<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
DECEMBER 31, 1995 0-3296
DIXIE NATIONAL CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
MISSISSIPPI 64-0440887
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
107 The Executive Center
Hilton Head Island, South Carolina 29928
(Address of Principal Executive Office)
Registrant's telephone number, including area code: 803-785-7850
Former name, former address and former fiscal year, if changed
from last report:
3760 I-55 North
P.O. Box 22587, Jackson, Mississippi, 39225
(Former Address)
Securities registered pursuant to section 12(g) of the Act:
Common Capital Stock par value $1 per share
(Title Of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---- ----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF 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. / /
AS OF APRIL 3, 1996, 13,097,661 COMMON SHARES WERE OUTSTANDING, AND THE
AGGREGATE MARKET VALUE OF THE COMMON SHARES (BASED UPON THE CLOSING AVERAGE OF
THE BID AND ASKED PRICES ON THE OVER-THE-COUNTER MARKET) OF DIXIE NATIONAL
CORPORATION HELD BY NONAFFILIATES WAS APPROXIMATELY $8,186,038.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE> 2
PART I
ITEM 1 - BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Dixie National Corporation ("Corporation") was organized in 1966 as a
Mississippi corporation. Until the sale on October 2, 1995 of its 99.3% owned
subsidiary, Dixie National Life Insurance Company ("Dixie Life"), a Mississippi
corporation organized in 1965, the Corporation was an insurance holding company
primarily engaged in the life insurance business. Prior to the sale of Dixie
Life, virtually all of the Corporation's consolidated revenues were represented
by premium income and net investment income generated in Dixie Life's insurance
operations. For the year ended December 31, 1995, the Corporation on a
consolidated basis had total revenues of $5,032,537 and a net loss of
$6,849,572.
Through its wholly-owned subsidiary, Text Retrieval Systems, Inc.
("TRS"), a Florida corporation acquired on April 2, 1996, the Corporation is
now primarily engaged in publishing electronic reference libraries that link
related data sources for convenient access by personal computers. The
Corporation's other assets include cash, lease receivables, real estate, and a
16% ownership interest in Phoenix Medical Management, Inc. ("PMM"), an Arizona
corporation engaged in the ownership and operation of a pain care facility.
The Corporation's future business plan contemplates the acquisition, ownership,
and operation of companies primarily engaged in applied technology. The
Corporation proposes to finance its acquisitions with its own funds, issuances
of its Common Stock, and, to the extent feasible and appropriate, borrowings
and public or private financings. For further information, see "Recent
Developments," below and "(c) Narrative Description of Business." The term
"Corporation" as used herein includes the Corporation and its subsidiaries as
the context indicates.
During December 1995, the Corporation relocated its executive offices
from Jackson, Mississippi to Hilton Head Island, South Carolina. Its new
address is 107 The Executive Center, Hilton Head Island, South Carolina, 29928
(telephone: 803-785-7850).
RECENT DEVELOPMENTS
SALE OF DIXIE LIFE AND SATISFACTION OF INDEBTEDNESS
On October 2, 1995, the Corporation completed the sale of Dixie Life
to Standard Life Insurance Company of Indiana ("Standard"). Dixie Life
represented virtually all of the Corporation's principal assets and operations.
The selling price of the Corporation's interest in Dixie Life to Standard was
$7,389,086, of which $3,646,468 was in cash. The Corporation used $1,720,000
of the cash proceeds to repay its Subordinated Convertible Notes and to
purchase from Dixie Life lease receivables of $503,258. Standard canceled a
$3,688,746 note payable of the Corporation held by a subsidiary of Standard.
The Corporation also received accounts receivable of $53,872, all of which have
been written off as uncollectible at December 31, 1995.
Standard is obligated to pay $15,000 per month rent to Vanguard, Inc.
("Vanguard"), a wholly-owned subsidiary of the Corporation through December 31,
1996, the expiration date of an existing lease on the office building
previously occupied by the Corporation and Dixie Life. The obligation will
terminate upon the earlier sale of the building.
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The sale of Dixie Life resulted in a loss of $4,174,535 ($.394 per
share). The loss on the sale is reported in a manner substantially the same as
discontinued operations. The Corporation continues to report insurance
operations in the same manner as prior to the measurement date of March 6,
1995. Accounting Principles Board Opinion No. 30 (APB 30) calls for reporting
the operations of discontinued operations as a single net amount in the
statement of operations, but in Management's opinion, reducing virtually all of
the Corporation's operations to a single amount in the statement of operations
would not be meaningful to readers of the Corporation's financial statements.
The Corporation has entered into another line of business and does not expect
to reenter the insurance business. Beginning on January 1, 1996, the
Corporation will report its insurance operations as discontinued operations in
accordance with APB 30. (See Note 11 of Notes to Consolidated Financial
Statements).
The sale of Dixie Life was approved by the Corporation's Shareholders
at an annual meeting held on September 19, 1995 and is described in detail in
the Corporation's Proxy Statement dated September 5, 1995 for that meeting.
ACQUISITION OF TRS
On April 2, 1996 the Corporation completed the acquisition of 100% of
the outstanding stock of TRS, a privately-held corporation based in Ponte Vedra
Beach, Florida. The Corporation had previously acquired a 35% initial
ownership interest in TRS in October 1995 as part of a financing agreement
entered into with the prior owners of TRS. Under the terms of its agreement,
the Corporation issued 100,000 shares of its Common Stock to the prior owners
and granted TRS a $750,000 line of credit for working capital purposes. To
complete the acquisition of TRS, the Corporation issued 2,500,000 additional
shares of its stock.
TRS publishes electronic reference libraries that link related data
sources for convenient access by personal computers. The electronic libraries,
often containing thousands of pages, are connected by hypertext cross-reference
links. This permits users to access massive documents while avoiding
time-consuming manual research. One of the latest TRS products is an
employer's compliance library which links all federal employment laws and
related regulations to a compendium of state statutes and regulations. Other
TRS libraries include comprehensive compliance data for the retail industry and
public housing markets.
Since its incorporation in 1994, TRS has been involved in the
development and packaging of software used in its electronic libraries, and in
the marketing of its products. TRS currently has 20 employees including 3
software writers and 12 marketers. As of June 30, 1995, the end of its fiscal
year, TRS had total assets of $515,295, and for the year then ended revenues of
$45,043, and a net loss of $69,342.
The Corporation is reporting its acquisition of TRS in this Form 10-K
Annual Report in lieu of filing a separate Form 8-K report for the acquisition.
Consistent with the provisions of Form 8-K, the Corporation will file a Form
8-K as soon as practicable, but not later than June 16, 1996, to provide
financial statements of TRS as required for an acquired business.
ACQUISITION AND WRITE-DOWN OF PMM
As previously reported in the Corporation's Form 10-K Annual Report
for the year ended December 31, 1994 and its Form 10-Q quarterly reports ended
March 31 and June 30, 1995, and as further discussed in the Corporation's Proxy
Statement dated September 5, 1995 (see above), the Corporation entered into an
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agreement with Universal Management Services ("UMS"), a Nevada corporation, as
of October 27, 1994 ("UMS Agreement"). On April 20, 1995, the Corporation and
UMS entered into an amended and restated agreement effective as of March 24,
1995 ("Second Amended and Restated UMS Agreement") which provided that UMS had
certain rights, since expired, to assist the Corporation in placing shares of
the Corporation's Common Stock. In connection with the Second Amended and
Restated UMS Agreement, on June 29, 1995, the Corporation issued 2,000,000
shares of its Common Stock in exchange for 16% of the outstanding common shares
of PMM, a privately-owned company, and 100,000 shares of its Common Stock for
an option to acquire the remaining 84% of the common shares of PMM for
10,400,000 additional shares of the Corporation's Common Stock. The 84% option
was relinquished by the Corporation in July 1995.
At the time that the Corporation acquired its 16% interest in PMM, it
had intended to enter into the health care industry, and PMM represented its
initial investment in a health care company. The Corporation understood that
several pain care facilities were to be opened by PMM in Louisiana and the
southwest, however, those developments have not transpired. Currently, PMM
operates one pain care facility in Phoenix, Arizona.
Due to the negative equity recorded on the PMM December 31, 1995
unaudited financial statements, and in accordance with Financial Accounting
Standard 115 (FAS 115), the Corporation has written its investment in PMM down
to zero. This results in a charge to current earnings of $1,051,217. See
"Investment in PMM under (c) Narrative Description of Business."
SALE OF INVESTMENT IN ALANCO STOCK
The UMS Agreement provided, among other things, that UMS would assist
the Corporation in locating potential investors for its Common Stock. On
November 29, 1994, the Corporation received common stock of Alanco
Environmental Resources, Inc. ("Alanco") having a market value of $2,000,000 in
consideration for the sale, with UMS' assistance, of 2,000,000 shares of the
Corporation's Common Stock ("November Transaction"). This transaction has been
previously reported and is more fully discussed in the annual and quarterly
reports and the Corporation's Proxy Statement dated September 5, 1995.
Alanco is a publicly-traded company that files periodic reports under
the Securities Exchange Act of 1934. Its Form 10-K for the fiscal year ended
June 30, 1995 states that Alanco's business segments include marketing,
designing and manufacturing of air pollution control technology; restaurant
equipment marketing; insurance claims adjusting; and mineral properties
ownership. Alanco's Form 10-Q for the quarter ended September 30, 1995
indicates that on that date it had 30,597,932 shares of common stock
outstanding. In December 1995 the Corporation sold 75,000 of its shares of
Alanco stock in the open market and realized a $10,020 profit. See Note 16 of
Notes to Consolidated Financial Statements. During the first quarter of 1996,
the remaining Alanco shares owned by the Corporation were sold in open market
transactions resulting in a $1,019,020 profit to the Corporation.
FUTURE BUSINESS PLANS
The acquisition of TRS marks the entry of the Corporation into the
applied technology area which offers strong growth potential in the Board's
view. The Corporation is also considering other lines of business, but does
not expect to reenter the life insurance business.
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(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Corporation's prior insurance operations represent the only
material industry segment in which the Corporation was engaged during the
periods included in the Consolidated Financial Statements contained herein.
(c) NARRATIVE DESCRIPTION OF BUSINESS
PRIOR INSURANCE OPERATIONS
Dixie Life traditionally offered various forms of life, health and
annuity insurance products, primarily designed for specialized insurance
markets. A significant part of Dixie Life's business involved the sale of
accident and health policies. Dixie Life sold virtually all of its accident
and health business in late 1995 and mid-1994. Life insurance policies sold in
the final expense, or burial market, included fixed premium interest sensitive
policies that provided for increasing death benefits as well as traditional
whole life policies. These policies were designed to cover expenses such as
funeral, last illness, monument and cemetery lot. Dixie Life's policies sold
in other markets included interest sensitive and traditional whole life
policies and forms of term policies. The interest sensitive and whole life
policies included cash values which could have been borrowed by the
policyholder. Dixie Life issued policies on both a participating and
non-participating basis. See Note 8 of Notes to Consolidated Financial
Statements.
The life insurance industry is highly competitive with over 2,000 life
insurance companies nationwide. Dixie Life was a relatively small, essentially
regional life insurance company that competed with larger, more widely known
insurance companies. Dixie Life's policies were offered through non-exclusive
sales agents compensated on a commission basis. A relatively small number of
Dixie Life's marketing directors generated a significant amount of Dixie Life's
premium income.
STATUTORY SURPLUS AND ACCOUNTING
As an insurance company, Dixie Life is subject to regulations and
supervisions by the insurance department of each of the jurisdictions in which
it is licensed to do an insurance business. Among other things, it must
maintain minimum levels of capital and surplus (Statutory Surplus), as required
by the insurance laws and regulations of the insurance company's state of
domicile and the various other states in which it operates. Statutory
accounting practices, as prescribed by the Mississippi Department of Insurance,
differ from generally accepted accounting principles ("GAAP") in several
respects. The most significant difference is that statutory accounting
practices require that costs incurred in writing new insurance business be
expensed as paid, while generally accepted accounting principles require the
capitalization of such costs, which are then amortized over the expected life
of the insurance products sold. The principal such first year cost expensed in
its entirety is commissions, which are significantly greater in the first year
compared to renewal commissions. The excess of first year commissions over
renewal commissions is deferred under generally accepted accounting principles,
as are other costs associated with the issuance of a policy.
Because the high first year costs associated with issuance of a policy
are expensed under statutory accounting practices, high levels of new business
create drains on statutory net income and therefore Statutory Surplus. Dixie
Life experienced increased levels of new business for several years through
1992, creating a strain on Statutory Surplus. However, primarily as a result
of the sale of Dixie Life's accident and health business and a 1993 agreement
by Dixie Life to cease writing new business in a particular state, the trend
did not continue in 1994 and 1993. In order to write an increasing amount of
new business while continuing to meet the statutory requirements of the states
in which it conducted its insurance operations, it was necessary
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for Dixie Life to utilize various forms of surplus relief. The principal
source of surplus relief since 1989 had been financial reinsurance agreements,
which for GAAP purposes are treated as financing arrangements, but for
statutory accounting purposes provide reserve credits that, in equal amount,
increase Statutory Surplus.
INVESTMENTS
Dixie Life is required to invest its assets in accordance with
applicable provisions of the Mississippi insurance law. The composition of
Dixie Life's invested assets at December 31, 1994 is shown in Note 3 of Notes
to Consolidated Financial Statements.
INVESTMENT IN PMM
PMM was formed in November 1993 to engage in the ownership and
operation of health care facilities specializing in pain care. The Corporation
understands that PMM intends to develop a proprietary network of medical
facilities that specialize in the comprehensive treatment of patients seeking
relief of chronic pain. Each facility is to be designed and equipped to
accommodate a multi-modality pain management, psychological and physical
rehabilitation program, as well as to accommodate other non-affiliated surgeons
who will perform their own "non-pain related" surgical procedures at these
facilities. PMM currently has one medical facility open and operating in
Phoenix, Arizona.
PMM had informed the Corporation that plans for the Lafayette and New
Orleans clinics had been postponed indefinitely in favor of development of
additional clinics in Arizona and that the Phoenix clinic, due in part to a
delay in obtaining Medicare approval of the facility, was not yet meeting
anticipated revenue projections. Although the Corporation relinquished the 84%
Option in July 1995, PMM shareholders retain the 100,000 shares of the
Corporation's Common Stock they received in exchange for the 84% Option. In
view of the write-down of its investment in PMM, the uncertain prospects for
PMM's business, and the Corporation's future business plan, it is unlikely that
the Corporation will seek to increase its investment in PMM. At this time, the
Corporation is reexamining its PMM investment but has made no decision as to
its retention.
The Corporation also is informed that Alanco and two unaffiliated
individuals hold a minority interest in PMM. John E. Haggar, who is a
Director of the Corporation, was Chief Financial Officer and a director of UMS
until June 1995. On June 1, 1995 Mr. Haggar became an employee of Alanco, and
in July 1995 became Alanco's Treasurer. Alanco owned 10% of PMM prior to the
Corporation's acquisitions of its 16% interest. In that acquisition, the
Corporation issued 200,000 shares of its Common Stock to Alanco in exchange for
shares of PMM owned by Alanco. James G. Ricketts, who is also a Director of
the Corporation, was Chairman of the Board of Directors of Alanco.
TRS
The acquisition of TRS and a description of its business and
operations including summary financial information is set forth under "(a)
General Development of Business - Recent Developments," above.
OTHER
As of March 31, 1996, the Corporation had $3,605,773 of cash and
marketable securities. It also has $485,299 of lease receivable .
FUTURE BUSINESS PLANS
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The Corporation is exploring several potential business opportunities,
principally in applied technology and is engaged in discussions concerning
companies that the Corporation may have an interest in acquiring. However,
these discussions are essentially in their preliminary stages and no agreements
have been reached as to any further acquisitions. The Corporation's business
plan contemplates the operation as well as the ownership of businesses it may
acquire in the future.
EMPLOYEES
At December 31, 1995, the Corporation had four employees including
officers. See "Recent Developments" above for sale of insurance business.
ITEM 2 - PROPERTIES
Vanguard continues to own the previous home office of the Corporation,
a two-story building located in Jackson, Mississippi. Under the terms of the
sale of Dixie Life, Standard is obligated to pay $15,000 per month to Vanguard
on an existing lease expiring December 31, 1996 or until sale of the building.
The Corporation is currently seeking to sell the building.
ITEM 3 - LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Corporation or any of its subsidiaries are a party or to which any of the
Corporation's property is subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded in the over-the-counter
market and is quoted on the NASDAQ Small Cap market system under the symbol
DNLC. The tables below set forth the reported high and low sales price as
reported by the National Quotation Bureau, Inc. for the quarters indicated.
This information does not include retail markups, markdowns, or commissions.
<TABLE>
<CAPTION>
1995
---------------------------------------------
High Low
-------------------- --------------------
Quarter Bid Asked Bid Asked
------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
First 1 1 1/32 13/16 15/16
Second 1 1 1/32 13/16 15/16
Third 7/8 1 1/2 5/8
Fourth 1 1 5/16 3/8 5/8
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------
High Low
-------------------- --------------------
Quarter Bid Asked Bid Asked
------- ----- ----- ----- -----
<S> <C> <C> <C> <<C>
First 1 1 1/4 1 1 3/16
Second 15/16 1 1/16 13/16 15/16
Third 9/16 3/4 1/2 11/16
Fourth 3/4 7/8 1/2 5/8
</TABLE>
No dividends were paid on the Corporation's Common Stock during the
last two years.
The number of holders of record of Common Stock of the Corporation on
March 8, 1996 was 2,438.
ITEM 6 - SELECTED FINANCIAL DATA
Selected consolidated financial data for the Corporation and its
subsidiaries is set forth in the following table:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31:
REVENUES
Premiums $ 2,485,974 $ 9,516,157 $19,499,289 $17,178,510 $15,146,819
Net Investment Income 1,950,874 2,133,635 2,005,075 2,157,848 2,410,940
Realized & unrealized investment
gains (losses) 503,600 1,551 25,580 (24,494) 2,029
other 92,084 - - - -
--------- ---------- ---------- ---------- ----------
Total $ 5,032,537 $11,651,343 $21,529,944 $19,311,864 $17,559,788
========= ========== ========== ========== ==========
NET INCOME (LOSS) $(6,849,572) $(2,554,779) $ (957,138) $ 848,984 $ 1,566,934
========== ========== =========== ========== ==========
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
PER COMMON SHARE AMOUNTS
Primary and fully diluted
Net income (loss) $ (.65) $ (.39) $ (.15) $ .13 $ .24
========= ========== ========== =========== ==========
AT YEAR-END:
TOTAL ASSETS $5,103,923 $44,577,452 $56,255,734 $55,540,644 $54,240,107
========= ========== ========== ========== ==========
NOTES PAYABLE
AND OTHER DEBT $ 448,456 $ 6,103,839 $ 6,253,670 $ 7,003,517 $ 7,520,447
========= ========== ========== ========== ==========
</TABLE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and notes thereto
appearing elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
The sale of Dixie Life to Standard was completed on October 2, 1995
and solved significant liquidity problems which the Corporation had faced for
several years. These problems were discussed in previous Form 10-K Annual
Reports and Form 10-Q Quarterly Reports of the Corporation and in its Proxy
Statement for the 1995 Annual Meeting of Shareholders held on September 19,
1995, at which the sale of Dixie Life was approved by its Shareholders.
Immediately following the sale, the Corporation had consolidated
assets of $5,749,388 including cash of $1,626,128 and marketable equity
securities of $1,998,470. Other assets included an investment in PMM
($1,051,217) lease receivables ($503,258) and property and equipment
($390,243). The Corporation's only significant liability was a mortgage note
payable of $499,511 on an office building
As of December 31, 1995, the Corporation had consolidated assets of
$5,103,923 including cash of $1,377,869 and marketable equity securities of
$2,227,904 represented by Alanco common stock. Other assets included the
investment in PMM which has been written down to a zero value; lease
receivables of $471,272; investment in TRS of $137,946; goodwill and an option
in TRS of $161,970; and net property and equipment of $410,935. The
Corporation continues to have only the one significant liability in the form of
a mortgage note payable by Vanguard of $428,835 on an office building.
During the first quarter of 1996, the Corporation sold all remaining
shares of Alanco common stock resulting in a $1,019,020 profit to the
Corporation.
At December 31, 1995, Vanguard owed a bank approximately $428,835
under a mortgage loan secured by the former home office building of the
Corporation and Dixie Life. Under a lease agreement, Standard is obligated to
pay Vanguard rent sufficient to cover the debt service under the mortgage until
December 31, 1996.
