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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-22475
____________________
DIRECTCOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2942013
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3 Garret Mountain Plaza, Suite 202A 07424
West Paterson, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 523-2500
Securities Registered Pursuant To Section 12(b) of The Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities Registered Pursuant To Section 12(g) of The Act:
Title of each class Name of each exchange on which registered
- ------------------------------ -----------------------------------------
Common stock, .00001 par value Over the counter
________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 2,221,983 shares of voting stock held by
non-affiliates of the Registrant as of February 27, 1998 (based on the aggregate
market value of the stock computed by reference to the price at which the stock
was most recently sold in an arm's-length transaction) was $1,177,651.
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The number of shares of Common Stock of the Registrant outstanding as of
February 27, 1998 was 3,101,983.
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PART I
ITEM 1. BUSINESS.
General
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DirectCom, Inc. ("DirectCom" or the "Company"), established in 1989, is a
full service direct marketing company. DirectCom provides turnkey database
marketing products and services to direct marketers. These services include
data warehouse development and management, data mining, direct mail creative
development, campaign management, and direct mail production. DirectCom assists
its customers in devising marketing strategies that focus on relationship
marketing, and developing marketing programs to improve customer acquisition,
retention, and activation.
DirectCom is headquartered in West Paterson, New Jersey, where it builds
and maintains client data warehouses and manages direct marketing programs.
DirectCom has a Wilmington, Delaware office where it provides creative services
in which graphic artists and copywriters prepare direct mail packages to achieve
a client's marketing objectives. Once a prospective mail piece has been chosen
by a client, DirectCom can print the promotional material at its subsidiary,
Color Graphics, Inc., located in Moorestown, New Jersey.
Business Strategy
- -----------------
DirectCom is implementing the following strategy: (1) the expansion of its
existing customer base through targeted business development in selected
industries; (2) growth through strategic acquisitions; (3) cross selling of
services to existing customers; and (4) introduction of new products and
services.
In accordance with its acquisition strategy, DirectCom successfully
completed the acquisition in October 1996 of Color Graphics, Inc., a company
engaged in printing promotional material for direct mail distribution.
DirectCom's acquisition of Color Graphics was intended to achieve a vertically
integrated company to provide database marketing products and services to direct
marketers.
DirectCom Products and Services
- -------------------------------
DirectCom provides customized services for a specific component of a
client's advertising or marketing program, such as database analysis, data
processing, direct mail creative design, list strategy, production of the
printed insert or envelope product, and packaging and mailing. Alternatively,
DirectCom can provide a turnkey service whereby it assumes responsibility for
the entire project, from marketing planning, design and production of the direct
mail marketing materials, and the actual mailing of the finished printed
products.
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Database Services
DirectCom database services include strategic consulting, data warehouse
development, data mining, list processing and data enhancement. In a typical
engagement, a client supplies DirectCom with customer data from its operational
systems. These files can include current and historical customer information
such as name and address, demographic data, purchase transactions and payment
history. DirectCom supplements the client's file through the use of outside
computer services (i.e., credit bureaus and list companies) and enhances the
client's database with additional variables such as age, income factors and
geographic location. DirectCom develops detailed statistics that measure a
customer's current actual profit contribution, as well as a customer's future
profit potential. From this additional information a client learns about its
customers, their behavior and their relative value. DirectCom provides data
mining services whereby it develops predictive models to forecast various
customer behaviors. DirectCom appends the resulting model scores to each
customer record in the client's database. Based upon these scores, clients are
better able to focus their marketing efforts to sell new and different products
to their existing customers.
List Processing Services
List processing includes the preparation and generation of comprehensive
name and address lists which are used for direct marketing promotions.
DirectCom assists its clients in developing the criteria for selecting names
from the client's database to solicit for specific marketing campaigns.
DirectCom customizes a list processing solution by utilizing a variety of
commercial and proprietary software products, such as Address Conversion and
Reformat, Address Standardization and Merge/Purge.
Creative and Production Services
DirectCom engages in creative services and production services through
Direct Line Productions, a division of DirectCom located in its Wilmington,
Delaware office, and Color Graphics, respectively. DirectCom provides its
client with agency creative services associated with the design and development
of direct marketing promotion materials. DirectCom also provides production
management services whereby it supervises and oversees the entire creative and
direct mail production process on behalf of its clients. These services include
campaign planning, vendor selection and coordination, production quality
assurance and program results analysis.
Production services enable DirectCom to be a one-stop direct marketing
firm. Once a prospective mail piece has been chosen by a client, DirectCom
either prints the promotional material at Color Graphics' facilities or bids the
print work and production of the direct mail to its affiliate, North American
Communications, Inc., or to a third party capable of completing the project in a
timely fashion. Color Graphics has six major multi-color web presses, with gas
and UV drying capability, that can print up to 12 colors. Color Graphics also
has bindery capabilities, including letter folding, foil embossing and card and
label affixing.
Markets and Marketing
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DirectCom's market for its services is nationwide and is not confined to
any specific sector or type of business. Currently, management has focused its
marketing efforts primarily on financial institutions and insurance companies.
Two customers Capital One and Citibank each accounted for more than 10% of
DirectCom's sales revenues in 1997. The loss of either of these financial
institutions could have a material adverse effect on DirectCom. In addition,
DirectCom's customers include, among others, American Express Company, AT&T,
MBNA America Bank National Association and MCI Communications Corp. DirectCom
markets its services primarily through referrals, client recommendations, print
advertising, industry trade shows and conferences.
Management believes that the comprehensive, integrated character of its
services and its expertise in information-based marketing techniques offer
clients a unique and highly effective approach
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to direct mail advertising and marketing. DirectCom is able to analyze data
provided by clients to develop effective marketing campaigns, produce the
marketing material analyze the results of the programs to further refine and
improve the effectiveness of future marketing efforts. Management believes that
its customized services provide its clients with products best suited to each
client's needs.
DirectCom's marketing strategy is to increase the awareness of its existing
customers of the broad range of DirectCom's services, emphasizing DirectCom's
comprehensive, integrated capabilities. In this way, DirectCom plans to focus
on increasing its share of the business of existing customers.
Competition
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The direct mail advertising and marketing market is highly competitive and
fragmented. According to data published by Ward's Business Directory of U.S.
---------------------------------
Private and Public Companies, there were 68 direct mail advertising and
- ----------------------------
marketing service companies which had 1997 annual sales in excess of $5,000,000.
Because the direct mail advertising and marketing service industry is price
sensitive, DirectCom believes that its business will remain susceptible to price
competition for the foreseeable future. To date, Color Graphics competes
primarily on the basis of its high quality and large volume capabilities and to
a much lesser extent on the basis of price. The largest competitors of DirectCom
include such major national publicly trade companies as Axciom Corporation,
Harte-Hanks Communications, Fair Isaac & Company, May & Speh, Metromail
Corporation, Big Flower Holdings and World Color Press.
Employees
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DirectCom employed a total of 108 people as of December 31, 1997, comprised
of 32 people in its database analysis and creative business and 76 people in its
Color Graphics subsidiary.
Environmental Matters
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DirectCom believes that it is substantially in compliance with all
regulations concerning the discharge of materials into the environment, and such
regulations have not had a material effect on the capital expenditures or
operations for DirectCom.
Raw Materials
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The principal raw materials used by Color Graphics are paper and ink.
Paper is purchased directly from major paper producers, including Union Camp,
and indirectly from paper merchants, including Resource Net International and
Clifford Paper. Color Graphics purchases most of its ink from larger suppliers
of ink, including Flint Ink and Sun Chemical Corporation. Raw materials
inventory is maintained on a just-in-time basis.
Forward-Looking Statements
- --------------------------
This report contains forward-looking statements based upon management's
current plans and expectations, related to, among other matters, the proposed
business activities of DirectCom and estimate of amounts that are not yet
determinable. Such statements involve risks and uncertainties which may cause
actual future activities and results of operations to be materially different
from that suggested in this report, including among others, the loss of one or
more significant customers and risks associated with industry consolidation,
acquisitions and competition.
ITEM 2. PROPERTIES.
Since March 1997, DirectCom has been headquartered at 3 Garret Mountain
Plaza, West Paterson, New Jersey 07424. DirectCom leases approximately 10,000
square feet under a lease which commenced March 1, 1997 and expires May 1, 2002
with an option to renew for a five year term.
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Color Graphics leases its facility at 101 Commerce Drive, Moorestown, New
Jersey 08057. The facility occupies 64,700 square feet. Color Graphics
purchased a 66,100 square foot building on approximately four acres of land in
Mount Laurel, New Jersey on December 23, 1997. DirectCom intends to move from
its existing facility in Moorestown, New Jersey upon expiration of its lease on
June 30, 1998 or as soon thereafter as possible. DirectCom also leases its
office in Wilmington, Delaware that consists of 800 square feet. That lease
expires August 31, 1999.
ITEM 3. LEGAL PROCEEDINGS.
There is no material litigation or other legal proceeding pending against
DirectCom.
Color Graphics has been notified by the Equal Employment Opportunity
Commission ("EEOC") of a charge of discrimination under Title VII of the Civil
Rights Act of 1964 by an individual employed as a press helper alleging
discrimination in payment and promotion. The complainant seeks an unspecified
amount of compensatory damages. The case is pending before the New Jersey
Department of Law and Public Safety, Division of Civil Rights (Docket No.
EC22RB-30973). DirectCom intends to vigorously contest these allegations.
Color Graphics also has been named by Mutual Pharmaceutical Company, Inc.
("Mutual") in a letter dated November 17, 1995 as a potentially responsible
party in a Notice of Intent to File a Lawsuit for claims under environmental
laws. Mutual also stated its intention to proceed against other former tenants
of 1120-1170 Orthodox Street, Philadelphia, Pennsylvania. Among the intended
defendants listed by Mutual were Action Arms, Limited and Orthodox Associates
which owned and operated the Geigy Chemical/Action Arms Parcel of the site from
approximately 1978 through 1993 and who owned and operated the Reading Railroad
Parcel of the Site from approximately 1987 through 1993. Also included as
potential defendants were Ciba-Geigy Corp. Color Graphics' involvement arose as
a result of its purchase of PennScan Forms, Inc. which had occupied the building
located on the two acre site from 1975 through 1979. This matter has not
reached the stage where significant liability has been assessed against
DirectCom. No further actions have been taken by Mutual since its letter dated
November 17, 1995. DirectCom has evaluated the matter and believes that it will
not give rise to a material charge to earnings or a material amount of capital
expenditures. This assessment is notwithstanding the ability of DirectCom to
recover on existing insurance policies or from other parties which DirectCom
believes will be held as joint and several obligors under any such liabilities.
However, future developments could alter these conclusions. Management does not
believe, however, that there is a likelihood of a material adverse affect on the
financial condition of Color Graphics or DirectCom in these circumstances.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of DirectCom
through the solicitation of proxies or otherwise during the fourth quarter of
1997.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
DirectCom's common stock (the "Common Stock") is not regularly traded and
there is no established public trading market for these securities.
As of December 31, 1997, there were 594 shareholders of DirectCom's Common
Stock.
DirectCom has not issued any dividends to its shareholders since its
inception. There are no material restrictions that could limit or restrict
management from declaring any such dividends in the future. At the current
time, management has no intention to declare any dividends in the forthcoming
fiscal year.
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Item 6. Selected Financial Data:
The following data insofar as it relates to the years ended December 31, 1997,
1996, 1995, 1994 and 1993, has been derived from the financial statements,
including the balance sheets as of December 31, 1997 and December 31, 1996, and
the related statements of operations and cash flows for the each of the three
years in the period ended December 31, 1997, and notes thereto appearing
elsewhere herein. For a more detailed discussion of the respective periods of
the Company's revenues, expenses, assets and liabilities see Management's
Discussion and Analysis- (a) Results of Operations and (b) Liquidity and Capital
Resources.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenue $25,426,297 $11,208,688 $ 4,665,599 $2,700,281 $ 2,577,448
Costs and expenses 22,505,303 9,396,275 4,502,677 2,328,425 2,206,288
Provision for income taxes 1,308,400 743,140 60,340 158,375 99,455
----------- ----------- ----------- ------------- -----------
Income from continuing operations 1,612,594 1,069,273 102,582 213,481 271,705
Income (loss) from discontinued operations (18,131) 47,575
Minority interest in net income of subsidiary (230,484) (56,064) - - -
----------- ----------- ----------- ------------- -----------
Net income $ 1,382,110 $ 1,013,209 $ 102,582 $ 195,350 $ 319,280
=========== =========== =========== ============= ===========
Basic earnings per share $0.45 $0.34 $0.08 $0.15 $0.24
Diluted earnings per share $o.44 $0.33 $0.07 $0.14 $0.23
Balance Sheet Data
Total assets - Continuing operations $14,299,768 $10,233,808 $ 2,422,410 $ 997,060 $ 1,104,079
Total assets - Discontinued operations - - - 126,102 459,131
Total assets 14,299,768 10,233,808 2,422,410 1,123,162 1,563,210
Total liabilities - Continuing operations 11,309,404 8,775,554 2,177,365 867,670 1,416,649
Total liabilities - Discontinued operations - - - 113,029 194,448
Total liabilities 11,309,404 8,775,554 2,177,365 980,699 1,611,097
Shareholders' equity (deficit) $ 2,990,364 $ 1,458,254 $ 245,045 $ 142,463 $ (47,887)
</TABLE>
- ----------
Previously reported amounts have been restated to segregate the results of
discontinued operations from continuing operations.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PERIODS ENDED DECEMBER 31, 1997, DECEMBER 31, 1996 AND DECEMBER 31, 1995
GENERAL
DirectCom has focused its growth strategy on acquiring complementary
database and direct mail marketing companies. The Company intends to build a
vertically integrated company that provides turnkey database marketing products
and services to direct marketers. These services will include database
management and data warehousing, predictive modeling, marketing strategy
consulting, agency creative, production management, direct mail production and
fulfillment. In October 1996, the Company entered the printing business with the
purchase of 82% of the stock of Color Graphics ("Color Graphics").
