UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22834
SUCCESSORIES, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 36-3760230
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2520 Diehl Road
Aurora, Illinois 60504
(Address of principal executive offices) (Zip Code)
(630) 820-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Registrant had 6,767,250 shares of common stock, $.01 par
value, outstanding as of December 2, 1998.
<PAGE> 1
SUCCESSORIES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statement of Stockholders'
Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
INDEX TO EXHIBITS 19
<PAGE> 2
PART I. FINANCIAL INFORMATION
SUCCESSORIES, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,648,000 $ 1,751,000
Accounts and notes receivable, net 4,830,000 7,330,000
Inventories, net 13,116,000 9,749,000
Prepaid catalog expenses 1,256,000 1,439,000
Other prepaid expenses 1,444,000 1,307,000
----------- -----------
Total current assets 22,294,000 21,576,000
Property and equipment, net 10,164,000 10,292,000
Notes receivable, net 266,000 292,000
Deferred financing costs 422,000 482,000
Deferred income taxes 5,339,000 5,339,000
Intangibles and other assets, net 2,228,000 2,600,000
---------- -----------
TOTAL ASSETS $40,713,000 $40,581,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,016,000 $ 5,445,000
Accounts payable 8,519,000 4,629,000
Accrued expenses 1,850,000 1,160,000
------------ -----------
Total current liabilities 17,385,000 11,234,000
Long-term debt 5,612,000 6,561,000
------------ -----------
Total liabilities 22,997,000 17,795,000
----------- -----------
Minority interest in subsidiaries 48,000 352,000
-------------- -----------
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,767,230 and 6,758,577 shares issued
and outstanding, respectively 68,000 68,000
Common stock warrants 1,584,000 1,584,000
Notes receivable from stockholders (273,000) (273,000)
Additional paid-in capital 26,158,000 26,127,000
Accumulated deficit (9,806,000) (4,999,000)
Foreign currency translation adjustment (63,000) (73,000)
---------- -----------
Total stockholders' equity 17,668,000 22,434,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,713,000 $40,581,000
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 3
SUCCESSORIES, INC.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net product sales $12,400,000 $13,706,000 $36,167,000 $38,595,000
Cost of goods sold 5,894,000 6,034,000 16,251,000 17,384,000
----------- ----------- ----------- -----------
Gross profit on product sales 6,506,000 7,672,000 19,916,000 21,211,000
Fees, royalties and other income 468,000 394,000 1,164,000 1,004,000
----------- ---------- ---------- -----------
Gross margin 6,974,000 8,066,000 21,080,000 22,215,000
Operating expenses 8,089,000 7,192,000 24,894,000 22,476,000
---------- ---------- ----------- -----------
(Loss)/income from operations (1,115,000) 874,000 (3,814,000) (261,000)
---------- ---------- ----------- -----------
Other income (expense):
Interest expense (380,000) (338,000) (1,051,000) (1,331,000)
Minority interest in
subsidiaries (12,000) (34,000) (22,000) (112,000)
Other, net 34,000 20,000 80,000 (50,000)
---------- ---------- ----------- ----------
Total other expense (358,000) (352,000) (993,000 (1,493,000)
---------- ---------- ----------- ----------
(Loss)/income before
income tax (1,473,000) 522,000 (4,807,000) (1,754,000)
Income tax - - - -
---------- --------- ------------ ----------
Net (loss)/income $(1,473,000) $ 522,000 $(4,807,000)$(1,754,000)
----------- ---------- ------------ -----------
(Loss)/income per share:
Basic and diluted $ ( .21) $ .07 $ ( .71) $ (.36)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>4
SUCCESSORIES, INC.
Consolidated Statement Of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Common
Common Stock Paid-In Stock
Shares Amount Capital Warrants
------------------- ---------- --------
<S> <C> <C> <C> <C>
Balance, January 31, 1998 6,758,577 $68,000 $26,127,000 $1,584,000
Net loss for the period
Foreign currency translation
adjustment
Common stock transactions:
Sales of common shares 8,653 31,000
Balance, October 31, 1998 6,767,230 $68,000 $26,158,000 $1,584,000
</TABLE>
<TABLE>
<CAPTION>
Foreign
Notes Currency
Receivable Accumulated Translation Stockholders'
From Officers Deficit Adjustment Equity
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 31, 1998 $(273,000) $(4,999,000) $(73,000) $22,434,000
Net loss for the period (4,807,000) (4,807,000)
Foreign currency translation
adjustment 10,000 10,000
Common stock transactions:
Sales of common shares 31,000
Balance, October 31, 1998 $(273,000) $(9,806,000) $(63,000) $17,668,000
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
SUCCESSORIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31, November 1,
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,807,000) $(1,754,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,106,000 1,753,000
Amortization of debt discount 86,000 525,000
(Gain)/loss on sale of property and equipment (83,000) 37,000
---------- ---------
(2,698,000) 561,000
Changes in operating assets and liabilities:
Accounts and notes receivable 2,978,000 (2,743,000)
Inventories (3,367,000) (1,352,000)
Prepaid catalog expenses 183,000 890,000
Other prepaid expenses (448,000) (743,000)
Deferred financing costs 60,000 (467,000)
Accounts payable 3,890,000 (14,000)
Accrued expenses 707,000 815,000
Minority interest (304,000) (163,000)
Other 89,000 737,000)
--------- --------
Net cash provided by (used in) operating activities 1,090,000 (3,953,000)
--------- ----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 45,000 -
Purchases of property and equipment (1,805,000) (2,946,000)
---------- -----------
Net cash used in investing activities (1,760,000) (2,946,000)
---------- -----------
Cash flows from financing activities:
Proceeds from sales of common stock 31,000 203,000
Preferred stock dividends - (153,000)
Redemption of Series B preferred stock - (500,000)
Net borrowings on revolving credit loan 1,351,000 5,928,000
Proceeds from long-term debt - 8,981,000
Repayments of long-term debt (815,000) (7,139,000)
---------- -----------
Net cash provided by financing activities 567,000 7,320,000
---------- -----------
Net (decrease)/increase in cash (103,000) 421,000
Cash and cash equivalents, beginning of period 1,751,000 1,173,000
---------- -----------
Cash and cash equivalents, end of period $ 1,648,000 $ 1,594,000
---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
SUCCESSORIES, INC.
Notes To Consolidated Financial Statements
(Unaudited)
NOTE 1. DESCRIPTION OF THE BUSINESS
Successories, Inc. (formerly Celex Group, Inc.) and its subsidiaries (the
"Company") design, manufacture and market proprietary and licensed products
for business, personal motivation and golf enthusiasts. The Company considers
itself a single line of business with products that are marketed primarily
under the Successories, Winners Collection, British Links and The Golf Company
from Golf Digest trade names through direct marketing (catalog, electronic
commerce and telemarketing), retail (Company-owned stores) and wholesale
distribution (including sales to franchisees) channels. The Company operates
a chain of Successories retail stores located primarily in the United States.
The Company also operates a franchising program whereby it sells franchises to
market the Company's products under the Successories trademark.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared, without
audit, in accordance with generally accepted accounting principles for interim
financial information and in conjunction with the rules and regulations of the
Securities and Exchange Commission. 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 only of normal recurring matters) considered
necessary for a fair presentation have been included. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The Company's fiscal year ends on the Saturday closest to January 31.
References to the three and nine months ended October 31, 1998 and November 1,
1997 refer to the thirteen and thirty-nine weeks ended on the dates indicated.
The results of operations for the nine months ended October 31, 1998 are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company's
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 31, 1998.
NOTE 3. NEW ACCOUNTING PRONOUNCEMENT
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income and its components.
Comprehensive income represents the change in equity during a period from
transactions and other events from nonowner sources. Comprehensive income
consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
October 31, November 1,
1998 1997
---------- ----------
<S> <C> <C>
Net loss $(4,807,000) $(1,754,000)
Foreign currency translation adjustment 10,000 (66,000)
------------ ------------
Comprehensive loss $(4,797,000) $(1,820,000)
</TABLE>
The adoption of this statement does not impact the Company's financial
position, results of operations or cash flows.
<PAGE> 7
NOTE 4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
<S> <C> <C>
Finished goods $ 9,451,000 $ 6,690,000
Raw materials 3,793,000 3,187,000
---------- ----------
13,244,000 9,877,000
Less reserve for obsolescence (128,000) (128,000)
---------- ----------
$13,116,000 $ 9,749,000
</TABLE>
NOTE 5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
---------- -----------
<S> <C> <C>
Bank borrowings:
Term loan, net of debt discount of
$348,000 and $401,000 $ 6,340,000 $ 6,849,000
Revolving credit loan 5,798,000 4,447,000
Fixed rate loan, net of debt discount of
$213,000 and $246,000 287,000 254,000
Subordinated note to former owners of
British Links Golf Classics, Inc. - 155,000
Capital lease obligations 203,000 301,000
----------- ----------
12,628,000 12,006,000
Less current portion (7,016,000) (5,445,000)
----------- -----------
Long-term debt $ 5,612,000 $ 6,561,000
</TABLE>
On June 20, 1997, the Company entered into a new credit facility with a bank.