At December 31, 1995 and 1994, the Company's investments are reported
in accordance with the provisions of Statement of Financial Accounting
Standards No. 115 (FAS 115) which was issued by the Financial Accounting
Standards Board in 1993 and effective for 1994 financial statements.
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RESULTS OF OPERATIONS
On October 2, 1995, the Corporation completed the sale of Dixie Life,
which was 99.3% owned by the Corporation, to Standard. Prior to its sales,
Dixie Life represented virtually all of the Corporation's assets and
operations. The selling price of the Corporation's interest in Dixie Life to
Standard was $7,389,086, of which $3,646,468 was in cash. The Corporation used
$1,720,000 of the cash proceeds to repay Subordinated Convertible Notes and to
purchase from Dixie Life lease receivables of $503,258. Standard canceled a
$3,688,746 note payable of the Corporation held by a subsidiary of Standard.
The Corporation also received accounts receivable of $53,872, all of which have
been written off as uncollectible at December 31, 1995.
The sale resulted in a loss of $4,174,535 ($.394 per share). The sale
of Dixie Life constitutes discontinuance of the life insurance business by the
Corporation. The loss on the sale is reported in a manner substantially the
same as discontinued operations. The Corporation continues to report insurance
operations in the same manner as prior to the measurement date of March 6,
1995. Accounting Principles Board Opinion No. 30 (APB 30) calls for reporting
the operations of discontinued operations as a single net amount in the
statement of operations, but in Management's opinion, reducing virtually all of
the Corporation's operations to a single amount in the statement of operations
would not be meaningful to readers of the Corporation's financial statements.
The Corporation has entered into another line of business. Beginning January 1,
1996, the Corporation will report its insurance operations as discontinued
operations in accordance with APB 30.
The Company incurred a net loss of $ 6,849,572 in 1995 compared to a
net loss of $2,554,779 in 1994 and a net loss of $957,138 in 1993. On a
per-share basis the net loss for 1995 was $.65 compared to a net loss of $.39
in 1994 and a net loss of $.15 in 1993.
Total revenues for 1995 were $5,032,537 compared to $11,651,000 in
1994 and $21,530,000 in 1993.
Premium income in 1995 was $2,485,974 compared to 1994 premiums of
$9,516,000 and $19,499,000 premiums in 1993. The decrease in premiums in 1995
was due primarily to the sale of Dixie Life. The composition of premium income
in each of the three years ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Life and Accident
Annuity and Health Total
--------- ---------- ------------
<S> <C> <C> <C>
1995 2,485,974 - 2,485,974
1994 4,214,000 5,302,000 9,516,000
1993 5,314,000 14,185,000 19,499,000
</TABLE>
Net investment income was $1,950,874 in 1995 compared to $2,133,635 in
1994 and $2,005,000 in 1993.
Total benefits and expenses were $12,056,626 in 1995, $14,236,000 in
1994 and $22,700,000 in 1993.
In 1995, every expense category experienced a significant decrease.
The decreases in benefits and claims to policyholders, amortization of deferred
policy acquisition costs and commissions resulted from the sale of Dixie Life
Insurance Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data called for by this
Item are set forth immediately following the Index to Financial Statements and
Financial Statement Schedules at page 19.
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Corporation's accountants,
Horne CPA Group.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of the Corporation are:
<TABLE>
<CAPTION>
Director
Name Age Since
------------------ --- -----
<S> <C> <C>
Marcia C. Cohen 47 1995
T. H. Etheridge 62 1966
John E. Haggar 53 1995
Robert B. Neal 58 1970
Dennis Nielsen 55 1995
Joe D. Pegram 55 1991
S. L. Reed, Jr. 59 1980
James G. Ricketts 57 1995
Herbert G. Rogers, III 53 1992
</TABLE>
Each director holds office until the next annual meeting of
shareholders or until a successor shall be duly elected and qualified.
The executive officers of the Corporation are:
<TABLE>
<CAPTION>
Executive Officer
Name Age Since
---- --- -----
<S> <C> <C>
S. L. Reed, Jr. 59 1995
Chairman
Chief Executive Officer
G. Thomas Reed 46 1995
President
Chief Operating Officer
David E. Williams 46 1996
Vice President Finance
Chief Financial Officer
Jerry M. Greer 52 1970
Secretary
</TABLE>
The Corporation's officers serve at the pleasure of the Board of
Directors.
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BUSINESS EXPERIENCE
The principal occupations and business experience for the last five
years or more of the directors and executive officers of the Corporation are as
follows:
Marcia C. Cohen - Senior Vice President, Corporate Development of Montgomery
General Hospital, Olney, Maryland. Formerly co-owner and Executive Vice
President of Imaging and Surgery Centers of America, Boston, Massachusetts
which was sold in 1992. Ms. Cohen was retired thereafter until 1994 when she
joined Montgomery General Hospital. Ms. Cohen serves as a member of the Board
of Trustees of Baltimore Medical Systems, Inc. She serves as a member of the
Finance and Business Strategy Committee and the Personnel and Compensation
Committee.
T. H. Etheridge - President and Chief Executive Officer of Choctaw Maid Farms,
Inc., (a food processing and marketing company), of Carthage, Mississippi;
Chairman of the Board of Central Industries and Director of Southern Hens, Inc.
He serves as a member of the Executive Committee.
Jerry M. Greer - Secretary of the Corporation; Formerly Senior Vice President.
John E. Haggar - From December 1994 until June 1995 Chief Financial Officer
and Director of UMS On June 1, 1995 Mr. Haggar became an employee of Alanco,
and in July 1995 became Alanco's Treasurer. Previously, Mr. Haggar was a sole
practitioner engaged in providing accounting services to the general public.
He is a member of the American Institute of Certified Public Accountants and
the Washington Society of Certified Public Accountants. Mr. Haggar serves as
Chairman of the Audit and Compliance Committee and as a member of the
Personnel and Compensation Committee.
Robert B. Neal - Chief Executive Officer of the Corporation until February
1995, President until October 1995. Mr. Neal was Chairman of the Board and
President of Dixie Life until October 1995, and since then has served as Vice
Chairman of Dixie Life.
Dennis Nielsen - Self-employed as a business consultant offering assistance to
businesses on restructuring, financing, or assisting with possible mergers or
acquisitions. Previously he was owner of P&N, Inc. and Hufburn Sales, Inc.,
both automobile dealerships. Mr. Nielsen serves as Chairman of the Finance and
Business Strategy Committee and as a member of the Nominating and Stockholder
Relations Committee.
Joseph D. Pegram - Attorney. He serves as Chairman of the Nominating and
Stockholder Relations Committee and as a member of the Audit and Compliance
Committee.
G. Thomas Reed - President and Chief Operating Officer of the Corporation since
October 1995. Previously had a management consultant practice, was a Private
Banking Manager for First Union National Bank, and Administrative Vice
President and Chief Operating Officer of Compudata Services, Inc., a software
development and service company. No relation to the Chairman of the
Corporation.
S.L. Reed, Jr. - From January 1995, Chairman of the Board of Directors and
Chief Executive Officer of the Corporation. President of Reed Enterprises,
Inc. (an aquaculture and investment company) of Belzoni, Mississippi; Director
of Delta Industries, Inc., Producers Feed Co. and Venture SystemSource, Inc. He
serves as Chairman of the Executive Committee.
James G. Ricketts - President and Chief Executive Officer of Technology
Systems International of Scottsdale, Arizona, a corporation founded to develop
and sell high-technology security systems to the corrections industry. He also
serves as an independent consultant to correctional agencies throughout the
United States and also serves as an expert witness in corrections litigation.
Previously he served as Director
12
<PAGE> 13
of Arizona Department of Corrections, Executive Director of the Colorado
Department of Corrections and deputy Secretary to the Florida Department of
Corrections. In addition, he was the past Chairman of the Board of Directors
of Alanco. Dr. Ricketts serves as a member of the Executive Committee.
Herbert G. Rogers, III - President of Rogers Agency, Inc., Rogers LP-Gas
Company, Rogers Investments, Inc., Mississippi Realty, Inc. and Roell Realty
Corp. of New Albany, Mississippi; Director of the Nashoba Bank and Chairman of
the Board of the Gentry Furniture Corporation. He serves as Chairman of the
Personnel and Compensation Committee and as a member of the Finance and
Business Strategy Committee.
David E. Williams - Vice President Finance and Chief Financial Officer of the
Corporation since April 1, 1996. Previously engaged as a sole practitioner of
a Certified Public Accounting practice. He is a Certified Public Accountant as
well as a Certified Management Accountant. He is a member of the American
Institute of Certified Public Accountants, the New Jersey State Society of
Certified Public Accounts, the Florida State Society of Certified Public
Accountants, and the Institute of Management Accountants.
The Corporation was the subject of an investigation by the Securities
and Exchange Commission (SEC), which was resolved by means of a settlement.
Pursuant to the settlement, on March 9, 1994, the United States District Court
for the District of Columbia entered final judgments of permanent injunction
against the Corporation and Robert B. Neal, a Director and former President of
the Corporation. The judgments were entered on the basis of a complaint filed
by the SEC. The Corporation and Mr. Neal each consented to the entry of final
judgments of permanent injunction without admitting or denying the allegations
contained in the SEC's complaint. The final judgments to which the Corporation
and Mr. Neal consented enjoin them from violating or aiding and abetting future
violations of sections of the Securities Act of 1933 and the Securities
Exchange Act of 1934 and certain rules thereunder.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
As discussed under "Item 11. Executive Compensation, " during 1995,
the Corporation granted to each of its non-employee directors an option to
purchase 5,000 shares of the Corporation's Common Stock. The Corporation
understands that such directors have not filed Forms 4 or 5 as to the grant of
those options on a timely basis. The Corporation is advised that the required
Forms, which may include other purchases during 1995, are in the process of
being by such persons. S.L. Reed, Jr., Chairman of the Board and Chief
Executive Officer of the Corporation, did not timely file a Form 5 as to
certain 1995 purchases of the Corporation's Common Stock, and G. Thomas Reed
did not timely file a Form 5 to report the grant to him during 1995 of an
option for 25,000 shares of the Corporation's Common Stock and certain other
purchases of Common Stock made in 1995. The Corporation is instituting
procedures designed to avoid the recurrence of any such filing failures in the
future.
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for each of the
last three years, information concerning the total compensation paid or awarded
to the Corporation's Chief Executive Officer and all other executive officers
whose total compensation exceed $100,000, for services rendered in all
capacities to the Corporation and its subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and
Principal Annual Compensation All Other
Position Year Salary Bonus Compensation
-------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
S. Leroy Reed, Jr. 1995(1) $ 25,346 None
Chairman and 1994 $ None
Chief Executive Officer 1993 $ None
Robert B. Neal 1995 (2) $ 92,071 None
Former President 1994 $125,269 None $2,505(3)
1993 $125,269 None $2,575(3)
</TABLE>
(1) Commenced employment January 1995.
(2) Terminated employment as Chief Executive Officer in October 1995.
(3) Includes the Corporation's contributions under its qualified profit sharing
plans for employees, including officers.
13
<PAGE> 14
At a meeting held on March 24, 1995, the Corporation's Board of
Directors approved granting to each non-employee director an option to purchase
5,000 shares of the Corporation's Common Stock at the average of the bid and
asked price as quoted by NASDAQ on April 3, 1995. Options to purchase 25,000
shares were also granted to G. Thomas Reed, President, on April 17, 1995. The
options may be exercised 20% per year beginning March 31, 1996 and expire March
31, 2000. If a person ceases being a director of the Corporation, his option
will be canceled 30 days thereafter.
COMPENSATION OF DIRECTORS
Directors who are also officers of the Corporation receive no
additional compensation for serving on the Corporation's Board or committees
thereof. All other Directors are paid $250 per day for each day they attend a
Board meeting. They are also paid $400 base monthly fee. As a group, Directors
who were not officers were paid $54,036 during 1995.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth pertinent information as to the
beneficial ownership of the Corporation's common stock as of April 2, 1996, of
persons known by the Company to be holders of 5% or more of such common stock.
Information as to the number of shares beneficially owned has been furnished by
the persons named in the table.
<TABLE>
<CAPTION>
Name and Address Shares
of Beneficial Beneficially Percent
Owner Owned of Class
---------------- ------------ --------
<S> <C> <C>
Constance Gamble Grewell 2,064,770(1) 15.5%
100 Executive Way
Ponte Vedra Beach, FL 32080
S. L. Reed, Jr. 722,286(2)(3) 5.4%
107 The Executive Center
Hilton Head Island, SC 29928
</TABLE>
(1) Constance Gamble Grewell acquired her shares in the acquisition of
TRS by the Corporation. She was the owner of 616 shares of TRS
outstanding common stock.
(2) Includes shares issuable upon exercise of stock options.
(3) Includes shares held in name of spouse, minor child, or other
relatives or persons as to some of which shares the owner has shared
voting or investment power, but to which beneficial ownership is
disclaimed.
14
<PAGE> 15
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets information as to the beneficial ownership of
the Corporation's Common Stock as of April 2, 1996 by each director, each
executive officer named in the Summary Compensation Table, and by all directors
and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Name of Beneficially Percent
Beneficial Owner Owned of Class
---------------- ------------ --------
<S> <C> <C>
Marcia C. Cohen 5,000(2) Less than 1%
T. H. Etheridge 216,827(1)(2) 1.6 %
Robert B. Neal 410,198(1)(2) 3.0 %
Joe D. Pegram 28,043(2) Less than 1%
S. L. Reed, Jr. 722,286(1)(2) 5.4 %
Herbert G. Rogers, III 107,128(1)(2) Less than 1%
John E. Haggar 7,000(2) Less than 1%
Dennis Nielsen 12,200(2) Less than 1%
James G. Ricketts 20,000(2) Less than 1%
Directors and
executive officers as
a group (12 persons) 1,685,360(2) 12.7%
</TABLE>
(1) Includes shares held in the name of spouse, minor child or other
relatives or persons, as to some of which shares the owner named has
shared voting or investment power, but as to which beneficial
ownership is disclaimed, as follows: T. H. Etheridge -37,510 shares;
Robert B. Neal - 1,368 shares; S. L. Reed, Jr. - 558,422 shares; and
Herbert G. Rogers, III - 27,479 shares.
(2) Includes shares issuable upon exercise of stock options: All
Non-Employee Directors have been issued options to purchase 5,000
shares of Dixie stock. G. Thomas Reed, President, has been granted
options to purchase 25,000 shares of Dixie stock. S. Leroy Reed,
Chairman of the Board and Chief Executive Officer was granted options
to purchase 50,000 shares of Dixie stock on February 22, 1996.
15
<PAGE> 16
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation's Subordinated Convertible Notes which were due May 1,
1995 were extended in connection with the sale of Dixie Life. The Corporation
satisfied the Subordinated Convertible Notes upon the sale of Dixie Life.
American Capital Insurance Company, a former beneficial owner of more than 5%
of the Corporation's Common Stock, held $1,000,000 of the Notes, and Robert B.
Neal, a director and former 5% owner of the Corporation, held $100,000 of the
Notes.
The relationships of John E. Haggar and James G. Ricketts, both
directors of the Corporation, with Alanco, one of the stockholders of PMM, is
described under "(c) Narrative Description of Business - Investment in PMM."
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules of
Dixie National Corporation and Subsidiaries. See separate Index to Financial
Statements and Financial Statement Schedules on page 19.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Incorporation by Reference to
------ -------------------------------------- ----------------------------------------
<S> <C> <C>
(2)(a) Restated Agreement dated as of October Registrant's Quarterly Report on
27, 1994 between Dixie National Form 10-Q for the nine months
Corporation and Universal Management ended September 30, 1994.
Services
(2)(a)(1) Seconded Amended and Restated Registrant's Quarterly Report on
Agreement dated as of March 24, 1995 Form 10-Q for the three months
between Dixie National Corporation and ended March 31, 1995
Universal Management Services
(2)(b) Second restated stock purchase Proxy Statement relating to the Annual
agreement restated as of August 30, meeting of Shareholders held on
1995, effective as of April 18, 1995, September 19, 1995.
among Standard Life Insurance Co.
of Indiana, Dixie Life Insurance Co.,
and Dixie National Corporation.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
(2)(c) Accounts receivable financing agreement
dated as of February 26, 1996 between
Dixie National Corporation and Text
Retrieval Systems, Inc. including
amended restated option agreement.
(3)(a)(1) Articles of Incorporation as Registrant's Annual Report on
amended and restated Form 10-K for the year ended
December 31, 1985. Exhibit
(3a)
(3)(a)(2) Articles of Amendment to the Registrant's Annual Report of
Articles of Incorporation of Form 10-K for the year ended
Dixie National Corporation dated December 31, 1994. Exhibit
May 23, 1986 (3)(a)(2).
(3)(a)(3) Articles of Amendment to the Registrant's Annual Report on
Articles of Incorporation of Form 10-K for the year ended
Dixie National Corporation dated December 31, 1994. Exhibit
January 24, 1995 (3)(a)(2).
(3)(b) By-Laws, as amended Registrant's Annual Report on
Form 10-K for the year ended
December, 31, 1990. Exhibit
(3(b).
(3)(b)(1) Amendment to Article III of Bylaws
effective January 24, 1996
(3)(b)(2) Amendment to Article IV of Bylaws
effective March 24, 1996
(4)(a)(1) Form of Dixie National Corporation Registrant's Current Report on
Subordinated Convertible Callable Form 8-K dated April 30, 1993.
Fixed Interest Rate Note Due May
1, 1995
(10)(a)* Incentive Stock Option Plan Registrant's Annual Report on
of 1982 Form 10-K for the year ended
December 31, 1990. Exhibit
(10)(b)* Incentive Stock Option Plan Proxy Statement relating to
of 1988 the Annual Meeting of
Stockholders held on April 1,
1988.
(10)(c)* 1995 Stock Option Plan Proxy Statement relating to the
Annual Meeting of Stockholders
held on September 19, 1995.
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
</TABLE>
*Management contract or compensatory plan.
17
<PAGE> 18
Registrant agrees to file with the Securities and Exchange Commission,
upon request, copies of any instrument defining the rights of the holders of
its consolidated long-term debt.
Schedules other than those referred to above are omitted for the
reason that they are not required, are not applicable, or the required
information is shown in the financial statements or notes thereto, or is
incorporated by reference.
(b) Reports on Form 8-K
The Corporation filed the following reports on Form 8-K during the
last quarter of the year ended December 31, 1995:
<TABLE>
<CAPTION>
Date of Current Report
(or Amendment) Items Reported
--------------------- -----------------------------------------------
<S> <C>
October 2, 1995 Item 2. Acquisition or Disposition of Assets.
Sale of Dixie National Life Insurance Company
Item 4. Financial Statements, Proforma Financial
Information and Exhibits.
Second Restated Stock Purchase Agreement regarding
sale of Dixie National Life Insurance Company.
December 1, 1995 Item 5. Other Events. Relocation of Dixie National
Corporation's principle office to Hilton Head Island,
South Carolina.
</TABLE>
(c) Exhibits required by Item 601 of Regulation S-K
The exhibits listed in Item 14(a)3 of this report, and not
incorporated by reference, follow "SIGNATURES." See "Exhibit Index."
(d) Financial statement schedules required by Regulation S-X
The financial statement schedules required by Regulation S-X, filed
herewith, are identified in the Index to Financial Statements and Financial
Statement Schedules on page 19.