Due to this acquisition the results of operations for 1997 and 1996 are not
comparable to prior years. See Note 3 of Notes to Consolidated Financial
Statements for additional information concerning this acquisition.
(A) RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1997
-----------------------
Database Printing Total
----------------------- -------------------------- -----------------------
<S> <C> <C> <C>
Revenues $10,584,057 $14,842,240 $25,426,297
Gross profit $ 3,145,540 $ 7,100,211 $10,245,751
Operating income $ 616,791 $ 2,304,203 $ 2,920,994
1996
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Revenues $ 7,867,656 $ 3,341,031 $11,208,688
Gross profit $ 2,725,947 $ 1,421,112 $ 4,147,059
Operating income $ 1,256,448 $ 555,966 $ 1,812,413
1995
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Revenues $ 4,665,599 $ - $ 4,665,599
Gross profit $ 1,433,870 $ - $ 1,433,870
Operating income $ 162,922 $ - $ 162,922
</TABLE>
Consolidated net revenues of $25,426,297 in 1997 represent an increase of
$14,217,609 over 1996. Operating income of $2,920,994 represents an increase of
$1,108,581 over 1996. The increase in the net revenues and operating income of
the Company resulted from the acquisition of Color Graphics on October 1, 1996
and the continued revenue growth of the database segment.
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Revenues
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Revenues in 1995 and 1996 were derived primarily from the Company's database
operations. Revenues increased significantly with the acquisition of Color
Graphics on October 1, 1996.
Net revenues increased $14,217,609 from $11,208,688 in 1996 to $25,426,297 in
1997 and increased $6,543,089 in 1996 from $4,665,599 in 1995 to $11,208,688 in
1996. The net revenue increase during 1997 was primarily attributable to the
acquisition of Color Graphics which generated 59% of consolidated net
revenues for 1997, as compared to 30% of the consolidated net revenues for 1996.
The 1997 growth in revenue resulted from expanded direct mail printing
services to customers in the credit card and lettershop industries, including
Capital One, Citibank and Communications Concept, Inc.
The increased database and advertising revenue during 1997 resulted from
increased sales to existing customers, including Capital One, Bank of New York
(Delaware) and Fleet Corporation, in addition to sales to several new clients
including Daytimers, Inc. and Bank United. The increase in revenue during 1996
resulted from increased sales to existing customers including First USA, Bank of
New York (Delaware) and Fleet Corporation, in addition to sales to several new
clients including Beneficial Bank and CoreStates. Customers in the banking
industry accounted for 95%, 97% and 90% of the Company's database revenues in
1997, 1996 and 1995.
Cost of Revenue
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The Company's cost of revenue, as a percentage of net revenues was 59.7%, 63%
and 69.2% in 1997, 1996 and 1995, respectively. The year to year comparative
decrease resulted from an increase in the database cost of revenue and offset in
part by a decrease in the printing cost of revenue.
The cost of revenue for database in 1997, in comparison to database revenues,
increased 5% from 1996 and decreased 4% in 1996 as compared to 1995. The current
period increase is a result of costs associated with salary expenses due to
additional staffing requirements to maintain increased production demands. The
prior period decrease resulted primarily from the development of internal
resources to fulfill production requirements.
The Color Graphics acquisition, cost of revenue as a percentage of sales
provided an overall decrease of 5.3% for the current period and a 11.8% decrease
for the prior period comparison.
Selling, General and Administrative Expenses
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Selling, general and administrative expenses increased $1,506,048 in 1997 and
increased $691,900 in 1996. The increase in 1997 expenses resulted primarily
from: a) the acquisition of Color Graphics, contributing 58% of the current
increase; b) increased database expenses related to computer equipment upgrades
and supplies; and c) increased lease expense associated with the relocation, in
March, of the database corporate office and the costs incurred for the move. The
increase in 1996 expenses resulted primarily from: a) increase in database
expenses and supplies related to computer equipment upgrades; b) costs
associated with promotion, travel and entertainment to secure new customers; c)
commission expenses relating to growth of the advertising and marketing
services; and d) the acquisition of Color Graphics, Inc. accounted for 43.1% of
the increase in selling general and administrative expenses for the 1996 period.
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Interest Expense
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Interest expense increased $253,189 in 1997 and increased $124,572 in 1996 as
compared to the prior period. A significant portion of the increase in 1997 and
1996 resulted from the acquisition of Color Graphics. The 1997 increase resulted
from Color Graphics equipment loans and revolving line of credit. The increase
in 1996 resulted primarily from: a) $1,000,000 loan acquired from a related
party to purchase Color Graphics and b) Color Graphics borrowings on both their
revolving line of credit and equipment loans. The increase for the current and
prior periods is not necessarily driven by the interest rate, but changes due to
increased debt levels.
Depreciation and Amortization
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Depreciation and amortization expenses relates to the depreciation of capital
assets. The Company's policy is to amortize goodwill over a fifteen year period.
Depreciation and amortization expense increased $700,874 in 1997, $247,226 in
1996 and $23,967 in 1995 as compared to prior periods. The 1997 increase relates
to the acquisition of Color Graphics, accounting for approximately 80% of
the increase. The 1996 increase resulted primarily from the purchase of computer
equipment and software necessary to fulfill the demand by database customers and
to support additional staffing. The acquisition of Color Graphics for
approximately 60% of the increase for 1996.
Provision for Income Taxes
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Provision for income taxes increased $565,260 in 1997 and $682,830 in 1996. The
increase in 1997 and 1996 was due to the increase in taxable income. A
reconciliation of the provision for income taxes is included in Note 15 of Notes
to Consolidated Financial Statements.
Inflation
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Inflation and price increases do not materially affect the Company's gross
profit margin as contract prices are adjusted at the same time increases are
implemented by outside vendors.
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LIQUIDITY AND CAPITAL RESOURCES
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<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Working capital (deficit) $4,077,593 $2,705,915 $(62,302)
Cash 2,837,427 1,080,630 520,865
Cash-restricted 1,400,000
Cash provided by operating activities 4,653,661 1,341,056 394,318
Cash used in investing activities 3,180,265 345,346 133,600
Cash provided by (used in) financing activities 283,401 (435,945) (15,591)
</TABLE>
Working capital increased in both 1997 and 1996 over the corresponding prior
year periods due primarily to increased cash flow from operations which resulted
in higher cash levels.
The increase in cash flows from operations in 1997 and 1996 resulted primarily
from improved profitability and strong cash collections.
The increased cash used in investing activities in both 1997 and 1996 resulted
primarily from higher capital expenditures. The current period increase resulted
primarily from increased capital expenditures relating to the printing segment,
Color Graphics, Inc. acquired in October of 1996. In December 1997, the Company
purchased a 66,100 square foot building and approximately 4 acres of land, for
$1,800,000, in New Jersey to relocate the Color Graphics, Inc. operation. The
acquisition was financed through a bond issue in the amount of $3,200,000 (Note
10). Color Graphics, Inc. current period expenditures for furniture and
equipment account for approximately 69% of the current furniture and equipment
expenditures. The Company expects to continue to invest in capital assets to
support its growth.
The cash provided by financing activities resulted from the Company securing
$3,200,000 in funding, in December 1997, financed through a bond issue from New
Jersey Economic Development Authority and administered by CoreStates Bank, N.A.
(Note 10). The Company utilized $1,800,000, of these funds, to purchase a
building and land, the balance, $1,400,000, is classified as restricted cash
and will be utilized to pay for improvements to the building and relocation of
the equipment. Additionally in the current period the Company reduced a portion
of their long term debt obligation through repayment of a related party note, in
addition to repayment of their lines of credit. In 1996, the Company borrowed
$1,000,000 from a related party to partially finance the acquisition of Color
Graphics, Inc. In addition the Company received $500,000 from the sale of a
convertible debenture in 1996. The Company used these proceeds and cash flow
from operations to reduce a significant portion of short term debt acquired from
Color Graphics, Inc. In addition, the Company purchased 160,000 shares of its
common stock held by two current officers for $300,000.
At December 31, 1997, the Company had outstanding debt of $6,652,882 primarily
in the form of notes payable.
At December 31, 1997 the amount available under the Company's lines of credit
was approximately $3,500,000.
The Company anticipates that current cash balances as well as anticipated cash
flows from operations will provide sufficient funds to meet its working capital
and capital expenditure needs at least through December 31, 1998. However, if
the pace or size of the Company's acquisition or capital expenditure activities
increase, then additional debt or financing may be necessary.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of DirectCom, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of DirectCom, Inc., and subsidiary as of and for the year
ended December 31, 1997, listed in Item 14(a) of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DirectCom, Inc.
and Subsidiary as of December 31, 1997, and the consolidated results of their
operations and their cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
March 31, 1998
McLean, Virginia
Coopers & Lybrand L.L.P.
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Thompson Dugan, PC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
March 20 , 1997
To the Board of Directors and
Shareholders of DirectCom, Inc.
