SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) JULY 1, 1999
DISC GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
Commission File Number: 0-22696
Delaware 13-3678012
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
10 Gilpin Avenue, Hauppauge, New York 11788-8831
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 234 -1400
-1-
INFORMATION TO BE INCLUDED IN THE REPORT
This Form 8-K/A amend the Registrant's current report on Form 8-K
dated July 1, 1999, and is filed pursuant to Item 7(a)(4) and 7(b)(2), with
respect to financial statements of Contemporary Color Graphics, Inc. ("CCG"), an
acquired business previously reported in the Form 8-K.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired. The Financial Statements
of CCG required to be filed under Item 7(a) are filed herewith.
(b) Pro Forma Financial Information. The pro forma financial
information required to be filed under Item 7(b) is filed herewith.
-2-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DISC GRAPHICS, INC.
(Registrant)
September 14, 1999 /s/ Donald Sinkin
-----------------------------------
Donald Sinkin
President and Chief Executive Officer
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CONTEMPORARY COLOR GRAPHICS, INC.
TABLE OF CONTENTS
Page
Independent Auditors' Report 5
Financial Statements
Balance Sheet as of December 31, 1998 6
Statements of Operations and Changes in Retained Earnings
(Accumulated Deficit) for the Year Ended December 31, 1998 7
Statement of Cash Flows for the Year Ended December 31, 1998 8
Notes to Financial Statements 9
-4-
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Contemporary Color Graphics, Inc.
We have audited the accompanying balance sheet of Contemporary Color Graphics,
Inc. ("Company") as of December 31, 1998 and the related statements of
operations and changes in retained earnings (accumulated deficit), and cash
flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Contemporary Color Graphics,
Inc. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Imowitz Koenig & Co., LLP
Certified Public Accountants
New York, New York
April 28, 1999
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<PAGE>
Contemporary Color Graphics, Inc.
Balance Sheet as of December 31, 1998
Assets
Current Assets
Cash and Cash Equivalents $ 267,682
Accounts Receivable 887,605
Inventories 216,974
Prepaid Expenses 46,990
-----------------
Total current assets 1,419,251
Property and Equipment, at Cost, Net of
Accumulated Depreciation of $975,949 1,236,506
Security Deposits 10,134
-----------------
Total assets $ 2,665,891
=================
Liabilities and stockholders' deficit
Current liabilities
Accounts Payable $ 898,972
Accrued Expenses 479,640
Loans Payable 483,306
-----------------
Total current liabilities 1,861,918
Loans Payable 867,508
-----------------
Total liabilities 2,729,426
-----------------
Commitments and Contingencies
Stockholders' deficit
Common Stock - No Par Value; Authorized - 200 shares;
Issued and Outstanding - 100 shares 35,300
Additional Paid-in-Capital 117,403
Accumulated Deficit (216,238)
-----------------
Total stockholders' deficit (63,535)
-----------------
Total liabilities and stockholders' deficit $ 2,665,891
=================
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<PAGE>
Contemporary Color Graphics, Inc.
Statements of Operations and Changes in Retained Earnings (Accumulated Deficit)
For the Year Ended December 31, 1998
Sales $ 7,467,992
Cost of Goods Sold 5,511,924
-----------------
Gross Profit 1,956,068
-----------------
Selling Expenses 442,420
General and Administrative Expenses 1,084,328
-----------------
Total Operating Expenses 1,526,748
-----------------
Income from Operations 429,320
Other Income 69,120
Rental Income 11,162
-----------------
Net Income 509,602
Add: Retained Earnings - Beginning of Period 52,035
Less: Prior Period Adjustment (608,329)
Less: Distributions to Stockholders (169,546)
-----------------
Accumulated Deficit - End of Period $ (216,238)
=================
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<PAGE>
Contemporary Color Graphics, Inc.