18
<PAGE> 19
DIXIE NATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent certified public accountant .........................................................20
Consolidated balance sheets as of December 31, 1995 and 1994 ..............................................21
Consolidated statements of operations for the three years ended
December 31, 1995 .......................................................................................22
Consolidated statements of stockholders' equity for the three
years ended December 31, 1995 ...........................................................................23
Consolidated statements of cash flows for the three years ended
December 31, 1995..........................................................................................24-25
Notes to Consolidated Financial Statements ................................................................26-37
Report of the independent certified public accountant on
financial statement schedules ...........................................................................38
Schedule III - Condensed Financial Information of Registrant ..............................................39-42
Schedule VI - Reinsurance .................................................................................43
Schedule VIII - Valuation and Qualifying Accounts .........................................................44
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITOR'S REPORT
To The Shareholders
Dixie National Corporation
Jackson, Mississippi
We have audited the accompanying consolidated balance sheets of Dixie National
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to report 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 Dixie National
Corporation and subsidiaries as of December 31, 1995 and 1994 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
HORNE CPA GROUP
Jackson, Mississippi
March 7, 1996
20
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments
Fixed maturities at amortized cost at December 31, 1994
(market approximately $13,631,000) $ - $17,332,660
Policy Loans - 3,060,185
Marketable equity securities 2,227,904 2,000,000
Government guaranteed student loans, less
allowance for uncollectible loans of $464,603 at
December 31, 1994 - 5,978,288
Short-term investments - 4,860,347
Cash and cash equivalents 1,377,869 459,109
---------- ----------
TOTAL INVESTMENTS 3,605,773 33,690,589
Accounts and lease receivable, less allowance for doubtful
accounts of -0- at December 31, 1995 and
$195,885 at December 31, 1994 485,299 787,419
Accrued investment income - 412,705
Deferred policy acquisition costs, net - 6,626,230
Value of life insurance purchased, net - 1,589,356
Property and equipment less accumulated depreciation
of $814,510 at December 31, 1995 and $1,482,500 at
December 31, 1994 410,935 584,694
Other assets 601,916 886,459
---------- ----------
TOTAL ASSETS $ 5,103,923 $44,577,452
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policy liabilities
Future policy benefits - $27,538,803
Other policy claims and benefits payable - 240,766
Other policyholders' funds - 829,530
---------- ----------
TOTAL POLICY LIABILITIES - 28,609,099
Notes payable and other debt 470,502 6,103,839
Income taxes - 3,599
Accrued liabilities and expenses 170,061 679,460
---------- ----------
TOTAL LIABILITIES 640,563 35,345,997
STOCKHOLDERS' EQUITY
Common Stock, $1 par value authorized 50,000,000 shares; issued
10,624,973 shares and 8,424,973 at December 31, 1995
and 1994, respectively; outstanding 10,597,661 shares and
8,394,973 shares at December 31, 1995 and 1994, respectively 10,597,661 8,394,973
Discount on Common Stock (996,222) -
Retained earnings (deficit) (5,138,079) 1,711,493
Unrealized holding losses on investments available for sale - (925,011)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,463,360 9,181,455
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,103,923 $44,577,452
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF OPERATIONS
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 2,485,974 $ 9,516,157 $19,499,289
Net investment income 1,950,874 2,133,635 2,005,075
Realized investment gains (losses) 155,741 1,551 25,580
Unrealized investment gains 347,859 - -
Other 92,089 0 0
----------- ----------- -----------
TOTAL REVENUES 5,032,537 11,651,343 21,529,944
BENEFITS AND EXPENSES
Benefits and claims to policyholders 1,495,591 6,573,216 12,573,809
Amortization of deferred policy acquisition costs and
value of insurance purchased 699,285 1,420,943 2,506,419
Commissions, net 385,354 1,893,838 3,509,301
General expenses, net 2,491,339 2,187,114 2,510,047
Interest expense 436,204 449,550 571,026
Insurance taxes, licenses and fees 315,830 514,579 705,170
Loss on sale of accident and health business - 1,196,811 324,511
Provision for litigation settlement 1,007,271 - -
Loss on sale of life insurance subsidiary 4,174,535 - -
Loss on write-down of non-marketable security 1,051,217 - -
----------- ---------- ----------
TOTAL BENEFITS AND EXPENSES 12,056,626 14,236,051 22,700,283
----------- ---------- ----------
LOSS BEFORE INCOME TAXES (7,024,089) (2,584,708) (1,170,339)
Income tax benefit (expense) 174,517 29,929 213,201
----------- ---------- ----------
NET INCOME (LOSS) $ (6,849,572) $(2,554,779) $ (957,138)
============ ========== ===========
Primary and fully diluted net income
(loss) per share $ (.65) $ (.39) $ (.15)
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DIXIE NATIONAL CORPORATION
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Discount Unrealized
Common on stock Retained Holding
Stock Issued Earnings Losses Total
----- ------ -------- --------- -----
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1992 $6,394,973 $ 5,223,410 $ 11,618,383
Net loss for 1993 (957,138) (957,138)
--------- ----------- ------------
BALANCE DECEMBER 31, 1993 6,394,973 4,266,272 10,661,245
Net loss for 1994 (2,554,779) (2,554,779)
Unrealized holding losses on investments
available for sale $(925,011) (925,011)
Common Stock issued 2,000,000 2,000,000
--------- ----------- --------- ------------
BALANCE DECEMBER 31, 1994 $ 8,394,973 $1,711,493 $(925,011) $ 9,181,455
Net loss for 1995 (6,849,572) (6,849,572)
Common stock issued 2,200,000 (996,222) 1,203,778
Recovery of holding losses on investments
available for sale 925,011 925,011
Transaction in treasury stock 2,688 2,688
---------- --------- ---------- --------- -----------
BALANCE DECEMBER 31, 1995 $10,597,661 $(996,222) $(5,138,079) $ 0 $ 4,463,360
========== ========= ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(6,849,572) $(2,554,779) $ (957,138)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Unrealized gains on investments (347,859) - -
Loss on write-off of non-marketable securities 1,103,778 - -
Loss on sale of life insurance subsidiary 4,174,535 - -
Loss on sale of accident and health business - 1,196,811 324,511
Increase (decrease) in policy liabilities (235,605) 2,155,070 2,952,775
Amortization of policy acquisition costs - 1,420,943 2,506,419
Increase (decrease) in deferred income taxes 123,884 (748,597) (278,991)
Decrease in accrued liabilities (636,883) (149,625) (251,709)
Policy acquisition costs deferred (307,364) (1,285,902) (3,642,818)
(Increase) decrease in accounts receivable (137,826) 1,623,993 163,070
Depreciation 55,782 119,564 117,910
Other, net - (37,996) (199,712)
Decrease in accrued investment income 412,705 - -
Value of insurance purchased, net 699,285 - -
-----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,945,140) 1,739,482 734,317
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities:
Maturities 3,508,400 2,326,044 14,500
Calls - 890,845 2,472,358
Sales - 224,500
Repayment of policy and student mortgage loans 1,350,353 2,099,864 1,976,751
Cost of investments acquired:
Investment in unconsolidated subsidiary (111,970)
Fixed maturities (1,615,581) (8,458,904) (9,038,606)
Policy and student loans (587,132) (952,404) (1,099,649)
Temporary investments, net 4,192,867 (1,819,899) 8,472,377
Additions to property and equipment - (96,046) (20,557)
Proceeds from sale of property and equipment 117,977 - 3,538
Proceeds from sale of life insurance subsidiary 1,350,640 - -
Other assets 292,794 - -
-----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 8,498,348 (5,786,000) 2,780,712
Cash flows from financing activities:
Treasury stock (1,112) - -
Proceeds from borrowing 428,835 1,515,000
Payments on debt (6,062,171) (149,831) (2,264,847)
----------- ---------- -----------
NET CASH USED BY FINANCING ACTIVITIES (5,634,448) (149,831) (749,847)
----------- ---------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH EQUIVALENTS 918,760 (4,196,349) 2,765,182
Cash and cash equivalents at beginning of year 459,109 4,655,458 1,890,276
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,377,869 $ 459,109 $ 4,655,458
========== ========== ==========
</TABLE>
24
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS
DIXIE NATIONAL CORPORATION (CONTINUED)
<TABLE>
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes $ 129,429 $ 718,668 $ 5,824
=========== =========== ==========
Cash payments for interest $ 492,797 $ 505,318 $ 552,459
=========== =========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Lease obligation incurred for new data processing equipment $ 8,061
===========
Notes issued in exchange for debentures $ 485,000
===========
Common Stock issued for equity securities of
nonaffiliated company $ 2,000,000
============
Sale of Dixie National Life Insurance Company:
Cash sales price $ 1,350,640
Payment of convertible notes 1,792,570
Payment of note secured by stock 3,688,746
Repurchase of leases from subsidiary 503,258
Guaranty of receivables sold 53,872
-----------
$ 7,389,086
Less basis in subsidiary 11,583,621
----------
Loss on sale (4,174,535)
==========
Acquisition of non-marketable securities and options
by issuance of capital stock:
Acquired 16% of Phoenix Medical Management, Inc.
for 2,000,000 shares of common stock and an option to
acquire the remaining 84% for 100,000 shares of
common stock
Par value of stock issued 2,100,000
Discounted to book value 996,222
----------
Recorded value of investment 1,103,776
==========
Acquired 35% of Text Retrieval Systems, Inc. for
cash and an option to acquire the remaining 65%
for 100,000 shares of common stock
Par value of stock issued $ 100,000
==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIXIE NATIONAL CORPORATION
DECEMBER 31, 1995
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
See note 11 as to the reporting of the life insurance operation, discontinued
as of October 2, 1995, with the sale of the life insurance subsidiary.
Principles of Consolidation: The consolidated financial statements include the
financial statements of Dixie National Corporation (Corporation), its
wholly-owned subsidiaries and Dixie National Life Insurance Company (Dixie
Life), which was sold on October 2, 1995 (See Note11 - Sale of Insurance
Business) and was approximately 99% owned by the Corporation. The interests
of Dixie Life minority stockholders are not material. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments: At December 31, 1995, the Company's investments are reported in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115 (FAS 115) which was issued by the Financial Accounting Standards Board
in 1993 and effective for 1994 financial statements.
At December 31, 1995, marketable securities are classified as trading, which,
under the provisions of FAS 115, are reported at market with unrealized market
gains or losses being reflected in operations. Because of the provisions of an
agreement with Universal Management Services (UMS) discussed in Notes 3 and 16,
marketable securities are reported at cost at December 31, 1994.
Policy loans are stated at the amounts loaned to policyholders and are
collateralized by assignment of the cash value of underlying policies. Student
loans are carried at cost less an allowance for uncollectible amounts.
Short-term investments will be held to maturity and are due in one year or less
and are carried at cost which approximate market.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks and
money-market investments which carry no withdrawal restrictions.
Recognition of Premium Revenue and Related Expenses: Premiums for traditional
life insurance contracts are reported as revenue over the premium-paying period
of the policy. Premiums for fixed premium interest sensitive products are
added to the policy account value and revenues for such products are recognized
as charges to the account value for mortality, administration and surrenders
(retrospective deposit method). Profits are also earned to the extent that
investment income exceeds policy requirements. The related benefits and
expenses are matched with revenues through the provision for future policy
benefits and the amortization of deferred acquisition costs in a manner which
recognizes profits as they are earned.
Future Policy Benefits: The liability for future policy benefits interest
sensitive products is represented by the policy account value. The liability
for future policy benefits for all other life and health products is provided
on the net level premium method based on estimated investment yields,
mortality, morbidity, persistency and other assumptions. Assumptions are based
upon Dixie Life's experience and industry experience, where appropriate, with
provision for possible adverse deviation.
26
<PAGE> 27
Deferred Acquisition Costs: The costs of acquiring new insurance business are
deferred. Such deferred costs consist principally of excess first year sales
commissions, as well as underwriting expenses and certain other expenses.
Deferred acquisition costs for other than interest sensitive products are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For interest sensitive products, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, withdrawals and mortality are consistent with
those used in computing the liability for future policy benefits and expenses.
Value of Life Insurance Purchased: Value of life insurance purchased is being
amortized over 12 years, the expected life of the income stream.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straight-line method
over the estimated useful lives of these assets.
Income Taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for changes in tax laws and rates on the date of
enactment.
Earnings Per Share: Earnings per share are based on the weighted average
number of common stock and common stock equivalents outstanding during the
year.
Reinsurance: Dixie Life cedes and assumes insurance risks with other
companies. Liabilities for future policy benefits, premiums and expenses are
reported after deduction of amounts relating to policy specific reinsurance
ceded and addition of amounts relating to policy specific reinsurance assumed.
Fair Value of Financial Instruments: The following methods and assumptions
were used to estimate the fair value of financial instruments, all of which
were determined to approximate carrying value at December 31, 1995:
Cash and cash equivalents:
The carrying value approximates fair value because of the short
maturity of those instruments.
Investments:
Investments are classified as trading investments and are carried at
fair value on the financial statements.
Long-term debt:
All debt bears interest at variable rates based on current market
conditions. Therefore it is estimated that carrying value
approximately equals fair value.
NOTE 2--STATUTORY ACCOUNTING
Dixie Life was required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare these
statutory financial statements differ from GAAP.
The excess, if any, of Dixie Life's stockholders' equity on a GAAP basis over
that determined on a statutory basis is not available for distribution to Dixie
Life's stockholders. Mississippi law governing insurance companies further
restricts payment of dividends to the lessor of (1) the prior year statutory
net income plus the excess of statutory net income for the second and third
preceding years over distributions in the first and second preceding years or
(2) 10% of statutory stockholders' equity. Since Dixie Life was sold in
September 1995, the statutory accounting financial statements information is
not available with regard to the year ended December 31, 1995.
27
<PAGE> 28
A reconciliation of Dixie Life's statutory net income to the Company's
consolidated GAAP net income is as follows for the preceding two years:
<TABLE>
<CAPTION>
Year Ended December 31
1994 1993
---- ----
<S> <C> <C>
Statutory net income $ 260,165 $ 3,348
Loss on sale of subsidiary - -
Deferral of acquisition costs 1,285,902 3,642,818
Amortization of acquisition costs (1,420,943) (2,506,419)
Differences in insurance policy
liabilities, excluding effect of
sale of block of business 1,775,875 55,079
Deferred income taxes 404,929 369,025
Premium income (1,077,138) (615,131)
Investment income 21,240 66,421
Commissions (246,584)
Interest expense (449,550) (571,026)
General insurance expenses 663,558 420,741
Write off of agent advances 366,661 766,584
Supplementary contracts (131,073) (83,079)
Other 265,182 190,596
STAT Bond write off of Vanguard
Debenture 2,000,000
Loss on write-down of non-marketable security - -
GAAP Loss on sale of accident and health business (1,196,811) (324,511)
STAT gain on sale of accident and health business (5,322,776) (2,125,000)
---------- ----------
GAAP Net Income (Loss) $(2,554,779) $ (957,138)
========== ==========
</TABLE>
A reconciliation of Dixie Life's statutory stockholders' equity to the
Company's consolidated GAAP stockholders' equity is as follows at December 31,
1994:
<TABLE>
<S> <C>
Statutory Stockholders' Equity $ 6,280,400
Loss on sale of subsidiary -
Differences in insurance policy liabilities (984,870)
Deferred acquisition costs 6,626,230
Deferred income taxes 61,459
Debt of parent company (5,933,050)
Asset Valuation Reserve 129,809
Value of life insurance purchased 1,589,356
Non-admitted assets 252,049
Common stock issued 2,000,000
Other (839,938)
-----------
GAAP Stockholders' Equity $ 9,181,455
===========
</TABLE>
At December 31, 1994 Dixie Life was a party to an indemnification reinsurance
agreement under which 90% of its retained life insurance in force at September
30, 1992 is reinsured. This transaction is accounted for as a financing
transaction in the accompanying financial statements. Dixie Life's statutory
financial statements include a reserve credit at December 31, 1994 of
$1,985,000 related to this agreement which has the effect of increasing
statutory stockholders' equity by that amount.
28
<PAGE> 29
NOTE 3--INVESTMENTS
The Company's investments in fixed maturity securities available for sale at
December 31, 1994 summarized as follows relate to the Dixie Life Insurance
Company. There were none of these investments at December 31, 1995:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Government agencies and authorities $ 8,966,030 $ $ 504,706 $ 8,461,324
States, municipalities and political subdivisions 511,461 6,115 505,346
Special revenue 10,278 878 9,400
Public utilities 2,041,142 23,637 121,159 1,943,620
All other corporate 6,960,013 33,432 580,475 6,412,970
----------- --------- ---------- -----------
$18,488,924 $ 57,069 $1,213,333 $17,332,660
========== ======== ========= ==========
</TABLE>
Fixed maturity and short-term investments with an approximate carrying amount
of $2,400,000 were pledged to various state insurance departments for
policyowner protection at December 31, 1994. At December 31, 1994, additional
securities with an approximate carrying amount of $13,435,000 were pledged
under the financing transaction reinsurance treaty (see Note 2).
Net investment income consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Investment income
Fixed maturities $1,038,589 $1,189,693 $ 745,534
Policy loans 137,150 170,142 159,666
Student loans 295,301 398,719 538,027
Interest on Accounts Receivable 44,051 151,759 254,538
Short-term investment 33,099 145,919 260,591
Other 402,684 77,403 46,719
--------- ---------- ----------
Net investment income $1,950,874 $2,133,635 $2,005,075
========= ========= =========
</TABLE>
Net realized investment gains (losses) for the year ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Realized gains $155,741 $12,002 $29,448
Realized losses - 10,451 3,868
-------- ------- -----
Net realized gains (losses) $155,741 $ 1,551 $25,580
======= ======= ======
</TABLE>
In November 1994, the Corporation issued 2,000,000 shares of its Common Stock
and received as consideration shares of Alanco Environmental Resources, Inc.
(Alanco) common stock with a market value at the date of the transaction of
$2,000,000. Under the terms of the UMS Agreement discussed in Note 16, any
market appreciation until June 30, 1995 could not be realized because the
purchasers of the Corporation's Common Stock had the right to buy the Alanco
shares for cash equal to the value on the day of the November Transaction. The
purchasers had the obligation to cover any market depreciation, as defined,
which might have occurred as of June 30, 1995. Therefore, the Alanco shares
were carried at cost until June 30, 1995. At December 31, 1995, market value
of the Alanco shares based on the average of the closing bid and asked price,
was $2,227,904.
29
<PAGE> 30
NOTE 4--DEFERRED POLICY ACQUISITION COSTS
An analysis of deferred policy acquisition costs for the years ended December
31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 6,626,230 $19,759,110 $18,787,222
Deferred during the year:
Commissions 242,616 975,002 2,818,953
Other Expenses 64,748 310,900 823,865
----------- ----------- -----------
Total Deferred 307,364 1,285,902 3,642,818
Deferred policy acquisition costs on
policies sold - (13,157,839) (324,511)
Amortized during the year (579,285) (1,260,943) (2,346,419)
Transfer to purchasers of Dixie Life (6,354,309) - -
------------ ----------- -----------
Balance at end of year $ - $ 6,626,230 $19,759,110
=========== =========== ===========
</TABLE>
NOTE 5--VALUE OF LIFE INSURANCE PURCHASED
An analysis of the value of life insurance purchased for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $1,589,356 $ 1,749,356 $1,909,356
Amortized during the year (120,000) (160,000) (160,000)
Transferred to purchase of Dixie Life (1,469,356) - -
Balance at end of year $ - $1,589,356 $1,749,356
========= ========== ==========
</TABLE>
NOTE 6--PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Home office property $ 795,038 $ 795,038
Data Processing Equipment - 818,149
Furniture, Equipment and Autos 430,407 454,007
---------- -----------
1,225,445 2,067,194
Less accumulated depreciation 814,510 1,482,500
---------- ------------
$ 410,935 $ 584,694
========= ============
</TABLE>
NOTE 7 - FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
Life Insurance
--------------
Interest Assumptions: Year of Issue Interest Rates
------------- --------------
<S> <C> <C>
1965-1982 8.5% graded to 4.5%
1983-1984 12.5% graded to 8.0%
1985-1991 9.0% graded to 6.0%
1992-1994 6.0% graded to 5.0%
Mortality assumptions: 1965-1983 1955-60 Select and Ultimate Table
1983-1994 1965-70 Select and Ultimate Table
</TABLE>
30
<PAGE> 31
Withdrawal assumptions: Linton B or Linton C Lapse Tables
Termination assumptions: Termination assumptions are based on Dixie
Life's experience.
NOTE 8 - PARTICIPATING BUSINESS
Life Insurance policies were issued on both a participating and
non-participating basis. The following summary presents the approximate
percentages of participating life business to total life business for the years
indicated:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Life insurance in force 5% 5%
Life premium income 9% 5%
Total number of life policies 12% 11%
</TABLE>
The amount of dividends to be apportioned to participating policies was
determined annually by the Board of Directors of Dixie Life. In the past,
Dixie Life sold participating life insurance through a policy known as the
Charter Contract as well as other participating policies. The Charter Contract
policies contain a participation endorsement whereby Dixie Life agreed to
apportion dividends to Charter Contract holders, as a group and on a pro rata
basis, in an amount which equals at least 35% of Dixie Life's statutory net
profits computed by a formula set forth in the policy. As of December 31,
1994, Dixie had participating policies in force with a total face amount of
approximately $20,486,000 of which approximately $11,721,000 were Charter
Contract policies.
