FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended
December 31, 1997
Commission File #0-15303
UNICO, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
73-1215433
(IRS Employer Identification Number)
8380 Alban Road, Springfield, VA 22150
(Address of principal executive offices )(Zip Code)
(703) 644-0200
(Registrant's telephone no., including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Warrants
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 [ ]
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B not contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
Revenues for year ended December 31, 1997. $29,147
Aggregate market value of the voting common stock held by non-
affiliates of the registrant as of April 13, 1998, was:
$264,884
Number of shares of the registrant's common stock outstanding as
of April 13, 1998 was: 2,119,077
UNICO, Inc.
FORM 10-KSB
PART I
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Item 1. Description of Business
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General
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UNICO, Inc., (the Company), was incorporated on April 11, 1984
under the laws of the State of Delaware. Initial business
activities, associated with the sale and administration of
cooperative direct mail advertising franchises, commenced during
May 1984. In September 1986, the Company filed an initial
registration statement with the Securities and Exchange
Commission and initiated a plan to expand Company
operations through the acquisition of existing businesses
operating in related fields.
The Company's Business
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Presently, the Company operates as a publicly-owned holding
company with one active wholly-owned subsidiary, United Marketing
Solutions, Inc., formerly United Coupon Corporation, ("United
Marketing"), involved in cooperative advertising. United
Marketing is involved in cooperative direct mail advertising
through franchising and production. The Company also operated
and owned a second subsidiary during 1996, Cal-Central
Marketing Corporation ("Cal-Central"). Cal-Central was
discontinued during 1996 and was involved in cooperative
advertising distributed primarily through supermarkets,
pharmacies and restaurants. Management has adopted a plan to
sell United Marketing to a third party. While a purchaser is
sought, United Marketing continues its regular operations
including the granting of additional franchises, opening of
additional marketing centers and introducing new products for use
and sale by franchisees.
The Company's cooperative advertising and production business
involves the design, layout, printing, packaging and distributing
of public relations, marketing materials and promotional coupons
for private businesses, usually involved in retailing goods or
providing professional services. Cal-Central's cooperative
advertising process included sales of advertising through
independent sales representatives.
Franchising activities related to this business involve the
granting and administering of independent franchise operations to
conduct cooperative direct mail advertising sales. All
activities related to franchising are conducted through United
Marketing, which was acquired on July 17, 1987. At year-end,
December 31, 1997, United Marketing had approximately 65 active
franchise operations.
The Company's Markets
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Cooperative Direct Mail Advertising
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The customer base of most local retailers and professionals comes
from within a three-mile radius of its location, therefore, it is
difficult for them to advertise effectively and economically.
The Company believes that direct mail is an effective advertising
method for the local merchant and professional since they can
target a specific area and have substantial saturation of their
advertising message. Radio and television advertising, in
contrast, is costly to produce and air. The advertiser is paying
for broadcasting over a large metropolitan area, much of which is
not part of its customer base. It may not be efficient or
affordable unless the advertiser has multiple locations. Major
city newspapers are also comparatively expensive since they, too,
cover an entire city and not just the specific area relevant to
the local retailer and professional. In addition, newspapers
usually contain large amounts of advertising, which may limit the
effectiveness of small ads.
Individual direct mail programs are also expensive, when the cost
of postage, design, envelopes, printing, and mailing lists are
considered. Cooperative direct mailing of advertisements for
several businesses in one mailing, substantially reduces the
advertisers' cost from the price of an individual direct mail
program.
The Company's franchisees sell cooperative direct mail
advertising to retailers and service organizations in a given
market area. They assist each business owner with the design and
content of advertisements or coupons. The Company produces and
mails a packet of coupons (usually consisting of fifteen or more
coupons) to thousands of homes in a targeted geographic area.
The Company receives a majority of its revenue by providing, on a
wholesale basis to its distributors, a complete mailing service.
Such services include computerized design, typesetting, paste-up,
proofing, printing, inserting, addressing, and mailing, as well
as paper, envelopes, labels and postage.
The market segment targeted by the Company's franchisees includes
local retailers, service businesses and professional
organizations. In addition, specialty mailings are conducted on
a regular basis and major consumer products companies that market
on a national level are solicited to advertise in the Company's
mailings.
Franchising
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The Company targets the major markets of the United States with a
population of 500,000 or more. Each Area franchise territory can
consist of 50,000 to 80,000 mailable homes. Franchise prospects
are located through the use of local and national advertising,
franchise shows and seminars, and a network of franchise sales
representatives. Sales tools consist of Company brochures, a
franchise sales booth, and a video presentation.
The Company has also implemented a franchise sales program
whereby the Company assists existing franchisees in selling parts
of their respective territories. Generally, franchise
territories which would be involved in this program, are those
which have more than 150,000 mailable homes.
Each franchise consists of an independent operation in an
exclusive territory in which no competition from other Company
franchisees is allowed. The Company provides the franchisee with
a thorough, individually-oriented, two-week training program
covering all facets of the business. In addition, the Company
provides the franchisee with operation manuals, sales support
materials, market softeners (direct mailings to potential
customers), use of its trademarks and logos, WATTS telephone and
FAX service for transferring layouts, and continuing management
support.
Franchise fees are based upon the total number of mailable homes
in the exclusive territory. Area franchise fees are $21,900 for
50,000 mailable-home territories plus $1,500 for each additional
increment of 10,000 mailable-home territories. Generally, the
franchise agreements are for a period of ten years, and are
renewable at the option of the franchisee, if certain conditions
are met. These agreements include a performance clause, which is
based upon a minimum distribution standard and frequency of
mailings over the term of the franchise agreements.
Regional franchisees, in addition to operating an Area franchise,
are directly involved in recruiting and training Area franchisees
within their region. United Marketing carefully designed the
Regional franchising program to provide substantial opportunity
for the Regional franchisee, while maintaining appropriate
corporate control over the approval of Area franchise grants and
contractual agreements. A Regional Franchisee also has an
exclusive territory, comprised of approximately 1,000,000
mailable homes, and supervises 15-18 Area Franchisees.
The license fee for a Region is $51,000 to $59,000. Regional
Franchisees attend one additional week of training at
the corporate headquarters.
The Company retains the right to terminate a franchise for a
variety of reasons, including insolvency or bankruptcy, failure
to operate the business according to prescribed standards,
failure to pay fees, and material misrepresentation on an
application for a franchise.
Set forth below is the geographical location of the franchises in
operation as of December 31, 1997.
Alabama 2 Maryland 4 North Carolina 3
California 5 Massachusetts 9 Pennsylvania 6
Connecticut 2 Minnesota 2 Texas 2
Florida 2 New Hampshire 1 Virginia 6
Georgia 3 New Jersey 6
Illinois 1 New York 10
Louisiana 1
Acquisition of Cal-Central Marketing Corporation
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On October 21, 1993, UNICO, Inc. (the "Company") and AEC
Acquisitions, Inc. ("AEC"), a wholly-owned subsidiary of the
Company, entered into a definitive Agreement for the merger of
Cal-Central Marketing Corporation, a Florida Corporation ("Cal-
Central/Florida") into AEC. The merger was effected on October
27, 1993, through the issuance of 1,200,000 (300,000 after giving
effect to the one for four reverse split effective December 30, 1997)
shares of restricted Common Stock of the Company, 600 shares of
Redeemable Preferred Stock of the Company and 1,000 shares of
Convertible Preferred Stock of the Company. The terms of the
Redeemable Preferred Stock provided that such shares be redeemed
for $600,000 at the holders' option after certain profit performance
tests are met by Cal-Central. The shares of Convertible Preferred
Stock were mandatorily convertible into Common Stock of the Company
after 12 months, and after certain profit performance tests by
Cal-Central for such period. The Convertible Preferred Stock
expired in October 1994, with performance tests not achieved. In
March 1995, 320 shares of the Redeemable Preferred Stock were
converted into 355,556 (88,889 after giving effect to the one for
four reverse split effective December 30, 1997) shares of Common Stock
of the Company at a conversion price of $.90 per share, in lieu of
cash redemption.
The acquisition was accounted for as a purchase with a price of
approximately $1,400,000. The operating results have been
included in the consolidated financial statements of the Company
since October 22, 1993 until closure of Cal-Central in the fourth
quarter of 1996. The Company acquired assets of $1,887,242 and
assumed liabilities of $2,687,824. The excess purchase price
over the fair value of the net assets acquired was recorded as
goodwill in the Company's balance sheet and was amortized on the
straight line method over forty years. During 1996, the Company
was forced to close the Cal-Central business due to lingering
operating losses and a shortage of working capital. Remaining
goodwill of $1,468,453 was written off during the fourth quarter
of 1996.
Cooperative Distribution Point Advertising
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With the acquisition of Cal-Central in October 1993, the Company
acquired several new product lines including TV Sports & Movies
Previews, Video Previews, Family Health & Fitness, bulletin board
displays, cash register tape coupons and take-out menus. The
advertising products were distributed primarily through
supermarkets, pharmacies, restaurants and other specialty
retailers. Cal-Central operated a complete art development and
printing facility in Fort Lauderdale, Florida until December 15,
1995. Cal-Central operations were discontinued during 1996.
Trade Names, Service Marks and Logo Types
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The United Coupon Corporation service mark was registered with
the United States Patent Office on Principal Register, register
number 1,310,366 on December 16, 1984. In addition, the service
mark was registered in the Commonwealth of Virginia on April 27,
1984. Franchisees of United Marketing are allowed to operate
under the trade names of United Marketing Solutions or United
Coupon.
Pursuant to its License Agreement, United Marketing authorizes
franchisees to operate a cooperative direct mail, advertising
business under the name United Coupon or United Marketing
Solutions and in accordance with the United Marketing system. In
connection with the operation of a United Marketing cooperative
direct mail advertising business, franchisees are authorized to
use the name and service mark "UNITED COUPON" as well as
other such service marks or commercial symbols as United
Marketing from time to time adopts and makes a part of
the United Marketing system.
