orders involving liabilities in excess of said
sum shall have continued unbonded or unsatisfied and without
stay of execution or agreement between the parties thereon for
a period of 30 days after the entry or issuance of such
judgment; or
9.13 Change of Control. The failure of any 2 of either Joel Cartun,
Leslie M. Abcug or Gary J. Marcello, to continue to function
as executive officers of the Borrower or its Subsidiaries in
substantially the same manner and with substantially the same
responsibilities with respect to the day-to-day operations of
the Borrower and its Subsidiaries as exists as of the Closing
Date.
X. REMEDIES.
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10.01 Acceleration of Obligations; Other Remedies. Upon and
following the occurrence of an Event of Default described in
Article IX hereof (other than the Events of
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Default described in Sections 9.06, 9.07, and 9.08 hereof), at
the Bank's sole option, the Bank's commitment, if any, to make
any further advance or Loans hereunder shall terminate and all
Obligations shall immediately become due and payable in full,
all without protest, presentment, demand or further notice of
any kind to the Borrower, all of which are expressly waived.
Upon the occurrence of the Event of Default described in
Sections 9.06, 9.07, and 9.08 hereof, immediately and
automatically, the Bank's commitment, if any, to make any
further advances or Loans hereunder shall terminate and all
Obligations shall immediately become due and payable in full,
all without protest, presentment, demand or further notice of
any kind to the Borrower, all of which are expressly waived.
Upon and following an Event of Default, the Bank may, at its
option, exercise any and all rights and remedies it has under
this Agreement, any other Credit Document and/or applicable
law, including, without limitation, the right to charge and
collect interest on the principal portion of the Obligations
at a rate equal to the lesser of: (i) the highest rate of
interest set forth in the Credit Documents, or (ii) the
highest rate of interest allowed by law, such rate of interest
to apply to the Obligations, at the Bank's option, upon and
after an Event of Default so long as of it shall continue,
maturity, whether by acceleration or otherwise, and the entry
of a judgment in favor of the Bank with respect to any or all
of the Obligations. Upon and following an Event of Default,
the Bank may proceed to protect and enforce the Bank's rights
under any Credit Document and/or under applicable law by
action at law, in equity or other appropriate proceeding
including, without limitation, an action for specific
performance to enforce or aid in the enforcement of any
provision contained herein or in any other Credit Document.
10.02 Right of Set-off. If any of the Obligations shall be due and
payable or any one or more Events of Default shall have
occurred and be continuing, whether or not the Bank shall have
made demand under any Credit Document and regardless of the
adequacy of any collateral for the Obligations or other means
of obtaining repayment of the Obligations, the Bank shall have
the right, without notice to any Borrower, and is specifically
authorized hereby to set-off against and apply to the then
unpaid balance of the Obligations any items or funds of any
Borrower held by the Bank, any and all deposits (whether
general or special, time or demand, matured or unmatured) or
any other property of the Borrower, including, without
limitation, securities
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and/or certificates of deposit, now or hereafter maintained by
the Borrower for its or their own account with the Bank, and
any other indebtedness at any time held or owing by the Bank
to or for the credit or the account of any Borrower, even if
effecting such set-off results in a loss or reduction of
interest or the imposition of a penalty applicable to the
early withdrawal of time deposits. For such purpose, the Bank
shall have, and the Borrower hereby grants to the Bank, a lien
on and security interest in such deposits, property, funds and
accounts and the proceeds thereof.
10.03 Remedies Cumulative; No Waiver or Impairment. The rights,
powers and remedies of the Bank provided in this Agreement and
any of the Credit Documents are cumulative and not exclusive
of any right, power or remedy provided by law or equity. No
failure or delay on the part of the Bank in the exercise of
any right, power or remedy shall operate as a waiver thereof,
nor shall any single or partial exercise preclude any other or
further exercise thereof, or the exercise of any other right,
power or remedy.
