<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 1, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____________
Commission file number 0-6004
SCANFORMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-1704876
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
181 Rittenhouse Circle
Keystone Park, Bristol, Pennsylvania 19007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 785-0101
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- -------
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of December 20, 1995, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately 5,230,940.*
As of December 20, 1995, 3,546,648 shares of common stock, $.01 par value,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement with respect to the
Registrant's 1996 Annual Meeting of Stockholders, to be filed not later than 120
days after the close of the Registrant's fiscal year, are incorporated by
reference into Part III of this Form 10-K.
_______________________
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without
conceding that all such persons are "affiliates" of the Registrant for
purposes of the federal securities laws.
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PART I
Item 1. Business
Scanforms, Inc. ("Scanforms" or the "Company")is a full-service
manufacturer of direct mail advertising with in-house forms manufacturing, laser
and impact computer personalization, bindery and mailing services.
Scanforms special capabilities include up to ten color web heatset
four color process printing, hot foil stamping and embossing, die cutting,
pressure sensitive labeling, tipped on plastic and paper cards and remoist
gluing.
The Company's sales staff markets the Company's services and products
to advertising agencies for use by the agencies' clients and directly to end
user clients.
The Company's marketing efforts also include direct mail advertising,
attendance at monthly direct mail industry meetings in various cities,
attendance at major trade shows and direct telephone contacts.
The market for the Company's services and products is located
principally on the east coast, although the Company also serves customers in the
midwest and is making efforts to develop markets nationally.
The primary raw material used by the Company is paper. The Company
also uses ink, film and metal plates. These products are available from
numerous sources. Generally, the Company maintains a six week supply of raw
materials.
Sales to the Company's largest customer, MBNA America accounted for
22.8% of the Company's revenues during the fiscal year ended October 1, 1995.
The loss of this customer would have a material adverse effect on the Company's
sales and income.
The total amount of the backlog of orders believed to be firm as of
October 1, 1995 and October 2, 1994 was approximately $7,497,000 and $7,696,000,
respectively. The Company usually fills its backlog within 12 months. The
Company's business is not significantly seasonal.
The direct mail production business in which the Company is engaged is
intensely competitive. The Company believes that there are at least ten
companies with which it
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competes in its principal market area. Some of these companies have greater
financial resources than the Company and larger sales forces and advertising
budgets than the Company. The Company attempts to compete with such companies by
stressing the quality of its services. The Company believes that it is able to
react quickly to customer requirements and to give its customers individualized
attention. Further, although its competitors do significant business in the
Philadelphia and New York metropolitan areas, the Company's principal markets,
the Company believes that it has one of the largest plants in the Washington to
New York corridor.
As of October 1, 1995, the Company had 166 employees, of whom 127 were
plant employees, 6 were executive and key administrative employees, 18 were
sales and sales service employees and 15 were clerical employees.
Repayment of Subordinated Indebtedness
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for
information regarding the repayment by the Company of its subordinated
indebtedness.
Item 2. Properties
The Company owns a 123,489 square foot, one-story office and plant at
181 Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania. The property is
currently financed through the Company's bank credit facility. See Notes 5 and
6 to the Company's financial statements for further information.
The Company believes that its facilities are suitable for its business
needs at the present time and for the immediate future.
Item 3. Legal Proceedings
In May 1993, the Company received a notice from the U.S. Environmental
Protection Agency ("EPA") that it had been named as a potentially responsible
party ("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") relative to the Frontier Chemicals
Superfund Site in Niagara Falls, New York (the "Site"). The Company joined
groups of PRPs that entered into a Consent Order with the EPA addressing drums
located at the Site (the "Drum Activities") and an Administrative Order on
Consent addressing tanks located at the Site (the "Tank Activities"). As a
result
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of its participation in these Orders, the Company has no further obligations
with respect to the Drum and Tank Activities, except as noted below.
In October 1994, the Company received a letter from the Drum
Activities PRP group stating that the remediation consultant initially retained
for those activities and subsequently terminated had filed a civil action in the
New York State Supreme Court, Monroe County, for breach of contract against the
PRP group and for defamation against certain individuals who may have the right
to be indemnified by the PRP group relative to those claims. The total damages
sought in the action, excluding punitive damages, which are requested but for
which no dollar amounts are specified are approximately $2.8 million, of which
approximately $240,000 relate to the breach of contract claim. For the initial
phase of this litigation, the Company, as part of the PRP group, paid an
assessment of $200.
Management has been advised by counsel to the PRP group that five of
the six counts of the complaint have been dismissed, leaving only the breach of
contract claim, and that the plaintiff did not respond to a counterclaim made by
the PRP group, so is in default regarding that claim. To date, the plaintiff
has not prosecuted the claim and it has been removed from the trial calendar.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 4A. Executive Officers of the Company
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Samans 63 Chairman of the Board and President
Robert W. O'Leary 49 Vice President, Sales and Marketing
Gary Crawford 54 Vice President, Operations
William P. Carey 54 Treasurer
</TABLE>
Robert A. Samans has served as the President and a director of the
Company since its formation in January 1969 and as Chairman of the Board since
September 1990.
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Robert W. O'Leary has served as Vice President, Sales and Marketing,
of the Company since January 1987. He has served as the Company's Sales Manager
since 1983.
Gary Crawford has served as Vice President, Operations of the Company
since October 1993. He was the Company's Director of Operations from June 1992
to October 1993. From November 1989 to June 1992, Mr. Crawford was General
Manager of Champion Envelope Corporation of Union, N.J., an envelope
manufacturer. From June 1987 to November 1989, he was the New York Sales
Manager for the Company. From March 1986 to June 1987 Mr. Crawford was
Executive Vice President and General Manager of Boston Envelope Incorporated, an
envelope manufacturer.
William P. Carey has served as Treasurer of the Company since February
1992. He has been employed by the Company in various capacities since 1984.
4
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock is included in The Nasdaq Stock Market
("Nasdaq"). The following table sets forth, for the calendar quarters
indicated, the quarterly high and low bid quotations for the Common Stock as
reported on Nasdaq. The quotations listed below reflect inter-dealer prices,
without retail mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
- ------------- -------- -------
<S> <C> <C>
September 30, 1995 $2 5/8 $ 2
June 30, 1995 2 3/4 2 3/16
March 31, 1995 2 7/8 1 11/16
December 31, 1994 2 1 1/2
September 30, 1994 1 13/16 1 1/2
June 30, 1994 2 3/16 1 3/4
March 31, 1994 2 7/16 1 9/16
December 31, 1993 1 13/16 1 11/16
</TABLE>
Holders of Common Stock
On December 20, 1995, 3,546,648 shares of the Company's Common Stock
were outstanding. On such date, there were 298 holders of record.