Government Regulation
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The Company is subject to regulation under the rules of the
Federal Trade Commission regarding
disclosure of certain information for the sale of franchises as
well as state regulatory authorities in certain states
where the Company does business. Statutory provisions in certain
states impose certain substantive requirements
on the relationship between the franchiser and the franchisee.
Management believes the Company is in material
compliance with such regulatory requirements.
Competition
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The advertising industry is highly competitive with many firms
having vast resources competing for businesses' advertising
dollars. The Company's business, primarily cooperative
advertising delivered through direct mail or through
distributors, is a relatively small, but rapidly growing segment
of the advertising industry. The Company's major competitors in
direct mail cooperative advertising are Val-Pak, Money Mailer,
American Advertising Distributors and Super Coups. Management
estimates the Company has about 5% of that market segment. There
are a large number of small, independent businesses operating in
each market segment serviced by the Company.
Employees
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The Company had approximately 95 employees as of December 31,
1997. The Company also relies upon commissioned sales
representatives involved in the franchise sales operations and
temporary workers during peak production periods at United
Marketing.
Item 2. Description of Property
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The Company operates its corporate headquarters and its coupon
sales and franchise activities through an office and production
facility at 8380 Alban Road, Springfield, VA 22150. This space
is leased for a monthly fee of approximately $30,000 covering
approximately 63,000 square feet. This lease expires in April
2005.
Item 3. Legal Proceedings
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The Company and its subsidiaries are involved in various legal
actions associated with the normal conduct of business
operations. No such actions involve known material gain or loss
contingencies not reflected in the consolidated financial
statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
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The Company's Annual Meeting of Stockholders was held on December
30, 1997. Mr. Steven Kronzek was nominated and elected as a
director during the meeting, for a term of two years. Votes
regarding his election were 12,961,873 in favor and 113,053
against. The following directors continue to serve as
directors following the meeting:
Gerard R. Bernier
Gerald Bomstad, Jr.
Leon Zajdel
In addition, the Shareholders authorized the reverse split of
issued and outstanding shares of the Company's stock on the basis
of one (1) share for each four (4) shares outstanding. Voting
regarding this matter included 12,766,961 in favor, 282,202
against and 25,763 abstained.
Also, selection of the Company's independent accountants and
auditors, Aronson, Fetridge & Weigle, was ratified. Voting
regarding this matter included 12,941,348 in favor, 85,250
against and 48,328 abstained.
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
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On April 13, 1998, there were approximately 500 shareholders of
record of the Company's common stock. Based on information
received from brokers and others in fiduciary capacity, the
Company estimates that the total number of shareholders of the
Company's common stock exceeds 500. The Company's common stock
was formerly traded on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"). During 1997, the
Company no longer qualified for this listing and is now available
through electronic trading services via NASD's Electronic
Bulletin Board.
All outstanding shares of Company stock and related options and
warrants were reverse split on the basis of four (4) shares for
one (1) share effective December 30, 1997.
The following table sets forth, for the periods indicated, the
range of high and low closing bid prices for the Company's common
stock, as reported by NASDAQ through March 1997 and as available
through electronic trading services subsequent to such date. The
values have not been restated for the one for four reverse split
that was effective December 30, 1997:
Common Stock Bid
High Low
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1995
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First Quarter $.87 $.65
Second Quarter .87 .50
Third Quarter .75 .50
Fourth Quarter .56 .25
1996
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First Quarter $.22 $.22
Second Quarter .34 .31
Third Quarter .38 .34
Fourth Quarter .25 .25
1997
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First Quarter $.31 $.19
Second Quarter .19 .13
Third Quarter .07 .05
Fourth Quarter .05 .02
Dividends
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The Company has never declared a cash dividend on common stock.
The Company intends to retain future earnings to support the
Company's growth. Any payment of cash dividends in the future
will be dependent upon: the amount of funds legally available
therefore; the Company's earnings; financial condition; capital
requirements; and other factors which the Board of Directors
deems relevant.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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Certain matters discussed herein (including the documents
incorporated herein by reference) are forward-looking statements
intended to qualify for the safe harbors from liabilities
established by the Private Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such
because the context of the statement will include words such as
the Company "believes," "plans," "intends," "anticipates,"
"expects," or words of similar import. Similarly, statements
that describe the Company's future plans, objectives, estimates,
or goals are also forward-looking statements. Such statements
address future events and conditions concerning capital
expenditures, earnings, litigation, liquidity and capital
resources and accounting matters. Actual results in
each case could differ materially from those currently
anticipated in such statements by reason of factors such as
future economic conditions, including changes in customer
demands; future legislative, regulatory and competitive
developments in markets in which the Company operates; and other
circumstances affecting anticipated revenues and costs.
General
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The Company commenced operations in May 1984. During 1985, the
Company established its marketing office and began a concentrated
effort of developing sales tools, procedures, and training sales
personnel. The first six months of operation in 1986 were
devoted to packaging and preparing a franchise system, developing
a sales force and documenting procedures to provide to
franchisees. The actual implementation of the operations as a
franchiser commenced in October 1986.
In July 1987, the Company acquired United Coupon Corporation, now
United Marketing Solutions, Inc., ("United Coupon"), a franchiser
of cooperative direct mail advertising distributorships. On
October 21, 1993, the Company acquired Cal-Central Marketing
Corporation ("Cal-Central").
Liquidity and Capital Resources
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Management views cash, certificates of deposit, and accounts
receivable as principle measures of liquidity. Management also
deems appropriately collateralized and managed bank lines of
credit as proper means for supplementing liquidity.
In August 1994, the Company renewed a revolving and term credit
facility with a bank, which had originally been secured to
consolidate existing debt and to provide supplemental working
capital for Company operations. This renewed credit facility was
a revolving note with a borrowing base of $600,000 at inception
and a reducing term note with an initial borrowed amount of
$500,000. The term facility required monthly principal
payments of $10,500 and both notes required monthly interest
payments. At December 31, 1995, the Company had borrowed
$934,433, the maximum available on the credit facility. The
interest rate on the term note was 1% over bank prime and on the
revolving note was 1.5% over bank prime. No principal payments
were required on the revolving note until the funds advanced on
the facility exceeded the available borrowing base. The loan was
secured by accounts and notes receivable, inventory, equipment
and other assets of the Company. On March 4, 1996, the Company
entered into an amended and restated credit facility, which
extended the amount owed the bank through January of 1997. Under
the terms of this amended and restated agreement, the Company was
required to make semi monthly principal payments of $20,000 plus
accrued interest on the outstanding balance owed, beginning March
1, 1996. Additionally, principal payments were required to be
made on March 1, April 1, May 1, and June 1, 1996, in that amount
which is equal to 50% of certain Cal-Central accounts receivable
which were collected during such periods. For the periods July
1, August 1, September 1, October 1, November 1, and December 1,
1996, such additional principal payments would be made from 100%
of the certain Cal-Central accounts receivable collected. The
interest rate was 1% over bank prime through June 30, 1996. On
July 1, 1996, the rates increased to 3% over national prime for
the remaining term of the agreement. The Company was required to
maintain a collateral base equal to or greater than the balance
outstanding on the original term note. The Company was in
compliance with this collateral requirement at December 31, 1995.
On August 15, 1996, the Company entered into a consolidated
renewal promissory note with BancFirst in the face amount of
$721,425, with interest at the prime rate plus 1%. The note is
payable in monthly installments, including interest, of $22,500
through January 15, 1997 and $27,500 through December 15, 1998.
The note matures December 31, 1998. The note is collateralized
by substantially all assets of the Company. At December 31,
1997, the Company is in default for nonpayment in accordance with
the terms of the loan. The balance outstanding at December 31,
1997 was $530,940. As a result of on-going negotiations, during
1997 the bank accepted payments at less than the stated terms in
the note.
On December 31, 1991, the Company entered into a $1,250,000
Convertible Debenture financing with Renaissance Capital
Partners, Ltd. The debenture was in the form of a seven-year
note with interest only payable quarterly during years one
through three. Beginning in 1995, unless waived, the Company was
to begin quarterly principal payments, plus interest, in an
amount sufficient to amortize 50% of the outstanding principal
balance over the final four years of the note. The remaining
principal amount was due and payable December 31, 1998.
On March 4, 1996, Renaissance executed a subordination agreement
which deferred all principal and interest payments regarding this
debenture until July 1997 or until such time as the current
amount owed to the bank was extended under terms which would
allow such payments. During 1995, Renaissance and Duncan-Smith
Investment Co. loaned the Company an additional $298,500 under
several notes that were convertible into common stock of the
Company at $.25 per share. On July 12, 1996, the Company,
Renaissance and Duncan-Smith entered into a loan conversion
agreement whereby the debenture, notes and accrued interest
related thereto were exchanged for 1,712,739 (428,185 after giving
effect to the one for four reverse split effective December 30, 1997)
shares of Series C Preferred Stock of the Company. Each share of
Series C Preferred Stock is convertible into four shares of the
Company's common stock at any time, at the option of the Holder.
On October 21, 1993, the Company and AEC Acquisition, Inc.
("AEC"), a wholly-owned subsidiary of the Company, entered into a
definitive Agreement for the merger of Cal-Central Marketing
Corporation, a Florida Corporation ("Cal-Central/Florida") into
AEC. The merger was effected on October 27, 1993, through the
issuance of 1,200,000 (300,000 after giving effect to the one for
four reverse split effective December 30, 1997) shares of restricted
Common Stock of the Company, 600 shares of Redeemable Preferred Stock
of the Company, and 1,000 shares of Series A Convertible Preferred
Stock of the Company. The terms of the Redeemable Preferred Stock
provided that such shares be redeemed at any time as an option of the
Company or, at the holders' option after certain profit performance
tests were met by Cal-Central. The shares of Series A Convertible
Preferred Stock of the Company were mandatorily convertible into
Common Stock of the Company after 12 months, and after certain profit
performance tests by Cal-Central for such period. The conversion
rights of the Series A Convertible Preferred Stock expired in October
1994 with performance tests not achieved. In March 1995, 320 shares of
the Redeemable Preferred Stock were converted to 355,556 (88,889 after
giving effect to the one for four reverse split effective December 30,
1997) shares of Common Stock of the Company at a conversion price of
$.90 per share. The terms of the remaining Redeemable Preferred Stock
of the Company provide that the shares are redeemable by the Company at
any time or by the holders after certain profit performance tests
are met by Cal-Central. Funds to be utilized in redeeming the
remaining Redeemable Preferred Stock were to be provided through
collection of existing notes receivable from stockholders.
