<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
Filed by a Party other than the Registrant ____
Check the appropriate box:
X Preliminary Proxy Statement Confidential, for Use of the Commission
- --- --- Only (as permitted by Rule 14a-6(e)(2))
___ Definitive Proxy Statement
___ Definitive Additional Materials
___ Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Scanforms, Inc.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
___ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
___ $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
X Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
--- and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
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(2) Aggregate number of securities to which transaction applies:
3,546,648
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(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
The filing fee was determined based upon (a) 2,267,538 issued and outstanding
shares of Common Stock, par value $0.01 per share (the "Shares"), of Scanforms,
Inc. as of April 8, 1995, excluding 1,279,110 Shares which will be owned by SCFM
Corp. upon consummation of the transaction for which no consideration will be
paid; and (b) the merger consideration of $3.60 per Share (the "Merger
Consideration") plus $509,700 payable to holders of the Options to purchase
Shares in exchange for cancellation of such options. The amount of the filing
fee, calculated in accordance with Regulation 240.0-11 under the Securities
Exchange Act of 1934, as amended, equals 1/50 of one percent of the value of the
Shares (and options to purchase Shares) for which the Merger Consideration will
be paid.
(4) Proposed maximum aggregate value of transaction:
$8,672,836.80
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(5) Total fee paid:
$1,734.57
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___ Fee paid previously with preliminary materials.
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___ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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SCANFORMS, INC.
--------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 31, 1996
--------------------
A Special Meeting of Stockholders (the "Special Meeting") of
Scanforms, Inc. (the "Company") will be held at 9:00 a.m., local time, on
Friday, May 31, 1996 at the offices of the Company, 181 Rittenhouse Circle,
Keystone Park, Bristol, Pennsylvania 19007-0602, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
the Agreement and Plan of Merger, dated as of February 15, 1996, as amended as
of April 4, 1996 (the "Merger Agreement"), between the Company and SCFM Corp.
("SCFM"), a Delaware corporation which is wholly owned by Robert A. Samans ("Mr.
Samans"), the President and Chairman of the Board of Directors of the Company,
and Sebastian A. Carcioppolo ("Mr. Carcioppolo"), a director of the Company.
Pursuant to the Merger Agreement, SCFM will merge with and into the Company (the
"Merger"), with the Company being the Surviving Corporation. Each outstanding
share of the common stock, par value $.01 per share, of the Company (the
"Shares"), including approximately 138,889 Shares held by each of Messrs. Samans
and Carcioppolo, and excluding those Shares held by the Company as treasury
stock, Shares held by SCFM and Shares held by stockholders who properly exercise
their appraisal rights under Delaware law, will be converted into the right to
receive $3.60 in cash, without interest.
2. To transact such other business as may properly come before
the Special Meeting or at any adjournment or postponement thereof.
Information regarding the matters to be acted upon at the
Special Meeting is contained in the accompanying Proxy Statement. The Merger
Agreement sets forth in full the terms and conditions of the Merger and is
attached to the Proxy Statement as Annex A.
The Board of Directors, upon the recommendation of a special
committee of the Board of Directors ("Special Committee") consisting of one
independent director who is not otherwise affiliated with the Company, has
determined that the Merger is fair to the stockholders of the Company and,
accordingly, has approved the Merger. In arriving at this recommendation, the
Special Committee gave careful consideration to a number of factors including,
as described in the accompanying Proxy Statement, the opinion of Janney
Montgomery Scott, the Special Committee's financial advisor, that the
consideration to be received in the Merger by holders of Shares (other than
Messrs. Samans and Carcioppolo) is fair to such holders from a financial point
of view. Such opinion is set forth in full and attached as Annex B to the Proxy
Statement and should be read in its entirety.
The Board of Directors recommends a vote FOR approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
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The Board of Directors has fixed the close of business on
___________, 1996 as the record date for the Special Meeting. Only stockholders
of record at that time are entitled to notice of, and to vote at, the Special
Meeting and any adjournments or postponements thereof.
By Order of the Board of Directors;
Emma Marie Cocci
Secretary
Bristol, Pennsylvania
____________, 1996
YOU ARE URGED TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN YOUR PROXY CARD
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING SO THAT YOUR SHARES MAY
BE VOTED IN ACCORDANCE WITH YOUR WISHES.
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
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PROXY
SCANFORMS, INC.
181 Rittenhouse Circle
Bristol, Pennsylvania 19007-0602
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned stockholder of SCANFORMS, INC. hereby
constitutes and appoints [ ] and [ ], and each of them acting individually, as
the attorney and proxy of the undersigned, with full power of substitution, for
and in the name and stead of the undersigned to attend the Special Meeting of
Stockholders to be held at Scanforms, Inc., 181 Rittenhouse Circle, Bristol,
Pennsylvania, on May 31, 1996, at 9:00 a.m., and any adjournment or postponement
thereof, and thereat to vote all shares of Common Stock of SCANFORMS, INC. held
by the undersigned which the undersigned would be entitled to vote if personally
present with respect to the following matters:
1. Approval and adoption of the Agreement and Plan of Merger, dated as of
February 15, 1996, as amended as of April 4, 1996, between SCFM Corp. and
Scanforms, Inc.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Upon such other matters as may properly come before the meeting or any
adjournment(s) or postponement(s) thereof.
(Continued, and to be signed, on other side)
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THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THE SHARES WILL BE VOTED "FOR" THE
PROPOSAL. THIS PROXY ALSO DELEGATES DISCRETIONARY AUTHORITY TO VOTE WITH RESPECT
TO ANY OTHER BUSINESS WHICH MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT(S) OR POSTPONEMENT(s) THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING AND PROXY STATEMENT.
Dated: ___________________, 1996
--------------------------------
Signature of Stockholder
--------------------------------
Signature of Stockholder
Please sign your name exactly as it
appears hereon. When signing as
attorney-in-fact, executor,
administrator, trustee or guardian,
please add your title as such. When
signing as joint tenants, all parties
in the joint tenancy must sign. If
signer is a corporation, please sign
in full corporate name by duly
authorized officer or officers and
affix the corporate seal.
PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
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SCANFORMS, INC.
181 RITTENHOUSE CIRCLE
KEYSTONE PARK
BRISTOL, PENNSYLVANIA 19007-0602
(800) 523-3936
--------------------
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 31, 1996
--------------------
INTRODUCTION
This Proxy Statement is being furnished to the holders of
common stock, par value $.01 per share (the "Shares" or the "Common Stock"), of
Scanforms, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company (the "Board")
for use at a special meeting of the stockholders of the Company to be held at
9:00 a.m., local time, on Friday, May 31, 1996, at the offices of the Company,
181 Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania and at any
adjournment or postponement thereof (the "Special Meeting"), for the purposes
set forth in the accompanying Notice of Special Meeting of Stockholders. This
Proxy Statement, the foregoing Notice of Special Meeting of Stockholders and the
enclosed proxy card are first being mailed to stockholders on or about
______________, 1996.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
Proposal to be Considered at the Special Meeting
At the Special Meeting, the stockholders of the Company will
consider and vote upon a proposal to approve and adopt an Agreement and Plan of
Merger, dated as of February 15, 1996, as amended as of April 4, 1996 (the
"Merger Agreement"), between the Company and SCFM Corp. ("SCFM"). All of the
outstanding shares of the capital stock of SCFM are owned by Robert A. Samans
("Mr. Samans"), the President and Chairman of the Board of the Company, and
Sebastian A. Carcioppolo ("Mr. Carcioppolo"), a director of the Company. Messrs.
Samans and Carcioppolo are hereinafter referred to together as the "Management
Group". A copy of the Merger Agreement is attached as Annex A to this Proxy
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Statement. It is anticipated that, prior to consummation of the transactions
contemplated by the Merger Agreement, the Management Group will transfer an
aggregate of approximately 1,279,110 Shares to SCFM.
The Merger Agreement provides, subject to the approval of
stockholders at the Special Meeting, for the merger of SCFM with and into the
Company (the "Merger"), with the Company being the surviving corporation (the
"Surviving Corporation"). Following the Merger, the separate existence of SCFM
will cease. The Merger will be effective when a properly executed Certificate of
Merger is delivered to and filed with the Secretary of State of the State of
Delaware (the "Secretary of State"). The time on the date when the Certificate
of Merger is filed with the Secretary of State is hereinafter referred to as the
"Effective Time." At the Effective Time, by virtue of the Merger and without any
further action on the part of any stockholder of the Company, (i) any Shares
which are held in the treasury of the Company (or by any subsidiary of the
Company) or which are owned by SCFM immediately prior to the Effective Time will
be canceled and cease to exist, without consideration, (ii) all remaining Shares
(including approximately 138,889 Shares held by each of Messrs. Samans and
Carcioppolo), other than Shares held by stockholders who properly exercise their
appraisal rights under the Delaware General Corporate Law (the "DGCL") will be
canceled and cease to exist and will represent only the right to receive an
amount in cash equal to $3.60 per Share (the "Merger Consideration") from the
Surviving Corporation, without interest, and (iii) each of the shares of common
stock of SCFM outstanding immediately prior to the Effective Time will be
converted into one share of common stock of the Surviving Corporation.
SCFM was organized by the Management Group for the purpose of
enabling the Management Group, through SCFM, to acquire, pursuant to the Merger
Agreement, the entire equity interest in the Company. For a description of a
stock purchase warrant to be granted to Mellon Bank, N.A. ("Mellon") in
connection with the financing for the Merger, see "FINANCING OF THE MERGER --
Warrant to Purchase Surviving Corporation's Common Stock." The outstanding
shares of capital stock of SCFM are owned by Mr. Samans, who owns a 67.8%
interest, and Mr. Carcioppolo, who owns a 32.2% interest. As a result of the
Merger, stockholders of the Company who are not members of the Management Group
will no longer have any equity interest in the Company. Pursuant to the Merger
Agreement, SCFM is obligated to vote, or cause to be voted, all Shares that it
is then entitled to vote, if any, in favor of the Merger. Each of Messrs. Samans
and Carcioppolo has informed the Board of his intention to vote, or cause to be
voted, all Shares that he is then entitled to vote in favor of the Merger. See
"INTRODUCTION -- Voting Rights; Votes Required for Approval" and "SPECIAL
FACTORS -- Purpose and Structure of the Merger," "-- Plans for the Company
After the Merger" and "--Certain Effects of the Merger."]
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Voting Rights; Votes Required for Approval
At the close of business on _____________, 1996, the record
date fixed for the determination of stockholders entitled to notice of, and to
vote at, the Special Meeting (the "Record Date") there were outstanding
3,546,648 Shares, each of which entitles the holder thereof to one vote. The
presence at the Special Meeting, in person or by proxy, of stockholders entitled
to cast at least a majority of the votes which all stockholders are entitled to
cast is necessary to constitute a quorum at the Special Meeting. Abstentions and
broker non-votes (where a broker or other record holder submits a proxy but does
not have authority to vote a customer's shares) will be considered present for
purposes of establishing a quorum.
Under the DGCL, the Merger Agreement must be approved and
adopted by the holders of at least a majority of the outstanding Shares. Neither
the DGCL nor the terms of the Merger Agreement requires the affirmative vote of
a majority of the outstanding Shares held by stockholders not affiliated with
SCFM or the Management Group. Pursuant to the Merger Agreement, SCFM is
obligated to vote, or cause to be voted, all Shares that it is then entitled to
vote, if any, in favor of the Merger. Each of Messrs. Samans and Carcioppolo has
informed the Board of his intention to vote, or cause to be voted, all Shares
that he is then entitled to vote in favor of the Merger. As of the Record Date,
an aggregate of 1,556,888 Shares or approximately 43.9% of the outstanding
Shares entitled to vote at the Special Meeting were beneficially owned by the
Management Group. Accordingly, the affirmative vote of the holders of 216,436
Shares or approximately 11% of the outstanding Shares (excluding Shares
beneficially owned by the Management Group) is required to approve and adopt the
Merger Agreement.
Holders of Shares who do not vote in favor of, or who abstain
from voting on, the Merger Agreement and who comply with the provisions of
Section 262 of the DGCL will have the right to receive cash payment for the
"fair value" of their Shares. Any stockholder contemplating the exercise of such
appraisal rights should carefully review Section 262 of the DGCL, particularly
the procedural steps required to perfect appraisal rights, a description of
which is provided herein under "DISSENTERS' RIGHTS". A stockholder who fails to
comply with such procedural requirements will lose such holder's appraisal
rights and will be entitled to receive the Merger Consideration for the Shares
held by such stockholder. See "DISSENTERS' RIGHTS" and "Section 262 of the
Delaware General Corporation Law," attached to this Proxy Statement as Annex C.
Proxies
All Shares represented by executed proxies received prior to
or at the Special Meeting and not revoked will be voted in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR the proposal to approve and adopt the Merger Agreement
and, in the discretion of the persons named in the proxy, on such other matters
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as may properly be presented at the Special Meeting. Abstentions and broker
non-votes will have the effect of a vote against the Merger Agreement.
A stockholder may revoke his or her proxy at any time prior to
its use by (i) delivering to the Secretary of the Company a signed notice of
revocation or a later dated and signed proxy or (ii) attending the Special
Meeting and voting in person. Attendance at the Special Meeting will not in
itself constitute the revocation of a proxy.
The cost of solicitation of proxies will be paid by the
Company. In addition to solicitation by mail, directors, officers and regular
employees of the Company may solicit proxies by telephone, telegram or by
personal interviews. Such persons will receive no additional compensation for
such services. The Company will reimburse brokers and certain other persons for
their charges and expenses in forwarding proxy materials to the beneficial
owners of Shares held of record by such persons.
SOURCE OF INFORMATION
Except as otherwise indicated herein, the information
appearing in this Proxy Statement concerning the Company, SCFM and the
Management Group has been supplied by the Company, SCFM and the Management
Group, respectively, or is based upon publicly available documents on file with
the Securities and Exchange Commission (the "Commission") and other public
records. The Company assumes no responsibility for the accuracy or completeness
of the information furnished by SCFM or the Management Group or contained in
such documents and records other than those documents filed or recorded by the
Company or for any failure of SCFM or the Management Group to disclose events
that may have occurred and may affect the significance or accuracy of such
information and that are unknown to the Company. All other information in this
Proxy Statement has been supplied by the Company. Neither SCFM nor the
Management Group assumes any responsibility for the accuracy or completeness of
the information furnished by the Company or for any failure by the Company to
disclose events that may have occurred and that may affect the significance or
accuracy of such information and that are unknown to either SCFM or the
Management Group.
The date of this Proxy Statement is _____________, 1996.
AVAILABLE INFORMATION
The Company, SCFM and the members of the Management Group have
filed with the Commission a Rule 13e-3 transaction statement (including any
amendments thereto, the "Schedule 13E-3") under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), with respect to the Merger. This Proxy
Statement does not contain all the information contained in the Schedule 13E-3,
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including the exhibits thereto, certain parts of which are omitted in accordance
with the rules and regulations of the Commission.
The Company is subject to the information requirements of the
Exchange Act and, in accordance therewith, files periodic reports, proxy
statements and other information with the Commission pursuant to the Exchange
Act relating to its business, financial statements and other matters.
The Schedule 13E-3, including the exhibits thereto, as well as
such reports, proxy statements and other information filed by the Company with
the Commission, can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Seven World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2551. Copies of such
materials also can be obtained at prescribed rates from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. The Company's Shares are included in the Nasdaq Small Cap Market of the
Nasdaq National Market ( the "Nasdaq Small Cap Market"). Reports, proxy
materials and other information should be available for inspection at the
offices of The Nasdaq, 1735 K Street, Washington, D.C. 20006.
No person has been authorized to give any information or make
any representation on behalf of the Company, SCFM or the Management Group not
contained herein and, if given or made, such information must not be relied on
as having been authorized.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INTRODUCTION......................................................................................................i
Proposal to be Considered at the Special Meeting................................................i
Voting Rights; Votes Required for Approval....................................................iii
Proxies .....................................................................................iii
SOURCE OF INFORMATION............................................................................................iv
AVAILABLE INFORMATION............................................................................................iv
SUMMARY...........................................................................................................1
SPECIAL FACTORS .................................................................................................13
Background of the Merger.......................................................................13
Recommendations of the Special Committee, the Board and the Management
Group; Fairness of the Merger.........................................................22
Opinion of the Special Committee's Financial Advisor...........................................28
Purpose and Structure of the Merger............................................................33
Plans for the Company After the Merger.........................................................36
Certain Effects of the Merger..................................................................38
Interests of Certain Persons in the Merger; Conflicts of Interest .............................38
Certain Federal Income Tax Consequences of the Merger..........................................39
Accounting Treatment of the Merger.............................................................41
Risk of Fraudulent Conveyance .................................................................42
Regulatory Approvals...........................................................................43
THE MERGER AGREEMENT.............................................................................................43
General ......................................................................................43
Effective Time of the Merger...................................................................43
Surviving Corporation..........................................................................44
Consideration to be Received By Stockholders of the Company....................................44
Representations and Warranties.................................................................45
Agreements and Covenants.......................................................................47
Conditions to the Merger.......................................................................48
Termination, Amendment and Waiver .............................................................49
Fees and Expenses..............................................................................50
TREATMENT OF EMPLOYEE STOCK OPTIONS..............................................................................51
REGULATORY APPROVALS.............................................................................................52
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
DISSENTERS' RIGHTS...............................................................................................52
FINANCING OF THE MERGER..........................................................................................55
OWNERSHIP OF SHARES..............................................................................................58
General ......................................................................................58
Stock Purchases by the Company, SCFM, the Management Group and Their
Affiliates............................................................................59
Beneficial Ownership of Shares and Transactions in Shares By Certain Persons ..................59
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY..................................................................60
DIRECTORS AND OFFICERS OF SCFM...................................................................................62
INFORMATION CONCERNING THE MANAGEMENT GROUP AND SCFM.............................................................62
BUSINESS OF THE COMPANY..........................................................................................63
Properties.....................................................................................64
Legal Proceedings..............................................................................64
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY.........................................................65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION............................66
Results of Operations..........................................................................66
Liquidity and Capital Resources................................................................68
MARKET PRICE FOR THE SHARES......................................................................................70
DIVIDENDS ...............................................................................................71
INDEPENDENT AUDITORS.............................................................................................71
TRANSACTION OF OTHER BUSINESS....................................................................................71
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................72
</TABLE>
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SUMMARY
The following Summary is furnished in order to assist the
holders of Shares in their review of this Proxy Statement. The summary is not
intended to be a complete description of the matters covered in this Proxy
Statement and is subject to, and qualified in its entirety by reference to, the
more detailed information contained elsewhere in this Proxy Statement, including
the Annexes hereto and the documents incorporated by reference herein.
Stockholders are urged to read carefully this Proxy Statement, including the
documents incorporated by reference herein and the Annexes hereto in their
entirety.
GENERAL
Time, Place, Date of Special
Meeting....................... The Special Meeting of Stockholders of the
Company will be held at the Company's offices at
181 Rittenhouse Circle, Keystone Park, Bristol,
Pennsylvania 19007 on Friday, May 31, 1996, at
9:00 a.m., local time.
Record Date................... Only holders of record of Shares at the close of
business on _________, 1996 (the "Record Date")
are entitled to notice of and to vote at the
Special Meeting. On the Record Date, there were
outstanding 3,546,648 Shares, each of which
entitles the holder thereof to cast one vote with
respect to the Merger at the Special Meeting. See
INTRODUCTION -- Voting Rights; Votes Required for
Approval.
Purpose of the Special Meeting;
Quorum; Vote Required......... At the Special Meeting, the stockholders of the
Company will consider and vote upon a proposal to
approve and adopt the Merger Agreement, a copy of
which is attached as Annex A to this Proxy
Statement. See "INTRODUCTION -- Proposal to Be
Considered at the Special Meeting." The presence
at the Special Meeting, in person or by proxy, of
stockholders entitled to cast at least a majority
of the votes which all stockholders are entitled
to cast is necessary to constitute a quorum at
the Special Meeting. Under the DGCL, the Merger
Agreement must be approved by the holders of at
least a majority of the outstanding Shares.
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Neither the DGCL nor the terms of the Merger
Agreement requires the affirmative vote of a
majority of the outstanding Shares held by
stockholders not affiliated with SCFM or the
Management Group. Pursuant to the Merger
Agreement, SCFM is obligated to vote all shares
that it is then entitled to vote, if any, in
favor of the Merger. The members of the
Management Group have informed the Board of their
respective intentions to vote all of the Shares
each is then entitled to vote in favor of the
Merger. As of the Record Date, an aggregate of
approximately 43.9% of the outstanding Shares
entitled to vote at the Special Meeting were
beneficially owned by the Management Group.
Accordingly, the affirmative vote of the holders
of approximately 11% of the outstanding Shares
(excluding Shares held by the Management Group)
is required to approve and adopt the Merger
Agreement. See "INTRODUCTION -- Voting Rights;
Votes Required for Approval."
Structure of the Merger....... Pursuant to the Merger Agreement, SCFM will merge
with and into the Company, with the Company being
the Surviving Corporation. As of the Effective
Time, by virtue of the Merger and without any
further action on the part of any stockholder of
the Company, (i) any Shares which are held in the
treasury of the Company (or by any subsidiary of
the Company) and any Shares owned by SCFM
immediately prior to the Effective Time will be
canceled and cease to exist, without
consideration, (ii) all remaining Shares
(including approximately 138,889 Shares held by
each of Messrs. Samans and Carcioppolo at such
time), other than Shares held by stockholders who
properly exercise their appraisal rights under
the DGCL, will be canceled and cease to exist and
will represent only the right to receive an
amount in cash equal to $3.60 per Share from the
Surviving Corporation, without interest, and
(iii) each of the outstanding shares of common
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stock of SCFM immediately prior to the Effective
Time will be converted into one share of common
stock of the Surviving Corporation. See
"INTRODUCTION -- Proposal to be Considered at the
Special Meeting," "SPECIAL FACTORS -- Purpose and
Structure of the Merger," "-- Interests of
Certain Persons in the Merger; Conflicts of
Interest," "TREATMENT OF EMPLOYEE STOCK OPTIONS"
and "THE MERGER AGREEMENT -- Consideration to be
Received by Stockholders of the Company."
SPECIAL FACTORS
Background of the Merger..... On February 15, 1996, the Company and SCFM
entered into the Merger Agreement providing for
the merger of SCFM into the Company, as a result
of which the entire equity interest in the
Company will be beneficially owned by the
Management Group. For a description of the events
leading up to the execution of the Merger
Agreement, see "SPECIAL FACTORS -- Background of
the Merger."
Recommendations of the Special
Committee, the Board and the
Management Group............. Each of the Special Committee, the Board and the
Management Group has determined that the Merger
is fair to the Company's stockholders, other than
the Management Group, from a financial point of
view. The Board recommends a vote for approval
and adoption of the Merger Agreement and the
transactions contemplated thereby. See "SPECIAL
FACTORS -- Recommendations of the Special
Committee, the Board and the Management Group."
Opinion of Financial Advisor.. Janney Montgomery Scott ("Janney"), a nationally
recognized investment banking firm, has rendered
its written opinion to the Special Committee of
the Board to the effect that the Merger is fair,
from a financial point of view, to holders of
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Shares who are unaffiliated with the Management
Group and SCFM. In connection with its opinion,
Janney performed certain analyses including, but
not limited to, the following: (1) analysis of
operating results and financial condition; (2)
analysis of comparable publicly traded companies;
(3) discounted cash flow analysis; and (4)
comparison of the Merger Consideration to
historical stock price. The full text of Janney's
written opinion, dated as of the date of the
mailing of this Proxy Statement, confirming its
prior written opinion to the Board dated February
15, 1996, which sets forth the assumptions made,
procedures followed, matters considered and
limits of its review, is attached to this Proxy
Statement as Annex B. HOLDERS OF SHARES ARE URGED
TO READ SUCH OPINION IN ITS ENTIRETY. For
additional information relating to the opinion of
Janney, see "SPECIAL FACTORS -- Opinion of the
Special Committee's Financial Advisor."
Plans for the Company after
the Merger................. Upon consummation of the Merger, the Company will
be highly leveraged and, accordingly, it is not
contemplated that the Company will seek to make
material acquisitions of other businesses pending
the substantial reduction of its indebtedness
unless it obtains additional equity and/or debt
financing for such purpose. The Company has not
formulated any specific plans in the event the
Merger is not consummated. See "SPECIAL FACTORS
-- Plans for the Company after the Merger."
Certain Effects of the Merger. As a result of the Merger, the Management Group
will own the entire equity interest in the
Company and will thereby be entitled to 100% of
the Company's net assets and earnings. For a
description of a stock purchase warrant to be
granted to Mellon in connection with the
financing for the Merger, see "FINANCING OF
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THE MERGER--Warrant to Purchase Surviving
Corporation's Common Stock." Therefore, following
the Merger, the present holders of the Shares
(other than the members of the Management Group)
will no longer have an equity interest in the
Company and will no longer share in future
earnings and growth of the Company, the risks
associated with achieving such earnings and
growth, or the potential to realize greater value
for their Shares through corporate opportunities
that may be pursued by the Company in the future.
Instead, each such holder of Shares will have
only the right to receive the Merger
Consideration for each Share held or to seek
appraisal rights as described under the caption
"DISSENTERS' RIGHTS." If the Merger is
consummated, the Management Group intends to
cause the Company to terminate the registration
of the Shares under the Exchange Act and the
Company's obligation to file reports, proxy
statements and other information with the
Commission. See "SPECIAL FACTORS -- Certain
Effects of the Merger."
Interests of Certain Persons
in the Merger; Conflicts of It is anticipated that, as of the Effective Time,
Interests...... SCFM and the Management Group will own
beneficially an aggregate of approximately 43.9%
of the outstanding Shares and may be deemed to
control the Company. The outstanding shares of
capital stock of SCFM are owned by the members of
the Management Group: Mr. Samans owns a 67.8%
interest, and Mr. Carcioppolo owns a 32.2%
interest. Mr. Samans is the President and
Chairman of the Board of the Company and Mr.
Carcioppolo is a director of the Company. Because
the Board of Directors of the Company is composed
of 3 directors and the DGCL requires a merger
agreement to be approved by a majority of a
Delaware corporation's Board, Messrs. Samans and
Carcioppolo participated in the vote of the Board
concerning the Merger and the Merger Agreement.
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It is anticipated that each of Messrs. Samans and
Carcioppolo will receive approximately $500,000
in Merger Consideration for Shares held
beneficially by each of them at the Effective
Time.
Certain executive officers of the Company are the
holders of options to purchase Shares under the
Scanforms, Inc. 1992 Stock Option Plan (the
"Stock Option Plan"). Each such executive officer
will receive, along with all other holders of
options under the Stock Option Plan, in exchange
for their options a cash payment from the Company
equal to the excess, if any, of the Merger
Consideration over the per Share exercise price
of each option held by such executive officer. It
is anticipated that, as of the Effective Time,
such executive officers will be entitled to
receive an aggregate of approximately $315,200 in
the Merger upon cancellation of options to
purchase an aggregate of 125,000 Shares held by
such executive officers (based on the Merger
Consideration of $3.60 per Share). See "SPECIAL
FACTORS -- Interests of Certain Persons in the
Merger; Conflicts of Interest", "OWNERSHIP OF
SHARES -- General," "OWNERSHIP OF SHARES --
Beneficial Ownership of Shares and Transactions
in Shares by Certain Persons," "TREATMENT OF
EMPLOYEE STOCK OPTIONS."
SCFM and the Company have agreed in the Merger
Agreement that all rights to indemnification now
existing in favor of the employees, agents,
directors or officers of the Company and the
Company's subsidiaries as provided in their
respective Certificates of Incorporation or
bylaws or otherwise in effect on the date of the
Merger Agreement will survive the Merger and will
continue in full force and effect after the
Effective Time for the benefit of the officers
and directors of the Company. See "SPECIAL
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FACTORS -- Interests of Certain Persons in the
Merger; Conflicts of Interest", and "MERGER
AGREEMENT-- Agreements and Covenants."