NOTE 9--NOTES PAYABLE AND OTHER DEBT
The Company has the following notes payable at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Note payable to an insurance company
bearing interest at
1% above prime (9.5% at December 31, 1994)
payable interest only monthly through
February 1995, with original maturity March 31, 1995,
collateralized by common stock of
Dixie Life (Term Loan) - $3,688,746
Note payable to a bank bearing interest at prime
plus 3/4% (at December 31, 1995 and 1994, the
rate was 9.25%), payable in monthly
installments of $11,846 through January 5, 2001;
secured by home office property 428,835 524,304
Convertible 10% notes due May 1, 1995 (Notes)
with interest payable semi-annually until
maturity, convertible to common stock on the
basis of one share for each $1 of Note
principal, collateralized by second security
interest in common stock of Dixie Life - 1,720,000
Obligation under capital lease - 170,789
Note payable to a bank bearing interest at
prime plus 1% (at December 31, 1995.
The rate was 9.5%), payable in monthly
installments of $689.81 16,667 -
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
Note payable to a bank bearing interest at
the CD rate plus 1.5% (at December 31, 1995.
The rate was 7.35%), payable in monthly
installments of $694.44 25,000 -
-------- ----------
$470,502 $ 6,103,839
======= =========
</TABLE>
Aggregate maturities of notes payable at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $122,393
1997 130,388
1998 139,298
1999 78,423
-------
$470,502
=======
</TABLE>
NOTE 10--INCOME TAXES
The Company and its subsidiaries file a life-nonlife consolidated federal
income tax return. The Internal Revenue Code contains several provisions which
affect the consolidated tax provision, including a special deduction for small
life insurance companies amounting to 60% of taxable income and limitations on
the amount of nonlife taxable losses which can be used to reduce life insurance
taxable income.
Because the life insurance subsidiary was sold during 1995, future tax returns
will not include a life insurance operation. In addition, the deferred taxes
at December 31, 1995 do not include any temporary differences related to life
insurance operations.
The accompanying balance sheet includes a liability (asset) for income taxes
payable (receivable) consisting of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C> <C>
Income taxes payable: (Receivable)
Current $ (302,000) $ 32,000
Net deferred - (28,401)
--------- --------
$ (302,000) $ 3,599
======= =========
</TABLE>
Net deferred tax liabilities (assets) consists of the following components as
of December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs $ - $597,100
FAS 115 adjustments 118,300 -
Other Items 9,183 69,500
---------- --------
127,483 666,600
Deferred tax assets:
Policy liabilities - 48,700
Financing reinsurance - 337,500
FAS 115 adjustment - 196,500
Unrealized loss on investment 357,410 -
Provisions for uncollectible
receivables - 112,301
Non-life net operating loss carryforward 100,715 -
Equity in loss of 35% owned subsidiary 16,556 -
---------- --------
474,681 695,001
Valuation allowance (474,681) -
----------- --------
0 695,001
---------- --------
NET LIABILITY (ASSET) $ 127,483 $ (28,401)
========== =========
</TABLE>
32
<PAGE> 33
The Corporation recorded a valuation allowance of $474,681 during the year 1995
because of the uncertainty in the Corporation's ability to realize future
benefits of the carryforward deductions.
Income tax (expense) benefit for the years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $302,000 $(381,900) $(155,000)
Deferred (127,483) 411,849 368,201)
--------- --------- ---------
$174,517 $ 29,929 $ 213,201
======= ======== ========
</TABLE>
The Company's effective income tax (expense) benefit differs from the expense
determined by applying the 34% statutory federal income tax rate to income
before income taxes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Expected tax benefit (expense)
at statutory federal income tax rate $2,388,200 $ 878,800 $ 398,000
Special deductions (485,400) (583,085) (199,000)
Alternative Minimum Tax 78,000 97,000 47,000
Change in deferred taxes on policy liabilities - (362,786)
Loss on sale of life insurance subsidiary $(1,419,300)
Valuation allowance (474, 681)
Other 67,698 (32,799)
----------- --------- --------
Total income tax benefit (expense) $ 174,517 $ 29,929 $ 213,201
=========== ========= ========
</TABLE>
In 1994, a change in deferred taxes on policy liabilities, resulting from an
incorrect estimate of the tax basis policy benefits at December 31, 1993,
caused a $362,786 reduction of the 1994 tax benefit credited to operations.
In 1995 the sale of the life insurance subsidiary resulted in a loss that will
not benefit future operations and that can not be carried back to previous
years. This loss is, therefore, reflected as a reconciling item between
expected and actual tax benefits.
NOTE 11-SALE OF INSURANCE BUSINESS
Dixie Life sold virtually all of its in force accident and health
insurance business to unaffiliated insurance companies in two transactions.
Both transactions were closed in 1994 although the first was effective December
31, 1993.
In the first transaction, Dixie Life sold all of its in force cancer
insurance in South Carolina for $2,125,000 resulting in a statutory gain equal
to the selling price in 1993. Under generally accepted accounting principles,
the transaction was not recorded until closing in February 1994, but the
Corporation did record the loss incurred ($324,000) under GAAP in 1993.
In 1994, Dixie Life sold virtually all of its remaining accident and
health for $5,322,000 in a transaction effective July 1, 1994, again resulting
in a statutory gain equal to the selling price. The Corporation incurred a
GAAP loss of approximately $1,197,000 on this sale.
33
<PAGE> 34
Together, these sales resulted in a reduction of deferred policy
acquisition costs and policy liabilities of $12,980,000 and $11,084,000,
respectively in 1994.
On October 2, 1995, the Corporation completed the sale of Dixie Life,
which was 99.3% owned by the Corporation, to Standard Life Insurance Company of
Indiana ("Standard"). Dixie Life represented virtually all of the
Corporation's assets and operations. The selling price of the Corporation's
interest in Dixie Life to Standard was $7,389,086, of which $3,646,468 was in
cash. The Corporation used $1,720,000 of the cash proceeds to repay
Subordinated Convertible Notes and to purchase from Dixie Life lease
receivables of $503,258. Standard canceled a $3,688,746 Term Loan held by a
subsidiary of Standard. The Corporation also received accounts receivable of
$53,872, all of which have been written off as uncollectible at December 31,
1995.
In addition, Standard is obligated to pay $15,000 per month rent to
Vanguard, Inc., a wholly-owned subsidiary of the Corporation through December
31, 1996, the expiration date of an existing lease on the office building
previously occupied by the Corporation and Dixie Life. The obligation
terminates upon earlier sale of the building.
The sale resulted in a loss of $4,174,536 ($.39 per share). The sale
of Dixie Life constitutes discontinuance of the life insurance business by the
Corporation. The loss on the sale is reported in a manner substantially the
same as discontinued operations. The Corporation continues to report insurance
operations in the same manner as prior to the measurement date of March 6,
1995. Accounting Principles Board Opinion No. 30 (APB 30) calls for reporting
the operations of discontinued operations as a single net amount in the
statement of operations, but in Management's opinion, reducing virtually all of
the Corporation's operations to a single amount in the statement of operations
would not be meaningful to readers of the Corporation's financial statements.
The Corporation anticipates entry into another line of business. Beginning on
January 1, 1996, the Corporation will report its insurance operations as
discontinued operations in accordance with APB 30.
NOTE 12--INCENTIVE STOCK OPTION PLANS
Options for the purchase of 5,000 shares of Common Stock were granted under the
1995 Stock Option Plan ("1995 Plan") upon its adoption on May 26, 1995 to each
of the Corporation's seven non-employee Directors, and an option for 25,000
shares also was granted to G. Thomas Reed, then Senior Vice President of the
Corporation. The options are exerciseable at $.781, the closing bid price on
the last trade date (May 25, 1995), prior to the grant.
NOTE 13 - CONCENTRATION OF CREDIT RISK
At December 31, 1995 and 1994, the Corporation had funds on deposit with a
federally-insured bank in excess of the $100,000 Federal Deposit Insurance
coverage limits.
NOTE 14--PROFIT SHARING PLAN
The Corporation had a profit sharing plan which covered substantially all
employees who met length of service provisions contained in the Plan. Prior to
1992, the plan provided for Company defined contributions based on earnings
before income taxes and realized investment gains. In 1992, the Plan was
amended to allow employee contributions as provided under Section 401(k) of the
Internal Revenue Code.
34
<PAGE> 35
The Company matched 50% of employee contributions up to 4% of compensation and,
at the discretion of the Board of Directors, could have made additional
contributions. Contributions to the Plan charged to expense were approximately
zero, $13,000, and $18,000 in 1995, 1994, and 1993 respectively. In
conjunction with the sale of Dixie Life (See Note 11 above), the profit sharing
plan was terminated and all assets liquidated to the participants.
NOTE 15--BUSINESS SEGMENT INFORMATION
The Corporation, through Dixie Life, had engaged in the following lines of
insurance business: life insurance, individual annuities, and accident and
health insurance (A&H). The Corporation sold its A&H business in July 1994 and
its life and annuity business in September 1995, and is no longer in the
insurance business. In March 1995 the Corporation acquired a 16% interest in
PMM (See Note 17) and in October 1995 acquired a 35% interest in TRS (See Note
18).
Investment income and certain general expenses have been allocated through the
utilization of assumptions, estimates and formulas. Such allocations have been
made on a basis considered reasonable under the circumstances; however, it
should be understood that other acceptable methods of allocation might produce
different results.
Financial information by product grouping is as follows:
<TABLE>
<CAPTION>
Life Annuity Other A&H Total
---- ------- ----- --- -----
<S> <C> <C> <C> <C> <C>
1995
- ----
Revenues $4,302,490 $135,869 $ 594,179 - $ 5,032,537
Benefits and expenses 6,489,330 204,936 136,618 - 6,830,874
---------- ------- ------- ----------
Operating Profit (Loss) $(2,186,840) $(69,067) $ 457,561 - (1,798,337)
========= ======= ========
Loss on sale of life insurance subsidiary (4,174,535)
Loss on write-down of non-marketable securities (1,051,217)
----------
Loss before income taxes $(7,024,089)
==========
1994
- ----
Revenues $5,360,344 $ 839,747 $ - $ 5,451,252 $11,651,343
Benefits and expenses 5,719,795 487,326 - 6,779,282 12,986,403
---------- --------- -------- ---------- -----------
Operating profit (Loss) $ (359,451) $ 352,421 $ $(1,328,030) $(1,335,060)
========= ======== ======== ==========
Unallocated general corporate expenses 1,249,648
-----------
Loss before income taxes $(2,584,708)
==========
1993
- ----
Revenues $6,201,285 $ 861,206 $ - $14,467,453 $21,529,944
Benefits and expenses 5,983,893 664,191 - 14,701,116 21,349,200
---------- ---------- -------- ----------- -----------
Operating profit $ 217,392 $ 197,015 $ - $ (233,663) $ 180,744
========= ========= ======== =========
Unallocated general corporate expenses 1,351,083
-----------
Loss before income taxes $(1,170,339)
==========
</TABLE>
NOTE 16--SALE OF COMMON STOCK
The Corporation entered into an agreement with Universal Management Services, a
Nevada corporation (UMS), as of October 27, 1994 (UMS Agreement). The UMS
Agreement provided that UMS would use its best efforts to assist the
Corporation in locating potential investors for its Common Stock. On November
29, 1994, with such assistance, the Corporation sold 2,000,000 shares of its
Common Stock for which it received
35
<PAGE> 36
shares of Alanco Environmental Resources, Inc. ("Alanco") common stock
(November transaction), with an aggregate market value of $2,000,000 on
November 29, 1994 (see Note 3 of Notes to Consolidated Financial Statements).
In December 1995, the Corporation sold 75,000 shares of Alanco stock on the
open market generating a $10,020 profit. During the first quarter of 1996, the
remaining Alanco shares were sold resulting in a $1,019,020 profit to the
Corporation.
The UMS Agreement also gave UMS the right to assist the Corporation in placing
additional 4,425,000 shares of its Common Stock. In light of the sale of Dixie
Life to Standard among other factors, the Corporation and UMS agreed to amend
and restate the UMS Agreement on the basis described below.
Under the amended and restated UMS Agreement, UMS had the right to use its best
efforts to assist the Corporation in placing up to 12,500,000 additional shares
of the Corporation's Common Stock. The Corporation:
1. On June 29, 1995 issued 2,000,000 shares of its Common Stock in
exchange for 16% of the outstanding common shares of Phoenix Medical
Management, Inc. (PMM), an Arizona corporation. (See Note 17).
2. On June 29, 1995 issued 100,000 shares of its Common Stock for an
option to acquire the remaining 84% of the common shares of PMM.
The Corporation has since relinquished its rights to exercise its
option. (See Note 17).
NOTE 17--INVESTMENT IN PHOENIX MEDICAL MANAGEMENT, INC. ("PMM")
PMM was formed in November 1993 to engage in the ownership and
operation of health care facilities specializing in pain care. Its primary
business activity is the development of a proprietary network of medical
facilities that specialize in the comprehensive treatment of patients seeking
relief of chronic pain. Each facility is to be designed and equipped to
accommodate a multi-modality pain management, psychological and physical
rehabilitation program, as well as to accommodate other non-affiliated surgeons
who will perform their own "non-pain related" surgical procedures at these
facilities. PMM currently has one medical facility open and operating in
Phoenix, Arizona.
After review of the prospects for PMM and the efforts of its
management in developing PMM to the stage of opening its first clinic in March
1995, the Corporation's Board approved the acquisition of a 16% interest in PMM
in exchange for 2,000,000 shares of the Corporation's Common Stock, and in
exchange for 100,000 additional shares, an option to acquire the remaining 84%
for 10,400,000 shares ("84% Option"). The Board's action was based on its
understanding that PMM would open additional clinics in Lafayette and New
Orleans, Louisiana in June and September 1995, respectively. The acquisition
was recorded at the book value of Dixie National Corporation resulting in a
discount on common stock of $996,222.
In subsequent discussions, PMM informed the Corporation that plans for
the Lafayette and New Orleans clinics had been postponed indefinitely in favor
of development of additional clinics in Arizona and that the Phoenix clinic,
due in part to a delay in obtaining Medicare approval of the facility, was not
yet meeting anticipated revenue projections. Although the Corporation
relinquished the 84% Option, PMM Shareholders retain the 100,000 shares of the
Corporation's Common Stock they received in exchange for the 84% Option.
36
<PAGE> 37
Due to the negative equity recorded on the PMM December 31, 1995
unaudited financial statements and in accordance with the Statement of
Financial Accounting Standards, No. 115 (FAS 115), the Corporation has written
its investment in PMM down to zero. This resulted in a charge to current
earnings of $1,051,217.
NOTE 18--ACQUISITION OF TEXT RETRIEVAL SYSTEMS, INC. ("TRS")
On April 2, 1996 the Corporation exercised its option and completed
the 100% acquisition of TRS, a privately-held corporation based in Ponte Vedra
Beach, Florida. In October 1995 the Corporation acquired the option with a 35%
initial ownership interest in TRS. Under the terms of that Agreement, the
Corporation issued 100,000 shares of its stock to the prior owners and granted
TRS a $750,000 line of credit for working capital purposes. To complete the
acquisition of TRS, the Corporation issued 2,500,000 additional shares of its
stock and converted the outstanding balance on the line of credit to equity.
TRS publishes electronic reference libraries that link related data
sources for convenient access by personal computers. The electronic libraries,
often containing thousands of pages, are connected by hypertext cross-reference
links. This permits users to access massive documents while avoiding
time-consuming manual research. One of the latest TRS products is an
employer's compliance library which links all federal employment laws and
related regulations to a compendium of state statutes and regulations. Other
TRS libraries include comprehensive compliance data for the retail and public
housing markets.
Since its incorporation in 1994, TRS has been involved in the
development and packaging of software used in its electronic libraries, and in
the marketing of its products. TRS has 20 employees including 3 software
writers, and 12 marketers. As of June 30, 1995, the end of its fiscal year,
TRS had total assets of $515,295, and for the year ended revenues of $45,043,
and a net loss of $69,342.
The Corporation is accounting for its initial investment in TRS by the
equity method of accounting under which the Corporation's share of the net
income (loss) of the affiliate is recognized as income (loss) in the
Corporation's operations and is added to (subtract from) the investment
account. The loss recorded by the Corporation for the year ended December 31,
1995 was $48,687. At the date of acquisition, the Corporation's investment
exceeded its share of the underlying equity in the assets of TRS by $61,970.
This amount is not being amortized because of the subsequent acquisition of the
remainder of TRS' outstanding stock subsequent to the year end.
Unaudited financial statements of TRS at December 31, 1995 reflect the
following for the six months ended December 31, 1995:
<TABLE>
<S> <C>
Assets $ 728,424
Liabilities 85,700
-------
Equity 642,724
=======
Revenues 168,403
Expenses 248,793
Net loss (80,390)
=======
</TABLE>
NOTE 19--LEASING ACTIVITIES
During the current year, the Company entered into leasing activities
which consist of the leasing of fry cook units to be placed in various
locations and operated by the lessee. All of the Company's leases are
classified as direct financing leases. Under the direct financing method of
accounting for leases, the total net rentals receivable under the lease
contracts are recorded as a net investment in direct financing leases, and the
unearned income on each lease is recognized each month at a constant periodic
rate of return on the unrecovered investment.
The composition of the net investment in direct financing leases at
December 31, 1995, is as follows:
<TABLE>
<S> <C>
Total minimum lease payments to be received 603,168
Unearned lease income 123,898
Net investment in direct financing leases 479,270
</TABLE>
The minimum future lease payments due under the direct financing
leases are as follows:
<TABLE>
<S> <C>
1996 148,239
1997 148,239
1998 148,239
1999 137,514
2000 20,937
Total minimum future
lease payments 603,168
</TABLE>
37
<PAGE> 38
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL
STATEMENT SCHEDULES
To The Shareholders
Dixie National Corporation
Jackson, Mississippi
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedules are presented for purposes of additional analysis and are not a
required part of the basic consolidated financial statements. The financial
statement schedules have been subjected to the auditing procedures applied in
the audit of the basic consolidated financial statements and, in our opinion,
the financial statement schedules are fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
HORNE CPA GROUP
Jackson, Mississippi
March 7, 1996
38
<PAGE> 39
SCHEDULE III
DIXIE NATIONAL CORPORATION (PARENT ONLY)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash $1,314,053 $ 196,883
Marketable equity securities 2,227,904 2,000,000
Leases receivable 471,272 -
Receivable from affiliates 14,529 22,093
Investment in stock of TRS 249,916 -
Equity in net assets of subsidiaries 1,969,542 13,985,455
Excess of cost over net assets of subsidiary, net 693,637
Furniture and equipment, net 31,526
Income taxes recovery receivable 302,000
---------- ----------
TOTAL ASSETS $6,580,742 $16,898,068
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ 41,667 $ 5,408,748
Note payable - subsidiaries 1,800,000 1,800,000
Income taxes payable - 21,134
Accounts payable as accrued expenses 12,077 60,950
Amount due subsidiaries 136,155 425,783
Deferred income tax payable 127,483 -
---------- ----------
TOTAL LIABILITIES 2,117,382 7,716,613
---------- ----------
STOCKHOLDERS' EQUITY 4,463,360 9,181,455
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,580,742 $16,898,068
========= ==========
</TABLE>
See accompany notes to consolidated financial statements.