The new facility is comprised of a $7.5 million term loan and a revolving
credit loan that provides for maximum borrowings of $6 million from January
through June and $9 million from July through December. Borrowings under the
revolving credit loan are limited to 85% of eligible receivables plus 50% of
eligible inventory, as defined, provided that from February through April
borrowings against eligible inventory are limited to $3 million. A commitment
fee of .5% is payable on the daily unused amount of the maximum revolving
credit commitment. The facility expires in June 2003 and borrowings under the
facility are secured by substantially all the assets of the Company. The
interest rates on the term loan and revolving credit loan borrowings fluctuate
based on the margin ratio, as defined, to no higher than prime plus 1.25% and
.75%, respectively. The term loan is payable in quarterly installments of
$125,000 through June 1, 1998, $312,500 from September 1, 1998 through June 1,
2000, and $375,000 thereafter. Prepayments on the loans are required in
certain cases including, among others, equity offerings and asset
dispositions. Further, the Company must annually prepay the loans in an
amount equal to 60% of excess cash flow, as defined. As of October 31, 1998,
available borrowings on the revolving credit loan were $1,291,000. Warrants
for 150,000 shares of the Company's common stock were issued to the bank as
part of this agreement. These warrants were issued at exercise prices ranging
from $6.19 to $9.73, and currently exercisable at $2.00.
In July 1997, the agreement for the credit facility was amended to include an
additional $500,000 fixed rate loan for the purpose of redeeming a portion of
the Series B cumulative convertible preferred stock. The loan bears interest
at 12% and is due in June 2003. Warrants for an additional 72,464 shares were
issued to the bank in connection with this amendment at an exercise price of
$6.90, and currently exercisable at $2.00.
<PAGE> 8
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on
capital expenditures and additional indebtedness, and restrictions on the
payment of dividends. On May 14, 1998, the agreement was amended to waive the
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
interest coverage ratio covenants for the year ended January 31, 1998, and
adjust certain other covenants. The amended agreement requires that (i)
EBITDA, which is based on a rolling four quarter period, may not be less than
$4 million for the four quarters ended May 2, 1998, and increases each
subsequent quarter to $6.8 million for the four quarters ended February 3,
2001 and each quarter thereafter and (ii) the interest coverage ratio, as
defined, may not be less than 3.0 to 1.0 from May 2, 1998 through October 31,
1998, 4.0 to 1.0 at January 30, 1999, 4.5 to 1.0 at May 1, 1999 and July 31,
1999, and 5.0 to 1.0 thereafter. In addition, on September 1, 1998, the
agreement was amended to waive the EBITDA covenant and two other related
covenants for the second and third quarters of fiscal 1998 and the interest
coverage ratio for the second quarter of fiscal 1998, provided that EBITDA for
the third quarter of fiscal 1998 is not less than $1.6 million. In
conjunction with the 1998 amendments, the exercise prices of the 222,464
warrants previously issued to the bank were reduced to $3.00 and their
expiration dates were extended an additional two years. Further, on December
11, 1998, the Company obtained a waiver from the bank for the EBITDA and
interest coverage covenant for the third quarter of fiscal 1998. In
conjunction with the waiver, the exercise prices of the 222,464 warrants
previously issued to the bank were reduced to $2.00. Based on year-to-date
operating results, there is a likelihood that the Company will not be in
compliance with certain financial covenants for the period ending January 30,
1999. The Company is engaged in discussions with the bank to obtain a waiver,
if necessary, for non-compliance with any covenants for the period ending
January 30, 1999 and also to amend the financial covenants in the credit
agreement for periods ending after January 30, 1999, as needed.
In connection with the acquisition of British Links Golf Classics, Inc., the
Company originally issued subordinated promissory notes aggregating $400,000.
The final settlement of the acquisition reduced the amount due on the
subordinated notes to $355,000. The notes are payable in three installments:
$100,000 was paid on May 1, 1997 and September 20, 1997, and the remaining
$155,000 was paid on September 20, 1998. Interest is payable at the prime
rate.
The stock options and warrants issued in conjunction with the new credit
facility and certain other financing transactions were assigned a fair value
using the Black-Scholes option pricing model. The fair value of the options
and warrants have been reflected as a discount on the debt and are being
amortized as interest expense over the terms of the related debt. Interest
expense related to these stock options and warrants amounted to $86,000 and
$525,000 for the nine months ended October 31, 1998 and November 1, 1997,
respectively.
The weighted average interest rate on borrowings outstanding as of October 31,
1998 and January 31, 1998 was 9.4% and 9.6%, respectively.
NOTE 6. SALE OF COMPANY-OWNED RETAIL STORES
In 1998, the Company converted four of its company-owned retail stores to
franchised stores. The total purchase price for the sale of the net assets
was $497,000, $45,000 was paid in cash and the balance of $452,000 was
financed with promissory notes. The payments on the promissory notes are
being made monthly from July 1998 through October 2002. The interest rates on
the promissory notes range from 7% to 9%. The gain recorded on the sale was
$159,000 for the three months ended October 31, 1998.
<PAGE> 9
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the statements of cash flows are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
October 31, November 1,
1998 1997
---------- -----------
<S> <C> <C>
Cash paid during the period for:
Income taxes $ 26,000 $ --
Interest 889,000 612,000
Non-cash investing activities:
Notes receivable issued on sale of
property and equipment 452,000 --
</TABLE>
NOTE 8. EARNINGS (LOSS) PER SHARE
Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The computations of basic
and diluted loss per share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, November 1 October 31, November 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Basic and diluted (loss)/income per share:
Net (loss)/income $(1,473,000) $522,000 $(4,807,000) $(1,754,000)
Preferred stock dividends
and accretion - - - (541,000)
------------ -------- ------------ -----------
(Loss)/income available to common
stockholders $(1,473,000) $522,000 $(4,807,000) $(2,295,000)
------------ -------- ------------ -----------
Weighted-average shares 6,769,000 7,733,000 6,766,000 6,284,000
------------ -------- ------------ -----------
Basic and diluted (loss)/
income per share $ (.21) $ .07 $ (.71) $ ( .36)
------------ -------- ------------ -----------
</TABLE>
The diluted computations did not assume the exercise of stock options and
warrants, nor the conversion of preferred stock due to their antidilutive
effect on the loss per share.
NOTE 9. CHANGE IN ESTIMATE
On November 23, 1998, Successories Pty Ltd, which holds the exclusive license
to distribute the Company's products in Australia and New Zealand was placed
into voluntary administration in Australia. At the time of administration,
the licensee owed the Company approximately $514,000, consisting mostly of
notes receivable related to licensing fees, trade debts, and accrued
royalties. Although the Company believes that it can ultimately recover a
portion of these receivables due to its rights under the license, an
additional $400,000 has been added to the Company's bad debt reserves as of
October 31, 1998.
<PAGE> 10
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company is currently engaged in legal proceedings with its former
president and chief executive officer. The former president alleges and seeks
lost compensation and benefits due and owing to him from the Company in an
amount claimed to be in excess of $400,000. The Company has responded to the
claim with what the Company believes is a meritorious defense. The
proceedings are in the early stages of discovery and no hearing date or place
has been scheduled. Management believes that the financial impact, if any, of
this litigation is not currently predictable.
In a related matter, the Company filed a complaint on December 9, 1998,
against its former president. The Company alleges non-payment of principal
and interest due on a promissory note executed by the former president. The
Company seeks judgement against him in the principal amount of $108,000 plus
interest at a rate of 7% through June 30, 1998, and thereafter at a rate of
10%, together with costs and attorney fees.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the consolidated financial statements and notes thereto
included elsewhere in this Report.
Successories, Inc. is a direct mail catalog company, specialty retailer and
wholesaler that designs, assembles and markets a diverse range of motivational
and self-improvement products, many of which are the Company's own proprietary
designs. The Company's products include distinctive lines of wall decor,
desktop art, books, audio tapes, personalized gifts and awards, greeting cards
and mugs. In addition, the Company sells other motivational products supplied
by third parties. In-house designers create proprietary art work and designs
that can be used in conjunction with a wide variety of products. The Company
will also customize its products to fulfill customers' special needs.
The Company's products are marketed primarily under its Successories and
Winners Collection trade names through direct marketing (catalog, electronic
commerce and telemarketing), retail (Company-owned stores) and wholesale
distribution (including sales to franchisees) channels. In October 1996, the
Company acquired the stock of British Links Golf Classics, Inc., a catalog
company selling golf-related gifts, art, wall decor and other collectibles.
In November 1997, the Company executed a license agreement with The New York
Times Company Magazine Group, Inc. to use the names Golf Digest, The Golf
Company, and The Golf Company from Golf Digest in connection with development
of retail locations and a direct mail catalog featuring golf-related wall
decor, gifts and other collectibles.
Although the Company utilizes multiple distribution channels for its products,
the Company's products have similar purposes and uses in each channel of
distribution and similar opportunities for growth. The profitability varies
among products and distribution channels. The Company utilizes its facilities
interchangeably for each distribution channel. Furthermore, the marketing
channels are directed at a single customer base located primarily in the
United States.