During 1996, the collectibility of these loans became doubtful
and an allowance for the full amount of the loans was recorded.
These loans were charged off during 1997. The Redeemable
Preferred Stock pledged as collateral for the loans was
reacquired and cancelled.
As a result of the merger, the name of AEC, the surviving
corporation, was changed to Cal-Central Marketing Corporation
("Cal-Central").
In the fourth quarter of 1993, the Company received $250,000 in
proceeds from the private offering of 400,000 (100,000 after giving
effect to the one for four reverse split effective December 30, 1997)
shares of the Common Stock of the Company and $435,000 from the private
sale of five year unsecured subordinated debentures with interest at
10.5% through October 1996, and 12% from November 1996 through
October 1998. These proceeds were utilized to pay Cal-Central
acquisition costs of $52,552 to reduce debt of Cal-Central and to
provide working capital. Management believes it is in the best
interest of shareholders, lenders and the Company that these
debentures be converted in whole or in part to equity in the
Company. Discussions to effect such conversion, as a component
of the overall restructuring of all long term debt for the
Company, have been initiated. Also, the holders of these
debentures have been required, as a provision of the amended and
restated loan agreement with the bank, to defer all requirements
for receipt of principal and interest until July 1997.
Management believes that cash flow from operations and from
available borrowing capacity will not be sufficient to pay the
debentures upon maturity unless a significant portion is
converted to equity.
The acquisition of Cal-Central was accounted for as a purchase
with a price of approximately $1,400,000. The operating results
have been included in the consolidated financial statements from
October 22, 1993 through 1996 when the company was dissolved. The
Company acquired assets of $1,887,242 and assumed liabilities of
$2,687,824. The excess purchase price over the fair value of the
net assets acquired was recorded as goodwill and was initially
amortized on the straight line method over a forty year life.
Several factors were considered in determining the purchase price
for Cal-Central which, in management's opinion, supported a
purchase price that was approximately $1,400,000 in excess of the
fair value of the Cal-Central assets acquired. These factors
included opportunities to increase profitability by reducing
inordinately high interest rates paid historically by Cal-Central
on borrowed funds, reducing high bank charges paid by Cal-Central
due to limited cash management practices, and reducing costs
associated with services performed by third parties for Cal-
Central by bringing these functions into the Company. Also, the
cooperative advertising products and distribution channels of
Cal-Central were logical compliments to those of the Company's
subsidiary, United Marketing.
The excess purchase price of $1,400,000 over the fair value of
the assets acquired is equal to the initial negative book equity
of Cal-Central of approximately $800,000 plus the value of the
restricted common stock provided of $600,000. Only the par value
of $16 was initially assigned to the Preferred Stock proceeds
provided in the purchase, due to the fact that redemption of the
preferred stock was at the Company's discretion or dependent
upon the achieving of pre-tax operating profits of $500,000 by
Cal-Central within a consecutive twelve month period following
the acquisition, in order for the Redeemable Preferred Stock to
be redeemed upon demand from the holders. In February 1995, The
Company converted 355,556 shares of common stock for 320 shares
of redeemable preferred stock, in lieu of future redemption of
such stock for $320,000 in cash. This transaction
resulted in the addition of $124,441 of goodwill as contingent
purchase price proceeds related to the acquisition of
Cal-Central. The value of the remaining Redeemable Preferred
Stock, 280 shares, is also considered contingent purchase
proceeds and will be reflected at par value until the stock is
redeemed or otherwise retired. During 1996, the Cal-Central
operation was closed and the remaining unamortized goodwill was
written off.
In February 1995, the Company exchanged 221,018 (55,255 after giving
effect to the one for four reverse split effective December 30, 1997)
shares of common stock at a market value of $.90 per share, in full
payment of $198,917 of amounts owed by Cal-Central. These shares, along
with 355,556 (88,889 after giving effect to the reverse split) shares
issued in exchange for redeemable preferred stock, were subsequently
registered in April 1995 via Form S-3 Registration Statement.
For the Period Ended December 31, 1997
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At December 31, 1997, the Company's working capital position,
current assets minus current liabilities, was a negative
$2,809,441. Working capital was impacted by the $916,666 loss
from operations as well as use of $164,597 in cash and
equivalents during the year to purchase property and equipment
related to the United Marketing art and printing facility, and
$49,530 for net payment of notes payable. In addition: short
term notes and accounts receivable declined by $360,771, as a
result of lower levels of business activity; inventories declined
by $20,812 due to utilization of stocks built in prior periods;
and prepaid expenses and other assets declined by $71,024 due to
utilization of accrued expenses and amortization of prepaid
items. Also, accrued liabilities and accounts payable increased
by $85,935 and deferred rent increased by $91,594 as a result of
accelerated recognition of deferred rental payments as current
period expenses.
Total assets for the Company declined 23% during 1997. This
change reflects the changes in current assets and property
noted above, as well as write-off of $224,932 of goodwill related
to the election to discontinue UNICO's ownership of United
Marketing Solutions, Inc.
Long-term liabilities decreased by $658,059 during 1997 as a
result of required net principal payments made of $49,530 and
reclassification of items previously classified as long term to
short term.
Management has considered operating losses and acquisitions which
have required substantial utilization of funds, as well as
anticipated operating and debt service requirements for the near
term, and believes that sufficient liquidity may not be available
from working capital to support the requirements of continuing
operations for the foreseeable future. As a result, management
has taken steps to assure continued operation. These actions
include the election to seek a buyer for United Marketing
Solutions, Inc. Because of this election, the accompanying
financial statements reflect the operations of United Marketing
Solutions, Inc. as a discontinued operation. The ultimate
outcome from this strategic action cannot be assured at this
time.
Results of Operations - Year Ended December 31, 1997 Compared to
the Year Ended December 31, 1996
- ----------------------------------------------------------------
Total Revenues for the Company decreased by 76% during 1997,
after restatement of both periods to reflect the plan to
discontinue the operations of the Company's remaining operating
subsidiary, United Marketing. This decline reflects a decline of
$19,049 in printing, advertising and design sales to third
parties and a $73,521 decline in other revenue associated with
reimbursement of expenses and non-recurring miscellaneous
revenues.
Total expenses decreased by approximately 85% during 1997, after
restatement of both periods to reflect the plan to discontinue
United Marketing. Included in total expense in 1996 is $187,661
of non-recurring cost of sales related to cooperative advertising
activities conducted by the Company during the initial months of
1996, while restructuring efforts were attempted for Cal-Central.
Included in 1996 costs is $956,913 of one-time charges related to
closing Company locations and other one-time charges, as well as
$1,692,710 in one-time costs associated with abandonment and re-
evaluation of assets. General and Administrative Expenses
declined by 33% during 1997 due to consolidation of
administrative functions throughout the year. In addition,
interest expense declined during 1997 by 40% due to the
conversion of subordinated debt to equity, as disclosed.
Loss from operations of subsidiary to be sold, United Marketing,
was $407,244 net of a $231,000 tax benefit related thereto, for
1997, compared to income of $163,653, net of an income provision
of $100,200, for 1996. Operating results of the United Marketing
for 1997 included $5,779,440 of total revenue compared to
$6,704,158 in 1996. Total operating expenses for 1997 were
$6,417,784 compared to $6,440,305 for 1996. The decline in total
revenue is related to a 13% decline in the subsidiary's
commercial printing, design and advertising sales, as well as a
40% decline in franchise fee revenue. The decline in total
operating expenses in 1997 is related to a 4% decline in cost of
sales, partially offset by an 8% increase in general and
administrative expense.
For fiscal 1997, the Company incurred a consolidated loss of
$916,666 compared to a net loss of $3,343,449 in 1996. This
reduced loss reflects the net impact of operating losses and
additional losses incurred during 1996 related to the
abandonement and closure of Cal-Central compared to the loss from
operation incurred during 1997 related to the discontinued
business segment, United Marketing.
Item 7. Financial Statements
- ----------------------------
The financial statements of the Company, together with the report
of auditors, are included in the report after the signature
pages.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------
None
PART III
- --------
Item 9. Directors, Executive Officers, Promoters and Control
Persons: Compliance With Section 16(a) of the Exchange Ad
- ------------------------------------------------------------
The directors and officers of the Company and its subsidiaries,
as of April 13, 1998, are set forth below. The directors hold
office for their respective term and until their successors are
duly elected and qualified. Vacancies in the existing Board are
filled by majority vote of the remaining directors. The officers
serve at the will of the Board of Directors.
With Company
Name Age Since Director/Position
- ------------------------------------------------------------
Gerard R. Bernier 48 1987 Chairman of the Board,
Chief Executive Officer &
President
Gerald Bomstad, Jr. 70 1993 Director
Leon Zajdel 50 1990 Director
Steven Kronzek 48 1997 Director
Subhash Ghei 54 1994 Corporate Secretary and
Treasurer, Chief Financial
Officer
Business Experience
- -------------------
Gerard R. Bernier was founder and has been a Director of United
Marketing Solutions, Inc., formerly United Coupon Corporation, of
Springfield, Virginia, since November 1981, and Chief Executive
Officer since August 1985. Mr. Bernier has held the position
of Vice President and Vice Chairman of the Board of Directors
of UNICO, Inc. since November, 1991. He was elected Chief
Executive Officer & President effective April 1, 1996. Prior to
1981, Mr. Bernier was an executive with various advertising and
manufacturing companies.
Gerald Bomstad, Jr. has been an investor and a Director of Cal-
Central Marketing Corporation since its inception in 1983. Mr.