XI. MISCELLANEOUS.
--------------
11.01 Notices. Notices and communications under this Agreement and
the other Credit Documents shall be in writing and shall be
given by either (i) hand-delivery, (ii) certified mail (return
receipt requested, postage prepaid), (iii) reliable overnight
commercial courier (charges prepaid), or (iv) telecopy, to the
addresses and telecopy numbers listed in this Agreement.
Notice given by telecopy shall be deemed to have been given
and received when sent. Notice by overnight courier shall be
deemed to have been given and received on the date scheduled
for delivery. Notice by certified mail shall be deemed to have
been given and received on the dates indicated on the receipt
returned to the sender thereof. A party may change its address
and/or telecopier number by giving written notice to the other
party as specified herein.
11.02 Costs and Expenses. Whether or not the transactions
contemplated by the Credit Documents are fully consummated,
the Borrower shall promptly pay (or reimburse, as the Bank may
elect) all reasonable costs and expenses which the Bank has
incurred or may hereafter incur in connection with the
negotiation, preparation, reproduction, interpretation,
perfection, monitoring, administration and enforcement of the
Credit Documents, the collection of all amounts due under the
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Credit Documents, and all amendments, modifications, consents
or waivers, if any, to the Credit Documents. Such costs and
expenses shall include, without limitation, the reasonable
fees and disbursements of counsel to the Bank, searches of
public records, costs of filing and recording documents with
public offices, internal and/or external audit and/or
examination fees and costs (but only to the extent that the
Borrower shall be responsible for such audit and examination
fees and expenses pursuant to Section 7.08 hereof), stamp,
excise and other taxes and costs and expenses incurred by the
Bank, and the fees of the Bank's accountants, consultants or
other professionals; provided, that it is hereby acknowledged
and agreed that the Borrower shall not be responsible and the
Bank may not seek payment or reimbursement from the Borrower
for the legal fees (exclusive of reasonable disbursements) of
the Bank's outside counsel in excess of $15,000 for
professional services rendered in connection with the
negotiations and preparation of the Credit Documents executed
and delivered on the Closing Date and the consummation of the
transactions therein contemplated. The Borrower's
reimbursement obligations under this paragraph shall survive
any termination of the Credit Documents.
11.03 Payment Due on a Day Other Than a Business Day. If any payment
due or action to be taken under this Agreement or any Credit
Document falls due or is required to be taken on a day that is
not a Business Day, such payment or action shall be made or
taken on the next succeeding Business Day and such extended
time shall be included in the computation of interest.
11.04 Governing Law. This Agreement shall be construed in accordance
with and governed by the substantive laws of the State of New
Jersey without reference to conflict of laws principles.
11.05 Integration. This Agreement and the other Credit Documents
constitute the sole agreement of the parties with respect to
the subject matter hereof and thereof and supersede all oral
negotiations and prior writings with respect to the subject
matter hereof and thereof.
11.06 Amendment; Waiver. No amendment of this Agreement, and no
waiver of any one or more of the provisions hereof shall be
effective unless set forth in writing and signed by the
parties hereto.
11.07 Successors and Assigns. This Agreement (i) shall be binding
upon the Borrower and the Bank and their
-52-
<PAGE>
respective successors and permitted assigns, and (ii) shall
inure to the benefit of the Borrower and the Bank and their
respective successors and permitted assigns; provided,
however, that the Borrower may not assign its rights hereunder
or any interest herein without the prior written consent of
the Bank, and any such assignment or attempted assignment by
the Borrower shall be void and of no effect with respect to
the Bank.