Dividend Policy
The Board of Directors of the Company has not declared a dividend for
several years. Under the terms of the Company's loan agreement with its
principal lending bank, the maximum dividends the Company can pay is 50% of the
net income of the Company during the year. The Company is restricted from
redeeming any of its outstanding capital stock for so long as the Company has
any existing obligations to the Bank under the loan agreement or any documents
ancillary to the agreement. See Notes 5 and 6 to the Financial Statements for
further information.
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Item 6. Selected Financial Data
The following is a summary of selected financial data of the Company
for each of the five years ended on the dates set forth below, which should be
read in conjunction with the financial statements of the Company and the notes
thereto:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------
October 1 October 2 October 3 October 4 September 30
1995 1994 1993 1992 1991
------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $24,518,878 $22,235,890 $22,488,184 $19,302,992 $19,321,779
----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of accounting change $1,570,540 $ 1,424,207 $ 774,932 $ 303,818 $(1,108,136)
Cumulative effect of
accounting change -- 260,686a -- -- --
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $1,570,540 $ 1,163,521 $ 774,932 $ 303,818 $(1,108,136)
----------- ----------- ----------- ----------- -----------
Income (Loss) per share of
common stock before
cumulative effect of
accounting change $ .43 $ .39 $ .22 $ .10 $ (.36)
Cumulative effect of
accounting change $ -- .07a -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) per share
of common stock $ .43 $ .32 $ .22 $ .10 $ (.36)
----------- ----------- ----------- ----------- -----------
October 1 October 2 October 3 October 4 September 29
1995 1994 1993 1992 1991
------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $16,693,206 $16,334,385 $13,618,380 $13,825,881 $14,942,300
----------- ----------- ----------- ----------- -----------
Long-term Obligations $3,900,535 $ 3,152,091 $ 3,567,668 $ 6,042,660 $ 7,209,661
----------- ----------- ----------- ----------- -----------
Stockholders' Equity $5,564,774 $ 3,984,552 $ 2,698,228 $ 1,687,471 $ 1,400,542
----------- ----------- ----------- ----------- -----------
</TABLE>
a - Cumulative effect of change in accounting for income taxes under FASB 109.
Note: The Company has not paid cash dividends during the five year period
presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations: Fiscal 1995 vs. Fiscal 1994
The Company's net sales increased by 10.3% from $22,235,890 in fiscal 1994 to
$24,518,878 in fiscal 1995, reflecting an expansion of the customer base. Gross
profit increased by 15.1% from $6,061,019 to $6,973,733. The increase in gross
profit was
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primarily the result of increased sales volume and an improvement in product
mix, net of a retroactive workmen's compensation insurance premium assessment.
Operating expenses were $3,999,945 and 3,450,986 in fiscal 1995 and fiscal
1994, respectively. The increase of 15.9% was primarily due to various factors
including increased compensation expense, the payment of performance bonuses,
consulting fees and additional employees.
Interest costs decreased by 8.6% from $436,120 to $398,665, due to the
retirement of certain indebtedness and the decreased borrowings needed to
provide working capital as a result of increased cash generated from operations.
The increase in the Company's effective tax rate in fiscal year 1995 from
fiscal 1994 is primarily the result of the reinstatement of the corporate net
operating loss deduction by the State of Pennsylvania as more fully described in
the "Results of Operations 1994 vs. 1993".
Competition in the direct mail industry continues to be strong, and some
pricing remains depressed. More pressure has been put on the margins due to
increases in paper prices. As disclosed under "Liquidity and Capital
Resources," the Company has purchased additional production equipment in order
to service its expanded customer base and resulting increased volume.
Results of Operations: Fiscal 1994 vs. Fiscal 1993
The Company's net sales for fiscal 1994 declined by 1.1% from fiscal 1993.
Gross profit increased by 3.4% from $5,858,550 to $6,061,019. The increase in
gross profit was the result of cost reductions relating to increased production
efficiencies.
Operating expenses were $3,450,986 and $3,890,250 in fiscal 1994 and fiscal
1993, respectively. The decrease of 11.3% reflects the Company's determination
to pass through a larger portion of shipping costs to customers, and also
reflects reduction of outside consulting costs and bank service charges. In
addition, during fiscal 1993, operating expenses were increased as a result of a
$288,199 write off of a note receivable from the former Chairman of the Company,
after the Company concluded that he would not be able to make additional
payments under the note. Moreover, the reduction in operating expenses gives
effect to the reversal of $67,083 of the amount previously written off in
connection with the note receivable from the Company's former Chairman of the
Board. A court order garnishing consulting fees payable to the former Chairman
was
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reversed on appeal. As a result, the Company was able to apply those consulting
fees to payment of a portion of the amounts due under the note.
Interest costs decreased by 31.7% from $638,942 to $436,120, due to the
retirement of certain indebtedness and the decreased borrowings needed to
provide working capital as a result of increased cash generated from operations.
As more fully described in Note 8 to the financial statements, the Company
adopted FASB Statement No. 109 in the first thirteen weeks of 1994. The
cumulative effect of the change in the method of accounting for income taxes
resulting from the Company's adoption of FASB Statement No. 109 was to decrease
the Company's net income by $260,686, or $0.07 per share, for fiscal 1994. The
$260,686 decrease constitutes a non-cash item and is a one time charge. The
deferred tax assets and expenses will be recognized when the temporary
differences as described in Note 8 to the financial statements are reversed.
The reduction in the Company's effective tax rate in fiscal 1994 is
primarily the result of the reinstatement of the corporate net operating loss
deduction by the State of Pennsylvania effective for the fiscal years beginning
in 1995. The Company had losses, for Pennsylvania income tax purpose, in fiscal
1989 and 1991 of $654,637 and $361,854, respectively. Because applicable
regulations limit to $500,000 the amount of loss in any single fiscal year that
may be utilized, the Company will not realize a benefit with respect to $154,637
of the $654,637 operating loss of 1989. Management estimates that the available
loss carry forward will be utilized to offset the taxes otherwise due on
$861,854 in income during the 1995, 1996 and 1997 fiscal years, and therefore,
the Company has recorded a deferred state income tax asset of $93,849 in fiscal
1994.
