<PAGE>
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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 MAY 1, 1999
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 6,922,988 shares of common stock, $.01 par value,
outstanding as of May 28, 1999.
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<PAGE>
SUCCESSORIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
<S> <C>
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.......... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk...................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 22
Item 6. Exhibits and Reports on Form 8-K....................... 22
SIGNATURES................................................................... 23
INDEX TO EXHIBITS............................................................ 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
SUCCESSORIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,400,000 $ 1,615,000
Accounts and notes receivable, net of allowance 3,305,000 3,706,000
of $731,000 and $660,000, respectively
Inventories, net 9,634,000 10,618,000
Prepaid catalog expenses 1,344,000 1,067,000
Other prepaid expenses 1,171,000 1,011,000
------------- ------------
Total current assets 16,854,000 18,017,000
Property and equipment, net 9,579,000 9,899,000
Notes receivable 274,000 297,000
Deferred financing costs, net 377,000 400,000
Deferred income taxes 5,476,000 5,476,000
Intangibles and other assets, net 868,000 888,000
-------------- -------------
TOTAL ASSETS $ 33,428,000 $ 34,977,000
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,450,000 $ 6,035,000
Accounts payable 6,492,000 6,447,000
Accrued expenses 1,845,000 2,022,000
-------------- -------------
Total current liabilities 13,787,000 14,504,000
Long-term debt 4,301,000 5,049,000
-------------- -------------
Total liabilities 18,088,000 19,553,000
-------------- -------------
Minority interest in subsidiaries -- 51,000
-------------- -------------
Stockholders' equity:
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,922,988 and 6,913,293 shares issued
and outstanding, respectively 69,000 69,000
Common stock warrants 2,291,000 1,788,000
Notes receivable from stockholders (273,000) (273,000)
Additional paid-in capital 26,209,000 26,188,000
Accumulated deficit (12,892,000) (12,335,000)
Accumulated other comprehensive loss (64,000) (64,000)
-------------- -------------
Total stockholders' equity 15,340,000 15,373,000
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,428,000 $ 34,977,000
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
May 1, May 2,
1999 1998
-------------- -------------
<S> <C> <C>
Net product sales $12,056,000 $ 12,261,000
Cost of goods sold 5,262,000 5,177,000
-------------- -------------
Gross profit on product sales 6,794,000 7,084,000
Fees, royalties and other income 155,000 318,000
-------------- -------------
Gross margin 6,949,000 7,402,000
Operating expenses 7,124,000 8,410,000
-------------- -------------
Loss from operations (175,000) (1,008,000)
-------------- -------------
Other income (expense):
Interest expense (363,000) (341,000)
Minority interests in subsidiaries (30,000) (36,000)
Interest income 9,000 --
Other, net 2,000 10,000
-------------- -------------
Total other expense (382,000) (367,000)
-------------- -------------
Loss before income tax (557,000) (1,375,000)
Income tax -- --
-------------- -------------
Net loss $ (557,000) $ (1,375,000)
============== =============
Foreign currency translation adjustment -- 1,000
-------------- -------------
Comprehensive loss $ (557,000) $ (1,374,000)
============== =============
Loss per share:
Basic and diluted $ (0.08) $ (.20)
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Notes Accumulated
Common Stock Additional Common Receivable Other
------------------- Paid-In Stock From Accumulated Comprehensive
Shares Amount Capital Warrants Stockholders Deficit Loss
--------- ------- ----------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 30, 1999 6,913,293 $69,000 $26,188,000 $1,788,000 $(273,000) $(12,335,000) $(64,000)
Net loss for the period -- -- -- -- -- (557,000) --
Stock Warrants -- -- -- 503,000 -- -- --
Common stock transactions:
Sales of common shares 9,695 -- 21,000 -- -- -- --
--------- ------- ----------- ---------- ------------ ------------- -------------
Balance at May 1, 1999 6,922,988 $69,000 $26,209,000 $2,291,000 $(273,000) $(12,892,000) $(64,000)
========= ======= =========== ========== ============ ============= =============
<CAPTION>
Total
Stockholders'
Equity
------------
<S> <C>
Balance at January 30, 1999 $ 15,373,000
Net loss for the period (557,000)
Stock Warrants 503,000
Common stock transactions:
Sales of common shares 21,000
------------
Balance at May 1, 1999 $15,340,000
============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
SUCCESSORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
May 1, May 2,
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (557,000) $(1,375,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 487,000 674,000
Amortization of debt discount 42,000 31,000
---------- -----------
(28,000) (670,000)
Changes in operating assets and liabilities:
Accounts and notes receivable 407,000 1,850,000
Inventories 984,000 (1,410,000)
Prepaid catalog expenses (277,000) 63,000
Other prepaid expenses (174,000) (235,000)
Deferred financing costs 23,000 16,000
Accounts payable 45,000 923,000
Accrued expenses (177,000) (63,000)
Minority interest (51,000) (56,000)
Other (27,000) 65,000
---------- -----------
Net cash provided by operating activities 725,000 483,000
---------- -----------
Cash flows from investing activities:
Proceeds from notes receivable issued in connection
with sale of property and equipment 17,000 --
Purchases of property and equipment (106,000) (703,000)
---------- -----------
Net cash used in investing activities (89,000) (703,000)
---------- -----------
Cash flows from financing activities:
Proceeds from sales of common stock 21,000 14,000
Net repayments on revolving credit loan (528,000) (165,000)
Repayments of long-term debt (344,000) (152,000)
---------- -----------
Net cash used in financing activities (851,000) (303,000)
---------- -----------
Net decrease in cash (215,000) (523,000)
Cash and cash equivalents, beginning of period 1,615,000 1,751,000
---------- -----------
Cash and cash equivalents, end of period $1,400,000 $ 1,228,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
SUCCESSORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF THE BUSINESS
Successories, Inc. and its subsidiaries (collectively the "Company") design,
manufacture, and market proprietary and licensed products for business, personal
motivation and for 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 months ended May 1, 1999 and May 2, 1998 refer to the thirteen
weeks ended on the dates indicated.
The results of operations for the three months ended May 1, 1999 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 30, 1999.
NOTE 3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
----------- -----------
<S> <C> <C>
Finished goods $ 7,354,000 $ 8,199,000
Raw materials 2,499,000 2,638,000
----------- -----------
9,853,000 10,837,000
Less reserve for obsolescence (219,000) (219,000)
----------- -----------
$ 9,634,000 $10,618,000
=========== ===========
</TABLE>
7
<PAGE>
NOTE 4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
----------- -----------
<S> <C> <C>
Bank borrowings:
Term loan, net of debt discount of
$953,000 and $477,000 $ 5,012,000 $ 5,800,000
Revolving credit loan 4,346,000 4,874,000
Fixed rate loan, net of debt discount of
$245,000 and $260,000 255,000 240,000
Capital lease obligations 138,000 170,000
----------- -----------
9,751,000 11,084,000
Less current portion (5,450,000) (6,035,000)
----------- -----------
Long-term debt $ 4,301,000 $ 5,049,000
=========== ===========
</TABLE>
On June 20, 1997, the Company entered into a credit facility agreement with a
bank. Per the agreement, as amended most recently on April 28, 1999, the
facility is comprised of a $7.5 million term loan and a revolving credit loan.