39
<PAGE> 40
SCHEDULE III (CONTINUED)
DIXIE NATIONAL CORPORATION (PARENT ONLY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
REVENUES
Administrative fees $1,386,000 $ 1,848,000 $ 1,848,000
Investment income 356,758 3,317 5,979
Other 54,621 - -
---------- ----------- -----------
TOTAL REVENUES 1,797,379 1,851,317 1,853,979
========== ========== ==========
EXPENSES
General and administrative 1,223,217 1,337,243 1,592,615
Interest 392,996 404,254 741,229
Loss on write-down of non-marketable securities 1,051,217 1,051,217 -
Loss on sale of life insurance subsidiary 4,174,535 - -
--------- --------- ---------
TOTAL EXPENSES 6,841,965 1,741,497 2,333,844
--------- --------- ---------
INCOME BEFORE EQUITY IN INCOME
OF CONSOLIDATED SUBSIDIARIES (5,044,586) 109,820 (479,865)
Equity in income (loss) of consolidated subsidiaries (1,804,986) (2,664,599) (477,273)
--------- ---------- ---------
NET INCOME (LOSS) $(6,849,572) $(2,554,779) $ (957,138)
========== ========== ==========
Earnings Per Share (.65) (.39) (.15)
========== ========== ==========
</TABLE>
40
<PAGE> 41
SCHEDULE III (CONTINUED)
DIXIE NATIONAL CORPORATION (PARENT ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
---- ---- ----
<S> <C>
Cash flows from operating activities
Net (loss) $ (6,849,572) $(2,554,779) $ (957,138)
Adjustments to reconcile net loss to net
cash provided by operating activities
Equity in loss of subsidiaries 799,188 2,664,599 1,005,946
Basis in sale of life insurance subsidiary 11,563,621
Unrealized gain on investments (227,904)
Loss on write-down of non-marketable securities 1,103,778
(Increase) decrease in accounts receivable from affiliates 7,564 2,210 (2,148)
Decrease in accrued liabilities (25,073) (56) (1,074)
Decrease in amounts due from subsidiaries (289,628)
(Increase) in income taxes recoverable (302,000)
(Increase) in deferred income taxes 106,349
Other, net 0 73,116 (4,361)
---------- ---------- ----------
Net cash provided by operating activities 5,888,323 185,090 41,225
========== ========== ==========
Cash flows from investing activities
(Increase) leases receivable (471,272)
Investment in non-marketable securities (249,916)
Acquisition of furniture and equipment (31,526)
Proceeds from sale of life insurance subsidiary 1,350,640
---------- ---------- ----------
Net cash provided by investing activities 597,926 0 0
---------- ---------- ----------
Cash flows from financing activities
Retirement of notes payable (5,442,079) (2,110,886)
Proceeds from borrowing 75,000 1,515,000
---------- ---------
Net cash used by financing activities (5,367,079) 0 (595,886)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 1,117,170 185,090 (554,661)
Cash and cash equivalents at beginning of year 196,883 11,793 556,454
---------- ---------- ---------
Cash and cash equivalents at end of year $ 1,314,053 $ 196,883 $ 11,793
========== ========== =========
Supplemental cash flow information:
Cash paid for income taxes $ 0 $ 750 $ 12,896
========== ========== =========
Cash paid for interest $ 436,204 $ 460,485 $ 506,309
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 42
SCHEDULE III (CONTINUED)
DIXIE NATIONAL CORPORATION (PARENT ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. The accompanying condensed financial information should be read in
conjunction with consolidated financial statements and notes thereto
of Dixie National Corporation which are included in this Form 10K.
2. At December 31 the notes payable presented in Dixie National
Corporation's Parent Only Statements included the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Notes payable to bank $ 41,667 -
Note payable to an insurance company - $3,688,746
Convertible Notes - 1,720,000
Note payable to subsidiary 1,800,000 1,800,000
---------- ----------
1,841,667 7,208,746
Less current maturities 41,667 5,408,746
---------- ---------
$1,800,000 $1,800,000
========= =========
</TABLE>
42
<PAGE> 43
SCHEDULE VI
DIXIE NATIONAL CORPORATION AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- ---------
Percentage of
Gross Ceded to Other Assumed From Amount Assumed
Amount Companies Other Companies Net Amount To Net
------ --------- --------------- ---------- ------
<S> <C> <C> <C> <C> <C>
1995
- ----
Life Insurance
in force - - - - -
1994
- ----
Life Insurance
in force $310,922,000 $228,076,000 $141,936,000 $224,782,000 63%
=========== =========== =========== =========== ==
Premiums
Life insurance $ 4,252,963 $ 374,631 $ $ 3,878,332
Annuities 335,786 335,786
Accident and
health insurance 5,302,039 5,302,039
----------- ----------- ------------ -----------
Total premiums $ 9,890,788 $ 374,631 $ $ 9,516,157
=========== =========== ============ ===========
1993
- ----
Life insurance
in force $331,301,000 $255,455,000 $ 112,491,000 $188,337,000 60%
=========== =========== ============ =========== ==
Premiums
Life insurance $ 5,400,953 $ 465,903 $ $ 4,935,050
Annuities 378,903 378,903
Accident and
health insurance 14,185,336 14,185,336
----------- ----------- ------------ -----------
Total premiums $ 19,965,192 $ 465,903 $ $19,.499,289
=========== =========== ============ ===========
</TABLE>
43
<PAGE> 44
SCHEDULE VIII
DIXIE NATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Balance at Charged to
Beginning Costs and Deductions- Balance at End
Description of Period Expenses Describe of Period
- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C>
Allowance for
Doubtful
Accounts
--------
1995 - - - -
1994 $ 480,000 $ 82,556 $(366,661) (1) $ 195,895
========== ======== ========= ===========
1993 $1,000,000 $246,584 $(766,584) (1) $ 480,000
========== ======== ========= ===========
</TABLE>
(1) Accounts written off
44
<PAGE> 45
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.
DIXIE NATIONAL CORPORATION
--------------------------
(Registrant)
Date: April 11, 1996 By: /s/Samuel Leroy Reed
----------------------------------
Samuel Leroy Reed
Chairman of the Board
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/Samuel Leroy Reed, Jr. April 11, 1996
------------------------------------------------------------------------------------------------
Samuel Leroy Reed, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
April 11, 1996
-------------------------------------------------------------------------------------------------
Tammy H. Etheridge
Director
/s/John E. Haggar April 11, 1996
------------------------------------------------------------------------------------------------
John E. Haggar
Director
/s/Robert B. Neal April 11, 1996
-------------------------------------------------------------------------------------------------
Robert B. Neal
Director
/s/Dennis Nielsen April 11, 1996
------------------------------------------------------------------------------------------------
Dennis Nielsen
Director
/s/Joseph D. Pegram April 11, 1996
-----------------------------------------------------------------------------------------------
Joseph D. Pegram
Director
/s/James G. Ricketts April 11, 1996
------------------------------------------------------------------------------------------------
James G. Ricketts
Director
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
/s/Herbert G. Rogers, III April 11, 1996
------------------------------------------------------------------------------------------------
Herbert G. Rogers, III
Director
/s/Marcia C. Cohen April 11, 1996
------------------------------------------------------------------------------------------------
Marcia C. Cohen
Director
/s/David E Williams April 11, 1996
------------------------------------------------------------------------------------------------
David E. Williams
Vice President Finance
(Principal Financial and Accounting Officer)
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------------------------------------------------------------------------------------------
<S> <C>
(2)(c) Accounts receivable financing agreement
dated as of February 26, 1996 between
Dixie National Corporation and Text
Retrieval Systems, Inc. including
amended restated option agreement.
(3)(b)(1) Amendment to Article III of Bylaws
effective January 24, 1996
(3)(b)(2) Amendment to Article IV of Bylaws
effective March 24, 1996
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
</TABLE>
47
<PAGE> 1
EXHIBIT 2(c)
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
DATED AS OF
FEBRUARY 26, 1996
BETWEEN
TEXT RETRIEVAL SYSTEMS, INC.
AND
DIXIE NATIONAL CORPORATION
48
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1.
TERMS OF THE ACCOUNTS RECEIVABLE FINANCING . . . . . . . . . . . . . 2
Section 1.1. Incorporation of Recitals; Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------------------------------------
Section 1.2. The Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------
Section 1.3. Maximum Amount; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------------------
Section 1.4. Stock Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
----------------
Section 1.5. Redemption of Additional TRS Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
----------------------------------
Section 1.6. Lock Box Arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
--------------------
Section 1.7. Disbursements From AR Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
-----------------------------
Section 1.8. Credit Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
---------------
Section 1.9. Loan Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
-----------------------
Section 1.10. Execution of Amended and Restated Option Agreement . . . . . . . . . . . . . . . . . . . 4
--------------------------------------------------
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 5
Section 2.1. Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
-----------------------------
Section 2.2. Corporate and Governmental Authorization; Contravention . . . . . . . . . . . . . . . . . 5
-------------------------------------------------------
Section 2.3. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
--------------
Section 2.4. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
----------
Section 2.5. Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------
ARTICLE 3.
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 6
Section 3.1. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------
Section 3.2. No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
----------
Section 3.3. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
--------
Section 3.4. Independence of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
-------------------------
Section 3.5. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
----------------------
Section 3.6. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
----------------------
Section 3.7. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
-------------
Section 3.8. Counterparts; Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
---------------------------
Section 3.9. Waiver of Jury Trial; Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . 7
------------------------------------------------
Section 3.10. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
----------------
</TABLE>
i
49
<PAGE> 3
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
THIS ACCOUNTS RECEIVABLE FINANCING AGREEMENT (as amended,
supplemented or modified from time to time, this "AR Financing Agreement") is
dated as of February 26, 1996 and is between TEXT RETRIEVAL SYSTEMS, INC., a
Florida corporation ("TRS"), and DIXIE NATIONAL CORPORATION, a Mississippi
corporation ("DNC").
RECITALS
A. Effective October 16, 1995, TRS and DNC entered into
a Credit Agreement (the "Credit Agreement") pursuant to which DNC has extended
a working capital loan (the "Working Capital Loan") to TRS pursuant to terms
set forth in the Credit Agreement.
B. As a condition of entering into the Credit Agreement
and obtaining the Working Capital Loan, (i) TRS executed a Note dated October
16, 1995 evidencing the Working Capital Loan and entered into a Security
Agreement dated as of October 16, 1995 (the "Security Agreement") and an Option
Agreement dated as of October 16, 1995 (the "Option Agreement"), and (ii)
certain TRS officers and employees entered into covenants not to compete dated
as of October 16, 1995 running in favor of DNC (collectively, the "Covenants"
and together with the Credit Agreement, the Note, the Security Agreement and
the Option Agreement, the "Credit Documents").
C. In addition to funds advanced as part of the Working
Capital Loan, TRS has requested DNC to provide TRS with accounts receivable
financing (the "AR Financing"), and DNC is willing to provide the AR Financing
pursuant to the terms and conditions set forth in this AR Financing Agreement.
D. The AR Financing shall constitute borrowings by TRS
which are in addition to and separate from the Working Capital Loan and shall
not alter TRS's obligations under the Credit Documents; provided, however, that
as a condition to receiving proceeds of the AR Financing, DNC and TRS shall
enter into an Amendment to the Security Agreement in the form attached hereto
as Exhibit A.
E. The AR Financing provided by DNC pursuant to the
terms of this AR Financing Agreement shall be evidenced by an AR Financing Note
in the form attached hereto as Exhibit B (the "AR Financing Note").
F. In connection with the AR Financing provided by DNC
pursuant to the terms of this AR Financing Agreement, TRS and all of the
stockholders of TRS, except DNC, shall enter into an Amended and Restated
Option Agreement in the form attached hereto as Exhibit C (the "Amended and
Restated Option Agreement Amendment").
50
<PAGE> 4
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
ARTICLE 1.
TERMS OF THE ACCOUNTS RECEIVABLE FINANCING
SECTION 1.1. INCORPORATION OF RECITALS; DEFINITIONS.
(a) RECITALS. The Recitals set forth above are
incorporated as part of this AR Financing Agreement.
(b) DEFINITIONS. In addition to the terms defined in
the Recitals above, the following terms shall have the following meanings:
"AR Account" shall mean account no. 0223560002238 maintained
exclusively by and at the Bank, over which DNC shall have the exclusive right
of withdrawal.
"Bank" shall mean Sun Trust Bank, North Florida, N.A. and its branch
located at 100 North Third Street, Jacksonville Beach, Florida 32250.
"DNC Option" shall have the meaning set forth in the Amended and
Restated Option Agreement.
"TRS Accounts Receivable" shall mean gross accounts receivable
generated by TRS for services provided and/or products delivered to TRS's
customers during the period beginning February 1, 1996 and ending February 21,
1997, without adjustment or offset for any bad debts, non-collectability or
non-payment.
SECTION 1.2. THE LOAN. DNC has agreed to finance
fifty-six percent (56%) of the TRS Accounts Receivable. In order to obtain
accounts receivable financing hereunder, TRS shall submit to DNC on Friday of
each week during the term hereof a complete list of TRS Accounts Receivable
generated during the prior week, certified as accurate by TRS's President, and
DNC shall make accounts receivable financing advances in reliance on such list
on the Monday immediately following its receipt of the aforementioned list in
an amount equal to fifty-six percent (56%) of the aggregate value of the TRS
Accounts Receivable set forth on the list. In calculating TRS Accounts
Receivable, there shall be no adjustment for any bad debts, non-collectable
amounts or non-payments by TRS customers.
SECTION 1.3. MAXIMUM AMOUNT; TERM. The AR Financing will
be made available by DNC in a maximum principal amount of $500,000.00, which
shall be disbursed during the period from February 26, 1996 through February
24, 1997. The AR Financing shall bear interest at the per annum rate of
"Prime" plus two percent (2%). Prime will be as
2
51
<PAGE> 5
quoted in the Wall Street Journal and will be a floating rate. Interest will
be treated on a cash basis, not an accrual basis.
SECTION 1.4. STOCK CONVEYANCE. In consideration for DNC
making the AR Financing available, DNC shall receive shares of TRS stock
constituting five percent (5%) of the outstanding common stock of TRS as of
February 26, 1996 by way of certificates duly endorsed as directed by DNC, free
and clear of all encumbrances, and with evidence of payment of all necessary
transfer taxes and fees. If, however, on April 29, 1996, the net collection
rate of the listed receivables for the period from February 1, 1996 through
February 29, 1996 (the "Initial Benchmark Period") is not equal to or greater
than fifty-six percent (56%), TRS shall promptly convey to DNC additional
shares of TRS stock constituting five percent (5%) of the then outstanding
common stock of TRS by way of certificates duly endorsed as directed by DNC,
free and clear of all encumbrances, and with evidence of payment of all
necessary transfer taxes and fees. Upon the conclusion of such conveyance, a
new benchmark collection rate (the "New Rate") will be established which shall
be equal to the actual rate of collection occurring during the Initial
Benchmark Period. If, however, on March 31, 1996, the net collection rate of
the listed receivables for the period from March 1, 1996 through May 31, 1996
(the "Second Benchmark Period") is not equal to or greater than the New Rate,
TRS shall promptly convey to DNC additional shares of TRS stock constituting
ten percent (10%) of the then outstanding common stock of TRS by way of
certificates duly endorsed as directed by DNC, free and clear of all
encumbrances, and with evidence of payment of all necessary transfer taxes and
fees. Any shares of TRS stock conveyed to DNC pursuant to the provisions of
this Section 1.4 shall be hereinafter referred to as the "Additional TRS
Stock").
SECTION 1.5. REDEMPTION OF ADDITIONAL TRS STOCK. In the
event DNC shall exercise its Put Option, pursuant to Article 3 of that certain
Amended and Restated Option Agreement dated as of even date herewith, by and
among TRS, DNC and all of the stockholders of TRS (except DNC), a copy of which
is attached hereto as Exhibit C, all funds advanced as part of the AR Financing
and evidenced by the AR Financing Note shall be due and payable thirty (30)
days from the date of the written notice exercising DNC's Put Option. In the
event DNC exercises its Put Option and TRS fails to repay all amounts due under
the AR Financing Note within thirty (30) days, TRS shall be required to redeem
all of the Additional TRS Stock on terms more fully set forth in Article 4 of
the Amended and Restated Option Agreement.
SECTION 1.6. LOCK BOX ARRANGEMENT. TRS will establish the
AR Account as a "lockbox" account with the Bank. The AR Account will be used
exclusively for the collection of all TRS Accounts Receivable. All TRS
Accounts Receivable shall be deposited directly into the AR Account over which
DNC shall have the exclusive right to withdraw, from time to time, amounts
therein. DNC shall have, and TRS hereby grants to DNC, a lien on and security
interest in the AR Account and the contents thereof. TRS agrees to address all
invoices with instructions for payments to be directed to the AR Account. Any
payments
3
52
<PAGE> 6
received directly by TRS at their offices or any other location shall be
immediately deposited into the AR Account.
SECTION 1.7. DISBURSEMENTS FROM AR ACCOUNT.
(a) Each week during the term of this AR Financing
Agreement and/or at such other times as DNC may determine in its discretion,
DNC shall have the right, but not the obligation, to disburse from the AR
Account such amounts as may be required to reduce the principal amount of the
indebtedness evidenced by the AR Financing Note.
(b) Each week during the term of this AR Financing
Agreement and/or at such other times as DNC may determine in its discretion,
DNC shall have the right, but not the obligation, to disburse from the AR
Account such amounts as may be required to pay the interest accrued on the
principal amount of the indebtedness evidenced by the AR Financing Note;
provided, however, that TRS may not require DNC to use TRS Accounts Receivable
to pay interest due on the AR Financing Note. Instead, TRS shall make all
interest payments due under the AR Financing Note by check directly to DNC,
pursuant to the terms of the AR Financing Note
(c) During the term of this AR Financing Agreement and/or
at such other times as DNC may determine in its discretion, DNC shall have the
right, but not the obligation, to disburse from the AR Account such amounts as
may be necessary or advisable to protect DNC's rights under the AR Financing
Note or in connection with any other obligation which TRS owes to DNC.
SECTION 1.8. CREDIT APPROVAL. Until such time as all
amounts due under the AR Financing Note have been paid in full, DNC shall have
the right to approve the amount of credit extended to any TRS customer or
account which exceeds, in the aggregate, Ten Thousand Dollars ($10,000). With
respect to each such customer or account, TRS agrees to provide DNC with prior
written notice of all applications or requests for credit which exceed, alone
or in the aggregate, Ten Thousand Dollars ($10,000.00) and, upon receipt of
such notice, DNC shall have two business days to review the credit approval
notice and inform TRS of DNC's decision to either grant or to withhold
approval.
SECTION 1.9. LOAN COSTS AND EXPENSES. TRS agrees to bear
all of the costs and expenses incurred by DNC in connection with providing the
AR Financing, including but not limited to, all legal and banking costs and
expenses.
SECTION 1.10. EXECUTION OF AMENDED AND RESTATED OPTION
AGREEMENT. TRS covenants and agrees that on or prior to Friday, March 29, 1996
it will execute the Amended and Restated Option Agreement and will obtain the
signature of each stockholder of TRS, except DNC, on the Amended and Restated
Option Agreement. The failure of TRS to comply with the requirement set forth
in the preceding sentence shall constitute an Event of Default
4
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<PAGE> 7
under this AR Financing Agreement and under the AR Financing Note, providing
DNC with the right to terminate the AR Financing and immediately collect all
amounts due under the AR Financing Note.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES
TRS represents and warrants that:
SECTION 2.1. CORPORATE EXISTENCE AND POWER. TRS is a
corporation duly incorporated, validly existing and in good standing under the
laws of the Florida, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted. TRS is duly qualified as a foreign corporation,
licensed and in good standing in each jurisdiction where qualification or
licensing is required by the nature of its business or the character and
location of its property, business or customers and in which the failure to so
qualify or be licensed, as the case may be, in the aggregate, could have a
material adverse effect on the business, financial position, results of
operations or properties of TRS.
SECTION 2.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION;
CONTRAVENTION. The execution, delivery and performance by TRS of this AR
Financing Agreement and AR Financing Note are within its corporate power, have
been duly authorized by all necessary corporate action, require no action by or
in respect of, or filing with, any governmental body, agency or official and do
not contravene, or constitute (with or without the giving of notice or lapse of
time or both) a default under, any provision of applicable law or of the
articles of incorporation or bylaws of TRS or of any agreement, judgment,
injunction, order, decree or other instrument binding upon or affecting TRS or
result in the creation or imposition of any lien (other than the lien of the
Security Agreement, as amended by the Amendment to the Security Agreement in
the form attached hereto as Exhibit A ) on any of its assets.
SECTION 2.3. BINDING EFFECT. Each of this AR Financing
Agreement, and the Amendment to the Security Agreement, and the AR Financing
Note, when executed and delivered in accordance with this AR Financing
Agreement, will constitute a valid and binding obligation of TRS, in each case
enforceable against TRS in accordance with its terms, except as (i) the
enforceability hereof and thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
SECTION 2.4. LITIGATION. There is no action, suit or
proceeding pending against, or to the knowledge of TRS threatened against or
affecting, TRS before any federal, state or local government, authority,
agency, court or other body, officer or entity, or before any arbitrator with
authority to bind a party at law, in which there is a reasonable possibility of
a decision which could materially adversely affect the business, financial
position, results of
5
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<PAGE> 8
operations or properties of TRS or which in any manner draws into question the
validity of this AR Financing Agreement, the AR Financing Note or the Amendment
to the Security Agreement and there is no basis known to TRS for any such
action, suit or proceeding.