Liquidity and Capital Resources
On June 21, 1995, the Company received a revolving line of credit with a new
lending institution in the amount of $2.5 million which is limited to 80% of
eligible accounts receivable less 80% of customer advances plus 50% of raw
material inventories up to $500,000. Borrowings under this line are
collateralized by all accounts receivable, inventories and other personal
property and bear interest at the bank's prime lending rate plus an annual
commitment fee of 0.125% on the unused portion. The agreement with the lender
also provides for mortgage note financing in the amount of $2.5 million with a
principal payment of $13,889 per month plus interest at 0.25% above the bank's
prime lending rate and a final payment of the
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<PAGE>
unpaid principal and accrued interest then due, payable at the maturity of the
note. The proceeds of the mortgage note were used to retire the existing
mortgage note of the former lending institution in the amount of $2,375,000 and
the remainder was used for working capital and deferred finance fees. The
revolving line of credit and the mortgage note are due on June 21, 2000 and July
1, 2000 respectively.
Under the terms of the revolving line of credit and mortgage note agreement
with the bank, the Company's ability to pay dividends is limited to 50% of the
Company's net income during the year. The Company is also subject to certain
covenants and restrictions related to increased debt, granting liens, tangible
net worth, earnings before interest and taxes and the ratio of liabilities to
tangible net worth and other items. The agreement prohibits the Company from
making capital expenditures in excess of $500,000 in the aggregate in any one
fiscal year which are not financed with permitted indebtedness.
The Company's working capital increased to $2,571,511 as of October 1, 1995,
an increase of $1,946,131 or 311.2% from $625,380 on October 2, 1994. The
increase was the result of net income for fiscal year 1995, the refinancing of
the mortgage note with the new primary lending institution and the refinancing
of the balloon payment of a press as described below.
Equipment purchased during October 1994 for an aggregate purchase price of
$795,114, was financed with five year term loans in the amount of $794,310. A
new water system for one of the presses was purchased for $209,999. This system
is being financed over three years along with the remainder of a note which was
due on the press in the amount of $346,428. The new note is in the amount of
$556,427. Additionally, a $91,791 camera monitoring system and additional
folding equipment for the finishing department have been purchased and financed
over five years in the aggregate amount of $255,300.
Certain other significant balance sheet changes during the fifty two weeks
ended October 1, 1995 included decreases in customer advances of $1,063,810
accounts receivable net of allowance of $125,611 and income taxes payable of
$240,060 and increases in accounts payable of $262,192 and inventories of
$831,016. The reduction in customer advances resulted from the utilization of
customer deposits to cover postage costs as the Company delivered direct mail
materials to the post office for shipment. The decrease in accounts receivable
reflects the timing of customer invoices and the reduction in income taxes
payable is the result of the payment of current year taxes based on requirements
of the federal and state agencies. The increase
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in accounts payable reflects the timing of vendors invoices as a result of
purchases relating to the fourth quarter production. The increase in inventories
is the result of the build up of paper inventory in anticipation of paper price
increases and spot shortages.
During the fifty two weeks of fiscal 1995, the Company did not utilize its
working capital line of credit with its principal lending banks. The Company
believes that the cash flow generated from operations and the amount available
under its working capital line of credit ($1,174,902 as of October 1, 1995) will
enable the Company to meet its currently anticipated operating requirements.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable.
10
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PART III
Item 10. Directors and Executive Officers of the Registrant
This information (other than the information regarding executive officers of
the Company called for by Item 401 of Regulation S-K which is included in Part I
hereof as Item 4A in accordance with General Instruction G(3)) will be contained
in the Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days following the end of the Company's fiscal year, and is hereby
incorporated by reference thereto.
Item 11. Executive Compensation
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
Item 13. Certain Relationships and Related Transactions
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission within 120 days following the
end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
11
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report.
1. Consolidated Financial Statements:
Index to Consolidated Financial Statements and Schedule
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - as of
October 1, 1995 and October 2, 1994
Consolidated Statements of Income - Years
ended October 1, 1995, October 2, 1994 and
October 3, 1993
Consolidated Statement of Stockholders' Equity -
Years ended October 1, 1995, October 2, 1994 and October 3,
1993
Consolidated Statements of Cash Flows - Years
ended October 1, 1995, October 2, 1994 and October 3, 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Valuation and Qualifying Accounts and Reserves (Schedule II)
Schedules other than those listed above have been omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits:
Exhibit
Number Description of Exhibits.
3.1 Restated Certificate of Incorporation of the Company (Incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the fiscal
year ended October 2, 1994)
3.2 By-laws of the Company, as amended (Incorporated by reference to
Exhibit 3(b) to the Company's Form 10-K for the fiscal year ended
September 29, 1991)
12
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10.1 Loan Agreement dated as of June 21, 1995, by and between the Company
and Mellon Bank, N.A. (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the fiscal quarter ended July 2, 1995)
10.2 Note Agreement dated as of January 1, 1994, issued by Robert A. Samans
to the Company (Incorporated by reference to Exhibit 10(e) to the
Company's Form 10-K for the fiscal year ended October 2, 1994)
10.3 Scanforms, Inc. Profit Sharing 401-K Plan (Incorporated by reference to
Exhibit 10(g) to the Company's Form 10-K for the fiscal year ended
October 2, 1994)
10.4 Scanforms, Inc. 1992 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8 (File No. 33-81720), filed with the Commission on July 19,
1994
11 Computation of Earnings Per Common Share
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports were filed on Form 8-K during the last quarter of the fiscal year
covered by this report.
13
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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, in Bristol,
Pennsylvania, on December 22, 1995.
SCANFORMS, INC.
By:/s/ Robert A. Samans
----------------------------
Robert A. Samans
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
Signature Title Date
/s/ Robert A. Samans Principal Executive December 22, 1995
- ----------------------------- Officer and Director
Robert A. Samans
/s/ Sebastian A. Carcioppollo Director December 22, 1995
- -----------------------------
Sebastian A. Carcioppollo
/s/ Joel Jacks Director December 22, 1995
- -----------------------------
Joel Jacks
/s/ William P. Carey Principal Financial December 22, 1995
- ----------------------------- and Accounting Officer
William P. Carey
14
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SCANFORMS, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES FILED WITH THE ANNUAL
REPORT OF THE REGISTRANT ON FORM 10-K
FOR THE YEAR ENDED OCTOBER 1, 1995
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements:
Balance sheets F-3
Statements of income F-4
Statement of stockholders' equity F-5
Statements of cash flows F-6-7
Notes to consolidated financial statements F-8-19
Financial Statement Schedule:
Valuation and qualifying accounts and reserves II F-20
Schedules other than those listed above have been omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Scanforms, Inc.