The revolving credit loan provides for maximum borrowings of $9 million through
May 1, 2000 and for each succeeding July 1 through December 31; the maximum
borrowings at all other times is $6 million. 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 eligible
inventory is limited to $5 million through the year 2000 and $3 million in years
thereafter. A commitment fee of 0.5% 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 generally fluctuate based on the margin ratio, as defined, from a
minimum of prime plus 0.50% to a maximum of prime plus 3.00% on the term loan,
and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit
loan. Interest is payable monthly. The interest rates on the term loan and
revolving credit loan were 9.00% and 8.50%, respectively, at May 1, 1999. 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 May 1, 1999, available borrowings on the revolving credit loan was $698,000.
On June 20, 1997, warrants to purchase 150,000 shares of the Company's common
stock were issued to the bank as part of this agreement. Initially these
warrants had exercise prices ranging from $6.19 to $9.73 and expiration dates in
June 2001; however, the exercise prices were subsequently adjusted to $2.00 and
the expiration dates were extended to June 2005.
In July 1997, the agreement for the credit facility was amended to include an
additional $500,000 fixed rate loan. The loan bears interest at 12% and is due
in June 2003. Warrants to purchase an additional 72,464 shares were issued to
the bank in connection with this amendment and initially had an exercise price
of $6.90 and an expiration date of July 2003; however, the exercise price was
subsequently adjusted to $2.00 and the expiration date was extended to July
2005.
On April 28, 1999, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio, fixed charge coverage, debt to EBITDA ratio, and capital expenditure
limitation covenants for the year ended January 30, 1999, and adjust certain
other covenants prospectively. The amended agreement requires that (i) adjusted
EBITDA, as defined, which is
8
<PAGE>
based on a rolling four quarter period, may not be less than a loss of
$1,565,000 for the four quarters ended May 1, 1999, and increases each
subsequent quarter to $6.8 million for the four quarters ended November 4,
2000; and for each quarter thereafter; (ii) the interest coverage ratio, as
defined, may not be less than 0.75 to 1.0 at October 30, 1999, and increases
each subsequent quarter to 5.0 to 1.0 for the quarter ended April 29, 2000
and for each quarter thereafter; (iii) the fixed charge coverage ratio, as
defined, may not be less than 2.6 to 1.0 at January 29, 2000, and 1.5 to 1.0
thereafter; and (iv) the debt to EBITDA ratio, as defined, may not be greater
than 3.0 to 1.0 at January 29, 2000 and thereafter. Also, in certain cases
where prepayments on the loans are made in connection with equity offerings,
the amendment provides that certain quarterly installments on the term loan
will be deferred and the limits on borrowings relating to eligible inventory
under the revolving credit loan will be increased.
As a result, pursuant to the terms of the bank credit agreement, $1,000,000 of
proceeds from the sale of convertible preferred stock by the Company in May 1999
were used to make a prepayment on the next three quarterly installments through
December 1, 1999, on the term loan. Also, per the agreement the limitation on
borrowings against eligible inventory, as defined, under the Company's revolving
credit loan was increased from 50% to 54%. For further information on the sale
of convertible preferred stock by the Company, see Note 11.
In conjunction with the April 28, 1999 amendment, warrants to purchase an
additional 300,000 shares were issued to the bank at an exercise price of $2.50
that expire in 2005, the expiration dates of the 150,000 warrants previously
issued to the bank on June 20, 1997 were extended an additional two years and
the Company paid the bank a fee equal to 0.5% of the aggregate commitments under
the facility. The bank fee of $69,000 is included in interest expense in the
accompanying financial statements for the three months ended May 1, 1999.
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. At May 1, 1999, the Company was in compliance with the debt covenant
requirements of the credit facility agreement.
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 required 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, 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 again amended to waive the EBITDA
covenant, the interest charge coverage ratio and other related covenants for the
second quarter of fiscal 1998 provided that EBITDA for the third quarter of
fiscal 1998 was not less than $1.6 million. On December 11, 1998, the Company
obtained a waiver from the bank for the EBITDA and interest coverage covenants
for the third quarter ended October 31, 1998.
In conjunction with the May 14, 1998 amendment, the exercise prices of the
warrants to purchase 222,464 shares of common stock previously issued to the
bank were reduced to $5.85 and their expiration dates were extended for one
year. In conjunction with the September 1, 1998 amendment, the exercise prices
of these warrants were reduced to $3.00 and their expiration dates were extended
for another year. In conjunction with the waiver obtained on December 11, 1998,
the exercise prices of these warrants were reduced to $2.00.
9
<PAGE>
The stock warrants issued in conjunction with the credit facility and certain
other financing transactions were assigned a fair value using the Black-Scholes
option pricing model. The fair value of the 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 warrants amounted to
$42,000 and $31,000 for the three months ended May 1, 1999 and May 2, 1998,
respectively.
The weighted average interest rate on borrowings outstanding as of May 1, 1999
and January 30, 1999 were 9.1% and 9.9%, respectively.
NOTE 5. INCOME TAXES
Management believes that it is more likely than not that the net deferred tax
asset will be realized. Realization of the net deferred tax asset is largely
dependent upon the Company generating sufficient taxable income prior to the
expiration of the net operating loss carryforwards. However, the amount of such
realization could be reduced in the near term if estimates of future taxable
income during the carryforward period are changed. To the extent the net
operating loss carryforwards and existing deductible temporary differences are
not offset by the existing taxable temporary differences reversing within the
carryforward period, the remaining loss carryforwards are expected to be
realized by achieving future profitable operations. See Note 9.
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the statements of cash flows are as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
May 1, May 2,
1999 1998
----------- ----------
<S> <C> <C>
Cash paid during the period for:
Income taxes $ 40,000 $ 19,000
Interest 312,000 294,000
</TABLE>
NOTE 7. LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
May 1, May 2,
1999 1998
----------- -----------
<S> <C> <C>
Basic and diluted loss per share:
Net loss $ (557,000) $(1,375,000)
============= ===========
Weighted-average shares 6,921,923 6,763,473
============= ===========
Basic and diluted loss per share $ (0.08) $ (0.20)
============= ===========
</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.
10
<PAGE>
NOTE 8. SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" as of January 30, 1999. This Statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and in interim financial
reports issued to shareholders.
The Company's reportable segments are the various distribution channels used to
market its products. The Company's products have similar purposes and uses in
each channel of distribution, but profitability varies among the channels. The
Company considers itself a single line of business with products that are
marketed through direct marketing (catalog, electronic commerce and
telemarketing), retail (Company- owned stores), wholesale and franchise
channels. The Company has five reportable segments - Direct Marketing -
Successories, Direct Marketing - Golf, Retail Company-owned stores, Wholesale
and Sales to Franchisees.
The accounting policies of the reportable segments are the same as those
described in Note 2 of Notes to Consolidated Financial Statements in the
Company's 10-K. The Company evaluates the performance of its operating segments
based on income (loss) before other income (expense) and income taxes.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" row includes corporate related items
not allocated to reportable segments.