For the three and nine months ended October 31, 1998 and November 1, 1997,
direct marketing, retail and wholesale distribution accounted for the
following percentages of the Company's net product sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Direct marketing 50% 46% 56% 49%
Retail 27% 25% 28% 28%
Wholesale distribution* 23% 29% 16% 23%
</TABLE>
- --------------------------------
*Includes sales to franchisees
The gross profit margins for retail sales attributable to Company-owned stores
are slightly lower than for direct marketing due to more non-proprietary
products being sold in the retail stores. The gross profit margin for
wholesale distribution sales, including sales to franchisees, is lower than
the other channels since these sales are generally made at a significant
discount from retail price.
On September 3, 1998, the Company announced that it would focus growth on its
core motivational and self-improvement products and its two most profitable
distribution channels: direct marketing and franchised retail stores. As a
result, the Company plans to sell its golf catalog business and convert up to
33 of its Company-owned retail locations to franchised stores.
<PAGE> 12
RESULTS OF OPERATION
Three Months Ended October 31, 1998, Compared To Three Months Ended
November 1, 1997
Net product sales were $12,400,000 for the quarter ended October 31, 1998,
compared to $13,706,000 for the corresponding quarter ended November 1, 1997.
The $1,306,000 decrease was comprised of a direct marketing sales decrease of
$5,000, or 0.1%, retail sales decrease of $60,000, or 1.7%, and wholesale
distribution sales decrease of $1,241,000, or 30.9%.
Retail sales decreased by 1.7% due to fewer stores in operation in the current
year, offset by an increase in same-store sales of 6.2% as compared to the
same quarter in 1997. The Company operated 40 stores at the end of October
31, 1998 as compared to 48 stores at the end of November 1, 1997. Wholesale
distribution sales decreased 30.9% primarily due to the loss of business from
one major account.
Cost of goods sold, as a percent of net product sales, was 47.5% for the
quarter ended October 31, 1998, compared to 44.0% for the corresponding
quarter in 1997. Cost of goods sold increased by 3.5% primarily due to
planned product promotions pursuant to market testing in the retail and direct
marketing channels in the current year.
Operating expenses increased for the quarter to $8,089,000 from $7,192,000 in
1997. In comparison to the prior year, operating expenses for 1998 include
additional charges of $1,108,000, which are comprised of costs associated with
reduction of corporate personnel of $350,000, provision for bad debt relating
to receivables from the Company's Australian licensee of $400,000, retail store
related expenses of $283,000, and expected real estate costs for the closing of
the Company's Canadian office of $75,000. Excluding the above noted charges,
operating expenses decreased by $211,000 for the quarter and was primarily
attributable to lower advertising costs in 1998.
The net loss of $1,473,000 for the quarter ended October 31, 1998 was less
than the net income of $522,000 for the quarter ended November 1, 1997,
primarily due to lower wholesale distribution sales and additional operating
expenses in 1998.
Nine Months Ended October 31, 1998, Compared To Nine Months Ended
November 1, 1997
Net product sales were $36,167,000 for the nine months ended October 31, 1998,
compared to $38,595,000 for the corresponding nine-months ended November 1,
1997. The $2,428,000 decrease was comprised of direct marketing sales
increase of $1,762,000, or 9.5%, while retail sales decreased $822,000, or
7.5%, and wholesale distribution sales decreased by $3,368,000, or 37.4%.
The 9.5% increase in direct marketing sales was attributable to improved
response rates and marketing strategies associated with the Company's core
customer lists. In 1998 the Company began to increase its direct marketing
customer base through prospective catalog mailings which also contributed to
the sales increase. Retail sales decreased by 7.5% due to fewer stores in
operation in the current year, offset by increase in same-store sales of 3.1%
as compared to the same nine months in 1997. During the current year, the
Company opened five stores, closed nine underperforming stores and converted
four of the Company-owned stores to franchise stores. Wholesale distribution
sales decreased by 37.4% primarily due to the loss of business from three
major accounts.
Cost of goods sold, as a percentage of net product sales, was 44.9% for the
nine months ended October 31, 1998, compared to 45.0% for the corresponding
nine months in 1997.
Operating expenses were $24,894,000 for the nine months ended October 31,
1998, compared to $22,476,000 for the same period in 1997. Operating expenses
for 1998 include additional charges of $1,108,000 related to severance costs,
allowance for receivables from the Company's Australian licensee, retail
store related expenses, and real estate costs for Canadian office closing.
Additional factors affecting the increase include start-up expenses for
European and golf markets, expenses related to post-installation improvements
in the Company's new information systems and expansion of the merchandising
and product development departments.
<PAGE> 13
Interest expense was $1,051,000 for the nine months ended October 31, 1998,
compared to $1,331,000 for the corresponding period in 1997. Included in
interest is the amortization of the debt discount associated with the value of
stock options and warrants issued to certain lenders. This non-cash interest
amounted to $86,000 and $525,000 for the nine-month periods ended October 31,
1998 and November 1, 1997, respectively.
The net loss of $4,807,000 for the nine months ended October 31, 1998 was
greater than the net loss of $1,754,000 for the nine months ended November 1,
1997, primarily due to lower wholesale distribution sales and additional
operating expenses in 1998. Preferred stock dividends and accretion increased
the 1997 loss available to common stockholders by $541,000 to $2,295,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ongoing cash requirements are for working capital, capital
expenditures and debt service. The Company expects to rely on cash generated
from its operations, supplemented by borrowings available on the revolving
credit loan, to fund its cash requirements.
Operating activities provided cash of $1,090,000 for the nine months ended
October 31, 1998 and used cash of $3,953,000 for the corresponding nine-month
period in fiscal 1997. The improvement in the cash flows from operating
activities for 1998 was primarily attributable to a decrease in accounts and
notes receivable, and an increase in accounts payable, offset by the net loss
and increase in inventories.
The decrease in accounts and notes receivable in 1998 primarily reflects the
return of approximately $926,000 of excess merchandise from a wholesale
customer in accordance with their agreement, combined with improved
collections in accounts receivable after a delay in billings in the fourth
quarter of fiscal 1997 due to a system conversion. This return of merchandise
also caused in part the increase in inventories in 1998. Other causes for the
increase in inventories and accounts payable include planned increases in
inventory levels to support the pre-build of wall and desk decor products to
meet the fourth quarter sales demand.
Investing activities utilized cash of $1,760,000 for the nine months ended
October 31, 1998, compared to $2,946,000 for the same period in 1997. Capital
expenditures were the principal use of cash. The Company installed new point-
of-sale computer systems in all of its retail locations in fiscal 1998. The
new systems cost approximately $500,000. Additionally, the Company opened
five Company-owned retail stores in 1998. The Company's credit facility
limits capital expenditures to $2 million for fiscal 1998 and $1 million for
each fiscal year thereafter.
Financing activities provided cash of $567,000 for the nine months ended
October 31, 1998, compared to $7,320,000 for the corresponding period in 1997.
On June 20, 1997 the Company entered into a new credit facility with a bank.
Borrowings on the new facility were the principal financing source of cash in
1998 and 1997. A portion of the funds from the new credit facility were used
to payoff existing debt and redeem a portion of the Series B convertible
preferred stock in 1997.
The credit facility agreement contains, among other provisions, requirements
for maintaining certain earnings levels and financial ratios, limits on
capital expenditures and additional indebtedness, and restrictions on the
payment of dividends. On May 14, 1998, the agreement was amended to waive the
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
interest coverage ratio covenants for the year ended January 31, 1998, and
adjust certain other covenants. The amended agreement requires that (i)
EBITDA, which is based on a rolling four quarter period, may not be less than
$4 million for the four quarters ended May 2, 1998, and increases each
subsequent quarter to $6.8 million for the four quarters ended February 3,
2001 and each quarter thereafter and (ii) the interest coverage ratio, as
defined, may not be less than 3.0 to 1.0 from May 2, 1998 through October 31,
1998, 4.0 to 1.0 at January 30, 1999, 4.5 to 1.0 at May 1, 1999 and July 31,
1999, and 5.0 to 1.0 thereafter. In addition, on September 1, 1998, the
agreement was amended to waive the EBITDA covenant and two other related
covenants for the second and third quarters of fiscal 1998 and the interest
coverage ratio for the second quarter of fiscal 1998, provided that EBITDA for
the third quarter of fiscal 1998 is not less than $1.6 million. In
conjunction with the 1998 amendments, the exercise prices of the 222,464
<PAGE> 14
warrants previously issued to the bank were reduced to $3.00 and their
expiration dates were extended an additional two years. Further, on December
11, 1998, the Company obtained a waiver from the bank for the EBITDA and
interest coverage covenant for the third quarter of fiscal 1998. In
conjunction with the waiver, the exercise prices of the 222,464 warrants
previously issued to the bank were reduced to $2.00. Based on year-to-date
operating results, there is a likelihood that the Company will not be in
compliance with certain financial covenants for the period ending January 30,
1999. The Company is engaged in discussions with the bank to obtain a waiver,
if necessary, for non-compliance with any covenants for the period ending
January 30, 1999 and also to amend the financial covenants in the credit
agreement for periods ending after January 30, 1999, as needed.