Bristol, Pennsylvania
We have audited the accompanying consolidated balance sheets of Scanforms, Inc.
and Subsidiary as of October 1, 1995 and October 2, 1994 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 1, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Scanforms, Inc. and Subsidiary as of October 1, 1995 and October 2, 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 1, 1995, in conformity with generally
accepted accounting principles.
We have also audited Schedule II of Scanforms, Inc. and Subsidiary for each of
the three years in the period ended October 1, 1995. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
November 24, 1995
F-2
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 1995 and OCTOBER 2, 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,910,264 $ 3,522,546
Note receivable - current portion 7,747 -
Accounts receivable, net of allowance for
doubtful accounts of $410,000 - 1995;
$390,000 - 1994 (Notes 5 and 6) 3,673,623 3,819,234
Inventories (Notes 2, 5 and 6) 1,665,313 834,297
Other current assets 316,012 250,100
Deferred income taxes (Note 8) 266,030 268,138
----------- -----------
Total current assets 8,838,989 8,694,315
----------- -----------
Property, plant and equipment - at cost, net of
accumulated depreciation and amortization
(Notes 4 and 6) 7,768,880 7,568,548
----------- -----------
Other assets:
Note receivable - long-term portion 12,201 -
Other 73,136 71,522
----------- -----------
Total other assets 85,337 71,522
----------- -----------
$16,693,206 $16,334,385
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 6) $ 730,692 $ 1,492,524
Accounts payable 1,738,699 1,476,507
Customer advances 3,045,342 4,109,152
Income taxes payable (Note 8) 189,549 429,609
Other current liabilities 563,196 561,143
----------- -----------
Total current liabilities 6,267,478 8,068,935
----------- -----------
Long-term debt, net of current maturities (Note 6) 3,900,535 3,152,091
----------- -----------
Deferred income taxes (Note 8) 960,419 1,128,807
----------- -----------
Commitments and contingencies (Note 9)
Stockholders' equity (Notes 3 and 7):
Preferred stock, $1 par;
500,000 shares authorized; none issued
Common stock, $0.01 par; - -
6,000,000 shares authorized; issued and
outstanding 3,546,648 in 1995 and
3,663,460 in 1994 35,467 36,635
Capital in excess of par 1,388,461 1,509,471
Retained earnings 4,548,827 2,978,287
Less:
Note receivable from stockholder (407,981) (411,663)
Treasury stock - 136,812 shares, at cost - (128,178)
----------- -----------
Total stockholders' equity 5,564,774 3,984,552
----------- -----------
$16,693,206 $16,334,385
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
Net sales $24,518,878 $22,235,890 $22,488,184
Cost of sales 17,545,145 16,174,871 16,629,634
----------- ----------- -----------
Gross profit 6,973,733 6,061,019 5,858,550
----------- ----------- -----------
Operating expenses:
Selling, general and administrative 3,979,945 3,459,836 3,535,944
Provision for losses on accounts
receivable 20,000 58,233 66,107
Write-off of stockholder's note
receivable (Notes 3 and 7) - - 288,199
Other - ( 67,083) -
----------- ----------- -----------
3,999,945 3,450,986 3,890,250
----------- ----------- -----------
Income from operations 2,973,788 2,610,033 1,968,300
Other expense:
Interest cost 398,665 436,120 638,942
----------- ----------- -----------
Income before income taxes and cumulative
effect of accounting change 2,575,123 2,173,913 1,329,358
Income taxes (Note 8) 1,004,583 749,706 554,426
----------- ----------- -----------
Income before cumulative effect
of accounting change 1,570,540 1,424,207 774,932
Cumulative effect of accounting
change (Note 8) - 260,686 -
----------- ----------- -----------
Net income $ 1,570,540 $ 1,163,521 $ 774,932
=========== =========== ===========
Earnings per common share:
Primary
Income before cumulative effect of
accounting change $ .43 $ .39 $ .23
Cumulative effect of accounting change - (.07) -
---------- ---------- ----------
Net primary $ .43 $ .32 $ .23
========== ========== ==========
Fully diluted
Income before cumulative effect of
accounting change $ .43 $ .39 $ .22
Cumulative effect of accounting change - (.07) -
---------- ---------- ----------
Net fully diluted $ .43 $ .32 $ .22
========== ========== ==========
Weighted average number of shares:
Primary 3,644,187 3,613,651 3,302,352
========== ========== ==========
Fully diluted 3,652,069 3,614,249 3,479,047
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
<TABLE>
<CAPTION>
Common Stock
--------------------- Capital Stockholders'
Shares in excess Retained notes Treasury
issued Amount of par earnings receivable stock
--------- -------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 4, 1992 3,163,460 $31,635 $1,389,471 $1,039,834 $(645,291) $(128,178)
--------- ------- ---------- ---------- --------- ---------
Decrease in notes from
stockholders (Note 7) 235,825
Net income for the year 774,932
--------- ------- ---------- ---------- --------- ---------
Balance, October 3, 1993 3,163,460 31,635 1,389,471 1,814,766 (409,466) (128,178)
Issuance of warrants
from the subordinated
debtholders (Note 7) 500,000 5,000 120,000
Increase in notes from
stockholder (Note 7) (2,197)
Net income for the year 1,163,521
--------- ------- ---------- ---------- --------- ---------
Balance, October 2, 1994 3,663,460 36,635 1,509,471 2,978,287 (411,663) (128,178)
Issuance of stock under
the incentive stock
option plan (Note 7) 20,000 200 5,800
Retirement of
treasury stock (136,812) (1,368) (126,810) 128,178
Decrease in notes from
stockholder (Note 7) 3,682
Net income for the year 1,570,540
--------- ------- ---------- ---------- --------- ---------
Balance, October 1, 1995 3,546,648 $35,467 $1,388,461 $4,548,827 $(407,981) $ -
========= ======= ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $24,020,668 $24,189,043 $23,043,930
Cash paid to suppliers and
employees (21,581,397) (18,971,641) (19,299,049)
Interest received 184,411 66,865 4,252
Interest paid (526,901) (583,979) (765,131)
Income taxes paid (1,410,924) (435,961) (255,180)
----------- ----------- -----------
Net cash provided by
operating activities 685,857 4,264,327 2,728,822
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of equipment 1,552 1,030 -
Purchase of plant and equipment (1,295,985) (672,524) (200,863)
Repayment of stockholder loans 3,682 2,644 11,955
----------- ----------- -----------
Net cash used in investing
activities (1,290,751) (668,850) (188,908)
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common shares 200 5,000 -
Paid-in surplus on issuance of
common shares of capital stock 5,800 120,000 -
Net repayments under revolving
credit facility - - (537,105)
Proceeds from long-term debt 4,106,038 1,070,952 123,591