<TABLE>
<CAPTION>
Net Segment Total Capital Depreciation
Sales Profit (Loss) Assets Expenditures and Amortization
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MAY 1, 1999:
Direct Marketing Successories $ 7,318,000 $ 994,000 $ 2,308,000 $ -- $ --
Direct Marketing Golf 257,000 64,000 784,000 -- --
Retail Company-owned stores 3,004,000 (110,000) 5,585,000 8,000 163,000
Wholesale 373,000 (23,000) 781,000 -- --
Sales to Franchisees 1,104,000 262,000 1,508,000 -- 5,000
Other -- (1,744,000) 22,462,000 98,000 319,000
CONSOLIDATED $12,056,000 $ (557,000) $33,428,000 $ 106,000 $ 487,000
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MAY 2, 1998:
Direct Marketing Successories $ 6,761,000 $ 1,091,000 $ 3,422,000 $ -- $ --
Direct Marketing Golf 674,000 (149,000) 2,335,000 -- 7,000
Retail Company-owned stores 3,284,000 (263,000) 6,447,000 141,000 206,000
Wholesale 645,000 133,000 1,295,000 -- --
Sales to Franchisees 897,000 237,000 1,353,000 -- 5,000
Other -- (2,424,000) 24,871,000 562,000 456,000
CONSOLIDATED $12,261,000 $(1,375,000) $39,723,000 $ 703,000 $ 674,000
</TABLE>
The Company utilizes its facilities and the majority of its assets
interchangeably among each distribution channel. Assets that relate specifically
to a reportable segment have been included in the above table. Assets identified
to the reportable segments are primarily cash, receivables, inventory, prepaid
catalog expenses, property and equipment, and intangibles.
11
<PAGE>
The following table presents the details for "Other":
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MAY 1 MAY 2
1999 1998
----------- -----------
<S> <C>
Corporate expenses $ 1,043,000 $ 1,601,000
Unallocated depreciation and
amortization expense 319,000 456,000
Other expenses 382,000 367,000
----------- -----------
$ 1,744,000 $ 2,424,000
=========== ===========
</TABLE>
Corporate expenses are primarily charges for those functions not specifically
attributable to any specific segment; these functions include the merchandising,
information systems, accounting, legal, human resource and executive
departments. Included in the expenses associated with these functions are
payroll and related costs, professional fees, information system maintenance
costs, office occupancy costs, and property and casualty insurance.
The Company's operations are principally in the United States. Operations
outside of the United States are primarily in United Kingdom, Australia and
Europe. No single foreign country or geographic area is significant to the
consolidated operations. Foreign operations' net sales were $55,000 and
$225,000, respectively, for the three months ended May 1, 1999 and May 2, 1998.
Long-lived assets are all located in the United States.
The Company's products include distinctive lines of wall decor, desktop art,
books and greeting cards, computer and audio products, personalized gifts and
awards, and mugs. In addition, the Company sells other motivational products
supplied by third parties. At May 1, 1999, sales by product categories comprised
of approximately 44% wall decor, 23% desktop art, 17% books and greeting cards,
4% computer and audio products, 9% personalized gifts and awards and 3% other
products. Information pertaining to sales by product categories as of May 2,
1998 was not available due to system limitations.
For the three months ended May 1, 1999 and May 2, 1998, no single customer or
group under common control represented 10% or more of the Company's sales.
NOTE 9: RISKS AND UNCERTAINTIES
ABSENCE OF OPERATING PROFITS
The Company has incurred a loss from operations in two of the past three years,
and has an accumulated deficit of $12,892,000 as of May 1, 1999. While
management does not expect to incur an operating loss in future years, its
ability to achieve profitability will depend on many factors including the
Company's ability to develop, manufacture, and introduce and market commercially
acceptable products while controlling operating costs.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational products business and its two most profitable
distribution channels: direct marketing of SUCCESSORIES products and franchised
retail stores. As a result, management developed plans, which are in progress as
of May 1, 1999, to divest its golf catalog business and to convert its
Company-owned retail stores to franchise owner-operators. The Company has hired
a consultant with experience in marketing
12
<PAGE>
franchises to assist with the conversion of the Company-owned retail stores.
The Company has not yet sold the golf catalog business. As of May 1, 1999,
the Company has converted five of its Company-owned retail stores to
franchised stores. In addition, the Company has reduced overhead expenses and
management expects to continue cost reductions.
The Company's operating results for the three months ended May 1, 1999 showed an
improvement compared to the three months ended May 2, 1998. The operating loss
of $175,000 for the three months ended May 1, 1999, an 83% improvement over the
operating loss of $1,008,000 incurred for the three months ended May 2, 1998,
was on plan. The improvement in operating results can be attributed to a
reduction in selling, general and administrative expenses of over 15% as
compared to the same period in the prior year. It should be noted that due to
seasonality, the projection for the full year indicates a net profit. However,
there can be no assurance that the Company will achieve a profitable level of
operations in fiscal 1999 or that once profitability is achieved, that it can be
sustained.
FINANCING CONSIDERATIONS
Based on current projections, management believes that there will be sufficient
cash generated from operations and borrowings under its credit facility to
enable the Company to operate for the foreseeable future.
In addition, the Company is discussing possible equity infusions with various
parties. Any additional equity obtained would provide additional working capital
in the event the Company does not achieve its projection. In May 1999, the
company received $1,220,000 in proceeds from the sale of convertible preferred
stock. Pursuant to the terms of the bank credit agreement, $1,000,000 of
proceeds were used to make a prepayment on the next three quarterly installments
through December 1, 1999, on the term loan. For further information on the sale
of convertible preferred stock by the Company, see Note 11.
NOTE 10. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
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
sought arbitration pursuant to an Employment Agreement dated June 1, 1996
between the Company and Claimant. Claimant alleged and sought 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 responded to the claim with what the Company
believed to be a meritorious defense. On May 26, 1999, the parties entered into
a settlement agreement to effectuate a final resolution of all matters relating
to Mr. Beltrame's employment and termination thereof. The settlement payment
made to Mr. Beltrame was included in accrued expenses as of January 30, 1999 and
May 1, 1999. The Company and Mr. Beltrame dismissed the arbitration hearing with
prejudice.
In a related matter, the Company 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 alleged
non-payment of principal and interest due on a promissory note executed by Mr.
Beltrame. The Company sought judgment 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
13
<PAGE>
with costs and attorney fees. The case was dismissed with prejudice as part
of the above-mentioned settlement agreement.
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company, filed
a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortious interference with contract and violation of the Wisconsin Fair
Dealership Act. Wascher alleges and seeks an award in an amount in excess of
$250,000 plus costs, disbursements and attorney's fees, an award of both treble
and punitive damages, and such other relief deemed just and equitable.
The hearing dates for Wascher were originally scheduled for January 20, 21, 22
and 25, 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
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.
NOTE 11. SUBSEQUENT EVENTS
On May 28, 1999, the Company sold 503,092 shares of Series A convertible
preferred stock to a group of investors, pursuant to Regulation D of the
Securities Act of 1933. The Series A preferred stock has a par value of $0.01
per share and a purchase price of $2.425 per share. Dividends on the preferred
stock are accrued and payable quarterly in either cash or common stock at the
rate of 8% per annum, commencing on the date of issuance. Accrued and unpaid
dividends shall be paid on (1) April 30, July 31, October 31, and January 31
of each year commencing on July 31, 2000, to the holders of record as they
appear on the books and records of the Company 10 days preceding each payment
date, and (2) the date certificates representing common stock of the Company
are required to be delivered following any conversion of Series A convertible
preferred stock. Holders of the preferred stock have the right to convert
their shares, in whole or in part, into the Company's common stock. The
preferred stock also has certain other rights including pre-emptive rights,
voting rights, board representation, registration rights, and liquidation
preference. At any time commencing one year after the date of issuance of the
preferred stock, the holders of a majority of the preferred stock may require
the Company to file a registration statement covering the conversion of
preferred stock to common stock.