Bomstad held various positions with Automation Industries, Inc.,
from 1951 to 1986. In 1951, he began his career as a staff
accountant. In 1960, he became the General Manager of the
Aerospace Division. In 1962, he was appointed Vice President,
Treasurer and Controller. From 1968 to 1978, he served as
Senior Vice President and Controller. From 1978 to 1986, after
Automation Industries became a subsidiary of Penn Central
Corporation, Mr. Bomstad served as President of the Manufactured
Productions Group. In 1986, he led a group of investors and
management in a spin-off of three divisions of Penn Central and
was appointed President and Chief Executive Officer of the new
operation. He has been active as a consultant, investor and
director for various enterprises. He became a Director of the
Company on October 26, 1993, when the Company acquired Cal-
Central Marketing Corporation.
Leon Zajdel was founder and has served as President of Energy
Guard Corp., a manufacturer and retailer of replacement windows,
located in Beltsville, Maryland, since 1972. Mr. Zajdel served as
a director of United Coupon Corporation from April, 1985 to
November, 1991, and has served as a director of the Company since
July, 1990.
Steven Kronzek was a founding partner in November 1977 and has
continued as partner of the accounting firm of Kronzek & Company,
located in Washington, DC. Mr. Kronzek was elected to the
Company's Board of Directors in June 1997. He has served as an
independent accountant for the Company's wholly-owned
subsidiary, United Marketing Solutions, Inc., since January 1982.
Subhash Ghei, Controller, Secretary and Treasurer of United
Coupon Corporation since 1994, was appointed Chief Financial
Officer, Secretary and Treasurer of UNICO, Inc. and subsidiaries
effective August 8, 1996. Prior to joining the Company he was
employed with several organizations in management, accounting and
administrative positions. He earned his Bachelors Degree with
emphasis in accounting and economics from the University of Delhi
in 1972 and another Bachelors Degree in Business Administration
from the University of Phoenix in 1987. He also holds a Masters
Degree in Business Administration from Averett College.
Certain Legal Proceedings
- -------------------------
No director; nominee for director, or executive officer of the
Company has appeared as a party in any legal proceeding material
to an evaluation of his ability or integrity during the past five
years.
Item 10. Executive Compensation
- -------------------------------
The following information relates to compensation received by the
executive officers who were serving as of December 31, 1997,
whose salary and bonus during fiscal 1997 exceeded $100,000.
Summary Compensation Table
Annual Compensation
- ---------------------------
Name and Principal Position Year Salary Bonus(l)
- ----------------------------------------------------------------
Gerard R. Bernier 1997 $156,668 (2) $0
Chief Executive Officer 1996 $125,000 $0
and President 1995 $124,403 $50,347
(1) Bonus amounts are reflected in the year received by the
employee. All bonus payments relate to services performed, and
incentive goals met by the employee during the prior year.
Expenses for such compensation are accrued and reflected in the
operating statements of the year such services are performed.
(2) Includes payment of $30,000 for accrued, unused vacation time
as approved by the board of directors.
Aggregated Option Exercises in Fiscal Year Ending December 31.
1996 and Fiscal Year-End Option Values
- --------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
12-31-97(1) 12-31-97(2)
Shares Acquired Value Exercisable/ Exercisable/
on Exercise (#) Realized Unexercisable Unexercisable
--------------- -------- ------------- -------------
Gerard R. Bernier - - 46,250 Exer. $0 Exer.(2)
- ---------------------------
(1) There were no options granted to Officers or Directors during
fiscal year 1997.
(2) This amount reflects the difference between the market value
of the Company's Common Stock on December 31, 1997 and the
exercise price.
Compensation Pursuant to Plans - Omnibus Equity Compensation
Plan. The Company has adopted an Omnibus Equity Compensation Plan
(the "Plan") under which 250,000 shares of Common Stock have been
reserved for issuance upon exercise of options granted pursuant
to the Plan. Under the Plan, incentive stock options may be
granted to employees, and non-qualified stock options may be
granted to employees, Directors, Franchisees, and other persons,
as the Compensation Committee determines will assist the
Company's business endeavors, at exercise prices equal to at
least 100% of the fair market value of the Common Stock on the
date of grant. In addition to selecting the options, the
Compensation Committee determines the number of shares subject
to each option and otherwise administers the Plan. Options
granted under the Plan are not exercisable until six months after
grant and expire a minimum of three years or maximum of five
years after the date of grant, provided employment is continued.
As of April 13, 1998, options to purchase 71,211 shares are
outstanding under the Plan, including options for 46,250 shares
to officers of the Company. These options have been granted at
exercise prices ranging from $1.00 to $4.64. The average exercise
price for all outstanding options is approximately $1.80 per
share. The shares underlying the options were registered during
1994.
Employment Agreements. The Company's subsidiary United Marketing
Solutions, Inc. has entered into an Employment Agreement with
Gerard R. Bernier to serve as the Chief Executive Officer and
President of that Company. The major terms of this Agreement
provide for a base salary of $125,000 plus a company provided
automobile or monthly allowance, and an incentive bonus based
upon the pre-tax profitability of United Marketing. The Agreement
provides for an annual cost of living increase based upon annual
increases in the Consumer Price Index of the general area
surrounding the home office of United Marketing. The Agreement
was entered into on April 1, 1996 and extended through March 31,
1999.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
- ------------------------------------------------------------
The following table sets forth as of April 1, 1997, information
with respect to the beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to own beneficially
5% or more of such stock, (ii) each Director of the Company who
owns any Common Stock, and (iii) all Directors and Officers as a
group, together with their percentage of beneficial holdings of
the outstanding shares.
Number of Shares of
Name of Beneficial Owner/ Common Stock % of Beneficial
Identity of Group Beneficially Owned Ownership (1)
- ------------------------- ------------------- ---------------
Renaissance Capital 1,589,220 (2) 42.85%
Partners, Ltd.
8080 North Central Expressway
Suite 210 LB 59
Dallas, TX 75206-1857
Gerard R. Bernier 215,682 (3) 9.68%
8380 Alban Road
Springfield, VA 22150
Gerald Bomstad, Jr. 205,900 (4) 9.65%
422 Montigue, Suite 6
Greenwood, SC 29649
Duncan Smith Company 182,099 (6) 7.91%
311 Third
San Antonio, TX 78205
Officers and Directors 427,832 (3)(4)(5) 19.04%
As a Group
- ------------------
(1) Percent is rounded to one decimal place.
(2) Includes 1,589,220 shares, the current maximum amount that
Renaissance is entitled to receive upon conversion of the Series
C Preferred Stock issued in July 1996. Such preferred shares are
convertible at the option of the Holder at any time.
(3) Includes 46,250 shares which may be purchased at $1.00 per
share pursuant to the Company's Omnibus Equity Compensation Plan
and 62,500 shares which have been granted to Mr. Bernier subject
to continued employment for a specified period.
(4) Includes 12,500 shares which may be purchased at $3.88 per
share pursuant to the Company's Omnibus Equity Compensation Plan
and 13,750 shares which are issued, but restricted from sale
until certain profit performance tests are met by Cal-Central
Marketing Corporation.
(5) Includes shares underlying stock options granted to Mr.
Bernier and Mr. Bomstad, as well as, 6,250 shares which may be
purchased at $1.00 per share by Leon Zajdel, a Director of the
Company, pursuant to the Company's Omnibus Equity Compensation
Plan.
(6) Includes 168,349 shares, the current maximum amount that
Duncan-Smith is entitled to receive upon conversion of the Series
C Preferred Stock issued in July 1996, plus 13,750 stock purchase
warrants which entitle the holder to purchase common stock at a
minimum of $3.60 per share.
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
Transactions with Management and Others
- ---------------------------------------
No business relationship between the Company and any business or
professional entity, for which a director of the Company has
served during the last fiscal year or currently serves as an
executive officer of, or has owned a 10% record or beneficial
interest in, has existed since the beginning of the Company's
last fiscal year, or currently exists, which represented or will
represent payments for property or services in excess of 5% of
the Company's gross revenues for its last full fiscal year or of
the other entity's consolidated gross revenues for its last
full fiscal year.
In addition, except as noted below, the Company did not owe, at
the end of its last fiscal period, to any business or
professional entity for which a director of the Company has
served during the last fiscal year or currently serves as an
executive officer, or has owned during the last fiscal year or
currently owns a 10% record or beneficial interest in, an
aggregate amount in excess of 5% of the Company's total assets at
the end of its last fiscal period. No director of the Company
has served as a partner or executive officer of any investment
banking firm that performed services for the Company during the
last fiscal year or that the Company proposes to have perform
services during the current year, except as noted below.
During 1997, the President of the Company and his wife pledged a
personal $75,000 certificate of deposit and a personal gurantee
for $25,000 to a bank as collateral for a $100,000 line of credit
extended to the Company. There were no borrowings on the line
during 1997.
At the end of the last fiscal year and at April 13, 1998, the
Company has 397,305 shares of Series C Preferred Stock issued to
Renaissance Capital Partners, Ltd. Russell Cleveland, who served
as a Director of the Company until the Annual Meeting of
Shareholders on December 2, 1996, is a major owner and Managing
General Partner of Renaissance Capital Partners, Ltd. The Series
C Preferred Stock was issued to Renaissance upon conversion of a
$1,250,000 Convertible Debenture entered into with Renaissance in
1991 and a Subordinated Convertible Note in the amount of
$149,250 entered into with Renaissance during 1995. Mr.
Cleveland did not serve as a Director of the Company at the time
that the Convertible Debenture was issued. Mr. Cleveland was a
director in 1995, when the Company entered into the Subordinated
Convertible Note with Renaissance, to provide interim financing
to support the working capital requirements. This note was
deemed to be in the best interests of the Company and its
shareholders and was entered into on an arms length basis, at the
request of Company management.
The Company advanced $280,000, in prior periods, to two former
officers of its subsidiary, Cal- Central Marketing Corporation,
Jack Brown, formerly President, and Gerald Bomstad, Jr., formerly
Executive Vice President. These advances were evidenced by notes
which were payable on demand by the Company. These notes
originally bore interest at 4%, but subsequent to October 26,
1995, bore an annual interest rate of 10%. Redeemable preferred
stock, with cash redemption value of an amount equal to the
principal value of these advances, was pledged as security for
the advances. These notes were deemed uncollectible and were
fully reserved during 1996. They were charged off during 1997.