Repayment of long-term debt (4,100,249) (2,039,173) (1,179,485)
Principal payments under capital
lease obligations (19,177) (59,956) (118,542)
----------- ----------- -----------
Net cash used in financing
activities (7,388) (903,177) (1,711,541)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (612,282) 2,692,300 828,373
Cash and cash equivalents -
beginning of year 3,522,546 830,246 1,873
----------- ----------- -----------
Cash and cash equivalents -
end of year $ 2,910,264 $ 3,522,546 $ 830,246
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Net income $ 1,570,540 $1,163,521 $ 774,932
----------- ---------- ----------
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 1,093,962 961,667 994,023
Loss on sale and abandonment
of equipment (19,809) 39,574 7,234
Accrued interest-officers - (4,841) (29,329)
Allowance for doubtful accounts 20,000 58,233 66,107
Write-off of note receivable - (67,083) 288,199
Amortization of finance charges 53,066 23,846 24,013
Amortization of warrants interest - - 7,421
Decrease (increase) in assets:
Accounts receivable 125,611 (186,805) (357,664)
Inventories (831,016) 112,184 580,639
Other current assets ( 65,912) 18,968 (73,087)
Deferred income taxes 2,108 (268,138) -
Other assets ( 54,680) (44,657) (4,528)
Increase (decrease) in
liabilities:
Accounts payable 262,192 4,964 (832,526)
Customer advances (1,063,810) 1,956,926 799,932
Other current liabilities 2,053 (346,602) 184,210
Income taxes payable (240,060) 220,070 58,394
Deferred income taxes (168,388) 622,500 240,852
----------- ---------- ----------
Total adjustments (884,683) 3,100,806 1,953,890
----------- ---------- ----------
Net cash provided by
operating activities $ 685,857 $4,264,327 $2,728,822
=========== ========== ==========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Retirement of treasury stock $ 128,178 - -
Reduction in common stock $ (1,368) - -
Reduction in paid-in surplus $ (126,810) - -
Sale of fixed asset for a note
receivable $ (21,500) - -
Increase in notes receivable from
stockholders from interest income - $ 2,197 $ 29,329
Increase in subordinated debt from
amortization of warrants - - $ 7,421
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Scanforms, Inc. and subsidiary (the "Company") consist of one operating segment,
a full-service direct mail organization. A summary of the significant
accounting policies consistently applied in the preparation of the accompanying
consolidated financial statements follows.
Basis of presentation
The consolidated financial statements include the accounts of Scanforms, Inc.
and its wholly-owned inactive subsidiary which was dissolved as of June 29,
1995. All intercompany balances and transactions have been eliminated.
Fiscal year
The Company's fiscal year ends on the Sunday after the Friday closest to
September 30. The fiscal years 1995, 1994 and 1993 ended October 1, 1995,
October 2, 1994 and October 3, 1993, respectively. The fiscal years 1995, 1994
and 1993 are comprised of 52 weeks.
Cash equivalents
Cash equivalents are short-term, highly liquid investments purchased with
maturities of three months or less.
Concentration of credit risk
The Company provides direct mail advertising materials to customers primarily in
the direct mail marketing industry. Customers are primarily on the East Coast.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers.
The Company maintains cash balances in financial institutions located in Rhode
Island, Massachusetts and Pennsylvania. These balances are insured by the
Federal Deposit Insurance Corporation up to $100,000. At October 1, 1995, the
uninsured amount held at these financial institutions totalled $3,660,261.
Although these amounts were uninsured at year-end, the Company reinvests the
excess cash on a daily basis to maximize yield and is able to monitor current
trends to minimize investment risk.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
F-8
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization
Depreciation and amortization are provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives,
principally on a straight-line basis. The estimated useful lives of depreciable
assets range from 3 to 50 years. Capitalized leased assets are amortized over
the estimated useful life of the asset. Amortization periods range from 5 to 12
years. Depreciation and amortization expense was $1,093,962, $961,667 and
$994,023 for 1995, 1994 and 1993, respectively.
Income taxes
The Company adopted, effective October 4, 1993, Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," issued in
February 1992. Under the liability method specified by SFAS No. 109, deferred
tax assets and liabilities are determined based on the difference between
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when the differences reverse.
Deferred tax expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation,
state net operating loss carryovers, investment tax credits, allowance for
doubtful accounts and capitalization of certain inventory costs.
The deferred method, used in the years prior to 1994, required the Company to
provide for deferred tax expense based on certain items of income and expense
which were reported in different years in the financial statements and the tax
returns as measured by the tax rate in effect for the year the differences
occurred.
The cumulative effect of the change in accounting for income taxes resulted in a
decrease in net earnings for 1994 of $260,686 or $0.07 per share. Years prior
to 1994 were not restated. This decrease primarily occurred because of the
method under Accounting Principles Board Opinion No. 11 of accounting for
investment tax credit carryforwards and tax rates.
Earnings per common share
Primary and fully dilutive earnings per common share are based on the weighted
average number of common shares outstanding, including common stock equivalents
(stock options and warrants).
F-9
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred financing costs
Financing costs, included in other assets, incurred in connection with the
refinancing of debt, have been capitalized and are being amortized over the life
of the related debt.
Financial instruments
In December 1991, the Financial Accounting Standards Board issued SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," which requires all
entities to disclose the estimated fair value of their financial instrument
assets and liabilities. The Company will be required to implement this standard
in its 1996 fiscal year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Raw materials $1,288,936 $464,377
Work-in-process 376,377 369,920
---------- --------
$1,665,313 $834,297
========== ========
</TABLE>
The Company wrote off $175,553, $95,000 and $175,000 for obsolete paper and
carton inventory in 1995, 1994 and 1993, respectively.