We have audited the accompanying consolidated balance sheets of DirectCom, Inc.,
formerly North American Integrated Marketing, Inc., and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and the
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and schedule 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
DirectCom, Inc. and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
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DIRECTCOM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,837,427 $ 1,080,630
Cash - restricted 1,400,000
Accounts receivable, less allowance for
doubtful accounts of $121,171 in 1997 and $53,093 in 1996 2,200,749 4,236,638
Inventories 450,837 466,117
Prepaid and other current assets 903,232 422,259
----------- -----------
Total current assets 7,792,245 6,205,644
PROPERTY, PLANT AND EQUIPMENT, Net 6,002,779 3,849,063
OTHER ASSETS 504,744 179,101
----------- -----------
TOTAL ASSETS $14,299,768 $10,233,808
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ - $ 466,593
Current maturities of long-term debt 437,430 210,175
Current maturities of long-term debt - related party - 65,000
Accounts payable 351,931 764,913
Accounts payable - related company 2,315,860 371,315
Income taxes payable 82,847 703,482
Accrued expenses and other current liabilities 526,584 818,776
Deferred revenue - 99,475
----------- -----------
Total current liabilities 3,714,652 3,499,729
LONG-TERM DEBT 6,215,452 2,952,713
LONG-TERM DEBT - RELATED COMPANY - 925,000
DEFERRED INCOME TAXES 577,000 542,200
OTHER LONG-TERM LIABILITIES - 284,096
MINORITY INTEREST 802,300 571,816
----------- -----------
TOTAL LIABILITIES 11,309,404 8,775,554
SHAREHOLDERS' EQUITY
Preferred stock $.00001 par value - authorized 10,000,000 shares;
issued and outstanding: none - -
Common stock $.00001 par value - authorized 60,000,000 shares;
issued: 3,421,983 shares in 1997 and 3,341,983 in 1996 of which
320,000 shares are held as treasury stock. 34 33
Paid-in capital 650,181 500,182
Retained earnings 2,645,149 1,263,039
----------- -----------
3,295,364 1,763,254
Less treasury stock, at cost (305,000) (305,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 2,990,364 1,458,254
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,299,768 $10,233,808
=========== ===========
</TABLE>
See notes to consolidated financial statements
14
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Database $10,584,057 $ 7,867,656 $ 4,665,599
Printing - related company 1,473,523 672,800 -
Printing 13,368,717 2,668,232 -
----------- ----------- -----------
Total revenues 25,426,297 11,208,688 4,665,599
COST OF REVENUE
Database - related company 4,799,400 4,070,042 1,974,938
Database - other 2,639,117 1,071,667 1,256,791
Printing 7,742,029 1,919,920 -
----------- ----------- -----------
Total cost of revenue 15,180,546 7,061,629 3,231,729
Selling, general and
administrative expense 3,385,587 1,879,539 1,187,639
Administrative fee - related party (Note 8) 1,780,000 - -
Interest expense 380,696 127,507 2,935
Depreciation and amortization 1,028,474 327,600 80,374
Buyout of stock option (Note 3) 750,000 - -
----------- ----------- -----------
Total costs and expenses 22,505,303 9,396,275 4,502,677
----------- ----------- -----------
Income from operations before income taxes
and minority interest 2,920,994 1,812,413 162,922
Provision for income taxes 1,308,400 743,140 60,340
----------- ----------- -----------
Income from continuing operations before 1,612,594 1,069,273 102,582
minority interest
Minority interest in income of subsidiary 230,484 56,064 -
----------- ----------- -----------
Net income $ 1,382,110 $ 1,013,209 $ 102,582
=========== =========== ===========
BASIC EARNINGS PER SHARE $0.45 $0.34 $0.08
=========== =========== ===========
DILUTED EARNINGS PER SHARE $0.44 $0.33 $0.07
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------
RETAINED
NUMBER PAID - IN EARNINGS TREASURY
OF SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
----------- ------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 as previously reported 16,040,073 $ 160 $ 55 $ 147,248 $ (5,000) $ 142,463
One - for - twelve reverse common stock split 14,703,092 (147) 147 - - -
----------- ------- ---------- ------------- ----------- -----------
Balance at December 31, 1994 as adjusted 1,336,981 13 202 147,248 (5,000) 142,463
Net income - - - 102,582 - 102,582
----------- ------- ---------- ------------- ----------- -----------
Balance at December 31, 1995 1,336,981 13 202 249,830 (5,000) 245,045
Purchase of treasury stock, at cost (300,000) (300,000)
Common stock issued in exchange for
convertible debenture 2,005,002 20 499,980 - - 500,000
Net income - - - 1,013,209 - 1,013,209
----------- ------- ---------- ------------- ----------- -----------
Balance at December 31, 1996 3,341,983 33 500,182 1,263,039 (305,000) 1,458,254
Issuance of common stock 80,000 1 149,999 - - 150,000
Net income - - - 1,382,110 - 1,382,110
----------- ------- ---------- ------------- ----------- -----------
Balance at December 31, 1997 3,421,983 $ 34 $ 650,181 $2,645,149 $ (305,000) $2,990,364
=========== ======= ========== ============= =========== ===========
</TABLE>
See notes to consolidated financial statements
16
<PAGE>
DIRECTCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,382,110 $ 1,013,209 $ 102,582
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,028,474 327,600 80,374
Bad debt expense 107,906 24,000 21,000
Buyout of stock option 500,000 - -
Minority interest 230,484 56,064 -
Deferred taxes 73,800 2,760 -
(Gain) loss on asset disposition (1,925) - 5,599
(Increase) decrease in: (excluding effects of acquisition)
Accounts receivable, net 1,927,983 527,341 (1,112,285)
Inventory 15,280 67,471
Prepaid and other current assets (519,973) 23,824 (28,238)
Other non current assets (325,643) 6,434
Increase (decrease) in: (excluding effects of aquisition)
Accounts payable (412,982) 267,855 (11,434)
Accounts payable - related company 1,944,545 (1,521,890) 1,353,751
Income taxes payable (620,635) 664,979 2,371
Accrued expenses and other current liabilities (292,192) (90,528) 12,298
Long term liabilities (284,096) (84,238)
Deferred revenue (99,475) 56,175 (31,700)
----------- ----------- ------------
Net Cash provided by operating activities 4,653,661 1,341,056 394,318
Cash flows from investing activities:
Business acquisition, net of cash acquired - (91,470) -
Purchase of furniture and equipment (1,417,265) (253,876) (148,219)
Purchase of building and land (1,800,000)
Proceeds from the sale of equipment 37,000 - 1,546
Cash provided by (used in) investing
activities - discontinued operations - - 13,073
----------- ----------- ------------
Net Cash used in investing activities (3,180,265) (345,346) (133,600)
----------- ----------- -----------
Cash flows from financing activities:
Repayments of notes payable (466,593) (1,562,930) -
Repayments of long-term debt (210,006) (73,015) (15,591)
Cash - restricted (1,400,000)
Proceeds from issuance of long-term debt -
related company - 1,000,000 -
Repayments of long-term debt - related company (990,000) - -
Sale of common stock 150,000
Purchase of treasury stock - (300,000) -
Sale of debenture - 500,000 -
Proceeds from issuance of long-term debt 3,200,000 - -
----------- ----------- -----------
Net cash provided by (used in) financing activities 283,401 (435,945) (15,591)
----------- ------------ -----------
Net increase in cash 1,756,797 559,765 245,127
Cash at beginning of year 1,080,630 520,865 275,738
----------- ----------- -----------
Cash at end of year $ 2,837,427 $ 1,080,630 $ 520,865
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
DirectCom, Inc. (the "Company"), is a Delaware corporation. On September 5, 1997
the Company, previously called North American Integrated Marketing, Inc.,
changed its name to DirectCom, Inc. The Company is a direct mail response
agency specializing in database and advertising and marketing services and
maintains offices in West Paterson, New Jersey and Wilmington, Delaware. In
October 1996, the Company entered the printing business with the acquisition of
82% of the stock of Color Graphics which is located in Morristown, New
Jersey.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management, who is
responsible for their integrity and objectivity.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its 82% owned subsidiary, Color Graphics. All intercompany transactions
and balances between companies have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Paper inventory is stated at last in, first out (LIFO) cost. The LIFO value is
not materially different from the current cost of such inventory. All other
inventory is stated at the lower of cost (first in, first out) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation is computed
using the straight line and accelerated methods based on estimated useful lives
of the assets which range from five to twenty years. Leasehold improvements are
amortized over the estimated useful lives or lease terms, as appropriate.
18
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
ASSET IMPAIRMENT
At each balance sheet date, management evaluates the recoverability of
identifiable tangible and intangible assets using certain financial indicators,
such as historical and future ability to generate income from operations. The
Company's policy is to record an impairment loss against the net unamortized
cost of the asset in the period when it is determined that the carrying amount
of the asset may not be recoverable. This determination is based on an
evaluation of such factors as the occurrence of a significant event, a
significant change in environment in which the business operates, or if the
expected future net cash flows (undiscounted without interest) would be less
than the carrying amount of the asset.
CONCENTRATION OF CREDIT RISK
The Company's market for its products and services is nationwide and is not
confined to any specific sector or type of business although a substantial
portion of the Company's revenue is generated from the banking and credit card
industries. In the normal course of business, the Company provides credit to
customers under standard terms without collateral.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and current liabilities approximate fair
value because of their short term nature. Based on the borrowing rates currently
available to the Company for loans similar in terms and average maturities, the
stated value of long term debt approximated fair value at December 31, 1997.
REVENUE RECOGNITION
The Company provides database services by preparing marketing reports and direct
marketing mailing lists and printing services providing printed material for
direct mail packages. Services are provided on a project-by-project basis under
periodic service arrangements that extend up to one year. Revenue and related
costs are recognized on a project-by-project basis in the period in which the
services are provided.
Deferred revenues and deferred costs arise when invoices are rendered or costs
incurred prior to performing services. Deferred costs exclude salaries, which
are expended as incurred.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising costs
included in selling, general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995 were $62,240, $75,857 and $42,591,
respectively.
19
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
INCOME TAXES
Deferred income taxes are provided under the asset and liability method. The
Company recognizes deferred tax liabilities and assets for the expected future
income tax consequences of events that have been recognized in the Company's
financial statements. Under this method, deferred tax assets and liabilities are
determined based on temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the temporary differences are expected to
reverse. Income tax expense consists of the Company's current liability for
federal and state taxes and the change in the Company's deferred income tax
asset and liabilities.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" encourages, but does not require companies to record compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No, 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
EARNINGS PER SHARE
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share. Basic
earnings per share is based on the weighted average number of outstanding common
shares for the period. Diluted earnings per share adjusts the weighted average
for the potential dilution that could occur if the stock options, warrants or
other convertible securities were exercised or converted into common stock.
Differences between historical quarterly earnings per share amounts, reported on
primary earnings per share basis, and amounts now reported as basic, are not
material.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997, which are both effective for
the year ending December 31, 1998. SFAS No. 130 establishes standards for
reporting comprehensive income in a full set of general purpose financial
statements either in the income statement or in a separate statement. SFAS No.
131 establishes standards for reporting information about operating segments,
including related disclosures and products and services, geographic areas and
major customers. These standards are not expected to have a material impact on
the financial position or results of operations of the Company.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
20
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 - ACQUISITIONS
Effective October 1, 1996, pursuant to a Stock Purchase Agreement dated
September 30, 1996, the Company acquired 82% of the outstanding common stock of
Color Graphics for a total consideration of $1,909,283. The consideration
consisted of $1,000,000 in cash paid by the Company, $286,000 in cash paid by
Color Graphics the assumption of liabilities totaling $250,000 and the
transfer of a life insurance policy valued at $210,806 by Color Graphics.
In addition, Color Graphics assigned an accounts receivable of $464,000
which Color Graphics had previously written off. The Company has assigned
a value of $162,477 to this receivable for purchase accounting. The Company
obtained the $1,000,000 from North American Communications, Inc. (NAC), a
related party (see Note 8). In addition, the Company granted to a consultant an
option to acquire 10 percent of the Color Graphics stock at an exercise
price of $1,058.82 per share or $30,000 in the aggregate through September 30,
2001 for his role in consummating the acquisition. The acquisition was accounted
for as a purchase and the excess of the $2,309,730 fair value of the net assets
acquired over the total consideration was allocated to "Property, Plant and
Equipment" in the accompanying consolidated balance sheet and is being
amortized over a fifteen year period on a straight line basis.
The pro forma results listed below are unaudited and reflect purchase price
accounting adjustments assuming the acquisition occurred at January 1, 1996. The
pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire period presented.
In addition, they are not intended to be a projection of future results and do
not reflect any efficiencies that might be achieved from the combined operation.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revenue $27,275,722
Net income 924,627
Basic earnings per share $ 0.28
</TABLE>
During 1997, the Company paid $750,000 to the consultant to buy out his option
to purchase 10% of the Color Graphics stock. This payment was recorded as
an operating expense in the Statement of Operations.
NOTE 4 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Paper $293,373 $321,623
Other raw materials 93,823 81,628
Work-in-process 63,641 62,866
-------- --------
$450,837 $466,117
======== ========
</TABLE>
21
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 - PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- ------------
<S> <C> <C>
Deferred income taxes $133,000 $172,000
Due from others - income taxes - 161,680
Refundable state taxes 13,876 66,388
Prepaid income taxes 676,591 -
Other current assets 79,765 22,191
-------- --------
$903,232 $422,259
======== ========
</TABLE>
NOTE 6 - PROPERTY PLANT AND EQUIPMENT
Property plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------ -----------
<S> <C> <C>
Machinery and equipment $ 3,949,949 $3,561,995
Building and land 1,800,000
Office furniture and equipment 98,618 105,742
Transportation equipment 88,528 135,737
Computer equipment and software 830,983 432,185
Leasehold improvements 88,319 61,703
Construction in progress 608,500 63,496
----------- ----------
7,464,897 4,360,858
Accumulated depreciation and amortization (1,462,118) (511,795)
----------- ----------
$ 6,002,779 $3,849,063
=========== ==========
</TABLE>
22
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash surrender value of life insurance $111,153 $ 93,207
Deposits 37,942 85,894
Debt issuance cost 303,178 -
Other 52,471 -
-------- --------
$504,744 $179,101
======== ========
</TABLE>
NOTE 8 - RELATED-PARTY TRANSACTIONS
Certain of the Company's major shareholders also exercise control over North
American Communications, Inc. (NAC), an affiliated company. The Company's
related party revenue is generated through printed materials for direct mail
packages. The Company's related party expenses result from the production,
printing and mailing of direct mail packages in addition to salary and
insurance expenses.
ACCOUNTS RECEIVABLE
Accounts receivable include amounts due from NAC as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------------- ---------------
<S> <C> <C>
NAC $ - $ 569,386
================ ===============
</TABLE>
ACCOUNTS PAYABLE - RELATED COMPANY
The accounts payable - related company at December 31, 1997 and 1996 represents
amounts due to NAC for printing and mailing services.
NOTE PAYABLE - RELATED COMPANY
During 1996, the Company borrowed $1,000,000 from NAC to partially finance the
acquisition of Color Graphics. The uncollateralized loan was represented
by a promissory note bearing interest at 8%, and payable in monthly installments
of $5,000 plus interest with payment in full due September 30, 2006. The
outstanding loan amount at December 31, 1996 was $990,000. This note was repaid
in 1997, with cash generated from operations. Interest expense related to this
note was $46,499 and $26,665 for the years ended December 31, 1997 and 1996,
respectively.
No borrowings were outstanding with NAC at December 31, 1997.
23
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 - RELATED-PARTY TRANSACTIONS (Continued)
OTHER EXPENSES
Salary Expense
Certain NAC employees perform services for the Company. Salary expense was
recorded by the Company based on an estimate of the related NAC employees' time
devoted to performing services for the Company. For the years ended December 31,
1997, 1996, and 1995, the expense recorded for these services was approximately
$79,967, $51,000 and $102,973, respectively. As of December 31, 1997 the amount
payable for these services is $17,625.
Insurance Expense
Insurance coverage is provided to the Company and NAC under one policy.
Insurance expense attributable to the Company was based on sales, number of
employees or specific identification of insured property. Insurance expense for
the years ended December 31, 1997, 1996 and 1995 was $102,742, $9,910 and
$12,917, respectively. As of December 31, 1997 the amount payable for the
provided coverage is $48,744.
Employment Contract
The Company has entered into an employment contract with an officer of the
Company for a five year term ending September 30, 2001. Under the terms of the
agreement the officer will receive an annual base salary of $325,000 and fringe
benefits, including a company automobile, health and disability insurance. In
addition, the officer has the right to require the Company to purchase his
common stock of Color Graphics at a price equal to its fair market value
as determined by an independent appraisal, exercisable at any time after the
earlier of October 1, 2001 or his termination of employment for whatever reason.
The Company has a similar right to purchase the stock on the same terms. In the
event of the officer's death, the first $1,000,000 of the purchase price of
common stock will be paid from the officer's life insurance policy paid for by
the Company. Administrative Fee
On December 15, 1997 the Company entered into a management agreement with a
related party. The agreement provides for administrative and management support
services. As a result an administrative fee of $1,780,000 was recorded in
December 1997.