14
<PAGE>
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.
On September 3, 1998, the Company announced that it would focus its future
growth on its core motivational and self-improvement products and its two most
profitable distribution channels: direct marketing of SUCCESSORIES products and
franchised retail stores. As a result, the Company began plans, which are in
progress as of May 1, 1999, to divest its golf catalog business and to convert
its Company-owned retail stores to franchise owner-operators. As of May 1, 1999,
the Company has converted five of its Company-owned retail stores to franchised
stores.
For the three months ended May 1, 1999 and May 2, 1998, net product sales for
the various distribution channels were as follows:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
May 1, May 2,
1999 1998
--------------- ---------------
<S> <C> <C>
Direct marketing - Successories 61% 56%
Direct marketing - Golf 2% 5%
Retail Company-owned stores 25% 27%
Wholesale distribution 3% 5%
Sales to franchisees 9% 7%
</TABLE>
15
<PAGE>
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 1, 1999, COMPARED TO THREE MONTHS ENDED MAY 2, 1998
Net product sales were $12,056,000 for the three months ended May 1, 1999,
compared to $12,261,000 for the corresponding three months ended May 2, 1998.
The $205,000, or 1.7%, decrease in sales was comprised of direct marketing-golf
sales of $417,000, or 61.9%, retail Company-owned store sales of $280,000, or
8.5%, and wholesale sales of $272,000, or 42.2%, offset by an increase in direct
marketing-Successories sales of $557,000, or 8.2%, and franchise sales of
$207,000 or 23.1%.
The 8.2% increase in direct marketing-Successories sales was attributable to
planned increases in circulation of SUCCESSORIES catalogs. The 23.1% increase in
franchise sales was due to new products and higher sales volume from the
conversion of five Company-owned retail stores to franchised stores. The
decrease in direct marketing-golf sales was due to planned reductions in
circulation of the Company's golf catalogs. Retail Company-owned store sales
decreased by 8.5% due to fewer stores in operation in the current year, offset
by an increase in same-store sales of 2.3% as compared to the same prior year
three months ended May 2, 1998. There were 33 Company-owned and operated retail
stores at May 1, 1999 as compared to 40 stores at May 2, 1998.
Gross margin, as a percent of net product sales, was 57.6% for the three months
ended May 1, 1999, compared to 60.4% for the corresponding three months ended
May 2, 1998. The decrease in gross margin is due to lower gross profit on
product sales and royalty income. The decrease in gross profit on product sales
was due to planned product promotions resulting from market testing in the
direct marketing and retail distribution channels. Royalty income decreased from
the prior year primarily as a result of a decrease in wholesale sales.
Operating expenses decreased for the three months ended May 1, 1999 to
$7,124,000 from $8,410,000 for the three months ended May 2, 1998. The 15.3%
decrease in current year operating expenses can be attributed to reducing
expenses related to the Company's golf catalog business and exiting its European
expansion, which had significant costs in the corresponding prior year three
months ended May 2, 1998. Also in the current year, corporate and administrative
expenses decreased as a result of focusing on the two core channels; direct
marketing of SUCCESSORIES products and sales to franchise owner-operators.
Interest expense was $363,000 for the three months ended May 1, 1999, compared
to $341,000 for the three months ended May 2, 1998. The current year interest
expense includes a bank amendment fee of $69,000. Included in interest expense
is the non-cash interest related to the amortization of the debt discount. This
non-cash interest amounted to $42,000 and $31,000 for the three months ended May
1, 1999 and May 2, 1998, respectively.
The net loss of $557,000 for the three months ended May 1, 1999 was less than
the net loss of $1,375,000 for the three months ended May 2, 1998, primarily due
to a decrease in operating expenses offset by a decrease in net sales and gross
margin. As a percentage of net product sales, the net loss decreased to
16
<PAGE>
4.6% for the three months ended May 1, 1999, as compared to a net loss of
11.2% for the three months ended May 2, 1998.
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 $725,000 for the three months ended May 1,
1999, compared to $483,000 for the three months ended May 2, 1998. The
improvement in cash flows from operating activities can be primarily
attributable to a decrease in the net loss and inventory, offset by a decrease
in depreciation and amortization, the change in accounts receivable and an
increase in prepaid catalog expenses. The decrease in inventory can be
attributed to management's planned efforts to reduce inventory expenses. The
decrease in accounts receivable can be attributed to improved collections.
Investing activities used cash of $89,000 for the three months ended May 1,
1999, compared to $703,000 for the three months ended May 2, 1998. Capital
expenditures were the principal use of cash. During the three months ended May
1, 1999, the Company expended funds for computer equipment related to addressing
Year 2000 compliance. In the prior year three months ended May 2, 1998, the
Company expended funds primarily for the new point-of-sale computer systems for
its Company-owned retail stores. The Company's current credit facility limits
capital expenditures to $1 million for each fiscal year.
Financing activities used cash of $851,000 for the three months ended May 1,
1999, compared to $303,000 for the three months ended May 2, 1998. Scheduled
debt repayments on term notes and capital leases, and net repayments on the
revolving credit loan were the principal uses of cash.
On June 20, 1997, the Company entered into a credit facility agreement with a
bank. Per the agreement, as amended most recently on April 28, 1999, the
facility is comprised of a $7.5 million term loan and a revolving credit loan.
The revolving credit loan provides for maximum borrowings of $9 million through
May 1, 2000 and for each succeeding July 1 through December 31; the maximum
borrowings at all other times is $6 million. 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 eligible
inventory is limited to $5 million through the year 2000 and $3 million in years
thereafter. A commitment fee of 0.5% 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 generally fluctuate based on the margin ratio, as defined, from a
minimum of prime plus 0.50% to a maximum of prime plus 3.00% on the term loan,
and a minimum of prime to a maximum of prime plus 3.00% on the revolving credit
loan. Interest is payable monthly. The interest rates on the term loan and
revolving credit loan were 9.00% and 8.50%, respectively, at May 1, 1999. 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. On
June 20, 1997, warrants to purchase 150,000 shares of the Company's common stock
were issued to the bank as part of this agreement. Initially these warrants had
exercise prices ranging from $6.19 to $9.73 and expiration dates in June 2001;
however, the exercise prices were subsequently adjusted to $2.00 and the
expiration dates were extended to June 2005.
17
<PAGE>
In July 1997, the agreement for the credit facility was amended to include an
additional $500,000 fixed rate loan. The loan bears interest at 12% and is due
in June 2003. Warrants to purchase an additional 72,464 shares were issued to
the bank in connection with this amendment and initially had an exercise price
of $6.90 and an expiration date of July 2003; however, the exercise price was
subsequently adjusted to $2.00 and the expiration date was extended to July
2005.