Certain Federal Income Tax
Consequences............... The receipt of cash for Shares pursuant to the
Merger will be a taxable transaction for federal
income tax purposes under the Internal Revenue
Code of 1986, as amended (the "Code"), and also
may be a taxable transaction under applicable
state, local, foreign and other tax laws. See
"SPECIAL FACTORS -- Certain Federal Income Tax
Consequences of the Merger."
THE MERGER AGREEMENT
Effective Time of the Merger.. The Merger will become effective upon the
delivery to and filing with the Secretary of
State of the State of Delaware of a properly
executed Certificate of Merger, which delivery
and filing will be made as soon as practicable
after the Special Meeting and the obtaining of
all consents and approvals and the expiration of
all waiting periods contained in the Merger
Agreement as conditions to the Merger have been
met or waived. The Company, SCFM and the
Management Group anticipate that the Merger will
be consummated as promptly as practicable
following the Special Meeting and the
finalization of financing for the Merger. See
"THE MERGER AGREEMENT -- General" and "--
Conditions to Effective Time of the Merger."
Consummation of
the Merger.................. The respective obligations of the Company, on the
one hand, and SCFM, on the other hand, to
consummate the Merger are subject to the
satisfaction or waiver (as permitted under the
terms of the Merger Agreement) of the following
conditions, among others: (a) the absence of an
order in effect which restrains or prohibits the
consummation of the Merger; (b) the approval of
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the Merger by the holders of a majority of the
outstanding Shares at the Special Meeting; (c)
the availability to the Company (or SCFM) of
satisfactory financing commitment(s) from (i)
Mellon pursuant to its offer and Outline of
Terms, each dated February 5, 1996 (such offer
and Outline of Terms are hereinafter referred to
the "Mellon Offer" and the "Mellon Outline of
Terms", respectively), (ii) any other reputable
banking institution satisfactory to the Special
Committee on terms not materially different from
those set forth in the Mellon Offer and Mellon
Outline of Terms, or (iii) any other source which
is satisfactory to the Special Committee and the
terms of which are satisfactory to the Special
Committee; (d) the perfection of dissenting
stockholders' appraisal rights pursuant to
Section 262 of the DGCL by stockholders owning no
more than 300,000 Shares; (e) the absence of any
injunction or other order preventing the
consummation of the Merger or any pending
government proceeding seeking any of the
foregoing; (f) the truth and correctness, in all
material respects, as of the date made and as of
the closing date of the representations and
warranties of each of the parties to the Merger
Agreement; and (g) the performance and compliance
in all material respects of each of the parties
with the covenants and agreements required by the
Merger Agreement to be performed by such parties
prior to or on the closing date. The obligation
of the Company to consummate the Merger is
further subject to the satisfaction or waiver (as
permitted by the terms of the Merger Agreement),
among other conditions, of the condition that the
opinion of the Company's Financial Advisor shall
not have been withdrawn prior to the mailing of
this Proxy Statement to the Company's
stockholders. See "THE MERGER AGREEMENT --
Conditions to Consummation of the Merger."
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Termination of the Merger
Agreement.................. The Merger Agreement may be terminated at any
time prior to the Effective Time, whether before
or after approval of the Merger by the
stockholders of the Company: (a) by mutual
consent of the Board of Directors of SCFM and the
Board of Directors of the Company (acting upon
the recommendation of the Special Committee in
its sole discretion); (b) by either SCFM or the
Company (acting upon the recommendation of the
Special Committee in its sole discretion) if the
Merger has not been consummated on or before
August 31, 1996 (other than as a result of a
breach of the Merger Agreement by the party
seeking termination); or (c) by either SCFM or
the Company (acting upon the recommendation of
the Special Committee) in the event of any final
and nonappealable order, decree or ruling
restraining, enjoining or otherwise prohibiting
the Merger; (d) by either SCFM or the Company
(acting upon the recommendation of the Special
Committee in its sole discretion) if any persons
shall have acquired beneficial ownership of, or
any "group" (as defined in Section 13(d) of the
Exchange Act and the rules and regulations
thereunder but not including SCFM or its
stockholders), shall have been formed which
beneficially owns, 50% or more of the Shares; (e)
by either SCFM or the Company if the Board
(acting upon the recommendation of the Special
Committee in its sole discretion) determines that
it is unable, consistent with its fiduciary
duties, to recommend that the stockholders of the
Company approve the Merger in accordance with the
provisions of the Merger Agreement; (f) by SCFM
or the Company (acting upon the recommendation of
the Special Committee in its sole discretion) if
either of them reasonably determines that an
Acquisition Proposal (as defined in the Merger
Agreement and described herein) constitutes a
Superior Proposal (as defined in the Merger
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Agreement and described herein); provided,
however, that the Company may not terminate the
Merger Agreement pursuant to this provision
unless (i) ten business days have elapsed after
delivery to SCFM of a written notice of such
determination and, during such ten business day
period, the Company shall have fully cooperated
with SCFM, including, without limitation,
informing SCFM of the terms, conditions and
proponent(s) of such Acquisition Proposal, (ii)
at the end of such ten business day period the
Special Committee shall continue reasonably to
believe that such Acquisition Proposal
constitutes a Superior Proposal, and (iii)
promptly thereafter the Company enters into a
definitive acquisition, merger or similar
agreement to effect such Superior Proposal. See
"THE MERGER AGREEMENT -- Termination, Amendment
and Waiver."
Amendment to and Waiver of
Terms and Provisions
of the Merger Agreement.... Any term or provision of the Merger Agreement
(other than the requirement for stockholder
approval, if required by applicable law, or a
term or provision that expressly provides
otherwise) may be waived by the party that is
entitled to the benefits thereof. The Merger
Agreement may be amended by the parties by action
of their respective Boards of Directors (in the
case of the Company, acting upon the
recommendation of the Special Committee) at any
time before or after approval of the Merger by
the stockholders of the Company but, after any
such approval, no amendment may be made that
reduces the amount of cash into which Shares are
to be converted as provided in the Merger
Agreement without further approval of
stockholders. See "THE MERGER AGREEMENT --
Termination, Amendment and Waiver."
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Fees and Expenses........... The Company has agreed to pay all costs and
expenses reasonably incurred by or on behalf of
the Management Group or SCFM in connection with
the Merger Agreement and the transactions
contemplated therein, up to $250,000, whether or
not the Merger is consummated. See "THE MERGER
AGREEMENT -- Fees and Expenses."
TREATMENT OF EMPLOYEE STOCK
OPTIONS .................... Holders of options to purchase Shares under the
Stock Option Plan will receive a cash payment
from the Company equal to the excess, if any, of
the Merger Consideration over the per Share
exercise price of each option, subject to
applicable federal, state and local tax
withholdings, multiplied by the number of Shares
covered by the option. As of March 31, 1996
options to purchase an aggregate of 205,000
Shares at exercise prices between $.30 and $1.69
were outstanding under the Stock Option Plan. See
"TREATMENT OF EMPLOYEE STOCK OPTIONS."
DISSENTERS' RIGHTS.......... Holders of Shares who follow the procedures set
forth in Section 262 of the DGCL will be entitled
to have their Shares appraised by the Delaware
Court of Chancery and to receive payment in cash
of the "fair value" of such Shares. A holder of
Shares wishing to exercise such holder's
appraisal rights must strictly comply with the
provisions of Section 262 of the DGCL, including,
but not limited to, (i) not voting in favor of
the Merger and (ii) delivering to the Company,
prior to the vote on the Merger at the Special
Meeting, a written demand for appraisal of such
holder's Shares. Any stockholder contemplating
the exercise of appraisal rights should carefully
review Section 262 of the DGCL, particularly the
procedural steps required to perfect appraisal
rights. See "DISSENTERS' RIGHTS" and Annex B
"Section 262 of the Delaware General Corporation
Law."
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FINANCING OF THE MERGER.... The total amount of funds required to pay the
Merger Consideration to holders of all
outstanding Shares (including approximately
138,889 Shares held by each of Messrs. Samans and
Carcioppolo, and excluding any Shares held by the
Company as treasury stock, and Shares held by
SCFM and to pay related expenses in connection
with the Merger is expected to be approximately
$8.5 million. It is anticipated that these funds
will be provided from bank financing to be
obtained pursuant to a loan agreement between the
Company and Mellon to provide to the Company a
term loan in the amount of $4.5 million and a
reducing revolving line of credit with an initial
maximum availability of $4.0 million. See
"FINANCING OF THE MERGER."
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SPECIAL FACTORS
Background of the Merger
During the latter part of January 1995, the Company's
Chairman, Robert A. Samans, had informal conversations with the president of a
publicly held company engaged in the printing industry ("Company A") concerning
their respective businesses. Mr. Samans and the Board were concerned, at that
time, that the Company seemed to be too small, and its market capitalization and
market following seemed to be too modest, for its stock to command the type of
attention and multiples in the market that they felt were warranted for a
quality competitor in the direct mail advertising business. The representative
bid price of the Shares on the Nasdaq Small Cap Market during the last five
trading days of January 1995 ranged from $1.69 (on 2,300 shares traded) to $2.00
per share (on 300 shares traded); moreover, at that time the stock had a 52 week
high/low of $2.38 and $1.50, respectively, and fewer than 50,000 Shares had
traded in all but three of the previous 52 weeks. The Company's net sales had
risen from $19.3 million for fiscal year 1992 to $22.5 million for fiscal 1993
and settled at $22.2 million in 1994; however, profitability had risen almost
fourfold (from $.10 to $.39 per share) over that period of time. The first
quarter of fiscal 1995 reflected a significant increase in net sales, from
approximately $6.5 million for the 1994 first quarter to approximately $7
million in the 1995 period, with earnings up almost 50%.
The president of Company A advised Mr. Samans during the
January 1995 meeting that Company A might be interested in making a merger
proposal to the Company. On February 2, 1995, a letter of intent was submitted
by Company A contemplating a merger of the Company into Company A, with all
stockholders of the Company receiving the equivalent of $3.00 value per Share in
the form of Company A stock valued on the date of the proposed merger. The
proposal sought an option on all Shares owned by Mr. Samans and all of the
Company's directors and officers and required exclusive transactional rights
through June 30, 1995. It was also a condition of Company A's proposal that
satisfactory agreements be reached for the continued employment of Mr. Samans,
as well as other unnamed employees. The public stockholders of the Company would
not have received any cash under the terms of this proposal.
On February 16, 1995 the Company received an unsolicited
preliminary discussion point memorandum from a privately held company engaged in
the printing industry ("Company B") suggesting a merger with the Company which,
in effect, would cause the stockholders of the Company to be continuing
stockholders in the merged entity along with the few existing stockholders of
Company B; thus, the public stockholders of the Company would not have received
any cash under the terms of this proposal. The proposal also envisioned a
significantly disproportionate (i.e., higher) multiple of earnings for valuation
of the stock of Company B than for the Company's Shares and contained special
provisions relating to Mr. Samans, including an option to sell his Shares in the
resulting entity back to that entity. This preliminary discussion memorandum,
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though considered by the Board, did not result in any subsequent proposal or
offer.
A special meeting of the Board was held on February 20, 1995
to discuss the above developments. The Board's consensus was that the Company's
prospects for the future were favorable and that, while the Board was willing to
explore a sale or change of control transaction, the Board would approve such a
transaction only if it resulted in a price or value to the Company's
stockholders which was fair from a financial point of view and sufficiently
attractive to justify the Company in changing from its current course of
operating and growing on an independent basis. Mr. Samans advised the Board that
Company A appeared to be willing to increase its per share valuation of Company
stock to $3.25 in value of Company A stock, but insisted on a $500,000 fee in
the event the transaction did not occur ("break up fee") and an agreement by the
Company not to solicit other offers ("no solicitation agreement"). At that
meeting, in light of Company A's interest in acquiring an option on Mr. Samans'
Shares and the condition to Company A's proposal that a satisfactory employment
and non-competition agreement be negotiated with Mr. Samans, the Board was
advised that it was appropriate for it to create a committee of independent
Board members and that a qualified financial advisor should be retained to
assist in evaluating the Company and other companies which may express an
interest in acquiring the Company, to advise the independent directors and the
Board, and to render a fairness opinion, if a transaction eventuated. Joel R.
Jacks ("Mr. Jacks") and Mr. Carcioppolo were appointed to serve as the members
of a committee of independent directors ("Special Committee"), with Mr. Jacks
serving as Chairman. The Special Committee was asked to recommend to the Board
from time to time whether the Company should pursue any currently proposed or
other sale or change of control transactions or, alternatively, whether the
Company should maintain its independent status. In addition, the Special
Committee was authorized to recommend the retention of financial advisors. It
was the expressed sense of the Board at that meeting that the Company not commit
to a change in its independent status, but merely entertain proposals that may
be forthcoming and attempt to avoid the necessity of entering into any
peremptory lock-up or option agreements.
On March 1, 1995, Company A revised its proposed letter of
intent, and reduced the amount of the proposed break-up fee to $100,000 or
$350,000, depending on the circumstances of the termination. On March 2, 1995,
the Company issued a press release to the effect that the Board had received and
was evaluating two merger proposals (i.e., the two proposals referred to above)
and that each contemplated that the Company's stockholders would own stock in a
merged entity having a market value representing a premium over the closing
price on the date of the press release of $2.25 per share. The release stated
that the Board was continuing to evaluate the proposals, and any others that may
be presented, but had not determined whether the most desirable course of action
would be to engage in such a transaction or to remain independent. The release
also advised that the Board had appointed a Special Committee and that the
Special Committee expected to retain a financial advisory firm.
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The Special Committee, as directed at the February 20, 1995
Board meeting, conducted a search for a financial advisor, which eventually
resulted in interviews with three finalists. The Special Committee selected
Janney primarily on the basis of Janney's presentation, experience, and
knowledge of the industry in which the Company competes, the quality of the team
of personnel that Janney committed to the assignment and its fee structure. On
March 2, 1995, the Special Committee executed an Agreement, pursuant to
authority of the Board, retaining Janney as financial advisor to the Board. The
agreement with Janney provided for a $90,000 fee for financial advice and for
rendering a fairness opinion in connection with a proposed transaction, payable
$20,000 upon acceptance, $20,000 on the date Janney renders an opinion to the
Board in connection with a merger or other acquisition transaction (a "merger"),
$35,000 on the date the Company files a registration statement or proxy
statement with the Commission and $15,000 on the effective date of a merger. In
addition, a formula-based fee would be payable on the effective date of a
merger, but only if the total consideration received by the Company's
stockholders in connection with a merger exceeds $13,200,000, as follows: 5% of
any consideration between $13.2 million and $14.2 million; plus 4% of any
consideration between $14.2 million and $15.2 million; plus 3% of any
consideration between $15.2 million and $16.2 million; plus 2% of any
consideration between $16.2 million and $17.2 million, plus 1% of any
consideration in excess of $17.2 million. Total consideration, for such
purposes, would consist of the sum of all cash, notes, stock, other securities
and assets received by the stockholders of the Company in connection with the
merger, valued at their cash or fair market value on the effective date of the
Merger and would include the total in-the-money value of all outstanding stock
options assumed, purchased or exchanged. In addition, the Company agreed to
reimburse Janney for all reasonable out-of-pocket expenses incurred by it in
connection with its activities, including reasonable fees and costs of counsel
up to $7,000, payable only if the Company has filed a preliminary proxy
statement referring to an opinion given by Janney. The agreement was to
terminate on August 31, 1995 in the event a merger was not consummated by that
time, unless extended. There will be no formula-based fee due Janney on the
basis of the terms of the proposed Merger described herein.
The Company issued a press release on March 6, 1995, stating
that Janney had been retained to provide assistance to the Company in connection
with consideration of any proposals. At a March 14, 1995 meeting of the Special
Committee, a representative of Janney advised that, based on a preliminary
review, the $3.25 per Share revised proposal from Company A would appear to be
at the bottom end of the range of fairness.
Janney, on March 20, 1995, met with and made a presentation to
Company A in response to Company A's March 1, 1995 revision of its proposed
letter of intent. This resulted in a further revision of Company A's letter of
intent on March 28, 1995, which increased to $3.50 the proposed value of each
Company A share which would be issued to Company stockholders, with certain
provisions which would adjust that value if the price of Company A stock varied
within a 30% price range. The proposed break-up fee was again increased to
$500,000.
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At a combined meeting of the Board and the Special Committee
on April 5, 1995, it was reported that discussions with Company A had been
proceeding on two levels; first, on the proposal to merge and, secondly, on a
proposal by Company A to Mr. Samans which would provide various benefits to Mr.
Samans, such as a continuing equity interest and an employment agreement, as an
inducement for him to remain with Company A after the merger, since it was a
condition to Company A's proposal that Mr. Samans stay on with Company A after
the merger and operate the acquired assets as well as certain assets of Company
A. Mr. Samans advised the Special Committee members at that meeting, and at a
subsequent meeting on April 7, 1995, that Company A had reduced the proposals
concerning his personal involvement from those originally suggested by Company A
and that, while he would consider some reduction in the terms originally
proposed, he would not be interested if he concluded that the proposal to him
were to be materially reduced.
The Board and the Special Committee met again on May 1, 1995,
at which time Mr. Samans advised that he was unable to reach agreement with
Company A with respect to his personal situation. The Special Committee
determined that, in light of the fact that satisfactory arrangements with Mr.
Samans were a predicate to Company A's proposal, an impasse had developed and
the Company should proceed to test the market to determine whether other
proposals for a transaction were forthcoming, again without committing the
Company to a path whereby it would lose its independence.
It was also agreed at the May 1, 1995 meeting to amend the
agreement with Janney to provide for Janney to perform additional services in
the nature of soliciting proposals from other parties for the merger or sale of
the Company. An amendment to the Janney agreement was executed on May 8, 1995,
authorizing and directing Janney to identify companies potentially interested in
acquiring the Company, to prepare a selling memorandum to distribute to
potential acquirors, and to contact and meet with potential acquirors and assist
in structuring any transaction that may eventuate. On May 8, 1995, the Company
and Janney executed an amendment to the March 2, 1995 agreement between them,
pursuant to which Janney agreed to perform certain additional investment banking
services for the Company in return for additional compensation. The additional
services included the identification of companies potentially interested in
acquiring the Company, preparation of a memorandum to distribute to potential
acquirors, contacting and meeting with potential acquirors, assisting and
structuring a merger or sale of the Company, and otherwise assisting the
Company's officers and directors in considering a sale of the Company. In
consideration for the additional services, the Company agreed to amend the
financial advisory fee to consist of a fee of $130,000 for the previously
agreed-upon services and for the additional services, of which $20,000 had
already been paid, $40,000 was to be payable on the date Janney rendered an
opinion to the Board in connection with a merger, $45,000 was to be payable on
the date the Company filed a preliminary proxy statement in connection with a
merger, and the remaining $25,000 was to be payable on the effective date of a
merger. The contingency fee compensation provision was to remain in effect in
accordance with the March 2, 1995 engagement letter.
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The Company, on May 3, 1995, issued its second quarter press
release, which included disclosure that the Company was considering two
proposals, one of which had reached an impasse and one for which no offer had
yet been received. Similar language was contained in the Form 10-Q for the
second quarter filed with the Commission in early May 1995.
On August 31, 1995 and October 23, 1995, two additional
indications of interest were received by the Board, which the Special Committee
considered at meetings held on September 18, 1995 and November 7, 1995,
respectively. The Special Committee determined that neither of these proposals
was in the best interests of the Company or its stockholders in light of its
determination that (i) one proposal indicated an interest in engaging in a
merger transaction which would be accompanied by a proposed private placement of
equity securities which would provide cash and stock in the merged entity to the
"inside" stockholders of the Company and the owner of the other merging company,
but which would neither provide cash to the Company's public stockholders nor
likely result in the enhancement of the liquidity of the Shares in the
marketplace and (ii) the second proposal constituted a proposal to acquire only
two blocks of Shares: (a) those held by a significant investor for $2.25 per
Share, which Shares, apparently without the knowledge of the proposing party,
were no longer owned by the investor, and (b) the Shares of Mr. Samans and other
employees for $3.25 per Share; however, the proposal did not contemplate the
acquisition of the Shares held by the Company's public stockholders.
At the September 28, 1995 meeting, the Board and Special
Committee discussed Janney's progress to date. Mr. Jacks reported that Janney
had contacted all of the parties identified in the market test, which consisted
of twenty potential merger or acquisition partners.
At the Board meeting held on November 7, 1995, it was reported
that, on October 24, 1995, Mr. Samans received a proposed term sheet from a
subsidiary of a large financial institution ("Company C"), which had been
contacted by Janney. This party indicated an interest in joining with Mr. Samans
and other members of existing management to acquire the Company in a leveraged
buy out, whereby (a) Company C would obtain a 57.5% ownership position in the
Company's equity in exchange for an investment of $4.8 million in convertible
preferred stock and subordinated debt with stock purchase warrants, and (b)
management (principally Mr. Samans, whose continued employment and agreement not
to compete were required) would receive a 42.5% interest, after receiving an
aggregate of $3.25 per share for 50% of their Shares. The proposal contemplated
a cash price to be paid to the Company's public stockholders (and management, to
the extent noted above) of $3.25 per Share. It was the sense of the Special
Committee members at that meeting that the Special Committee would be interested
in further pursuing Company C's proposal provided Mr. Samans reached agreement
on terms with Company C as to his personal involvement with both Company C, as a
financial partner, and the Company in the event Company C's proposal were
implemented.
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Janney made a presentation to the Special Committee on
November 27, 1995, summarizing its activities to date with respect to all of the
twenty potential merger or acquisition partners which had been approved by the
Company, most of whom were strategic buyers. Janney stated that five companies
had expressed an interest in receiving additional information. Janney reported
that, in the process, it had been advised of several reasons for the lack of
interest by various of the parties that had been approached, such as that the
Company was not a good business fit; that the Company had experienced limited
growth over the last five years; that there were concerns about the value and
productivity of the Company's press equipment; that significant capital
investment would be required to grow the Company beyond $30 million of sales;
that there was limited growth potential in the Company's present facility; that
there was an expectation of limited internal growth and too much reliance on
acquisitions to expand more rapidly; that there were limited cost savings
resulting from a merger or acquisition; that there were concerns about the
stability of revenues and profit margins; and that there was a concern that the
acquisition price was too high based on preliminary discussions.
On December 1, 1995, Mr. Jacks, as Chairman of the Special
Committee, and Mr. Samans met with two representatives of Company C (Mr.
Carcioppolo was unavailable for health reasons). Mr. Samans advised that the
transaction proposed by Company C, which would involve a joint transaction with
Mr. Samans and members of management, was progressing well and that he believed
he could reach an understanding with Company C on his personal arrangement. Mr.
Samans was then excused from the meeting and Mr. Jacks sought to encourage the
representatives of Company C to attempt to increase the price to stockholders
above the $3.25 per Share price which had been previously communicated to him.
During that meeting, Company C's representatives first increased their proposal
to support a cash payment by the Company of $3.50 cash per Share to the public
stockholders and, after further negotiations, to $3.60 cash per Share. Mr. Jacks
advised that he would be satisfied to recommend the $3.60 per Share price to the
Special Committee for approval if it were also satisfactory, in terms of
fairness from a financial point of view, to Janney, and further, if Mr. Samans
(and other members of management) could reach satisfactory terms concerning
compensation and agreement not to compete.
Shortly after the meeting, Mr. Samans advised members of the
Special Committee, counsel to the Special Committee and Janney that one of the
Company's largest customers had inquired about the possibility of substantially
increasing its purchase orders for 1996, and perhaps into the first six months
of 1997. Mr. Samans also stated that Mellon, which had been providing the
Company's current bank financing needs, had advised him that it was preparing a
proposal pursuant to which it would lend to the Company all of the funds needed
to permit the Company to acquire all of the Shares owned by its stockholders,
other than the members of the Management Group, at $3.60 cash per Share, in a
management buyout, and that Mellon would require only a 7.5% equity interest in
the Company in the form of a nominally priced stock purchase warrant. Mr. Jacks,
in turn, asked Janney to study the financial impact of the new information
concerning the possibility of increased orders, the range of value of the
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Company's Shares would be likely to change and what the relative relationship of
the $3.60 proposal from Company C, and possibly from Mellon, would be to that
range.
A meeting of the Board was held on December 21, 1995, at which
an outline of terms supplied by Mellon was reviewed. Mellon's outline stated an
interest in providing up to $9.5 million to the Company, in the form of term,
reducing revolver and existing revolver financing, which would permit the
purchase, through the term loan and reducing revolver loan portion, of
approximately 2.4 million Shares at $3.60 per Share to facilitate a management
buyout pursuant to which Messrs. Samans and Carcioppolo would own all of the
equity of the Company, with the revolver to be available to finance working
capital needs. All of these loans were to be on a five year basis, with
different amortization provisions. The Mellon proposal provided for a stock
purchase warrant to be issued to Mellon for 7.5% of the Company's equity, priced
on a nominal basis, for a ten year term, with a put option after year five at a
value to be determined by the fair market value as determined by an independent
third party valuation. The proposal provided that all public stockholders of the
Company would receive $3.60 cash per Share, and that Messrs. Samans and
Carcioppolo would each be able to include in the transaction a value of $500,000
of his Shares (approximately 138,888 Shares each at the $3.60 price). Mr. Jacks
stated that a ten month search for potential acquirors or merger partners
conducted by the Company, its Special Committee and Janney had resulted in only
two current viable proposals at $3.60 cash per Share, the highest price yet
offered, which, by their nature, constituted management buyout proposals funded
with cash by third parties; as such, he noted, the two proposals were addressed
to Mr. Samans (and management and/or Mr. Carcioppolo). Mr. Jacks stated that
either such proposal would, by definition, require those persons who are to
participate in a leveraged buyout to determine which proposal they wished to
embrace and to develop that proposal to the point where it is appropriate to
bring to the Special Committee. Since the Mellon proposal involved Mr.
Carcioppolo as a continuing owner of the Company, Mr. Carcioppolo would no
longer be independent. Accordingly, Mr. Carcioppolo resigned as a member of the
Special Committee and from that point forward, Mr. Jacks has served as the sole
member of the Special Committee.
At a January 21, 1996 Board meeting, the Board discussed the
status of the business opportunity concerning the possible order increase from a
major customer. Mr. Jacks instructed that both Company C and Mellon be given
equal access to information concerning the possible increase in orders from the
major customer and current financial information about the Company's first
quarter results.
On January 29, 1996, the Company announced by press release a
14.9% increase in net sales and a 42% increase in net income (from $.19 to $.27
per share) for the first quarter ended December 31, 1995. The results were
attributed in part to increased customer demand, more efficient productivity and
declining paper prices.
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The Special Committee was advised during the last week of
January 1996 that the Management Group (Messrs. Samans and Carcioppolo) intended
to present a proposal, financed by Mellon, which would result in the Company
being privately held. Accordingly, the Special Committee determined that it
would be prudent for the Company to issue a press release so notifying the
public. The release, dated February 1, 1996, stated that the Company had been
advised that it would be receiving a management buyout proposal from Messrs.
Samans and Carcioppolo based on the $3.60 price, subject to the ability of the
Management Group to finalize financing arrangements with Mellon, receipt of a
fairness opinion, and approval by the Special Committee and the Board of a
formal proposal presented by the Management Group and, further, subject to
stockholder approval. Mr. Samans' amendment to his Schedule 13D filed with the
Commission on February 9, 1996, reflected this information as well.
The Board met again on February 12, 1996 to consider the
proposal submitted on February 9, 1996 by Messrs. Samans and Carcioppolo (the
"Proposal") based on the proposed Mellon financing terms. At this meeting, Mr.
Jacks asked Messrs. Samans and Carcioppolo, and their counsel, to provide full
details and explanations with respect to their proposal. Extensive discussion
ensued concerning the proposed financing by Mellon, the likelihood of the
transaction closing, the amount of stock that Messrs. Samans and Carcioppolo
intended to sell for cash in connection with the transaction, the possibility of
the payment by the Company of break-up fees in the event of a more attractive
offer, the Company's willingness to pay or reimburse expenses incurred by or on
behalf of the Management Group or SCFM in connection with the transaction and
the terms of the Proposal. The proposed merger agreement was reviewed in detail.