24
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9 - LINES OF CREDIT
At December 31, 1997 and 1996 the Company had available a revolving line of
credit in the maximum aggregate principal amount of $1,000,000 and with interest
payable monthly, which expires on June 30, 1998, at the lender's basic rate plus
1 percent (9.50 percent at December 31, 1997). Borrowings are used to provide
working capital to fund inventory purchases and for payment of certain other
costs approved by the lender incidental to the loan. The borrowings under the
line of credit are collateralized by the Company's receivables, equipment and
fixtures. The repayment of the loan is guaranteed by NAC, an affiliated company.
In addition, a subordination agreement was executed by NAC and the shareholders
of the Company.
There were no borrowings outstanding under the lines of credit at December 31,
1997 and 1996, respectively.
At December 31, 1997 the Company's subsidiary had a short-term revolving line of
credit with United States National Bank, which expires on June 30, 1998, in the
maximum aggregate principal amount of $2,500,000 and with interest payable
monthly at the lender's rate plus 1% (9.50 percent at December 31, 1997). The
agreement permits borrowing on a percentage of qualified accounts receivable and
inventory as defined in the agreement. The borrowings under the line of credit
are collateralized by the subsidiary's accounts receivable and equipment and
guaranteed by the Company and NAC, an affiliated company. This debt is cross
collateralized with the term financing described in Note 11.
Borrowings outstanding under the line of credit were $-0- and $466,593 at
December 31, 1997 and 1996, respectively.
25
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 10 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------- -------------------
<S> <C> <C>
Note payable to United States National Bank in monthly
installments, including interest at 9.73%, for the first 5
years. The note payments will then be reset for the next five
years based on interest rates as specified in the agreement
(see Note 9 for collateral guarantees). $2,952,882 $3,155,713
Note payable to CoresStates Bank, N.A. with interest at
bank's prime rate (9.5% at December 31, 1997) plus 2% 3,200,000
Promissory note A payable to a consultant with interest at
8% due on April 10, 1998. 250,000 -
Promissory note B payable to a consultant with interest at
8% due on April 10, 1999. 250,000 -
Installment note payable to a bank with interest at 11.66%,
collateralized by a motor vehicle and payable in monthly
installments of $726, due through May 1997. - 3,675
Installment note payable to bank with interest at 8.25%,
collateralized by a motor vehicle and payable in monthly
installments of $780, due through May 1997 - 3,500
---------- ----------
6,652,882 3,162,888
Less: Current maturities 437,430 210,175
---------- ----------
$6,215,452 $2,952,713
========== ==========
</TABLE>
At December 31, 1997 the scheduled principal payments on the debt are as
follows:
<TABLE>
<S> <C> <C>
1998 $ 437,430
1999 494,909
2000 269,476
2001 298,012
2002 328,778
Thereafter 1,624,277
----------
$3,452,882
==========
</TABLE>
On December 24, 1997, the Company entered into a loan agreement with the New
Jersey Economic Development Authority for $3,200,000. This loan was assigned to
CoreStates Bank, N.A. as trustee, and the proceeds from the long term debt
arrangement will be used to finance the Company's purchase of a building and
related land. The loan accrues interest at the bank's prime rate (9.5% as of
December 31, 1997) plus 2% and has a maturity date of December 1, 2017.
Principal repayments will commence upon completion of the build out of the
facility. As of December 31, 1997 the Company has recorded $1,800,000 in
property, plant and equipment related to the original acquisition of the land
and building and $1,400,000 as cash - restricted. The loan balance of
$3,200,000 is included in the long term debt.
26
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Accrued payroll $160,186 $ 95,588
Accrued vacation 130,708 128,186
Accrued rent 45,645 171,780
Customer deposits - 117,909
Liability related to acquisition - 250,000
Accrued healthcare 60,000 -
Accrued expenses - other 130,045 55,313
-------- --------
$526,584 $818,776
======== ========
</TABLE>
NOTE 12 - LEASES
The Company leases its plant and office facilities under noncancelable operating
leases which expire on various dates through May 1, 2002. In some cases the
lease requires the Company to pay for insurance, operating expenses and a
portion of the real estate taxes. The Company's Color Graphics facility
lease expires in April 1998. The Company has negotiated the acquisition of
property, for the relocation of Color Graphics facility, and will continue
the current leasing arrangements on an extended lease agreement through June
1998. The future minimum lease payments at December 31, 1997 under the
agreements and other operating leases are as follows:
<TABLE>
<S> <C> <C>
1998 $275,611
1999 167,531
2000 161,452
2001 166,120
2002 70,028
--------
$840,742
========
</TABLE>
Rent expense was $597,648, $191,593 and $68,439 for the years ended December 31,
1997, 1996 and 1995, respectively.
NOTE 13 - EMPLOYEE BENEFITS
The Company and its subsidiary have two voluntary retirement plans that cover
all eligible employees. Effective January 1, 1997 both plans provide for annual
matching contributions by the Company at the discretion of the Company's board
of directors. Contribution's to the plans totaled $35,070 for the year ended
December 31, 1997. The Company did not make a contribution for the years ended
December 31, 1996 and 1995.
27
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14 - SHAREHOLDERS' EQUITY
Common Stock
In April, 1997, the stockholders approved a proposal to adopt certain amendments
to the Company's Certificate of Incorporation to (1) effect a 1 for 12 reverse
stock split of the Company's common stock and (2) to change the total number of
shares the Company is authorized to issue to 70,000,000 shares, consisting of
60,000,000 of common stock, having a par value of $.00001 per share and
10,000,000 shares of preferred stock, having a par value of $.00001 per share.
All references in the accompanying financial statements to the number of common
shares and per-share amounts for all years prior to 1997 have been restated to
reflect the reverse stock split.
On May 17, 1996, the Company entered into a Convertible Debenture Purchase
Agreement with First Commercial and Finance Corp., Establishment, a Lichtenstein
corporation ("Purchaser"). The Company agreed to issue and sell a non-interest
bearing convertible debenture (the "Debenture") in the amount of $500,000 due
May 17, 1998.
Pursuant to the Agreement the Purchaser converted the entire principal amount of
the Debenture into 2,005,002 shares of common stock of the Company on September
25, 1996. Such conversion extinguished any cash payments due under the
Debenture.
Stock Option Plan
In March 1996, the Company adopted the Stock Option Plan ("Plan") which provided
for the issuance of non-qualified stock options and incentive stock options as
well as stock appreciation rights (in connection with options) to eligible
employees, an officer, consultants and advisors of the Company. Under the terms
of this plan, options to purchase 833,333 shares of Common Stock were reserved
for issuance and are generally are granted at not less than fair market value.
They become exercisable as established by the Board of Directors or the
Compensation Committee, and generally expire ten years from the date of grant.
As of December 31, 1996, options to purchase 340,000 shares of Common Stock at
$.48 per share were outstanding of which 308,333 shares were vested.
The fair value of the options granted was estimated using a valuation model with
the following assumptions: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 6.5% and expected term of 5 years. The weighted
average fair value of options granted in 1996 was $.60 per share. The weighted
average remaining contractual life of the options outstanding was approximately
9 years. Had the Company followed SFAS 123 rather than APB25, the reported net
income for the year ended December 31, 1996 would have been approximately
$928,200 ($.39 per share). There were no options granted during 1997. Options
for 493,333 shares were available for future grant under the plan at
December 31, 1997. To date, the Company has not issued any stock appreciation
rights under this plan.
Restricted Stock Plan
Effective January 1, 1992 the Company adopted a Restricted Stock Plan. The
Restricted Stock Plan authorizes the issuance of 16,667 shares of restricted
stock to certain key employees of the Company over a five-year period. Employees
become vested in shares of restricted stock issued to them for the current
fiscal year if they remained continuously employed by the Company for the entire
fiscal year. If the employee separates from service on or before the last day of
such fiscal year (other than for separations from service due to death,
disability or unjust termination), all shares of the Company's stock allocated
to that employee for such fiscal year shall be forfeited. Once vested, all
restrictions on the shares issued expire. Restricted shares outstanding for the
plan totaled 3,333 at December 31, 1997 and 1996.
28
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14 - SHAREHOLDERS' EQUITY (Continued)
Treasury Stock On December 5, 1996 the Board of Directors approved the purchase
of 160,000 shares of common stock from two current officers of the Company for
$300,000.
On September 30, 1994, the Board of Directors approved the purchase of 160,000
shares of common stock held by a former officer for $5,000.00.
NOTE 15 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------------- ---------------- -----------------
<S> <C> <C> <C>
Current provision:
Federal $ 958,000 $577,800 $ 61,200
State 276,600 168,100 16,250
---------- -------- --------
Total current 1,234,600 745,900 77,450
---------- -------- --------
Deferred (benefit) provision:
Federal 56,200 600 (15,400)
State 17,600 (3,360) (1,710)
---------- -------- --------
Total deferred 73,800 (2,760) (17,110)
---------- -------- --------
Total $1,308,400 $743,140 $ 60,340
========== ======== ========
</TABLE>
The federal statutory rate differs from the Company's effective income tax rate
on income from continuing operations as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in the tax rate resulting
from:
State income tax, net of federal effect 5.9 5.9 5.9
Nondeductible expenses 1.2 1.1 4.7
Accruals 3.8 - (4.0)
Other (0.1) - (3.6)
---- ---- ----
44.8% 41.0% 37.0%
==== ==== ====
</TABLE>
29
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 15 - INCOME TAXES - (Continued)The components of the deferred tax asset and
liabilities, as reflected on the balance sheet, consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------------- ------------------- -------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation $(491,892) $(513,083) $ -
State taxes (65,449) (55,057) -
--------- --------- -------
Total deferred tax liabilities (557,341) (568,140) -
--------- --------- -------
Deferred tax assets
Accounts receivable 41,319 21,452 9,891
Accruals 60,942 172,606 7,536
Depreciation - - 5,034
State taxes - - 977
Other 11,080 3,882 2
--------- --------- -------
Total deferred tax assets 113,341 197,940 23,440
--------- --------- -------
Net $(444,000) $(370,200) $23,440
========= ========= =======
Recorded as:
Prepaid and other current assets $ 133,000 $ 172,000 $23,440
Deferred income taxes (577,000) (542,200) -
--------- --------- -------
$(444,000) $(370,200) $23,440
========= ========= =======
</TABLE>
NOTE 16 - COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. Management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's consolidated results of operations or
consolidated financial position of consolidated cash flows.
30
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 17 - CONCENTRATION OF CREDIT RISK
At December 31, 1997 and 1996, approximately 53 percent and 46 percent,
respectively, of the Company's accounts receivable balance was due from
customers in the banking and credit card industry. During the years ended
December 31, 1997, 1996 and 1995 the Company earned approximately 73 percent, 80
percent and 97 percent, respectively, of its total net revenue from customers in
the banking and credit card industries.
Two individual customers accounted for 10 percent or more of the Company's total
net revenue for the year ended December 31, 1997. Net revenue from these
customers was approximately 28 percent and 19 percent of total net revenue. Two
customers constituted approximately 26 percent and 13 percent of total net
revenue for the year ended December 31, 1996 and two customers constituted
approximately 34 percent and 19 percent of total net revenue, for the year ended
December 31, 1995.
The Company maintains cash balances at several financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. At December 31, 1997, the Company's uninsured cash balances on
deposit, per the bank's records, in excess of insured limits totaled $2,359,355.
NOTE 18 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------- -------------------- ----------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 380,696 $ 119,195 $ 2,935
========== =========== =======
Income taxes $2,472,502 $ 70,921 $79,507
========== =========== =======
Noncash investing and financing activities
Issuance of common stock in exchange
for convertible debenture $ - $ 500,000 $ -
========== =========== =======
In connection with the acquisition of Color
Graphics, Inc., assets acquired and liabilites
assumed were as follows:
Fair value of assets acquired $ - $ 9,783,500 $ -
Less: Cash paid - (1,000,000) -
---------- ----------- -------
Liabilities assumed $ - $ 8,783,500 $ -
========== =========== =======
Acquisition of option
Cost of option $ 750,000 $ - $ -
Debt incurred (500,000) - -
---------- ----------- -------
Cash paid $ 250,000 $ - $ -
========== =========== =======
</TABLE>
31
<PAGE>
DIRECTCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19 - SEGMENT INFORMATION
The Company classifies its business operations into two segments: database,
which includes advertising and marketing services and printing services. Prior
to October 1, 1996 the Company's principal line of business was database
services. Effective October 1, 1996 the Company acquired 82 percent of the stock
of Color Graphics (see Note 3).