At October 31, 1998 available borrowings on the revolving credit loan were
$1,291,000. The Company believes that internally generated funds and the
credit facility will be sufficient to meet its current operating needs and
fund debt service and anticipated capital expenditures for the next year.
Year 2000 Compliance
As is the case with most other companies using computers in their operations,
the Company is in the process of addressing the "Year 2000" problem. The
Company has conducted a review of its information technology ("IT") to
identify those areas that could be affected by the Year 2000 issue. The
Company plans, by December 1998, to have developed a comprehensive, risk-based
plan. This plan will address IT and non-IT systems and products, as well as
dependencies on those with whom the Company does significant business.
The following table reflects the methodology and the completion status of each
phase as it applies to the key IT and non-IT systems and products:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Preparation Surveying Planning Implementation
Financial and
Inventory Systems Complete Complete Complete Est. Q1-1999
Order Entry and
Fulfillment Complete Complete Complete Est. Q1-1999
Telecommunications Complete Complete Complete Complete
LAN/WAN Complete Est. Q1-1999 Est. Q1-1999 Est. Q2-1999
Ancillary Software Complete Est. Q4-1998 Est. Q1-1999 Est. Q1-1999
PC Software
(Non-Financial) Complete Est. Q1-1999 Est. Q1-1999 Est. Q2-1999
Manufacturing
Equipment Est. Q4-1998 Est. Q4-1998 Est. Q1-1999 Est. Q2-1999
Third Party Vendors Est. Q1-1999 Est. Q1-1999 Est. Q2-1999 Est. Q3-1999
</TABLE>
The new order entry, inventory control, manufacturing, fulfillment, financial
and point-of-sale systems are all Year 2000 compatible. The majority of the
work to be completed relates to vendor compliance issues.
Even with the above phases, the Company can not guarantee that its compliant
systems will not encounter difficulties when attempting to interface or
interconnect with third party systems, whether or not those systems are
claimed to be "compliant", and the Company can not guarantee that such failure
to interface or interconnect will not have a materially adverse effect on the
Company's operations. The Company expects to identify any significant vendor-
compliance problems by the second quarter of 1999, and to resolve those issues
by the end of the third quarter 1999. Despite this approach, there can be no
guarantee that the systems of other companies on which the Company is reliant
will be converted timely, or that a failure by another company to convert
would not have a materially adverse effect on the Company.
<PAGE> 15
The Company presently believes, with modification to existing software, the
Year 2000 problem will not pose significant operational risk. While the
Company can not accurately predict a "worst case scenario" with regard to its
Year 2000 issues, the failure by the Company and/or vendors to complete Year
2000 compliance work in a timely manner could have a materially adverse effect
on the Company's operations. The Company is in the process of assessing these
risks and uncertainties and developing appropriate contingency plans and
procedures in an attempt to minimize the effects of such a scenario.
SEASONALITY
The Company generally experiences peak sales in the fourth quarter of its
fiscal year (November through January) due to the holiday season, and its
lowest sales levels in its first and second fiscal quarters (February through
July). The effects of seasonality are greater in the Company's retail
operations than in its direct marketing operations. Most operating expenses
are incurred evenly throughout the year, although some selling and
administrative expenses are variable with sales. The Company's quarterly
operating results may also vary depending upon such factors as the opening of
new stores, converting Company-owned to franchise stores, new catalog
mailings, the timing of new product introductions and promotions by the
Company. The Company's cash requirements generally reach a seasonal peak in
October to finance increased inventory levels needed to meet third and fourth
quarter sales demand.
INFLATION
The Company does not believe that inflation has had a material impact on its
operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements may be deemed to include, among other things,
statements relating to anticipated financial performance, the management team,
management's long-term performance goals, plans to divest the Company's golf
catalog business and convert retail locations to franchised stores, programs
to reduce the Company's costs and enhance asset utilization, efficiencies
realized from new systems, the Company's generation of funds sufficient to
meet its current operating needs and to fund anticipated capital expenditures,
as well as statements relating to the Company's operational and growth
strategies. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be accurate, and actual results could differ
materially from those addressed in forward-looking statements contained in
this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1998, James M. Beltrame, the Company's former president and chief
executive officer ("Claimant"), filed a Demand for Arbitration dated August
11, 1998 with the American Arbitration Association (Case No. 51-160-00347-98).
Claimant was separated from employment with the Company on June 26, 1998 and
now seeks arbitration pursuant to an Employment Agreement dated June 1, 1996
between the Company and Claimant. Claimant alleges and seeks lost
compensation and benefits due and owing to him from the Company in an amount
claimed to be in excess of $400,000. The Company has responded to the claim
with what the Company believes is a meritorious defense. The arbitration is
in the early stages of discovery and no hearing date or place has been
scheduled. Given the phase of the proceedings, the Company has determined
that a reasonable assessment with respect to the financial impact, if any,
cannot be made at this point in time.
In a related matter, the Company has filed a complaint on December 9, 1998,
against James M. Beltrame in the Circuit Court of the Eighteenth Judicial
Circuit in DuPage County, Wheaton, Illinois (Case No. 98L01282). The Company
alleges non-payment of principal and interest due on a promissory note
executed by Mr. Beltrame. The Company seeks judgement against Mr. Beltrame in
the principal amount of $107,625 plus interest at a rate of 7% through June
30, 1998, and thereafter at a rate of 10%, together with costs and attorney
fees.
Except as noted above, there are no other material pending legal proceedings
against the Company. The Company is, however, involved in routine litigation
arising in the ordinary course of its business and, while the results of the
proceedings cannot be predicted with certainty, the Company believes that the
final outcome of such matters will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits immediately following the Signatures page.
(b) No reports on Form 8-K have been filed during the three months ended
October 31, 1998.
<PAGE> 17
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 thereunto duly authorized.
SUCCESSORIES, INC.
(Registrant)
Date: December 8, 1998 By: /s/ Arnold M. Anderson
Arnold M. Anderson
President and Chief Executive Officer
(Principal Executive Officer)
Date: December 8, 1998 By: /s/ Steven D. Kuptsis
Steven D. Kuptsis
Senior Vice President, Administration and
Chief Financial Officer
(Principal Financial Officer)
<PAGE> 18
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Articles of Incorporation of Registrant (1)
3.2 Articles of Amendment to the Company's Articles of
Incorporation changing the Company's name to Successories,
Inc. (2)
3.3 Certificate of Designation creating the Company's Series A
Cumulative Convertible Preferred Stock (2)
3.4 Certificate of Designation creating the Company's Series B
Cumulative Convertible Preferred Stock (2)
3.5 By-laws of Registrant (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Specimen Series A Cumulative Convertible Preferred Stock
Certificate (2)
4.3 Specimen Series B Cumulative Convertible Preferred Stock
Certificate (2)
10.1 Form of Franchising Agreement (3)
10.4 Credit Agreement and Guaranty between the Company and NBD Bank (5)
10.5 First Forbearance Agreement between the Company and NBD Bank (6)
10.6 Amended and Restated Credit Agreement between the Company and
NBD Bank dated as of July 31, 1995 (7)
10.7 Lease Agreements between LaSalle National Trust Bank as
Trustee under Trust No. 107739 and Celebrating Excellence (4)
10.8 Stock Option Instrument for Arnold M. Anderson dated November
19, 1991 (1)
10.9 Celex Group, Inc. Stock Option Plan (1)
10.10 Joint Venture Agreement with Morrison DFW, Inc. and related
documents (4)
10.11 Indemnification Agreement dated May 26, 1995 between the
Company and Arnold M. Anderson (7)
Indemnification Agreements in the form filed were also entered
into by the Messrs. James M. Beltrame, Seamas T. Coyle,
Timothy C. Dillon, C. Joseph LaBonte, Steven B. Larrick,
Michael H. McKee, Mervyn C. Phillips, Jr., Michael Singletary,
Guy E. Snyder and Peter C. Walts
10.12 First Amendment to the Credit Agreement between the Company
and NBD Bank dated as of September 25, 1995 (8)
10.13 Second Amendment to the Credit Agreement between the Company
and NBD Bank dated as of February 7, 1996 (9)
<PAGE> 19
10.14 Form of Subordinated Note, Common Stock Purchase Warrant and
Subordination Agreement relating to issuance of $1,500,000
Subordinated Notes and Warrants to purchase 120,000 shares of
the Company's Common Stock (9)
10.15 Common Stock Option Agreement granted to Arnold M. Anderson
and Incentive Stock Option Agreement granted to Arnold M.