The Company believes the terms of these transactions are as
favorable as it might have obtained from unaffiliated parties.
PART IV
- -------
Item 13. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following documents are filed as part of this report:
1. Financial statements; see index to financial statement and
schedules immediately following the signature pages of this
report.
2. Financial statement schedules; see index to financial
statements and schedules immediately following the signature
pages of this report.
3. Exhibits:
The following exhibits are filed with this Form 10-KSB and are
identified by the numbers indicated; see index to exhibits
immediately following financial statements and schedules of this
report.
2 Plan of Reorganization and Agreement of Merger among UNICO,
Inc., AEC Acquisitions, Inc. and Cal-Central Marketing
Corporation(1)
3.1 Certificate of Incorporation, as amended(2)
3.2 Bylaws, as amended(2)
3.3 Amendment to the Certificate of Incorporation to increase
the authorized shares of Common Stock(3)
3.4 By-laws, as amended (8)
4.1 Form of Common Stock Purchase Warrant, dated September 11,
l986(4)
4.2 Form of Class B Common Stock Purchase Warrant dated November
1, 1993(3)
4.3 Form of Subordinated Debenture dated October 26, 1993,
offered through Duncan Smith Co.(3)
4.4 Certificate of Designations, Preferences, and Rights of
Series A Convertible Preferred Stock(3)
4.5 Certificate of Designations, Preferences, and Rights of
Series A Redeemable Preferred Stock(3)
4.6 Certificate of Designations, Preferences, and Rights of
Series B Redeemable Preferred Stock(3)
4.7 Certificate of Designations, Preferences, and Rights of
Series C Preferred Stock (8)
10.1 Employment Agreement between Cal-Central Marketing
Corporation and Jack Brown. (1)
10.2 Employment Agreement between Cal-Central Marketing
Corporation and Gerald Bomstad, Jr. (1)
10.3 Lease of executive offices at 1101-B Sovereign Row,
Oklahoma City, OK 73108. (3)
10.4 Form of Common Stock Purchase Warrant dated October 26,
1993 offered through Duncan-Smith Co. (3)
10.5 Second Amendment to Lease Agreement Cal-Central Marketing
Corporation.(3)
10.6 United Coupon Corporation Franchise Agreement. (2)
10.7 Employment Agreement between United Coupon Corporation and
Gerard R. Bernier, as amended January 1, 1995. (5)
10.8 Employment Agreement between UNICO, Inc. and W. Douglas
Frans. (2)
10.9 Credit Agreement by and Between UNICO, Inc., and its
subsidiaries and BancFirst. (2)
10.10 Purchase Agreement with Concord Video. (2)
10.11 Omnibus Equity Compensation Plan. (2)
10.12 Convertible Debenture Loan Agreement by and between UNICO,
Inc. and its subsidiaries, United Coupon Corporation and AEC
Acquisitions, Inc. and Renaissance Capital Partners, Ltd. Dated
December 31, 1991.(2)
10.13 Amended and Restated Loan Agreement by and between UNICO,
Inc. and its subsidiaries and BancFirst as amended August 31,
1994. (5)
10.14 Promissory Note of Jack Brown. (3)
10.15 Promissory Note of Gerald Bomstad, Jr. (3)
10.16 Novation(3)
10.17 Restructure Agreement Among UNICO, Inc., Cal-Central
Marketing Corporation, and The American Education Corporation,
dated as of December 31, 1993. (3)
10.18 United Coupon Corporation Lease Agreement. (5)
10.19 Master Agreement and Schedules of Indebtedness 1 and 2
between CIT Group and United Coupon Corporation. (5)
10.20 Machinery Contract between MAN Roland, Inc. and Cal-
Central Marketing Corporation. (5)
10.21 Exchange Agreement between Gerald Bomstad and the Company
dated February 22, 1995. (6)
10.22 Exchange Agreement between Jack Brown and the Company
dated February 22, 1995. (6)
10.23 Debt Exchange Agreement between Graphic Rolls Unlimited
and the Company dated February 22, 1995. (6)
10.24 Debt Exchange Agreement between McCollum & Bunch and the
Company dated February 22, 1995. (6)
10.25 Debt Exchange Agreement between Walter Rose and the
Company dated February 22, 1995. (6)
10.26 Debt Exchange Agreement between Ronald Martin and the
Company dated February 22, 1995. (6)
10.27 Subordinated Loan Agreement dated June 30, 1995, among
UNICO, Inc. and Cal-Central Marketing Corporation and the Harlon
Morse Fentress Trust, Philip M. Stevenson, Jr., RHOJOAMT
Partnership, Ltd., CITCAM Stock Co., Barbara T. Grinnan, and
Goose Creek. (7)
10.28 Form of Common Stock Purchase Warrant, dated June 30,
1995. (7)
10.29 Subordinated Convertible Debt Loan Agreement dated
October, 1995, and schedule of advances, among UNICO, Inc.,
United Coupon Corporation, and Cal-Central Marketing Corporation
and Renaissance Capital Group, Inc. and Duncan-Smith Company.
(7)
10.30 Debt Exchange Agreement among UNICO, Inc., Renaissance
Capital Partners, Ltd. and Duncan-Smith Investment Co. dated July
1996. (8)
10.31 Debt Exchange Agreement among UNICO, Inc., Renaissance
Capital Partners, Ltd and Duncan-Smith Investment Co., dated July
1996. (8)
10.32 Employment Agreement Between United Coupon Corporation and
Gerard R. Bernier dated April 1, 1996. (7)
10.33 Modification and Extension to the Third Restated Loan
Agreement between UNICO, Inc., United Coupon Corporation, Cal-
Central Marketing Corporation and BancFirst dated August 15,
1996. (10)
10.34 Consolidated Renewal Promissory Note between UNICO, Inc.,
United Coupon Corporation, Cal-Central Marketing Corporation and
BancFirst dated August 15, 1996. (10)
10.35 Loan Conversion Agreement between UNICO, Inc. and Kurt
H.C. Bottcher dated September 30, 1996. (10)
16 Letter from Arthur Andersen, LLP to Securities & Exchange
Commission dated December 3, 1996. (9)
21 List of Subsidiaries(3)
27 Financial Data Schedule - Pursuant to EDGAR filing
requirements for the period ended December 31, 1997, filed
herewith this Form 10-KSBA dated April 15, 1998.
(b) Reports on Form 8-K. - None.
- -------------------
(1) Incorporated by reference to the Registrant's Form 8-K,
October 27, 1993 (SEC File No. (0-15303).
(2) Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ending December 31, 1992 (SEC File No. 0-15303).
(3) Incorporated by reference to the Registrant's Form 1O-KSB
for the fiscal year ending December 31, 1993 (SEC File No. 0-
15303).
(4) Incorporated by reference to the Registrant's Form S-18
registration statement (SEC File No. 33-73 10-FW).
(5) Incorporated by reference to the Registrant's Form 10-KSB
for the fiscal year ended December 31, 1994, (SEC File No. 0-
15303).
(6) Incorporated by reference to the Registrant's Form S-3 dated
April 28, 1995 (SEC File No. 33-91270).
(7) Incorporated by reference to the Registrant's Form 10-KSB
dated April 15, 1996 (SEC File No. 0-15303).
(8) Incorporated by reference to the Registrant's Form 8-K dated
July 30, 1996 (SEC File No. 0-15303).
(9) Incorporated by reference to the Registrant's Form 8-K/A
dated December 12, 1996 (SEC File No. 0-15303).
(10) Incorporated by reference to the Registrant's Form 10-KSB
dated April 15, 1997 (SEC File No. 0-15303).
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.
UNICO, Inc.
April 15, 1998
By: /s/Gerard R. Bernier
Chief Executive Officer and President
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.
Name Title Date
- ---- ----- ----
/s/Gerard R. Bernier Chief Executive Officer April 15, 1998
Chairman of the Board
/s/Subhash Ghei Chief Financial officer April 15, 1998
/s/Gerald Bomstad, Jr. Director April 15, 1998
/s/Leon Zajdel Director April 15, 1998
/s/Steven Kronzek Director April 15, 1998
UNICO, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants - 1997 22
Consolidated Financial Statements:
Consolidated of Financial Condition, December 31, 1997 23
Consolidated Statements of Operations for the
Years Ended December 31, 1997 and 1996 25
Consolidated Statements of Stockholders' Equity
Deficiency for the Years Ended
December 31, 1997 and 1996 27
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996 28
Notes to Consolidated Financial Statements 30
All other schedules are omitted because of the absence of the
condition under which they are required or because the
information is included in the financial statements or notes
thereto.