Statement of Cash Flows For the Year Ended December 31, 1998
Cash Flows From Operating Activities:
Net Income $ 509,602
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 252,070
Changes in Operating Assets and Liabilities:
Accounts Receivable (228,030)
Inventories (71,355)
Prepaid Expenses (14,934)
Accounts Payable 107,306
Accrued Expenses 253,985
Tenant Security Deposit (3,060)
-----------------
Net Cash Provided by Operating Activities 805,584
-----------------
Cash Flows From Investing Activities:
Purchase of Property and Equipment (118,917)
-----------------
Cash Used in Investing Activities (118,917)
-----------------
Cash Flows From Financing Activities:
Payments on Loans Payable (390,607)
Payments on Loans Payable - Officers (4,141)
Distributions to Stockholders (169,546)
-----------------
Net Cash Used in Financing Activities (564,294)
-----------------
Increase in Cash and Cash Equivalents 122,373
Cash and Cash Equivalents at Beginning of Period 145,309
-----------------
Cash and Cash Equivalents at End of Period $ 267,682
=================
Supplemental Disclosure of Cash Flow Information:
Cash paid for Interest $ 158,551
=================
Supplemental Disclosure of Non-Cash Financing and
Investing Activities
Purchase of Property and Equipment $ 510,316
Equipment Loans (391,399)
-----------------
Cash Used for Purchase of Property and Equipment $ 118,917
=================
Loan Payable - Officers reclassified as $ 117,403
=================
Additional Paid-in-Capital
-8-
<PAGE>
CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. The Company
Contemporary Color Graphics, Inc. (the "Company") specializes in the
design and production of high quality lithographic sheet-fed printing,
flexographic label printing, digital pre-press services, and graphic design
work. The Company caters to a wide range of industries, including the music
publishing, cosmetics, pharmaceutical industries, as well as the national credit
card collateral material markets.
Note 2. Summary of Significant Accounting Policies
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less at time of purchase to be cash equivalents.
Use of Estimates:
Preparation of the financial statements in conformity with generally
acceptedaccounting principles requires management to make estimates and
assumptions that affect the amounts required in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Major Customers:
Sales activity with one customer accounted for approximately $1,176,000 or 15.5%
of sales for the year ended December 31, 1998. At December 31, 1998, this
customer had an accounts receivable balance of approximately $11,000. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. Historically, credit losses have not been significant.
Inventories:
Inventories are stated at the lower of cost or market, by the first-in,
first-out method of valuation.
Property and Equipment:
Property and equipment are recorded at cost. Maintenance and repairs are charged
to earnings as incurred. Major renewals and betterments are capitalized. When
assets are sold, retired or otherwise disposed of, the applicable costs and
allowances are eliminated from the respective accounts and the resulting gain or
loss is recognized. Provision for depreciation and amortization is made by
straight-line and accelerated methods on the basis of the estimated useful lives
of the related assets.
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which requires impairment
losses to be recognized for long-lived assets used in operations when indicators
of impairments are present and the undiscounted cash flows are not sufficient to
recover the assets carrying amount. The impairment loss is measured by comparing
the fair value of the asset to its carrying amount.
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CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Income Taxes:
The Company has elected to be taxed under the provisions of subchapter "S" of
the Internal Revenue Code and comparable state regulations. Under these
provisions, the Company does not pay federal or state corporate income taxes on
its taxable income. Instead, the stockholders report their proportionate share
of the Company's taxable income (loss) and tax credits on their personal income
tax returns.
Comprehensive Income:
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This Statement requires that all items recognized under
accounting standards as components of comprehensive income be reported in annual
financial statements and be displayed with the same prominence as other items in
annual financial statements. Other comprehensive income may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as available for
sale. The Company has no elements of other comprehensive income other than net
income, therefore, comprehensive income equals reported net income
Note 3. Inventories
Inventories comprise the following at December 31, 1998:
Work in Process $136,362
Raw Materials 80,612
------
$216,974
========
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CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Note 4. Property and Equipment
Property and equipment comprise the following at December 31, 1998:
Machinery and Equipment $1,822,499
Leasehold Improvements 231,574
Furniture and Fixtures 158,382
------------
2,212,455
Less: Accumulated Depreciation and Amortization (975,949)
--------
$1,236,506
==========
Depreciation and amortization expense for property and equipment was $252,070
for the year ended December 31, 1998.