On April 28, 1999, the agreement was amended to waive the earnings before
interest, taxes, depreciation and amortization ("EBITDA"), interest coverage
ratio, fixed charge coverage, debt to EBITDA ratio, and capital expenditure
limitation covenants for the year ended January 30, 1999, and adjust certain
other covenants prospectively. The amended agreement requires that (i) adjusted
EBITDA, as defined, which is based on a rolling four quarter period, may not be
less than a loss of $1,565,000 for the four quarters ended May 1, 1999, and
increases each subsequent quarter to $6.8 million for the four quarters ended
November 4, 2000 and for each quarter thereafter; (ii) the interest coverage
ratio, as defined, may not be less than 0.75 to 1.0 at October 30, 1999, and
increases each subsequent quarter to 5.0 to 1.0 for the quarter ended April 29,
2000 and for each quarter thereafter; (iii) the fixed charge coverage ratio, as
defined, may not be less than 2.6 to 1.0 at January 29, 2000, and 1.5 to 1.0
thereafter; and (iv) the debt to EBITDA ratio, as defined, may not be greater
than 3.0 to 1.0 at January 29, 2000 and thereafter. Also, in certain cases where
prepayments on the loans are made in connection with equity offerings, the
amendment provides that certain quarterly installments on the term loan will be
deferred and the limits on borrowings relating to eligible inventory under the
revolving credit loan will be increased.
In conjunction with the April 28, 1999 amendment, warrants to purchase an
additional 300,000 shares were issued to the bank at an exercise price of $2.50
that expire in 2005, the expiration dates of the 150,000 warrants previously
issued to the bank on June 20, 1997 were extended an additional two years to
June 2005, and the Company paid the bank a fee equal to 0.5% of the aggregate
commitments under the facility. The bank fee of $69,000 is included in interest
expense in the accompanying financial statements for the three months ended May
1, 1999.
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. At May 1, 1999, the Company was in compliance with the debt covenant
requirements of the credit facility agreement.
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 required 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, 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 again amended to waive the EBITDA
covenant, the interest charge coverage ratio and other related covenants for the
second quarter of fiscal 1998 provided that EBITDA for the third quarter of
fiscal 1998 was not less than $1.6 million. On December 11, 1998, the Company
obtained a waiver from the bank for the EBITDA and interest coverage covenants
for the third quarter ended October 31, 1998.
In conjunction with the May 14, 1998 amendment, the exercise prices of the
warrants to purchase 222,464 shares of common stock previously issued to the
bank were reduced to $5.85 and their expiration dates were extended for one
year. In conjunction with the September 1, 1998 amendment, the exercise prices
18
<PAGE>
of these warrants were reduced to $3.00 and their expiration dates were extended
for another year. In conjunction with the waiver obtained on December 11, 1998,
the exercise prices of these warrants were reduced to $2.00.
At May 1, 1999 available borrowings on the revolving credit loan was $698,000.
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.
In addition, the Company is discussing possible equity infusions with various
parties. Any additional equity obtained would provide additional working capital
in the event the Company does not achieve its projection. In May 1999, the
Company received $1,220,000 in proceeds from the sale of convertible preferred
stock. Pursuant to the terms of the bank credit agreement, $1,000,000 of
proceeds were used to make a prepayment on the next three quarterly installments
through December 1, 1999, on the term loan. Also, per the agreement the
limitation on borrowings against eligible inventory, as defined under the
Company's revolving credit loan was increased from 50% to 54%. For further
information on the sale of convertible preferred stock by the Company, see Note
11.
YEAR 2000 COMPLIANCE
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify years. As a result, such systems will recognize the
year 2000 as "00." This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
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
has developed a comprehensive risk-based plan. The plan addresses 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>
PREPARATION SURVEYING PLANNING IMPLEMENTATION
----------- --------- -------- --------------
<S> <C> <C> <C> <C>
FINANCIAL AND INVENTORY Complete Complete Complete Est. Q2 - 1999
SYSTEMS
ORDER ENTRY AND Complete Complete Complete Est. Q2 - 1999
FULFILLMENT
TELECOMMUNICATIONS Complete Complete Complete Complete
LAN/WAN Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
ANCILLARY SOFTWARE Complete Complete Est. Q2 - 1999 Est. Q2 - 1999
PC SOFTWARE Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
(NON-FINANCIAL)
MANUFACTURING Complete Complete Est. Q2 - 1999 Est. Q3 - 1999
EQUIPMENT
THIRD PARTY VENDORS Complete Complete 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
19
<PAGE>
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 vendors 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.
The Company presently believes, with the modifications made to existing
software, the Year 2000 problem will not pose significant operational risk.
While the Company cannot 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 finalizing appropriate contingency plans and
procedures in an attempt to minimize the effects of such a scenario. The cost of
addressing potential Year 2000 problems are not currently expected to have a
material impact on the Company's consolidated financial position or results of
operations, and the Company expects to incur approximately $250,000 or less in
related capital expenditures in fiscal 1999.
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, and direct marketing catalog advertising expenses as a
percentage of sales are higher in the first calendar quarter. 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 the fall 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,
realization of deferred tax assets, costs associated with potential year 2000
problems, 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.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rate and foreign currency exchange rates, but does not hold any market
risk sensitive instruments for trading purposes. Principal exposed to interest
rate risk is limited to $10,311,000 in variable rate debt. The Company measures
its interest rate risk by estimating the net amount by which potential future
net earnings would be impacted by hypothetical changes in market interest rates
related to all interest rate sensitive assets and liabilities. The Company's
exposure to foreign currency exchange rate risk relates primarily to the
financial position and results of operations in Canada, United Kingdom and
Australia. The Company's exposure to foreign currency exchange rate risk is
difficult to estimate due to factors such as balance sheet accounts and the
existing economic uncertainty and future economic conditions in the
international marketplace.
21
<PAGE>
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
sought arbitration pursuant to an Employment Agreement dated June 1, 1996
between the Company and Claimant. Claimant alleged and sought 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 responded to the claim with what the Company
believed to be a meritorious defense. On May 26, 1999 the parties entered into a
settlement agreement to effectuate a final resolution of all matters relating to
Mr. Beltrame's employment and termination thereof. The settlement made to Mr.
Beltrame was included in accrued expenses at January 30, 1999 and May 1, 1999.
The Company and Mr. Beltrame dismissed the arbitration hearing with prejudice.
In a related matter, the Company 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 alleged
non-payment of principal and interest due on a promissory note executed by Mr.
Beltrame. The Company sought judgment 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. The case was
dismissed with prejudice as part of the above-mentioned settlement agreement.
In May 1998, Wascher Corporation ("Wascher"), a franchisee of the Company, filed
a Demand for Arbitration dated May 26, 1998 with the American Arbitration
Association (Case No. 51-114-00227-98). Wascher alleges the following causes of
action against the Company: breach of contract, breach of good faith and fair
dealing, common law fraud, unfair competition, Robinson-Patman Act violation,
tortious interference with contract and violation of the Wisconsin Fair
Dealership Act. Wascher alleges and seeks an award in an amount in excess of
$250,000 plus costs, disbursements and attorney's fees, an award of both treble
and punitive damages, and such other relief deemed just and equitable.
The hearing dates for Wascher were originally scheduled for January 20, 21, 22
and 25, 1999. The Company and Wascher have postponed the hearing and are
involved in settlement negotiations. If a settlement is not reached with
Wascher, the Company intends to vigorously defend itself against the claims.
Given the phase of this proceeding, the Company has determined that a reasonable
assessment with respect to the financial impact, if any, cannot be made at this
point in time.