Independent Auditor's Report
Board of Directors and Stockholders
UNICO, INC. AND SUBSIDIARIES
Springfield, Virginia
We have audited the accompanying Consolidated Statement of Financial
Condition of UNICO, INC. AND SUBSIDIARIES as of December 31, 1997,
and the Consolidated Statements of Operations, Stockholders' Equity
(Deficiency) and Cash Flows for the years ended December 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of UNICO, INC. AND SUBSIDIARIES as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note
17 to the financial statements, the Company has suffered losses from
operations in 1997 and 1996, its consolidated current liabilities exceeded
its consolidated current assets by approximately $2,810,000 and the
Company is in default of its bank loan as of December 31, 1997. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans regarding these matters are
also described in Note 17. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARONSON, FETRIDGE & WEIGLE
Rockville, Maryland
February 11, 1998
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 129,860
Accounts and notes receivable - trade
(net of allowance for doubtful accounts
of $60,000) 292,003
Other receivables 2,877
Inventory (Note 1) 119,203
Prepaid expenses 9,140
-------------
Total current assets 553,083
-------------
PROPERTY AND EQUIPMENT, AT COST
(NOTES 1 AND 2)
Printing and office equipment 3,428,274
Computer equipment and software 604,591
Transportation equipment 138,693
Leasehold improvements 63,063
-------------
Total 4,234,621
Less: Accumulated depreciation (2,166,065)
-------------
Net property and equipment 2,068,556
-------------
DEPOSITS AND OTHER ASSETS 18,302
-------------
TOTAL ASSETS $ 2,639,941
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,307,198
Accrued liabilities (Note 3) 485,433
Current portion of long-term liabilities
(Note 2) 1,449,384
Deferred revenue (Note 1) 120,509
------------
Total current liabilities 3,362,524
LONG-TERM LIABILITIES
Notes payable (Note 2) 360,622
Deferred rent (Note 4) 320,874
------------
Total long-term liabilities 681,496
------------
Total liabilities 4,044,020
------------
COMMITMENTS AND CONTINGENCIES
(NOTES 4, 5, 16, 17 AND 19)
DEFICIENCY IN STOCKHOLDERS' EQUITY (NOTE 6)
Preferred stock, $.01 par value; 5,000,000
shares authorized, designated as:
Redeemable preferred; 70 shares issued and
outstanding (adjusted for the 1 for 4 reverse
split in December 1997) 1
Series A Convertible Preferred -
Series B Preferred -
Series C Preferred stock - $.01 par value;
voting on the basis of 4 votes to 1 vote for
the common stock, preferred in liquidation
at $1 per share over common stockholders,
convertible into common stock on the basis
of 4 common shares for each preferred
share with automatic conversion on
August 1, 1998; 2,000,000 shares authorized,
428,185 shares issued and outstanding,
(adjusted for the 1 for 4 reverse split in
December 1997) (Note 7) 4,282
Common stock - $.01 par value; 20,000,000
shares authorized, 2,119,077 shares issued
and outstanding (adjusted for the 1 for 4
reverse split in December 1997) (Notes 8, 9,
10, 11 and 12) 21,191
Additional paid-in capital 6,801,008
Deferred compensation (Note 10) (4,557)
Accumulated deficit (8,226,004)
-------------
Total deficiency in stockholders' equity (1,404,079)
-------------
TOTAL LIABILITIES AND DEFICIENCY IN
STOCKHOLDERS' EQUITY $ 2,639,941
-------------
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------- -------
REVENUE (NOTES 1 AND 16)
Printing, design and advertising
sales, net of discounts and allowances $ - $ 19,049
Other 29,147 102,668
--------- ----------
Total revenue 29,147 121,717
EXPENSES
Cost of sales - 187,661
General and administrative 401,959 600,029
General and administrative associated
with closed locations and other one
time charges - 956,913
interest expense - affiliate - 87,514
Interest expense - other 173,964 204,192
Loss on abandonment and
revaluation of assets (Note 15) - 1,692,710
---------- ------------
Total expenses 575,923 3,729,019
---------- ------------
LOSS BEFORE INCOME TAXES,
DISCONTINUED OPERATIONS AND
EXTRAORDINARY GAIN (546,776) (3,607,302)
INCOME TAX PROVISION (BENEFIT)
(NOTE 13) 129,100 (100,200)
---------- -------------
LOSS BEFORE DISCONTINUED
OPERATIONS AND EXTRAORDINARY GAIN (675,876) (3,507,102)
GAIN (LOSS) FROM OPERATIONS TO
BE DISCONTINUED (NOTE 16)
(Loss) income from operations of
subsidiary to be sold, net of an
income tax benefit of $231,000
in 1997 and an income tax
provision of $100,200 in 1996 (Note 16) (407,244) 163,653
Loss on disposal of subsidiary,
net of income tax benefit of
$85,500 (Note 18) (139,432) -
------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN (1,222,552) (3,343,449)
EXTRAORDINARY GAIN FROM
TERMINATION OF OBLIGATIONS,
NET OF INCOME TAXES OF $187,500
(NOTE 18) 305,886 -
------------ -------------
NET LOSS $ (916,666) $(3,343,449)
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------- -------
BASIC NET LOSS PER COMMON SHARE
Weighted average common shares outstanding 2,119,077 2,047,618
----------- -----------
Loss from continuing operations $ (.32) $ (1.71)
(Loss) income from discontinued operations (.26) .08
----------- -----------
Loss before extraordinary gain (.58) (1.63)
Extraordinary gain .15 -
----------- -----------
Net loss $ (.43) $ (1.63)
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
<TABLE>
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
<CAPTION>
Preferred Stock
Redeemable Series A Series C
Shares Amount Shares Amount Shares Amount
-------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 70 $ 1 - $ - - $ -
ISSUE OF COMMON
STOCK AS COMPENSATION
(NOTE 10) - - - - - -
CONVERSION OF DEBT TO
PREFERRED STOCK
(NOTE 8) - - - - 428,185 4,282
CONVERSION OF DEBT TO
COMMON STOCK
(NOTE 9) - - - - - -
NET LOSS FOR 1996 - - - - - -
-------- --------- -------- ------- -------- -------
BALANCE,
DECEMBER 31, 1996 70 1 - - 428,185 4,282
AMORITZATION OF
DEFERRED COMPENSATION
(NOTE 10) - - - - - -
NET LOSS FOR 1997 - - - - - -
-------- --------- ------- ------- -------- --------
BALANCE,
DECEMBER 31, 1997 70 $ 1 - $ - 428,185 $ 4,282
</TABLE>
<TABLE>
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTINUED
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
-------------------- --------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1996 1,970,774 $ 19,708 5,033,158 $ - $(3,965,889) $ 1,086,978
ISSUE OF COMMON STOCK
AS COMPENSATION
(NOTE 10) 65,500 675 28,857 (18,230) - 11,302
CONVERSION OF DEBT TO
PREFERRED STOCK
(NOTE 8) - - 1,708,457 - - 1,712,739
CONVERSION OF DEBT TO
COMMON STOCK (NOTE 9) 80,803 808 30,536 - - 31,344
NET LOSS FOR 1996 - - - - (3,343,449) (3,343,449)
---------- ---------- --------- ---------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 2,119,077 21,191 6,801,008 (18,320) (7,309,338) (501,086)
AMORTIZATION OF
DEFERRED COMPENSATION
(NOTE 10) - - - 13,673 - 13,673
NET LOSS FOR 1997 - - - - (916,666) (916,666)
---------- --------- ---------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1997 2,119,077 $ 21,191 $6,801,008 $ (4,557) $(8,226,004) $(1,404,079)
</TABLE>
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (916,666) $ (3,343,449)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Depreciation and amortization 414,115 414,454
Provision for bad debts (295,000) (17,606)
Loss on disposal of subsidiary 224,932 -
Write-off of assets from closure
of offices - 1,944,310
Amortization of deferred
compensation 13,673 11,302
Changes in assets and liabilities
Inventory 20,812 114,490
Accounts and notes receivable 360,771 901,034
Other receivables (2,877) -
Prepaid expenses 13,496 148,567
Deposits and other assets 57,528 3,162
Accounts payable 28,594 19,836
Accrued liabilities 57,341 280,831
Deferred revenue (4,279) 13,867
Deferred rent 91,594 229,280
Other - (91,933)
---------- -----------
Net cash provided by operating activities 64,034 628,145
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (164,597) (232,795)
Proceeds from landlord as reimbursement
for leasehold improvements 45,982 -
---------- -----------
Net cash used by investing activities (118,615) (232,795)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 236,000 93,599
Payment of notes payable (285,530) (555,799)
---------- -----------
Net cash used by financing activities (49,530) (462,200)
---------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (104,111) (66,850)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 233,971 300,821
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 129,860 $ 233,971
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
UNICO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------- --------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 89,738 $ 338,357
========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES
Exchange of common and preferred stock for debt
and other liabilities at fair value on
date of exchange $ 1,744,083
===========
Common stock issued (67,500 shares) for
compensation at an estimated fair value at
the date of issue of $ 29,532
===========
The accompanying Notes to Financial Statements are an integral part of
these financial statements.
UNICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) Nature of operations
UNICO, Inc. (the "Company") was incorporated on April 11, 1984 in the
State of Delaware. The Company's primary business, cooperative direct
mail advertising, involves the designing, printing, packaging, and
distributing of public relations and marketing materials and coupons for
retailers who provide goods and services. Sales are conducted primarily
through franchise operations. The Company's customers are primarily
located in the eastern, southeastern, midwestern and western United
States. During 1997, the Company decided to dispose of its only
remaining operating subsidiary, United Marketing Solutions, Inc.(formerly
United Coupon Corporation). The activities of this subsidiary are
presented as discontinued operations in the Statement of Operations and
detailed in Note 16).
(B) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, United Marketing Solutions,
Inc., Cal-Central Marketing Corporation (a dormant corporation whose
charter was terminated in 1997) and Greenleaf Catalogue, Inc. (a
dormant corporation). All material intercompany accounts and
transactions have been eliminated in consolidation.
(C) Use of accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(D) Property and equipment
Property is recorded at cost and is depreciated over the estimated useful
lives of the individual assets, which are ten to fourteen years using the
straight-line method. Leasehold improvements are amortized over their
estimated useful life or the term of the lease, whichever is shorter.
(E) Revenue recognition
The Company recognizes revenue from the design, production and
printing of coupons on a percentage of completion basis as stages of the
production process are completed. Revenue from initial franchise fees
are recognized when substantially all services or conditions relating to
the sale have been substantially performed. Franchise support and other
fees are recognized when billed to the franchisee. Franchise fees of
United Marketing Solutions, Inc. (UMS) recognized as revenue in 1997
includes $89,165 of initial franchise fees. Franchise fee revenue has
been reduced in 1997 by $106,800 in credits granted to franchisees who
have returned portions of franchise territories. Amounts billed or
collected in advance of final delivery or shipment are reported as deferred
revenue in the Balance Sheet.
(F) Inventory
Inventory consists primarily of paper, envelopes and printing materials
and is stated at the lower of cost or market, with cost determined on the
first-in, first-out method.
(G) Basic net loss per common share
In 1997, the Company adopted Statement of Financial Accounting
Standard No. 128, Earnings Per Share. The adoption of this Standard
had no effect on current period or previously reported net loss per share.
The basic net loss per common share is computed by dividing the net
loss by the weighted average number of common shares outstanding
during the period. Because the Company has incurred losses, fully
diluted per share amounts are not presented. The weighted average
shares outstanding reflect the 1 for 4 reverse split in 1997.