3. NOTE RECEIVABLE FROM STOCKHOLDER
The unsecured balance of a note due from Robert A. Samans, Chairman and
President, plus accrued interest as of October 3, 1993 (Note 7) was amended,
effective January 1, 1994, to provide that the principal and accrued interest as
of that date be repaid monthly, commencing on January 31, 1994, in accordance
with a 30-year amortization schedule. Interest is payable at 8% per annum. On
January 1, 1999, any outstanding principal and interest is payable in full.
Interest income on the notes was $32,798, $24,716 and $29,330 in
1995, 1994 and 1993, respectively.
F-10
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land $ 208,837 $ 208,837
Buildings and improvements 5,239,966 5,239,966
Production equipment 13,709,333 12,436,845
Office furniture and equipment 413,900 398,720
Automobiles 21,200 21,200
----------- -----------
19,593,236 18,305,568
Less accumulated depreciation
and amortization 11,824,356 10,737,020
----------- -----------
$ 7,768,880 $ 7,568,548
=========== ===========
</TABLE>
Production equipment includes capitalized leased assets of $0 in 1995 and
$95,460 in 1994 before accumulated amortization of $40,780 in 1994.
5. BANK REVOLVING CREDIT FACILITY
On June 21, 1995, the Company received a revolving line of credit with a new
lending institution in the amount of $2.5 million which is limited to 80% of
eligible accounts receivable less 80% of customer advances plus 50% of raw
material inventories up to $500,000. Borrowings under this line are
collateralized by all accounts receivable, inventories and other personal
property and bear interest at the bank's prime lending rate plus an annual
commitment fee of 1/8% on the unused portion. The agreement with the lender
also provides for mortgage note financing in the amount of $2.5 million with a
principal payment of $13,889 per month plus interest at 1/4% above the bank's
prime lending rate (effective rate was 9 1/4% at October 1, 1995) and a final
payment of the unpaid principal then due, payable at the maturity of the note.
The proceeds of the mortgage note were used to retire the existing mortgage note
of the former lending institution in the amount of $2,375,000 and the remainder
was used for working capital and deferred finance fees. The revolving line of
credit and the mortgage note are due on June 21, 2000 and July 1, 2000,
respectively.
F-11
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3,1993
5. BANK REVOLVING CREDIT FACILITY (CONTINUED)
Under the terms of the revolving line of credit and mortgage note agreement with
the bank, the Company is limited on payment of dividends to 50% of the Company's
net income during the year. The Company is also subject to certain covenants
and restrictions related to increased debt, granting liens, tangible net worth,
earnings before interest and taxes, and the ratio of liabilities to tangible net
worth and other items. The agreement prohibits the Company in making capital
expenditures in excess of $500,000 in the aggregate in any one fiscal year which
are not financed with permitted indebtedness.
At October 1, 1995, there were no borrowings against the revolving credit
facility and approximately $1,174,000 of borrowing under the revolving credit
facility of $2,500,000 was available for use by the Company. The line of credit
expires on June 21, 2000.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Mortgage notes:
Payable in monthly installments of
$13,889 plus interest of 1/4% over
prime effective June 1995 with a
final payment of $1,680,556 due on
July 1, 2000 (effective rate at
year-end 9%) $2,472,222 $ -
Payable in monthly installments of
$23,750 plus interest at 2-1/4%
over prime effective November 1993
with a final payment of $1,448,750
due October 1998 - 2,588,750
Installment notes payable in monthly
installments of:
$6,423 including interest at
10.1% through November 2000 261,158 -
$6,423 including interest at
10.1% through November 2000 265,375 -
$4,075 including interest at
10.1% through December 2000 170,942 -
</TABLE>
F-12
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3,1993
6. LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C> <C>
$17,790 including interest at
9.4% through April 1998 488,271 -
$5,156 including interest at
7.8% through September 2000 255,301 -
$3,530 including interest at
9.0% through April 1999 130,910 160,053
$5,232 including interest at
9.9% through July 1999 199,635 240,485
$7,138 including interest at
10.0% through July 1999 280,986 335,968
$17,675 including interest at
14.195% through June 1995
with final payment of $375,000 17,675 489,254
$9,255 including interest at
14.26% through September 1995 9,255 104,073
$353 including interest at 9.75%
through May 1998 9,937 13,048
$2,215 including interest at
8.95% through August 1998 69,560 89,098
$9,290 including interest at
13.38% through May 1995 - 71,446
$2,810 including interest at
12.5% through November 1994 - 8,263
$29,762 plus interest at 1%
over prime - 525,000
---------- ----------
4,631,227 4,625,438
---------- ----------
Capitalized lease obligations
Payable in monthly installments of
$1,520 including interest at
12.75% through July 1995 - 15,200
Other - 5,800
---------- ----------
- 21,000
Less amounts representing interest - 1,823
---------- ----------
Present value of capitalized lease
obligations - 19,177
---------- ----------
4,631,227 4,644,615
Less current maturities 730,692 1,492,524
---------- ----------
Long-term debt $3,900,535 $3,152,091
========== ==========
</TABLE>
F-13
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
6. LONG-TERM DEBT (CONTINUED)
Long-term debt, excluding capitalized lease obligations and the bank revolving
credit facility, matures as follows:
1996 $ 730,692
1997 739,651
1998 704,381
1999 554,058
2000 1,902,445
----------
$4,631,227
==========
Long-term debt is collateralized by substantially all assets of the Company.
The Company is subject to certain covenants and restric-tions relating to
working capital, minimum capital base and certain other matters with its lender
(Note 5).
7. STOCKHOLDERS' EQUITY
Warrants
On October 8, 1993, the warrants to purchase the 500,000 shares were exercised
at $.25 per share. The exercise amount of $125,000 was satisfied by reduction
in the amount due on the subordinated notes.
Stock Options
In December 1992, the Company authorized a 1992 Stock Option Plan. The plan
authorizes the granting of both incentive stock options and non-qualified stock
options to employees, consultants and advisors of the Company to purchase up to
a total of 300,000 shares of the Company's common stock. The exercise price of
incentive stock options may not be less than 100% of the fair market value on
the date of the grant. Non-qualified options may be granted at less than the
fair market value of the Company's common stock. For those individuals who own
more than 10% of the total combined voting power of all classes of stock of the
Company, options must be granted at an exercise price per share of not less than
110% of the fair market value of a share of the Company's common stock on the
date of the grant and expire in five years. All options outstanding under the
plan are currently exercisable. The plan will terminate on December 22, 2002.