Note 5. Loans Payable
Long-term debt is summarized as follows:
Installment notes payable in monthly installments of $12,493 with
interest at 10.702% per annum through March 2002 (Six Color
Mitsubishi Press). The note is secured by related equipment and
personally guaranteed by the stockholders. $409,997
Installment notes payable in monthly installments of $790 with
interest at 11.75% per annum through August 1999 (Misomex
Machine). The note is secured by related equipment and personally
guaranteed by the stockholders. 5,730
Installment notes payable in monthly installments of $10,200 with
interest at 10.25% per annum through August 2001 (Imaging
Equipment). The note is secured by related equipment and
personally guaranteed by the stockholders. 291,935
Installment notes payable in monthly installments of $3,894 with
interest at 7.00% per annum through January 1999 (PC Color). The
note is secured by related equipment and personally guaranteed by
the stockholders. 3,872
Installment notes payable in monthly installments of $2,565 with
interest at 9.76% through March 1999 (Dolev 200). The note is
secured by the related equipment and personally guaranteed by the
stockholders. 7,637
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<PAGE>
CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Installment notes payable in monthly installments of $3,135 with
interest at 9.290% per annum through September 2002 (Fleet Bank
Term Loan). The note is secured by Receivables, Inventory and
personally guaranteed by the stockholders. $121,413
Installment notes payable in monthly installments of $4,760 with
interest at 9.81% per annum through May 1999 (Fleet Bank
Construction Loan). The note is secured by Receivables, Inventory
and guaranteed by the stockholders. 22,750
Installment notes payable in monthly installments of $1,333
through February 2000 (Toshiba Telephone System). The note is
secured by related equipment and personally guaranteed by
stockholders. 20,001
Installment notes payable in monthly installments of $5,768 with
interest at 9.285% per annum through December 2004 (Five Color
Omni Press). The note is secured by the related equipment and
personally guaranteed by the stockholders. 317,479
Notes payable, with interest only payments at 10% per annum
(Fleet Bank Credit Line). The note is secured by the related
equipment and personally guaranteed by the stockholders. 150,000
-------
$1,350,814
==========
Interest expense for the year ended December 31, 1998 was $158,551.
Aggregate maturities of long-term debt are as follows:
Year Ending December 31:
1999 483,306
2000 310,954
2001 308,473
2002 122,208
2003 60,041
Thereafter 65,832
-----------
1,350,814
=========
During 1998, a long-term loan payable to the stockholders of the
Company was reclassified as additional paid-in-capital.
-12-
CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(CONTINUED)
Note 6. Commitments and Contingencies
The Company leases its manufacturing and office space.All leases
expire on July 14, 2003.
As of December 31, 1998, the minimum annual rental commitment under
the aforementioned leases approximates:
Year Ending December 31:
1999 $161,000
2000 166,000
2001 171,000
2002 176,000
2003 181,000
Thereafter 101,000
-------
$956,000
========
Rent expense for the year ended December 31, 1998 was $191,079.
Note 7. Defined Contribution Retirement Plan
The Company adopted the Contemporary Color Graphics 401(k) Profit Sharing Plan,
a defined contribution retirement plan which covers all eligible employees.
Participants may contribute up to 20% of their salary, as defined. The Company
does not make contributions to the plan. A determination letter on the plan has
not yet been received from the Internal Revenue Service.
Note 8. Related Party Transactions
The Company has transactions in the normal course of business with entities
owned by certain of the Company's stockholders. Sales to these entities totaled
approximately $720,000 for the year ended December 31, 1998. As of December 31,
1998, the balance due from related entities totaled approximately $83,000.