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
May 1, 1999.
22
<PAGE>
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: June 11, 1999 By: /s/ Arnold M. Anderson
-------------------------------------
Arnold M. Anderson
Chief Executive Officer, Chairman
of the Board and Director
(Principal Executive Officer)
Date: June 11, 1999 By: /s/ Gary Rovansek
-------------------------------------
Gary Rovansek
President, Chief Operating Officer
and Director
Date: June 11, 1999 By: /s/ Steven D. Kuptsis
-------------------------------------
Steven D. Kuptsis
Senior Vice President, Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ---------- -----------
<S> <C>
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 April 7, 1999 between the Company and
Arnold M. Anderson (filed herewith)
Indemnification Agreements in the form filed were also entered into by
the Messrs, Seamas T. Coyle, Timothy C. Dillon, C. Joseph LaBonte,
Steven B. Larrick, Michael H. McKee, Mervyn C. Phillips, Jr., Guy E.
Snyder, Gary Rovansek, Scott R. Morrison, Jr., and Jack Miller
24
<PAGE>
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)
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)
25
<PAGE>
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)
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 (15)
10.34 Employment Agreement with Gary Rovansek dated October 29, 1998 (15)
10.35 Fourth Amendment to Credit Agreement between the Company and the
Provident Bank dated as of April 28, 1999 (filed herewith)
10.36 Warrants to Purchase Common Stock of the Company granted to Provident
Bank and dated as of April 29, 1999 (filed herewith)
10.37 Preferred Stock Purchase Agreement dated as of May 28, 1999 by and
among the Company and the investors (16)
21.1 Subsidiaries (4)
27.1 Financial Data Schedule (filed herewith)
- -----------------------------
</TABLE>
(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.
26
<PAGE>
(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.
(15) Previously filed with the Company's Form 10-Q for the quarter ended October
31, 1998, and incorporated herein by reference.
(16) Filed with the Company's Form 8-K on June 10, 1999, and incorporated herein
by reference.
27
<PAGE>
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "AGREEMENT"), dated as of the 7TH
day of April, 1999, is between Successories, Inc., an Illinois corporation (the
"COMPANY") and Arnold M. Anderson (the "INDEMNITEE").
W I T N E S S E T H:
WHEREAS, the Company desires to obtain the services of Indemnitee as a
director of the Company;
WHEREAS, as a condition to Indemnitee's agreement to serve and continue to
serve the Company, Indemnitee requires that he be indemnified from liability to
the fullest extent permitted by law; and
WHEREAS, the Company is willing to indemnify Indemnitee to the fullest
extent permitted by law in order to retain the services of Indemnitee.
NOW, THEREFORE, for and in consideration of the mutual premises and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Indemnitee hereby agree as follows:
1. CERTAIN DEFINITIONS.
(a) CLAIM: any threatened, pending, or completed action, suit, or
proceeding or any inquiry or investigation (including discovery), whether
conducted by the Company or any other party, that Indemnitee in good faith
believes might lead to the institution of any action, suit, or proceeding,
whether civil, criminal, administrative, investigative, or other.
(b) EXPENSES: all costs, expenses (including attorneys' and expert
witnesses' fees), judgments, fines, penalties, amounts paid in settlement and
obligations (including all interest, assessments, and other charges paid or
payable in connection with or in respect of such Expenses, judgments, fines,
penalties, or amounts paid in settlement) paid or incurred in connection with
investigating, defending (including affirmative defenses and counterclaims),
settling, being a witness in, or participating in (including on appeal), or
preparing to defend, be a witness in, or participate in, any Claim relating to
any Indemnifiable Event.
1
<PAGE>
(c) INDEMNIFIABLE EVENT: any event or occurrence related to, or
arising out of, the fact that Indemnitee is or was a director, officer,
employee, trustee, or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee, trustee, or agent of another
corporation, partnership, joint venture, employee benefit plan, trust, or other
enterprise, or by reason of any thing done or not done by Indemnitee in any such
capacity.
2. BASIC INDEMNIFICATION AND EXPENSE REIMBURSEMENT ARRANGEMENT.
(a) In the event Indemnitee was, is, or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than 30
days after written demand is presented to the Company, against any and all
Expenses of or with respect to that Claim.
(b) If so requested by Indemnitee, the Company shall pay any and all
Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee for any
and all Expenses incurred by Indemnitee and previously paid by Indemnitee)
within ten days after such request (an "EXPENSE ADVANCE"); PROVIDED, HOWEVER,
such request must contain (i) a statement reasonably detailing the Expenses for
which advancement is requested, and (ii) an undertaking by Indemnitee, or on
Indemnitee's behalf, to repay such advancement of Expenses if it is ultimately
determined by a final judicial decision from which there is no further right to
appeal that Indemnitee is not entitled to be indemnified for such Expenses under
this Agreement or otherwise. The Company shall be obligated to make or pay an
Expense Advance in advance of the final disposition or conclusion of any Claim
in accordance with this Section 2(b). Any dispute as to the reasonableness of
any Expense shall not delay an Expense Advance by the Company, and the Company
agrees that any such dispute shall be resolved only upon the disposition or
conclusion of the underlying Claim against the Indemnitee.
3. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
Indemnitee against any and all costs and expenses (including attorneys' and
expert witnesses' fees), and, if requested by Indemnitee, shall (within ten
business days of that request) advance or reimburse those costs and expenses to
Indemnitee, that are incurred by Indemnitee in connection with (A) the
negotiation and execution of this Agreement, which shall include, without
limitation, the review of the Company's Articles of Incorporation, Bylaws and
the directors' and officers' liability insurance policies and (B) any claim
asserted against or action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under this Agreement or any other
agreement or provision of the Company's Articles of Incorporation or Bylaws now
or hereafter in effect relating to Claims for Indemnifiable Events or
(ii) recovery under any directors' and officers' liability insurance policies
maintained by the Company; provided, however, that Indemnitee shall repay such
advancement of costs and expenses if it is ultimately determined by a final
judicial decision from which there is no further right to appeal that Indemnitee
is not entitled to be indemnified for such costs or expenses under this
Agreement or otherwise.
2
<PAGE>
4. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of
this Agreement to indemnification by the Company for some or a portion of the
Expenses but not, however, for all of the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
5. CONTRIBUTION.
(a) CONTRIBUTION PAYMENT. To the extent the indemnification provided
for under any provision of this Agreement is determined (in the manner
hereinabove provided) not to be permitted under applicable law, then in the
event Indemnitee was, is, or becomes a party to or witness or other participant
in, or is threatened to be made a party to or witness or other participant in, a
Claim by reason of (or arising in part out of) an Indemnifiable Event, to the
extent contribution with respect to such Indemnifiable Event is permitted under
applicable law, the Company, in lieu of indemnifying Indemnitee, shall
contribute to the amount of any and all Expenses assessed against or incurred or
paid by Indemnitee on account of or with respect to that Claim for which such
contribution is permitted ("CONTRIBUTION AMOUNTS"), in such proportion as is
appropriate to reflect the relative fault with respect to the Indemnifiable
Event giving rise to the Contribution Amounts of Indemnitee, on the one hand,
and of the Company and any and all other parties (including officers and
directors of the Company other than Indemnitee) who may be at fault with respect
to such Indemnifiable Event (collectively, including the Company, the "THIRD
PARTIES") on the other hand.