After discussion, Mr. Jacks advised that he was opposed to a break-up fee but
agreeable to having the Company facilitate a transaction which is in the best
interests of the stockholders by paying the bank commitment fee of $85,000, as
well as the legal fees of Mellon and the Management Group and other professional
fees which it might be necessary for the Management Group to incur. Mr. Jacks
stated that the absence of a break-up or topping fee provision in the merger
agreement beyond such an expense reimbursement provision would create an
atmosphere which he felt would encourage other parties who desired to submit
bids to acquire the Company during the entire period leading up to the proposed
merger.
Mr. Jacks next requested Janney to make a presentation on the
fairness of the proposal. Janney, consistent with its written report delivered
at the meeting, advised that the range of fairness, in their view, was between
$3.40 and $4.50. Janney noted that the fact that the $3.60 price was at the
lower end of that range was countered by (a) the Company's projected dependence
on a single customer, (b) the Company's modest projected growth in earnings, (c)
significant capital expenditures required to expand the Company's production
capability, and (d) the Company's relatively small size in the printing
industry. Moreover, Janney noted that $3.60 was more than a 15.2% increase over
the high price of $3.13 on two days of the 52 week period preceding the
Company's announcement on February 1, 1996 of the $3.60 price which Messrs.
Samans and Carcioppolo had intended to propose. Janney also stated that it was
significant that the Company had publicly announced its plans to consider its
strategic options, including a potential sale of the Company; that Janney
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had solicited proposals to merge or acquire the Company from 20 companies; and
that the Management Group's proposal was announced to the public with no
superior offer having emerged.
Continuing to explore the fairness of the $3.60 price at the
February 12, 1996 meeting, Mr. Jacks stated his concern that, while it was
basically Mr. Samans' decision as to which entity (Mellon or Company C) he chose
to join with in making a proposal, Mr. Jacks wanted to be sure that those
parties possessed similar information, including information concerning the
proposed increase in 1996 orders from a substantial customer. Accordingly, the
meeting was continued to February 15, 1996.
The adjourned Board meeting resumed on February 15, 1996. The
Board was advised that Company C had been fully informed of recent information
concerning the Company. Messrs. Samans and Carcioppolo reiterated their desire
to proceed with the Proposal to be financed by Mellon. Messrs. Samans and
Carcioppolo also advised that the proposal contemplated that outstanding options
to purchase an aggregate of 205,000 Shares under the Stock Option Plan would be
cancelled in exchange for payment of the excess of the Merger Consideration over
the exercise prices of the options. Messrs. Samans and Carcioppolo further
advised that the funds to be provided by Mellon in a proposed transaction were
sufficient for that purpose. Mr. Jacks advised that, as a result of additional
negotiations between counsel for the Special Committee and counsel for Messrs.
Samans and Carcioppolo, the termination provisions of the proposed merger
agreement had been revised to provide that the Company may terminate the
proposed merger agreement under specified conditions where a superior offer is
received. Mr. Jacks then requested that Messrs. Samans and Carcioppolo increase
their offer. Messrs. Samans and Carcioppolo responded that they were unwilling
and unable to do so because the financing provided by Mellon would not so
permit, the price was the highest offered to date and represented fair value to
the stockholders and the absence of a break-up or topping fee beyond the limited
expense reimbursement provision in the proposed merger agreement would permit
the Board to consider superior proposals. Thereafter, Janney advised the Special
Committee that it remained of the view that the range of fairness was between
$3.40 and $4.50 and that $3.60 was a fair price and that Janney's written
opinion would be delivered promptly. Mr. Jacks then advised the Board of the
factors on which the Special Committee had based its determination to recommend
the Proposal (see "SPECIAL FACTORS --Recommendations of the Special Committee,
the Board and the Management Group; Fairness of the Merger"). At that point, the
Board, upon the recommendation of the Special Committee, accepted the Proposal
of Messrs. Samans and Carcioppolo dated February 9, 1996, as amended at the
meeting of February 15, 1996, and authorized the execution of the Merger
Agreement. On February 16, 1996, a press release was issued to the effect that a
merger agreement had been entered into with a management group consisting of
Messrs. Samans and Carcioppolo which would provide $3.60 per share to the public
stockholders, with financing to be provided by Mellon.
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At a meeting of the Board on February 21, 1996, Janney
reported that, in the previous week, two additional companies had indicated a
potential interest in acquiring the Company on a friendly basis. One of those
companies ("Company D"), was a privately held company which had been discussed
previously at the February 15, 1996 meeting of the Board. The other company
("Company E") also was a privately-held company. Janney advised that both
companies were interested only in a transaction on a friendly basis in
combination with Mr. Samans. Mr. Jacks concluded that, under such circumstances,
those companies should deal directly with Mr. Samans (and perhaps Mr.
Carcioppolo), before coming to the Special Committee if they intend to proceed
further.
On Friday, March 22, 1996, Mr. Morris Weissman, Chairman of
the Board and Chief Executive Officer of American Banknote Corporation ("ABN")
sent a letter to Mr. Samans advising him that ABN was filing a Schedule 13D with
the Commission (the "ABN Schedule 13D") announcing that it had acquired
approximately 5.32% of the outstanding Shares and describing ABN's potential
interest in the Company, including the possibility of ABN making a proposal
relating to a merger transaction between ABN and the Company. The letter further
stated that based upon ABN's preliminary valuation of the Company, stockholders
of the Company would receive greater value in a transaction with ABN than they
would pursuant to the Merger. ABN requested that the Company supply ABN with the
same financial and other information made available by the Management Group and
the Company to the Management Group's potential lending sources. The letter to
Mr. Samans acknowledged that ABN would agree to execute a customary
confidentiality agreement with respect to the confidential information supplied
to ABN. On Monday, April 8, 1996, a confidentiality agreement was agreed to by
the Company and ABN and certain proprietary information of the Company has been
delivered to ABN under the terms of that agreement.
Recommendations of the Special Committee, the Board
and the Management Group; Fairness of the Merger
The Special Committee. At a Board meeting held on February 15,
1996 (as a continuation of the February 12, 1996 Board meeting), the Special
Committee, which at that time consisted solely of Mr. Jacks, approved the Merger
and the Merger Consideration as fair from a financial point of view to, and in
the best interests of, the stockholders of the Company (other than to members of
the Management Group) and recommended to the Board of Directors that it approve
the Merger Agreement based upon the following factors:
(i) the opinion of the Special Committee's financial
advisor, Janney, to the effect that the merger is fair, from a financial point
of view, to the stockholders of the Company (other than to members of the
Management Group);
(ii) the existing assets, financial condition and
operations of the Company, including its relatively small size and market
capitalization, and the Company's relatively narrow market niche, coupled
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with the Special Committee's judgment that, in light of these factors and the
historical and projected levels of corporate overhead, the future growth
prospects of the Company's business were limited;
(iii) the trading history of the Shares, with
particular emphasis on the relationship between the price to be paid pursuant to
the Merger and the trading history of the Shares, including the fact that the
consideration to be received pursuant to the Merger represents (a) a premium of
approximately 22.9% over the $2.93 average closing prices on the Nasdaq Small
Cap Market for the ten days preceding the February 1, 1996 public announcement
that a proposal to acquire the Company was to be received from the Management
Group at a cash price of $3.60, and (b) a premium of approximately 41.7% over
the $2.54 average closing price for the fifty-two week period preceding the
February 1, 1996 press release;
(iv) the fact that the terms of the Merger Agreement
and the price to be paid were determined through arms' length negotiations
between representatives of the Management Group on the one hand, and Janney and
the Special Committee, on the other; and that as a result of these negotiations,
and those that preceded them from the beginning of the process in February 1995,
the price to be received by the public stockholders was increased from $3.00 per
Share (in stock) to $3.60 in cash;
(v) the terms and conditions of the Proposal and the
Merger Agreement, and the Special Committee's judgment that the transaction was
highly likely to be consummated;
(vi) the fact that the Special Committee had negotiated
in the Merger Agreement (a) the ability to respond to and negotiate with third
parties, whether or not they had previously expressed an interest in acquiring
the Company, or might thereafter express such an interest, and, if appropriate,
to terminate the Merger Agreement if a superior offer is received and not
matched, (b) the right to terminate the Merger Agreement if the Board (acting
upon the recommendation of the Special Committee in its sole discretion)
determines that it is unable, consistent with its fiduciary duties, to recommend
that the stockholders of the Company approve the Merger, and (c) the absence of
break-up fees or topping fees (terms of which might deter third parties from
making an offer to acquire the Company) beyond the limited expense reimbursement
provisions in the event the Merger Agreement is terminated;
(vii) the fact that Mr. Samans' continued employment
with the Company was a condition of every indication of interest that had been
brought to the attention of the Special Committee from the beginning of the
process in February of 1995 until the execution of the Merger Agreement;
(viii) the risk that the value of the Shares of the
Company could be severely affected by the possible loss or disability of only
one person, Mr. Samans;
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(ix) the significant, open and publicly announced
solicitation, as evidenced by numerous press releases, references in the
Company's Quarterly Reports on Form 10-Q and other filings, for proposals for an
acquisition or merger of the Company;
(x) the fact that the Merger Consideration consists of
cash, on an immediate basis, and not stock of another company which may have
liquidity or volatility problems; and
(xi) the speed with which the Merger could be
consummated, especially in light of the availability of financing from Mellon.
In view of the wide variety of factors considered by the
Special Committee in connection with its evaluation of the Merger and the Merger
Consideration, the Special Committee did not find it practicable to quantify or
otherwise attempt to assign relative weights to specific factors considered in
making its determination, nor did it evaluate whether such factors were of equal
weight. As a general matter, the Special Committee believes that the factors
discussed in Paragraphs (i) through (xi) above supported its determination that
the Merger Agreement is fair to the stockholders of the Company not affiliated
with the Management Group and its decision to approve the Merger.
As described more fully under "SPECIAL FACTORS -- Background
of the Merger," above, the Management Group made its Proposal of $3.60 per Share
on February 9, 1996 after a process which began with discussions throughout 1995
with a company that was originally interested in offering $3.00 per Share value
of its common stock, and, thereafter, following negotiations with another
prospective party which was interested in doing a management leveraged buy out
originally at $3.25 per Share and ultimately at $3.60 per Share. On several
occasions, the Special Committee attempted to obtain an increase in the $3.60
per Share price but was not successful as the Management Group was unwilling to
pay a higher price and lacked sufficient financing to do so. On February 15,
1996, the Special Committee determined that the Proposal was fair and adequate,
after its own deliberations and upon review of the findings and opinion of
Janney, and recommended the Proposal to the full Board of Directors. The full
Board of Directors then unanimously approved the Proposal and the Merger
Agreement and a press release was issued shortly thereafter.
As noted above, the Special Committee considered as an
important element in its analysis, among the other factors described above, the
analysis of its financial advisor, Janney, as to the fairness of the Merger from
a financial point of view. The Special Committee reviewed the report submitted
by Janney and relied upon the fairness opinion rendered by Janney. In its
presentation to the Special Committee, Janney discussed the financial analysis
that it had conducted (described under "SPECIAL FACTORS -- Opinion of the
Special Committee's Financial Advisor") and indicated that such analysis
supported its conclusion that the Merger is fair, from a financial point of
view, to the holders of the Shares unaffiliated with the Management Group. The
Special Committee relied on the analysis performed by Janney, which
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evaluated the Proposal using several different financial analyses. In its review
of the analyses performed by Janney, the Special Committee did not study each of
the separate analyses individually, but rather relied upon the summary and
conclusions of Janney that the analyses, taken as a whole, supported the
conclusion that the Merger is fair to the stockholders of the Company not
affiliated with the Management Group. The Special Committee did not consider it
necessary to study each analysis individually, but felt it was appropriate,
given the expertise and reputation of Janney, to rely upon Janney's conclusions.
See "SPECIAL FACTORS -- Opinion of Special Committee's Financial Advisor". The
Special Committee did not establish a range of fair values for the Company as a
whole; however, Janney advised at the February 15, 1996 continuation of the
February 12, 1996 Board meeting that the range of fairness was between $3.40 and
$4.50 per share and that $3.60 under the circumstances is a fair price from a
financial point of view. Janney noted at that meeting that the Merger
Consideration was in the lower 50% of such a range; however, they noted that
this concern was countered by the fact that the Company's stock is relatively
illiquid and that the low multiples in the industry may tend to suppress the
price. Moreover, Janney noted that $3.60 per Share was a 22.9% increase over the
average closing prices on the Nasdaq Small Cap Market for the ten days preceding
the Company's announcement on February 1, 1996 of the $3.60 price that Messrs.
Samans and Carcioppolo intended to propose. Janney also noted that there had
been an open and publicized attempt, for over a year, to ascertain whether there
were any willing purchasers or merger partners for the Company in the
marketplace.
The Special Committee determined that the factors discussed
above indicated that the Merger Consideration of $3.60 per Share was a fair
price. Accordingly, the Special Committee believed that the factors described in
Paragraphs (i) through (xi) above were supportive of its determination that the
Merger is fair to the stockholders of the Company unaffiliated with the
Management Group. The Special Committee also concluded that there could be no
assurance that the Company's public stockholders would be able to realize any
greater value per Share in an alternative transaction or otherwise in the near
future.
Noting that the members of the Management Group beneficially
owned in the aggregate approximately 43.9% of the outstanding Shares and that
the Merger must be approved by the holders of a majority of the Company's
outstanding Shares, the Special Committee recognized that it would be necessary
to obtain approval of the Merger by holders of approximately 11% of the Shares
held by stockholders not affiliated with the Management Group. The Special
Committee determined that, in addition to the approval of the Merger Agreement
by holders of a majority of the outstanding Shares, it was not necessary to
impose a requirement that the Merger Agreement be approved by a majority of
Shares held by stockholders not affiliated with the Management Group. This
determination was based on the fact that (a) the Company had publicly disclosed
since March of 1995 its willingness to consider indications of interest by
others who may desire to acquire or merge with the Company, (b) the Company had
conducted a market test through Janney to attempt to identify interested
parties, (c) the Special Committee had negotiated in the Merger Agreement (i)
the ability to respond to and negotiate with third parties, whether or not
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they had previously expressed an interest in acquiring the Company, or might
thereafter express such an interest, and, if appropriate, to terminate the
Merger Agreement if a superior offer is received and not matched, (ii) the right
to terminate the Merger Agreement if the Board (acting upon the recommendation
of the Special Committee in its sole discretion) determines that it is unable,
consistent with its fiduciary duties, to recommend that the stockholders of the
Company approve the Merger, and (iii) that there would be no break-up fees or
topping fees (which might deter third parties from making an offer to acquire
the Company) beyond a limited expense reimbursement provision in the event the
Merger Agreement is terminated and (d) the Management Group was not willing to
accept such a provision in the Merger Agreement unless it was accompanied by a
break-up fee or topping fee in addition to expense reimbursement and strict no
solicitation covenants. See "SPECIAL FACTORS -- Interests of Certain Persons in
the Merger; Certain Relationships," "-- Opinion of the Special Committee's
Financial Advisor," and "--Market Price for the Common Shares."
The Special Committee also took note that, throughout
approximately twelve months of publicity concerning a potential transaction
involving the Company prior to the execution of the Merger Agreement on February
15, 1996, only a limited number of parties expressed an interest in acquiring
the entire Company, principally those discussed under "SPECIAL FACTORS --
Background of the Merger." Further, despite the Company's press releases
throughout that period and other public announcements of the proposed Merger, no
parties, other than those described in this Proxy Statement, had come forth with
a serious expression of interest with respect to a possible transaction
involving the Company. All indications of interest brought to the Special
Committee's attention were traced back to parties which had indicated that they
would only consider a transaction on the basis that Mr. Samans would be willing,
as a pre-condition, to enter into arrangements to stay on to manage the
Company's operations after the transaction.
The right of the Special Committee to continue to respond on
behalf of the Company to offers and expressions of interest by third parties
was, to the Special Committee, an important aspect of the Merger Agreement. As a
result of the Special Committee's insistence on this point, the Special
Committee, in its negotiations with the Management Group, retained the ability
to respond to interested third parties even after the Merger Agreement was
entered into by the Company. The Special Committee also obtained the right of
the Company, acting through the Special Committee, to terminate the Merger
Agreement if the Board of Directors or the Special Committee were to recommend a
superior transaction, as defined in the Merger Agreement, or withdraw its
recommendation of the Merger. See "THE MERGER AGREEMENT -- Termination,
Amendment and Waiver." The repeated public announcements of these provisions
relating to receipt of a superior offer, and the filing of Schedule 13D
amendments by Mr. Samans concerning the transaction, one which included a copy
of the Merger Agreement, have permitted the Special Committee to keep the
process open so that any person having any interest in acquiring the Company
could communicate with the Special Committee or its financial advisor. The
Special Committee believed that it was not necessary to conduct any further
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active solicitations of proposals from third parties in light of the publicity
from press releases and Commission filings referred to above, and the market
test that was conducted by the Special Committee and Janney.
The Special Committee, in conclusion, believed that its arms'
length negotiations with the Management Group, as described above, the matters
discussed in factors (i) through (xii), above, and its reliance on the analyses
and opinion of Janney were the principal factors upon which the Special
Committee based its conclusion that the Merger and Merger Consideration are fair
to, and in the best interests of, the stockholders of the Company not affiliated
with the Management Group. The Special Committee also believed that the
possibility of realizing greater value for stockholders through an alternative
transaction with a third party was, and continues to be, protected by the
Special Committee's ongoing contractual power to negotiate with any third
parties interested in pursuing a transaction which qualifies as a superior
offer. See "THE MERGER AGREEMENT --Termination, Amendment and Waiver."
The Board. The Board of Directors of the Company consists of
only three members, two of whom constitute the Management Group and the third of
whom is the Special Committee member. Accordingly, while the Board of Directors
considered and approved the findings and recommendations of the Special
Committee, and deliberated with respect thereto, the actions of the Board of
Directors were subsumed by the Special Committee's actions regardless of whether
those actions occurred during meetings of the Special Committee or of the Board
of Directors. The Board of Directors in every respect responded to, cooperated
with and followed the advice of the Special Committee in its approach to the
process of considering and approving the Merger.
The Management Group. The Management Group has concluded that
the Merger, including the Merger Consideration and the negotiation and structure
of the Merger, is fair to the stockholders of the Company (other than members of
the Management Group) based upon the following factors: (i) the conclusions and
recommendations of the Special Committee and the Board; (ii) the fact that the
Merger Consideration and the other terms and conditions of the Merger Agreement
were the result of arms' length good faith negotiations between the Special
Committee and its advisors, on the one hand, and the representatives of the
Management Group and its advisors, on the other hand; (iii) the fact that for
approximately twelve months prior to the execution of the Merger Agreement there
had been, and during the substantial period of time which would elapse between
the announcement of the execution of the Merger Agreement and the consummation
of the Merger there would be, more than sufficient time and opportunity for
other persons to propose alternative transactions to the Merger, (iv) the fact
that the terms of the Merger Agreement authorized the Company to furnish
information to and negotiate with third parties in response to unsolicited
requests by such parties concerning any merger, sale of assets, sale of shares
of capital stock or similar transaction involving the Company or any subsidiary
or division thereof if the Special Committee deemed such action to be
appropriate in light of its fiduciary obligations to the Company's stockholders
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after consultation with legal counsel; and (v) the other factors referred to
above as having been taken into account by the Special Committee and the Board,
which the members of the Management Group adopt as their own. See "SPECIAL
FACTORS -- Background of the Merger" and "-- Opinion of the Special Committee's
Financial Advisor".
The members of the Management Group, in view of the wide
variety of factors considered in connection with its evaluation of the Merger
and the Merger Consideration, did not find it practicable to assign relative
weights to the factors considered in reaching their decision, and, therefore,
they did not quantify or otherwise attach relative weights to the specific
factors considered by the Special Committee and the Board. The members of the
Management Group recognized that their interests in the Merger are not the same
as the interests of the other holders of Shares in the Merger. See "SPECIAL
FACTORS -- Interests of Certain Persons in the Merger; Certain Relationships."
Opinion of the Special Committee's Financial Advisor
The Board retained Janney as its financial advisor to review
the Merger and to render an opinion as to the fairness, from a financial point
of view, of the consideration to be received by the Company's stockholders not
affiliated with the Management Group in connection with the Merger.
At the February 12, 1996 meeting of the Special Committee,
Janney rendered its oral opinion and subsequently confirmed to the Board on
February 15, 1996 in writing that, as of such date, the consideration to be
received by the stockholders of the Company in the Merger was fair to such
stockholders from a financial point of view. Janney was not requested to and did
not make any recommendations to the Board as to the form or amount of
consideration to be received by the Company's stockholders, which was determined
by negotiation between the Company and the Management Group. No limitations were
imposed on Janney by the Board with respect to the investigations made or the
procedures followed by it in rendering its opinion.
A copy of Janney's opinion is attached to this Proxy Statement
as Annex B. Holders of the Company's Common Stock are urged to read carefully
the full text of the opinion for a description of the assumptions made, factors
considered and limitations on the review undertaken by Janney. Janney's opinion
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote at the Special Meeting.
In connection with the rendering of its opinion, Janney
delivered to the Special Committee a written report, dated February 12, 1996,
containing its statistical and financial analyses (the "Janney Report"). A copy
of the Janney Report has been filed with the Commission as an Exhibit to the
Schedule 13E-3. Copies will be made available for inspection and copying at the
principal executive offices of the Company during regular business hours by
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any interested stockholder of the Company, or the representative of such
stockholder who has been designated in writing as such by such stockholder.
In rendering its opinion, Janney reviewed, among other things:
(a) the Merger Agreement; (b) publicly available business and historical
financial information relating to the Company, including the 1995 Annual Report
of the Company and the Company's Form 10-Q for the thirteen weeks ended December
31, 1995; (c) certain financial and other data provided to Janney by the Company
that is not publicly available relating to the business and prospects of the
Company, including financial projections prepared by the management of the
Company; (d) the reported historical market prices and trading volume of the
common stock of the Company; (e) selected financial and stock market data for
certain other publicly traded companies in lines of business comparable to the
Company; and (f) the financial terms of certain other recent mergers and
acquisitions of direct mail and commercial printing companies. In addition,
Janney held discussions with the management of the Company regarding the
Company's business, operating results, financial condition, prospects and the
Merger, and undertook other analyses, studies and investigations as it
considered appropriate.
In connection with its review, Janney relied, without
independent verification, upon the accuracy and completeness of the financial
and other information used by it in arriving at its opinion. Janney also relied
upon the assessment by the management of the Company regarding its business,
prospects and the Merger and also assumed that the financial projections of the
Company were reasonably prepared by management on bases reflecting the best
currently available estimates and good faith judgments of the future financial
performance of the Company. Janney did not undertake any independent valuations
or appraisals of the real properties or other assets of the Company, nor was it
furnished with any such valuations or appraisals. Janney's opinion was
necessarily based upon economic, market and other conditions as they existed on,
and could have been evaluated, on the date of its opinion.
The following summary is a general description of Janney's
presentation to the Special Committee on February 12, 1996 and does not purport
to be a complete description of the analyses performed or matters considered by
Janney in rendering its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Furthermore, Janney believes that its analyses must be
considered as a whole and that selecting portions of such analyses and the
matters considered, without considering all matters and analyses, could lead to
inappropriate conclusions. In its analyses, Janney made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of the Company. Any
estimates of value derived from Janney's analyses are not necessarily indicative
of future results or actual values, which may be more or less favorable than
such estimates. In addition, estimates relating to the value of businesses do
not purport to be appraisals nor necessarily reflect the prices at which such
businesses may actually be sold.
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Consequently, since such estimates are inherently subject to uncertainty,
neither Janney, the Company nor any other person assumes any responsibility for
their accuracy.
Analysis of Operating Results and Financial Condition. Janney
reviewed with the Board the historical and projected operating performance and
financial condition of the Company. The Company's net sales increased from $19.9
million in fiscal 1991 to $24.5 million in fiscal 1995, a 6.1% compounded annual
growth rate. Net sales increased $1.1 million, or 14.9%, in the first quarter of
fiscal 1996 compared to the same quarter a year ago and were projected to grow
almost 30.0% in fiscal year 1996 to $31.7 million due to an increase in business
with one customer. This customer was projected to account for approximately
one-third of the Company's total net sales in 1996. The Company projected net
sales to increase from $31.7 million in fiscal 1996 to $38.2 million in fiscal
2000, or a 4.7% compounded annual growth rate.
The Company incurred a net loss of $1.1 million in fiscal 1991
but undertook cost containment measures, analyzed the profitability by customer
and instituted total quality management practices to reverse the 1991 loss.
Consequently, profits were restored in fiscal 1992 and net income grew from
$300,000 to $1.6 million, or 6.5% of net sales, in fiscal year 1995 and $980,000
or 11.4% of net sales in the first quarter of fiscal 1996, traditionally the
Company's strongest quarter. Net income increased 42.4% in the first quarter of
1996 from $688,000 in the same quarter a year ago due to the increase in
business with one customer (as described above in the discussion of increased
revenues for the first quarter of fiscal 1996) and a special order from a
different customer. Declining paper prices further contributed to the
improvement in net income in fiscal 1995 and the first quarter of fiscal 1996.
Net income was projected to increase almost 58.0% to $2.5 million in fiscal
1996, or 7.9% of net sales, as a result of the strong first quarter and expected
business from one customer, and was projected to grow to $2.6 million, or 6.9%
of net sales, in fiscal 2000.
The Company's cash, long-term debt and equity were $4.6
million, $4.5 million and $6.5 million, respectively, as of December 31, 1995.
Cash balances were primarily attributable to advanced payments by customers for
paper and postage of $4.3 million. Capital expenditures totaled $2.1 million
from fiscal 1991 to fiscal 1995 and the Company projected total capital
expenditures of $8.4 million from fiscal 1996 to fiscal 2000, of which $4.7
million was projected to be expended in fiscal years 1996 and 1997 to increase
production capacity.
Analysis of Comparable Publicly Traded Companies. Janney
reviewed and analyzed publicly available financial information and stock market
data for twelve publicly traded direct mail and commercial printing companies:
Advo, Inc., Banta Corp., Cadmus Communications, Dimac Corp., DiMark Corp., (RR)
Donnelley & Sons, Graphic Industries, LCS Industries, Mail-Well Inc., Merrill
Corp., Moore Corp. and Standard Register and compared the data to the Company.
In Janney's opinion Cadmus, Dimac, DiMark, RR Donnelley and Moore, are not
directly comparable to the Company for purposes of this analysis. Cadmus,
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Dimac and DiMark are more vertically integrated, providing creative development
and database management services not offered by the Company and are expected to
grow faster than the Company in the next five years. Furthermore, on February 6,
1996, DiMark agreed to be acquired in a merger with Harte-Hanks Communications,
Inc. Additionally, RR Donnelley and Moore are much larger, diversified printing
companies with considerably greater financial and other resources than the
Company. Janney considered the remaining publicly traded companies, Advo, Banta,
Graphic Industries, LCS Industries, Mail-Well, Merrill and Standard Register to
be more directly comparable to the Company and advised the Board to consider
these public companies as comparable to the Company for purposes of this
analysis. Accordingly, references to the comparable companies refer to these
seven public companies.
The financial information and stock market data reviewed by
Janney included (a) stock price multiples to historical and estimated earnings;
(b) enterprise value (total stock market value adjusted for debt and cash) to
latest twelve months revenues, operating cash flow (earnings before interest,
taxes, depreciation and amortization) and operating profits (earnings before
interest and taxes); (c) profit margins and returns on assets and equity; (d)
historical and estimated growth rates; and (e) the capitalization of the
comparable companies and the Company. Janney noted that stock price multiples of
the comparable companies ranged from 8.7 to 16.4 times 1995 estimated earnings,
6.4 to 16.0 times 1996 estimated earnings and 1.4 to 3.5 times current book
value. Enterprise value multiples ranged from 0.4 to 1.0 times latest twelve
months revenues, 4.7 to 8.3 times latest twelve months operating cash flow and
6.6 to 10.3 times latest twelve months operating profits. Applying the range of
multiples of the comparable companies to the appropriate financial information
for the Company results in a range of estimated values per Share of
approximately $2.30 to $7.15. Janney noted that the range of estimated values is
quite broad and, therefore, subject to interpretation. Janney concluded that the
appropriate range of values per Share was between $3.40 and $4.50 based on the
Company's historical operating results, projected growth and dependence on a
single customer projected to represent as much as one-third of total net sales
in fiscal 1996.