SECTION 2.5. FILINGS. All actions by or in respect of,
and all filings with, any governmental body, agency or official required in
connection with the execution, delivery and performance of this AR Financing
Agreement, the AR Financing Note or the Amendment to the Security Agreement, or
necessary for the validity or enforceability hereof and thereof or for the
protection or perfection of the rights and interests of DNC hereunder and
thereunder, will, prior to the date of delivery hereof or thereof, have been
duly taken or made, as the case may be, and will at all times thereafter remain
in full force and effect.
ARTICLE 3.
MISCELLANEOUS
SECTION 3.1. NOTICES. All notices, requests and other
communications to a party hereunder shall be in writing and shall be given to
such party at its address set forth on the signature page of the Amended and
Restated Option Agreement or such other address as such party may hereafter
specify for that purpose by notice to the other. Each such notice, request or
other communication shall be effective (i) if given by mail, 72 hours after
such communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid or (ii) if given by any other means, when delivered at
the address specified in this Section 3.1.
SECTION 3.2. NO WAIVERS. No failure or delay by DNC in
exercising any right, power or privilege hereunder or under the Note shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 3.3. EXPENSES. TRS shall pay (i) all
out-of-pocket expenses of DNC, including the reasonable fees and disbursements
of its counsel, in connection with the preparation and administration of this
AR Financing Agreement, any waiver or consent hereunder, any amendment hereof
or any Default or alleged Default hereunder and (ii) if an Event of Default
occurs, all out-of-pocket expenses incurred by DNC, including the reasonable
fees and disbursements of its counsel, in connection with such Event of Default
and any collection or other enforcement proceedings resulting therefrom. TRS
shall indemnify DNC against any transfer taxes, documentary taxes, assessments
or charges made by any governmental authority by reason of the execution and
delivery of this AR Financing Agreement or the AR Financing Note.
SECTION 3.4. INDEPENDENCE OF COVENANTS. All covenants
contained in this AR Financing Agreement shall be given independent effect. If
a particular action or condition
6
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<PAGE> 9
is not permitted by any of such covenants, the fact that such action or
condition would be permitted by an exception to, or otherwise be within the
limitations of, another covenant shall not avoid the occurrence of a Default if
such action is taken or such condition exists.
SECTION 3.5. AMENDMENTS AND WAIVERS. Any provision of
this AR Financing Agreement or the AR Financing Note may be amended or waived
if, but only if, such amendment or waiver is in writing and is signed by TRS
and DNC.
SECTION 3.6. SUCCESSORS AND ASSIGNS. The provisions of
this AR Financing Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns, except that TRS
may not assign or otherwise transfer any of its rights under this AR Financing
Agreement without the prior written consent of DNC.
SECTION 3.7. GOVERNING LAW. This AR Financing Agreement
and the AR Financing Note shall be deemed to be contracts made under seal and
shall be governed by and construed in accordance with the laws of the
Mississippi, except as otherwise provided herein.
SECTION 3.8. COUNTERPARTS; EFFECTIVENESS. This AR
Financing Agreement may be signed in counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This AR Financing Agreement shall become effective
when DNC shall have received counterparts hereof signed by all parties.
SECTION 3.9. WAIVER OF JURY TRIAL; SUBMISSION TO
JURISDICTION. TRS hereby irrevocably and unconditionally waives all right to
trial by jury in any action, proceeding or counterclaim arising out of or
related to this AR Financing Agreement or the AR Financing Note or any of the
transactions contemplated hereby or thereby. Any legal action or proceeding
with respect to this AR Financing Agreement or the AR Financing Note, or any
document related hereto or thereto, shall be brought in any court having
jurisdiction in one or more proceedings, and by execution and delivery of this
AR Financing Agreement, TRS hereby accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of such courts. TRS
hereby irrevocably and unconditionally waives any objection, including, without
limitation, any objection to the laying of venue or based on the grounds of
forum non conveniens, which it now has or hereafter may have to the bringing of
any action or proceeding in such jurisdictions.
SECTION 3.10. ENTIRE AGREEMENT. This AR Financing
Agreement sets forth the entire agreement of the parties with respect to the
subject matter hereof and thereof and supersedes all previous understandings,
written or oral, in respect thereof.
7
56
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this AR
Financing Agreement to be duly executed by their respective authorized officers
as of the day and year first above written.
DIXIE NATIONAL CORPORATION
By: G. THOMAS REED [SEAL]
------------------------------
G. Thomas Reed, President
107 Executive Office Center
Hilton Head Island, S.C. 29928
TEXT RETRIEVAL SYSTEMS, INC.
By: BRUCE GREWELL [SEAL]
------------------------------
Bruce Grewell, President
200 Executive Way
Ponte Vedra Beach, Florida 32082
8
57
<PAGE> 11
EXHIBIT A
AMENDMENT TO SECURITY AGREEMENT
DATED AS OF
FEBRUARY 26, 1996
BETWEEN
TEXT RETRIEVAL SYSTEMS, INC.
AND
DIXIE NATIONAL CORPORATION
58
<PAGE> 12
AMENDMENT TO SECURITY AGREEMENT
THIS AMENDMENT TO SECURITY AGREEMENT (this "Amendment") is
dated as of February 26, 1996 and is between TEXT RETRIEVAL SYSTEMS, INC., a
Florida corporation ("TRS"), and DIXIE NATIONAL CORPORATION, a Mississippi
corporation ("DNC").
RECITALS
A. DNC proposes to enter into an Accounts Receivable Financing
Agreement dated as of February 26, 1996 (as the same may be amended,
supplemented or modified from time to time and including any agreement
extending the maturity of, refinancing or otherwise restructuring all or any
portion of the obligations under such agreement or any successor agreement, the
"AR Financing Agreement") whereby DNC may provide TRS with accounts receivable
financing in an amount not to exceed $500,000.00 (the "Financing Loan"); and
B. The Financing Loan is evidenced by a certain Accounts
Receivable Financing Note (the "AR Financing Note") dated February 26, 1996;
and
C. The parties hereto desire to amend that certain Security
Agreement dated as of October 16, 1995 by and between TRS and DNC (the
"Security Agreement") to provide that it secures the AR Financing Note;
NOW, THEREFORE, in consideration of the premises, the respective
representations, agreements, covenants and conditions contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in order to induce DNC to extend the Financing Loan,
the parties hereto agree as follows:
1. The Recitals set forth above, and the definitions contained
therein, are hereby incorporated into this Amendment.
2. The Security Agreement is hereby amended as follows:
(a) In each instance in which the term "Credit Agreement"
appears in the text of the Security Agreement, it shall be deemed to mean and
refer to the Credit Agreement and the AR Financing Agreement.
(b) In each instance in which the term "Loan" appears in
the text of the Security Agreement, it shall be deemed to mean and refer to the
Working Capital Loan (hereinafter defined) and the Financing Loan.
(c) The Recitals set forth on page 1 of the Security
Agreement are hereby deleted and replaced with the following:
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<PAGE> 13
A. DNC has entered into a Credit Agreement dated
as of October 16, 1995 (as the same may be amended, supplemented, or modified
from time to time and including any agreement extending the maturity of,
refinancing or otherwise restructuring all or any portion of the obligations
under such agreement or any successor agreement, the "Credit Agreement")
whereby DNC has provided TRS with a $750,000.00 Working Capital Loan (the
"Working Capital Loan");
B. DNC has entered into an accounts Receivable
Financing Agreement dated as of February 26, 1996 (as the same may be amended,
supplemented, or modified from time to time and including any agreement
extending the maturity of, refinancing or otherwise restructuring all or any
portion of the obligations under such agreement or any successor agreement, the
"AR Financing Agreement") whereby DNC has agreed to provide TRS with a accounts
receivable financing in a maximum amount of $500,000.00 (the "AR Financing");
C. In order to induce DNC to enter into the
Credit Agreement and the AR Financing Agreement and to secure TRS's obligations
hereunder and thereunder, TRS has given DNC a security interest in certain
property of TRS;
(d) The definition of "Obligations" set forth on page 2
of the Security Agreement is hereby deleted and replaced with the following:
"Obligations" means (i) all amounts now or hereafter payable
by TRS to DNC on the Note, (ii) all amounts now or hereafter payable
by TRS to DNC on the AR Financing Note, (iii) all amounts now or
hereafter payable by TRS to DNC in connection with the Amended and
Restated Option Agreement, (iv) all obligations or liabilities now or
hereafter payable by TRS pursuant to the Credit Agreement and/or the
AR Financing Agreement, (v) all amounts hereafter payable by TRS on
any note(s) entered into pursuant to the terms of Section 3.3 and/or
Section 4.2 of the Amended and Restated Option Agreement, and (vi) all
obligations and liabilities now or hereafter payable by TRS under,
arising out of or in connection with this Security Agreement.
(e) By inserting " ,including, but not limited to, the AR
Account as defined in that certain Accounts Receivable Financing Agreement
dated as of February 26, 1996 between DNC and TRS" after the word "bank" on the
fourth line of Clause (v) of Section 2.1.
3. TRS hereby ratifies and affirms all of the terms and
provisions of, and all of its obligations under, the Security Agreement, as
modified hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
Security Agreement to be duly executed by their respective authorized officers
as of the day and year first above written.
2
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<PAGE> 14
DIXIE NATIONAL CORPORATION
By: G. THOMAS REED [SEAL]
----------------------------
G. Thomas Reed, President
107 Executive Center
Hilton Head Island, SC 29928
TEXT RETRIEVAL SYSTEMS, INC.
By: BRUCE GREWELL [SEAL]
----------------------------
Bruce Grewell, President
200 Executive Way
Ponte Vedra Beach, FL 32082
3
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<PAGE> 15
EXHIBIT B
ACCOUNTS RECEIVABLE FINANCING NOTE
Hilton Head Island, South Carolina
February 26, 1996
For value received, TEXT RETRIEVAL SYSTEMS, INC., a Florida
corporation (the "Maker"), promises to pay to the order of DIXIE NATIONAL
CORPORATION, a Mississippi corporation, and any subsequent holder of this Note
("Holder" or "Holders"), in the manner hereinafter provided, the principal sum
of $500,000.00, or such lesser amount as shall have been advanced from time to
time (the "Loan"), pursuant to the terms of that certain Accounts Receivable
Financing Agreement dated as of February 26, 1996 between the Maker and the
Holder (as amended, supplemented or modified from time to time, the "AR
Financing Agreement"), together with interest at the rate and on the terms
hereinafter provided for in this note (including all modifications,
substitutions, renewals or extensions hereof, this "Note").
Interest shall accrue on the unpaid principal balance of the
Loan from the date hereof at a rate (the "Note Rate") equal to two percent (2%)
above the Prime Rate (hereinafter defined). The Note Rate shall adjust monthly
on the first day of March, 1996 and on the first day of each month thereafter
based on the Prime Rate in effect on the Monthly Adjustment Date (hereinafter
defined) occurring immediately prior thereto. As used herein, the term
"Monthly Adjustment Date" means (i) for the period from February 26, 1996
through February 29, 1996, the date of February 26, 1996, and (ii) for each
calendar month thereafter during the term of the Loan evidenced by this Note,
the last day of the preceding calendar month on which The Wall Street Journal
is published. As used herein, the term "Prime Rate" means the floating and
fluctuating per annum rate of interest identified as the prime rate of interest
and published in The Wall Street Journal on the Monthly Adjustment Date.
Interest accrued on the unpaid principal balance of the Loan
shall be paid by the Maker to the Holder monthly on the first day of each
month, commencing on April 1, 1996 until the maturity of this Note (whether by
acceleration, extension or otherwise) at which time the Maker shall pay to the
Holder all accrued and unpaid interest due hereunder. If not sooner paid, the
entire principal balance of the Loan and all interest accrued thereon shall be
paid by the Maker to the Holder on February 26, 1997.
Any overdue principal and, to the extent permitted by law,
overdue interest accrued on the unpaid principal balance of this Loan shall
bear interest for each day until paid at a rate per annum of two percent (2%)
above the Note Rate in effect on the date such principal or interest became
due. In addition, in the event that any payment of principal of or interest is
not made within fifteen (15) days after the date such payment was due, the
Maker promises to pay to the Holder a late charge equal to 5.00% of the amount
of such payment. Interest on the aggregate unpaid principal balance of the
Loan shall be computed on the basis of a year of 360 days and paid for the
actual number of days for which due. All payments of
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<PAGE> 16
principal and interest shall be made in lawful money of the United States in
immediately available funds at the office of the Holder located at 107 the
Executive Office Center, Hilton Head Island, S.C. 29928.
The Holder shall record on its books, and prior to any
transfer hereof shall make on the Schedule A attached hereto appropriate
notations to evidence, the date and amount of each advance made pursuant to the
AR Financing Agreement and the date and amount of each payment of principal
made by the Maker with respect thereto; provided, however, that any failure of
the Holder to make such a notation or any error therein shall not in any manner
affect the obligation of the Maker to repay the amounts advanced by the Holder
under the AR Financing Agreement in accordance with the terms hereof.
The Maker hereby appoints any attorney admitted to practice
before any court of record in the United States as its true and lawful
attorney-in-fact, for and in the place and stead of the Maker, upon the
occurrence of an Event of Default, to appear for the Maker and to confess
judgment against the Maker, in any court having jurisdiction in one or more
proceedings, upon this Note and all amounts owed hereunder, including all costs
of collection, court costs and attorneys' fees, the Maker hereby ratifying and
confirming the acts of such attorney-in-fact as if done by the Maker. The
Maker hereby waives and releases, to the extent permitted by law, all errors
and all right of exemption, appeal, stay of execution, inquisition and
extension upon any levy on real estate or personal property to which the Maker
may otherwise be entitled under any federal or state law now in force or which
may hereafter be passed. The authority and power to appear for and enter
judgment against the Maker shall not be exhausted by one or more exercises
thereof, or by any imperfect exercise thereof, and shall not be extinguished by
any judgment entered pursuant thereto. The authority and power to appear for
and enter judgment against the Maker may be exercised on one or more occasions
in the same or different jurisdictions as often as the Holder may deem
necessary or desirable.
If one or more of the following events ("Events of Default")
shall have occurred and be continuing:
(a) The Maker shall fail to pay when due any
principal of or interest due under this Note.
(b) The Maker shall default in its obligations
under (i) that certain $750,000 Note dated October 16, 1995 from Maker
for the benefit of Holder, (ii) that certain Credit Agreement dated as
of October 16, 1995 between the Maker and the Holder, (iii) that
certain Security Agreement dated as of October 16, 1995 between the
Maker and the Holder, as amended by that certain Amendment to Security
Agreement dated as of February 26, 1996 (the "Security Agreement"), or
(iv) that certain Amended and Restated Option Agreement dated as of
February 26, 1996 between the Maker, the Holder and individuals
holding shares of the Maker's common stock (the "Stockholders");
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<PAGE> 17
(c) The Maker and/or the Stockholders shall fail
to observe or perform any other covenant or agreement contained in the
AR Financing Agreement or the Amended and Restated Option Agreement;
(d) The Maker shall fail to make any payment in
respect of any debt or obligation (other than this Note) when due or
within any applicable grace period;
(e) Any event or condition shall occur which
results in the acceleration of the maturity of any debt or obligation
of the Maker or enables (or, with the giving of notice or lapse of
time or both, would enable) the holder of such debt or obligation or
any person acting on such holder's behalf to accelerate the maturity
thereof;
(f) The Maker shall commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
shall consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment
for the benefit of creditors, or shall fail generally to pay its debts
as they become due, or shall take any corporate action to authorize
any of the foregoing;
(g) An involuntary case or other proceeding shall
be commenced against the Maker seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days, or an order for relief shall be
entered against the Maker under the federal bankruptcy laws as now or
hereafter in effect;
(h) One or more judgments or orders for the
payment of money in excess of $10,000 shall be rendered against the
Maker and such judgment or order shall continue unsatisfied for a
period of 60 days during which execution thereof shall not be
effectively stayed;
(i) (A) the Security Agreement shall cease for
any reason to be in full force and effect or shall cease to be
effective to grant a first priority perfected security interest in the
collateral therein described or such security interest shall cease to
be in full force and effect or shall be declared null and void, or the
validity or enforceability of such security interest or the Security
Agreement shall be contested by the Maker or the Maker shall deny that
it has any further liability or obligation under,
3
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<PAGE> 18
or shall fail to perform its obligations under, the Security Agreement
or (B) any creditor of the Maker shall obtain possession of any of the
collateral described in the Security Agreement by any means
(including, without limitation, levy, distraint, replevin or
self-help) or any such creditor shall establish or obtain rights in
such collateral that are equal to or senior to the security interests
of the Holder in such collateral;
(j) (A) the expiration of five days after the
Holder has given the Maker notice of the Holder's good faith
determination that the Holder deems itself insecure, that a material
adverse change in the financial condition of the Maker has occurred
since the date of this Note or that the Holder's prospect of payment
hereunder has been impaired, or (B) the reasonable suspicion by the
Holder that one or more Events of Default have occurred and the
failure of the Maker, upon five days notice thereof from the Holder,
to provide reasonably satisfactory evidence to the Maker that such
Events of Default have not occurred;
then, and in every such event, the Holder may, at its option, by notice to the
Maker, terminate the AR Financing Agreement and declare this Note (together
with accrued but unpaid interest thereon) to be immediately due and payable
(and this Note shall thereupon become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Maker); provided, however, that upon the occurrence of any
of the Events of Default specified in clause (f) or (g) above with respect to
the Maker, without any notice to the Maker or any other act by the Holder, the
AR Financing Agreement shall terminate and this Note (together with accrued but
unpaid interest thereon) shall immediately become due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Maker.
This Note is the AR Financing Note referred to in the AR
Financing Agreement.
TEXT RETRIEVAL SYSTEMS, INC.
By: BRUCE GREWELL [SEAL]
---------------------------
Bruce Grewell, President
4
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<PAGE> 19
SCHEDULE A
ADVANCES AND PAYMENTS
<TABLE>
<CAPTION>
===================================================================================================================
ADVANCES PURSUANT TO AR FINANCING PAYMENTS OF
AGREEMENT PRINCIPAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
Date: Amount: $ Date: Amount: $
- -------------------------------------------------------------------------------------------------------------------
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</TABLE>
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<PAGE> 20
EXHIBIT C
AMENDED AND RESTATED OPTION AGREEMENT
DATED AS OF FEBRUARY 26, 1996
AMONG
DIXIE NATIONAL CORPORATION
AND
TEXT RETRIEVAL SYSTEMS, INC.
AND
HOLDERS OF THE COMMON STOCK OF
TEXT RETRIEVAL SYSTEMS, INC.
67
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1.
RECITALS; DEFINITIONS . . . . . . . 2
Section 1.1. Incorporation of Recitals . . . . . . . . . 2
-------------------------
Section 1.2. Definitions . . . . . . . . . . . . . . . . 3
-----------
ARTICLE 2.
THE DNC OPTION . . . . . . . . 8
Section 2.1. Grant of Option . . . . . . . . . . . . . . 8
---------------
Section 2.2. Term . . . . . . . . . . . . . . . . . . . 8
----
Section 2.3. Exercise . . . . . . . . . . . . . . . . . 8
--------
Section 2.4. Consideration for Grant of DNC Option . . . 8
-------------------------------------
Section 2.5. Exercise Consideration . . . . . . . . . . 9
----------------------
Section 2.6. Early Exercise . . . . . . . . . . . . . . 9
--------------
Section 2.7. Transfer in Escrow . . . . . . . . . . . . 10
------------------
Section 2.8. Investment Representation . . . . . . . . . 10
-------------------------
Section 2.9. Discretion to Choose Form of Payment . . . 11
------------------------------------
ARTICLE 3.
THE DNC PUT OPTION . . . . . . . 11
Section 3.1. Grant of Option. . . . . . . . . . . . . . 11
---------------
Section 3.2. Exercise . . . . . . . . . . . . . . . . . 11
--------
Section 3.3. Payment . . . . . . . . . . . . . . . . . . 11
-------
Section 3.4. Escrow. . . . . . . . . . . . . . . . . . . 12
------
Section 3.5. Expiration Upon Early Exercise of
---------------------------------
DNC Option. . . . . . . . . . . . . . . . 12
----------
ARTICLE 4.