<TABLE>
<CAPTION>
Database Printing Total
----------------------- ----------------------- ----------------------
1997
<S> <C> <C> <C>
Revenues $10,584,057 $14,842,240 $25,426,297
Gross profit $ 3,145,540 $ 7,100,211 $10,245,751
Operating income $ 616,791 $ 2,304,203 $ 2,920,994
Identifiable assets $ 3,116,608 $11,183,160 $14,299,768
1996
Revenues $ 7,867,656 $ 3,341,031 $11,208,687
Gross profit $ 2,725,947 $ 1,421,112 $ 4,147,059
Operating income $ 1,256,448 $ 555,966 $ 1,812,414
Identifiable assets $ 2,486,701 $ 7,747,107 $10,233,808
</TABLE>
32
<PAGE>
SCHEDULE II
DIRECTCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED BALANCE AT
CLASSIFICATION OF PERIOD TO OPERATIONS WRITE OFFS END OF PERIOD
- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
December 31, 1995 $ 26,167 $ 21,000 $ (18,074) $ 29,093
=========== =========== =========== =============
December 31, 1996 $ 29,093 $ 24,000 $ - $ 53,093
=========== =========== =========== =============
December 31, 1997 $ 53,093 $ 107,906 $ (39,828) $ 121,171
=========== =========== =========== =============
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Names, Ages and Positions of the Directors and Executive Officers
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- ---------------------------------
<S> <C> <C>
Robert J. Bzezensky 58 President
Nicholas Robinson 32 Chairman of the Board,
Chief Executive Officer
Steven Gasner 48 Vice President
Robert W. Paltrow 56 Director, Secretary and Treasurer
Robert E. Herman 37 Director
Anthony Nardiello 55 President, Color Graphics
</TABLE>
The current members of DirectCom's Board of Directors are Nicholas
Robinson, Robert W. Paltrow and Robert E. Herman. Nicholas Robinson serves as
Chairman of the Board. Mr. Robinson is Mr. Paltrow's son-in-law. Directors are
elected for staggered terms at the annual meeting of stockholders and remain in
office until their successors are elected and qualified or until their earlier
resignation or removal. Mr. Herman serves as a director until DirectCom's
annual meeting in 1998, Mr. Paltrow serves as a director until DirectCom's
annual meeting in 1999 and Mr. Robinson serves as a director until DirectCom's
annual meeting in 2000. Officers are elected by the Board and serve at the
discretion of the Board.
Business Experience of the Directors and Executive Officers
- -----------------------------------------------------------
Robert J. Bzezensky serves as the President of DirectCom, a position he has
held since January 1989. Between 1987 and 1989 he served as the President of
North American Information Services, Inc. ("NAIS"), a direct mail response
agency specializing in database services which was a predecessor to DirectCom.
Mr. Bzezensky's prior employment experience includes service as the Vice
President, Sales and Marketing with Della Femina Travisano and Partners Direct
Ltd.; a senior consultant with CACI, Inc., a leading marketing information and
systems supplier; the Director of Marketing for R.H. Donnelley; Vice President
of Marketing for Metro Mail Corporation; and Vice President of Mail Marketing
with John Blair Marketing.
Nicholas Robinson serves as the Chief Executive Officer of DirectCom and
Chairman of the Board, positions he has held since October 1, 1994. Mr.
Robinson previously served as a database consultant for the Systems Integration
Practice of Andersen Consulting.
Steven Gasner is Vice President, Database Marketing, for DirectCom, a
position he has held since January 1989. Between 1987 and 1989 he has served as
the Vice President of NAIS. Mr. Gasner's prior employment experience includes
service as the Director of Information Management with Citicorp Retail Services
and with American Express; Vice President-Data Base Marketing with the Direct
Marketing Group; and Vice President-Data Base Marketing with Della Femina
Travisanao and Partners Direct Ltd.
Robert W. Paltrow is the Secretary and Treasurer and a director of
DirectCom, positions held he has held since January 1989. From 1981 through 1996
Mr. Paltrow served as President of North American Communications, Inc., a direct
mail production company affiliated with DirectCom.
Robert E. Herman is President of North American Communications, Inc. Mr.
Herman has been employed at North American Communications since 1992 in various
departments and became its President in 1995.
34
<PAGE>
Anthony Nardiello has been President of Color Graphics since 1985 and was
Vice President of Color Graphics from 1976-1985.
ITEM 11. EXECUTIVE COMPENSATION.
Both the officers and directors may receive a set remuneration from
DirectCom, and reimbursements are also made for any expenses incurred on behalf
of DirectCom. DirectCom's By-Laws provide that directors may be paid their
expenses, if any, and may be paid a fixed sum for attendance of each Board of
Directors meeting. The current directors have waived any reimbursement of
expenses or fees for attending meetings.
The following table sets forth certain information regarding compensation
paid during each of the last three fiscal years to DirectCom's Chief Executive
Officer and each of DirectCom's four other most highly compensated executive
officers whose annual compensation exceeded $100,000 in fiscal 1997.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------- ----------------------------------------------
Securities
Other Restricted Underlying All
Name and Principal Fiscal Annual Stock Options/SAR Other
Position Year Salary Bonus Compensation(1) Grants Award(s) Compensation
-------- ----------- --------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nicholas Robinson 1997 $120,000 -- -- -- -- --
Chairman & CEO 1996 $131,591 -- -- -- 240,000(3) --
1995 84,000 -- -- -- -- --
Robert J. Bzezensky 1997 150,000 $ 21,055 -- -- -- --
President 1996 $176,376 $ 31,146 -- -- -- --
1995 172,933 -- -- -- -- --
Steven Gasner 1997 $150,000 $ 21,055 -- -- -- --
Vice President 1996 $176,100 $ 31,146 -- -- -- --
1995 172,605 -- -- -- -- --
Anthony Nardiello 1997 325,000 -- -- -- -- --
President,
Color Graphics 1996 $325,000(2) $ 71,608 -- -- -- --
1995 200,000 100,000 -- -- -- --
</TABLE>
____________________
(1) Since the Common Stock is infrequently traded, the fair market value of the
Common Stock has been assumed to be $.53 per share based upon the most
recent arm's-length sale of the Common Stock in May 1997 to Allen &
Company.
(2) DirectCom's financial statements show only the portion paid since
DirectCom's acquisition of Color Graphics effective October 1, 1996.
(3) The original grant of 2,880,000 options was reduced to 240,000 options in
light of DirectCom's 1-for-12 reverse stock split effective September 4,
1997.
35
<PAGE>
Stock Options
- -------------
No options were granted to the executive officers listed in the Summary
Compensation Table ("Named Executive Officers").
The following table provides information relating to the value of
unexercised options held by the Named Executive Officers at the end of fiscal
1997. No options were exercised by the Named Executive Officers.
UNEXERCISED STOCK OPTIONS AT FISCAL YEAR END
<TABLE>
<CAPTION>
Value of Unexercised
Total Number of In-The-Money
Unexercised Options(#) Options at Year End
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nicholas Robinson 240,000 - $25,000(1) -
</TABLE>
________________________
(1) Since the Common Stock is infrequently traded, the fair market value of the
Common Stock underlying the options has been assumed to be $.53 per share
based upon the most recent arm's-length sale of Common Stock in May 1997 to
Allen & Company.
Employment Contracts
- --------------------
DirectCom has entered into an employment contract with Anthony Nardiello,
President of Color Graphics. The agreement is for a five year term ending
September 30, 2001. The contract may be terminated by DirectCom if Mr.
Nardiello (i) competes with DirectCom, unless such competition is consented to
by DirectCom, (ii) commits any material misrepresentation, dishonesty or theft
against DirectCom, (iii) dies or suffers a disability making him incapable of
performing his essential duties or (iv) commits acts of gross misconduct. Under
the terms of his Employment Contract, Mr. Nardiello receives an annual base
salary of $325,000 and fringe benefits, including a Company automobile, health
and disability insurance. In addition, Mr. Nardiello has the right to require
DirectCom to purchase his Color Graphics common stock (18% of the outstanding
common stock of Color Graphics) at a price equal to its fair market value as
determined by an independent appraisal, exercisable at any time after the
earlier of October 1, 2001 or his termination of employment for whatever reason.
DirectCom has a similar right to purchase Mr. Nardiello's stock on the same
terms. In the event of Mr. Nardiello's death, the first $1,000,000 of the
purchase price for his Color Graphics common stock will be paid from the life
insurance policy for Mr. Nardiello paid for by DirectCom.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Nicholas Robinson, Chief Executive Officer of DirectCom, and Robert W.
Paltrow, Secretary/Treasurer of DirectCom, also serve on DirectCom's Board of
Directors and on DirectCom's Compensation Committee.
Report of the Compensation Committee
The compensation for the Company's executive officers was determined by the
Compensation Committee. It is the policy of the Compensation Committee that a
significant portion of the annual compensation of the Company's Chief Executive
Officer and other executive officers should be directly linked to the Company's
performance, as well as each individual's contribution. The Company's
compensation programs are designed to provide competitive financial rewards for
successfully meeting
36
<PAGE>
the Company's strategic and operating objectives, with the purposes of retaining
personnel and supporting a performance-oriented environment.
The compensation of the Company's Chief Executive Officer and other
executive officers is comprised of base salary, as well as cash and stock
incentives based on annual and long-term results of the Company. Increases in
base salary, if any, will be based on individual performance, level of
responsibilities and the Company's overall performance.
Changes in Mr. Robinson's compensation, if any, would be determined by the
Committee based upon its subjective analysis of his performance and the
Company's overall performance. All executive officers' salaries, including the
salary of Mr. Robinson, were reduced in fiscal 1997 to provide more compensation
through bonuses and stock options.
The Company has an incentive compensation program which rewards the
Company's executive officers based upon the Committee's subjective determination
concerning individual performance and the Company's achievement of its internal
financial objectives. Executive officers become entitled to receive a bonus
based upon the Company's operating profit and an evaluation of each executive
officer's contribution to such operating profit. Through this plan, a
significant portion of each executive officer's annual total compensation is
placed at risk in order to provide an incentive toward sustained high
performance. For fiscal 1997, the Company met its projected financial goals
and, as a result, two of the Company's three executive officers received bonus
payments under this plan.
In addition, it has been the policy of the Committee to utilize stock
options to provide a link between compensation and the market performance of the
Company's stock, and to focus attention of management on the enhancement of
shareholder value. In this regard, in fiscal 1996, the Company's Chief
Executive Officer, Mr. Robinson, was granted options to acquire shares of Common
Stock. If the efforts of the executive officers create additional value for the
Company's shareholders, evidenced by increases in the Company's stock price, the
Company's executive officers will also benefit through appreciation of the
potential value of outstanding stock options. The Committee believes that the
long-term nature of stock options also encourages executive officers to remain
in the employ of the Company.
Compensation Committee
Nicholas Robinson
Robert W. Paltrow
1996 Stock Option Plan
- ----------------------
DirectCom believes that stock option plans provide long term incentives to
its key employees, directors and consultants and encourage the ownership of
DirectCom's Common Stock. In March 1996, DirectCom adopted the Stock Option
Plan ("Plan") which provides for the grant of stock options as well as other
types of stock and incentive awards.
Stock Options. The Plan authorizes the grant of nonqualified stock
options to employees, consultants and advisors of DirectCom and its
subsidiaries. Incentive stock options may only be granted to employees of
DirectCom and its subsidiaries. A total of 10,000,000 shares of Common Stock
were authorized for issuance under the Plan which have been reduced to 833,333
shares of Common Stock following the Company's 1-for-12 reverse stock split
effective September 4, 1997. As of December 31, 1997, options to purchase a
total of 340,000 shares of Common Stock were outstanding under the Plan and none
of these options have been exercised. The exercise price of a nonqualified
stock option may be determined by the Board of Directors or the Compensation
Committee in its discretion. The exercise price of an incentive stock option
may not be less than the fair market value of the Common Stock on the date of
grant (110% of the fair market value in the case of an incentive stock option
granted to a stockholder
37
<PAGE>
owning in excess of 10% of the Common Stock). The value of Common Stock
(determined at the time of grant) that may be subject to incentive stock options
that become exercisable by any one employee in any one year is limited by the
Internal Revenue Code ("Code") to $100,000. The maximum term of stock options
granted under the Plan is ten years from the date of grant. The Board of
Directors or Compensation Committee shall determine the extent to which an
option shall become and/or remain exercisable in the event of the termination of
employment or service of a participant under certain circumstances, including
retirement, death or disability, subject to certain limitations for incentive
stock options. Under the Plan, the exercise price of an option is payable by the
participant in cash or, in the discretion of the Board of Directors or
Compensation Committee, in Common Stock or a combination of cash and Common
Stock.
Stock Appreciation Rights. A stock appreciation right may be granted in
connection with an option, either at the time of grant or at any time thereafter
during the term of the option. A stock appreciation right granted in connection
with an option entitled the holder, upon exercise, to surrender the related
option and receive a payment based on the difference between the exercise price
of the related option and the fair market value of DirectCom's Common Stock on
the date of exercise. A stock appreciation right granted in connection with an
option is exercisable only at such time or times as the related option is
exercisable and expires no later than the time when the related option expires.
A stock appreciation right also may be granted without relationship to an option
and will be exercisable as determined by the Board of Directors or Compensation
Committee, but in no event after ten years from the date of grant. A stock
appreciation right granted without relationship to an option entitles the
holder, upon exercise, to a payment based on the difference between the base
price assigned to the stock appreciation right by the Compensation Committee on
the date of grant and the fair market value of DirectCom's Common Stock on the
date of exercise. Payment to the holder in connection with the exercise of a
stock appreciation right may be in cash or shares of Common Stock or in a
combination of cash and shares.
Administration. The Plan shall be administered by the Board of Directors
or Compensation Committee or such other committee as may be appointed by the
Board. Subject to the limitations set forth in the Plan, the Board of
Directors or Compensation Committee has the authority to determine the persons
to whom awards will be granted, the time at which awards will be granted, the
number of shares, units or other rights subject to each award, the exercise,
base or purchase price of an award (if any), the time or times at which the
award will become vested, exercisable or payable and the duration of the award.