(H) Cash and cash equivalents
The statements of cash flows are prepared on the basis of cash on hand
and in banks which are subject to withdrawal on demand. The Company
considers all investments that have an original maturity of three months or
less to be cash equivalents.
The Company maintains cash balances which may exceed Federally
insured limits. The Company does not believe that this results in any
significant credit risk.
(I) Income taxes
The Company files a consolidated federal income tax return. Deferred
income taxes are provided for temporary differences between the
financial reporting and tax bases of the Company's assets and liabilities
and for all loss and tax credit carryforwards, less valuation allowances as
applicable.
(J) Fair value of financial instruments
The fair value of the financial instruments included in the consolidated
financial statements, except as otherwise discussed in the notes to
financial statements, approximates their carrying value.
(K) Impairment of long-lived assets
It is the Company's policy to periodically evaluate the economic
recoverability of all of its long-lived assets. In accordance with that
policy, when the Company determines that an asset has been impaired, it
recognizes the loss on the basis of the discounted future cash flows
expected from the asset.
(L) Accounting pronouncements
In October 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting No. 123, Accounting for Stock
Based Compensation (SFAS No. 123). That Standard recommends the
use of a fair market valuation method for recognizing compensation from
stock options and similar equity instruments. However, SFAS No. 123
permits the continued measurement of compensation using the intrinsic
value based method as prescribed by Accounting Principle Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25),
provided that financial statements disclose the effect of applying SFAS
No. 123 had it been adopted. This pronouncement was effective for
transactions entered into in fiscal years that began after December 15,
1995. In that regard, the Company has elected to continue to measure
stock based compensation on the basis of APB No. 25. Had the
Company adopted SFAS No. 123, the effect on the loss reported for 1997
and 1996 would have been insignificant.
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive
Income. This standard requires the reporting of the components of
comprehensive income, which includes net income, and is effective for
years beginning after December 15, 1997. The Company believes that
had the standard been adopted for the year ended December 31, 1997,
that the presentation would not differ significantly from the presentation
contained in its Statement of Operations.
(M) Reclassifications
Certain amounts in the 1996 financial statements as reported herein have
been reclassified to conform with the 1997 presentation. These
reclassifications relate primarily to reporting discontinued operations
(Note 16). These reclassifications had no effect on the net loss, total
current assets or total current liabilities as previously reported.
NOTE 2 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of the following:
BancFirst - consolidated renewal promissory note
dated August 15, 1996 in the face amount of
$721,425 with interest at the prime rate plus
1%. The note is collateralized by substantially
all assets of the Company. The note is payable
in monthly installments of $22,500 through
January 15, 1997, and $27,500 through
December 15, 1998, including interest, with
the entire unpaid balance due on December 31,
1998. As a result of ongoing negotiations,
during 1997 the bank accepted payments
at less than the stated terms in the note.
At December 31, 1997, the Company is in default
for nonpayment in accordance with the terms of
the loan. $ 530,940
Duncan-Smith Company - eighteen notes due in
October 1998 bearing interest at 12%. This
note has been subordinated as to payment to the
BancFirst note. This note is classified as a
current liability at December 31, 1997 because
of the current status of the BancFirst note. $ 460,000
Humphrey Group - four notes for $25,000, one
note for $50,000 and one note for $150,000 that
bear interest at 12%, and due in quarterly
installments of principal commencing March 31,
1997 of $25,000, with a final payment of
$225,000 on December 31, 1997. This note has
been subordinated as to payment to the
BancFirst note. This note has been classified
as current at December 31, 1997 as a result of
the current status of the BancFirst note. $ 300,000
CIT Group - two installment notes bearing
interest at approximately 10% and requiring
monthly payments, in aggregate, of $8,989
including interest. Final payments on the
notes are scheduled for 1999 and 2000. The
proceeds of these loans were used to purchase
specific equipment and are collateralized by
the equipment. $ 220,134
Renaissance Capital Partners, Ltd. - four
notes dated from August 13, 1996 to March
24, 1997 requiring interest at 9.25% to 10%
payable monthly, with principal due at dates
from December 31, 1998 to March 1999. The notes
are subordinate in payment to the BancFirst note
described above. Renaissance Capital Partners,
Inc. are the holders of all of the Company's
Series C Preferred Stock, and a principal of
Renaissance is also a common stockholder. $ 274,000
Unsecured loan from a member of the Board of
Directors with no specific terms. Interest
is being accrued by the Company at 10%. $ 12,000
Note payable to a bank bearing interest at 8.75%,
due in monthly installments of principal and
interest of $589, with final payment due in
1999. The note is collateralized by an automobile. $ 12,932
----------
Total notes payable 1,810,006
Less: Current portion 1,449,384
----------
Long-term portion $ 360,622
==========
Future maturities of notes payable at December 31, 1997, based upon
their terms, are as follows:
Year Ending
December 31 Amount
- ----------- ----------
1998 $ 1,449,384
1999 323,300
2000 37,322
------------
Total $ 1,810,006
NOTE 3 - ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 were as follows:
Interest $ 245,540
Sales tax 96,418
Payroll 88,760
Franchise buyback credits 30,125
Other 24,590
----------
Total $ 485,433
NOTE 4 - LEASES
The Company leases its main office and printing facility under an
agreement last amended by restatement in September 1994. The lease
has a term of 10 years and requires payment of base rent which includes
scheduled rent increases plus increases in the annual operating costs
and real estate taxes applicable to the property. The lease provides for
an eighteen month abatement of rent during the initial period for a portion
of the space leased. The Company has an option to renew the lease for
a five year period at the end of the base term at the then current fair
rental value of the property. The minimum payments required under the
lease, which takes into account the rent abatement and scheduled
increases in base rent, are recognized as expense on a straight-line
basis over the life of the lease, with a liability recognized in the balance
sheet to the extent that expense to date exceeds the minimum lease
payments to date.
Scheduled future minimum payments required under the lease are as
follows:
Year Ending
December 31 Amount
- ----------- --------
1998 $ 383,799
1999 415,088
2000 444,290
2001 474,534
2002 505,823
Thereafter 1,298,452
----------
Total $3,521,986
Rent expense for the years ended December 31, 1997 and 1996 was
$675,576 and $652,659, respectively.
UNICO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 5 - PROFIT SHARING PLAN
The Company has a defined contribution plan that is qualified under
401(k) of the Internal Revenue Code. Employees may elect to contribute
up to 15% of their salary before income taxes subject to an annual limit
provided for in the Code, which was $9,500 for 1996 and 1997. The
Company matches employee contributions up to 3% of gross wages. All
employees who are at least 18 years of age are eligible to participate in
the plan. Contributions to the plan by the Company were $22,662 and
$27,578 in 1997 and 1996, respectively.
NOTE 6 - 1 FOR 4 REVERSE SPLIT OF COMMON STOCK
At its meeting on December 30, 1997, the stockholders approved a
reverse split of all of the Company's outstanding common and preferred
shares on a one-for-four basis. All share amounts presented in the
financial statements have been adjusted to reflect this reverse split.
NOTE 7 - REDEEMABLE PREFERRED STOCK
In the Company's 1993 acquisition of Cal-Central Marketing Corporation
(CCMC), 150 shares of redeemable preferred stock were issued. These
shares were redeemable at $4,000 per share at the option of the holder
after the attainment of certain profit performance tests by CCMC. On
April 20, 1995, holders exchanged 80 of these shares for 88,889 shares
of common stock at an exchange rate of $3.60 per common share. (All
shares and exchange rate adjusted for the 1 for 4 reverse stock split in
1997). The profit performance tests of CCMC were never achieved, and
in 1995 CCMC's operations were discontinued except for fulfillment of
work in process. This stock was pledged as collateral for loans totaling
$280,000 by two former officers of CCMC (Note 14).
NOTE 8 - SERIES C PREFERRED STOCK
Prior to 1996, the Company had issued a 12.5% Convertible Debenture to
Renaissance Capital Partners, Ltd. in the face amount of $1,250,000.
During 1995, Renaissance and Duncan-Smith Investment Co. loaned the
Company $298,500 under several notes that were to be convertible into
common stock of the Company. On July 12, 1996, the Company,
Renaissance and Duncan-Smith entered into a loan conversion
agreement whereby the debenture and notes plus accrued interest were
exchanged for 428,185 shares of the Company's newly authorized Series
C Preferred Stock. Each share of the Series C Preferred Stock is
convertible into one share of the Company's common stock at any time at
the option of the holders, with conversion to occur automatically on
August 1, 1998. The agreement further provides that if and whenever
any additional shares of common stock are issued by the Company for a
net consideration of less than $1.00 per share then in each such case the
conversion price shall be reduced to the net consideration received per
share and the number of shares issuable to the holders of the Series C
Preferred Stock shall be proportionality increased. In addition, the
agreement provides for adjustment of the conversion ratio in the event the
number of shares of common stock outstanding is changed as the result
of a subdivision or combination in manner of the common stock or the
making of a stock dividend. The shares and share amounts reported
above have been adjusted for the 1 for 4 reverse stock split in 1997.
NOTE 9 - CONVERSION OF DEBT TO COMMON STOCK
Effective September 30, 1996, the holder of a debenture issued by the
Company prior to 1996 agreed to exchange the debenture and all
accrued interest for 80,803 shares of the Company's common stock (as
adjusted for the 1 for 4 reverse stock split in 1997). The Company
recognized a gain on the conversion of $45,250 representing the
difference in the fair value of the stock at the date of the exchange and
the amount of the debt. The gain is included in income in the
Consolidated Statement of Operations as other revenue.
NOTE 10 - COMMON STOCK ISSUED FOR COMPENSATION
Pursuant to an action by the Board of Directors, during 1996 the
Company issued 5,000 shares of its common stock (as adjusted for the 1
for 4 reverse stock split in 1997) to its former Chief Financial Officer as
compensation. The estimated value of the stock at the date of issue was
$2,188, which is recognized as a general and administrative expense in
the Statement of Operations.