Discounted Cash Flow Analysis. Janney prepared a discounted
cash flow analysis to estimate the present value of the unlevered free cash
flows as projected by the management of the Company. Unlevered free cash flows
of the Company are projected to average $2.1 million annually for the five year
projected period but are expected to fluctuate from a low of $800,000 to a high
of $3.2 million as a result of total projected capital expenditures of $8.4
million, of which $4.7 is expected to be expended in fiscal years 1996 and 1997.
Janney considered a range of terminal exit values from $28.5 million to $37.9
million, which represented enterprise values of 4.5 to 6.0 times projected
operating cash flows in fiscal year 2000. Janney discounted the unlevered free
cash flows for the five year period and terminal exit values to present values
using a range of discount rates from 19.0% to 22.0% and deducted debt of $4.5
million to arrive at a range of estimated values per Share of between $3.30 and
$4.90.
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Analysis of Mergers and Acquisitions in the Printing Industry.
Janney identified 28 pending and completed mergers and acquisitions of direct
mail advertising and printing companies since January 1991 but advised the Board
that there was insufficient information to estimate the value of the Company
based on these transactions. Most of the acquired companies were private and,
consequently, the business and operating performance of the acquired company or
the financial terms of the transaction were not publicly available for 24 of the
28 transactions. The enterprise value to sales multiple was the valuation
information most often available but it ranged (excluding the single highest and
lowest multiples) from 0.33 to 1.02 times net sales. Furthermore, in Janney's
judgment, four of the mergers and acquisitions, the pending acquisition of
DiMark, Inc. by Harte-Hanks Communications, the pending acquisition of Dimac
Corp. by Heritage Media Corp., the pending acquisition of Wallace Computer
Services, Inc. by Moore Corp. Ltd., and the November 1993 acquisition of Dimac
Corporation by McCowan De Leeuw & Co. were not comparable to the Merger for
purposes of this analysis. DiMark, Dimac and Wallace Computer are more
vertically integrated, substantially larger, equally or more profitable and are
expected to grow faster in the next five year period than is the Company.
Comparison of Merger Consideration to Historical Stock Price.
Janney reviewed the reported historical market prices and trading volume of the
Common Stock for the 52 weeks and five year period ended February 9, 1996. The
Common Stock traded to a then all time high price of $3.38 upon the announcement
of the Merger. Janney noted that prior to the announcement of the Merger, the
Common Stock traded to a high of $3.13 on two days in the preceding 52-week
period and that the average trading price was $2.54. Thus, the Merger
Consideration represented a 15.2% premium over the high price of the Common
Stock prior to the announcement of the Merger and a 41.7% premium to the average
trading price for the preceding 52-week period.
Janney is a nationally recognized investment banking firm and,
as part of its investment banking activities, is regularly engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and valuations for corporate and other purposes. In the
ordinary course of its trading and brokerage activities, Janney makes a market
in the stock of the Company. Janney has not provided investment banking services
to the Company prior to this current engagement, which commenced in March 1995.
Pursuant to an engagement letter dated March 2, 1995, and
amended May 8, 1995, between Janney and the Company, the Company engaged Janney
to solicit and evaluate merger and acquisition opportunities and to render a
fairness opinion in connection with a merger or acquisition. The Company agreed
to pay Janney a financial advisory fee of $130,000 of which $20,000 was paid in
March 1995, $40,000 was paid in March 1996 after delivery by Janney of its
written opinion dated February 15, 1996, $45,000 is payable upon the filing of
this Proxy Statement with the Commission in connection with the Merger and
$25,000 is payable on the effective date of the Merger. The Company also
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agreed to pay Janney a contingency fee if the Merger Consideration exceeded
$13,200,000. The Company also agreed to reimburse Janney for the reasonable
expenses incurred by it and to indemnify Janney against certain liabilities
including liabilities under federal securities law.
Purpose and Structure of the Merger
The Management Group proposed the Merger because the Company
has not achieved a substantial amount of growth, either through acquisitions or
internal expansion, and because of their belief that the Company would be more
suitably positioned as a private rather than a public company. The reasons for
this are that the Company's sales and capacity are too limited, especially in
the context of its limited borrowing capacity and its modest equity market
capitalization and market following, for its stock to command the type of
attention and multiples in the marketplace that the Management Group felt were
warranted. Notwithstanding the Management Group's belief that the Company is a
solid competitor in the direct mail advertising business, the Company remains a
small player in the direct mail industry, occupying a market niche too narrow
for the Company to expand into a significant business without making
acquisitions in related fields -- a strategy that the Company would be unable to
execute with its limited resources, both in terms of capital and personnel. The
Management Group believes that these factors have inhibited both the growth of
the Company and the development of any significant interest in the Company's
Shares by the investment community. The Management Group is unaware of any
securities analysts who have issued research reports on the Company or who
otherwise have followed the Company on a recent basis until the market activity
related to the Merger. Between March 1, 1995, the date before the first press
release announcing the willingness of the Company to entertain other acquisition
proposals, and January 31, 1996, the date of the announcement that a $3.60 cash
merger proposal was forthcoming, the range of the closing market price was
$2.313 to $3.125 per Share. The limitations on size experienced by the Company
have affected its ability to gain stronger relationships with Fortune 500-type
companies, which are natural customers for the Company's services and products.
It is the Management Group's belief that the Company, as a privately held,
rather than publicly held, company would be better situated to effect strategic
decisions that are in the Company's long-term interest without regard to their
temporary effects on earnings and market value, or the particular interests of
public stockholders holding a common stock with a limited and volatile market.
Throughout the twelve-month period commencing February 1995,
various alternatives were considered by the Board of Directors and the Special
Committee in addressing these issues, including sale or merger of the Company to
or with a public company, merger with a private entity of near or equal size,
management-participating leveraged buy-out of the Company's public stockholders
or the continuation of the Company as an independent public company. Each of
these alternatives was reviewed throughout that period of time in the context of
discussions with other parties and Board and Special Committee meetings. The
possibility of an outright acquisition by a third party presented itself on
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one occasion and solely within the context of the Company's public stockholders
receiving stock of the acquiring company, rather than cash. The confining issue
in those discussions, as in all other situations, was the peculiar fact that Mr.
Samans' continued availability and service to the resulting or continuing entity
was, in all cases, deemed to be a pre-condition both to the continuation or
resumption of discussions and the consummation of an overall transaction; the
Company, in the view of third parties, could not be acquired independent of Mr.
Samans' continued employment and participation. This factor caused the Special
Committee to realize that any transaction would have to be suitable to Mr.
Samans and the potential acquiring or merging party before a transaction could
be effected at the corporate or stockholder level; moreover, this dependency of
the Company on the continuation of the services and leadership of Mr. Samans
created additional concerns for the Board of Directors and the Special
Committee, especially in the context of (a) the heavy reliance of the Company on
the managerial skills of one person and (b) Mr. Samans' age (63), since the
value of the Company would likely be diminished within a short period of time in
the event Mr. Samans were no longer able to perform his duties. The nature of
the discussions with third parties, conducted by the Board of Directors or by
Janney since February of 1995, did not produce a situation with respect to a
third party acquiror which was satisfactory to Mr. Samans.
The Board of Directors and the Special Committee determined
that a process that allowed the Company to seek indications of interest from
third parties, without the strictures or restrictions of a break-up fee or
lock-up provisions, would be the most attractive for purposes of maximizing
value for the Company's public stockholders. As a result of its open manner in
dealing with the issue of the possible sale of the Company and its
acknowledgment that any transaction would be likely to require the continued
involvement and employment of Mr. Samans, the Board of Directors and the Special
Committee attempted to create an atmosphere in which third parties could
indicate their interest in becoming involved with the Company. As the activities
of the Special Committee proceeded, however, it became more likely that any
transaction resulting from the process would involve a financial partner
investing in the Company in a manner that would enable the Company to buy out
the publicly held stockholders while permitting the continuation of the
Company's operations and ownership (at least in part) by Mr. Samans and others.
During the last several months leading up to receipt of the Mellon-backed
Proposal, the only remaining parties indicating an interest in participating in
a significant transaction with the Company were financial investors who realized
the importance of Mr. Samans to the Company and who were willing to invest on
the basis that the Company would buy out its public stockholders with the
invested, or borrowed, funds and no longer be subject to the concerns of
satisfying public stockholders having a myriad of objectives. See "SPECIAL
FACTORS -- Background of the Merger." Accordingly, the Merger has been
structured so as to enable members of the Management Group to acquire the entire
equity interest in the Company not already owned by members of the Management
Group, while maximizing stockholder value for the Company's public stockholders.
The Merger will terminate the equity interests in the Company of its
stockholders, other than members of the Management Group, and the Company's
public stockholders will neither share in future earnings and growth of the
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Company nor the risks associated with achieving such earnings and growth
following the Merger. The Merger will enable the Company's public stockholders
to receive a cash payment of $3.60 per Share held, or to seek appraisal rights
as described under "Dissenters' Rights," pursuant to a transaction which has
been determined by the Special Committee (and, upon the recommendation of the
Special Committee, by the Board) to be fair to such stockholders. The Merger
Consideration was the result of arms' length bargaining between representatives
of the Management Group and the Special Committee and their respective advisors,
following a proposal by the Management Group. See "Opinion of the Special
Committee's Financial Advisor."
Following the Merger, the interest of the Management Group in
the Company's net book value (deficit) and net income (loss) will increase to
100%. The members of the Management Group, as the only stockholders of the
Company, will thereafter benefit from any future earnings, growth and increases
in the value of the Company, will bear the risk of any decreases in the value of
the Company's assets or operations, and will have the ability to enter into and
benefit from any corporate opportunities that may be pursued by the Company in
the future. For a description of the stock purchase warrant to be granted to
Mellon in connection with the financing of the Merger, see "FINANCING OF THE
MERGER -- Warrant to Purchase Surviving Corporation's Common Stock." See
"SPECIAL FACTORS -- Plans for the Company After the Merger."
Pursuant to the Merger Agreement, upon consummation of the
Merger, SCFM will merge with and into the Company, with the Company being the
Surviving Corporation. Each outstanding Share (excluding those Shares held by
the Company as treasury stock or held by SCFM and Shares held by stockholders
who properly exercise their appraisal rights under the DGCL), including 138,889
Shares beneficially owned by each of Messrs. Samans and Carcioppolo, will be
converted into the right to receive $3.60 in cash, without interest. Each
outstanding Share held in the treasury of the Company (or by any subsidiary of
the Company) and each outstanding Share beneficially owned by SCFM will be
canceled without consideration. Each outstanding share of common stock of SCFM
will be converted into one share of common stock of the Surviving Corporation.
The holders of options to purchase Shares under the Stock
Option Plan will receive a cash payment from the Company equal to the excess, if
any, of the Merger Consideration over the per Share exercise price of each
option, subject to applicable federal, state and local tax withholdings,
multiplied by the number of Shares covered by the option. As of March 31, 1996,
options to purchase an aggregate of 205,000 Shares (including an aggregate of
125,000 Shares held by certain of the executive officers of the Company) were
outstanding under the Stock Option Plan at exercise prices ranging between $.30
and $1.69 per Share. Holders of such options will receive an aggregate of
$509,700 (of which amount an aggregate of $315,200 will be paid to executive
officers) in the Merger upon cancellation of such options, based on a Merger
Consideration of $3.60 per Share. See "SPECIAL FACTORS -- Interests of Certain
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Persons in the Merger; Conflicts of Interest", "OWNERSHIP OF SHARES --
General," "OWNERSHIP OF SHARES -- Beneficial Ownership of Shares and
Transactions in Shares by Certain Persons," "TREATMENT OF EMPLOYEE STOCK
OPTIONS."
Members of the Management Group beneficially own an aggregate
of approximately 1,556,888 Shares (representing approximately 43.9% of the
Shares outstanding). Messrs. Samans and Carcioppolo have agreed to contribute,
or cause to be contributed, to SCFM such number of outstanding Shares which,
together with any cash contributed by them to SCFM, will result in SCFM having
contributed equity of not less than $4,604,796, if their Shares are valued at
$3.60 per Share.
The Special Committee has negotiated a Merger Agreement with
SCFM which does not provide for a break-up fee or topping fee in the event of
the receipt of a superior offer, as defined therein.
Under Section 251 of the DGCL, approval and adoption of the
Merger Agreement requires the affirmative vote of the holders of a majority of
the outstanding Shares. The DGCL does not require the affirmative vote of a
majority of the outstanding Shares held by stockholders not affiliated with SCFM
or the Management Group. In accordance with the terms of the Merger Agreement,
SCFM has agreed to vote all its Shares in favor of approval and adoption of the
Merger Agreement, and Messrs. Samans and Carcioppolo have advised the Board of
Directors of their intention to do so as well. Members of the Management Group
discussed with their financial and legal advisors alternative methods for a
transaction in which the Management Group could acquire the publicly held Shares
including: (a) a cash merger and (b) a cash tender offer followed by a cash
merger. The Management Group sought to acquire the outstanding common shares not
already owned by members of the Management Group in the simplest possible
transaction and determined that the Merger offered the most efficient and
effective means of documenting and executing the transaction. This determination
was based upon the timing, procedures and financing required to complete the
transaction.
Holders of Shares have the right to demand appraisal of, and
obtain payment for, the "fair value" of their Shares by following the procedures
prescribed in Section 262 of the DGCL, a copy of which is attached as Annex C to
this Proxy Statement, and is summarized under "DISSENTERS' RIGHTS" in this Proxy
Statement. Failure to take any of the steps required under Section 262 on a
timely basis could result in a loss of appraisal rights.
Plans for the Company After the Merger
The Merger Agreement provides that the Certificate of
Incorporation and By-Laws of the Company shall remain as the Certificate of
Incorporation and By-Laws of the Company after the Merger. Moreover, the
Directors of SCFM at the Effective Time of the Merger shall be the Directors of
the Company after the Merger and the officers of the Company at the Effective
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Time shall be the officers of the Company after the Merger. See "THE MERGER
AGREEMENT -- Surviving Corporation."
The Company will be highly leveraged after the Merger,
primarily as a result of the significant borrowings required in order to finance
the acquisition of the Shares held by the public stockholders. Accordingly, it
is not contemplated that the Company will make material acquisitions pending
substantial reduction of its indebtedness unless it obtains additional equity
financing or permitted debt financing under the Mellon loan agreements. The
Company will, however, continue to explore strategic agreements with businesses
providing ancillary services or opportunities to the Company in order to permit
the Company to enhance its profitability and expand its capabilities so as to
enable it to service and continue to service more and larger customers. At the
present time, the Company has no agreements, arrangements or understandings and,
except as otherwise described in this Proxy Statement, is not currently engaged
in any negotiations regarding the possible sale of any of its assets or
acquisitions of any businesses or assets, or any strategic transactions although
the Company intends to pursue any business opportunities which may be presented,
including, without limitation, the acquisition of businesses or assets, which
are in the best interests of the Company and its stockholders. The Company is
presently negotiating the terms of an agreement with a company to serve as the
Company's primary vendor for the Company's inserting and mailing services. In
connection therewith, the Company is negotiating the terms of a loan from the
Company to the vendor in the approximate amount of $200,000 to enable the vendor
to obtain sufficient space to service the Company's orders. In addition, the
Company is investigating the possibility of the purchase of a direct mail
manufacturing plant in the Midwest.
Except as otherwise described in this Proxy Statement, the
Management Group advises that it has developed no plans or proposals regarding
activities or transactions which are to occur after the Merger that would relate
to or would result in an extraordinary transaction such as a merger,
reorganization or liquidation involving the Company, a sale or transfer of a
material amount of assets of the Company, or a change in any material aspect of
the Company's corporate structure or business. The Management Group, however,
reserves the right to take such actions relating to the Company following the
Merger as it deems appropriate and in its best interests, including activities
and transactions of the nature discussed under this heading.
The Company, moreover, has formulated no specific plans in the
event the Merger is not consummated because of reasons other than the receipt of
a superior proposal and the consummation of a transaction to effect such
superior proposal. In such event, it is currently contemplated that the Company
will continue as a public company and continue with its current strategy,
including seeking to make appropriate acquisitions to utilize the Company's
available cash or authorized common stock.
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Certain Effects of the Merger
As a result of the Merger, the Management Group will own the
entire equity interest in the Company and will thereby be entitled to 100% of
the Company's net assets and earnings. For a description of the stock purchase
warrant to be granted to Mellon in connection with the financing for the Merger,
see "FINANCING OF THE MERGER - Warrant to Purchase Surviving Corporation's
Common Stock." Therefore, following the Merger, the present holders of Shares
(other than the members of the Management Group) will no longer have an equity
interest in the Company and will no longer share in future earnings and growth
of the Company, the risks associated with achieving such earnings and growth, or
the potential to realize greater value for their Shares through corporate
opportunities that may be pursued by the Company in the future. See "SPECIAL
FACTORS -- Purpose and Structure of the Merger" which describes certain other
effects of the Merger. Instead, each such holder of Shares will have only the
right to receive the Merger Consideration for each Share held or to seek
appraisal rights as described under the caption "DISSENTERS' RIGHTS." If the
Merger is consummated, the Management Group intends to cause the Company to
terminate the registration of the Shares under the Exchange Act and its
obligation to file reports, proxy statements and other information with the
Commission.
The Merger will be a taxable transaction to the holders of the
Shares (other than SCFM) for federal income tax purposes and may be taxable for
state, local, foreign and other tax purposes. See "SPECIAL FACTORS -- Certain
Federal Income Tax Consequences of the Merger."
Interests of Certain Persons in the Merger; Conflicts of Interest
SCFM was organized by the Management Group for the purpose of
enabling the Management Group to obtain the entire equity interest in the
Company. The outstanding shares of capital stock of SCFM are owned by Mr.
Samans, who owns a 67.8% interest, and Mr. Carcioppolo, who owns a 32.2%
interest. As a result of the Merger, the current stockholders of the Company,
other than members of the Management Group, will no longer have any equity
interest in the Company. See "SPECIAL FACTORS -- Certain Effects of the Merger."
Pursuant to the Merger Agreement, SCFM will merge with and
into the Company, with the Company being the Surviving Corporation. Each
outstanding Share (including approximately 138,889 Shares held by each of
Messrs. Samans and Carcioppolo, and excluding those Shares held by the Company
as treasury stock or held by SCFM and Shares held by stockholders who properly
exercise their appraisal rights under the DGCL) will be converted into the right
to receive $3.60 in cash, without interest. Each Share beneficially owned by
SCFM or held by the Company as treasury stock will be canceled without
consideration. Each share of common stock of SCFM will be converted into one
share of common stock of the Surviving Corporation. It is anticipated that each
of Messrs. Samans and Carcioppolo will receive approximately $500,000 in Merger
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Consideration for the 138,889 Shares held beneficially by each of them at the
Effective Time.
Certain executive officers of the Company are the holders of
options to purchase Shares under the Stock Option Plan. Each such executive
officer will receive, along with all other holders of options under the Stock
Option Plan, a cash payment from the Company equal to the excess, if any, of the
Merger Consideration over the per Share exercise price of each option held by
such executive officer, subject to applicable federal, state and local tax
withholdings, multiplied by the number of Shares covered by the option. As of
March 15, 1996, the executive officers of the Company as a group held options to
purchase an aggregate of 125,000 Shares at exercise prices ranging between $0.30
and $1.69. Such executive officers will be entitled to receive an aggregate of
approximately $315,200 in the Merger upon cancellation of such options (based on
the Merger Consideration of $3.60 per Share). See "OWNERSHIP OF SHARES --
General," "-- Beneficial Ownership of Shares and Transactions in Shares by
Certain Persons" and "TREATMENT OF EMPLOYEE STOCK OPTIONS."
SCFM and the Company have agreed in the Merger Agreement that
all rights to indemnification now existing in favor of the employees, agents,
directors or officers of the Company and the Company's subsidiaries as provided
in their respective Certificates of Incorporation or bylaws or otherwise in
effect on the date of the Merger Agreement will survive the Merger and will
continue in full force and effect after the Effective Time; that any permissive
provision therein relating to rights of indemnification will be deemed to be
mandatory to the maximum extent permitted by law; and that the Surviving
Corporation will maintain for a period of not less than two years from the
Effective Time policies of directors' and officers' liability insurance
providing the same coverage, or other coverage no less favorable, as the
policies currently maintained by the Company for the benefit of the officers and
directors of the Company. See "MERGER AGREEMENT-- Agreements and Covenants."
Since September 1994, pursuant to an arrangement with the
Company, Mr. Carcioppolo has provided consulting advice and assistance to the
Company with regard to manufacturing, production and potential acquisitions and
sales of businesses and/or product lines. Mr. Carcioppolo is compensated at the
rate of $200 per hour for such consulting services. During the fiscal year ended
October 1, 1995, the Company paid Mr. Carcioppolo $28,673 for consulting
services. It is anticipated that Mr. Carcioppolo will continue to provide
consulting services to the Surviving Corporation and be compensated therefor at
the rate of $200 per hour.
Certain Federal Income Tax Consequences of the Merger
The following discussion summarizes certain United States
federal income tax consequences of the Merger to stockholders of the Company
other than members of the Management Group (and certain related parties, if any)
or SCFM. It is based upon laws, regulations (whether final, temporary, or
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proposed), rulings and judicial decisions now in effect, all of which are
subject to change, including changes to a taxpayer's detriment with retroactive
effect. It does not address all aspects of federal income taxation that may be
relevant to a particular stockholder in light of that stockholder's personal
circumstances, or to types of taxpayers subject to special treatment under the
federal income tax laws (e.g., life insurance companies, tax exempt
organizations, foreign taxpayers, securities dealers, and persons who have
entered into hedging transactions with respect to the Shares), nor does it
address any aspect of state, local, or foreign tax laws. The Company has not
requested any ruling from the Internal Revenue Service with respect to the
Merger. STOCKHOLDERS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO
THE CONSEQUENCES TO THEM OF THE MERGER UNDER FEDERAL AND APPLICABLE STATE,
LOCAL, AND FOREIGN TAX LAWS.
The Merger will be treated for federal income tax purposes as
a redemption by the Company of the Shares held by stockholders other than
members of the Management Group and parties related to them.
The receipt of cash for Shares pursuant to the Merger by
stockholders (other than members of the Management Group, SCFM and parties
related to them) will be treated for federal income tax purposes as a redemption
by the Company of the Shares held by such stockholders and as a taxable sale or
exchange of such Shares by them. For these purposes, parties related to the
members of the Management Group includes the spouses, children, grandchildren,
and parents of members of the Management Group, corporations (other than S
corporations) 50% or more of which is owned directly or indirectly by any such
persons, partnerships and S corporations in which any of such persons is a
partner or stockholder, and trusts for the benefit of any such persons. The
Merger also may be a taxable transaction under applicable state, local, foreign
and other tax laws.
In general, stockholders other than members of the Management
Group, parties related to them, and SCFM will recognize gain or loss equal to
the difference between the cash received by them in the Merger and the adjusted
tax basis of their Shares converted to cash in the Merger. Such gain or loss
will be capital gain or loss if the Shares are capital assets in the hands of
such stockholders, and will be long-term capital gain or loss if their holding
period for such Shares is more than one year.
Cash payments to stockholders pursuant to the Merger may be
subject to a backup withholding tax at a rate of 31% on the gross amount of such
payments unless the stockholder has complied with certain reporting and/or
certification procedures. The Letter of Transmittal, which will be sent to the
former stockholders of the Company following the Effective Time if the Merger is
consummated, will include a substitute Form W-9 on which stockholders can
provide the information required to avoid the backup withholding provisions of
federal income tax law. Any amount withheld from a stockholder under the backup
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withholding rules will be allowed as a credit against such stockholder's federal
income tax liability and may entitle the stockholder to a refund, provided that
the required information is furnished to the Internal Revenue Service.
Stockholders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular circumstances
and the availability of an exemption therefrom if the stockholders cannot or do
not make the certifications required by the substitute Form W-9.
In the case of stockholders who acquired their Shares upon the
exercise of qualified incentive stock options granted to employees of the
Company ("ISO Shares"), such stockholders will receive the treatment described
above only with respect to ISO Shares as to which both of the following
conditions apply: (1) the date of transfer of the ISO Shares following exercise
of the applicable options was more than one year prior to the Effective Time,
and (2) the applicable options were granted to the employee more than two years
prior to the Effective Time. As to all other ISO Shares, the receipt of cash for
such ISO Shares in the Merger will be a disqualifying disposition of such ISO
Shares. Such stockholders will recognize ordinary income equal to the excess, if
any, of (a) the lesser of (i) the fair market value of the applicable ISO Shares
on the date such ISO Shares were transferred pursuant to the exercise of the
options, or (ii) the cash received with respect to such ISO Shares in the
Merger, over (b) the exercise price paid to acquire such ISO Shares. The federal
income tax withholding applicable to wages will apply to such ordinary income.
Such stockholders' adjusted basis in such ISO Shares will include the exercise
price paid to acquire such ISO Shares and any ordinary income recognized by
reason of the disqualifying disposition, and such stockholders will also
recognize capital gain or loss equal to the difference between the cash received
for the applicable ISO Shares in the Merger and the adjusted basis of such ISO
Shares in their hands. Such gain or loss will be long-term gain or loss if the
applicable options were exercised more than one year prior to the Effective
Time.
Persons who receive cash payments in the Merger in settlement
of employee options outstanding under the Stock Option Plan will recognize
ordinary income in the amount of such cash payments. The federal income and
employment tax withholding applicable to wages will apply to such ordinary
income.
Accounting Treatment of the Merger
The Merger will be accounted for as a "business combination"
as that term is used under generally accepted accounting principles for
accounting and financial reporting purposes.
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Risk of Fraudulent Conveyance
If a court in a lawsuit by an unpaid creditor or
representative of creditors of the Company, such as a trustee in bankruptcy, or
the Surviving Corporation, as debtor in possession, were to find that, at the
Effective Time or at the time the Surviving Corporation distributed the Merger
Consideration to the holders of Shares, the Surviving Corporation made such
payment with fraudulent intent, or (i) was insolvent, (ii) was rendered
insolvent by reason of such distributions, (iii) was engaged in a business or
transaction for which the assets remaining with the Surviving Corporation
constituted unreasonably small capital or (iv) intended to incur, or believed
that it would incur, debts beyond its ability to pay such debts as they matured,
such court could (w) find that the distribution of the Merger Consideration and
the financing thereof constituted fraudulent transfers or conveyances; (x) void
the Merger and require that the Surviving Corporation return the assets of the
Company to a fund for the benefit of the Company's creditors (including, under
certain circumstances, bank lenders and other holders of debt of the Surviving
Corporation); (y) void the distribution of the Merger Consideration to holders
of Shares and require that such holders return the same (or equivalent amounts)
to the Surviving Corporation or a fund for the benefit of its creditors
(including, under certain circumstances, bank lenders and other holders of debt
of Surviving Corporation); and (z) void or modify the rights and obligations
relating to the financing of the Merger.
The measure of insolvency for purposes of the foregoing will
vary depending upon the law of the jurisdiction that is being applied.
Generally, however, the Surviving Corporation would be considered insolvent if
the sum of its debts is greater than all of its property, at a fair valuation,
or if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured. No assurance can be given as to what method a court
would use in order to determine whether the Surviving Corporation was
"insolvent" at the Effective Time or that, regardless of the method of
valuation, a court would not determine that the Surviving Corporation was
insolvent at the Effective Time. The avoidance of the distribution of the Merger
Consideration to holders of the Shares as described above could result in such
holders being required to return all or a portion of the Merger Consideration.