Anderson (9)
10.16 Common Stock Option Agreement granted to James M. Beltrame and
Incentive Stock Option Agreement granted to James M. Beltrame (9)
10.17 Third Amendment to the Credit Agreement between the Company
and NBD Bank dated as of May 2, 1996 (9)
10.18 Employment Agreement with Arnold M. Anderson dated March 1, 1996 (10)
10.19 Employment Agreement with James M. Beltrame dated June 1, 1996 (10)
10.20 Employment Agreement with Michael H. McKee dated June 1, 1996 (10)
10.21 Common Stock Option Agreement granted to James M. Beltrame
dated June 17, 1996 (10)
10.22 Agreement and Plan of Merger among Successories, Inc., British
Links Acquisition Corp., British Links Golf Classics, Inc.,
David J. Houston and Michael McArthur dated October 1, 1996 (11)
10.23 Regulations S Securities Subscription Agreement between
Successories, Inc. and Seacrest Capital Limited and Farring
Capital Limited dated September 16, 1996 (2)
10.24 Registration Rights Agreement dated as of December 17, 1996,
by and among Successories, Inc., Infinity Investors Limited
and Seacrest Capital Limited (2)
10.25 Form of Subordinated Note Extensions, Stock Options and
Subordination Agreement relating to the extension of
$1,250,000 of Subordinated Notes, and options to purchase
125,000 shares of the Company's Common Stock (2)
10.26 Fourth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of December 16, 1996 (12)
10.27 Fifth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of December 17, 1996 (12)
10.28 Sixth Amendment to the Credit Agreement between the Company
and American National Bank & Trust Company of Chicago dated as
of January 30, 1997 (12)
10.29 Credit Agreement between the Company and The Provident Bank
dated as of June 20, 1997 (13)
10.30 First Amendment to Credit Agreement between the Company and
The Provident Bank dated as of July 16, 1997 (13)
10.31 Lease Agreement between LaSalle National Trust, N.A. as
Trustee under Trust No. 120358 and Celex, Group, Inc. (14)
<PAGE> 20
10.32 Second Amendment to Credit Agreement between the Company and
the Provident Bank dated as of May 14, 1998 (14)
10.33 Third Amendment to Credit Agreement between the Company and
the Provident Bank dated as of September 1, 1998 (filed
herewith)
10.34 Employment Agreement with Gary Rovansek dated October 29, 1998
(filed herewith)
21.1 Subsidiaries (4)
27.1 Financial Data Schedule (filed herewith)
_____________________________
(1) Previously filed with Registration Statement on Form SB-2,
No. 33-76530C filed on August 17, 1993, and incorporated herein by
reference.
(2) Previously filed with Registration Statement of Form S-3,
No. 333-19313, and incorporated herein by reference.
(3) Previously filed with Post-effective Amendment Number 1 to the
Registration Statement of Form SB-2, No. 33-67530C filed on January
19, 1994, and incorporated herein by reference.
(4) Previously filed with the Annual Report on Form 10-K for the year
ended April 30, 1994 and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q/A-1 for the quarter
ended July 31, 1995 and incorporated herein by reference.
(6) Previously filed with the Company's Form 8-K on June 7, 1995,
reporting Date of Event May 26, 1995, and incorporated herein by
reference.
(7) Previously filed with the Annual Report on Form 10-K for the year
ended April 30, 1995, and incorporated herein by reference.
(8) Previously filed with the Company's Form 10-Q for the quarter ended
October 28, 1995, and incorporated herein by reference.
(9) Previously filed with the Company's Annual Report on Form 10-K for
the year ended February 3, 1996, and incorporated herein by
reference.
(10) Previously filed with the Company's Form 10-Q for the quarter ended
August 3, 1996 and incorporated herein by reference.
(11) Previously filed with the Company's Form 10-Q for the quarter ended
November 2, 1996 and incorporated herein by reference.
(12) Previously filed with the Company's Annual Report on Form 10-K for
the year ended February 1, 1997, and incorporated herein by
reference.
(13) Previously filed with the Company's Form 10-Q for the quarter ended
August 2, 1997, and incorporated herein by reference.
(14) Previously filed with the Company's Form 10-Q for the quarter ended
May 2, 1998, and incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 1,648,000
<SECURITIES> 0
<RECEIVABLES> 5,242,000
<ALLOWANCES> 412,000
<INVENTORY> 13,116,000
<CURRENT-ASSETS> 22,294,000
<PP&E> 18,857,000
<DEPRECIATION> 8,693,000
<TOTAL-ASSETS> 40,713,000
<CURRENT-LIABILITIES> 17,385,000
<BONDS> 5,612,000
0
0
<COMMON> 68,000
<OTHER-SE> 17,600,000
<TOTAL-LIABILITY-AND-EQUITY> 40,713,000
<SALES> 36,167,000
<TOTAL-REVENUES> 37,331,000
<CGS> 16,251,000
<TOTAL-COSTS> 41,145,000
<OTHER-EXPENSES> (58,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,051,000
<INCOME-PRETAX> (4,807,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,807,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,807,000)
<EPS-PRIMARY> (.71)
<EPS-DILUTED> (.71)
</TABLE>
THIRD AMENDMENT TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Third Amendment")
dated as of September 1, 1998, by and among SUCCESSORIES, INC., an
Illinois corporation, CELEBRATING EXCELLENCE, INC., an Illinois
corporation, SUCCESSORIES OF ILLINOIS, INC., an Illinois
corporation, CELEX SUCCESSORIES, INC., a Canadian corporation,
BRITISH LINKS ACQUISITION CORP., an Illinois corporation, and
B.L.G.C., INC., a Texas corporation (hereinafter, together with
their successors in title and assigns, called the "Borrowers" and
each of which individually is a "Borrower"), THE PROVIDENT BANK, as
Agent, an Ohio banking corporation ("Agent"), and various Lenders as
set forth in the Credit Agreement.
PRELIMINARY STATEMENT
WHEREAS, Borrowers, Agent and Lenders have entered into a
Credit Agreement dated as June 20, 1997, as amended by a First
Amendment dated as of July 16, 1997, and a Second Amendment dated as
of May 14, 1998 (the "Credit Agreement"); and
WHEREAS, Borrowers have requested Agent and Lenders to adjust
various of the financial covenants set forth in the Credit
Agreement; and
WHEREAS, Borrowers, Agent and Lenders now wish to amend the
Credit Agreement in accordance with the terms and provisions hereof.
NOW, THEREFORE, the parties hereto agree to supplement and
amend the Credit Agreement upon such terms and conditions as
follows:
1. Capitalized Terms. All capitalized terms used herein
shall have the meanings assigned to them in the Credit Agreement
unless the context hereof requires otherwise. Any definitions as
capitalized terms set forth herein shall be deemed incorporated into
the Credit Agreement as amended by this Third Amendment.
2. Definitions. The following definitions contained in
Section 1.2 of the Credit Agreement are hereby amended as follows:
(a) The definition of "EBITDA" shall be amended in its
entirety to read as follows:
"EBITDA" for any period shall mean, without duplication (i) Net
Income; plus (ii) for such period any interest Expense deducted in
the determination of Net Income; plus (iii) any income and franchise
taxes deducted in the determination of Net Income; plus (iv)
amortization and depreciation deducted in determining Net Income for
such period; plus (v) extraordinary losses and losses on sales of
assets (other than sales of inventory in the ordinary course of
business); minus (vi) the sum for such period of interest income,
extraordinary gains and gains from sales of assets (other than sales
of inventory in the ordinary course of business).
<PAGE>
(b) The definition of "Indebtedness" shall be amended
by the addition of the following subparagraph (f) to the end of the
existing definition:
"(f) any sum or thing of value, no matter what the form, paid or
given by Borrowers as consideration in connection with the issuance
of Indebtedness, which could be characterized as original issue
discount in accordance with GAAP, shall be included within the term
'Indebtedness' hereunder regardless of how Borrowers may
characterize such consideration on their financial statements."
3. Waiver of Certain Covenants. The Lenders hereby agree
to waive (a) the application of Sections 7.1, 7.3 and 7.5 of the
Credit Agreement as they relate to the Reference Period ending
closest to July 31, 1998 and October 31, 1998, and (b) the
application of Section 7.2 of the Credit Agreement as it relates to
the Reference Period ending closest to July 31, 1998; provided,
however, that the foregoing waivers are conditioned upon (a) EBITDA
for the Reference Period ending closest to July 31, 1998 being at
least One Million Three Hundred Forty-One Thousand and 00/100
Dollars ($1,341,000.00); and (b) EBITDA for the quarter ending on
the Computation Date ending closest to October 31, 1998 being at
least One Million Six Hundred Thousand and 00/100 Dollars
($1,600,000.00); provided, however, when calculating EBITDA for such
quarter, Borrower shall be allowed a credit against expenses in an
amount not to exceed the lesser of (i) $400,000 and (ii) the amount
of any payment, if any, made by Borrower to James M. Beltrame, the
former President and Chief Executive Office of Borrower, to settle
any claims which may exist between them.
4. Reaffirmation of Covenants, Warranties and
Representations. Borrowers hereby agree and covenant that all
representations and warranties set forth in the Credit Agreement
including, without limitation, all of those representations and
warranties set forth in Article 5 thereof, are true and accurate as
of the date hereof. Borrowers further reaffirm all covenants set
forth in the Credit Agreement, and reaffirm each of the affirmative
covenants set forth in Article 6, all financial covenants set forth
in Article 7, and all negative covenants set forth in Article 8
thereof, as if fully set forth herein, except to the extent modified
by this Third Amendment.
5. Conditions Precedent to Closing of Third Amendment. On
or prior to the closing of this Third Amendment (hereinafter the
"Third Amendment Closing Date"), each of the following conditions
precedent shall have been satisfied:
(a) Documents. Each of the documents to be executed
and delivered at the Third Amendment Closing and all other
certificates, documents and instruments to be executed in connection
herewith shall have been duly and properly authorized, executed and
delivered by Borrowers and shall be in full force and effect on and
as of the Third Amendment Closing Date.