Note 9. Prior Period Adjustment
The Company's financial statements as of December 31, 1997 have been restated to
reflect the correction of the prior years overstatement of assets and
understatement of liabilities. The Company's retained earnings have been
adjusted as follows:
Overstatement of Accounts Receivable $216,720
Understatement of Accounts Payable 139,380
Understatement of Accrued Expenses 242,229
-------
$608,329
========
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DISC GRAPHICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
give effect to the acquisition (the "Acquisition") of substantially all of the
assets and certain liabilities of Contemporary Color Graphics, Inc. ("CCG") by
Disc Graphics, Inc. (the "Company") pursuant to the Asset Purchase Agreement
dated as of July 1, 1999 (the "Agreement") which was included as an exhibit to
the Company's Current Report on Form 8-K dated July 1, 1999 which was filed with
the Securities and Exchange Commission (the "Commission") on July 16, 1999.
These unaudited pro forma consolidated financial statements are based
on the estimates and assumptions set forth below and in the notes to such
statements which include pro forma adjustments. The unaudited pro forma
consolidated financial statements were prepared utilizing the historical
financial statements of the Company and CCG and should be read in conjunction
with the Company's Annual Report on Form 10-K for the period ended December 31,
1998 and the Company's Quarterly Reports on Form 10-Q for the first and second
quarters of fiscal 1999, each of which were filed with the Commission. The pro
forma adjustments are based upon available information as well as assumptions
that management believes are reasonable.
The Acquisition was accounted for using the purchase method of
accounting and in accordance with generally accepted accounting principles.
Pursuant to the Agreement, the Company acquired substantially all of the assets
and certain liabilities of CCG as of July 1, 1999. The allocation of the
purchase price has been based on management's best estimate of the fair value of
the assets and liabilities assumed as of July 1, 1999.
-14-
DISC GRAPHICS, INC. AND CONTEMPORARY COLOR GRAPHICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
The following unaudited pro forma consolidated balance sheet reflects,
on a purchase basis of accounting, the unaudited consolidated balance sheet of
the Company and its subsidiaries and the unaudited balance sheet of CCG as of
June 30, 1999. The unaudited pro forma consolidated information is not
necessarily indicative of the actual or future financial position that would
have occurred or will occur as a result of the Acquisition.
-15-
<PAGE>
<TABLE>
Disc Graphics, Inc. and Contemporary Color Graphics, Inc.
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1999
Historical Pro Forma
---------------------------- --------------------------------
Disc Graphics CCG Adjustments Consolidated
---------------------------- --------------------------------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $583,282 113,509 (70,000) (b) $626,791
Accounts receivable, net 10,643,673 1,056,975 - 11,700,648
Inventories 2,602,269 190,841 - 2,793,110
Prepaid expenses and other current assets 400,403 59,890 (19,600) (a) 440,693
Deferred Income Tax 963,000 - - 963,000
------------- ------------- ------------- -------------
Total current assets 15,192,627 1,421,215 (89,600) 16,524,242
Plant and equipment, net 10,455,134 1,122,773 (114,500) (b) 11,463,407
Cost in excess of assets acquired 1,228,894 - 5,247,300 (b) 6,476,194
Other assets 1,728,886 703,124 296,933 (a/b) 2,728,943
------------- ------------- ------------- -------------
Total assets $28,605,541 3,247,112 5,340,133 $37,192,786
------------- ------------- ------------- -------------
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of equipment notes payable $95,183 - - $95,183
Current Portion, long term debt 67,500 - - 67,500
Current maturities of capital lease 1,497,596 659,208 (659,200) (a/c) 1,497,604
obligations
Accounts payable and accrued expenses 5,437,736 2,082,499 (807,500) (a) 6,712,735