Effective April 1, 1996, the Board of Directors adopted a resolution to
issue 62,500 shares of the Company's common stock (as adjusted for the
1 for 4 reverse stock split in 1997) to the newly appointed President and
Chief Executive Officer of the Company as compensation for his services
during the initial two year term of his appointment. Under the resolution,
the shares shall be subject to forfeiture of a ratable amount of such
shares in the event the officer does not serve the full two years of the
initial term. The Board further resolved to issue 25,000 shares of the
Company's common stock for each successive one year term which the
officer is so appointed by the Board. The 62,500 shares issued were
estimated to have a fair value of $27,344 at the date of the award and are
being recognized over the two year period. As a result, $13,673 and
$9,114 have been recognized as an expense in 1997 and 1996,
respectively. Deferred compensation in the amounts of $4,557 and
$18,230 is reported in the Statements of Stockholders' Equity (Deficiency)
as of December 31, 1997 and 1996, respectively.
NOTE 11 - STOCK PURCHASE WARRANTS
In connection with a financing arrangement entered into in October 1993
and January 1994, the Company issued 57,500 common stock purchase
warrants to the lenders, known as the D.S. Warrants, and 7,500 warrants
to Duncan-Smith Co., the investment banker that arranged the private
placement. The warrants entitle the holder to purchase one share of
common stock per warrant at prices which range from $3.60 to $5.60.
The warrants expire in 1998.
In February 1994, the Company issued warrants to the owner of Duncan-
Smith Co. to purchase 6,250 shares of common stock at a price of $5 per
share. These warrants are exercisable over a five year period from the
date granted. These warrants were issued in connection with a financing
arrangement.
In June 1995, in connection with a lending arrangement, the Company
issued warrants to purchase 112,500 shares of common stock at $3.60
per share. These warrants expire, if not exercised earlier, on December
31, 2000.
Certain of the above mentioned warrants contain anti-dilution provisions
and require the Company to register the warrants under certain
conditions. The Company has reserved 182,500 shares of its unissued
common stock for exercise of these warrants. All of the above shares and
per share amounts have been adjusted for the 1 for 4 reverse stock split
in 1997.
NOTE 12 - STOCK OPTION PLAN
The Company has reserved 250,000 shares of its common stock for
issuance to directors, key employees, franchisees, and others
contractually related to the Company, pursuant to an Omnibus Equity
Compensation Plan adopted by the Company in 1989. The Plan provides
for the granting of both incentive and non-qualified stock options. The
exercise price of the options is not less than the market value of the stock
on the date of grant. Options granted become exercisable at the date of
grant or at such other time as the compensation committee may
determine, and expire in a maximum of five years. The following table
reflects a summary of stock option activity (adjusted for the 1 for 4 reverse
stock split n 1997) for 1997 and 1996.
1997 1996
-------- --------
Shares available for grant at beginning of year 105,691 82,918
Options granted during the year - -
Options forfeited or canceled 62,776 22,773
-------- --------
Shares available for grant at the end of the year 168,467 105,691
======== ========
Shares under option at the end of the year at
option prices of $1.00 to $4.64 71,211 133,987
======== ========
Options exercised since inception of the plan 10,322 10,322
======== ========
NOTE 13 - INCOME TAXES
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires an asset
and liability approach to accounting for income taxes. Under SFAS 109,
deferred tax assets or liabilities are computed on the difference between
the financial statement and income tax basis of assets and liabilities
("temporary differences") using the enacted marginal tax rate. Deferred
income tax expenses or benefits are based on the changes in the
deferred tax asset or liability from period to period.
The Company has a deferred tax asset at December 31, 1997 of
approximately $2,300,000 that is principally the result of income tax net
operating loss carryforwards of approximately $6,000,000. Because of
the uncertainty that the Company will be able to utilize these losses,
which expire in years 2010 through 2012, a valuation allowance for the
full amount of the deferred tax asset has been provided at December 31,
1997. The income tax benefit reported for 1997 represents the effect of
reducing the net loss from discontinued operations and the extraordinary
gain by the applicable tax effects and to which no valuation allowance is
applied.
NOTE 14 - LOANS TO OFFICERS
At the time the Company acquired its Cal-Central Marketing Corporation
subsidiary in October 1993, the Company loaned two of the officers of
CCMC $280,000 on notes that matured in October 1995. The Company's
70 shares of Redeemable Preferred Stock were pledged as collateral for
these loans. During 1996, the Company determined that collectibility of
these loans was doubtful and provided an allowance for the full amount of
the loans. This loss has been charged to general and administrative
expense in the 1996 Consolidated Statement of Operations. During
1997, the Company wrote-off the loans against the allowance.
NOTE 15 - FOURTH QUARTER ADJUSTMENTS
During the first and second quarters of 1996, the Company continued the
corporate restructuring plan it initiated in 1995 by closing its headquarters
office in Oklahoma City, Oklahoma, and transferring these activities to its
expanded and modernized Springfield, Virginia facility. These actions,
designed to realize long-term benefits for the Company, resulted in a one-
time charge of $224,257 in costs in 1996. In furtherance of the
restructuring plan, management determined that it was in the best
interests of the stockholders and the Company to discontinue the minimal
remaining operations of its Cal-Central subsidiary. As a result, the
Company determined that previously capitalized and unamortized
goodwill associated with the acquisition of Cal-Central should be written-
off concurrent with the elimination of that business segment. That
adjustment, in the amount of $1,468,453, was also recorded in the fourth
quarter of 1996.
NOTE 16 - DISCONTINUED OPERATIONS OF SUBSIDIARY
During 1997, the Company decided to dispose of its principal operating
subsidiary United Marketing Solutions, Inc. (formerly United Coupon
Corporation), by sale if a suitable purchaser could be obtained.
Accordingly, the results of operations for 1997 and 1996 have been
presented showing the results of continuing operations and discontinued
operations net of applicable income taxes (income tax benefits). In
addition, the Company has recorded a loss on disposition, in the amount
of $139,432 net of income taxes, resulting from a write-off of the
unamortized goodwill attributable its original acquisition of the subsidiary.
A summary of the subsidiary's operations for 1997 and 1996 are as
follows:
1997 1996
-------- --------
REVENUE
Printing, design and advertising sales, net $5,541,214 $6,391,769
Franchise fees 110,667 185,708
Other 127,559 126,681
---------- ----------
Total revenue 5,779,440 6,704,158
EXPENSES
Cost of sales $3,851,427 $4,017,499
Franchise development 356,944 360,719
General and administrative 2,177,411 2,016,583
Interest 32,002 45,504
---------- ---------
Total expenses 6,417,784 6,440,305
---------- ---------
NET (LOSS) INCOME BEFORE INCOME TAX
BENEFIT (PROVISION) (638,344) 263,853
INCOME TAX BENEFIT (PROVISION) 231,100 (100,200)
----------- -----------
NET (LOSS) INCOME $ (407,244) $ 163,653
Summarized balance sheets of the subsidiary to be discontinued,
exclusive of intercompany accounts, are as follows:
1997 1996
------- --------
ASSETS
Cash and cash equivalents $ 129,639 $ 225,944
Accounts and notes receivable, net 294,880 357,774
Inventory 119,203 140,015
Prepaid expenses 9,140 22,636
---------- ----------
Total current assets 552,862 746,369
Property and equipment, net 2,068,556 2,356,581
Other assets 8,105 56,188
---------- ----------
Total assets $ 2,629,523 $ 3,159,138
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities $ 1,545,204 $ 1,119,070
Current portion of long term liabilities 96,444 143,364
Deferred revenue 120,509 124,788
----------- ------------
Total current liabilities 1,762,157 1,387,222
Long-term liabilities 457,496 462,430
Stockholder's equity 409,870 1,309,486
----------- ------------
Total liabilities and stockholders equity $ 2,629,523 $ 3,159,138
NOTE 17 - FINANCIAL CONDITION
The Company has a deficiency in stockholder's equity at December 31,
1997 of approximately $1,404,000 and a deficit in working capital of
approximately $2,810,000. These conditions result from losses from
operations in recent years. The Company continues to work with its
creditors to restructure its obligations and, as discussed in Note 16, plans
to sell its principal operating subsidiary in the near future. The Company
believes that these actions will enable it to satisfy its obligations in the
future. However, the ability to continue operating during 1998 is
dependent upon the forbearance of certain creditors of the Company and
the availability of short-term credit on an as-needed basis. While
management believes it can work through these issues, there can be no
assurance it will be successful, in which event, the Company may not be
able to continue as a going concern.
NOTE 18 - EXTRAORDINARY GAIN
The extraordinary gain results from liabilities of the Company's Cal-
Central Marketing subsidiary that had its charter terminated during 1997,
and which had the effect of discharging those obligations as they pertain
to the Company. The obligations discharged totaled $493,386 and are
presented in the Consolidated Statement of Operations as an
extraordinary gain net of applicable income taxes of $187,500.
NOTE 19 - LINE OF CREDIT
During 1997, the Company obtained a $100,000 line of credit from a bank
that expires in September 1998. Borrowings on the line bear interest at
the prime rate. The President of the Company has pledged as collateral
a $75,000 certificate of deposit that is personally held, and he and his
spouse have executed a personal guarantee for the remaining $25,000
on the line. There were no borrowings on the line during 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM - FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 129,860
<SECURITIES> 0
<RECEIVABLES> 354,880
<ALLOWANCES> 60,000
<INVENTORY> 119,203
<CURRENT-ASSETS> 553,083
<PP&E> 4,234,621
<DEPRECIATION> 2,166,065
<TOTAL-ASSETS> 2,639,941
<CURRENT-LIABILITIES> 3,362,524
<BONDS> 0
0
4,283
<COMMON> 21,191
<OTHER-SE> (1,429,552)
<TOTAL-LIABILITY-AND-EQUITY> 2,639,941
<SALES> 29,147
<TOTAL-REVENUES> 29,147
<CGS> 0
<TOTAL-COSTS> 401,959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 546,676
<INTEREST-EXPENSE> 173,964
<INCOME-PRETAX> (546,776)
<INCOME-TAX> 129,100
<INCOME-CONTINUING> (675,876)
<DISCONTINUED> (546,676)
<EXTRAORDINARY> 305,886
<CHANGES> 0
<NET-INCOME> (916,666)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