11.08 Sale, Assignment or Participations. The Bank may from time to
time sell or assign, in whole or in part, or grant
participations in some or all of the Credit Documents and/or
the obligations evidenced thereby. The holder of any such
sale, assignment or participation, if the applicable agreement
between the Bank and such holder so provides, (i) shall be
entitled to all of the rights, obligations and benefits of the
Bank and (ii) shall be deemed to hold and may exercise the
rights of set-off or banker's lien with respect to any and all
obligations of such holder to the Borrower, in each case as
fully as though the Borrower were directly indebted to such
holder. The Bank may, in its discretion, give notice to the
Borrower of such sale, assignment or participation; however,
the failure to give such notice shall not affect any of the
Bank's or such holder's rights hereunder. The Borrower
authorizes the Bank to provide information concerning the
Borrower to any prospective purchaser, assignee or
participant, subject to such other party's agreement to the
provisions of Section 11.15 hereof. The information provided
may include, but is not limited to, amounts, terms, balances,
payment history, return item history and any financial or
other information about the Borrower. The Borrower agrees to
indemnify, defend, and hold the Bank harmless at the
Borrower's cost and expense, from and against any and all
lawsuits, claims, actions, proceedings, or suits against the
Bank or against the Borrower and the Bank, arising out of or
relating to the disclosure by the Bank of such information to
any prospective purchaser, assignee or participant to the
extent that such information does not comport with the
requirements set forth in Section 6.17 hereof as of the date
such information was furnished to the Bank by, or on behalf
of, the Borrower.
11.09 Severability. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement
required hereunder shall not in any way affect or impair the
legality or enforceability of the remaining provisions of this
Agreement or any instrument or agreement required hereunder.
In lieu of any illegal
-53-
<PAGE>
or unenforceable provision in this Agreement, there shall be
added automatically as a part of this Agreement a legal and
enforceable provision as similar in terms to such illegal or
unenforceable provision as may be possible.
11.10 Consent to Jurisdiction and Service of Process. The Borrower
irrevocably appoints each and every corporate officer of the
Borrower as its attorneys upon whom may be served, by regular
or certified mail at the address set forth in this Agreement,
any notice, process or pleading in any action or proceeding
against it arising out of or in connection with this Agreement
or any of the other Credit Documents. The Borrower hereby
consents that any action or proceeding against it may be
commenced and maintained in any court within the State of New
Jersey or in the United States District Court for the District
of New Jersey by service of process on any such officer. The
Borrower further agrees that such courts of the State of New
Jersey and the United States District Court for the District
of New Jersey shall have jurisdiction with respect to the
subject matter hereof and the person of the Borrower and all
collateral for the Obligations. Notwithstanding the foregoing,
the Borrower agrees that any action brought by the Borrower
shall be commenced and maintained only in a court in the
federal judicial district or county in which the Bank has its
principal place of business in New Jersey.
11.11 Indemnification.
(a) The Borrower agrees to indemnify and hold harmless the
Bank and its officers, directors, employees, agents and
advisors (each, an "Indemnified Party") from the against any
and all claims, damages, losses, liabilities and reasonable
expenses (including, without limitation, reasonable fees and
expenses of counsel; provided, that, in the case of fees and
expenses of counsel for the Indemnified Parties, the Borrower
shall be obligated to pay only the fees and expenses of a
single counsel in any one jurisdiction) that may be incurred
by or asserted or awarded against any Indemnified Party, in
each case arising out of or in connection with or by reason
of, or in connection with the preparation for a defense of any
investigation, litigation or proceeding arising out of,
related to or in connection with (i) the actual proposed use
of the proceeds or the Loan or Letter of Credit, the Credit
Documents or any of the transactions contemplated thereby,
including, without limitation, any acquisition or proposed
acquisition by the Borrower or any of its Subsidiaries in each
-54-
<PAGE>
case whether or not such investigation, litigation or
proceeding is brought by any Indemnified Party or any
Indemnified Party is otherwise a party thereto and whether or
not the transactions contemplated hereby are consummated,
except to the extent such claim, damage, loss, liability or
expense is found in a final, non-appealable judgment by a
court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct.
(b) If, after receipt of any payment of all or any part of the
Obligations, the Bank is compelled or (after notice to the
Borrower) agrees, for settlement purposes, to surrender such
payment to any person or entity for any reason (including,
without limitation, a determination that such payment is void
or voidable as a preference or fraudulent conveyance, an
impermissible set-off, or a diversion of trust funds), then
this Agreement and the other Credit Documents shall continue
in full force and effect, and the Borrower shall be liable
for, and shall indemnify, defend and hold harmless the Bank
with respect to the full amount so surrendered.