Income Taxes Payable 628,433 - - 628,433
------------- ------------- ------------- -------------
Total current liabilities 7,726,448 2,741,707 (1,466,700) 9,001,455
Long-term debt, less current maturities 511,875 192,403 7,119,800 (a/b/c) 7,824,078
Equipment notes payable, less current maturities 15,454 - - 15,454
Capitalized lease obligations payable, less -
current maturities 4,087,635 624,035 (624,000) ( c) 4,087,670
Deferred income taxes 1,323,000 - - 1,323,000
------------- ------------- ------------- -------------
Total liabilities 13,664,412 3,558,145 5,029,100 22,251,657
Stockholders' equity:
Preferred stock - - - -
Common stock 55,488 - - 55,488
Additional paid-in capital 5,009,671 35,300 (35,300)(a) 5,009,671
Retained earnings 9,907,576 (346,333) 346,333 (a) 9,907,576
------------- ------------- ------------- -------------
14,972,735 (311,033) 311,033 14,972,735
Less:
Treasury Stock (31,606) - - (31,606)
------------- ------------- ------------- -------------
Total stockholders' equity 14,941,129 (311,033) 311,033 14,941,129
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $28,605,541 3,247,112 5,340,133 $37,192,786
============= ============= ============== =============
</TABLE>
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DISC GRAPHICS, INC. AND CONTEMPORARY COLOR GRAPHICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
AS OF JUNE 30, 1999
The following Unaudited Pro Forma Consolidated Statements of Income
combines, on a purchase basis of accounting, the Unaudited Consolidated
Statements of Income of the Company and the Statement of Income of CCG for the
six months ended June 30, 1999. The Unaudited Pro Forma Consolidated Information
is not necessarily indicative of the actual or future financial position that
would have occurred or will occur as a result of the Acquisition.
-17-
<PAGE>
<TABLE>
Disc Graphics, Inc. and Contemporary Color Graphics, Inc.
Unaudited Pro Forma Consolidated Income Statement as of June 30, 1999
Historical Pro Forma
-------------------------------- -----------------------------------
Disc Graphics CCG Adjustments Consolidated
-------------------------------- -------------- ---------------
<S> <C> <C> <C>
Sales $29,602,670 3,617,954 - $ 33,220,624
Cost of sales 22,087,438 2,724,159 - 24,811,597
--------------- -------------- -------------- ---------------
Gross profit 7,515,232 893,795 - 8,409,027
Operating expenses:
Selling and shipping expenses 3,061,675 270,355 - 3,332,030
General and administrative expenses 2,556,046 783,268 19,900 (h/i) 3,359,214
--------------- -------------- -------------- ---------------
Operating income (loss) 1,897,511 (159,828) (19,900) 1,717,783
Other Income(expense) - 36,472 - 36,472
Interest expense 231,515 - 189,000 (j) 420,515
--------------- -------------- -------------- ---------------
Income (loss) before provision for
income taxes 1,665,996 (123,356) (208,900) 1,333,740
--------------- -------------- -------------- ---------------
Provision for income taxes 665,000 - (132,000) (k) 533,000
--------------- -------------- -------------- ---------------
Net income (loss) $1,000,996 (123,356) ($76,900) $800,740
=============== ============== ============== ===============
Net income per share:
Basic $0.18 $0.15
=============== ===============
Diluted $0.18 $0.14
=============== ===============
Weighted average shares outstanding:
Basic 5,518,370 5,518,370
=============== ===============
Diluted 5,549,510 5,549,510
=============== ===============
</TABLE>
-18-
<PAGE>
DISC GRAPHICS, INC. AND CONTEMPORARY COLOR GRAPHICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
AS OF DECEMBER 31, 1998
The following Unaudited Pro Forma Consolidated Income Statement
combines, on a purchase basis of accounting, the Consolidated Statement of
Income of the Company and the Statement of Income of CCG for the twelve months
ended December 31. 1998. The Pro Forma Consolidated Income Statement gives
effect to the acquisition of CCG as if it had occurred on January 1, 1998. The
Pro Forma Consolidated Information is not necessarily indicative of the actual
or future financial position that would have occurred or will occur as a result
of the Acquisition.