<PAGE>
(b) Legality of Transactions. No change in
applicable law shall have occurred as a consequence of which it
shall have become and continue to be unlawful (i) for Agent and each
Lender to perform any of their agreements or obligations under any
of the Loan Documents, or (ii) for Borrowers to perform any of their
agreements or obligations under any of the Loan Documents.
(c) Performance. Except as set forth herein,
Borrowers shall have duly and properly performed, complied with and
observed each of their covenants, agreements and obligations
contained in each of the Loan Documents. Except as set forth
herein, no event shall have occurred on or prior to the Third
Amendment Closing Date, and no condition shall exist on the Third
Amendment Closing Date which constitutes a Default or an Event of
Default.
(d) Amendments to Warrants. Successories, Inc. shall
have issued to Agent amendments to the four existing Warrants issued
to Provident Financial Group, Inc. amending the Purchase Price to
Three and 00/100 Dollars ($3.00) per share and extending the
expiration date of each Warrant by one (1) year.
(e) Proceedings and Documents. All corporate,
governmental and other proceedings in connection with the
transactions contemplated on the Third Amendment Closing Date, each
of the other Loan Documents and all instruments and documents
incidental thereto, shall be in form and substance reasonably
satisfactory to Agent.
(f) No changes. Since the date of the most recent
balance sheets of Borrowers delivered to Agent, no changes shall
have occurred in the assets, liabilities, financial condition,
business, operations or prospects of Borrowers which, individually
or in the aggregate, are material to Borrowers, and Agent shall have
completed such review of the status of all current and pending legal
issues as Agent shall deem necessary or appropriate.
6. Miscellaneous.
(a) Borrowers shall reimburse Agent for all fees and
disbursements of legal counsel to Agent which shall have been
incurred by Agent in connection with the preparation, negotiation,
review, execution and delivery of this Third Amendment and the
handling of any other matters incidental hereto.
(b) All of the terms, conditions and provisions of the
Credit Agreement not herein modified shall remain in full force and
effect. In the event a term, condition or provision of the Credit
Agreement conflicts with a term, condition or provision of this
Third Amendment, the latter shall govern.
(c) This Third Amendment shall be governed by and
shall be construed and interpreted in accordance with the laws of
the State of Ohio.
<PAGE>
(d) This Third Amendment shall be binding upon and
shall inure to the benefit of the parties hereto and their
respective heirs, successors and assigns.
(e) this Third Amendment may be executed in several
counterparts, each of which shall constitute an original, but all
which together shall constitute one and the same agreement.
Remainder of page intentionally left blank. Signature pages follow.
<PAGE>
IN WITNESS WHEREOF, this Third Amendment has been duly executed
and delivered by or on behalf of each of the parties as of the day and
year first above written.
BORROWERS:
SUCCESSORIES, INC., an Illinois corporation
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
CELEBRATING EXCELLENCE, INC., an Illinois corporation
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
SUCCESSORIES OF ILLINOIS, INC., an Illinois corporation
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
CELEX SUCCESSORIES, INC., a Canadian corporation
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
BRITISH LINKS ACQUISITION CORP., an Illinois corporation
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
B.L.G.C., INC., a Texas corporation
By: /s/Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
AGENT:
THE PROVIDENT BANK, as Agent, an Ohio banking corporation
By: /s/ Nick Jevic
Name: Nick Jevic
Title: Vice President
LENDERS:
THE PROVIDENT BANK, an Ohio banking corporation
By: /s/ Nick Jevic
Name: Nick Jevic
Title: Vice President
<PAGE>
Second Amendment to Warrant Certificate No. 1 Warrants
for 75,000 Shares
Original Issue Date: June 20, 1997
SECOND AMENDMENT TO
WARRANT TO PURCHASE COMMON STOCK
OF
SUCCESSORIES, INC.
This certifies that the Warrant to Purchase Common Stock No.
1, issued to PROVIDENT FINANCIAL GROUP, INC., an Ohio corporation,
or its registered assigns ("Holder"), on June 20, 1997 is hereby
amended as follows:
1. From and after the date hereof, the purchase price shall be
Three and 00/100 Dollars ($3.00) per share of Common Stock (the
"Purchase Price").
2. For purposes of this Warrant, the following capitalized
term shall have the meaning set forth below:
"Warrant Period" shall mean the period commencing
on June 20, 1997 and ending on June 20, 2003.
September 1, 1998 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
Second Amendment to Warrant Certificate No. 2 Warrants
for 50,000 Shares
Original Issue Date: June 20, 1997
SECOND AMENDMENT TO
WARRANT TO PURCHASE COMMON STOCK
OF
SUCCESSORIES, INC.
This certifies that the Warrant to Purchase Common Stock No.
2, issued to PROVIDENT FINANCIAL GROUP, INC., an Ohio corporation,
or its registered assigns ("Holder"), on June 20, 1997 is hereby
amended as follows:
1. From and after the date hereof, the purchase price shall be
Three and 00/100 Dollars ($3.00) per share of Common Stock (the
"Purchase Price").
2. For purposes of this Warrant, the following capitalized
term shall have the meaning set forth below:
"Warrant Period" shall mean the period commencing
on June 20, 1997 and ending on June 20, 2003.
September 1, 1998 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
Second Amendment to Warrant Certificate No. 3 Warrants
for 25,000 Shares
Original Issue Date: June 20, 1997
SECOND AMENDMENT TO
WARRANT TO PURCHASE COMMON STOCK
OF
SUCCESSORIES, INC.
This certifies that the Warrant to Purchase Common Stock No.
3, issued to PROVIDENT FINANCIAL GROUP, INC., an Ohio corporation,
or its registered assigns ("Holder"), on June 20, 1997 is hereby
amended as follows:
1. From and after the date hereof, the purchase price shall
be Three and 00/100 Dollars ($3.00) per share of Common Stock (the
"Purchase Price").
2. For purposes of this Warrant, the following capitalized
term shall have the meaning set forth below:
"Warrant Period" shall mean the period commencing
on June 20, 1997 and ending on June 20, 2003.
September 1, 1998 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
Second Amendment to Warrant Certificate No. 4 Warrants
for 72,464 Shares
Original Issue Date: July 16, 1997
SECOND AMENDMENT TO
WARRANT TO PURCHASE COMMON STOCK
OF
SUCCESSORIES, INC.
This certifies that the Warrant to Purchase Common Stock No.
4, issued to PROVIDENT FINANCIAL GROUP, INC., an Ohio corporation,
or its registered assigns ("Holder"), on July 16, 1997 is hereby
amended as follows:
1. From and after the date hereof, the purchase price shall
be Three and 00/100 Dollars ($3.00) per share of Common Stock (the
"Purchase Price").
2. For purposes of this Warrant, the following capitalized
term shall have the meaning set forth below:
"Warrant Period" shall mean the period commencing
on July 16, 1997 and ending on July 16, 2005.
September 1, 1998 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into on this
29th day of October, 1998, BETWEEN:
(1) Successories, Inc., an Illinois corporation ("the
Company"); and,
(2) Gary J. Rovansek, a resident of Illinois ("the
Employee").
THE COMPANY AND THE EMPLOYEE HEREBY AGREE, in consideration of
the mutual obligations and covenants set forth below, to the
following terms and conditions:
1. Employment
1.1 The Company shall employ the Employee as President &
Chief Operating Officer subject to the terms and conditions
specified in this Employment Agreement ("the Employment").
1.2 The Employee shall also be appointed a Director of the
Company for an initial term that expires at the Company's annual
shareholder meeting in 2001.
1.3 The Employment pursuant to this Employment Agreement
shall commence on November 30, 1998 and continue for a term of three
(3) years ("the Term of Employment").
1.4 Unless either party to this Employment Agreement, at
least one year prior to the conclusion of the Term of Employment,
provides written notice to the other party that it wishes not to
renew this Employment Agreement, then the Term of Employment will be
automatically extended for one additional year. There is no limit
on the number of extensions of the Term of Employment that may occur
pursuant to this section.
2. Commencement and Place of Employment
The Company hereby employs the Employee as its President &
Chief Operating Officer effective on the date specified above, and
the Employee hereby accepts such employment on the terms and
conditions set forth in this Employment Agreement. The Employment
shall be in Aurora, Illinois.
3. Duties
The Employee shall faithfully and diligently perform the
duties and responsibilities assigned to him by the Company, provided
that such duties are commensurate with the Employee's titles.
4. Exclusivity of Service
While employed by the Company, the Employee shall devote all
of his time, attention, and energies to the Company's business;
provided that it shall not be a violation of this Agreement for the
Employee to (i) serve on corporate, civic or charitable boards or
committees, (ii) deliver lectures and fulfill speaking engagements
or (iii) manage personal investments, so long as such activities
under clauses (i), (ii) and (iii) do not interfere, in any material
respect, with the Employee's responsibilities hereunder.