Management of the Company believes that the payments to be
made in connection with the Merger will be made for proper purposes and in good
faith and that, based on present forecasts and other financial information, the
Company is, and the Surviving Corporation will be, solvent, and that the
Surviving Corporation will have sufficient capital for carrying on its
businesses after the Merger and will be able to pay its debts as they mature. As
a condition of Mellon's obligation to provide certain loans to the Company to
finance the Merger, the Board has engaged Howard Lawson & Co. to provide to the
Board an opinion of solvency attesting to the solvency of the Surviving
Corporation after the Merger. See "FINANCING OF THE MERGER" and "SELECTED
HISTORICAL FINANCIAL INFORMATION OF THE COMPANY."
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Regulatory Approvals
No consent, approval, order or authorization of, or
registration, declaration or filing with, any federal, state, local or foreign
governmental or regulatory authority is required to be made or obtained by
either party to the Merger Agreement in connection with consummation of the
Merger Agreement, except for the requirements of federal securities law,
delivery to and filing of the Certificate of Merger with respect to the Merger
with the Secretary of State of the State of Delaware and the requirements of the
DGCL in connection with stockholder approvals and consummation of the Merger.
THE MERGER AGREEMENT
General
The description of the Merger Agreement contained herein is
qualified in its entirety by reference to the Merger Agreement which is attached
to this Proxy Statement as Annex A and incorporated in its entirety herein by
reference.
The Merger Agreement provides that, subject to compliance with
certain covenants and conditions, some of which are described below, SCFM will
be merged with and into the Company in accordance with the laws of the State of
Delaware, with the Company being the Surviving Corporation, and the separate
existence of SCFM will cease. As a result of the Merger, the Management Group
will own all of the Surviving Corporation's common stock. For a description of
the stock purchase warrant to be granted to Mellon in connection with the
financing of the Merger, see "FINANCING OF THE MERGER - Warrant to Purchase
Surviving Corporation's Common Stock." In the Merger, the stockholders of the
Company, other than the Management Group, SCFM and stockholders who exercise
their appraisal rights under the DGCL, will receive the Merger Consideration
described below. See "SPECIAL FACTORS -- Purpose and Structure of the Merger."
Effective Time of the Merger
The Effective Time will occur at the time on the date that a
properly executed Certificate of Merger is delivered to and filed with the
Secretary of State of the State of Delaware, which delivery and filing will be
made as soon as practicable after the closing of the transactions contemplated
by the Merger Agreement. Such filing will be made, however, only upon
satisfaction or waiver of all conditions to the Merger contained in the Merger
Agreement. The following discussion of the Merger Agreement is qualified in its
entirety by reference to the complete text of the Merger Agreement, which is
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included in this Proxy Statement as Annex A and incorporated herein by
reference.
Surviving Corporation
The Merger Agreement provides that, at the Effective Time, the
persons identified herein under "DIRECTORS AND EXECUTIVE OFFICERS OF SCFM" will
be the directors of the Surviving Corporation and the persons identified herein
under "DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY" as the officers of the
Company will be the officers of the Surviving Corporation. The Certificate of
Incorporation and bylaws of the Company in effect immediately prior to the
Effective Time will be the Certificate of Incorporation and bylaws of the
Surviving Corporation.
Consideration to be Received By Stockholders of the Company
The Merger Agreement provides that, at the Effective Time, by
virtue of the Merger and without any further action on the part of any holder of
Shares, (a) any Shares which are held in the treasury of the Company or by any
subsidiary of the Company immediately prior to the Effective Time and any Shares
beneficially owned by SCFM will be canceled and cease to exist, without any
consideration being payable therefor; (b) each remaining Share (including
approximately 138,889 Shares held by each of Messrs. Samans and Carcioppolo),
except the Shares held by stockholders who properly exercise their appraisal
rights under the DGCL, will be canceled and cease to exist and will represent
only the right to receive the Merger Consideration of $3.60 per Share, without
interest; and (c) each share of common stock of SCFM outstanding immediately
prior to the Effective Time will be converted into one share of common stock,
$.01 par value, of the Surviving Corporation, such conversion to be effected by
the cancellation of the certificate or certificates representing such shares of
capital stock and the issuance to SCFM's stockholders of new certificates
representing shares of common stock of the Surviving Corporation.
Pursuant to the Merger Agreement, from time to time after the
Effective Time, the Surviving Corporation will cause to be delivered to a
reputable banking institution selected by the Special Committee (the "Paying
Agent") for the benefit of the holders of certificates formerly representing
Shares, funds in an aggregate amount equal to the Merger Consideration
multiplied by the number of Shares outstanding at the Effective Time other than
the Shares held in the treasury of the Company, Shares held by stockholders who
properly exercise their appraisal rights under the DGCL, and Shares owned by any
subsidiary of the Company or by SCFM. Such funds will be provided to the Paying
Agent as needed to make payments for Shares pursuant to the Merger Agreement.
As soon as practicable after the Effective Time, the Paying
Agent will mail to each holder of record (other than the Company or any
subsidiary of the Company and SCFM) of a certificate or certificates which
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immediately prior to the Effective Time represented outstanding Shares (the
"Certificates"): (i) a form of letter of transmittal and (ii) instructions for
use in effecting the surrender of the Certificates for payment therefor.
STOCKHOLDERS SHOULD NOT SUBMIT CERTIFICATES TO THE PAYING AGENT OR THE COMPANY
UNTIL SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED. Upon surrender
of a Certificate for cancellation to the Paying Agent together with such letter
of transmittal, duly executed, the holder of such Certificate will be entitled
to receive promptly the amount of cash into which the Shares represented by the
Certificate will have been converted pursuant to the provisions of the Merger
Agreement and the Certificate will be canceled. No interest will be paid or
accrued on the cash payable upon the surrender of the Certificates.
If Certificates are not surrendered prior to one year after
the Effective Time, unclaimed funds payable with respect to such Certificates
will, to the extent permitted by applicable law, become the property of the
Surviving Corporation, subject to any legally enforceable claims or interest of
any person entitled thereto.
If payment is to be made to any person other than the person
in whose name the surrendered Certificate is registered, it will be a condition
of such payment that the Certificate so surrendered will be properly endorsed
and the signatures thereon properly guaranteed and otherwise in proper form for
transfer and that the person requesting such payment will pay to the Paying
Agent any transfer or other taxes required by reason of the payment to any
person other than the registered holder of the Certificate surrendered, or
otherwise required, or will establish to the satisfaction of the Paying Agent
that such tax has been paid or is not payable.
After the Effective Time, there will be no further
registration of transfers of Shares on the stock transfer books of the Surviving
Corporation. If, after the Effective Time, Certificates representing such Shares
are presented to the Surviving Corporation (or the registrar or transfer agent
of the Company), they will be canceled and exchanged for cash as provided in the
Merger Agreement.
Representations and Warranties
The Merger Agreement contains various representations and
warranties of the Company and SCFM relating to, among other things, the
following matters : (a) due organization, corporate existence, good standing and
power of and similar corporate matters with respect to each of the Company,
subsidiaries of the Company and SCFM; (b) corporate power and authority
(subject, in the case of the Company, to approval of the Merger by the
stockholders of Company) to enter into the Merger Agreement and to consummate
the transactions contemplated thereby, including the Merger; (c) validity and
enforceability of the Merger Agreement; (d) absence of any conflict with,
violation of or default or loss of a benefit, or grounds for acceleration of any
obligation, as a result of the party's execution and delivery of the Merger
Agreement and consummation of the Merger, under any provision of (i) the
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Certificate of Incorporation or bylaws of the party, (ii) any mortgage,
indenture, lease, agreement or other instrument to which the party is party or
by which any of their respective properties are bound or (iii) any permit,
concession, grant, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the party or their respective
properties, except, in the case of clauses (ii) and (iii) above, such conflicts,
violations, defaults, losses or accelerations that would not, individually or in
the aggregate, have a material adverse effect; (e) the absence, except as
disclosed, of any requirement for any consent, approval, order or authorization
of, or registration, declaration or filing with, any federal, state, local or
foreign governmental or regulatory authority in connection with the execution
and delivery of the Merger Agreement or the consummation of the transactions
contemplated thereby except for such consents, approvals, orders or
authorizations which if not obtained, or registrations, declarations or filings
which if not made, would not, individually or in the aggregate, have a material
adverse effect; (f) the accuracy of information supplied by the party included
in this Proxy Statement and the Schedule 13E-3; and (g) the absence of any
broker's, finder's or financial advisor's fee or similar compensation due in
connection with the Merger, except for compensation payable by the Company to
Janney pursuant to the letter agreement dated March 2, 1995, as amended May 8,
1995.
In the Merger Agreement, the Company has made certain
additional representations and warranties to SCFM relating to the following
matters (with respect to the Company and, in certain instances, its
subsidiaries): (a) capital structure; (b) delivery to SCFM of certain documents
filed with the Commission and the accuracy of the information contained in such
documents; (c) fair presentation of financial statements included in such
Commission filings which were delivered to SCFM; (d) absence, as of January 31,
1996, of any material liabilities not specifically disclosed or provided for in
the Company's financial statements, except for liabilities incurred in
connection with the Merger; (e) absence, since December 31, 1995, of any
incurrence of material liabilities (after taking into account applicable
insurance coverage) except liabilities incurred in the ordinary course of
business consistent with past practice and for the liabilities referred to in
the preceding clause; (f) the conduct of its business, since December 31, 1995,
in the ordinary and usual course (except for actions approved by the Company's
Board); (g) absence of actions by the Company and any of its subsidiaries which
are prohibited by the covenants of the Company set forth in the Merger Agreement
and absence of any material adverse effect; (h) absence of agreements providing
for severance or termination payments, or payments in connection with any change
in control of the Company or employment agreements with any former employee,
employee, officer, consultant or director of the Company or any of its
subsidiaries; (i) due approval by the Special Committee of the Merger Agreement
and the Merger, determination by the Special Committee that the Merger is fair
to stockholders other than SCFM or any affiliate of SCFM and resolution of the
Special Committee to recommend acceptance of the Merger; (j) advice of Janney to
the Special Committee and the Company's Board that the Merger Consideration is
fair to the Company's stockholders (other than SCFM and any affiliate of SCFM)
from a financial point of view.
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In the Merger Agreement, SCFM has represented and warranted to
the Company that it has done and will do any and all things necessary to assist
in assuring that all funds or appropriate commitments from responsible financial
institutions to provide funds to the Company will be available in connection
with the Merger sufficient to satisfy the obligation of the Company to pay at
the Effective Time to the holders of Shares of the aggregate amount of cash to
which such holders will be entitled.
Agreements and Covenants
The Company has agreed in the Merger Agreement that, during
the period prior to the Effective Time, the Company and each of its subsidiaries
will carry on its business in, and only in, the usual, regular and ordinary
course and will promptly notify SCFM of any material adverse change to the
Company and its subsidiaries, taken as a whole, in its assets, business,
operations and financial condition and, among other things, that neither the
Company nor (in the case of certain of the actions set forth below) any of its
subsidiaries will, without the prior written consent of SCFM, (a) amend its
Certificate of Incorporation or bylaws (or other constituent documents); (b)
acquire or offer to acquire substantially all of the assets of any business; (c)
split, combine or reclassify the outstanding Shares or declare, set aside, make
or pay any dividend or other distribution in respect of its capital stock or
purchase or redeem any shares of its capital stock; (d) issue or sell (or agree
to issue or sell) any shares of its capital stock or any rights to purchase such
shares (other than pursuant to employee stock options under employee stock
option plans that were outstanding as of the date of the Merger Agreement); (e)
other than in the ordinary course of business consistent with prior practice,
(i) incur any indebtedness for borrowed money or vary the terms of any existing
debt securities, (ii) issue or sell any debt securities, (iii) acquire or
dispose of any substantial assets or (iv) enter into any other material
transaction; (f) mortgage, pledge or subject to any lien, lease, security
interest or other charge or encumbrance any of its properties or assets,
tangible or intangible, other than in the ordinary course of business consistent
with prior practice; (g) grant to any officer or director any increase in
compensation in any form, or any severance or termination pay, or make any loan
or enter into any Agreement with any officer or employee (except in accordance
with the normal practices of the Company or in accordance with the terms of an
existing written agreement previously disclosed to SCFM); or (h) adopt, amend in
any material respect or terminate any bonus, profit sharing, stock option, stock
appreciation rights, employee stock ownership, pension, retirement, deferred
compensation, employment or other plan, agreement or arrangement for the benefit
of any of its employees.
The Company has agreed that, prior to the Effective Time, the
Company will timely file with the Commission (and deliver to SCFM copies of )
all reports required to be filed by the Company under federal securities laws;
that, as of their respective dates, none of such reports filed with the
Commission will contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and that the Company's audited consolidated financial statements
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and unaudited interim financial statements included in such reports will be
prepared in accordance with generally accepted accounting principles and will
fairly present the financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the results of their operations and
changes in financial position for the periods then ended.
The Company has agreed in the Merger Agreement that it will
furnish information and access, in response to unsolicited requests, to the same
extent information and access are to be furnished by the Company to SCFM under
the terms of the Merger Agreement, to any person or entity pursuant to
appropriate confidentiality agreements, and may participate in discussions and
negotiate with any such person or entity concerning any merger, sale of assets,
sale of shares of capital stock or similar transaction involving the Company
(any such transaction being referred to herein as a "Competing Transaction") if
the Special Committee determines that such action is appropriate after
consultation with counsel. The Company will cooperate with and be reasonably
available to consult with any such entity or group. Except as set forth above,
the Company will not solicit, participate in or initiate discussion or
negotiations with, or provide any information to, any person or entity (other
than SCFM or its affiliates or associates) concerning any Competing Transaction.
See "THE MERGER AGREEMENT -- Termination, Amendment and Waiver."
SCFM and the Company have agreed in the Merger Agreement that
all rights to indemnification now existing in favor of the employees, agents,
directors or officers of the Company and the Company's subsidiaries as provided
in their respective Certificates of Incorporation or bylaws or otherwise in
effect on the date of the Merger Agreement will survive the Merger and will
continue in full force and effect after the Effective Time; that any permissive
provision therein relating to rights of indemnification will be deemed to be
mandatory to the maximum extent permitted by law; and that the Surviving
Corporation will maintain for a period of not less than two years from the
Effective Time policies of directors' and officers' liability insurance
providing the same coverage, or other coverage no less favorable, as the
policies currently maintained by the Company for the benefit of the officers and
directors of the Company.
Conditions to the Merger
The obligation of each party to the Merger Agreement to
consummate the Merger is subject to the satisfaction or waiver (if permitted by
law and under the terms of the Merger Agreement) of the following conditions:
(a) the absence of an order restraining or prohibiting the Merger; (b) the
approval of the Merger Agreement by the holders of a majority of the Shares; (c)
the availability to the Company or SCFM of satisfactory financing commitment(s)
from (i) Mellon, pursuant to the Mellon Offer and Outline of Terms, each dated
February 5, 1996, (ii) any other reputable banking institution satisfactory to
the Special Committee on terms not materially different from those under (i),
above, or (iii) any other source on terms satisfactory to the Special
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Committee; (d) the perfection of stockholders' appraisal rights by stockholders
owning no more than 300,000 Shares; (e) the absence of any injunction or order
preventing the consummation of the Merger or any pending governmental proceeding
seeking any of the foregoing.
The obligations of SCFM to consummate the Merger are also
subject to the satisfaction or waiver (if permitted by law and under the terms
of the Merger Agreement) of the following conditions: (a) the representations
and warranties of the Company contained in the Merger Agreement will be true and
correct in all material respects as of the date when made and at and as of the
Closing Date; and (b) the Company will have performed and complied in all
material respects with the covenants and agreements required by the Merger
Agreement to be performed or complied with prior to or on the Closing Date.
The obligation of the Company to consummate the Merger is also
subject to the satisfaction or waiver (if permitted by law and under the terms
of the Merger Agreement) of the following conditions: (a) the representations
and warranties of SCFM contained in the Merger Agreement will be true and
correct in all material respects as of the date when made and at and as of the
Closing Date; and (b) SCFM will have performed and complied in all material
respects with the covenants and agreements required by the Merger Agreement to
be performed or complied with by it prior to or on the Closing Date.
Termination, Amendment and Waiver
The Merger Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Merger Agreement by
the stockholders of the Company: (a) by mutual consent of the Board of Directors
of SCFM and the Board (acting upon the recommendation of the Special Committee);
or (b) by either SCFM or the Company (acting upon the recommendation of the
Special Committee) if the Merger has not been consummated on or before August
31, 1996; or (c) by SCFM or the Company (acting upon the recommendation of the
Special Committee) if any court of competent jurisdiction in the United States
or any other United States federal, state or local governmental body will have
issued an order, decree or ruling or taken other action restraining, enjoining
or otherwise prohibiting the Merger and such order, decree, ruling or other
action will have become final and nonappealable and will not have resulted from
an action by the party seeking termination; (d) by SCFM or by the Company
(acting upon the recommendation of the Special Committee) if any person will
have acquired beneficial ownership of, or any "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations thereunder but not
including SCFM or its stockholders) will have been formed which beneficially
owns 50% or more of the outstanding Shares; (e) by SCFM or by the Company if the
Board (acting upon the recommendation of the Special Committee) determines that
it is unable, consistent with its fiduciary duties, to recommend in the Proxy
Statement and at the Special Meeting that the stockholders of the Company
approve the Merger Agreement; (f) by SCFM or by the Company (acting upon the
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recommendation of the Special Committee) if either of them reasonably determines
that an Acquisition Proposal (as defined below) constitutes a Superior Proposal
(as defined below); provided, however, that the Company may not terminate the
Merger Agreement pursuant to this clause (f) unless (i) ten business days will
have elapsed after delivery to SCFM of a written notice of such determination
and during which period the Company has fully cooperated with SCFM, including,
without limitation, informing SCFM of the terms and conditions and the identity
of the proponent(s) of such Acquisition Proposal, (ii) at the end of such ten
business day period the Special Committee will continue reasonably to believe
that such Acquisition Proposal constitutes a Superior Proposal, and (iii)
promptly thereafter the Company will enter into a definitive acquisition, merger
or similar agreement to effect such Superior Proposal.
As used in the Merger Agreement and described in clause (f) of
the immediately preceding paragraph, the term "Acquisition Proposal" means any
proposal or offer for, or any expression by any person (other than SCFM) of its
interest in effectuating any of the following: (i) a tender of exchange offer
for 20% or more of the equity of the Company, (ii) a merger, consolidation or
other business combination involving the Company, (iii) an acquisition in any
manner of 20% or more of the equity of, or 20% or more of the assets of, the
Company. As used in the Merger Agreement and described in clause (f) of the
immediately preceding paragraph, "Superior Proposal" means a bona fide, written
proposal or offer made by any person or group (other than SCFM) to effect any
Acquisition Proposal (i) at a per share price higher than $3.60 per Share, (ii)
on terms (including price) which the Special Committee determines in its
judgment (based on the advice of independent financial advisors), to be more
favorable to the Company and its stockholders than the Merger, (iii) for which
any required financing is committed or which, in the judgment of the Special
Committee (based on the advice of independent financial advisors), is reasonably
capable of being financed by such person, and (iv) which is not otherwise
subject to material conditions (other than conditions similar to those contained
in the Merger Agreement) which, in the judgment of the Special Committee, render
recommendation of the Acquisition Proposal undesirable.
Any term or provision of the Merger Agreement (other than the
requirement for stockholder approval, if required by applicable law, or a term
or provision that expressly provides otherwise) may be waived in writing at any
time by the party that is entitled to the benefits thereof. The Merger Agreement
may be amended, before or after approval of the Merger by the stockholders of
the Company but, after any such approval, no amendment may be made which reduces
the amount of cash into which Shares are to be converted as provided in the
Merger Agreement without the further approval of such stockholders.
Fees and Expenses
Janney is acting as financial advisor to the Special Committee
in connection with the proposed going private transaction, including the Merger.
Pursuant to an engagement letter dated March 2, 1995 and amended May 8, 1995
between Janney and the Company, the Company engaged Janney to solicit and
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evaluate merger and acquisition opportunities and to render a fairness opinion
in connection with a merger or acquisition. The Company agreed to pay Janney a
financial advisory fee of $130,000 of which $20,000 was paid in March 1995,
$40,000 was paid in March 1996 after delivery of Janney's written opinion dated
February 15, 1996, $45,000 is payable upon the filing of this Proxy Statement
with the Commission in connection with the Merger and $25,000 is payable at the
Effective Time. The Company also agreed to pay Janney a contingency fee if the
aggregate Merger Consideration exceeded $13,200,000. The Company also agreed to
reimburse Janney for the reasonable expenses incurred by it and to indemnify
Janney against certain liabilities including liabilities under federal
securities law.
It is estimated that the expenses incurred in connection with
the process leading up to the Merger as well as the expenses incurred in
connection with the Merger will be approximately as set forth below:
Financial advisor fees and expenses.........................$130,000.00
Legal fees and expenses ....................................$
Paying Agent fees and expenses .............................$
Loan commitment fees .......................................$ 85,000.00
Accountant's fees and expenses .............................$
Solvency Opinion............................................$ 40,000.00
Filing fees ................................................$ 1,734.57
Printing and mailing fees...................................$
Miscellaneous...............................................$
The Company has agreed in the Merger Agreement that all costs
and expenses reasonably incurred by or on behalf of the Management Group or SCFM
in connection with the Merger Agreement and the Merger (including, without
limitation, commitment fees paid to lenders, fees and disbursements of financial
advisors, accountants and attorneys), up to $250,000, will be paid by the
Company. Such fees are included in/excluded from the estimates set forth above.
TREATMENT OF EMPLOYEE STOCK OPTIONS
The holders of options to purchase Shares under the Stock
Option Plan will receive a cash payment from the Company equal to the excess, if
any, of the Merger Consideration over the per Share exercise price of each
option, subject to applicable federal, state and local tax withholdings,
multiplied by the number of Shares covered by the option. As of March 31, 1996,
options to purchase an aggregate of 205,000 Shares (including an aggregate of
125,000 Shares held by certain of the executive officers of the Company) were
outstanding under the Stock Option Plan at exercise prices ranging between $.30
and $1.69 per Share. Holders of such options will receive an aggregate of
$509,700 (of which amount an aggregate of $315,200 will be paid to executive
officers) in the Merger upon cancellation of such options, based on a Merger
Consideration of $3.60 per Share. See "OWNERSHIP OF SHARES -- General" and
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"OWNERSHIP OF SHARES -- Beneficial Ownership of Shares and Transactions in
Shares by Certain Persons".
REGULATORY APPROVALS
No federal or state regulatory approvals are required to be
obtained nor any regulatory requirements complied with, in connection with
consummation of the Merger by any party to the Merger Agreement, except for the
requirements of the DGCL in connection with stockholder approvals and
consummation of the Merger, and the requirements of federal securities law.
DISSENTERS' RIGHTS
Holders of record of Shares who comply with the applicable
procedures summarized herein will be entitled to appraisal rights under Section
262 of the DGCL. A person having a beneficial interest in Shares held of record
in the name of another person, such as a broker or nominee, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner to perfect appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE
LAW PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS
ENTIRETY BY THE FULL TEXT OF SECTION 262 WHICH IS REPRINTED IN ITS ENTIRETY AS
ANNEX C TO THIS PROXY STATEMENT. ANY STOCKHOLDER WHO DESIRES TO EXERCISE SUCH
STOCKHOLDER'S APPRAISAL RIGHTS SHOULD REVIEW CAREFULLY SECTION 262 AND IS URGED
TO CONSULT A LEGAL ADVISOR BEFORE ELECTING OR ATTEMPTING TO EXERCISE SUCH
RIGHTS. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER" ARE
TO THE RECORD HOLDER OF SHARES AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED. VOTING
AGAINST, ABSTAINING FROM VOTING OR FAILING TO VOTE ON APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT WILL NOT CONSTITUTE A DEMAND FOR APPRAISAL WITHIN THE
MEANING OF SECTION 262 OF THE DGCL.
Under the DGCL, holders of Shares who follow the procedures
set forth in Section 262 will be entitled to have their Shares appraised by the
Chancery Court and to receive payment in cash of the "fair value" of such
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, as
determined by such court. Stockholders who properly perfect such rights will not
be entitled to surrender their Shares for the Merger Consideration in the manner
otherwise described in this Proxy Statement.
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Under Section 262, where a proposed merger is to be submitted
for approval at a meeting of stockholders, the corporation, not less than 20
days prior the meeting, must notify each of its stockholders who was a
stockholder on the record date for such meeting with respect to shares for which
appraisal rights are available, that appraisal rights are so available, and must
include in such notice a copy of Section 262. This Proxy Statement constitutes
such notice to the holders of Shares and the applicable statutory provisions of
the DGCL are attached to this Proxy Statement as Annex C. Any stockholder who
wishes to exercise such appraisal rights or who wishes to preserve his or her
right to do so should review the following discussion and Annex C carefully
because failure to timely and properly comply with the procedures specified will
result in the loss of appraisal rights under the DGCL.
A holder of Shares wishing to exercise such holder's appraisal
rights (i) must not vote in favor of adoption of the Merger Agreement and (ii)
must deliver to the Company prior to the vote on the Merger Agreement at the
Special Meeting to be held on May 31, 1996, a written demand for appraisal of
such holder's Shares. A holder of Shares wishing to exercise such holder's
appraisal rights must be the record holder of such Shares on the date the
written demand for appraisal is made and must continue to hold such Shares of
record until the Effective Time. Accordingly, a holder of Shares who is the
record holder of Shares on the date the written demand for appraisal is made,
but who thereafter transfers such Shares prior to the Effective Time, will lose
any right to appraisal in respect of such Shares.
Only a holder of record of Shares is entitled to assert
appraisal rights for the Shares registered in the holder's name. A demand of
appraisal should be executed by or on behalf of the holder of record, fully and
correctly, as such holder's name appears on such holder's stock certificates. If
the Shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the Shares are owned of record by more than one person as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including an agent for two or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for such
owner or owners. A record holder such as a broker who holds Shares as nominee
for several beneficial owners may exercise appraisal rights with respect to
Shares held for one or more beneficial owners while not exercising such rights
with respect to the Shares held for other beneficial owners; in such case, the
written demand should set forth the number of Shares as to which appraisal is
sought and where no number of Shares is expressly mentioned the demand will be
presumed to cover all Shares held in the name of the record owner. Stockholders
who hold their Shares in brokerage accounts or other nominee forms and who wish
to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
such a nominee.
All written demands for appraisal should be sent or delivered
to the Company at:
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181 Rittenhouse Circle
Keystone Park
Bristol, Pennsylvania 19007-0602
Attention: Emma Marie Cocci
Corporate Secretary.
The Surviving Corporation shall within 10 days after the
Effective Time notify each stockholder who has complied with the statutory
requirements summarized above that the Merger has become effective. Within 120
days after the Effective Time, but not thereafter, the Company or any
stockholder who has complied with the statutory requirements summarized above
may file a petition with the Court of Chancery demanding a determination of the
fair value of the Shares. The Company is under no obligation to and has no
present intention to file a petition with respect to the appraisal of the fair
value of the Shares. Accordingly, it is the obligation of the stockholders to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the Effective Time, any stockholder who
has complied with the requirements of exercise of appraisal rights will be
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of Shares not voted in favor of adoption of the
Merger Agreement and with respect to which demands for appraisal have been
received and the aggregate number of holders of such Shares. Such statements
must be mailed within 10 days after a written request therefor has been received
by the Company or 10 days after expiration of the aforementioned 120 day period
for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed, after a
hearing on such petition, the Court of Chancery will determine the stockholders
entitled to appraisal rights and will appraise the "fair value" of their Shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. Stockholders considering seeking
appraisal should be aware that the fair value of their Shares as determined
under Section 262 could be more than, the same as or less than the consideration
they would receive pursuant to the Merger Agreement if they did not seek
appraisal of their Shares and that investment banking opinions as to fairness
from a financial point of view are not necessarily opinions as to fair value
under Section 262. The Delaware Supreme Court has stated that "proof of value by
any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
the appraisal proceedings.