The Board of Directors or Compensation Committee may provide for the
acceleration of the vesting or exercise period of an award at any time prior to
its termination or upon the occurrence of specified events. With the consent of
the affected participant, the Board of Directors or Compensation Committee has
the authority to cancel and replace awards previously granted with new options
for the same or a different number of shares and having a higher or lower
exercise or base price, and may amend the terms of any outstanding awards to
provide for an exercise or base price that is higher or lower than the current
exercise or base price.
Reservation of Shares. DirectCom has authorized and reserved 833,333
shares of Common Stock for issuance under the Plan. The shares may be unissued
shares or treasury shares. If any shares of Common Stock that are the subject
of an award are not issued or transferred and cease to be issuable or
transferable for any reason, such shares will no longer be charged against such
maximum share limitation and may again be made subject to awards under the
Plan. In the event of certain corporate reorganizations, recapitalizations, or
other specified corporate transactions affecting DirectCom or the Common Stock,
proportionate adjustments may be made to the number of shares available for
grant and to the number of shares and prices under outstanding awards made
before the event.
Term and Amendment. The Plan has a term of ten years, subject to earlier
termination or amendment by the Board of Directors. All awards granted under
the Plan prior to its termination remain outstanding until exercised, paid or
terminated in accordance with their terms. The Board of Directors may amend the
Plan at any time, except that shareholder approval is required for certain
amendments to the extent necessary for purposes of Rule 16b-3 under the
Securities Exchange Act of 1934.
38
<PAGE>
401(k) Savings and Retirement Plan
- ----------------------------------
In 1993, DirectCom adopted the provisions of the amended and restated North
American Integrated Marketing 401 (k) Plan (the "401(k) Plan"), a tax-qualified
plan covering all eligible employees, as defined therein. Each eligible
employee may elect to reduce his or her current compensation by 15%, subject to
the statutory limit (a maximum of $9,500 in 1996) and have the amount of the
reduction contributed to the 401(k) Plan. For fiscal 1996 DirectCom had
discretion to match employee contributions. Since inception of the 401(k) Plan
in 1993, DirectCom has made no matching contributions. Effective January 1,
1997, DirectCom has agreed to match 25% up to the first 6% of compensation that
eligible employees contribute to the 401(k) Plan. In addition, DirectCom may
also make discretionary contributions, as defined in the 401(k) Plan, each year
on behalf of all eligible participants.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of December 31,
1997, with regard to the beneficial ownership of the Common Stock by (i) each
person known by DirectCom to be the beneficial owner of more than 5% of its
outstanding Common Stock, (ii) the Named Executive Officers and directors and
key employees of DirectCom individually and (iii) the executive officers and
directors of DirectCom as a group.
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned(1) % of Class Outstanding
- ------------------- --------------------- ----------------------
<S> <C> <C>
First Commercial and Finance Corp. 2,005,002(2) 65%
Establishment
c/o Dr. Danni Rothschild
10 Manesse Street
Zurich 800 Switzerland
Wye Investments, a Limited Partnership 360,000(3) 11.6%
c/o Michael Herman, General Partner
North American Communications, Inc.
Route 22 and Route 220, Wye Switches
Duncansville, PA 16635
Aspetong Partners, L.P. 360,000(4) 11.6%
c/o Robert W. Paltrow, General Partner
20 Maple Avenue
Armonk, NY 10504
Nicholas Robinson 240,000(5) 7.7%
Robert J. Bzezensky 80,000 2.6%
Steven Gasner 80,000 2.6%
Robert E. Herman 80,000(5)(3) 2.6%
North American Communications, Inc.
Route 22 and 220, Wye Switches
Duncansville, PA 16835
All officers & directors as a 3,205,002(5) 104%(6)
group (four persons)
</TABLE>
_______________
(1) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, each stockholder has sole voting and
investment power with respect to the Common Stock listed.
(2) First Commercial and Finance Corp., Establishment, pursuant to a May 17,
1996 Convertible Debenture Purchase Agreement with DirectCom, entered into
a five year irrevocable proxy (effective until September 24, 2001) in favor
of Nicholas Robinson, DirectCom's Chief Executive Officer, to vote all its
Common Stock in his discretion. Mr. Robinson may be deemed to be the
beneficial owner of these shares.
40
<PAGE>
(3) Represents shares owned directly by Wye Investments, which shares could be
deemed to be beneficially owned by Mr. Michael Herman as General Partner of
Wye Investments. Mr. Michael Herman, as General Partner of Wye Investments,
owns directly only a 1% interest in Wye Investments. Robert E. Herman, son
of Michael Herman, is a limited partner in Wye Investments with a 14%
interest in Wye Investment.
(4) Represents shares owned directly by Aspetong Partners, L.P. which shares
could be deemed to be beneficially owned by Mr. Paltrow as General Partner
of Aspetong Partners, L.P. Mr. Paltrow, as General Partner of Aspetong
Partners, holds directly only a 1% interest in Aspetong Partners.
(5) Represents shares issuable pursuant to stock options that may be exercised
within 60 days from December 31, 1997. Such shares are not deemed
outstanding for computing the percentage of beneficial ownership of any
other person.
(6) Percentage exceeds 100% as a result of including unexercised stock options
by Nicholas Robinson and Robert E. Herman in shares of Common Stock
beneficially owned compared to 3,101,983 shares of Common Stock outstanding
as of February 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
North American Communications, Inc. ("NAC"), an affiliate of
DirectCom, is one of several suppliers of mailing services and is awarded
contracts by DirectCom. Robert W. Paltrow, a director of DirectCom, is General
Partner of Aspetong Partners, L.P. which owns 50% of the issued and outstanding
stock of NAC. Wye Investments owns the other 50% of the issued and outstanding
stock of NAC. Mr. Paltrow also is a director of NAC. For fiscal 1997,
DirectCom purchased from NAC $4,799,400 in mailing services. NAC assigned to
DirectCom, effective January 1, 1996, its lease to the Wilmington, Delaware
office. In addition, NAC is a guarantor of DirectCom's $1,000,000 revolving
line of credit with United States National Bank. Finally, DirectCom entered
into a Management Agreement December 15, 1997 with NAC under which DirectCom
paid 7% of its fiscal 1997 net revenues or $1,780,000 for sales and
administrative support services, client referrals, strategic advice, etc.
In January 1998 DirectCom agreed to sell 80,000 shares of DirectCom's
Common Stock held as treasury stock to Seth Kanegis, Robert W. Paltrow's son-in-
law, for $150,000.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following financial statements are filed as a part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants......................................................... 12
Report of Independent Public Accountants......................................................... 13
Consolidated Financial Statements:
Balance Sheets as of December 31, 1997 and 1996.................................................. 14
Statements of Operations for the years ended December 31, 1997, 1996 and 1995.................... 15
Statements of Shareholders' Equity for the years ended December 31, 1997,
1996 and 1995.................................................................................... 16
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................... 17
Notes to Consolidated Financial Statements....................................................... 18
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this report:
Page
----
II Valuation of Qualifying Accounts............................................................. 33
All other schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
<CAPTION>
(A) 3. Exhibits: Page
--------- ----
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.
The Certificate of Ownership and Merger was filed with
DirectCom's Form 10-K on April 20, 1990 and
is hereby incorporated by reference. 46
3.2 Bylaws of the Corporation already have been
filed with DirectCom's prior Registration
Statement effective May 18, 1989 and are
hereby incorporated by reference. N/A
4.1 Form of Common Stock Certificate (specimen)
has been filed with DirectCom's Registration
Statement effective May 18, 1989, and is hereby
incorporated by reference. N/A
10.1 Office Lease Agreement between Garrett Mountain N/A
Office Center Associates-I and DirectCom, with
regard to the West Paterson, New Jersey office has
been filed with DirectCom's 10-K for the year
ended December 31, 1996 and is hereby incorporated
by reference.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
10.2 Stock Option Plan 49
11.1 Statement regarding the computation of per-share
earnings is included in Note 3 to Financial
Statements on sequentially numbered pages 20-21
and is hereby incorporated by reference. N/A
21 List of Subsidiaries 61
27 Financial Data Schedule (filed herewith) 62
</TABLE>
43
<PAGE>
(b) DirectCom did not file any reports on Form 8-K during the fourth quarter
of 1997.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH AMERICAN INTEGRATED MARKETING, INC.
By: /s/Nicholas Robinson
-------------------------------
Nicholas Robinson March 31, 1998
Chief Executive Officer and Chairman of the Board
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.
Title Date
----- ----
By: /s/Robert J. Bzezensky President March 31, 1998
----------------------------
Robert J. Bzezensky
By: /s/Nicholas Robinson Chief Executive Officer, March 31, 1998
---------------------------- Chairman of the Board
Nicholas Robinson
By: /s/ Robert W. Paltrow Director, March 31, 1998
---------------------------- Secretary/Treasurer
Robert W. Paltrow
By: /s/ Robert E. Herman Director March 31, 1998
----------------------------
Robert E. Herman
45
<PAGE>
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF NORTH AMERICAN INTEGRATED MARKETING, INC.
North American Integrated Marketing, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The present name of the Corporation is North American Integrated
Marketing, Inc.
2. The Corporation was originally incorporated under the name Opportunistics
Inc., and the original Certificate of Incorporation of the Corporation was
filed with the Secretary of the State of Delaware on February 23, 1989.
3. This Restated Certificate of Incorporation was duly adopted in accordance
with the provisions of Sections 242, 245, and 228 of the General Corporation Law
of the State of Delaware by the written consent of the Corporation's
stockholders, with written notice being provided to all stockholders in
accordance with Section 228(d). This Restated Certificate of Incorporation
restates, integrates, amends and supersedes the provisions of the Certificate of
Incorporation of the Corporation as heretofore amended, restated and
supplemented.
4. The text of the Certificate of Incorporation as heretofore amended,
restated and supplemented is hereby restated and further amended to read in its
entirety as follows:
FIRST. The name of the Corporation is DirectCom, Inc. (the "Corporation").
SECOND. Its registered office in the State of Delaware is to be located at
1209 Orange Street, Wilmington, County of New Castle, 19801. The registered
agent in charge thereof is The Corporation Trust Company.
THIRD. The purpose or purposes of the Corporation are to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, and to have and exercise all the
powers conferred by the laws of the State of Delaware upon corporations formed
under the General Corporation Law of the State of Delaware.
FOURTH. The total number of shares which the Corporation shall have authority
to issue is 70,000,000 shares, consisting of 60,000,000 shares of Common Stock,
having a par value of $.00001 per share, and 10,000,000 shares of Preferred
Stock having a par value of $.00001 per share.
The Board of Directors is authorized, subject to limitations prescribed by
law, to provide for the issuance of the shares of Preferred Stock in series, and
by filing a certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares of each such series and any
qualifications, limitations or restrictions thereof.
<PAGE>
FIFTH. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation shall have the following
powers:
(a) To adopt, and to alter or amend the Bylaws, to fix the amount
to be reserved as working capital, and to authorize and cause to be
executed mortgages and liens (without limits to the amount) upon the
property and franchises of the Corporation; and
(b) With the consent in writing or pursuant to a vote of the
holders of a majority of the capital stock issued and outstanding, to
dispose of, in any manner, the whole property of the Corporation.
SIXTH. The shareholders and directors shall have the power to hold their
meetings and keep the books, documents and papers of the Corporation within or
outside the State of Delaware and at such place or places as may be from time to
time designated by the Bylaws or by resolution of the shareholders or directors,
except as otherwise required by the laws of the State of Delaware.
SEVENTH. The objects, purposes and powers specified in any clause or
paragraph of this Restated Certificate of Incorporation shall be in no way
limited or restricted by reference to or inference from the terms or any other
clause or paragraph of this Restated Certificate of Incorporation. The objects,
purposes and powers in each of the clauses and paragraphs of this Restated
Certificate of Incorporation shall be regarded as independent objects, purposes
and powers. The objects, purposes and powers specified in this Restated
Certificate of Incorporation are in furtherance and not in limitation of the
objects, purposes and powers conferred by statute.
EIGHTH. The Corporation shall have the power to indemnify its officers,
directors, employees and agents, and such other persons as may be designated as
set forth in the Bylaws, to the full extent permitted by the laws of the State
of Delaware. A director shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware
Code, or (iv) for any transaction from which the director derived an improper
personal benefit shall not be eliminated or limited hereby.
NINTH.
(a) The number of directors constituting the entire Board of Directors
shall be fixed from time to time by vote of a majority of the entire Board of
Directors, provided, however, that the number of directors shall not be reduced
so as to shorten the term of any director at the time in office.
2
<PAGE>
(b) The Board of Directors shall be divided into three classes, as
nearly equal in numbers as the then total number of directors constituting the
entire Board of Directors permits with the term of office of one class expiring
each year. At the first annual meeting of stockholders, directors of the first
class shall be elected to hold office for a term expiring at the next succeeding
annual meeting, directors of the second class shall be elected to hold office
for a term expiring at the second succeeding annual meeting and directors of the
third class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. Any vacancies in the Board of Directors for any
reason, and any directorships resulting from any increase in the number of
directors, may be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected and
qualified. At each annual meeting of stockholders the successors to the class of
directors whose term shall then expire shall be elected to hold office for a
term expiring at the third succeeding annual meeting.