<PAGE>
5. Compensation and Benefits
5.1 Effective as of November 30, 1998, the Company shall pay
the Employee a minimum base salary of TWO HUNDRED TWENTY-FIVE
THOUSAND DOLLARS ($225,000) per year, payable in arrears on a
monthly basis. The Company may make deductions or withholdings as
required by applicable State and Federal law, or as may be or has
been consented to by the Employee. The minimum base salary shall be
adjusted on an annual basis (but not reduced below the minimum base
salary set forth above in this paragraph) by the Company for
purposes of the second, third, and, if applicable, any succeeding
year of the Employment due to its extension.
5.2 The Employee shall also be eligible to receive a bonus
on an annual basis in an amount of up to ONE HUNDRED THOUSAND
DOLLARS ($100,000) per year. Within thirty (30) days after the
commencement of the Company's fiscal years, the Employee and the
Company's Board of Directors shall agree in writing upon the
specific performance standards and criteria that will be used to
determine how the bonus is actually earned. In addition, the
Employee and the Company's Board of Directors will also agree at
that time as to the amount of the actual bonus opportunity of the
Employee for the forthcoming fiscal year.
5.3 The Company shall also reimburse the Employee, against
receipts or other satisfactory evidence, all reasonable business
expenses properly incurred by him in the course of the Employment
and in accordance with the Company's rules relating to reimbursement
of expenses.
5.4 The Company shall also provide the Employee with paid
vacation in accordance with the Company's policies, but in no event
less than twenty (20) days per annum, to be taken at such time as is
mutually agreed between the Employee and the Company. The Employee
will not forfeit any paid vacation days that are not taken in any
year.
5.5 The Company shall also afford the Employee certain
fringe benefits and perquisites at least equal to those made
available by the Company to its other senior executive employees,
and in accordance with the terms of such plans and policies,
including but not limited to entitlement to holidays, personal
leave, sick leave, family leave, medical insurance, disability
insurance, dental insurance, and life insurance. The Company shall
reimburse the Employee for the cost of premiums paid by him to
obtain health insurance coverage from his former employer under
COBRA during any applicable waiting period or preexisting condition
limitation period under the Company's medical benefit plans.
5.6 The Employee shall also be entitled to receive options
to be granted under the Company's stock option plan as determined by
the Compensation Committee of the Board of Directors.
Notwithstanding anything in the foregoing to the contrary, the
Employee shall be granted 100,000 stock options on his first day of
employment pursuant to Stock Option Agreements attached hereto as
Exhibits A and B. The Employee shall also, upon attainment of
certain performance goals agreed upon between the Employee and the
Board of Directors, be eligible to receive a grant of 25,000 options
on the first anniversary and second anniversary, respectively, of
the effective date of this Employment Agreement.
<PAGE>
5.7 The Company shall reimburse the Employee for reasonable
life insurance premiums incurred by the Employee to purchase and
maintain during the Term of Employment an individual term life
insurance policy on the Employee's life with a $500,000 death
benefit, with the beneficiary(ies) on such policy to be selected in
the sole discretion of the Employee.
5.8 The Company shall reimburse the Employee for reasonable
disability insurance premiums incurred by the Employee to purchase
and maintain during the Term of Employment a supplemental individual
long term disability policy with respect to the Employee that would
pay a maximum disability benefit of $325,000 per year (after giving
effect to the Company's disability insurance policy that covers the
Employee and which is referenced in Section 5.5).
6. Reasonableness of Restrictions
The Employee acknowledges that, during the term of Employment,
the Company will provide the Employee with the use of and access to
trade secrets and confidential information. In turn, the Employee
recognizes that, while performing his duties hereunder he will have
access to and come into contact with trade secrets and confidential
information belonging to the Company and will obtain personal
knowledge of and influence over its customers and/or employees. The
Employee therefore agrees that the restrictions contained in
Sections 7, 8, and 9 are reasonable and necessary to protect the
legitimate business interests of the Company both during and after
the termination of the Employment.
7. Confidentiality
7.1 The Employee shall neither during the Employment (except
in the proper performance of his duties) nor at any time (without
limit) after the termination thereof directly or indirectly:
7.1.1 use for his own purposes or those of any other
person, company, business entity, or other organization whatsoever,
or
7.1.2 disclose to any person, company, business entity,
or other organization whatsoever,
any trade secrets or confidential information relating or belonging
to the Company, including but not limited to any such information
relating to clients or customers, client or customer lists or
requirements, market information, business plans or dealings,
financial information and plans, trading models, market access
information, research activities, any document marked Confidential,
or any information which the Employee has been told is Confidential,
or any information which has been given the Company in confidence by
customers, suppliers, or other persons.
8. Trade Secrets
8.1 During the term of this Employment Agreement, the
Employee acknowledges that he will be afforded access to and become
familiar with various trade secrets of the Company, including, but
not necessarily be limited to the following: the Company's business
plans, financial information, marketing strategies, customer or
client lists, software and research and proprietary technology
information. The Employee acknowledges that these trade secrets are
owned and shall continue to be owned solely by the Company and that
they contain specialized and confidential information not generally
known in the industry and which constitute the Company's trade
secrets. The Employee recognizes and acknowledges that it is
essential to the Company to protect this trade secret information.
<PAGE>
8.2 The Employee further represents to the Company that, as
an inducement for his employment, the Employee will hold this
information in trust and confidence for the Company's sole benefit
and use during the Employment and after the Employment terminates
the Employee agrees not to use this information for any purpose
whatsoever or to divulge this information to any person other than
the Company without express written authorization unless such
information shall no longer constitute trade secret information
other than as a result of conduct of the Employee in violation of
this Section 8.2.
9. Post-Termination Obligations
9.1 Non-Competition. The Employee hereby agrees that,
during his employment by the Company pursuant to this Employment
Agreement and for a period of one (1) year following the termination
of the Employment under this Employment Agreement, he will not,
directly or indirectly and in any way, whether as principal or as
director, officer, employee, consultant, agent, partner or
stockholder to another entity (other than by the ownership of a
passive investment interest of not more than 2.5% in a company with
publicly traded equity securities):
9.1.1 own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership,
management, operation, or control of any business competing with any
business of the Company in the one (1) year immediately preceding
such termination;
9.1.2 contact, interfere with, solicit on behalf of
another, or attempt to entice away from the Company (or any
affiliate or subsidiary of the Company):
(i) any client or customer of the Company (or
any affiliate or subsidiary of the Company); or
(ii) any contract, agreement or arrangement that
the Company (or any affiliate or subsidiary of the Company) is
actively negotiating with any other party; or
(iii) any prospective business opportunity that
the Company (or any affiliate or Subsidiary of the Company) has
identified, unless the Company has declined to pursue such
opportunity.
9.2 Non-Solicitation of Employees. The Employee hereby
agrees that he will not, for a period of one (1) year immediately
following the termination of his employment, howsoever arising,
either on his own account or in conjunction with or on behalf of any
other person, company, business entity, or other organization
whatsoever directly or indirectly:
9.2.1 induce, solicit, entice or procure any person who
is an employee of the Company to leave such employment, where that
person is:
<PAGE>
(i) is a Company Employee on the Termination
Date; or
(ii) had been a Company Employee in any part of
the one (1) year period immediately preceding the Termination Date;
or
9.2.2 accept into employment or otherwise engage or use
the services of any person who:
(i) is a Company Employee on the Termination
Date; or
(ii) had been a Company Employee in any part of
the one (1) year period immediately preceding the Termination Date;
provided, however, that this Section 9.2.2 shall not apply to any
Company Employee who is terminated without cause by the Company.
10. Termination
10.1 The Company and the Employee agree that this employment
relationship is for a term of three (3) years commencing on the date
specified in paragraph 1.3 of this Employment Agreement.
10.2 On termination of the Employment for whatever reason,
the Employee shall return to the Company in accordance with its
instructions all of the Company's proprietary technology and trading
models, records, software, models, reports, and other documents and
any copies thereof and any other property belonging to the Company
which are in the Employee's possession or under his control. The
Employee shall, if so required by the Company, confirm in writing
his compliance with his obligations under this paragraph.
10.3 The termination of the Employment shall be without
prejudice to any right the Employee or the Company may have in
respect of any breach by the other of any provisions of this
Employment Agreement which may have occurred prior to such
termination.
10.4 In the event of termination of the Employment hereunder
however arising, the Employee agrees that he will not at any time
after such termination represent himself as still having any
connection with the Company, except as a former employee for the
purpose of communicating with prospective employers or complying
with any applicable statutory requirements.
10.5 Notwithstanding anything to the contrary in this
Employment Agreement, the Company may terminate this Employment
Agreement for "just cause" by providing to the Employee written
notice of the termination on account of just cause and the specific
grounds thereof. Upon termination of the Employment for just cause,
the Employment will immediately end and the Employee will not be
entitled to receive any further compensation after that date except
as may be required by law. The term "just cause" means (a) an act
of fraud or dishonesty by the Employee that results directly or
indirectly in gain or personal enrichment of the Employee at the
Company's expense, (b) an act by the Employee that the Company's
Board of Directors reasonably believes constitutes a felony, or (c)
any material breach by the Employee of any provision of this
Employment Agreement that has not been cured by the Employee within
30 days of written notice of such a breach from the Company.