F-14
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
7. STOCKHOLDERS' EQUITY (CONTINUED)
Stock option transactions for the years ended October 1, 1995, October 2, 1994
and October 3, 1993 are summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding-beginning of year 225,000 115,000 36,000
Granted - 120,000 105,000
Exercised (20,000) - -
Canceled - (10,000) (26,000)
--------- --------- ---------
Outstanding-end of year 205,000 225,000 115,000
========= ========= =========
Exercise price $.30-1.69 $.30-1.69 $.30-2.50
========= ========= =========
</TABLE>
Activity in notes receivable from stockholders for the fiscal years ended 1995,
1994 and 1993 is as follows:
<TABLE>
<CAPTION>
Robert J. Roy Sebastian
Total Samans Morris Carcioppolo
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Balance, October 4, 1992 $ 645,291 $390,460 $ 243,349 $ 11,482
Accrued interest 29,330 19,006 9,850 474
Return of payment due to
cancellation of contract 35,000 - 35,000 -
Write-off to bad debts (288,199) - (288,199) -
Payments by stockholder (11,956) - - (11,956)
--------- -------- --------- ---------
Balance, October 3, 1993 409,466 409,466 - -
Accrued interest 29,556 29,556 - -
Payments by stockholder (27,359) (27,359) - -
--------- -------- --------- ---------
Balance, October 2, 1994 411,663 411,663 - -
Accrued interest 32,798 32,798 - -
Payments by stockholder (36,480) (36,480) - -
--------- --------- --------- ---------
Balance, October 1, 1995 $ 407,981 $ 407,981 $ - $ -
========= ========= ========= =========
</TABLE>
F-15
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
7. STOCKHOLDERS' EQUITY (CONTINUED)
During 1993, a note due from the former Chairman of the Board was deemed
uncollectible. The Company was applying amounts due to the former Chairman under
a consulting agreement (which provided for payments of $35,000 annually through
October 1992) towards payment of the note; however, a bank that held a personal
note of the former Chairman obtained a court order, garnishing the consulting
fees. In March 1994, the court order was reversed and the bank's appeal was
denied. Accordingly, the Company reversed the 1993 accrual of the $67,083 that
remained payable under the consulting agreement.
8. INCOME TAXES
Effective October 4, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method (Note 1). The
income tax provision for 1993 has not been restated. The Company's pretax income
for fiscal years 1995, 1994 and 1993 was $2,575,123, $2,173,913 and $1,329,358,
respectively. The components of income tax expense were as follows:
<TABLE>
<CAPTION>
Liability Liability Deferred
Method Method Method
----------- ---------- ----------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 903,964 $ 424,939 $168,925
State 266,899 231,092 144,649
---------- --------- --------
Total current 1,170,863 656,031 313,574
---------- --------- --------
Deferred:
Federal (97,914) 212,135 248,943
State (68,366) (118,460) ( 8,091)
---------- --------- --------
Total deferred (166,280) 93,675 240,852
---------- --------- --------
Total $1,004,583 $ 749,706 $554,426
========== ========= ========
</TABLE>
The difference between the Company's effective tax rate and the U.S. federal
statutory tax rates for fiscal years 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ -----
<S> <C> <C> <C>
Statutory federal income
tax rate 34.0% 34.0% 34.0%
State income tax, net of
federal income tax effect 5.1 3.4 10.3
Other (.1) (3.0) (2.6)
----- ----- ----
Effective tax rate 39.0% 34.4% 41.7%
===== ===== ====
</TABLE>
F-16
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
8. INCOME TAXES (CONTINUED)
Pennsylvania Act 48 of 1994 was signed into law on June 16, 1994, effective on
July 1, 1994. Pursuant to Pennsylvania Act 48 of 1994, for taxable years
beginning in 1995 and thereafter, a net operating loss deduction of up to
$500,000 is allowable for each taxable year. Losses from previous taxable years
can be carried forward and utilized, earliest year first, beginning with 1988
under a predetermined schedule. The amount of deferred state income tax credit
as a result of the provisions of the act is $91,099.
The components of deferred income tax expense for 1993 includes:
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Net operating loss carryover $345,217
Depreciation (99,064)
Alternative minimum tax credit -
Allowance for doubtful accounts not
deductible until written off (22,440)
Investment tax credit 19,598
Capitalized inventory costs (2,124)
Miscellaneous (334)
--------
Total $240,852
========
</TABLE>
Deferred tax assets and liability at October 1, 1995 and October 2, 1994 consist
of the following:
<TABLE>
<CAPTION>
1995 1994
-------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts not
deductible until written off $172,364 $ 171,288
State of Pennsylvania net operating
loss benefit 91,099 93,849
Capitalized inventory costs 2,567 3,001
-------- ----------
Total deferred tax assets $266,030 $ 268,138
======== ==========
Deferred tax liability:
Depreciation $960,419 $1,128,807
======== ==========
</TABLE>
The net deferred tax liability in the balance sheets at October 1, 1995 and
October 2, 1994 includes the following:
<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Deferred tax liability $960,419 $1,128,807
Deferred tax asset 266,030 268,138
-------- ----------
Net deferred tax liability $694,389 $ 860,669
======== ==========
</TABLE>
F-17
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
9. COMMITMENTS AND CONTINGENCIES
The Company leases automotive, data processing and office equipment under
operating leases.
Total minimum rentals under noncancellable operating leases as of October 1,
1995 are as follows:
1996 $233,803
1997 181,181
1998 124,467
--------
Total $539,451
========
Rent expense incurred under these lease agreements was $299,997, $140,581 and
$134,412 in 1995, 1994 and 1993, respectively.
In May 1993, the Company received a notice from the U.S. Environmental
Protection Agency ("EPA") that it had been named as a potentially responsible
party ("PRP") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") relative to the Frontier Chemicals
Superfund Site in Niagara Falls, New York (the "Site"). The Company joined
groups of PRPs that entered into a Consent Order with the EPA addressing drums
located at the Site (the "Drum Activities") and an Administrative Order on
Consent addressing tanks located at the Site (the "Tank Activities"). As a
result of its participation in these Orders, the Company has no further
obligations with respect to the Drum and Tank Activities, except as noted below.