(c) Notwithstanding any other provisions of this Certificate of
Incorporation or by Bylaws of the Corporation, any director or the entire Board
of Directors of the Corporation may be removed at any time, but only for cause
and only by the affirmative vote of the holders of 80 percent or more of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed
by Nicholas Robinson, its Chief Executive Officer, this 4th day of September,
1997.
DIRECTCOM, INC.
By:
--------------------------------
Nicholas Robinson
Chief Executive Officer
3
<PAGE>
Exhibit 10.2
DIRECTCOM, INC.
STOCK OPTION PLAN
1. Establishment, Purpose and Types of Awards
DirectCom, Inc. hereby establishes the DIRECTCOM, INC. STOCK OPTION PLAN
(the "Plan"). The purpose of the Plan is to promote the long-term growth and
profitability of DirectCom, Inc. (the "Corporation") by (i) providing key people
with incentives to improve stockholder value and to contribute to the growth and
financial success of the Corporation, and (ii) enabling the Corporation to
attract, retain and reward the best available persons for positions of
substantial responsibility.
The Plan permits the granting of stock options (including nonqualified
stock options and incentive stock options qualifying under Section 422 of the
Code) and stock appreciation rights (including free-standing, tandem and limited
stock appreciation rights) or any combination of the foregoing (collectively,
"Awards").
2. Definitions
Under this Plan, except where the context otherwise indicates, the
following definitions apply:
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Change in Control" shall mean (i) any sale, exchange or other
disposition of substantially all of the Corporation's assets; or (ii) any
merger, share exchange, consolidation or other reorganization or business
combination in which the Corporation is not the surviving or continuing
corporation, or in which the Corporation's stockholders become entitled to
receive cash, securities of the Corporation other than voting common stock, or
securities of another issuer.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
any regulations issued thereunder.
(d) "Committee" shall mean the Board or committee of Board members
appointed pursuant to Section 3 of the Plan to administer the Plan.
(e) "Common Stock" shall mean shares of the Corporation's common stock.
(f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations issued thereunder.
<PAGE>
(g) "Fair Market Value" of a share of the Corporation's Common Stock for
any purpose on a particular date shall be determined in a manner such as the
Committee shall in good faith determine to be appropriate.
(h) "Grant Agreement" shall mean a written agreement between the
Corporation and a grantee memorializing the terms and conditions of an Award
granted pursuant to the Plan.
(i) "Grant Date" shall mean the date on which the Committee formally acts
to grant an Award to a grantee or such other date as the Committee shall so
designate at the time of taking such formal action.
(j) "Parent" shall mean a corporation, whether now or hereafter existing,
within the meaning of the definition of "parent corporation" provided in Section
424(e) of the Code, or any successor thereto of similar import.
(k) "Rule 16b-3" shall mean Rule 16b-3 as in effect under the Exchange Act
on the effective date of the Plan, or any successor provision prescribing
conditions necessary to exempt the issuance of securities under the Plan (and
further transactions in such securities) from Section 16(b) of the Exchange Act.
(l) "Subsidiary" and "subsidiaries" shall mean only a corporation or
corporations, whether now or hereafter existing, within the meaning of the
definition of "subsidiary corporation" provided in Section 424(f) of the Code,
or any successor thereto of similar import.
3. Administration
(a) Appointment of Committee. The Plan shall be administered by the Board.
In the alternative, the Board may appoint a Committee consisting of not less
than two (2) members of the Board to administer the Plan on behalf of the Board,
subject to such terms and conditions as the Board may prescribe. In the event
that the Corporation registers its Common Stock under Section 12(b) or 12(g) of
the Exchange Act, the members of the Committee shall be both "disinterested
persons" within the meaning of Rule 16b-3, and "outside directors" within the
meaning of Section 162(m) of the Code. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the
Board may increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies, however caused, and remove all members of
the Committee and, thereafter, directly administer the Plan. In the event that
the Board is the administrator of the Plan in lieu of a Committee, the term
"Committee" as used herein shall be deemed to mean the Board.
(b) Procedure of the Committee. Members of the Board or Committee who are
either eligible for Awards or have been granted Awards may vote on any matters
affecting the administration of the Plan or the grant of Awards pursuant to the
Plan,
2
<PAGE>
except that no such member shall act upon the granting of an Award to himself or
herself, but any such member may be counted in determining the existence of a
quorum at any meeting of the Board or the Committee during which action is taken
with respect to the granting of an Award to him or her.
The Committee shall meet at such times and places and upon such notice as
it may determine. A majority of the Committee shall constitute a quorum. Any
acts by the Committee may be taken at any meeting at which a quorum is present
and shall be by majority vote of those members entitled to vote. Additionally,
any acts reduced to writing or approved in writing by all of the members of the
Committee shall be valid acts of the Committee.
(c) Powers of the Committee. The Committee shall have all the powers
vested in it by the terms of the Plan, such powers to include authority, in its
sole and absolute discretion, to grant Awards under the Plan, prescribe Grant
Agreements evidencing such Awards and establish programs for granting Awards.
The Committee shall have full power and authority to take all other actions
necessary to carry out the purpose and intent of the Plan, including, but not
limited to, the authority to:
(i) determine the eligible persons to whom, and the time or times at
which Awards shall be granted,
(ii) determine the types of Awards to be granted,
(iii) determine the number of shares to be covered by or used for
reference purposes for each Award,
(iv) impose such terms, limitations, restrictions and conditions upon
any such Award as the Committee shall deem appropriate,
(v) modify, extend or renew outstanding Awards, accept the surrender of
outstanding Awards and substitute new Awards, provided that no such action
shall be taken with respect to any outstanding Award which would adversely
affect the grantee without the grantee's consent, and
(vi) accelerate or otherwise change the time in which an Award may be
exercised or becomes payable and to waive or accelerate the lapse, in whole
or in part, of any restriction or condition with respect to such Award,
including, but not limited to, any restriction or condition with respect to
the vesting or exercisability of an Award following termination of any
grantee's employment
The Committee shall have full power and authority to administer and interpret
the Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and for the conduct of its
business as the Committee deems
3
<PAGE>
necessary or advisable and to interpret same, all within the Committee's sole
and absolute discretion.
(d) Limited Liability. To the maximum extent permitted by law, no member
of the Board or Committee shall be liable for any action taken or decision made
in good faith relating to the Plan or any Award thereunder.
(e) Indemnification. To the maximum extent permitted by law, the members
of the Board and Committee shall be indemnified by the Corporation in respect of
all their activities under the Plan.
(f) Effect of Committee's Decision. All actions taken and decisions and
determinations made by the Committee on all matters relating to the Plan
pursuant to the powers vested in it hereunder shall be in the Committee's sole
and absolute discretion and shall be conclusive and binding on all parties
concerned, including the Corporation, its stockholders, any participants in the
Plan and any other employee of the Corporation, and their respective successors
in interest.
4. Shares Available for the Plan; Maximum Awards
Subject to adjustments as provided in Section 10 of the Plan, the shares of
stock that may be delivered or purchased or used for reference purposes (with
respect to stock appreciation rights) under the Plan, including with respect to
incentive stock options intended to qualify under Section 422 of the Code, shall
not exceed an aggregate of 10,000,000 shares of Common Stock of the Corporation
and the Corporation shall reserve said number of shares of Common Stock for
issuance pursuant to the Plan. If any Award, or portion of an Award, under the
Plan expires or terminates unexercised, becomes unexercisable or is forfeited or
otherwise terminated, surrendered or canceled as to any shares, the shares
subject to such Award shall thereafter be available for further Awards under the
Plan unless such shares would not be deemed available for future Awards pursuant
to Section 16 of the Exchange Act.
The maximum number of shares of Common Stock subject to Awards of any
combination that may be granted during any period of two consecutive calendar
years to any one individual shall be limited to 3,000,000. To the extent
required by Section 162(m) of the Code and so long as Section 162(m) of the Code
is applicable to persons eligible to participate in the Plan, shares of Common
Stock subject to the foregoing limit with respect to which the related Award is
terminated, surrendered or canceled shall not again be available for grant under
this limit.
5. Participation
Participation in the Plan shall be open to all employees, officers,
directors and consultants of the Corporation, employees of the Corporation's
affiliates, or of any Parent or Subsidiary of the Corporation, as may be
selected by the Committee from time to time. Notwithstanding the foregoing,
participation in the Plan with respect to Awards of
4
<PAGE>
incentive stock options shall be limited to employees of the Corporation, or of
any Parent or Subsidiary of the Corporation. To the extent necessary to comply
with Rule 16b-3 of the Exchange Act or to constitute an "outside director"
within the meaning of Section 162(m) of the Code, Committee members shall not be
eligible to participate in the Plan while members of the Committee.
Awards may be granted to such eligible persons and for or with respect to
such number of shares of Common Stock as the Committee shall determine, subject
to the limitations in Section 4 of the Plan. A grant of any type of Award made
in any one year to an eligible person shall neither guarantee nor preclude a
further grant of that or any other type of Award to such person in that year or
subsequent years.
6. Stock Options
Subject to the other applicable provisions of the Plan, the Committee may
from time to time grant to eligible participants nonqualified stock options or
incentive stock options as that term is defined in Section 422 of the Code. The
stock options granted shall be subject to the following terms and conditions.
(a) Grant of Option. The grant of a stock option shall be evidenced by a
Grant Agreement, executed by the Corporation and the grantee, stating the number
of shares of Common Stock subject to the stock option evidenced thereby and the
terms and conditions of such stock option, in such form as the Committee may
from time to time determine.
(b) Price. The price per share payable upon the exercise of each stock
option ("exercise price") shall be determined by the Committee.
(c) Payment. Stock options may be exercised in whole or in part by payment
of the exercise price of the shares to be acquired in accordance with the
provisions of the Grant Agreement, and/or such rules and regulations as the
Committee may have prescribed, and/or such determinations, orders, or decisions
as the Committee may have made. Payment may be made in cash (or cash
equivalents acceptable to the Committee) or, unless otherwise determined by the
Committee, in shares of Common Stock or a combination of cash and shares of
Common Stock, or by such other means as the Committee may prescribe. The Fair
Market Value of shares of Common Stock delivered on exercise of stock options
shall be determined as of the date of exercise. Shares of Common Stock
delivered in payment of the exercise price may be previously owned shares or, if
approved by the Committee, shares acquired upon exercise of the stock option.
Any fractional share will be paid in cash. The Corporation may make or
guarantee loans to grantees to assist grantees in exercising stock options.
If the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, the Committee, subject to such limitations as it may determine,
may authorize payment of the exercise price, in whole or in part, by delivery of
a properly executed exercise notice, together with irrevocable instructions, to:
(i) a brokerage firm designated
5
<PAGE>
by the Corporation to deliver promptly to the Corporation the aggregate amount
of sale or loan proceeds to pay the exercise price and any withholding tax
obligations that may arise in connection with the exercise, and (ii) the
Corporation to deliver the certificates for such purchased shares directly to
such brokerage firm.
(d) Terms of Options. The term during which each stock option may be
exercised shall be determined by the Committee. In no event shall a stock
option be exercisable more than ten years from the date it is granted. Prior to
the exercise of the stock option and delivery of the shares certificates
represented thereby, the grantee shall have none of the rights of a stockholder
with respect to any shares represented by an outstanding stock option.
(e) Restrictions on Incentive Stock Options. Incentive Stock Options
granted under Code Section 422 shall meet the following additional requirements.
(i) Grant Date. An incentive stock option must be granted within 10
years of the earlier of the Plan's adoption by the Board of Directors or
approval by the Corporation's shareholders.
(ii) Exercise Price and Term. The exercise price of an incentive stock
option shall not be less than 100% of the Fair Market Value of the shares on
the date the stock option is granted. Also, the exercise price of any
incentive stock option granted to a grantee who owns (within the meaning of
Section 422(b)(6) of the Code, after the application of the attribution
rules in Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of shares of the Corporation or its Parent or
Subsidiary corporations (within the meaning of Sections 422 and 424 of the
Code) shall be not less than 110% of the Fair Market Value of the Common
Stock on the grant date and the term of such stock option shall not exceed
five years.
(iii) Maximum Grant. The aggregate Fair Market Value (determined as of
the Grant Date) of shares of Common Stock with respect to which all
incentive stock options first become exercisable by any grantee in any
calendar year under this or any other plan of the Corporation and its Parent
and Subsidiary corporations may not exceed $100,000 or such other amount as
may be permitted from time to time under Section 422 of the Code. To the
extent that such aggregate Fair Market Value shall exceed $100,000, or other
applicable amount, such stock options shall be treated as nonqualified stock
options. In such case, the Corporation may designate the shares of Common
Stock that are to be treated as stock acquired pursuant to the exercise of
an incentive stock option by issuing a separate certificate for such shares
and identifying the certificate as incentive stock option shares in the
stock transfer records of the Corporation.
(iv) Grantee. Incentive stock options shall only be issued to employees
of the Corporation, or of a Parent or Subsidiary of the Corporation.
6
<PAGE>
(v) Designation. No stock option shall be an incentive stock option
unless so designated by the Committee at the time of grant or in the Grant
Agreement evidencing such stock option.
(f) Other Terms and Conditions. Stock options may contain such other
provisions, not inconsistent with the provisions of the Plan, as the Committee
shall determine appropriate from time to time.