The Court of Chancery will determine the amount of interest,
if any, to be paid upon the amounts to be received by persons whose Common
Shares have been appraised. The costs of action may be determined by the Court
of Chancery and taxed upon the parties as the Court of Chancery deems equitable.
The Court of Chancery may also order that all or a portion of the expenses
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incurred by any stockholder in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all the Shares entitled to appraisal.
Any holder of Shares who has duly demanded an appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote the Shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those Shares (except dividends or
other distributions payable to holders of record of Shares as of a record date
prior to the Effective Time.)
If any stockholder who properly demands appraisal of such
stockholder's Shares under Section 262 fails to perfect, or effectively
withdraws or loses, such stockholder's right to appraisal as provided in the
DGCL, the Shares of such stockholder will be converted into the right to receive
the consideration receivable with respect to such Shares in accordance with the
Merger Agreement. A stockholder will fail to perfect, or effectively lose or
withdraw, his or her right to appraisal if, among other things, no petition of
reappraisal is filed within 120 days after the Effective Time, or if the
stockholder delivers to the Company a written withdrawal of his or her demand
for appraisal and acceptance of the Merger. Any such attempt to withdraw an
appraisal demand more than 60 days after the Effective Time will require the
written approval of the Company.
Failure to follow the steps required by Section 262 of the
DGCL of perfecting appraisal rights may result in the loss of such rights (in
which event a stockholder will be entitled to receive the Merger Consideration
with respect to such Shares in accordance with the Merger Agreement).
Delaware courts have decided that the statutory appraisal
remedy, depending on factual circumstances, may or may not be the dissenting
stockholders' exclusive remedy. Several decisions by the Delaware courts have
held that a controlling stockholder of a company involved in a merger has a
fiduciary duty to the other stockholders which requires that the merger be
"entirely fair" to such other stockholders. In determining whether a merger is
fair to minority stockholders, the Delaware courts have considered, among other
things, the type and amount of consideration to be received by stockholders and
whether there was fair dealing among the parties. The Delaware Supreme Court
stated in Weinberger v. UOP, Inc., 457 A.2d 701, 714 (1983), that although the
remedy ordinarily available in a merger that is found not to be "fair" to
minority stockholders is the right to appraisal described above, such appraisal
remedy may not be adequate "in certain cases, particularly where fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets, or gross
and palpable overreaching are involved," and that in such cases the Court of
Chancery would be free to fashion any form of appropriate relief.
FINANCING OF THE MERGER
Based on the Merger Consideration of $3.60 per Share, payable
in cash without interest, the total amount of funds required to pay the Merger
Consideration following the Effective Time to the holders of all outstanding
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Shares on a fully diluted basis (including Shares beneficially owned by Messrs.
Samans and Carcioppolo but excluding Shares held by the Company, its
subsidiaries or SCFM) and to pay related fees and expenses in connection with
the Merger is estimated to be approximately $8.5 million. This amount will be
provided out of the bank financing described below.
General. The Company has entered into a Loan Agreement, dated
April 2, 1996, with Mellon (the "Loan Agreement") setting forth an outline of
terms relating to a term loan (the "Term Loan"), a reducing revolving line of
credit (the "Reducing Revolver") and a continuation of the Company's existing
revolving line of credit with Mellon in the reduced amount of $1,000,000
(collectively, the "Loans") proposed to be made by Mellon to the Company. The
proceeds of the Term Loan and the Reducing Revolver may be used to repurchase
Shares. The following is a summary of the terms set forth in such Loan
Agreement.
Amortization, Interest Rate and Fees. The Term Loan will be in
the amount of $4,500,000 and will be repayable in sixty monthly installments of
$75,000 each. Under the Reducing Revolver, loans may be made, repaid and
reborrowed during the five year term thereof, subject to the initial maximum
availability of $4,000,000 outstanding at any one time, which availability will
be reduced by $300,000 per year. All unpaid amounts under the Reducing Revolver
must be repaid by the Company at the end of the five-year term thereof. The
Company will also be required to make mandatory prepayments of any excess cash
flow (as defined) each year, which prepayments will first be applied against the
Term Loan and then to reduce the maximum availability under the Reducing
Revolver. The loans referred to in this paragraph will bear interest at 1% in
excess of the prime rate of Mellon from time to time unless the Company and
Mellon mutually agree on a fixed rate for the Term Loan. The Company will pay to
Mellon a one time fee of $85,000 and will also pay a fee of 0.5% per annum on
the average undrawn amounts under the Reducing Revolver.
The expenses incurred by Mellon in the negotiation and
preparation of the loan documents and closing thereunder will be paid by the
Company.
Collateral. The Loans will be secured by a first lien on
substantially all of the Company's assets and a pledge of the shares of the
Surviving Corporation owned by Mr. Samans and the shares of the Surviving
Corporation owned by Mr. Carcioppolo. The Stock Pledge will be released at such
time, if any, when Mellon's committed exposure is less than $6,000,000 and the
Company's ratio of total liabilities to tangible net worth is reduced to a
specified amount.
Covenants. The Loan Agreement contains various financial
covenants and other affirmative and negative covenants, including limitations on
incurrence of debt, granting of liens, acquisitions, dispositions and
participation in corporate transactions outside of the ordinary course of
business, capital expenditures, loans, advances and payment of dividends.
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Warrant to Purchase Surviving Corporation's Common Stock. In
connection with the making of the Loans, an affiliate of Mellon will be granted
a ten-year stock purchase warrant for a nominal fee enabling it to purchase, for
a price of one cent per share, 7.5% of the Surviving Corporation's outstanding
common stock, with anti-dilution protection. After the sixth anniversary of the
stock purchase warrant, the holder has the option to sell the stock purchase
warrant to the Surviving Corporation at a price equal to the greater of $750,000
or the fair market value of the stock purchase warrant, as determined by an
independent third party valuation. In connection with certain transactions the
option to sell the stock purchase warrant may be exercised before the sixth
anniversary thereof.
Conditions. The obligation of Mellon to close under the Loan
Agreement will be subject to the satisfaction of certain conditions. These
conditions include, among other things: closing of the Loans taking place
on or before September 1, 1996, the provision of an opinion of solvency
attesting to the solvency of the Company after the purchase of the Shares,
satisfaction of Mellon with the Company's contract with a major customer,
receipt by the Company from the financial advisor to the Special Committee of an
opinion as to the fairness of the price paid for the Shares held by the public
stockholders, the Company having obtained interest rate protection satisfactory
to Mellon on $3,000,000 of the Loans, the trading price of the Shares not
exceeding $3.70 per Share as of the Closing Date and an appraisal of the
Company's equipment satisfactory to Mellon.
Events of Default. The Loan Agreement contains certain events
of default, including, without limitation, failure to pay principal, interest or
other amounts due under the loan documents, breach of representations or
covenants and, unless Mellon shall have exercised any portion of its warrant,
failure of Mr. Samans to maintain of ownership of 51% or more of the stock of
the Company. If a default is not cured within any applicable grace period,
Mellon may enforce various remedies, including, without limitation, acceleration
of the Loans and termination of the revolving loan commitments.
The foregoing description of the terms of the Loan Agreement
is qualified in its entirety by reference to the Loan Agreement which will be
filed as an exhibit to Schedule 13E-3 and is incorporated herein by reference.
The Company plans to repay the Loans from its operating
income.
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OWNERSHIP OF SHARES
General
On March 29, 1996, 3,546,648 Shares were outstanding and there
were 298 holders of record. The Management Group owns, in the aggregate,
1,556,888 Shares (approximately 43.9% of the outstanding Shares). It is
anticipated that, immediately prior to the Effective Time, the members of the
Management Group will transfer to SCFM an aggregate of approximately 1,279,110
Shares. Except as set forth in this Proxy Statement, none of SCFM, the
Management Group nor, to the best of their knowledge, any of the directors or
executive officers of SCFM, nor any associate or majority-owned subsidiary of
any of the foregoing persons (other than the Company), beneficially owns or has
a right to acquire, directly or indirectly, any equity securities of the Company
or has effected any transaction in Shares during the past 60 days. For a
description of the stock purchase warrant to be granted to Mellon in connection
with the financing of the Merger, see "FINANCING OF THE MERGER -- Warrant to
Purchase Surviving Corporation's Stock."
Except as set forth in this Proxy Statement, (i) none of SCFM,
the Management Group or the Company, nor to the best of their knowledge, any of
the directors or executive officers of any of them, has any contract,
arrangement or understanding or relationship with any other person with respect
to any securities of the Company, including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint ventures, loan or option agreements, puts or
calls, guaranties of loans, guaranties against loss or the giving or withholding
of proxies, consents or authorizations, (ii) since October 3, 1993, there have
been no transactions between SCFM, the Management Group or any of their
respective subsidiaries or, to the best of their knowledge, any of the directors
or executive officers of SCFM, on the one hand, and the Company or any of its
executive officers, directors, subsidiaries or affiliates, on the other hand,
that would require reporting under the rules and regulations of the Commission
and (iii) since October 3, 1993, there have been no contacts, negotiations or
transactions between SCFM, the Management Group or, to the best of their
knowledge, any of the directors or executive officers of SCFM, on the one hand,
and the Company or its subsidiaries or affiliates, on the other hand, concerning
a merger, consolidation or acquisition, tender offer or other acquisition of
securities, an election of directors or a sale or other transfer of a material
amount of assets of the Company or any of its subsidiaries.
As of April 1, 1996 Mr. Samans was indebted to the Company in
the aggregate amount of $406,074 under a $417,760 note, dated as of January 1,
1994, issued by Mr. Samans to the Company. The $417,760 principal amount of the
note represents accrued principal and interest on previously outstanding
obligations, $200,000 of which was loaned to assist Mr. Samans in the purchase
of certain real property and the balance of which principally constitutes
accrued interest. The note is being repaid in monthly installments which
commenced on January 31, 1994, in accordance with a 30 year amortization
schedule with interest on the outstanding principal balance payable at the
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rate of 8% per annum. Full payment of the remaining principal balance will be
due on January 1, 1999.
Stock Purchases by the Company, SCFM, the Management Group and Their Affiliates
Since October 3, 1993, none of the Company, SCFM, the
Management Group nor their affiliates have purchased any Shares.
Beneficial Ownership of Shares and Transactions in Shares By Certain Persons
Based upon information contained in the ABN Schedule 13D and
information furnished by directors and executive officers of the Company, their
respective ownership of Shares as of the Record Date and their rights to acquire
such ownership within 60 days of such date are reflected in the following table:
Amount and
Nature of Percent
Name (and Address of 5% Beneficial of
Beneficial Owners) Ownership (1) Class
- ----------------------- ------------- -------
Robert A. Samans 1,006,268 28.4
Scanforms, Inc.
181 Rittenhouse Circle
Bristol, PA 19007-0602
Sebastian A. Carcioppolo 550,620 15.5
c/o Scanforms, Inc.
181 Rittenhouse Circle
Bristol, PA 19007-0602
American Banknote Corporation 188,800 5.3
200 Park Avenue
New York, NY 10166
Robert W. O'Leary 152,600(2) 4.2
Gary S. Crawford 35,000(3) *
William P. Carey 25,000(4) *
Joel R. Jacks 0 *
Executive Officers and 1,764,488(5) 48.1
directors of the Company
as a group (6 persons)
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- -----------------
*Less than one percent
(1) Unless otherwise indicated, each person listed holds sole voting and
investment power with respect to the shares listed above.
(2) Includes 65,000 shares of Common Stock subject to outstanding options
exercisable within 60 days after the Record Date.
(3) Represents 35,000 shares of Common Stock subject to outstanding options
exercisable within 60 days after the Record Date.
(4) Represents 25,000 shares of Common Stock subject to outstanding options
exercisable within 60 days after the Record Date.
(5) Includes 125,000 shares of Common Stock subject to outstanding options
exercisable within 60 days after the Record Date.
No pension, profit sharing or similar plan of the Company is
the beneficial owner, or has the right to acquire any equity securities of the
Company.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is the name of each director and executive
officer of the Company and the present principal occupation or employment of
each such person, the material occupations, positions, offices or employments
and the name, principal business and address of any corporation or other
organization in which such occupation, position, office or employment of each
such person was held during the past five years. Unless otherwise indicated, the
address of each director and executive officer is that of the Company at 181
Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania 19007-0602. Unless
otherwise indicated, each person listed below is a citizen of the United States.
<TABLE>
<CAPTION>
<S> <C> <C>
Present Principal Principal Occupations or
Occupation or Positions During the Past Five
Name Employment Years.
- ------ ------------------------- -------------------------------
Robert A. Samans President and Chairman of President and member of the Board
the Board since its formation in January 1969;
Chairman of the Board since September
1990.
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Robert W. O'Leary Vice President, Sales and Vice President, Sales and
Marketing; Sales Manager Marketing, of the Company since
January 1987; the Company's
Sales Manager since 1983.
Gary Crawford Vice President, Operations Vice President, Operations of the
Company since October 1993;
Company's Director of Operations
from June 1992 to October 1993;
General Manager of Champion
Envelope Corporation of Union,
N.J., an envelope manufacturer,
from November 1989 to June 1992.
William P. Carey Treasurer Treasurer of the Company since
February 1992; employed by the Company
in various capacities since 1984.
Sebastian A. Carcioppolo Director Director of the Company since
1977; independent consultant since
September 1994; Vice President of
the Company from July 1977 until
February 1992; consultant to
Standard Forms, Inc., from March
1991 to September 1994.
Joel R. Jacks Director Director of the Company since
1994; managing director of Carl
Marks Consulting Group, a
management consulting firm, since
May 1992; President and sole
stockholder of JLAD Limited, a
management consulting company,
since January 1991; associated
with OEM Capital, which provided
asset recovery management
services to the Company, during
1991.
</TABLE>
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DIRECTORS AND OFFICERS OF SCFM
Set forth below is the name of each director and executive
officer of SCFM and the present principal occupation or employment of each such
person, the material occupations, positions, offices or employments and the
name, principal business and address of any corporation or other organization in
which such occupation, position, office or employment of each such person was
held during the past five years. Unless otherwise indicated, the address of each
director and executive officer is that of the SCFM, c/o Scanforms, Inc., 181
Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania 19007-0602. Unless
otherwise indicated, each person listed below is a citizen of the United States.
<TABLE>
<CAPTION>
<S> <C> <C>
Present Principal Principal Occupation or
Occupation or Positions During the Past Five
Name Employment Years
- ---- ----------------- ------------------------------
Robert A. Samans See "DIRECTORS AND See "DIRECTORS AND
EXECUTIVE OFFICERS EXECUTIVE OFFICERS OF
OF THE COMPANY." Also THE COMPANY."
President, Treasurer and
Director of SCFM.
Sebastian Carcioppolo See "DIRECTORS AND See "DIRECTORS AND
EXECUTIVE OFFICERS EXECUTIVE OFFICERS OF
OF THE COMPANY." THE COMPANY."
Also Vice President,
Secretary and Director of
SCFM.
</TABLE>
INFORMATION CONCERNING THE MANAGEMENT GROUP AND SCFM
The Management Group is comprised of Mr. Samans, the President
and Chairman of the Board, and Mr. Carcioppolo, a director of the Company. See
"DIRECTORS AND OFFICERS OF THE COMPANY."
SCFM was incorporated in Delaware on February 9, 1996 and to
date has engaged in no activities other than those incident to its organization
and the Merger. The outstanding shares of capital stock of SCFM are owned by Mr.
Samans, who owns a 67.8% interest, and Mr. Carcioppolo, who owns a 32.2%
interest. The address of the principal executive offices of SCFM is c/o
Scanforms, Inc., 181 Rittenhouse Circle, Keystone Park, P.O. Box 602, Bristol,
PA 19007, telephone: (800) 523-3936.
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BUSINESS OF THE COMPANY
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.
The Company's 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 although the first
quarter of the fiscal year is traditionally the Company's strongest quarter.
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 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,
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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 March 19, 1996, the Company had 168 employees, of whom
128 were plant employees, 6 were executive and key administrative employees, 18
were sales and sales service employees and 16 were clerical employees.
Properties
The Company owns a 123,489 square foot, one-story office and
plant at 181 Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania
19007-0602. The property is currently financed through the Company's bank credit
facility with Mellon. For further information see Notes 5 and 6 to the Company's
Consolidated Financial Statements - Years Ended October 1, 1995, October 2, 1994
and October 3, 1993.
The Company believes that its facilities are suitable for its
business needs at the present time and for the immediate future.
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 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
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counterclaim made by the PRP group, so is in default regarding that claim. To
date, the plaintiff has not prosecuted the claim and the claim has been removed
from the trial calendar.
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE COMPANY
The following table sets forth selected historical financial
information and balance sheet data of the Company for the thirteen weeks ended
December 31, 1995 and January 1, 1995 and for each of the five years ended on
the dates set forth below. The following financial information should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION" and the consolidated financial statements and related
Notes included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Year Ended
-------------------------- ---------------------------------------------------------------------------
December 31, January 1, October 1, October 2, October 3, October 4, September 30,
1995 1995 1995 1994 1993 1992 1991
------------ ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales $8,566,130 $7,458,102 $24,518,878 $22,235,890 $22,488,184 $19,302,992 $19,321,779
========== ========== =========== =========== =========== =========== ===========
Income before cumulative
effect of accounting
change $ 979,734 $ 688,140 $ 1,570,540 $ 1,424,207 $ 774,932 $ 303,818 $(1,108,136)
Cumulative effect of
accounting change - - - $ 260,686a - - -
---------- ---------- ----------- ------------ ----------- ----------- ------------
Net income (loss) $ 979,734 $ 688,140 $ 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 $ .27 $ .19 $ .43 $ .39 $ .22 $ .10 $ (.36)
Cumulative effect of
accounting change $ - $ - $ - (.07)a - - -
---------- ---------- ---------- ------------ ---------- ---------- -----------
Net income (loss) per
share of common stock $ .27 $ .19 $ .43 $ .32 $ .22 $ .10 $ (.36)
========== ========== ========== ========== ========== ========== ===========
December 31, January 1, October 1, October 2, October 3, October 4, September 29,
1995 1995 1995 1994 1993 1992 1991
------------ ---------- ---------- ---------- ---------- ---------- -------------
Balance Sheet Data:
Total assets $19,304,938 $16,862,497 $16,693,206 $16,334,385 $13,618,380 $13,825,881 $14,942,300
=========== =========== =========== =========== =========== =========== ===========
Long-term obligations $ 3,718,490 $ 3,447,686 $ 3,900,535 $ 3,152,091 $ 3,567,668 $ 6,042,660 $ 7,209,661
=========== =========== =========== =========== =========== =========== ===========
Stockholders' equity $ 6,545,490 $ 4,676,611 $ 5,564,774 $ 3,984,552 $ 2,698,228 $ 1,687,471 $ 1,400,542
=========== =========== =========== =========== =========== =========== ===========
Ratio of earnings
to fixed charges 242.28 14.33 7.46 5.98 3.08 1.56 (0.32)
Book value per share $ 1.85 $ 1.32 $ 1.57 $ 1.13 $ 0.89 $ 0.56 $ 0.46
</TABLE>
a - Cumulative effect of change in accounting for income taxes under FASB 109.
Note: The Company has not paid cash dividends during the period presented.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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
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 Commonwealth 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.
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
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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 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 Company's
Consolidated Financial Statements - Years Ended October 1, 1995, October 2, 1994
and October 3, 1995, 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
Company's Consolidated Financial Statements - Years Ended October 1, 1995,
October 2, 1994 and October 3, 1995 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 Commonwealth 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.
Thirteen Weeks Ended December 31,1995 vs. Thirteen Weeks Ended
January 1, 1995. The Company's net sales increased from $7,458,102 during the
thirteen weeks ended January 1,1995 to $8,566,130 during the thirteen weeks
ended December 31,1995, a 14.9% increase, principally reflecting an increase in
customer demand. Gross profit increased by 20.8% from $2,338,071 to $2,825,212.
The increase in gross profit was primarily the result of the higher sales volume
which contributed to more efficient productivity. In addition declining paper
prices during this period plus a special order from one of the Company's larger
customers contributed to the high margin.
Operating expense was $1,192,978 and $1,086,369 for the first
thirteen weeks of fiscal 1996 and fiscal 1995, respectively. The increase of
9.8% was primarily due to increased compensation expense, the payment of
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performance bonuses, consulting fees and an increase in costs related to
acquisition and Merger considerations and the preparation of the annual report.
Interest cost decreased from $87,366 to $6,737 during the
first thirteen weeks of fiscal 1996 as compared to the same period in fiscal
1995. The decrease was due primarily to the additional interest income earned as
a result of higher cash balances, and the reduction of interest rates under new
loan agreements with Mellon which occurred in July of 1995.
The FASB issued a new standard, SFAS No. 11, "Accounting for
the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of this new statement is
not expected to have a material impact on the Company's financial position or
results of operations. The Company is required to adopt this new standard for
its year ended October 5, 1997.
Liquidity and Capital Resources
On June 21, 1995, the Company received a revolving line of
credit with Mellon 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 Mellon 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 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 Company's
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
Mellon, 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 has entered into the Loan Agreement, dated April
2, 1996, with Mellon setting forth an outline of terms relating to the Term
Loan, the Reducing Revolver and a continuation of the Company's existing
revolving line of credit with Mellon in the reduced amount of $1,000,000
(collectively, the "Loans") proposed to be made by Mellon to the Company.
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The proceeds of the Term Loan and the Reducing Revolver may be used to
repurchase Shares. See "FINANCING OF THE MERGER" for a summary of the terms set
forth in such Loan Agreement.
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. The
Company's working capital increased further to $3,574,595 as of December 31,
1995, an increase of $1,003,084 or 30.0% from $2,571,511 on October 1, 1995. The
increase was the result of an increase in net income for the thirteen week
period.
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.
The Company is in the process of purchasing additional
production equipment for product personalization in the amount of $972,800,
which is anticipated to be financed by five year term purchase money debt and
for the press area in the amount of $98,000, which will be financed by working
capital. These acquisitions are necessary to service the Company's existing
customer base and remain competitive.
Certain 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 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.
Certain other significant balance sheet changes during the
thirteen weeks ended December 31, 1995 included an increase in customer advances
of $1,268,214, an increase in accounts receivable of $1,469,311, a decrease in
inventories of $407,323, and an increase in income taxes payable of $423,375.
The increase in customer advances represents customer payments to cover postage
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costs, as the Company delivers direct mail materials to the post office for
shipment over the near future. Accounts receivable were higher due to increased
billings in the first quarter of fiscal 1996, reflecting increased sales. The
decrease in inventories is the result of the consumption of built up paper
inventory during the 13 week period and the higher billings of work-in-process
as of the end of the period. The increase in the income taxes payable is the
result of the higher profits in the first quarter of fiscal 1996 versus the
first quarter of 1995 and the timing differences between the accrual and the
payment of income taxes.
During the fifty two weeks of fiscal 1995 and the thirteen
weeks ended December 31, 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 ($1,246,446 as of December 31, 1995) will enable the
Company to meet its currently anticipated operating requirements during the
fiscal year 1996.
MARKET PRICE FOR THE SHARES
The Company's Common Stock is included in the Nasdaq Small Cap
Market. The following table sets forth, for the calendar quarters indicated, the
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.
Calendar Year Sales Quotation
- ------------- ---------------
High Low
---- ---
1994
First Quarter 2 7/16 1 9/16
Second Quarter 2 3/16 1 3/4
Third Quarter 1 13/16 1 1/2
Fourth Quarter 2 1 1/2
1995
First Quarter 2 7/8 1 11/16
Second Quarter 2 3/4 2 3/16
Third Quarter 2 5/8 2
Fourth Quarter 3 1/16 2 1/8
1996
First Quarter 3 2 3/16
Second Quarter (through April 10, 1996) 3 3/4 2 3/4
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On January 31, 1996, the last full trading day prior to the
first public announcement of the Management Group's notification to the Company
of the Management Group's intention to present to the Company a proposal that
would pay $3.60 cash per Share to the Company's public stockholders and would
result in the Company becoming privately held by the Management Group, the
closing bid price per Share was $2.94 according to published sources. On
February 15, 1996, the last full trading day prior to the announcement of the
execution of the Merger Agreement, the reported closing bid price per Share was
$3.43 according to published sources. On ____________, 1996, the last full
trading day for which such information was available prior to the printing of
this Proxy Statement, the reported closing bid price was $_____ per Share
according to published sources.
DIVIDENDS
The Board has not declared any dividends during the past two
years. Under the terms of the Company's present loan agreement with Mellon, its
principal lending bank, the maximum dividend the Company is permitted to pay is
50% of the net income of the Company during the year. The Company is prohibited
from redeeming any of its outstanding capital stock for so long as the Company
has any existing obligations to Mellon under the loan agreement or any documents
ancillary to the agreement. The Loan Agreement contains a total prohibition on
the payment of dividends unless the Surviving Corporation becomes a Subchapter S
Corporation under the Code in which event the Company would be permitted to pay
dividends to stockholders in an amount equal to such stockholders' tax
liability, if any, resulting from the allocation of income of the Company. SEE
"FINANCING OF THE MERGER -- Covenants."
INDEPENDENT AUDITORS
The consolidated balance sheets of the Company 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, included herein, have been audited by Grant Thornton LLP,
independent auditors for the Company. Representatives of Grant Thornton LLP are
expected to be present at the Special Meeting, will have the opportunity to make
a statement if they so desire and will be available to respond to appropriate
questions.
TRANSACTION OF OTHER BUSINESS
The Board knows of no other matters to be presented for action
at the Special Meeting. If any other matters properly come before the Special
Meeting, Shares represented by proxies will be voted in accordance with the
judgment of the person exercising the authority conferred by the proxies.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates documents by reference that
are not presented in or delivered with this Proxy Statement. Copies of these
documents are available without charge upon request from Scanforms, Inc., 181
Rittenhouse Circle, Keystone Park, Bristol, Pennsylvania 19007-0602, Attention:
Emma Marie Cocci, Corporate Secretary, and will be provided by first class mail
or other equally prompt means within one business day of receipt of such
request.
The following documents are hereby incorporated by reference
into this Proxy Statement:
o The Company's Annual Report, pursuant to Section 13 of the
Exchange Act, filed on Form 10-K for the fiscal year ended October 1, 1995.
o The Company's Quarterly Report, pursuant to Section 13 of
the Exchange Act, filed on Form 10-Q for the thirteen weeks ended December 31,
1995.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy Statement
but before the Special Meeting shall be deemed incorporated by reference into
this Proxy Statement.