(b) RELATIVE FAULT. The relative fault of the Third Parties and the
Indemnitee shall be determined (i) by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency assessing the
Contribution Amounts or (ii) to the extent such court or other governmental
agency does not apportion relative fault, by a majority of the disinterested
members of the Company's Board of Directors after giving effect to, among other
things, the relative intent, knowledge, access to information, and opportunity
to prevent or correct the applicable Indemnifiable Event and other relevant
equitable considerations of each party. The Company and Indemnitee agree that
it would not be just and equitable if contribution pursuant to this SECTION 5(b)
were determined by pro rata allocation or by any other method of allocation
which does take account of the equitable considerations referred to in this
SECTION 5(b).
6. PRESUMPTION. Indemnitee shall be presumed to be entitled to
indemnification for any act or omission covered in this Agreement. The burden
of proof of establishing that Indemnitee is not entitled to indemnification
because of the failure to fulfill any legal requirement shall be on the Company.
3
<PAGE>
7. NON-EXCLUSIVITY. The rights of Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's Bylaws or
Articles of Incorporation or the Illinois Business Corporation Act ("IBCA") or
otherwise. To the extent that a change in the IBCA (whether by statute or
judicial decision) permits greater indemnification by agreement than would be
afforded currently under the Company's Bylaws or Articles of Incorporation and
this Agreement, it is the intent of the parties hereto that Indemnitee shall
enjoy by this Agreement the greater benefits so afforded by that change.
8. LIABILITY INSURANCE. Except as otherwise agreed to by the Company and
Indemnitee in a written agreement, to the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by that policy or those policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
9. MISCELLANEOUS.
(a) NOTICE PROVISION. Any notice, payment, demand or communication
required or permitted to be delivered or given by the provisions of this
Agreement shall be deemed to have been effectively delivered and received (i) if
personally delivered, upon receipt, (ii) if sent via facsimile, upon mechanical
confirmation of successful transmission thereof generated by the sending
telecopy machine only if such notice is also delivered by hand, or deposited in
the United States mail, postage prepaid, registered or certified mail, on or
before two business days after its delivery by facsimile, or (iii) if sent by
registered or certified mail, five days after deposit thereof in the U.S. mail
and addressed to the parties at the addresses set forth above their signatures
to this Agreement.
(b) ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties and supersedes all prior understandings, whether
written or oral, between the parties with respect to the subject matter of this
Agreement.
(c) SEVERABILITY OF PROVISIONS. If any provision of this Agreement
is held to be illegal, invalid, or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this
Agreement; and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance from this Agreement. Furthermore,
in lieu of each such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid or unenforceable provision as may be possible and be
legal, valid, and enforceable.
(d) APPLICABLE LAW. This Agreement shall be governed by and
construed under the laws of the State of Illinois.
4
<PAGE>
(e) EXECUTION IN COUNTERPARTS. This Agreement and any amendment may
be executed simultaneously or in two or more counterparts, each of which
together shall constitute one and the same instrument.
(f) COOPERATION AND INTENT. The Company shall cooperate in good
faith with Indemnitee and use its best efforts to ensure that Indemnitee is
indemnified for liabilities described herein to the fullest extent permitted by
law.
(g) AMENDMENT. No amendment, modification or alteration of the terms
of this Agreement shall be binding unless in writing, dated subsequent to the
date of this Agreement, and executed by the parties hereto.
(h) BINDING EFFECT. The obligations of the Company to Indemnitee
hereunder shall survive and continue as to Indemnitee even if Indemnitee ceases
to be a director, officer, employee and/or agent of the Company. Each and all
of the covenants, terms and provisions of this Agreement shall be binding upon
and inure to the benefit of the successors to the Company and to the benefit of
the estate, heirs, executors, administrators and personal representatives of
Indemnitee.
(j) EFFECTIVE DATE. The provisions of this Agreement shall cover
claims, actions, suits and proceedings whether now pending or hereafter
commenced and shall be retroactive to cover acts or omissions or alleged acts or
omissions which heretofore have taken place. By way of example but not of
limitation, this Agreement shall apply to all liabilities, known or unknown,
contingent or otherwise, that presently exist or arise in the future, regardless
whether the liabilities relate to activities of Indemnitee and/or the Company
preceding or subsequent to the date of this Agreement.
[Signature Page to Follow]
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Indemnification
Agreement as of the day and year first written above.
THE COMPANY:
SUCCESSORIES, INC.
Address: 2520 Diehl Road
------------------------------
Aurora, Illinois 60504
------------------------------
------------------------------
By: /s/ Gary J. Rovansek
------------------------------
THE INDEMNITEE:
ARNOLD M. ANDERSON
Address: 222 Hawley Lane
------------------------------
Geneva, Illinois 60134
------------------------------
------------------------------
/s/ Arnold M. Anderson
------------------------------
Signature
6
<PAGE>
FOURTH AMENDMENT TO
CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT ("Third Amendment") dated as of
April 28, 1999. 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, a Second Amendment dated as of May 14, 1998 and a Third Amendment dated as
of September 1, 1998 (as so amended, the "Credit Agreement"); and
WHEREAS, Borrowers have requested Lenders to make various financial
adjustments to the Credit Agreement and waive and adjust various 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. WAIVER OF CERTAIN COVENANTS. The Lenders hereby agree to waive the
application of (i) Sections 7.1, 7.2 and 7.3 of the Credit Agreement solely as
they relate to the Reference Period ending on the Computation Date closest to
January 31, 1999, (ii) Section 7.6 of the Credit Agreement solely as it relates
to fiscal year ended January 30, 1999 and (iii) Section 7.5 of the Credit
Agreement solely as it relates to the Reference Periods ending on the
Computation Dates closest to January 31, 1999, April 30, 1999, July 31, 1999 and
October 31, 1999. The waivers contained in this Section 2 apply only to
Sections 7.1, 7.2, 7.3 and 7.5 and 7.6 of the Credit Agreement to the
<PAGE>
-2-
extent expressly stated herein and do not otherwise modify or waive any other
covenant or agreement contained in the Credit Agreement or for any other
Reference Period.
3. DEFINITIONS; EXHIBITS. (a) Section 1.2 of the Credit Agreement is
hereby amended to add the following definitions to read in its entirety as
follows:
"ADVANCE RATE" means an amount equal to 50%, until such time as
Borrowers close the Equity Transaction, in which event the Advance
Rate until May 1, 2000 shall be an amount based upon the net proceeds
thereof, as set forth below:
<TABLE>
<CAPTION>
Aggregate Net Proceeds
of Equity Transaction Advance Rate
------------------------------- --------------
<S> <C>
Between $1,000,000.00 and $1,999,999.99 54.0%
Between $2,000,000.00 and $2,999,999.99 57.0%
$3,000,000.00 or greater 60.0%
</TABLE>
"FOURTH AMENDMENT CLOSING DATE" means the day on which the Fourth
Amendment to Credit Agreement is executed and delivered by all
applicable parties.
"EQUITY TRANSACTION" means the sale of Preferred Stock of
Holdings to Jack Miller, or other equity investor reasonably
acceptable to the Lenders.