7. Stock Appreciation Rights
(a) Award of Stock Appreciation Rights. Subject to the other applicable
provisions of the Plan, the Committee may at any time and from time to time
grant stock appreciation rights ("SARs") to eligible participants, either on a
free-standing basis (without regard to the grant of a stock option) or on a
tandem basis (related to the grant of an underlying stock option), as it
determines. SARs shall be evidenced by Grant Agreements, executed by the
Corporation and the grantee, stating the number of shares of Common Stock
subject to the SAR evidenced thereby and the terms and conditions of such SAR,
in such form as the Committee may from time to time determine. The term during
which each SAR may be exercised shall be determined by the Committee. In no
event shall an SAR be exercisable more than ten years from the date it is
granted. The grantee shall have none of the rights of a stockholder with
respect to any shares of Common Stock represented by an SAR.
(b) Restrictions of Tandem SARs. No incentive stock option may be
surrendered in connection with the exercise of a tandem SAR unless the Fair
Market Value of the Common Stock subject to the incentive stock option is
greater than the exercise price for such incentive stock option. SARs granted
in tandem with stock options shall be exercisable only to the same extent and
subject to the same conditions as the stock options related thereto are
exercisable. The Committee may, in its discretion, prescribe additional
conditions to the exercise of any such tandem SAR.
(c) Amount of Payment Upon Exercise of SARs. An SAR shall entitle the
grantee to receive, subject to the provisions of the Plan and the Grant
Agreement, a payment having an aggregate value equal to the product of (i) the
excess of (A) the Fair Market Value on the exercise date of one share of Common
Stock over (B) the base price per share specified in the Grant Agreement, times
(ii) the number of shares specified by the SAR, or portion thereof, which is
exercised. In the case of exercise of a tandem SAR, such payment shall be made
in exchange for the surrender of the unexercised related stock option (or any
portion or portions thereof which the grantee from time to time determines to
surrender for this purpose).
(d) Form of Payment Upon Exercise of SARs. Payment by the Corporation of
the amount receivable upon any exercise of an SAR may be made by the delivery of
Common Stock or cash, or any combination of Common Stock and cash, as determined
in the sole discretion of the Committee from time to time. The Committee may
impose such restrictions upon the forms of payment upon exercise of an SAR as it
may deem
7
<PAGE>
necessary or appropriate to comply with the requirements for exemption under
Rule 16b-3. If upon settlement of the exercise of an SAR a grantee is to
receive a portion of such payment in shares of Common Stock, the number of
shares shall be determined by dividing such portion by the Fair Market Value of
a share of Common Stock on the exercise date. No fractional shares shall be
used for such payment and the Committee shall determine whether cash shall be
given in lieu of such fractional shares or whether such fractional shares shall
be eliminated.
8. Withholding of Taxes
The Corporation may require, as a condition to the grant of any Award under
the Plan or exercise pursuant to such Award or to the delivery of certificates
for shares issued or payments of cash to a grantee pursuant to the Plan or a
Grant Agreement (hereinafter collectively referred to as a "taxable event"),
that the grantee pay to the Corporation, in cash or, unless otherwise determined
by the Corporation, in shares of Common Stock, including shares acquired upon
grant of the Award or exercise of the Award, valued at Fair Market Value on the
date as of which the withholding tax liability is determined, any federal, state
or local taxes of any kind required by law to be withheld with respect to any
taxable event under the Plan; subject, however, if the grantee is subject to
Section 16(b) of the Exchange Act, to such restrictions as may be imposed from
time to time by the Securities and Exchange Commission to comply with Section
16(b) of the Exchange Act. An election to deliver Common Stock to pay
withholding taxes must be made on or before the date the amount of tax to be
withheld is determined and once made will be irrevocable. The withholding tax
obligation that may be paid by the withholding or delivery of shares may not
exceed the statutory minimum required withholding amount with respect to the
grantee's federal, state and local income tax obligations in connection with a
taxable event.
The Corporation, to the extent permitted or required by law, shall have the
right to deduct from any payment of any kind (including salary or bonus)
otherwise due to a grantee any federal, state or local taxes of any kind
required by law to be withheld with respect to any taxable event under the Plan,
or to retain or sell without notice a sufficient number of the shares to be
issued to such grantee to cover any such taxes.
9. Transferability
To the extent required to comply with Rule 16b-3, if applicable, and in any
event in the case of an incentive stock option or a stock appreciation right
granted with respect to an incentive stock option, no Award granted under the
Plan shall be transferable by a grantee otherwise than by will or the laws of
descent and distribution. Unless otherwise determined by the Committee in
accord with the provisions of the immediately preceding sentence, an Award may
be exercised during the lifetime of the grantee, only by the grantee or, during
the period the grantee is under a legal disability, by the grantee's guardian or
legal representative.
8
<PAGE>
10. Adjustments; Business Combinations
In the event of a reclassification, recapitalization, stock split, stock
dividend, combination of shares, or other similar event, the maximum number and
kind of shares reserved for issuance or with respect to which Awards may be
granted under the Plan as provided in Section 4 shall be adjusted to reflect
such event, and the Committee shall make such adjustments as it deems
appropriate and equitable in the number, kind and price of shares covered by
outstanding Awards made under the Plan, and in any other matters which relate to
Awards and which are affected by the changes in the Common Stock referred to
above.
In the event of any proposed Change in Control, the Committee shall take
such action as it deems appropriate to effectuate the purposes of this Plan and
to protect the grantees of Awards, which action may include, but without
limitation, any one or more of the following: (i) acceleration or change of the
exercise dates of any Award; (ii) arrangements with grantees for the payment of
appropriate consideration to them for the cancellation and surrender of any
Award; and (iii) in any case where equity securities other than Common Stock of
the Corporation are proposed to be delivered in exchange for or with respect to
Common Stock of the Corporation, arrangements providing that any Award shall
become one or more Awards with respect to such other equity securities.
In the event the Corporation dissolves and liquidates (other than pursuant
to a plan of merger or reorganization), then notwithstanding any restrictions on
exercise set forth in this Plan or any Grant Agreement, or other agreement
evidencing a stock option or stock appreciation right: (i) each grantee shall
have the right to exercise his stock option or stock appreciation right at any
time up to ten (10) days prior to the effective date of such liquidation and
dissolution; and (ii) the Committee may make arrangements with the grantees for
the payment of appropriate consideration to them for the cancellation and
surrender of any stock option or stock appreciation right that is so canceled or
surrendered at any time up to ten (10) days prior to the effective date of such
liquidation and dissolution. The Committee may establish a different period
(and different conditions) for such exercise, delivery, cancellation, or
surrender to avoid subjecting the grantee to liability under Section 16(b) of
the Exchange Act. Any stock option or stock appreciation right not so
exercised, canceled, or surrendered shall terminate on the last day for exercise
prior to such effective date.
11. Termination and Modification of the Plan
The Board, without further approval of the stockholders, may modify or
terminate the Plan, except that no modification shall become effective without
prior approval of the stockholders of the Corporation if stockholder approval
would be required for continued compliance with Rule 16b-3.
The Committee shall be authorized to make minor or administrative
modifications to the Plan as well as modifications to the Plan that may be
dictated by requirements of federal or state laws applicable to the Corporation
or that may be authorized or made
9
<PAGE>
desirable by such laws. The Committee may amend or modify the grant of any
outstanding Award in any manner to the extent that the Committee would have had
the authority to make such Award as so modified or amended. No modification may
be made that would materially adversely affect any Award previously made under
the Plan without the approval of the grantee.
12. Non-Guarantee of Employment
Nothing in the Plan or in any Grant Agreement thereunder shall confer any
right on an employee to continue in the employ of the Corporation or shall
interfere in any way with the right of the Corporation to terminate an employee
at any time.
13. Transfer of Employee
For purposes of maintaining grantee's continuous status as an employee and
accrual of rights under any Award, transfer of an employee among the Corporation
and the Corporation's Parent or Subsidiaries shall not be considered a
termination of employment. Nor shall it be considered a termination of
employment for such purposes if an employee is placed on military or sick leave
or such other leave of absence which is considered as continuing intact the
employment relationship; in such a case, the employment relationship shall be
continued until the date when an employee's right to reemployment shall no
longer be guaranteed either by law or contract.
14. Written Agreement
Each Grant Agreement entered into between the Corporation and a grantee
with respect to an Award granted under the Plan shall incorporate the terms of
this Plan and shall contain such provisions, consistent with the provisions of
the Plan, as may be established by the Committee.
15. Non-Uniform Determinations
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive Awards, the form, amount and timing of
such Awards, the terms and provisions of such Awards and the agreements
evidencing same) need not be uniform and may be made by it selectively among
persons who receive, or are eligible to receive, Awards under the Plan, whether
or not such persons are similarly situated.
16. Limitation on Benefits
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan or action by
the Committee fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
10
<PAGE>
17. Listing and Registration
If the Corporation determines that the listing, registration or
qualification upon any securities exchange or upon any listing or quotation
system established by the National Association of Securities Dealers, Inc.
("Nasdaq System") or under any law, of shares subject to any Award is necessary
or desirable as a condition of, or in connection with, the granting of same or
the issue or purchase of shares thereunder, no such Award may be exercised in
whole or in part and no restrictions on such Award shall lapse, unless such
listing, registration or qualification is effected free of any conditions not
acceptable to the Corporation.
18. Compliance with Securities Law
The Corporation may require that a grantee, as a condition to exercise of
an Award, and as a condition to the delivery of any share certificate, provide
to the Corporation, at the time of each such exercise and each such delivery, a
written representation that the shares of Common Stock being acquired shall be
acquired by the grantee solely for investment and will not be sold or
transferred without registration or the availability of an exemption from
registration under the Securities Act and applicable state securities laws. The
Corporation may also require that a grantee submit other written representations
which will permit the Corporation to comply with federal and applicable state
securities laws in connection with the issuance of the Common Stock, including
representations as to the knowledge and experience in financial and business
matters of the grantee and the grantee's ability to bear the economic risk of
the grantee's investment. The Corporation may require that the grantee obtain a
"purchaser representative" as that term is defined in applicable federal and
state securities laws. The stock certificates for any shares of Common Stock
issued pursuant to this Plan may bear a legend restricting transferability of
the shares of Common Stock unless such shares are registered or an exemption
from registration is available under the Securities Act and applicable state
securities laws. The Corporation may notify its transfer agent to stop any
transfer of shares of Common Stock not made in compliance with these
restrictions. Common Stock shall not be issued with respect to an Award granted
under the Plan unless the exercise of such Award and the issuance and delivery
of share certificates for such Common Stock pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act of 1933, the Exchange Act, the rules and regulations promulgated thereunder,
and the requirements of any national securities exchange or Nasdaq System upon
which the Common Stock may then be listed or quoted, and shall be further
subject to the approval of counsel for the Corporation with respect to such
compliance to the extent such approval is sought by the Committee.
19. Governing Law
The validity, construction and effect of the Plan, of Grant Agreements
entered into pursuant to the Plan, and of any rules, regulations, determinations
or decisions made by the Board or Committee relating to the Plan or such Grant
Agreements, and the rights of
11
<PAGE>
any and all persons having or claiming to have any interest therein or
thereunder, shall be determined exclusively in accordance with applicable
federal laws and the laws of the State of Delaware without regard to its
conflict of laws rules and principles.
20. Plan Subject to Articles and By-Laws
This Plan is subject to the Articles and By-Laws of the Corporation, as
they may be amended from time to time.
21. Effective Date; Termination Date
The Plan is effective as of March 11, 1996, the date on which the Plan was
adopted by the Board, subject to approval of the stockholders within twelve
months of such date. Unless previously terminated, the Plan shall terminate on
the close of business on March 10, 2006, the day before the tenth anniversary of
the effective date. Subject to other applicable provisions of the Plan, all
Awards made under the Plan prior to termination of the Plan shall remain in
effect until such Awards have been satisfied or terminated in accordance with
the Plan and the terms of such Awards.
12
<PAGE>
Exhibit 21
List of Subsidiaries
--------------------
Color Graphics, Inc.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 4,237,427 1,080,630
<SECURITIES> 0 0
<RECEIVABLES> 2,321,920 4,289,731
<ALLOWANCES> 121,171 53,093
<INVENTORY> 450,837 466,117
<CURRENT-ASSETS> 7,792,245 6,205,644
<PP&E> 7,031,253 4,176,663
<DEPRECIATION> 1,028,474 327,600
<TOTAL-ASSETS> 14,299,768 10,233,808
<CURRENT-LIABILITIES> 3,714,652 3,499,729
<BONDS> 0 0
0 0
0 0
<COMMON> 34 33
<OTHER-SE> 650,181 500,182
<TOTAL-LIABILITY-AND-EQUITY> 14,299,768 10,233,808
<SALES> 25,107,783 11,142,518
<TOTAL-REVENUES> 25,426,297 11,208,688
<CGS> 13,274,757 5,953,971
<TOTAL-COSTS> 15,180,546 7,061,629
<OTHER-EXPENSES> 5,915,587 1,879,539
<LOSS-PROVISION> 107,906 24,000
<INTEREST-EXPENSE> 380,696 127,507
<INCOME-PRETAX> 2,920,994 1,812,413
<INCOME-TAX> 1,308,400 743,140
<INCOME-CONTINUING> 1,612,594 1,069,273
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,382,110 1,013,209
<EPS-PRIMARY> .45 .34
<EPS-DILUTED> .44 .33
</TABLE>