Any statement contained in a document incorporated or deemed
to be incorporated by reference in this Proxy Statement shall be deemed to be
modified or superseded for purposes of this Proxy Statement to the extent that a
statement contained in this Proxy Statement or in any other subsequently filed
document that also is or is deemed to be incorporated by reference in this Proxy
Statement modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Unaudited Financial Statements:
Consolidated Balance Sheets - December 31, 1995
and October 1, 1995.................................................................... F-2
Consolidated Statements of Operations and Retained Earnings - Thirteen
Weeks Ended December 31, 1995 and January 1, 1995...................................... F-3
Consolidated Statements of Cash Flows - Thirteen Weeks
Ended December 31, 1995................................................................ F-4
Notes to Financial Statements............................................................ F-6
Audited Financial Statements:
Report of Independent Certified Public Accountants....................................... F-8
Consolidated Balance Sheets - October 1, 1995 and October 2, 1994........................ F-9
Consolidated Statements of Income - Years Ended October 1, 1995,
October 2, 1994 and October 3, 1993.................................................... F-10
Consolidated Statement of Stockholders' Equity - Years Ended
October 1, 1995, October 2, 1994 and October 3, 1993................................... F-11
Consolidated Statements of Cash Flows -- Years Ended
October 1, 1995, October 2, 1994 and October 3, 1993................................... F-12
Notes to Consolidated Financial Statements - Years Ended
October 1, 1995, October 2, 1994 and October 3, 1993................................... F-14
</TABLE>
F-1
<PAGE>
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, OCTOBER 1,
1995 1995
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,574,476 $ 2,910,264
Note receivable - current portion 7,449 7,747
Accounts receivable, net of allowance for
doubtful accounts of $427,502 - December 31,
1995 and $410,000 - October 1, 1995 5,127,932 3,673,623
Inventories (Note 2) 1,257,990 1,665,313
Other current assets 498,856 316,012
Deferred income taxes 249,452 266,030
------------- ------------
Total current assets 11,716,155 8,838,989
----------- -----------
Property, plant and equipment - at cost, net of accumulated depreciation of
$12,115,000 - December 31, 1995 and $11,824,356 - October 1,
1995 7,484,474 7,768,880
----------- -----------
Other assets:
Note receivable - long-term portion 10,363 12,201
Other 93,946 73,136
----------- -----------
Total other assets 104,309 85,337
----------- -----------
$19,304,938 $16,693,206
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 735,390 $ 730,692
Accounts payable 1,803,195 1,738,699
Customer advances 4,313,556 3,045,342
Income taxes payable 612,924 189,549
Other current liabilities 676,495 563,196
----------- -----------
Total current liabilities 8,141,560 6,267,478
----------- -----------
Long-term debt, net of current maturities 3,718,490 3,900,535
----------- -----------
Deferred income taxes 899,398 960,419
----------- -----------
Stockholders' equity:
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 35,467 35,407
Capital in excess of par 1,388,461 1,388,461
Retained earnings 5,528,561 4,548,827
Less: Note receivable from stockholder (406,999) (407,981)
------------ -----------
Total stockholders' equity 6,545,490 5,564,774
------------ -----------
$19,304,938 $16,693,206
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Unaudited
---------
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Thirteen Weeks Ended
December 31, January 1,
1995 1995
------------ ----------
<S> <C> <C>
Net sales $8,566,130 $7,458,102
Cost of sales 5,740,918 5,120,031
---------- ----------
Gross profit on sales 2,825,212 2,338,071
Operating expense 1,192,978 1,086,369
---------- ----------
Income from operations 1,632,234 1,251,702
Other expenses:
Interest cost 6,737 87,366
---------- ----------
Income before income taxes 1,625,497 1,164,336
Income taxes 645,763 476,196
---------- ----------
Net income 979,734 688,140
Retained earnings-beginning 4,548,827 2,978,287
---------- ----------
Retained earnings-ending $5,528,561 $3,666,427
========== ==========
Weighted average number of shares
fully diluted 3,668,296 3,617,262
========== ==========
Net earnings per common share
fully diluted $ 0.27 $ 0.19
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Unaudited
---------
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirteen Weeks Ended
December 31 January 1
1995 1995
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 8,396,406 $ 5,041,918
Cash paid to suppliers and employees (6,269,637) (5,602,742)
Interest received 96,887 46,404
Interest paid (111,241) (136,940)
Income taxes paid (266,831) (612,650)
----------- ------------
Net cash from (used in) operating
activities 1,845,584 (1,264,010)
----------- ------------
Cash flows from investing activities:
Purchases of plant and equipment (6,238) (788,186)
Additional CSV on life insurance (905) -
Payment of vendor note receivable 2,136 -
Payment of note from stockholder 982 920
----------- ------------
Net cash (used in) investing
activities (4,025) (787,266)
----------- ------------
Cash flows from financing activities:
Issuance of common shares of
capital stock - 100
Paid in surplus on issuance of
common shares of capital stock - 2,900
Proceeds from long-term debt - 603,000
Repayment of long-term debt
(177,347) (304,950)
----------- ------------
(177,347) 301,050
Principle payments under capital
lease obligations - (6,061)
----------- ------------
Net cash from (used in) financing
activities (177,347) 294,989
----------- ------------
Net increase (decrease) in cash 1,664,212 (1,756,287)
Cash:
Beginning 2,910,264 3,522,546
----------- -----------
Ending $ 4,574,476 $ 1,766,259
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Unaudited
---------
SCANFORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reconciliation of Net Income to Net Cash Flows From
Operating Activities
Thirteen Weeks Ended
December 31 January 1
1995 1995
------------- -----------
Net Income $ 979,734 $ 688,140
Adjustments to reconcile net income
to net cash from (used in) operating
activities:
Depreciation and amortization 290,644 265,035
Deferred finance charges 2,199 5,947
Increase in allowance for doubtful
accounts 15,002 15,002
Decrease (Increase) in assets:
Accounts receivable (1,469,311) (1,401,095)
Inventories 407,323 (471,526)
Other current assets (182,844) 138,428
Deferred income taxes 16,578 (333)
Other assets (22,104) (47,671)
Increase (decrease) in liabilities:
Accounts payable 64,496 708,367
Customer advances 1,268,214 (1,128,413)
Other current liabilities 113,299 100,229
Income taxes payable 423,375 (95,338)
Deferred income taxes (61,021) (40,782)
----------- ------------
Net cash from (used in) operating activities $ 1,845,584 $(1,264,010)
=========== ===========
See accompanying notes to financial statements.
F-5
<PAGE>
Unaudited
---------
SCANFORMS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Basis of Presentation:
Accounting Period:
The registrant employs a fifty-two, fifty-three week year for
financial accounting purposes. Accordingly, these quarterly financial statements
are for the thirteen week periods ended December 31, 1995 and January 1, 1995.
The fiscal year ending September 30, 1996 will consist of fifty-two weeks.
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
the Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen weeks ended December 31, 1995
are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 1996. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended October 1, 1995.
Note 2 - Inventories:
Inventories consisted of the following:
December 31 October 1
1995 1995
----------- ----------
Raw materials $ 968,579 $1,288,936
Work in process 289,411 376,377
---------- ----------
$1,257,990 $1,665,313
========== ==========
Note 3 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of:
The FASB issued a new standard, SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of this new statement is
not expected to have a material impact on the Company's financial position or
results of operations. The Company is required to adopt this new standard for
its year ended October 5, 1997.
Note 4 - Subsequent Events:
The Company reported on February 1, 1996 that a management
group, consisting of its President and one of its Directors, has advised that it
intends to present to the Company's Board of Directors a proposal which will pay
$3.60 cash per share to the Company's public shareholders and would result in
the Company becoming privately held by the management group. The proposal
F-6
<PAGE>
resulted from a process commenced with a public announcement in March 1995 of
the Company's willingness to consider proposals for a significant transaction.
Any such proposal would be contingent upon the negotiation and completion of
bank financing by the management group and of final documentation relating to
the transaction, the receipt of a fairness opinion and the approval of the Board
of Directors, including its independent Director, and of the shareholders at a
special meeting.
F-7
<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.
/s/ Grant Thornton LLP
- --------------------------
GRANT THORNTON LLP
Philadelphia, Pennsylvania
November 24, 1995
F-8
<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-9
<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-10
<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-11
<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-12
<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 NON-CASH 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-13
<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-14
<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-15
<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:
1995 1994
---------- --------
Raw materials $1,288,936 $464,377
Work-in-process 376,377 369,920
---------- --------
$1,665,313 $834,297
========== ========
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-16
<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:
1995 1994
------------ ------------
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
============ ============
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-17
<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:
1995 1994
------------- ------------
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 -
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
6. Long-term debt (continued)
1995 1994
------------ --------
$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
========== ==========
F-19
<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 restrictions 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-20
<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-21
<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:
Liability Liability Deferred
Method Method Method
1995 1994 1993
----------- ----------- ----------
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
=========== =========== ===========
The differences 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:
1995 1994 1993
----- ------ -----
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%
==== ==== ====
F-22
<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:
1993
---------
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 (335)
--------
Total $240,852
========
Deferred tax assets and liability at October 1, 1995 and October 2, 1994
consist of the following:
1995 1994
---------- -----------
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
======== ===========
The net deferred tax liability in the balance sheets at October 1, 1995 and
October 2, 1994 includes the following:
1995 1994
-------- ----------
Deferred tax liability $960,419 $1,128,807
Deferred tax asset 266,030 268,138
-------- ----------
Net deferred tax liability $694,389 $ 860,669
======== ==========
F-23
<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-24
<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-25
<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
beginning costs and Charged to Balance at
Description of period expenses other accounts Deductions end of period
- ----------- ----------- ---------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended October 1, 1995: (a)
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-26
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
SCFM CORP.
AND
SCANFORMS, INC.
April 4, 1996
-i-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. THE MERGER....................................................................................................2
1.01. The Merger......................................................................................2
1.02. Conversion or Cancellation of Stock.............................................................3
1.03. Surrender of Share Certificates; Payment for Shares.............................................5
II. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY...........................................................................................8
2.01. Due Organization, Etc...........................................................................8
2.02. Execution and Delivery of Agreement............................................................10
2.03. Capital Stock..................................................................................12
2.04. Periodic Filings...............................................................................12
2.05. Proxy Statement................................................................................15
2.06. No Brokers.....................................................................................16
2.07. Employment, Severance and Termination Agreements, Etc..........................................16
2.08. Company Actions................................................................................16
III. REPRESENTATIONS AND WARRANTIES
OF NEWCO................................................................................................17
3.01. Due Organization, Etc..........................................................................17
3.02. Execution and Delivery of Agreement............................................................17
3.03. Financing......................................................................................19
3.04. Proxy Statement................................................................................19
3.05. No Brokers.....................................................................................20
IV. COVENANTS OF THE COMPANY....................................................................................20
4.01. Ordinary Course of Business....................................................................20
4.02. Subsequent Financial Statements................................................................24
4.03 Other Potential Bidders........................................................................25
V. ADDITIONAL AGREEMENTS........................................................................................26
5.01. Access and Information.........................................................................26
5.02. Shareholder Approvals; Proxy Statement.........................................................27
5.03. Expenses.......................................................................................28
5.04. Miscellaneous Agreements.......................................................................29
5.05. Filings........................................................................................30
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
5.06. Certain Notifications..........................................................................31
5.07. Indemnification................................................................................31
VI. CONDITIONS..................................................................................................32
6.01. Conditions to the Obligations of All Parties...................................................32
6.02. Conditions to the Obligations of Newco.........................................................33
6.03. Conditions to the Obligations of the Company...................................................34
VII. TERMINATION, AMENDMENT AND WAIVER..........................................................................35
7.01. Termination....................................................................................35
7.02. Effect of Termination..........................................................................38
7.03. Amendment......................................................................................39
7.04. Waiver.........................................................................................39
VIII. GENERAL PROVISIONS........................................................................................40
8.01. Non-Survival of Representations, Warranties and Agreements.....................................40
8.02. Closing........................................................................................40
8.03. Notices........................................................................................41
8.04. Publicity......................................................................................42
8.05. Miscellaneous..................................................................................42
8.06. Definitions....................................................................................43
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of
February 15, 1996, as amended and restated as of April 4, 1996, by and between
SCFM CORP., a Delaware corporation ("Newco"), SCANFORMS, INC., a Delaware
corporation (the "Company").
WHEREAS, the Boards of Directors of Newco and of the Company
(upon the recommendation of its Special Committee, as defined in Section 2.08)
have approved the acquisition of Newco by the Company; and
WHEREAS, in furtherance of such acquisition, the Boards of
Directors of Newco and of the Company (upon the recommendation of its Special
Committee, as defined in Section 2.08) have, approved a merger (the "Merger") of
Newco with and into the Company in accordance with the laws of the State of
Delaware upon the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein, and subject to the satisfaction or waiver of
the conditions contained herein, the parties agree as follows:
<PAGE>
I. THE MERGER
1.01. The Merger. (a) As promptly as practicable following the
date hereof, upon the terms and subject to the conditions of this Agreement,
Newco shall be merged with and into the Company in accordance with the laws of
the State of Delaware, with the Company being the surviving corporation
(sometimes referred to hereinafter as the "Surviving Corporation"), and the
separate existence of Newco shall cease. The Merger shall be effective when a
properly executed Certificate of Merger (together with any other documents
required by law to effectuate the Merger) shall be delivered to and filed with
the Secretary of State of the State of Delaware (the "Secretary of State"),
which delivery and filing shall be made as soon as practicable after the closing
of the transactions contemplated by this Agreement as provided in Section 8.02
hereof. When used in this Agreement, the term "Effective Time" shall mean the
time on the date when the Certificate of Merger is filed with the Secretary of
State.
(b) The Surviving Corporation shall have the name
"Scanforms, Inc.", and, pursuant to Section 259 of the Delaware General
Corporation Law (the "DGCL"), shall, among other things, possess all the rights,
privileges, powers and franchises of Newco and the Company and shall be subject
to all the restrictions, disabilities and duties of each of such corporations.
-2-
<PAGE>
(c) The Certificate of Incorporation and Bylaws of
Company in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
(d) The directors of Newco shall be the directors of
the Surviving Corporation, and the officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, in each
case to serve until such time as their successors have been elected and have
qualified in accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation and applicable law unless sooner removed, retired,
disqualified or deceased.
1.02. Conversion or Cancellation of Stock. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder of
shares of common stock, par value $.01 per share, of the Company ("Company
Common Stock") or any holder of common stock, par value $.01 per share, of Newco
("Newco Common Stock"):
(a) Each share of Company Common Stock then owned by
SCFM or any Subsidiary (as hereinafter defined) of the Company
and each share of Company Common Stock then held in the
treasury of the Company shall be canceled and cease to exist,
-3-
<PAGE>
without any consideration being payable therefor. As used in
this Agreement, the term "Subsidiary" shall have the meaning
set forth for the term "majority-owned subsidiary" in Rule
12b-2 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
(b) Each then remaining share of Company Common Stock
(other than Dissenting Shares, as hereinafter defined) shall
be converted into the right to receive $3.60 in cash, without
interest thereon (the "Merger Consideration"), upon the due
surrender of the certificate for such share of Company Common
Stock, together with an appropriate letter of transmittal and
any other documents required thereby, to a reputable banking
institution selected by the Special Committee, acting as
Paying Agent (the "Paying Agent").
(c) Each then outstanding share of Newco Common Stock
shall be converted into one share of common stock, par value
$.01 per share, of the Surviving Corporation.
(d) All then outstanding shares of Company Common
Stock held by stockholders who shall have properly exercised
appraisal rights with respect thereto under Section 262 of the
-4-
<PAGE>
DGCL ("Dissenting Shares") shall not be converted into the
right to receive the Merger Consideration pursuant to the
Merger, but shall be entitled to receive payment of the
appraised value of such shares in accordance with the
provisions of such Section 262, except that any Dissenting
Shares held by a stockholder who shall thereafter withdraw his
or her demand for appraisal of such shares or lose his or her
right to such payment, in both cases as provided in such
Section 262, shall be deemed converted, as of the Effective
Time, into the right to receive the Merger Consideration such
holder otherwise would have been entitled to receive as a
result of the Merger.
1.03. Surrender of Share Certificates; Payment for Shares.
(a) From time to time after the Effective Time, the
Surviving Corporation shall cause to be delivered to the Paying Agent for the
benefit of the holders of shares of Company Common Stock, funds in an aggregate
amount equal to the Merger Consideration multiplied by the number of shares of
Company Common Stock outstanding at the Effective Time other than the shares of
Company Common Stock to be canceled or converted pursuant to Sections 1.02(a) or
1.02(c) hereto. Such funds shall be provided to the Paying Agent as needed to
-5-
<PAGE>
make payments for shares of Company Common Stock surrendered pursuant to Section
1.02(b), hereto.
(b) As soon as practicable after the Effective Time,
the Paying Agent shall mail to each holder of record (other than (i) the Company
or any Subsidiary of the Company and (ii) Newco or the shareholders of Newco) of
a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (the "Certificates"): (i)
a form of letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Paying Agent) and (ii) instructions for use
in effecting the surrender of the Certificates for payment therefor. Upon
surrender of a Certificate for cancellation to the Paying Agent or to such other
agent or agents as may be appointed by the Surviving Corporation, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive promptly in payment therefor the amount of cash into
which the shares of Company Common Stock theretofore represented by the
Certificate so surrendered shall have been converted pursuant to the provisions
of this Article I and the Certificate so surrendered shall be canceled. No
interest will be paid or accrued on the cash payable upon the surrender of the
Certificates.
-6-
<PAGE>
(c) The appointment of the Paying Agent may be
terminated by the Surviving Corporation at any time after six (6) months
following the Effective Time. Upon termination of such appointment, all
unclaimed cash held by the Paying Agent shall be returned to the Surviving
Corporation and thereafter all Certificates shall be surrendered to, and payment
therefor delivered by, the Surviving Corporation (subject to abandoned property,
escheat or other similar laws). Notwithstanding the foregoing, the Surviving
Corporation shall not be liable to a holder of a Certificate for amounts
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar laws. If Certificates are not surrendered prior to one year
after the Effective Time, unclaimed funds payable with respect to such
Certificates shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, subject to any legally enforceable claims
or interest of any person entitled thereto.
(d) If, in respect of a Certificate surrendered in
exchange for payment, such payment is to be made to any person other than the
person in whose name the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such payment that the Certificate so
surrendered shall be properly endorsed and the signatures thereon properly
guaranteed and otherwise in proper form for transfer and that the person
-7-
<PAGE>
requesting such payment shall pay to the Paying Agent any transfer or other
taxes required by reason of the payment to any person other than the registered
holder of the Certificate surrendered, or otherwise required, or shall establish
to the satisfaction of the Paying Agent that such tax has been paid or is not
payable.
(e) After the Effective Time, there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates representing such shares are presented to the Surviving Corporation
(or the registrar or transfer agent of the Company) they shall be canceled and
exchanged for cash as provided in this Article I.
II. REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants to Newco that:
2.01. Due Organization, Etc. The Company and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, and has all
-8-
<PAGE>
requisite corporate power and authority to own, operate and lease its properties
and to carry on its businesses as they are being conducted on the date of this
Agreement. The Company and each of its Subsidiaries is duly qualified as a
foreign corporation, and is in good standing, in each jurisdiction where the
character of its properties or the nature of its activities makes such
qualification necessary, except for such jurisdictions where the failure to so
qualify would not have a material adverse effect on the business, operations,
assets or financial condition of the Company and its Subsidiaries, taken as a
whole (a "Material Adverse Effect"). All of the outstanding shares of capital
stock of each Subsidiary of the Company are validly issued, fully paid and
nonassessable and all of such shares owned by the Company or another Subsidiary
of the Company are owned free and clear of all liens, claims or encumbrances.
The Company does not, directly or indirectly, own any material interest in any
other corporation, partnership, joint venture or other business association or
entity, except as set forth in the Company's Annual Report on Form 10-K for the
year ended October 1, 1995 (the "1995 Annual Report") or as set forth on
Schedule 2.01.
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2.02. Execution and Delivery of Agreement.
(a) The Company has all requisite corporate power to
enter into this Agreement and to consummate the transactions contemplated
hereby, including the Merger. The execution and delivery of this Agreement and,
subject to the approval of the Merger by the shareholders of the Company, the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company. This Agreement has
been duly executed and delivered by the Company and constitutes a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms.
(b) Except as set forth in Schedule 2.02, the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with, or result in any
violation of or default or loss of a benefit under, or permit the acceleration
of any obligation under, any provision of (i) the Certificate of Incorporation
or Bylaws of the Company or any of its Subsidiaries, (ii) any mortgage,
indenture, lease, Agreement or other instrument to which the Company or any such
Subsidiary is party or by which any of their respective properties are bound or
(iii) any permit, concession, grant, franchise, license, judgment, order,
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decrees, statute, law, ordinance, rule or regulation applicable to the Company
or any of its Subsidiaries or their respective properties, except, in the case
of clauses (ii) and (iii) above, such conflicts, violations, defaults, losses or
accelerations that would not, individually or in the aggregate, have a Material
Adverse Effect. No consent, approval, order or authorization of, or
registration, declaration or filing with, any federal, state, local or foreign
governmental or regulatory authority is required to be made or obtained by the
Company in connection with the execution and delivery of this Agreement by the
Company or the consummation by the Company of the transactions contemplated
hereby except for (a) compliance by the Company with the Exchange Act (and the
rules and regulations thereunder), (b) the delivery to and filing of the
Certificate of Merger with respect to the Merger with the Secretary of State,
(c) compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act"), if applicable, and (d) such consents,
approvals, orders or authorizations which if not obtained, or registrations,
declarations or filings which if not made, would not, individually or in the
aggregate, have a Material Adverse Effect.
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2.03. Capital Stock. The authorized capital stock of the Company
consists of (i) 500,000 shares of preferred stock, par value $1.00 per share, of
which, as of the date of this Agreement, no shares are issued and outstanding
and (ii) 6,000,000 shares of Company Common Stock of which, as of the date of
this Agreement, 3,546,648 shares are issued and outstanding, no shares are held
in Treasury, and 205,000 shares are subject to issuance upon exercise of
outstanding options under the Option Plan. All outstanding shares of Company
Common Stock are duly authorized, validly issued, fully paid and nonassessable.
Except for options under the Option Plan outstanding on the date hereof to
purchase 205,000 shares of Company Common Stock at exercise prices ranging from
$.30 to $1.69 per share, there are not outstanding any subscriptions, options,
conversion rights, warrants or other agreements or commitments of any nature
whatsoever (either firm or conditional) obligating the Company or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, any additional shares of the capital stock, or any securities convertible
into or exchangeable for shares of capital stock, of the Company or any
Subsidiary or obligating the Company or any of its Subsidiaries to grant, extend
or enter into any such agreement or commitment.
2.04. Periodic Filings.
(a) The Company has heretofore delivered to Newco
true and complete copies of all of its Annual Reports on Form 10-K, Quarterly
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Reports on Forms 10-Q, Current Reports on 8-K, proxy statements, and
registration statements filed by the Company with the SEC since October 1, 1994.
As of their respective dates, such reports and statements did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim consolidated financial
statements of the Company included in such Annual Report and Quarterly Report
(collectively, the ("Company Financial Statements") were prepared in accordance
with generally accepted accounting principles applied on a consistent basis
(except as may be indicated in the notes thereto and except that the unaudited
interim consolidated financial statements do not contain footnotes and are
subject to normal year-end adjustments) and fairly present the financial
position of the Company and its consolidated Subsidiaries as at the dates
thereof and the results of their operations and changes in financial position
for the periods then ended.
(b) As of January 31, 1996, neither the Company nor
any of its Subsidiaries had any liabilities of any nature, whether accrued,
absolute, contingent or otherwise, and whether or not to become due
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("Liabilities"), material to the Company and its Subsidiaries taken as a whole,
which were not specifically disclosed or provided for in the audited
consolidated balance sheet of the Company for the year ended October 1, 1995 or
the unaudited interim balance sheet of the Company for the quarter ended
December 31, 1995, respectively, or the notes thereto, except for Liabilities
incurred in connection with the transactions contemplated hereby. Since December
31, 1995, neither the Company nor any of its Subsidiaries has incurred any
Liabilities material to the Company and its Subsidiaries taken as a whole after
taking into account applicable insurance coverage except Liabilities incurred in
the ordinary course of business consistent with past practice and for the
Liabilities referred to in the preceding sentence.
(c) Since December 31, 1995 and except for actions
approved by the company's Board of Directors, the Company and its Subsidiaries
have conducted their respective businesses only in the ordinary and usual course
and neither the Company nor any of its Subsidiaries (A) has taken any of the
actions described in paragraphs (d) through (k) (in the case of the Company) or
paragraphs (e) and (g) through (k) (in the case of the Company's Subsidiaries)
of Section 4.01 hereof or (B) has undergone or suffered any Material Adverse
Effect.
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2.05. Proxy Statement. None of the information supplied or to be
supplied by or on behalf of the Company for inclusion in (i) the Statement on
Schedule 13E-3 with respect to the Merger (the "Schedule 13E-3") or (ii) the
proxy statement of the Company with respect to the Merger, as from time to time
supplemented or amended (collectively, including any schedules thereto, as well
as the related letter to shareholders, form of proxy, notice of meeting and any
other proxy materials to be distributed to shareholders, the "Proxy Statement"),
will, at the time the Schedule 13E-3 or any amendments or supplements thereto is
filed with the SEC, at the time the Proxy Statement is mailed to shareholders of
the Company, at the time of the meeting of shareholders of the Company referred
to in Section 5.02 hereof, and at the Effective Time, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading or to correct any
statement in any earlier communication with respect to the solicitation of any
proxy or approval for the meeting in connection with which the Proxy Statement
shall be mailed. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder.
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2.06. No Brokers. All negotiations relating to this Agreement and
the transactions contemplated hereby have been carried on without the
intervention of any person acting on behalf of the Company in such manner as to
give rise to any valid claim against the Company, Newco, or any of their
respective Subsidiaries or the Surviving Corporation for any broker's, finder's
or financial advisor's fee or similar compensation in connection with the
Merger, except for compensation payable by the Company to Janney Montgomery
Scott Inc. ("Janney") pursuant to the letter agreement dated March 2, 1995, as
amended May 8, 1995.
2.07. Employment, Severance and Termination Agreements, Etc.
Neither the Company nor any of its Subsidiaries is a party to (i) any agreements
providing for severance or termination payments, or payments in connection with
any change in control of the Company or (ii) any employment agreement with any
former employee, employee, officer, consultant or director of the Company or any
of its Subsidiaries.
2.08. Company Actions. The Board of Directors of the Company, upon
recommendation of the Independent Director Committee thereof (the "Special
Committee"), has (i) duly approved this Agreement and the Merger, (ii)
determined that the Merger is fair to shareholders of the Company other than
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Newco or any affiliate of Newco and (iii) resolved to recommend acceptance of
the Merger; and Janney, has advised the Special Committee and the Company's
Board of Directors that the Merger Consideration is fair to the Company's
shareholders (other than Newco and any affiliate of Newco) from a financial
point of view.
III. REPRESENTATIONS AND WARRANTIES
OF NEWCO
Newco represents and warrants to the Company that:
3.01. Due Organization, Etc. Newco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is wholly owned by Robert A. Samans (51%) and Sebastian Carcioppolo
(49%) in the percentages set forth beside their respective names. Newco has not
conducted any business prior to the date hereof other than in connection with
the transactions contemplated hereby.
3.02. Execution and Delivery of Agreement.
(a) Newco has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby, including the Merger. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
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duly authorized by all necessary corporate action on the part of Newco. This
Agreement has been duly executed and delivered by Newco and constitutes a legal,
valid and binding obligation of Newco in accordance with its terms.
(b) The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby will not conflict with,
or result in any violation of or default or loss of a benefit under, or permit
the acceleration of any obligation under, any provision of (i) the Certificate
of Incorporation or Bylaws of Newco or (ii) any mortgage, indenture, lease,
agreement or other instrument to which Newco is a party or by which any of its
respective property is bound or any permit, concession, grant, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Newco or its respective properties, other than any such conflict,
violation, default, loss or acceleration which would not have a material adverse
effect on the ability of Newco to consummate the transactions contemplated
hereby. No consent, approval, order or authorization of, or registration,
declaration or filing with, any federal, state, local or foreign governmental or
regulatory authority is required to be made or obtained by Newco in connection
with the execution and delivery of this Agreement by Newco or the transactions
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contemplated hereby except for (a) compliance by Newco with the Exchange Act
(and the rules and regulations thereunder), (b) the delivery to and filing of
the Certificate of Merger with respect to the Merger with the Secretary of
State, (c) compliance with the Hart-Scott-Rodino Act, if applicable, and (d)
consents, approvals, orders or authorizations which if not obtained, or
registrations, declarations or filings which if not made, would not materially
adversely affect the ability of Newco to consummate the transactions
contemplated hereby.
3.03. Financing. Newco has and will do any and all things
necessary to assist in assuring that all funds or appropriate commitments from
responsible financial institutions to provide funds to Company will be available
in connection with the Merger sufficient to satisfy the obligation of Company to
pay at the Effective Time to the holders of shares of Company Common Stock the
aggregate amount of cash to which such holders will be entitled.