-19-
<TABLE>
Disc Graphics, Inc. and Contemporary Color Graphics, Inc.
Unaudited Pro Forma Consolidated Income Statement as of December 31, 1998
Historical Pro Forma
--------------------------------- ------------------------------------
Disc Graphics CCG Adjustments Consolidated
--------------------------------- --------------- ---------------
<S> <C> <C> <C>
Sales $58,881,533 7,467,992 - $66,349,525
Cost of sales 43,082,081 5,462,397 - 48,544,478
--------------- --------------- --------------- ---------------
Gross profit 15,799,452 2,005,595 - 17,805,047
Operating expenses:
Selling and shipping expenses 6,018,562 442,420 - 6,460,982
General and administrative expenses 4,531,620 1,084,328 354,500 (d/e) 5,970,448
--------------- --------------- --------------- ---------------
Operating income (loss) 5,249,270 478,847 (354,500) 5,373,617
Other Income - 80,282 - 80,282
Interest expense 633,512 - 318,600 (f) 952,112
Gain on disposal of equipment 149,669 - - 149,669
--------------- --------------- --------------- ---------------
Income (loss) before provision for
for income taxes 4,765,427 559,129 (673,100) 4,651,456
Provision for income taxes 1,901,000 - (40,000) (g) 1,861,000
--------------- --------------- --------------- ---------------
Net income (loss) $2,864,427 559,129 (633,100) $2,790,456
=============== =============== =============== ===============
Net income per share:
Basic $0.52 $0.51
=============== ===============
Diluted $0.52 $0.51
=============== ===============
Weighted average shares outstanding:
Basic 5,474,444 5,474,444
=============== ===============
Diluted 5,492,050 5,492,050
=============== ===============
</TABLE>
-20-
<PAGE>
DISC GRAPHICS, INC. AND CONTEMPORARY COLOR GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements of the Company and CCG
give effect to the following pro forma adjustments and assumptions:
Adjustments for Pro Forma Consolidated Balance Sheet dated June 30, 1999:
(a) The Company acquired substantially all the assets and certain liabilities of
CCG; an adjustment has been made to eliminate the assets and liabilities which
were not acquired by the Company in accordance with the Agreement.
(b) This adjustment records the purchase price of the Acquisition. The purchase
price consisted of $3,500,000.00 in cash, a promissory note in the amount of
$1,000,000.00, a supplemental promissory note in the amount of $1,000,000.00,
convertible debentures in the amount of $600,000.00 and assumed debt of
approximately $1,300,000.00. Principal on the promissory note must be paid in
three annual installments commencing on August 1, 2000. Interest at a rate of
8.33% per annum on the principal balance of the note must be paid quarterly in
arrears commencing on November 1, 1999. Principal on the supplemental note must
be paid in two annual installments commencing on August 1, 2003. Interest at a
rate of 8.33% per annum on the unpaid principal balance of the supplemental note
must be paid on each principal payment date. Principal on the convertible
debentures must be paid in three annual installments commencing on August 1,
2000. Interest at a rate of 8.33% per annum on the unpaid principal balance of
the debentures must be paid quarterly in arrears commencing on November 1, 1999.
CCG has the right to convert the debentures into shares of the Registrant's
common stock, par value $0.01 per share, not less than 30 days before any
principal or interest payment date at a rate of one share for every $5.50 of
principal or interest, as applicable. Common stock issuable under convertible
debentures are not included in earnings per share since the conversion price of
the debentures exceeded the market price during the period presented. Payment on
the promissory note, supplemental note and convertible debenture is secured by a
subordinated lien in favor of CCG on all of the assets acquired from CCG. The
promissory note, the supplemental promissory note, the convertible debentures,
the cash and the assumed debt are subject to adjustments as set forth in the
Asset Purchase Agreement.