(c) Without limiting the applicability of the clause (a) of
this Section 11.11, the Borrower shall indemnify, defend and
hold harmless the Bank with respect to any and all claims,
expenses, demands, losses, costs, fines or liabilities of any
kind (including, without limitation, those involving death,
personal injury or property damage and including reasonable
attorneys fees and costs) arising from or in any way related
to any hazardous materials or a dangerous environmental
condition within, on, from, related to or affecting any real
property owned or occupied by the Borrower including, without
limitation, any and all claims that may arise as a result of
an intentional or unintentional act or omission of any
Borrower, any previous owner and/or operator of real property
owned or occupied by the Borrower that resulted in the
discharge of hazardous substances or wastes into the
atmosphere or waters or onto the lands.
(d) The provisions of this Section 11.11 shall survive the
termination of this Agreement and the other Credit Documents
and shall be and remain effective notwithstanding the payment
of the Obligations, the release of any security interest, lien
or encumbrance securing the Obligations or any other action
which the Bank may have taken in reliance upon its receipt of
such payment. Any action by the Bank shall be deemed to have
-55-
<PAGE>
been conditioned upon any payment of the Obligations having
become final and irrevocable.
11.12 Inconsistencies. The Credit Documents are intended to be
consistent. However, in the event of any inconsistencies among
any of the Credit Documents, such inconsistency shall not
affect the validity or enforceability of each Credit Document.
The Borrower agrees that in the event of any inconsistency or
ambiguity in any of the Credit Documents, the Credit Documents
shall not be construed against any one party but shall be
interpreted consistent with the Bank's policies and
procedures.
11.13 Headings. The headings of articles, Sections and paragraphs
have been included herein for convenience only and shall not
be considered in interpreting this Agreement.
11.14 Schedules. All Schedules, Annexes and/or an Exhibits attached
hereto are incorporated herein.
11.15 Confidentiality. The Bank shall not disclose any Confidential
Information to any Person without the prior consent of the
Borrower, other than (i) to its officers, directors,
employees, agents and advisors and to actual or prospective
purchaser, assignee, or participant of or in the Loans and
participants, and then only on a confidential basis, (ii) as
required by any law, rule or regulation or judicial process
and (iii) as requested or required by any Governmental
Authority or examiner regarding banks or banking.
11.16 Judicial Proceeding; Waivers.
(a) EACH PARTY TO THIS AGREEMENT AGREES THAT ANY SUIT, ACTION
OR PROCEEDING, WHETHER CLAIM OR COUNTER-CLAIM, BROUGHT OR
INSTITUTED BY ANY PARTY HERETO OR ANY SUCCESSOR OR ASSIGN OF
ANY PARTY, ON OR WITH RESPECT TO THIS AGREEMENT OR ANY OF THE
OTHER CREDIT DOCUMENTS OR THE DEALINGS OF THE PARTIES WITH
RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A COURT AND
NOT BY A JURY.
(b) EACH PARTY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION
OR PROCEEDING. FURTHER, EACH PARTY WAIVES ANY RIGHT IT MAY
HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY SPECIAL, EXEMPLARY,
-56-
<PAGE>
PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN,
OR IN ADDITION TO, ACTUAL DAMAGES.
(c) THE BORROWER ACKNOWLEDGES AND AGREES THAT THIS SECTION IS
A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND THAT THE
BANK WOULD NOT EXTEND CREDIT TO ANY BORROWER IF THE WAIVERS
SET FORTH IN THIS SECTION WERE NOT A PART OF THIS AGREEMENT.
11.17 Counterparts. This Agreement may be executed in as many
counterparts as may be deemed necessary or convenient, and by
the different parties hereto on separate counterparts, each of
which, when so executed, shall be deemed an original but all
such counterparts shall constitute but one and the same
instrument.
-57-
<PAGE>
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have executed this Agreement as of the day and year first above
written.
WITNESS/ATTEST: VESTCOM INTERNATIONAL, INC.