3.04. Proxy Statement. None of the information supplied by Newco
for inclusion in the Schedule 13E-3 or the Proxy Statement, will, at the
respective times the Schedule 13E-3 or any amendments or supplements thereto is
filed with the SEC, at the time the Proxy Statement is mailed to shareholders of
the Company, at the time of the meeting of shareholders of Company referred to
in Section 5.02 hereof, and at the Effective Time, contain any untrue
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statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading or to correct any
statement in any earlier communication with respect to the solicitation of any
proxy or approval for the meeting in connection with which the Proxy Statement
shall be mailed. The Schedule 13E-3 will comply as to form in all material
respects with the provisions of the Exchange Act, and the rules and regulations
promulgated thereunder.
3.05. No Brokers. All negotiations relating to this Agreement and
the transactions contemplated hereby have been carried on without the
intervention of any person acting on behalf of Newco or any of its affiliates in
such manner as to give rise to any valid claim against the Company or any of its
Subsidiaries for any broker's, finder's or financial advisor's fee or similar
compensation in connection with the Merger.
IV. COVENANTS OF THE COMPANY
4.01. Ordinary Course of Business. During the period from the date
of this Agreement to the Effective Time, except (i) as otherwise consented to in
writing by Newco, (ii) as otherwise approved by the Board of Directors of
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the Company, (iii) as otherwise approved in writing or caused by an officer,
director or employee of the Company who is a present or former officer, director
or employee of Newco or any of its affiliates, or the Company will, and with
respect to matters identified in clauses (a), (c), (e) and (g) through (l) will
cause each of its Subsidiaries to:
(a) carry on its business in, and only in, the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent with such business, use all
reasonable efforts to preserve, intact its present business organization, keep
available the services of its present officers and employees, and preserve its
relationships with clients, customers, distributors and others having business
dealings with it so that its good will and ongoing business shall be unimpaired
at the Effective Time;
(b) promptly advise Newco in writing of any change
in its business, operations, assets or financial condition or in that of its
Subsidiaries which is or may reasonably be expected to be materially adverse to
the Company and its Subsidiaries, taken as a whole;
(c) use its best efforts to obtain (and to cooperate
with Newco in obtaining) any consent, authorization or approval of, or exemption
by, any governmental or regulatory authority or agency required to be obtained
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or made by it (or by its Subsidiaries), in connection with the Merger or the
taking of any action in connection with the consummation thereof and promptly
comply with all filing requirements which federal or state law may impose on the
Company or any of its Subsidiaries with respect to the Merger (including the
solicitation of proxies in connection with the Merger) and cooperate with and
promptly furnish information to Newco in connection with any such filing imposed
upon it or on any of its Subsidiaries in connection with the Merger;
(d) not amend its Certificate of Incorporation or
Bylaws (or other constituent documents);
(e) neither acquire nor offer to acquire by merging
or consolidating with, or purchase substantially all of the assets of, or
otherwise acquire any business of any corporation, partnership, association or
other business organization or division thereof;
(f) not split, combine or reclassify its outstanding
capital stock or declare, set aside, make or pay any dividend or other
distribution in respect of its capital stock or purchase or redeem, directly or
indirectly, any shares of its capital stock;
(g) not issue or sell (or agree to issue or sell)
any shares of its capital stock of any class or any options, warrants,
conversion or other rights to purchase any such shares or any securities
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convertible into or exchangeable for such shares, other than pursuant to
employee stock options under the Option Plan that are outstanding on the date
hereof;
(h) not, other than in the ordinary course of
business consistent with prior practice, (i) incur any indebtedness for borrowed
money or vary the terms of any existing debt securities, (ii) issue or sell any
debt securities, (iii) acquire or dispose of any substantial assets or (iv)
enter into any other material transaction;
(i) not mortgage, pledge or subject to any lien,
lease, security interest or other charge or encumbrance any of its properties or
assets, tangible or intangible, other than in the ordinary course of business
consistent with prior practice;
(j) not grant to any officer or member of the board
of directors of the Company any increase in compensation in any form, or any
severance or termination pay, or grant to any employee any increase in
compensation or any severance or termination pay, except in accordance with the
terms of an existing written Agreement disclosed to Newco pursuant to Section
2.07 or with the normal practices of the Company and its Subsidiaries consistent
with past practice, or make any loan (except in accordance with the
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normal practices of the Company) to or enter into any employment, severance,
consultancy or other agreement with any officer, director or employee;
(k) not adopt, amend in any material respect or
terminate, any bonus, profit sharing, stock option, stock appreciation rights,
employee stock ownership, pension, retirement, deferred compensation, employment
or other plan, Agreement or arrangement for the benefit of employees of the
Company or its Subsidiaries; or
(l) not agree to take any of the actions set forth
in the foregoing subparagraphs (d)-(k).
4.02. Subsequent Financial Statements. Prior to the Effective
Time, the Company will timely file with the SEC each Annual Report on Form 10-K,
Quarterly Report on Form 10-Q and Current Report on Form 8-K required to be
filed by the Company under the Exchange Act and the rules and regulations
promulgated thereunder and will promptly deliver to Newco copies of each such
report filed with the SEC. As of their respective dates, none of such reports
shall contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
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financial statements of the Company included in such reports shall be prepared
in accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated in the notes thereto) and shall
fairly present the financial position of the Company and its consolidated
Subsidiaries as at the dates thereof and the results of their operations and
changes in financial position for the periods then ended.
4.03 Other Potential Bidders. The Company shall, directly or
indirectly, furnish information and access, in each case in response to
unsolicited requests therefor, received prior to or after the date of this
Agreement, to the same extent permitted by Section 5.01 hereof, to any person or
entity pursuant to appropriate confidentiality agreements, and may participate
in discussions and negotiate with any such person or entity concerning any
merger, sale of assets, sale of shares of capital stock or similar transaction
involving the Company or (any such transaction being referred to herein as a
"Competing Transaction"), if the Special Committee determines that such action
is appropriate in light of its fiduciary obligations to the Company's
stockholders after consultation with counsel. In addition, the Company shall
direct its officers and other appropriate personnel to cooperate with and be
reasonably available to consult with any such entity or group. Except as set
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forth above, the Company shall not solicit, participate in or initiate
discussion or negotiations with, or provide any information to, any person or
entity (other than Newco or its affiliates or associates) concerning any merger,
sale of assets, sale of shares of capital stock or similar transaction involving
the Company.
V. ADDITIONAL AGREEMENTS
5.01. Access and Information. The Company shall afford to Newco,
and to its accountants, counsel and other representatives, full access during
normal business hours during the period prior to the Effective Time to all of
its properties, books, contracts, commitments and records (including but not
limited to tax returns) and, during such period, shall furnish promptly to Newco
(a) a copy of each report, schedule and other document filed or received by the
Company during such period pursuant to the requirements of federal or state
securities laws, and (b) all other information concerning its business,
properties and personnel as Newco may reasonably request; provided, however,
that no investigation pursuant to this Section 5.01 shall affect any
representations or warranties or the conditions to the obligations of the
parties hereto to consummate the Merger. Newco shall hold confidential all
information obtained hereunder with respect to the Company, shall utilize such
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information only for purposes of evaluating the transaction contemplated hereby
and preparing for a transition from and after the Effective Time and shall, upon
any termination hereof (i) return to the Company all copies of information
obtained hereunder from the Company or its representatives and (ii) destroy any
analyses, memoranda or other documents prepared utilizing such information.
5.02. Shareholder Approvals; Proxy Statement. The Company (i)
shall promptly call a meeting of its shareholders to be held as soon as
reasonably practicable for the purpose of considering and voting upon the Merger
and related matters (the "Special Meeting"), (ii) shall, through the Board of
Directors upon recommendation of the Special Committee and subject to their
fiduciary duties, recommend in the Proxy Statement and at the Special Meeting
that its shareholders approve the Merger and (iii) subject to the Board of
Directors' fiduciary duty, shall use its best efforts to solicit the requisite
vote of approval at the Special Meeting in accordance with the applicable laws
of the State of Delaware and the Exchange Act. In connection with the Special
Meeting, each of the Company and Newco shall cooperate in preparing and filing
with the SEC, the Schedule 13E-3 and a preliminary proxy statement relating to
the Merger and shall use its best efforts to respond to the comments of the SEC
and to cause the Proxy Statement to be mailed to the Shareholders
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of the Company as soon as reasonably practicable. The Company shall notify Newco
of the receipt of the comments of the SEC and of any request by the SEC for
amendments or supplements to, the Schedule 13E-3, the preliminary proxy
statement or the Proxy Statement and shall supply Newco with copies of all
correspondence between the Company (or its representatives) and the SEC (or its
staff) with respect thereto. If at any time prior to the Special Meeting, any
event should occur relating to the Company and its Subsidiaries or Newco and its
Subsidiaries or their respective officers and directors which should be
described in an amendment or supplement to the Proxy Statement, the parties
shall promptly inform each other and shall cooperate in promptly preparing,
filing and clearing with the SEC and mailing to the Company's shareholders such
amendment or supplement.
5.03. Expenses. Whether or not the Merger is consummated, all
costs and expenses reasonably incurred by or on behalf of Newco or the
stockholders of Newco in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, commitment fees paid to
lenders, and any fees and disbursements of Newco's or its stockholders'
financial advisors, accountants and attorneys) shall be paid by the Company;
provided, however, that, notwithstanding the foregoing, the Company shall have
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no obligation to pay any such costs and expenses in excess of $250,000;
provided, further, however, that nothing in this Section 5.03 shall limit the
rights of any person to indemnification or advancement of expenses under the
applicable provisions of the DGCL, the Company's Certificate of Incorporation or
its Bylaws.
5.04. Miscellaneous Agreements. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, to consummate and make effective the transactions contemplated by
this Agreement (it being understood that this Section 5.04 shall not require the
Board of Directors or the Special Committee to recommend approval of the Merger
to the Company's shareholders if such recommendation is not required by Section
5.02). At the Special Meeting, Newco will vote, or cause to be voted, all shares
of Company Common Stock which it is then entitled to vote in favor of the
Merger, it being understood that such favorable vote shall not in any way limit
the rights of Newco under Article VI hereof. The Company and Newco will, and
will cause each of their respective Subsidiaries to, use their best efforts to
obtain consents of all third parties and governmental bodies necessary or
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advisable to consummate and make effective the transactions contemplated by this
Agreement. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the proper
officers or directors of the Company or Newco, as the case may be, shall take
all such necessary action.
5.05. Filings. If applicable, the Company and Newco shall, as soon
as practicable, file Notification and Report Forms under the Hart-Scott-Rodino
Act with the Federal Trade Commission and the Antitrust Division of the
Department of Justice with respect to the Merger and shall use their best
efforts to respond as promptly as practicable to all inquiries received from the
Federal Trade Commission and the Antitrust Division for additional information
or documentation. The Company and Newco will take all such action as may be
necessary under the federal and state securities laws applicable to or necessary
for, and will file and, if appropriate, use their reasonable efforts to have
declared effective or approved all documents and notifications with the SEC and
other governmental or regulatory bodies which they deem necessary or appropriate
for, the consummation of the Merger and the transactions contemplated hereby,
and each party shall give the other information reasonably requested by such
other party pertaining to it and its Subsidiaries and affiliates reasonably
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necessary to enable such other party to take such actions. The Company and Newco
shall file in a timely manner all reports and documents required to be so filed
by or under the Exchange Act and other applicable laws.
5.06. Certain Notifications. At all times prior to the Effective
Time, each party shall promptly notify the other in writing of the occurrence of
any event of which any of its executive officers has knowledge which will or may
result in the failure to satisfy the conditions contained in Article VI hereof.
5.07. Indemnification. Newco and Company agree that all rights to
indemnification now existing in favor of the employees, agents, directors or
officers of the Company and the Company's Subsidiaries as provided in their
respective Certificates of Incorporation or Bylaws or otherwise in effect on the
date hereof shall survive the Merger and shall continue in full force and effect
after the Effective Time. Any permissive provision therein relating to rights of
indemnification shall be deemed to be mandatory to the maximum extent permitted
by law. To the extent necessary to provide the same insurance coverage as
currently exists, or other coverage no less favorable, Surviving Corporation
shall maintain for a period of not less than two years from the Effective Time
policies of directors' and officers' liability insurance providing the same
coverage, or other coverage no less favorable, as the policies currently
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maintained by the Company for the benefit of the officers and directors of the
Company.
VI. CONDITIONS
6.01. Conditions to the Obligations of All Parties. The
obligations of each party hereto to consummate the Merger are subject to the
satisfaction or waiver (in writing) of the following conditions:
(a) Absence of Injunctions. There shall be no order
of any court or governmental, administrative or regulatory agency or authority
in effect which restrains or prohibits the consummation of the Merger.
(b) Shareholder Approval. The holders of a majority
of the shares of Company Common Stock shall have approved the Merger at the
Special Meeting.
(c) HSR. All applicable waiting periods under the
Hart-Scott-Rodino Act, if applicable, with respect to the Merger shall have
expired or been terminated.
(d) Financing. The Company (or Newco) shall have
available to it satisfactory financing commitment(s) from (a) Mellon Bank, N.A.
pursuant to its offer and Outline of Terms, each dated February 5, 1996, (b) any
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other reputable banking institution satisfactory to the Special Committee on
terms not materially different from those under (a), above, or (c) any other
source which is satisfactory to the Special Committee and the terms of which
financing are satisfactory to the Special Committee.
(e) Appraisal Rights. Dissenting shareholders'
appraisal rights pursuant to Section 262 of the DGCL shall have been perfected
by shareholders owning no more than 300,000 shares of Company Common Stock.
(f) No Legal Action. No temporary restraining
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, nor shall any proceeding initiated by the U.S. or any state government
or any agency thereof seeking any of the foregoing be pending.
6.02. Conditions to the Obligations of Newco. The obligations of
Newco to consummate the Merger are subject to the satisfaction or waiver (in
writing) of the following conditions:
(a) Representation and Warranties True. The
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects as of the date when made and at and
as of the Closing Date (as hereinafter defined) as if made on the Closing Date.
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(b) Performance of Covenants. The Company shall have
performed and complied in all material respects with the covenants and
agreements required by this Agreement to be performed or complied with by it
hereunder prior to or on the Closing Date.
(c) Certificate. Newco shall have received from the
Company a certificate, signed in the name and on behalf of the Company by the
appropriate officers of the Company, as to compliance with the conditions set
forth in Section 6.01(b) and in Sections 6.02 (a) and (b).
6.03. Conditions to the Obligations of the Company. The obligation
of the Company to consummate the Merger is subject to the satisfaction or waiver
(in writing) of the following conditions:
(a) Representations and Warranties True. The
representations and warranties of Newco contained in this Agreement shall be
true and correct in all material respects as of the date when made and at and as
of the Closing Date as if made on the Closing Date.
(b) Performance of Covenants. Newco shall have
performed and complied in all material respects with the covenants and
agreements required by this Agreement to be performed or complied with by it
hereunder prior to or on the Closing Date.
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(c) Certificate. The Company shall have received
from Newco a certificate as to compliance with the conditions set forth in
Sections 6.03(a) and (b).
(d) Opinion of Financial Advisor. The opinion of
Janney referred to in Section 2.08, shall not have been withdrawn prior to the
mailing of the Proxy Statement to the Company's shareholders.
VII. TERMINATION, AMENDMENT AND WAIVER
7.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger by
the shareholders of the Company:
(a) by mutual consent of the Board of Directors of
Newco and the Board of Directors of the Company (acting upon the recommendation
of the Special Committee in its sole discretion); or
(b) by either Newco or the Company (acting upon the
recommendation of the Special Committee in its sole discretion) if the Merger
shall not have been consummated on or before August 31, 1996 (other than as a
result of a breach of this Agreement by the party seeking termination); or
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(c) by Newco or the Company (acting upon the
recommendation of the Special Committee in its sole discretion) if any court of
competent jurisdiction in the United States or any other United States federal,
state or local governmental body shall have issued an order, decree or ruling or
taken other action restraining, enjoining or otherwise prohibiting the Merger
and such order, decree, ruling or other action shall have become final and
nonappealable and shall not have resulted from an action by the party seeking
termination;
(d) by Newco or by the Company (acting upon the
recommendation of the Special Committee in its sole discretion) if either of
them shall reasonably determine that an Acquisition Proposal (as defined below)
constitutes a Superior Proposal (as defined below); provided, however, that the
Company may not terminate this Agreement pursuant to this clause (d) unless (i)
ten business days shall have elapsed after delivery to Newco of a written notice
of such determination and during such ten business day period the Company shall
have fully cooperated with Newco, including, without limitation, informing Newco
of the terms and conditions of such Acquisition Proposal and the identity of the
person or group making such Acquisition Proposal, (ii) at the end of such ten
business day period the Special Committee shall continue reasonably to believe
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that such Acquisition Proposal constitutes a Superior Proposal, and (iii)
promptly thereafter the Company shall enter into a definitive acquisition,
merger or similar agreement to effect such Superior Proposal. As used in this
clause (d), the term "Acquisition Proposal" means any proposal or offer for, or
any expression (by public announcement of otherwise) by any person (other than
Newco) of its interest in effectuating any of the following: (i) a tender of
exchange offer of 20% or more of the equity of the Company, (ii) a merger,
consolidation or other business combination involving the Company, (iii) an
acquisition in any manner of 20% or more of the equity of, or 20% or more of the
assets of, the Company. As used in this clause (d), the term "Superior Proposal"
means a bona fide, written proposal or offer made by any person or group (other
than Newco) to effect any Acquisition Proposal (I) at a per share price higher
than $3.60 per share, (II) on terms (including price) which the Special
Committee determines in its judgment (based on the advice of independent
financial advisors), to be more favorable to the Company and its shareholders
than the transactions contemplated hereby, (III) for which any required
financing is committed or which, in the judgment of the Special Committee (based
on the advice of independent financial advisors), is reasonably capable of being
financed by such person, and (IV) which is not otherwise subject to material
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conditions (other than conditions similar to those contained in Article VI
hereof) which, in the judgment of the Special Committee, render recommendation
of the Acquisition Proposal undesirable.
(e) by Newco or by the Company (acting upon the
recommendation of the Special Committee in its sole discretion) if any person
shall have acquired beneficial ownership of, or any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder but
not including Newco or its shareholders) shall have been formed which
beneficially owns, 50% or more of the Common Stock.
(f) by Newco or by the Company if the Board of
Directors (acting upon the recommendation of the Special Committee in its sole
discretion) determines that it is unable, consistent with its fiduciary duties,
to recommend in the Proxy Statement and at the Special Meeting that the
shareholders of the Company approve the Merger, in accordance with the
provisions of 5.02 hereof.
7.02. Effect of Termination. In the event of termination of this
Agreement by either Newco or the Company as provided above, the Merger shall be
deemed abandoned and this Agreement shall forthwith become void and there shall
be no liability on the part of any of Newco, Newco or the Company
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or any of their respective officers or directors, except as set forth in the
last sentence of Section 5.01 and in Section 5.03 hereof and except for
liability arising from a material breach of this Agreement.
7.03. Amendment. This Agreement may be amended by the parties
hereto by action taken by their respective Boards of Directors (in the case of
the Company, acting upon the recommendation of the Special Committee in its sole
discretion), at any time before or after approval of the Merger by the
shareholders of the Company but, after any such shareholder approval, no
amendment shall be made which reduces the amount of cash into which shares of
Company Common Stock are to be converted as provided in this Agreement without
the further approval of such shareholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.04. Waiver. Any term or provision of this Agreement (other than
the requirement for shareholder approval, or a term or provision that expressly
provides otherwise) may be waived in writing at any time by the party which is
entitled to the benefits thereof. Any such waiver by the Company must be
authorized by the Board of Directors upon the recommendation of the Special
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Committee. Any such waiver must be by an instrument in writing signed by the
party against whom enforcement is sought.
VIII. GENERAL PROVISIONS
8.01. Non-Survival of Representations, Warranties and Agreements.
No representation, warranty or Agreement of Newco or the Company in this
Agreement or in any instrument delivered by Newco or the Company pursuant to
this Agreement shall survive the Merger, except the agreements set forth in
Article I and in Sections 5.03, 5.04 and 5.07 hereof.
8.02. Closing. Unless this Agreement shall have been terminated in
accordance with the provisions of Article VII hereof and the Merger herein
contemplated shall have been abandoned, a closing (the "Closing") will be held
as soon as practicable after the Special Meeting, and the obtaining of all
consents and approvals and expiration of all waiting periods referred to in
Article VI, at the offices of Wolf, Block, Schorr and Solis-Cohen in
Philadelphia, Pennsylvania. At such time (the "Closing Date") and place the
documents referred to in Article VI will be exchanged by the parties and,
immediately thereafter, the Certificate of Merger will be delivered to the
Secretary of State for filing; provided, however, that if any of the conditions
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provided for in Article VI shall not have been met or waived by the date on
which the Closing is otherwise scheduled, then, Subject to Section 7.01 hereof,
the party to this Agreement which is unable to meet such condition or conditions
shall be entitled to postpone the Closing by notice to the other parties until
such condition or conditions shall have been met (which such modifying party
will seek to cause to happen at the earliest practicable date) or waived.
8.03. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or sent by
telex or facsimile to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Newco, to:
Robert A. Samans
Scanforms, Inc.
181 Rittenhouse Circle
Keystone Park
P. O. Box 602
Bristol, PA 19007
Facsimile: 215-785-1501
With a copy to:
Stephen P. Lamb, Esquire
Law Offices of Stephen P. Lamb
One Rodney Square
Fifth Floor
Wilmington, DE 19801
Facsimile: 302-984-2497
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(b) If to the Company, to:
Scanforms, Inc.
181 Rittenhouse Circle
Keystone Park
P. O. Box 602
Bristol, PA 19007
Attn.: Emma M. Cocci, Secretary
Facsimile: 215-785-1501
with a copy to:
Wolf, Block, Schorr and Solis-Cohen
Packard Building
12th Floor
Philadelphia, PA 19102
Attn.: Mark K. Kessler, Esquire
Facsimile: 215-977-2776
8.04. Publicity. So long as this Agreement is in effect, neither
the Company nor Newco shall, or permit any off its Subsidiaries or
representatives to, issue or cause the publication or dissemination of any press
release or other announcement with respect to the Merger or this Agreement
except after consultation with the other party or except as may be required to
comply on a timely basis with public disclosure obligations under applicable
laws.
8.05. Miscellaneous. This Agreement, (including the documents and
instruments referred to or incorporated herein) (a) constitutes the entire
Agreement and supersedes all other prior agreements and undertakings, both
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written and oral, among the parties, or any of them, with respect to the subject
matter hereof; (b) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder; (c) shall not be assigned by
operation of law or otherwise (except that Newco may assign its rights hereunder
to any direct or indirect wholly-owned subsidiary of Subsidiary); and (d) shall
be governed in all respects, including validity, interpretation and effect, by
the laws of the State of Delaware without regard to principles of conflicts of
law. This Agreement may be executed in two or more counterparts which together
shall constitute a single Agreement.
8.06. Definitions. The following terms shall have the respective
meanings specified in the indicated Sections off the Agreement:
Term Agreement Section
---- -----------------
Acquisition Recitals
Certificates 1.03(b)
Closing 8.02
Closing Date 8.02
Company Recitals
Company Common Stock 1.02
Company Financial Statements 2.04(a)
Effective Time 1.01(a)
Exchange Act 1.02(a)
Hart-Scott-Rodino Act 2.02(b)
Liabilities 2.04(b)
Material Adverse Effect 2.01
Merger Recitals
Merger Consideration 1.02(b)
1995 Annual Report 2.01
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Term Agreement Section
---- -----------------
DGCL 1.01(b)
Option Plans 1.04
Paying Agent 1.02(b)
Proxy Statement 2.05
Schedule 13E-3 2.05
SEC 2.04
Secretary of State 1.01(a)
Special Committee 2.08
Special Meeting 5.02
Subsidiary 1.02(a)
Surviving Corporation 1.01(a)
IN WITNESS WHEREOF, Newco and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
SCANFORMS, INC.
By: /s/ Joel Jacks
---------------------------------------
Joel Jacks, Chairman, Special
Committee
SCFM CORP.
By: /s/ Robert A. Samans
---------------------------------------
Robert A. Samans, President
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Schedule 2.02
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ANNEX B
February 15, 1996
Board of Directors
Attention: Independent Director Committee
Scanforms, Inc.
181 Rittenhouse Circle
Bristol, PA 19007
Gentlemen:
You have requested our opinion as to the fairness, from a financial
point of view, of the consideration to be received by the stockholders of
Scanforms, Inc. (the "Company") in connection with the merger of SCFM Corp., a
Delaware corporation formed by the President and a Director of the Company, with
and into the Company (the "Merger"). Upon the consummation of the Merger,
holders of approximately 2.27 million shares of the Company's common stock will
receive cash in the amount of $3.60 per share (the "Merger Consideration")
pursuant to the Agreement and Plan of Merger Among SCFM Corp. and Scanforms,
Inc. dated February 15, 1996 (the "Merger Agreement"). The President and a
Director of SCFM Corp. (the "Management Group") will become the sole
stockholders of the Company by virtue of the Merger.
In rendering our opinion, we have reviewed, among other things: (a) the
Merger Agreement; (b) publicly available business and historical financial
information relating to the Company, including the 1995 Annual Report of the
Company and 10-Q for the quarter ended December 31, 1995; (c) certain financial
information and other data provided to us by the Company, that is not publicly
available, relating to the business and prospects of the Company, including
financial projections prepared by the management of the Company; (d) the
reported historical market prices and trading volume of the common stock of the
Company; (e) selected financial and stock market data for certain other publicly
traded companies in lines of business comparable to the Company; and (f) the
financial terms of certain other recent mergers and acquisitions of direct mail
and commercial printing companies. In addition we held discussions with the
management of the Company regarding its business, operating results, financial
condition, prospects and the Merger, and undertook other analyses, studies and
investigations as we considered appropriate.
In connection with our review, we have relied, without independent
verification, upon the accuracy and completeness of the financial and other
information used by us in arriving at our opinion. We have also relied upon the
assessment of the management of the Company regarding its business, prospects
and the Merger and also assumed that the financial projections of the Company
were reasonably prepared by management on bases reflecting the best currently
available estimates and good faith judgments of the future financial performance
of the Company. We did not undertake any independent valuations or appraisals of
the real properties or other assets of the Company, nor were we furnished with
any such valuations or appraisals. Our opinion is necessarily based upon
economic, market and other conditions as they exist on, and can be reasonably
evaluated as of, the date of this letter.
<PAGE>
Board of Directors
February 15, 1996
Page 2
Janney Montgomery Scott is acting as the financial advisor to the
Company in connection with soliciting and evaluating merger and acquisition
opportunities and will receive customary fees upon the completion of the Merger.
In addition, in the ordinary course of our securities business we trade the
equity securities of the Company for our own account and the accounts of our
customers and, therefore, we may from time to time hold a long or short position
in such securities.
We are of the opinion, as of the date of this letter and subject to the
foregoing, that the Merger Consideration to be received by the Company's
stockholders (other than the Management Group) in connection with the Merger is
fair, from a financial point of view, to such stockholders.
Very truly yours,
/s/ Janney Montgomery Scott Inc.
----------------------------------
Janney Montgomery Scott Inc.
<PAGE>
ANNEX C
SECTION 262 OF THE
DELAWARE GENERAL CORPORATION LAW
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in favor
of the merger or consolidation nor consented thereto in writing pursuant to
Section 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Section 251, Section 252, Section 254,
Section 257, Section 258, Section 263 or Section 264 of this title:
(l) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsections (f) or (g)
of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
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a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of this title is not
owned by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to take
such action must do so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or consolidation, the
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surviving or resulting corporation shall notify each stockholder of each
constituent corporation who has complied with this subsection and has not voted
in favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Sections 228 or 253 of this title, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within 10
days thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that appraisal
rights are available for any or all of the shares of the constituent
corporation, and shall include in such notice a copy of this section. The notice
shall be sent by certified or registered mail, return receipt requested,
addressed to the stockholder at his address as it appears on the records of the
corporation. Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of the notice, demand in writing from the surviving or
resulting corporation the appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
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addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
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fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as provided
in subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
his demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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