In October 1994, the Company received a letter from the Drum Activities PRP
group stating that the remediation consultant initially retained for those
activities and subsequently terminated had filed a civil action in the New York
State Supreme Court, Monroe County, for breach of contract against the PRP group
and for defamation against certain individuals who may have the right to be
indemnified by the PRP group relative to those claims. The total damages sought
in the action, excluding punitive damages, which are requested but for which no
dollar amounts are specified are approximately $2.8 million, of which
approximately $240,000 relate to the breach of contract claim. For the initial
phase of this litigation, the Company, as part of the PRP group, paid an
assessment of $200.
F-18
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 1, 1995, OCTOBER 2, 1994 AND OCTOBER 3, 1993
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Management has been advised by counsel to the PRP group that five of the six
counts of the complaint have been dismissed, leaving only the breach of contract
claim, and that the plaintiff did not respond to a counterclaim made by the PRP
group, so is in default regarding that claim. To date, the plaintiff has not
prosecuted the claim and it has been removed from the trial calendar.
10. EMPLOYEE BENEFIT PLAN
The Company has a qualified profit-sharing plan with a 401(k) feature covering
substantially all of its full-time employees. Company contributions for the
profit-sharing portion are discretionary and are determined by the Company's
Board of Directors.
Eligible employees may contribute up to 15% of their compensation and the
Company matches the lesser of $500 or 25% of those voluntary contributions.
Total expense under this plan was $79,390 in 1995, $77,945 in 1994 and $70,437
in 1993.
11. MAJOR CUSTOMERS
In 1995, one customer accounted for 22.8% of the Company's sales.
Two customers accounted for 11.5% and 10.4% of the Company's sales in 1994 and
no customer accounted for 10% of sales during 1993.
F-19
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
===========================================================================================
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Balance
beginning costs and Charged to at end of
Description of period expenses other accounts Deductions of period
- ----------- ---------- ---------- -------------- ---------- ---------
(a)
<S> <C> <C> <C> <C> <C>
Year ended October 1, 1995:
Allowance for doubtful
accounts $ 390,000 $ 20,000 $ - $ 410,000
=========== ========= ========== =========
Year ended October 2, 1994:
Allowance for doubtful
accounts $ 458,000 $ (8,850) $ 59,150 $ 390,000
=========== ========= ========= =========
Year ended October 3, 1993:
Allowance for doubtful
accounts $ 392,000 $ 66,107 $ 107 $ 458,000
=========== ========= ========= =========
</TABLE>
(a) Write-offs of accounts receivable, net of recoveries.
F-20
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibits.
- -------- -----------------------
3.1 Restated Certificate of Incorporation of the Company (Incorporated
by reference to Exhibit 3(a) to the Company's Form 10-K for the
fiscal year ended October 2, 1994)
3.2 By-laws of the Company, as amended (Incorporated by reference to
Exhibit 3(b) to the Company's Form 10-K for the fiscal year ended
September 29, 1991)
10.1 Loan Agreement dated as of June 21, 1995, by and between the Company
and Mellon Bank, N.A. (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the fiscal quarter ended July 2, 1995)
10.2 Note Agreement dated as of January 1, 1994, issued by Robert A.
Samans to the Company (Incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the fiscal year ended October 2, 1994)
10.3 Scanforms, Inc. Profit Sharing 401-K Plan (Incorporated by reference
to Exhibit 10(g) to the Company's Form 10-K for the fiscal year
ended October 2, 1994)
10.4 Scanforms, Inc. 1992 Stock Option Plan, as amended (Incorporated by
reference to Exhibit 4 to the Company's Registration Statement on
Form S-8 (File No. 33-81720), filed with the Commission on July 19,
1994
11 Computation of Earnings Per Common Share
23.1 Consent of Grant Thornton LLP
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
SCANFORMS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Fiscal Year Ended
October 1, October 2, October 3,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Primary Earnings Per Share
Net Earnings $1,570,540 $1,163,521 $ 774,932
========== ========== ==========
Weighted average number of common
shares outstanding during year 3,546,648 3,526,648 3,026,648
Add common equivalent shares (as
determined by the application of
the treasury stock method)
representing shares issuable upon
assumed exercise of stock options 97,539 87,001 275,704
---------- ---------- ----------
Weighted average number of common
shares used in calculation of
primary earnings per share 3,644,187 3,613,649 3,302,352
========== ========== ==========
Earnings per common share assuming
no dilution $ .43 $ .32 $ .23
========== ========== ==========
Fully Diluted Earnings Per Share
Net Earnings $1,570,540 $1,163,521 $ 774,932
========== ========== ==========
Weighted average number of common
shares outstanding during year 3,546,648 3,526,648 3,026,648
Add common equivalent shares (as
determined by the application of
the treasury stock method)
representing shares issuable upon
assumed exercise of stock options 105,421 87,598 452,399
---------- ---------- ----------
Weighted average number of common
shares used in calculation of
primary earnings per share 3,652,069 3,614,246 3,479,047
========== ========== ==========
</TABLE>
Earnings per common share assuming
dilution $ .43 $ .32 $ .22
========== ========== ==========
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated November 24, 1995 accompanying the
consolidated financial statements included in the Annual Report of Scanforms,
Inc. and subsidiary on Form 10-K for the year ended October 1, 1995. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Scanforms, Inc. and subsidiary on Form S-8 (File No. 33-81720,
effective July 19, 1994).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
November 24, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-1-1995
<PERIOD-END> OCT-1-1995
<CASH> 2,910,264
<SECURITIES> 0
<RECEIVABLES> 3,673,623
<ALLOWANCES> 410,000
<INVENTORY> 1,665,313
<CURRENT-ASSETS> 8,838,989
<PP&E> 19,593,236
<DEPRECIATION> 11,824,356
<TOTAL-ASSETS> 16,693,206
<CURRENT-LIABILITIES> 6,267,478
<BONDS> 0
35,467
0
<COMMON> 0
<OTHER-SE> 5,529,307
<TOTAL-LIABILITY-AND-EQUITY> 16,693,206
<SALES> 24,518,878
<TOTAL-REVENUES> 24,518,878
<CGS> 17,545,145
<TOTAL-COSTS> 17,545,145
<OTHER-EXPENSES> 3,979,945
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 398,665
<INCOME-PRETAX> 0
<INCOME-TAX> 1,004,583
<INCOME-CONTINUING> 1,570,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,570,540
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