Purchase Price
Cash $3,500,000
Promissory note 1,000,000
Supplemental Promissory note 1,000,000
Debenture 600,000
Transaction costs 70,000
-------------
6,170,000
=========
CCG's net assets, at cost 37,200
Fair value adjustment of
plant and equipment (114,500)
--------
Net Assets (77,300)
------------
6,247,300
Allocated to
Covenant not to compete 1,000,000
---------
Excess of cost over fair value of business acquired $5,247,300
==========
(c) This adjustment records the repayment of CCG's bank line of credit and notes
payable to various financial institutions. The cash used to repay CCG's bank
line or credit and notes payable was obtained from borrowings under the
Company's Financing Agreement with KeyBank National Association.
Adjustments for Pro Forma Consolidated Income Statement for the year ended
December 31, 1998:
-21-
<PAGE>
(d) This adjustment reflects the incremental decrease in general and
administrative expenses due to the Employment Agreements entered into between
the Company and the former principals of CCG.
(e) This adjustment records the amortization over a period of 15 years of the
excess of cost over the current market value of net assets acquired. The Company
estimates 15 years as the useful life of this intangible asset. It also records
the amortization of the covenant not to compete over a period of five (5) years.
(f) This adjustment records the increase in interest expenses related to the pro
forma adjustments (b) and (c). It also reflects the elimination of CCG's
interest expense as it relates to the pro forma adjustments (b) and (c). The
elimination of the CCG's interest expense related to its bank line of credit and
notes payable was offset by the Company's interest expense related to cash
obtained from borrowings under the Company's Financing Agreement with KeyBank
National Association for the payment of the purchase price and the repayment of
CCG's bank line of credit and notes payable. The adjustment has been calculated
on the basis of the interest rate available for borrowing under the Company's
Financing Agreement with KeyBank National Association as of June 30, 1999.
The Company
Purchase price of $3,500,000 at
6.31% per annum $220,900
Repayment of CCG's debt assumed
$1,212,233 at 6.31% per annum 76,500
Promissory note 83,300
Supplemental note 83,300
Debentures 50,000
Reduction of interest expense (195,400)
-----------
Total increase in interest expense $318,600
(g) This adjustment records the income tax effect on the consolidated financial
results using the Company's historical effective tax rate.
Adjustments for Pro Forma Consolidated Income Statement for the six month period
ended June 30, 1998:
(h) This adjustment reflects the incremental decrease in general and
administrative expenses due to the Employment Agreements entered into between
the Company and the former principals of CCG.
(i) This adjustment records the amortization over a period of 15 years of the
excess of cost over the current market value of net assets acquired. The Company
estimates 15 years as the useful life of this intangible asset. It also records
the amortization of the covenant not to compete over a period of five (5) years.
(j) This adjustment records the incremental increase in interest expense related
to the pro forma adjustments (b) and (c). It also reflects the elimination of
CCG's interest expense as it relates to the pro forma adjustments (b) and (c).
The elimination of the CCG's interest expense related to its bank line of credit
and notes payable was offset by the Company's interest expense related to cash
obtained from borrowings under the Company's Financing Agreement with KeyBank
National Association for the purchase price and the repayment of CCG's bank line
of credit and notes payable. The adjustment has been calculated on the basis of
the interest rate available for borrowing under the Company's Financing
Agreement with KeyBank National Association as of June 30, 1999.
The Company
Purchase Price of $3,500,000 at
at 6.31% per annum $110,400
Repayment of CCG's debt assumed
$1,212,233 at 6.31% per annum 38,200
-22-
Promissory Note 41,700
Supplemental note 41,700
Debentures 25,000
Reduction of interest expense (68,000)
----------
Total increase in interest expense $189,000
========
(k) This adjustment records the income tax effect on the consolidated financial
results using the Company's historical effective tax rate.
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