THE CONTINGENT REDEMPTION OF AR
FINANCING STOCK . . . . . . . 12
Section 4.1. Grant of Option. . . . . . . . . . . . . . 12
---------------
Section 4.2. Payment . . . . . . . . . . . . . . . . . . 12
-------
Section 4.3. Escrow. . . . . . . . . . . . . . . . . . . 13
------
</TABLE>
i
68
<PAGE> 22
<TABLE>
<S> <C>
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES . . . . 13
Section 5.1. Corporate Existence and Power; TRS Shares
-----------------------------------------
Outstanding . . . . . . . . . . . . . . . 13
-----------
Section 5.2. Due Authorization; Contravention . . . . . 14
--------------------------------
Section 5.3. Binding Effect . . . . . . . . . . . . . . 14
--------------
Section 5.4. Litigation . . . . . . . . . . . . . . . . 14
----------
Section 5.5. Filings . . . . . . . . . . . . . . . . . . 14
-------
ARTICLE 6.
MISCELLANEOUS . . . . . . . . . 14
Section 6.1. Notices . . . . . . . . . . . . . . . . . . 14
-------
Section 6.2. No Waivers . . . . . . . . . . . . . . . . 15
----------
Section 6.3. Amendments and Waivers . . . . . . . . . . 15
----------------------
Section 6.4. Successors and Assigns . . . . . . . . . . 15
----------------------
Section 6.5. Governing Law . . . . . . . . . . . . . . . 15
-------------
Section 6.6. Counterparts; Facsimile Signatures;
----------------------------------
Effectiveness . . . . . . . . . . . . . . 15
-------------
Section 6.7. Entire Agreement . . . . . . . . . . . . . 15
----------------
Section 6.8. Covenant Regarding Transfers of TRS Stock . 15
-----------------------------------------
Section 6.9. Ratification . . . . . . . . . . . . . . . 16
------------
</TABLE>
ii
69
<PAGE> 23
AMENDED AND RESTATED OPTION AGREEMENT
THIS AMENDED AND RESTATED OPTION AGREEMENT (as further amended,
supplemented or modified from time to time, this "Agreement") is dated as of
February 26, 1996 and is by and among Dixie National Corporation, a Mississippi
corporation ("DNC"), Text Retrieval Systems, Inc., a Florida corporation
("TRS"), and all of the holders of the common stock of TRS as of February 26,
1996, except DNC (collectively, the "TRS Stockholders").
RECITALS
A. DNC entered into a Credit Agreement dated as of October 16, 1995 (the
"Credit Agreement"), pursuant to which DNC agreed to provide TRS with a
$750,000.00 working capital loan (the "Working Capital Loan").
B. Pursuant to the Credit Agreement, DNC received four hundred fifty-five
(455) shares of TRS common stock, constituting thirty-five percent (35%) of the
issued and outstanding capital stock in TRS (the "Working Capital Loan
Inducement Stock").
C. As a condition to DNC entering into the Credit Agreement and committing
to make the Working Capital Loan, TRS and each of the TRS Stockholders agreed
to enter into a written Option Agreement dated as of October 16, 1995 (the
"Option Agreement"), granting DNC an option (the "DNC Option") to acquire the
Remaining TRS Stock (hereinafter defined) and an option (the "DNC Put Option")
to require TRS to redeem the Working Capital Loan Inducement Stock in the event
DNC elects not to exercise the DNC Option.
D. Subsequent to providing the Working Capital Loan, DNC agreed to provide
TRS with accounts receivable financing in an amount not to exceed $500,000.00
(the "Financing Loan"), pursuant to terms and conditions set forth in an
Accounts Receivable Financing Agreement dated as of even date herewith (the "AR
Financing Agreement").
E. The Financing Loan is evidenced by a certain Accounts Receivable
Financing Note (the "AR Financing Note") dated February 26, 1996.
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<PAGE> 24
F. Pursuant to the AR Financing Agreement, DNC shall receive shares of TRS
common stock constituting five percent (5%) of the issued and outstanding
shares of TRS capital stock (the "Financing Loan Inducement Stock") and, if DNC
does not first exercise the DNC Option: (i) in the event the February
Receivable Collections (hereinafter defined) do not equal or exceed an amount
which is equal to fifty-six percent (56%) of the TRS Accounts Receivable
generated during the period from February 1, 1996 through February 29, 1996,
DNC shall receive shares of TRS common stock constituting an additional five
percent (5%) of the issued and outstanding shares of TRS capital stock (the
"February Stock"), and (ii) in the event the March Receivable Collections
(hereinafter defined) do not equal or exceed an amount equal to the product of
the New Benchmark Rate (hereinafter defined) and TRS Accounts Receivable
generated during the period from March 1, 1996 through March 31, 1996, DNC
shall receive shares of TRS common stock constituting an additional ten percent
(10%) of the issued and outstanding shares of TRS capital stock (the "March
Stock").
G. As a condition to DNC entering into the AR Financing Agreement and
committing to make the Financing Loan, TRS and each of the TRS Stockholders
agreed that TRS shall redeem (the "Contingent Redemption") the AR Financing
Stock (hereinafter defined) in the event DNC exercises the DNC Put Option and
TRS fails to timely pay all amounts due under the AR Financing Note.
H. In connection with TRS and DNC entering into the AR Financing
Agreement, DNC, TRS and the TRS Stockholders desire to amend and restate the
Option Agreement to clarify the terms governing the Contingent Redemption and
the exercise of the DNC Put Option and to evidence the consent of the TRS
Stockholders to (i) the transfer of the AR Financing Stock to DNC and (ii) any
future transfers of TRS capital stock to DNC pursuant to the terms of
agreements between TRS and DNC subsequent to the date hereof.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree that the Option Agreement is
hereby amended and restated to read as follows:
ARTICLE 1.
RECITALS; DEFINITIONS
2
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<PAGE> 25
SECTION 1.1. INCORPORATION OF RECITALS. The foregoing recitals and
statements are made a part of this Agreement.
SECTION 1.2. DEFINITIONS. Whenever used in this Agreement, the following
terms shall be read as herein provided:
SECTION 1.2.1. "Applicable Multiplier" shall mean either a multiplier of
ten (10) or, instead, a multiplier of eight (8), depending upon the amount of
TRS Pre-Tax Income; such that if TRS Pre-Tax Income equals or exceeds Projected
TRS Pre-Tax Income, the Applicable Multiplier shall be ten (10), but if TRS
Pre-Tax Income does not equal or exceed Projected TRS Pre-Tax Income, the
Applicable Multiplier shall instead be eight (8).
SECTION 1.2.2. "AR Financing Agreement" shall mean that certain Accounts
Receivable Financing Agreement dated as of February 26, 1996, setting forth the
terms and conditions of the Financing Loan.
SECTION 1.2.3. "AR Financing Note" shall mean that certain Accounts
Receivable Financing Note dated February 26, 1996, made by TRS for the benefit
of DNC, evidencing amounts advanced by DNC to TRS pursuant to the Financing
Loan.
SECTION 1.2.4. "AR Financing Stock" shall mean the collective reference
to the Financing Loan Inducement Stock and, if transferred to DNC pursuant to
the terms of this Agreement, the February Stock and the March Stock.
SECTION 1.2.5. "Contingent Redemption" shall mean the redemption by TRS
of the AR Financing Stock, which shall occur in the event DNC exercises the DNC
Put Option and TRS fails to timely pay all amounts due under the AR Financing
Note.
SECTION 1.2.6. "DNC Exercise Shares" shall mean a certain, but currently
undetermined, number of shares of DNC common stock which may, at the election
of DNC, be conveyed to TRS Stockholders in exchange for the Remaining TRS Stock
in the event DNC exercises the DNC Option.
SECTION 1.2.7. "DNC Grant Shares" shall mean 100,000 shares of DNC
common stock conveyed to TRS Stockholders in connection with the Working
Capital Loan.
3
72
<PAGE> 26
SECTION 1.2.8. "DNC Option" shall mean that certain option granted to
DNC by the TRS Stockholders, providing DNC with the option to acquire all of
the TRS Remaining Stock.
SECTION 1.2.9. "DNC Option Exercise Date" shall mean the date, if any,
on which DNC elects, by written notice to TRS, to exercise the DNC Option.
SECTION 1.2.10. "DNC Option Exercise Period" shall mean the period
between October 16, 1995 and the DNC Option Expiration Date.
SECTION 1.2.11. "DNC Option Expiration Date" shall mean that date which
is thirty (30) days after DNC's receipt of audited financial statements
satisfactory to DNC, as required by Section 5.1 of the Credit Agreement, for
TRS's fiscal year ending June 30, 1997.
SECTION 1.2.12. "DNC Put Option" shall mean that certain option granted
to DNC by TRS, providing DNC with the option to require TRS to redeem all of
the Working Capital Loan Inducement Stock in the event the DNC Option is not
exercised, for a redemption price and upon terms set forth below in Article 3.
SECTION 1.2.13. "DNC Put Option Exercise Date" shall mean the date, if
any, on which DNC elects, by written notice to TRS, to exercise the DNC Put
Option.
SECTION 1.2.14. "Early Exercise Shares Per TRS Stockholder" shall differ
for each of the TRS Stockholders and, for each TRS Stockholder, shall mean the
number of DNC Early Exercise Shares received by an individual TRS Stockholder,
which number shall mean the product obtained by multiplying 2,500,000 by a
fraction the numerator of which is the number of shares of TRS capital stock
held by such stockholder on the DNC Option Exercise Date and the denominator of
which is the total number of shares of TRS capital stock outstanding on the DNC
Option Exercise Date.
SECTION 1.2.15. "Early Exercise Shares" shall mean 2,500,000 shares of
DNC common stock which shall be conveyed to TRS Stockholders promptly upon
DNC's exercise of the DNC Option, provided the DNC Option Exercise Date is a
date occurring prior to January 1, 1997.
4
73
<PAGE> 27
SECTION 1.2.16. "Earnings Period" shall mean the twelve month period
beginning July 1, 1996 and concluding June 30, 1997.
SECTION 1.2.17. "Enterprise Value" shall mean the product obtained by
multiplying TRS Earnings by the Applicable Multiplier.
SECTION 1.2.18. "Exercise Consideration Per TRS Stockholder" shall
differ for each of the TRS Stockholders and, for each individual TRS
Stockholder, shall mean the product obtained by multiplying Enterprise Value by
a fraction the numerator of which is the number of shares of TRS capital stock
held by such stockholder on the DNC Option Exercise Date and the denominator of
which is the total number of shares of TRS capital stock outstanding on the DNC
Option Exercise Date.
SECTION 1.2.19. "Fair Market Value of DNC Stock" shall mean that value
equal to the average NASDAQ closing bid price of DNC stock for a six-month
period, beginning January 1, 1997 and ending June 30, 1997, adjusted to give
effect to any stock dividend, stock split or reverse stock split.
SECTION 1.2.20. "February Receivable Collections" shall mean the amount
of TRS Accounts Receivable generated during the period from February 1, 1996
through February 29, 1996, which have been submitted to DNC as provided in
Section 1.2 of the AR Financing Agreement and collected by TRS as of the close
of business on April 29, 1996.
SECTION 1.2.21. "February Stock" shall mean the number of shares of TRS
capital stock equal to five percent (5%) of the total number of shares of TRS
capital stock issued and outstanding as of the close of business on April 29,
1996, which shares shall be transferred to DNC as additional consideration for
DNC making the Financing Loan only in the event February Receivable Collections
do not meet or exceed an amount equal to fifty-six percent (56%) of the TRS
Accounts Receivable generated during the period from February 1, 1996 through
February 29, 1996.
SECTION 1.2.22. "Financing Loan" shall mean that certain accounts
receivable financing loan in the maximum principal amount of $500,000 provided
by DNC to TRS pursuant to the terms of the AR Financing Agreement, and
evidenced by the AR Financing Note.
5
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<PAGE> 28
SECTION 1.2.23. "Financing Loan Inducement Stock" shall mean the number
of shares of TRS capital stock equal to five percent (5%) of the total number
of shares of TRS capital stock issued and outstanding on February 26, 1996,
which shares are to be transferred to DNC in consideration of DNC making the
Financing Loan.
SECTION 1.2.24. "Forfeiture Legend" shall mean a legend set forth on
each stock certificate representing DNC Early Exercise Shares, which shall read
as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE, AND THE TRANSFER HEREOF,
ARE SUBJECT TO FORFEITURE PROVISIONS SET FORTH IN AN AMENDED AND
RESTATED OPTION AGREEMENT DATED AS OF FEBRUARY 26, 1996, A COPY OF
WHICH IS ON FILE AND MAY BE EXAMINED AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
SECTION 1.2.25. "Forfeiture Shares", if any, shall differ for each TRS
Stockholder and, for each TRS Stockholder shall mean the number of shares of
DNC common stock held by such stockholder equal to the difference between such
stockholder's Early Exercise Shares Per TRS Stockholder and the quotient
obtained by such stockholder's Exercise Consideration Per TRS Stockholder by
the Fair Market Value of DNC Stock.
SECTION 1.2.26. "March Receivable Collections" shall mean the amount of
TRS Accounts Receivable generated during the period from March 1, 1996 through
March 31, 1996, which have been submitted to DNC as provided in Section 1.2 of
the AR Financing Agreement and collected by TRS as of the close of business on
June 3, 1996.
SECTION 1.2.27. "March Stock" shall mean the number of shares of TRS
capital stock equal to ten percent (10%) of the total number of shares of TRS
capital stock issued and outstanding as of the close of business on June 3,
1996, which shares are to be transferred to DNC as additional consideration for
the Financing Loan only in the event March Collections do not meet or exceed an
amount equal to the product of the New Benchmark Rate and the TRS Accounts
Receivable generated during the period from March 1, 1996 through March 31,
1996.
6
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<PAGE> 29
SECTION 1.2.28. "New Benchmark Rate" shall be established only in the
event the February Receivable Collections do not meet or exceed an amount equal
to fifty-six percent (56%) of the TRS Accounts Receivable generated during the
period from February 1, 1996 through February 29, 1996 and, if established,
shall mean a percentage rate of collection equal to the actual percentage rate
of collection, as of April 29, 1996, for TRS Accounts Receivable generated
during the period from February 1, 1996 through February 29, 1996.
SECTION 1.2.29. "Projected TRS Pre-Tax Income" shall mean the sum of One
Million Four Hundred Eighteen Thousand Dollars ($1,418,000).
SECTION 1.2.30. "Redemption Price - AR Financing Stock" shall mean an
amount equal to twice the amount of the outstanding principal balance, plus
accrued interest, if any, due and owing on the AR Financing Note on that date
which is thirty (30) days after the DNC Put Option Exercise Date.
SECTION 1.2.31. "Redemption Price - Working Capital Loan Inducement
Stock" shall mean an amount equal to the outstanding principal balance, plus
accrued interest, if any, of the Working Capital Loan on the date of
renunciation or expiration of the DNC Option.
SECTION 1.2.32. "Remaining TRS Stock" shall mean all of the capital
stock of TRS which is not owned by DNC on the DNC Option Exercise Date.
SECTION 1.2.33. "TRS Accounts Receivable" shall mean gross accounts
receivable generated by TRS for services provided and/or products delivered to
TRS customers during a period beginning February 1, 1996 and ending February
21, 1997, without any adjustment for bad debts, non-collectable amounts or
non-payment by TRS customers.
SECTION 1.2.34. "TRS Earnings" shall mean TRS Pre-Tax Income reduced by
an agreed-upon amount equal to forty percent (40%) of TRS Pre-Tax Income,
pursuant to the agreement among the parties that the foregoing forty percent
(40%) reduction shall constitute an assumed combined federal and state tax
rate.
SECTION 1.2.35. "TRS Pre-Tax Income" shall mean gross income received by
TRS during the Earnings Period, as determined by generally accepted accounting
principles consistently applied, less deductions for depreciation and
7
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<PAGE> 30
amortization accrued during the Earnings Period and calculated on a
straight-line basis pursuant to conventions and asset useful lives provided by
applicable Treasury Regulations, and less deductions for interest paid during
the Earnings Period; provided, however, that net operating losses incurred by
TRS shall be excluded from the calculation of TRS Pre-Tax Income.
SECTION 1.2.36. "Working Capital Loan" shall mean that certain working
capital loan in the maximum principal amount of $750,000 provided by DNC to TRS
pursuant to the terms of the Credit Agreement.
SECTION 1.2.37. "Working Capital Loan Inducement Stock" shall mean 455
shares of TRS capital stock transferred to DNC as consideration for DNC making
the Working Capital Loan.
SECTION 1.2.38. "Working Capital Loan Note" shall mean that certain Note
dated October 16, 1995 made by TRS for the benefit of DNC evidencing the
Working Capital Loan.
ARTICLE 2.
THE DNC OPTION
SECTION 2.1. GRANT OF OPTION. Each of the undersigned TRS Stockholders
jointly and severally grant to DNC, subject to the terms and conditions set
forth in this Article 2, the option to purchase all of the Remaining TRS Stock
immediately upon exercise of the DNC Option.
SECTION 2.2. TERM. The DNC Option may be exercised by DNC for all, but
not less than all, of the Remaining TRS Stock at any time prior to the DNC
Option Expiration Date.
SECTION 2.3. EXERCISE. DNC may exercise the DNC Option during the DNC
Option Exercise Period by providing the TRS Stockholders with written notice,
at the notice addresses set forth on the signature pages of this Agreement or
otherwise specified pursuant to Section 6.1, dated not later than the DNC
Option Expiration Date. Within ten (10) days of the date of the written notice
of exercise, the TRS Stockholders or TRS, as the case may be, shall (i) tender
to DNC certificates evidencing all shares of TRS Remaining Stock, and (ii) each
TRS Stockholder who is a director of TRS shall tender to DNC a written letter
of resignation resigning from his or her position as
8
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<PAGE> 31
director of TRS. In the event DNC exercises the DNC Option, it may, at its
sole and exclusive option, terminate any agreements then in effect between TRS
and Electronic Reference Systems, Inc.
SECTION 2.4. CONSIDERATION FOR GRANT OF DNC OPTION. In connection with
the Working Capital Loan, prior to the date hereof, DNC conveyed the DNC Grant
Shares to the TRS Stockholders. All of the DNC Grant Shares were evidenced by
certificates duly executed by officers of DNC. Each TRS Stockholder received a
portion of the DNC Grant Shares equal to such stockholder's proportionate
interest in TRS as of October 16, 1995.
SECTION 2.5. EXERCISE CONSIDERATION. The consideration which DNC shall
provide in order to acquire the Remaining TRS Stock upon exercise of the DNC
Option shall be the DNC Exercise Shares, with each TRS Stockholder receiving a
portion of the DNC Exercise Shares equal to such stockholder's proportionate
interest in TRS on the DNC Option Exercise Date. Each TRS Stockholder shall
receive a number of the DNC Exercise Shares equal to the Exercise Consideration
Per TRS Stockholder calculated with respect to each such stockholder divided by
the Fair Market Value of DNC Stock. By way of example, the following
calculation illustrates the number of DNC Exercise Shares that would be
received by a TRS Stockholder holding ten percent (10%) of TRS capital stock on
the DNC Option Exercise Date, assuming Five Dollars ($5.00) is the per share
Fair Market Value of DNC Stock and further assuming TRS Earnings of One Million
Five Hundred Thousand Dollars ($1,500,000):
1,500,000 x 10 = 10,500,000 [Enterprise Value]
10,500,000 x 10% = 1,500,000 [Exercise Consideration Per
(10%) TRS Stockholder]
1,500,000 / 5 = 300,000 [Number of DNC Exercise
Shares]
All DNC Exercise Shares shall be evidenced by certificates duly executed by
officers of DNC. The DNC Exercise Shares shall be conveyed by DNC to the TRS
Stockholders within forty-five (45) days following receipt by DNC of the
completed audited financial statement of TRS for the Earnings Period.
SECTION 2.6. EARLY EXERCISE. In the event DNC exercises the DNC Option
prior to January 1, 1997, DNC shall tender the Early Exercise Shares, with each
individual TRS Stockholder entitled to receive a number of the Early Exercise
Shares equal to such stockholder's Early Exercise Shares Per TRS Stockholder.
All
9
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<PAGE> 32
Early Exercise Shares shall bear the Forfeiture Legend. The Early Exercise
Shares shall, depending upon subsequent calculation of the formula set forth in
Section 2.5, constitute all or a portion of the DNC Exercise Shares due in
connection with the exercise of the DNC Option; provided, however, that the
Early Exercise Shares received by each individual TRS Stockholder are subject
to forfeiture to the extent the number of such stockholder's Early Exercise
Shares Per TRS Stockholder exceed the quotient obtained by dividing such
stockholder's Exercise Consideration Per TRS Stockholder by the Fair Market
Value of DNC Stock. Upon calculation of the aforementioned quotient, either
(i) any Forfeiture Shares shall promptly be tendered to DNC, or (ii) if,
however, the quotient obtained by dividing each individual TRS Stockholder's
Exercise Consideration Per TRS Stockholder by the Fair Market Value of DNC
Stock exceeds such stockholder's Early Exercise Shares Per TRS Stockholder,
then DNC shall promptly tender to each TRS Stockholder shares of DNC common
stock equal to the difference. Upon conclusion of the transaction referred to
in the preceding sentence, full and complete tender of all Exercise Shares
shall be deemed to have occurred.