By: /s/ S By: /s/ S
-------------------------------- ----------------------------------
Name: Name:
Title: Title:
Address: 1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Attention:_________________
Telecopier:_____________________
SUMMIT BANK
By: /s/ S
----------------------------------
Name:
Title:
Address: 250 Moore Street
Hackensack, New Jersey 07601
Attention: Michael Bernal
Vice President
Telecopier: (201) 488-6185
-58-
<PAGE>
AMENDMENT NUMBER ONE
TO
EQUIPMENT FACILITY AND REVOLVING CREDIT AGREEMENT
This AMENDMENT NUMBER ONE (the "Amendment") amends the Equipment
Facility and Revolving Credit Agreement by and between Summit Bank (the "Bank")
and Vestcom International, Inc. ("Vestcom") dated as of August 13, 1997 (the
"Credit Facility"), and is entered into as of the 28th day of July, 1998.
WHEREAS, both the Bank and Vestcom desire to amend and modify the
Credit Facility to delete a covenant which is no longer required.
NOW THEREFORE, for good and valuable consideration, the parties hereto
hereby agree as follows:
1. Section 9.13, Change in Control, of the Credit Facility is hereby
amended to be deleted in its entirety and the following is to be
inserted in lieu thereof: "intentionally left blank".
2. All other terms and conditions of the Credit Facility shall remain
unchanged and in full force and affect.
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Amendment Number One to the Credit Facility
as of the date first written above.
VESTCOM INTERNATIONAL, INC.
By: /s/Harvey Goldman
-----------------------------------
Harvey Goldman
Executive Vice President
and Chief Financial Officer
SUMMIT BANK
By: /s/Michael Bernal
-----------------------------------
Name:
Title:
<PAGE>
WAIVER AND AMENDMENT NUMBER TWO
TO THE
EQUIPMENT FACILITY AND REVOLVING CREDIT AGREEMENT
This WAIVER AND AMENDMENT NUMBER TWO (the "Amendment") amends the
Equipment Facility and Revolving Credit Agreement by and between Summit Bank
(the "Bank") and Vestcom International, Inc. ("Vestcom") dated as of August 13,
1997 (the "Credit Facility"), and is a waiver of a certain covenant thereof and
is entered into as of the 16th day of February, 1999.
WHEREAS, both the Bank and Vestcom desire to amend and modify the
Credit Facility to amend a certain covenant; and
WHEREAS, in addition to modifying a certain covenant, the Bank has
waived the applicability of such covenant for calendar year 1998 and the parties
desire to document such waiver.
NOW THEREFORE, for good and valuable consideration, the parties hereto
hereby agree as follows:
1. Pursuant to Article XI, Section 11.06 of the Credit Facility, the
Bank hereby waives Vestcom's compliance with Article VIII, Section
8.13, Consolidated Tangible to Stated Net Worth, for the entire
calendar year 1998.
2. In addition, pursuant to Article XI, Section 11.06 of the Credit
Facility, the current language of Article VIII, Section 8.13,
Consolidated Tangible to Stated Net Worth, is hereby deleted in
its entirety, and shall be replaced with the following in lieu
thereof:
8.13 Consolidated Tangible to Stated Net Worth. Permit at any
time, its Consolidated Tangible Net Worth to be any less than 10%
of the Consolidated Stated Net Worth, tested no less frequently
than quarterly and determined in accordance with GAAP,
consistently applied.
3. The amendment to Section 8.13 pursuant to paragraph two above
shall be effective as of January 1, 1999.
4. All other terms and conditions of the Credit Facility shall remain
unchanged and in full force and affect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Waiver and Amendment Number Two to the Credit
Facility as of the date first written above.
VESTCOM INTERNATIONAL, INC.