<PAGE>
10.6 Notwithstanding anything to the contrary in this
Employment Agreement, the Company's obligations under this
Employment Agreement shall cease or terminate upon the death of the
Employee or upon the determination that the Employee has a
disability. Upon the death of the Employee, the Company shall pay
the surviving spouse (if any) of the Employee six (6) months of the
then current base salary of the Employee and any other compensation
or pro rata bonus due the Employee; if there is no surviving spouse,
the Company shall pay those sums to the estate of the Employee. For
purposes of this paragraph only, the Employee will be deemed to have
a "disability" only where the Employee has suffered a physical or
mental illness, injury, or infirmity that prevents the Employee from
fulfilling all of his material duties under this Employment
Agreement for at least ninety (90) consecutive days and the
Company's Board of Directors has determined in good faith and with
the advice of the Employee's physician (or other relevant medical
professional), that the Employee's illness, injury, or infirmity is
more than likely to continue indefinitely. In these circumstances,
after a determination has been made in good faith by the Company's
Board of Directors that the Employee has a disability, the Company
shall pay to the Employee, the Employee's guardian or administrator,
or the Employee's estate, the then current base salary provided
under this Employment Agreement commencing with the first month
after the determination of the existence of a disability and until
the expiration of the Employment Agreement or for a period of six
(6) months, whichever is lesser.
10.7 Notwithstanding anything to the contrary in this
Employment Agreement, the Company may, in connection with the notice
of non-renewal delivered to the Employee pursuant to paragraph 1.4,
elect not to utilize the Employee's services during the remainder of
the Term of Employment and relieve the Employee of any further
obligation to perform his duties under this Employment Agreement.
If the Company so elects, then the Employee shall cease to occupy
his office or otherwise have access to the Company's premises, but
the Employee shall continue to have access to a Company-provided
voice mail box for a period of six (6) months following his
termination of employment, and the Company shall pay and will remain
obligated to pay the Employee the remainder of his base salary,
bonus and all other benefits during the remainder of the Term of
Employment. In such event, the Employee will not be required to
mitigate his damages by seeking other alternative employment during
the remainder of the Term of Employment under this Employment
Agreement.
10.8 Notwithstanding anything to the contrary in this
Employment Agreement, the Employee may terminate the Employment
under this Employment Agreement for good reason in which event the
Company shall still have the same obligations to the Employee as
provided in paragraph 5. For purposes of this paragraph, "good
reason" shall mean: (a) without the Employee's express written
consent, the assignment to the Employee of any duties inconsistent
with his title, position, duties, responsibilities, and status with
the Company prior to a Change in Control as hereinafter defined, or
a change in his reporting responsibilities, title, or office as in
effect after a Change in Control, or any removal of the Employee
from or any failure to reelect him to any such positions, except in
connection with the termination of the Employment for just cause,
disability, or as a result of his death; (b) (i) a reduction in the
Employee's minimum base salary or (ii) a reduction in the Employee's
benefits or material breach of the Company's obligations undertaken
in this Employment Agreement; (c) subsequent to a Change in Control
of the Company, the failure by the Company to obtain the assumption
of the obligation to perform this
<PAGE>
Employment Agreement by any successor; or (d) subsequent to a
Change in Control of the Company, any purported termination of the
Employee's Employment which is not effected pursuant to a notice of
termination satisfying the requirements of paragraphs 1.4 or 10
hereof. For purposes of this Section 10.8, the term "Change in
Control" means the occurrence of one or more of the following: (i)
without prior approval of the Board of Directors, a single entity or
group of affiliated entities acquires more than 50% of the Company's
outstanding stock, (ii) the Company is involved in a merger or a
sale of all or substantially all of its assets so that its
shareholders before the merger or sale own less than 50% of the
voting power of the surviving or acquiring corporation, (iii) a
liquidation or dissolution of the Company occurs, (iv) a change in
the majority of the Board of Directors occurs during any twenty-four
(24) month period without the approval of a majority of the
directors in office at the beginning of such period. In the event
that the Employee determines to terminate his Employment for good
reason, and the reason for termination is an alleged violation of
subsections (a) and/or (b)(ii) above, the Employee shall be
obligated to give notice of termination of thirty (30) days to the
Company, which notice shall identify the reason for such
termination, and the Company shall have a reasonable opportunity to
cure any such alleged defects. In the event of any termination by
the Employee for "good reason," the Employee shall be entitled to
the remainder of the base salary due under the Term of Employment.
11. Severability
The various provisions and sub-provisions of this Employment
Agreement are severable, and if any provision or sub-provision or
identifiable part thereof is held to be invalid or unenforceable by
any court of competent jurisdiction, then such invalidity or
unenforceability shall not affect the validity or enforceability of
the remaining provisions or sub-provisions or identifiable parts in
this Employment Agreement.
12. Warranty
The Employee represents and warrants that he is not prevented
by any other Employment Agreement, arrangement, contract,
understanding, Court Order or otherwise, which in any way directly
or indirectly conflicts, is inconsistent with, or restricts or
prohibits him from fully performing the duties of the Employment, in
accordance with the terms and conditions of this Employment
Agreement.
13. Notices
Any notice to be given hereunder may be delivered (a) in the
case of the Company by first class mail addressed to its Registered
Office and (b) in the case of the Employee, either to him personally
or by first class mail to his last known residence address. Notices
served by mail shall be deemed given 3 days after the date on which
they are mailed.
14. Waivers and Amendments
No act, delay, omission, or course of dealing on the part of
any party hereto in exercising any right, power, or remedy hereunder
shall operate as, or be construed as, a waiver thereof or otherwise
prejudice such party's rights, powers, and remedies under this
Employment Agreement. This Employment Agreement may be amended only
by a written instrument signed by the Employee and a duly authorized
officer of the Company or the Board of Directors.
<PAGE>
15. Prior Agreements
This Employment Agreement cancels and is in substitution for
all previous letters of engagement, offer letters, agreements, and
arrangements (whether oral or in writing) relating to the subject-
matter hereof between the Company and the Employee, all of which
shall he deemed to have been terminated by mutual consent, with the
exception of any rights the Employee may have under any stock option
plan or bonus plan previously in existence. This Employment
Agreement constitutes the entire terms and conditions of the
Employee's employment and no waiver or modification thereof shall be
valid unless in writing, signed by the parties, and only to the
extent therein set forth.
16. Arbitration Jurisdiction and Governing Law
Except for disputes arising under or in connection with
Sections 7, 8, and 9, all disputes arising under or in connection
with this Employment Agreement or concerning in any way the
Employee's employment shall be submitted exclusively to arbitration
in Chicago, Illinois under the Rules of the American Arbitration
Association then in effect, and the decision of the arbitrator shall
be final and binding upon the parties. Judgment upon the award
rendered may be entered and enforced in any court having
jurisdiction. The Employee and the Company consent to personal
jurisdiction of any state or federal court sitting in Du Page
County, Illinois, in order to enforce any arbitration judgment or
the rights of the Employee or of the Company under Sections 7, 8,
and 9 and waive any objection that such forum is inconvenient. The
Employee and the Company hereby consent to service of process in any
such action by U.S. mail or other commercially reasonable means of
receipted delivery. The parties also agree that the party found to
be at fault shall reimburse the other party for all reasonable
attorneys' fees that the other party incurs in pursing their
remedies in good faith under this Employment Agreement.
17. Governing Law
This Employment Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois.
18. Assignability
The rights and obligations contained herein shall be binding
on and inure to the benefit of the successors and assigns of the
Company. The Employee may not assign his rights or obligations
hereunder without the express written consent of the Company.
19. Headings; Construction
The headings contained in this Employment Agreement are
inserted for reference and convenience only and in no way define,
limit, extend, or describe the scope of this Employment Agreement or
the meaning or construction of any of the provisions hereof. As used
herein, unless the context otherwise requires, the single shall
include the plural and vice versa, words of any gender shall include
words of any other gender, and "or" is used in the inclusive sense.
<PAGE>
20. Survival of Terms
If this Employment Agreement is terminated for any reason, the
provisions of Sections 7, 8, and 9 shall survive and the Employee
and the Company, as the case may be, shall continue to be bound by
the terms thereof to the extent provided therein.
21. Employee Acknowledgment and Advice of Counsel
THE EMPLOYEE REPRESENTS THAT HE HAS HAD AMPLE OPPORTUNITY TO
REIEW THIS AGREEMENT AND THE EMPLOYEE ACKNOWLEDGES THAT HE
UNDERSTANDS THAT IT CONTAINS IMPORTANT CONDITIONS OF THE EMPLOYMENT
AND THAT IT EXPLAINS POSSIBLE CONSEQUENCES, BOTH FINANCIAL AND
LEGAL, IF THE EMPLOYEE BREACHES THE AGREEMENT.
AS WITNESS the hands of a duly authorized officer of the
Company and of the Employee the day and year first before written.
SIGNED by ____________________ ) /s/ Mac Anderson
For and on behalf of Successories, Inc. Chairman
October 29, 1998
Date
SIGNED by Gary J. Rovansek ) /s/ Gary J. Rovansek
)
October 29, 1998
Date