SECTION 2.7. TRANSFER IN ESCROW. Upon exercise of the DNC Option, the
Remaining TRS Stock shall be transferred to an Escrow Agent designated by DNC
and approved by TRS and held in escrow pursuant to an escrow agreement
containing such terms and conditions as are mutually agreeable to DNC and TRS
until such time as all of the DNC Exercise Shares have been distributed to the
TRS Stockholders pursuant to this Article 2. While held in escrow, the TRS
Stockholders shall retain a security interest in the Remaining TRS Stock until
such time as all of the DNC Grant Shares have been distributed. The escrow
agreement shall provide, among other things, that DNC shall have the full
right, power and authority to vote the Remaining TRS Stock on any matters
requiring approval of the stockholders of TRS.
SECTION 2.8. INVESTMENT REPRESENTATION. Each TRS Stockholder
acknowledges and agrees that neither the DNC Grant Shares nor the DNC Exercise
Shares, which include but are not limited to the Early Exercise Shares, have
not been registered under the Securities Act of 1933 (the "1933 Act"), but that
the transfer thereof to the TRS Stockholders pursuant to this Agreement is
intended to be exempt from registration thereunder pursuant to Section 4(2)
thereof and Regulation D thereunder. In agreeing to accept such shares of DNC
stock, each TRS Stockholder hereby represents and warrants to DNC that such
stockholder is acquiring the all such shares of DNC stock solely for his or her
own account and not for resale or distribution. Each TRS Stockholder also
acknowledges and agrees that a restrictive legend shall be placed on any
certificates or other document evidencing the DNC Grant
10
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<PAGE> 33
Shares and the DNC Exercise Shares, which include but are not limited to the
Early Exercise Shares, received by such stockholder. The legend shall appear
on all such certificates or other documents as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR ANY SIMILAR PROVISIONS OF THE LAWS OF ANY
STATE AND HAVE NOT BEEN ACQUIRED WITH A VIEW TO, OR IN CONNECTION WITH, ANY
SALE OR OTHER DISTRIBUTION THEREOF. NO SUCH SALE, DISTRIBUTION OR OTHER
TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATING TO SUCH SHARES OR AN OPINION OF COUNSEL SATISFACTORY TO THE BOARD
OF DIRECTORS OF THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY."
SECTION 2.9. DISCRETION TO CHOOSE FORM OF PAYMENT. The foregoing
provisions notwithstanding, the parties hereto acknowledge and agree that at
its option DNC may substitute cash or cash equivalents for all or any portion
of the DNC Exercise Shares.
ARTICLE 3.
THE DNC PUT OPTION
SECTION 3.1. GRANT OF OPTION. TRS hereby grants to DNC, subject to the
terms and conditions set forth in this Article 3, the option to require TRS to
redeem the Working Capital Loan Inducement Stock for an amount equal to the
Redemption Price - Working Capital Loan Inducement Stock. DNC's exercise of
the DNC Put Option shall have no effect upon TRS's obligation to repay the
Working Capital Loan pursuant to the terms of the Credit Agreement and the
Working Capital Loan Note.
SECTION 3.2. EXERCISE. DNC may exercise the DNC Put Option by
providing TRS with written notice dated on or after the date of renunciation or
termination of the DNC Option. Exercise of the DNC Put Option provided for in
this
11
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<PAGE> 34
Article 3 shall cause all amounts evidenced by the AR Financing Note to become
due and payable as provided in Section 4.1 of this Agreement.
SECTION 3.3. PAYMENT. Payment in full of the Redemption Price -
Working Capital Loan shall be due by the later of (i) January 2, 1997, or (ii)
that date which is thirty (30) days after the date of the written notice
provided for under Section 3.2 hereof; provided, however, that upon receipt of
a written request from TRS, DNC and TRS shall prepare and execute a written
note which evidences TRS's obligation to pay the Redemption Price - Working
Capital Loan Inducement Stock to DNC, provides for extension of such payment
obligation over a period of seven (7) years in equal monthly installments
bearing interest at the rate of ten percent (10%) per annum, with the initial
monthly installment payment due exactly one month after the date of
renunciation or termination of the DNC Option and the remaining payments due on
the first day of each month thereafter until the note is fully paid, and cross
collateral and cross default provisions with respect to the Working Capital
Loan Note and the note evidencing TRS's obligation to pay the Redemption Price
- - AR Financing Stock pursuant to Section 4.2 hereof.
SECTION 3.4. ESCROW. During the extended seven year payment period
provided for in Section 3.3 hereof, the Working Capital Loan Inducement Stock
shall be transferred to an Escrow Agent designated by DNC and approved by TRS
and held in escrow pursuant to an escrow agreement containing such terms and
conditions as are mutually agreeable to DNC and TRS until such time as the note
evidencing TRS's obligation to pay the Redemption Price - Working Capital Loan
Inducement Stock has been paid in full, including all accrued interest. While
held in escrow, DNC shall retain a security interest in the Working Capital
Loan Inducement Stock until such time as the note evidencing TRS's obligation
to pay the Redemption Price - Working Capital Loan Inducement Stock has been
paid in full. The escrow agreement shall provide, among other things, that DNC
shall have the full right, power and authority to vote the Working Capital Loan
Inducement Stock on any matters requiring approval of the stockholders of TRS.
SECTION 3.5. EXPIRATION UPON EARLY EXERCISE OF DNC OPTION. In the
event DNC exercises the DNC Option prior to January 1, 1997, the DNC Put Option
shall be deemed to have expired without exercise.
12
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<PAGE> 35
ARTICLE 4.
THE CONTINGENT REDEMPTION OF AR FINANCING STOCK
SECTION 4.1. GRANT OF OPTION. In the event the DNC Put Option is
exercised, all amounts advanced pursuant to the Financing Loan and evidenced by
the AR Financing Note shall be due and payable, with interest, thirty (30) days
after the DNC Put Option Exercise Date. In the event the DNC Put Option is
exercised and TRS fails to repay all amounts advanced pursuant to the Financing
Loan and evidenced by the AR Financing Note, prior to the end of the thirty
(30) day period provided for in the preceding sentence, TRS shall be required
to redeem the AR Financing Stock for an amount equal to the Redemption Price -
AR Financing Stock.
SECTION 4.2. PAYMENT. Payment in full of the Redemption Price - AR
Financing Stock shall be due by the later of (i) January 2, 1997, or (ii) that
date which is sixty (60) days after the DNC Put Option Exercise Date; provided,
however, that upon receipt of a written request from TRS, DNC and TRS shall
prepare and execute a written note which evidences TRS's obligation to pay the
Redemption Price - AR Financing Stock to DNC, provides for extension of such
payment obligation over a period of seven (7) years in equal monthly
installments bearing interest at the rate of ten percent (10%) per annum, with
the initial monthly installment payment due on that date which is sixty (60)
days after the DNC Put Option Exercise Date and the remaining payments due on
the first day of each month thereafter until the note is fully paid, and cross
collateral and cross default provisions with respect to the Working Capital
Loan Note and the note evidencing TRS's obligation to pay the Redemption Price
- - Working Capital Loan Inducement Stock.
SECTION 4.3. ESCROW. During the extended seven year payment period
provided for in Section 4.2 hereof, the AR Financing Stock shall be transferred
to an Escrow Agent designated by DNC and approved by TRS and held in escrow
pursuant to an escrow agreement containing such terms and conditions as are
mutually agreeable to DNC and TRS until such time as the note evidencing TRS's
obligation to pay the Redemption Price - AR Financing Stock has been paid in
full, including all accrued interest. While held in escrow, DNC shall retain a
security interest in the AR Financing Stock until such time as the note
evidencing TRS's obligation to pay the Redemption Price - AR Financing Stock
has been paid in full. The escrow agreement shall provide, among other things,
that DNC shall have the full right, power and authority to vote the AR
Financing Stock on any matters requiring approval of the stockholders of TRS.
13
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<PAGE> 36
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES
TRS and each of the TRS Stockholders, jointly and severally represent
and warrant that:
SECTION 5.1. CORPORATE EXISTENCE AND POWER; TRS SHARES OUTSTANDING.
TRS is a corporation duly incorporated, validly existing and in good standing
under the laws of the Florida, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. TRS is duly qualified as a foreign
corporation, licensed and in good standing in each jurisdiction where
qualification or licensing is required by the nature of its business or the
character and location of its property, business or customers and in which the
failure to so qualify or be licensed, as the case may be, in the aggregate,
could have a material adverse effect on the business, financial position,
results of operations or properties of TRS. As of the date hereof, TRS has
issued and outstanding 1,300 shares of common stock of a single class. All of
the shares of issued and outstanding stock in TRS are duly authorized, validly
issued, fully paid and nonassessable.
SECTION 5.2. DUE AUTHORIZATION; CONTRAVENTION. The execution, delivery
and performance by TRS of this Agreement is within its corporate power, has
been duly authorized by all necessary corporate action, requires no action by
or in respect of, or filing with, any governmental body, agency or official and
does not contravene, or constitute (with or without the giving of notice or
lapse of time or both) a default under, any provision of applicable law or of
the articles of incorporation or bylaws of TRS or of any agreement, judgment,
injunction, order, decree or other instrument binding upon or affecting TRS and
will not result in the creation or imposition of any lien (other than the lien
of the Security Agreement, as amended) on any of its assets.
SECTION 5.3. BINDING EFFECT. This Agreement constitutes a valid and
binding agreement of TRS and of each of the TRS Stockholders and when executed
and delivered, will constitute a valid and binding obligation of TRS and of
each of the TRS Stockholders, enforceable against TRS and of each of the TRS
Stockholders in accordance with its terms.
SECTION 5.4. LITIGATION. There is no action, suit or proceeding
pending against, or to the knowledge of TRS threatened against or affecting,
TRS before any
14
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<PAGE> 37
federal, state or local government, authority, agency, court or other body,
officer or entity, or before any arbitrator with authority to bind a party at
law, in which there is a reasonable possibility of a decision which could
materially adversely affect the business, financial position, results of
operations or properties of TRS or which in any manner draws into question the
validity of this Agreement, and there is no basis known to TRS for any such
action, suit or proceeding.
SECTION 5.5. FILINGS. All actions by or in respect of, and all filings
with, any governmental body, agency or official required in connection with the
execution, delivery and performance of this Agreement, or necessary for the
validity or enforceability hereof or for the protection or perfection of the
rights and interests of DNC hereunder, will, prior to the date of delivery
hereof, have been duly taken or made, as the case may be, and will at all times
thereafter remain in full force and effect.
ARTICLE 6.
MISCELLANEOUS
SECTION 6.1. NOTICES. All notices, requests and other communications
to a party hereunder shall be in writing and shall be given to such party at
its address set forth on the signature pages hereof or such other address as
such party may hereafter specify for that purpose by notice to the other. Each
such notice, request or other communication shall be effective (i) if given by
U.S. Mail, 72 hours after such communication is deposited in the U.S. Mail
with first class postage prepaid, addressed as aforesaid or (ii) if given by
any other means, when delivered at the address specified in this Section 6.1.
SECTION 6.2. NO WAIVERS. No failure or delay by DNC in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
SECTION 6.3. AMENDMENTS AND WAIVERS. Any provision of this Agreement
may be amended or waived if, but only if, such amendment or waiver is in
writing and is signed by TRS, each of the TRS Stockholders and DNC.
15
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<PAGE> 38
SECTION 6.4. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that neither TRS nor any of the TRS
Stockholders may assign or otherwise transfer any of its or their rights under
this Agreement without the prior written consent of DNC.
SECTION 6.5. GOVERNING LAW. This Agreement and the Note shall be
deemed to be contracts made under seal and shall be governed by and construed
in accordance with the laws of the Mississippi, except as otherwise provided
herein.
SECTION 6.6. COUNTERPARTS; FACSIMILE SIGNATURES; EFFECTIVENESS. This
Agreement may be signed in counterparts by facsimile or original signature,
each of which shall be effective as an original, with the same effect as if the
signatures thereto and hereto were upon a single, original copy of this
Agreement. This Agreement shall become effective when DNC shall have received
original or facsimile counterparts hereof signed by all parties.
SECTION 6.7. ENTIRE AGREEMENT. This Agreement, the Credit Agreement,
the Note, the AR Financing Agreement, and the AR Financing Note set forth the
entire agreement of the parties with respect to the subject matter hereof and
thereof and supersede all previous understandings, written or oral, in respect
thereof.
SECTION 6.8. COVENANT REGARDING TRANSFERS OF TRS STOCK. TRS and/or
each of the TRS Stockholders, as the case may be, promise to promptly transfer
to DNC (i) the AR Financing Stock in accordance with the terms of the AR
Financing Agreement and (ii) any additional shares of TRS capital stock the
transfer of which may be required pursuant to the terms of any agreements
between TRS and DNC subsequent to the date hereof.
SECTION 6.9. RATIFICATION. TRS and each TRS Stockholder ratifies and
affirms all of the terms and provisions of, and all of his or her obligations
under, the Option Agreement, as hereby amended and restated.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
16
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
ATTEST/WITNESS: DIXIE NATIONAL CORPORATION
THERESA D. HARTER By: G. THOMAS REED [SEAL]
- ------------------------- -------------------------
Name: Theresa D. Harter G. Thomas Reed, President
Title: Assistant Secretary
107 Executive Center
Hilton Head Island, South Carolina 29928
TEXT RETRIEVAL SYSTEMS, INC.
KATHY L. HOWE By: BRUCE GREWELL [SEAL]
- ---------------------------- --------------------
Name: Kathy L. Howe Bruce Grewell, President
Title: Comptroller
200 Executive Way
Ponte Vedra Beach, Florida 32082
WITNESS: STOCKHOLDERS
KATHY L. HOWE CONNIE GAMBLE GREWELL [SEAL]
- ---------------------------- -----------------------
Name: Kathy L. Howe Connie Gamble Grewell
c/o Text Retrieval Systems, Inc.
200 Executive Way
Ponte Vedra Beach, Florida 32082
17
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<PAGE> 40
WITNESS:
CRAIG ADAS DAVID A. SPURIA [SEAL]
- ----------------------------- ---------------------------------
Name: Craig Adas David A. Spuria
Weil, Gotshal & Manges
100 Crescent Court, Suite 1300
Dallas, TX 75201-6950
ANTHONY SPURIA [SEAL]
- ---------------------- -------------------------------
Name: Anthony Spuria
Marcon
200 Executive Way
Ponte Vedra Beach, FL 32082
FRANCES M. McDONALD ROBERT P. ROWE [SEAL]
- ----------------------- --------------------------------
Name: Frances M. McDonald Robert Rowe
Plastics Manufacturing, Inc.
4685 Highway 49, Box 579
Harrisburg, NC 28075
LAURA W. FREEMAN WADE MOYER [SEAL]
- -------------------------- --------------------------------
Name: Laura W. Freeman Wade Moyer
A La Carte
4400 Stuart Andrew Blvd., Suite K
Charlotte, NC 28217
18
87
<PAGE> 41
WITNESS:
SUZANNE A. SLIGH WILLIAM ZACHARY, JR. [SEAL]
- ---------------------------- ----------------------------
Name: Suzanne A. Sligh William Zachary, Jr.
Zachary & Seagraves
1000 Commerce Drive
Decatur, GA 30030
ANDREW HOMAN GEORGE KANNAN [SEAL]
- --------------------------- ------------------------------
Name: Andrew Homan George Kannan
c/o Makshoff Services (Europe)
Limited
Kensington Centre
66 Hammersmith Road
London England W14 8YT
MARTHA DICKINSON WILLIAM SALLADIN [SEAL]
- --------------------- ------------------------------
Name: Martha Dickinson William Salladin
All Risk, LTD.
1020 Cromwell Bridge Road
Towson, MD 21286
MARTHA DICKINSON NICK CORTEZI [SEAL]
- ---------------------- ----------------------------------
Name: Martha Dickinson Nick Cortezi
All Risk, LTD.
1020 Cromwell Bridge Road
Towson, MD 21286
19
88
<PAGE> 42
WITNESS:
WUTYI TUN J.D. GREWELL [SEAL]
- ----------------------------- ----------------------------------
Name: Wutyi Tun J.D. Grewell
9001 16th Street
Silver Spring, MD 20910
WUTYI TUN CHRISTINE GREWELL [SEAL]
- ----------------------------- -----------------------------
Name: Christine Grewell
9001 16th Street
Silver Spring, MD 20910
20
89
<PAGE> 1
EXHIBIT (3)(b)(1)
AMENDMENT TO BYLAWS
DATED JANUARY 24, 1995
"Resolved, that Article III of the Bylaws of this corporation shall
be, and is hereby amended so that the hereafter specified sections shall read
as follows:
Section 2. Chairman. There shall be a chairman of the Board of
Directors elected annually by the directors.
Section 3. Executive Committee. There is hereby established an
Executive Committee of the Board of Directors which shall consist of
the chairman of the Board of Directors, who shall serve as chairman of
the Executive Committee, along with two other members of the Board of
Directors, nominated by the Chairman, who shall be subject to
ratification by the Board of Directors. The Executive Committee shall
have and may exercise all the authority of the Board of Directors,
save and except such authority as is expressly reserved to the full
Board of Directors by the Mississippi Business Corporation Law."
90
<PAGE> 1
EXHIBIT (3)(b)(2)
AMENDMENT TO BYLAWS
DATED MARCH 24, 1995
"Resolved, that the By-Laws of this corporation shall be and are
hereby, amended as follows:
Article IV, Section 1, is amended to read as follows:
ARTICLE IV
OFFICERS
Section 1. Number and Qualifications. The officers of the
corporation shall be a chief executive officer, a president, one or more
vice-presidents (the number thereof to be determined by the Board of
Directors), a secretary and a treasurer, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers as may be
deemed necessary may be elected or appointed by the Board of Directors. Any
two or more offices may be held by the same person, except the offices of
president and secretary, and except the offices as chairman of the Board of
Directors and president of the corporation. No person shall be eligible to
serve as an officer of the corporation unless when his term commences he is at
least 21 years of age and not more than 65 years of age. Any officer attaining
the age of 65 during his term of office shall serve the unexpired portion
thereof.
Article IV shall further be amended by adding a new Section 4 which
shall read as follows:
Section 4. Chief Executive Officer. The chief executive officer,
subject to the control of the Board of Directors, shall supervise and control
the affairs of the corporation.
The existing Section 4 shall be renumbered as Section 5 and shall be
amended to read as follows:
Section 5. President. The president shall perform and discharge such
duties and responsibilities as may be assigned to that office by the chief
executive officer and the board of directors of the Corporation. The president
may sign, with the secretary or any other proper officer of the corporation
thereunto authorized by the Board of Directors, certificates for shares of the
corporation, and deeds,. Mortgages, bonds, contracts or other instruments which
the Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these bylaws to some other officer of the corporation, or shall
be required by law to be otherwise signed or executed.
Existing Section 5 through 9 inclusive shall be amended by renumbering
each so that such sections shall be numbered as sections 6 through 10
respectively."
91
<PAGE> 1
EXHIBIT (21)
DIXIE NATIONAL CORPORATION
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
PLACE OF STOCK HELD
NAME OF SUBSIDIARY INCORPORATION BY REGISTRANT
- ------------------ ------------- -------------
<S> <C> <C>
Executive Capital Corporation Mississippi 100%
Vanguard, Inc. Mississippi 100%
</TABLE>
92
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ENCLOSED AUDITED FINANCIAL STATEMENTS 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,377,869
<SECURITIES> 2,227,904
<RECEIVABLES> 485,299
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,091,072
<PP&E> 1,225,445
<DEPRECIATION> 814,510
<TOTAL-ASSETS> 5,103,923
<CURRENT-LIABILITIES> 640,563
<BONDS> 0
0
0
<COMMON> 9,601,439
<OTHER-SE> (5,138,079)
<TOTAL-LIABILITY-AND-EQUITY> 5,103,923
<SALES> 2,485,974
<TOTAL-REVENUES> 5,032,537
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,620,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,204
<INCOME-PRETAX> 7,024,089
<INCOME-TAX> (174,517)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,849,572)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