By: /s/Harvey Goldman
-------------------------------
Harvey Goldman
Executive Vice President
and Chief Financial Officer
SUMMIT BANK
By: /s/Michael Bernal
-------------------------------
Name:
Title:
<PAGE>
MEMORANDUM
REGARDING EQUIPMENT FACILITY AND
REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
SUMMIT BANK
AND
VESTCOM INTERNATIONAL, INC. (the "Credit Facility")
Dated as of August 13, 1997
This MEMORANDUM, dated as of March 29, 1999, is intended to memorialize
the parties understanding of an error in the Credit Facility, and to correct
such error. Both parties agree that Section 8.15 Consolidated Fixed Charges
Ratio is incorrect as currently written, and should be modified to read, in its
entirety, as follows:
"Section 8.15 Consolidated Fixed Charges Ratio. Permit at any time its
Consolidated Fixed Charges Ratio to be less than 1.50 to 1.00, tested
no less frequently than quarterly for each Test Period and determined
in each case in accordance with GAAP, consistently applied."
In addition, the parties hereby agree, Section 8.15 should
have been written as shown above from the effective date of the Credit Facility.
In WITNESS WHEREOF, the parties, by their duly authorized
representatives, have executed this Memorandum as of the day and year first
above written.
Vestcom International, Inc.
By:/s/ Brendan Keating
-------------------
Name:
Title:
Summit Bank
By:/s/ Michael Bernal
------------------
Name:
Title:
By:/s/ James Noonan
------------------
Name:
Title:
<PAGE>
Subsidiaries of the Registrant
Name of Subsidiary State or Jurisdiction of Incorporation
- ------------------ --------------------------------------
3013439 Nova Scotia Company Nova Scotia, Canada
504087 N.B. Inc. New Brunswick, Canada
COS Information, Inc. Quebec, Canada
Electronic Imaging Services, Inc. Delaware
Laser Mail Services, Inc. Ontario, Canada
Lirpaco, Inc. Canadian (Federal)
Moreau Promotional Services, Inc. Ontario, Canada
Vestcom Connecticut, Inc. Connecticut
Vestcom Investments, Inc. New Jersey
Vestcom Management Solutions Group, Inc. New Jersey
Vestcom Massachusetts, Inc. Massachusetts
Vestcom Mid-Atlantic, Inc. Delaware
Vestcom New England, Inc. Rhode Island
Vestcom Northwest, Inc. Delaware
Vestcom Retail Solutions Group, Inc. Missouri
Vestcom Rhode Island Corp. Rhode Island
Vestcom St. Louis, Inc. Delaware
Vestcom Wisconsin, Inc. Wisconsin
<PAGE>
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 30, 1999
<PAGE>
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, 1998,
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, 1998, 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 26th day of March, 1999.
Signatures Title
---------- -----
/s/Joel Cartun Chairman, Chief Executive Officer and Director
--------------------
Joel Cartun
/s/Stephen R. Bova Director
--------------------
Stephen R. Bova
/s/Leonard Fassler Director
--------------------
Leonard Fassler
/s/Brendan Keating President, Chief Operating Officer and Director
--------------------
Brendan Keating
/s/Fred S. Lafer Director
--------------------
Fred S. Lafer
/s/Robert J. Levenson Director
---------------------
Robert J. Levenson
/s/Richard D. White Director
---------------------
Richard D. White
/s/Harvey Goldman Executive Vice President, Chief Financial
--------------------- Officer and Treasurer (Principal and Financial
Harvey Goldman and Accounting Officer)
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,887,971
<SECURITIES> 360,480
<RECEIVABLES> 22,313,960
<ALLOWANCES> (1,123,581)
<INVENTORY> 4,476,122
<CURRENT-ASSETS> 34,991,759
<PP&E> 32,079,849
<DEPRECIATION> (4,502,957)
<TOTAL-ASSETS> 142,544,236
<CURRENT-LIABILITIES> 31,246,551
<BONDS> 0
0
2,651,867
<COMMON> 86,782,015
<OTHER-SE> 477,458
<TOTAL-LIABILITY-AND-EQUITY> 142,544,236
<SALES> 108,675,572
<TOTAL-REVENUES> 108,675,572
<CGS> 68,793,382
<TOTAL-COSTS> 30,955,177
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<INTEREST-EXPENSE> 796,251
<INCOME-PRETAX> 8,374,194
<INCOME-TAX> 3,746,773
<INCOME-CONTINUING> 4,627,421
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