(b) The following definitions contained in Section 1.2 of the Credit
Agreement are hereby amended as follows:
"APPLICABLE MARGIN" shall initially mean Three percent (3.00%)
for each of the Revolving Credit Loans and the Term Loan to be added
to the Prime Rate used in calculating the rate of interest for the
applicable Loan at any time; PROVIDED, that from and after the time at
which the Margin Ratio is less than 3.00 to 1.00, the Applicable
Margin shall mean the amount set forth below, as a percentage, to be
added to the Prime Rate, as the case may be, and used in calculating
the rate of interest for the applicable Loan at any time:
<PAGE>
-3-
<TABLE>
<CAPTION>
Applicable Margin
Margin Ratio
----------------------------- --------------------
Revolving Credit Loan Term Loan
----------------------------------------------- ----------------------------- --------------------
<S> <C> <C>
Greater than or equal to 3.00 to 1.00 3.00% 3.00%
----------------------------------------------- ----------------------------- --------------------
Greater than or equal to 2.50 to 1.00
but less than 3.00 to 1.00 .75% 1.25%
----------------------------------------------- ----------------------------- --------------------
Greater than or equal to 2.00 to 1.00
but less than 2.50 to 1.00 .50% 1.00%
----------------------------------------------- ----------------------------- --------------------
Greater than or equal to 1.50 to 1.00
but less than 2.00 to 1.00 .25% .75%
----------------------------------------------- ----------------------------- --------------------
Less than 1.50 to 1.00 0.00% .50%
----------------------------------------------- ----------------------------- --------------------
</TABLE>
The determination of Applicable Margin hereunder as of any Interest
Adjustment Date shall be based on unaudited quarterly compliance
certificates required to be delivered pursuant to Section 6.1(c)
hereof, PROVIDED that in the event of any discrepancy between
computations based upon any compliance certificate and the related
audited financial statements furnished pursuant to Section 6.1(c), the
computation based upon the audited financial statements shall govern
(retroactive to the Interest Adjustment Date as to which such
adjustment applies). In the event of a retroactive correction of the
determinations of the Applicable Margin in favor of the Lenders, the
amount of interest thereby overdue and payable by the Borrowers shall
be paid to the Lenders within five (5) days after the date of such
retroactive correction. In the event of a retroactive correction of
the determinations of the Applicable Margin in favor of the Borrowers,
the amount of interest overpaid by the Borrowers shall be applied by
the Lender as a credit against any fees, charges and interest or
principal payments then due hereunder or to become due hereunder to
Lenders. No downward adjustment of the Applicable Margin shall occur
if, at the time such downward adjustment would otherwise be made,
there shall exist any Default or Event of Default, PROVIDED that such
downward adjustment shall be made on the first day of the first month
after the date on which any Default or Event of Default shall have
been waived or cease to exist.
"BORROWING BASE" means, as of any date of determination, the sum
of (a) an amount equal to eighty-five percent (85%) of Eligible
Receivables, PLUS (b) an amount equal to a percentage of Eligible
Inventory equal to the Advance Rate; PROVIDED, HOWEVER, that (i)
through May 1, 2000, this clause (b) shall equal the lesser of Five
Million and 00/100 Dollars ($5,000,000.00) and an amount equal to a
<PAGE>
-4-
percentage of Eligible Inventory equal to the Advance Rate, and (ii)
during the months of February, March and April 2001 and each February,
March and April thereafter this clause (b) shall equal the lesser of
Three Million and 00/100 Dollars ($3,000,000.00) and an amount equal
to the percentage of Eligible Inventory equal to the Advance Rate.
"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); PLUS (vi)
for each of the Reference Periods ending on the Computation Date
closest to April 30, 1999, July 31, 1999 and October 31, 1999,
$2,000,000; MINUS (vii) 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).
"MAXIMUM REVOLVING COMMITMENT" means the following amounts during
the periods set forth below:
<TABLE>
<CAPTION>
PERIOD MAXIMUM REVOLVING COMMITMENT
-------------- ----------------------------
<S> <C>
Fourth Amendment Closing Date through Nine Million and 00/100 Dollars
May 1, 2000 ($9,000,000.00)
May 1, 2000 through June 30, 2000 Six Million and 00/100 Dollars
($6,000,000.00)
July 1, 2000 through December 31, 2000 Nine Million and 00/100 Dollars
and each succeeding July 1, through ($9,000,000.00)
December 31
January 1, 2001 through June 30, 2001 Six Million and 00/100 Dollars
and each succeeding January 1, through ($6,000,000.00)
June 30
</TABLE>
(a) RESTRICTED PAYMENT. Clause (a) (ii) of the definition of
"Restricted Payment" is hereby amended to read as follows:
<PAGE>
-5-
"(ii) a dividend payable solely in shares of that class of
stock to the holders of that class or payable solely in
common stock."
(b) FORM OF BORROWING BASE CERTIFICATE. Exhibit G to the Credit
Agreement is hereby amended in its entirety as Exhibit G to this Amendment.
(c) FORM OF COMPLIANCE CERTIFICATE. Exhibit H to the Credit
Agreement is hereby amended in its entirety as Exhibit H to this Amendment;
4. APPLICATION OF PROCEEDS. Section 2.6(i) of the Credit Agreement is
hereby amended in its entirety to read as follows:
(i) APPLICATION OF PROCEEDS. With respect to mandatory
prepayments described in Sections 2.6(d) through 2.6(g) above, such
prepayments shall first be applied in the inverse order of maturity to
the payment of the remaining installments on the Term Loan, and
thereafter such payments shall be applied in repayment of the
Revolving Loan; PROVIDED, HOWEVER, that with respect to a mandatory
prepayment of the proceeds of the Equity Transaction pursuant to
Section 2.6(f), the first One Million Dollars ($1,000,000) of such
prepayment shall be applied first to the next three principal payments
on the Term Loan due following such Equity Transaction and then to the
payment of the remaining installments of the Term Loan in the inverse
order of maturity, the next Two Million Dollars ($2,000,000) of such
prepayment shall be applied in repayment of the Revolving Loan, and
the balance of such prepayment shall be applied to the payment of the
remaining installments of the Term Loan in the inverse order of
maturity.
5. PREPAYMENT FEES. Section 2.6(j) of the Credit Agreement is hereby
amended to delete the phrase "and three-fourths of one percent (0.75%) upon
prepayment during the Third Loan Year."
6. EBITDA. Section 7.1 of the Credit Agreement is hereby amended in its
entirety to read as follows:
Section 7.1 EBITDA. Borrowers shall not permit its EBITDA for
the Reference Period ending on each Computation Date set forth below
to be less than the dollar amount set forth below opposite such date:
<PAGE>
-6-
<TABLE>
<CAPTION>
Computation Date CONSOLIDATED
Closest to EBITDA
------------------------ ------------------
<S> <C>
January 31, 1998 $4,164,000
April 30, 1998 $4,000,000
July 31, 1998 $4,200,000
October 31, 1998 $4,500,000
January 31, 1999 $5,300,000
April 30, 1999 ($1,565,000)
July 31, 1999 ($230,000)
October 31, 1999 $830,000
January 31, 2000 $4,100,000
April 30, 2000 $6,300,000
July 31, 2000 $6,500,000
October 31, 2000 $6,800,000
January 31, 2001 $6,800,000
</TABLE>
7. INTEREST COVERAGE RATIO. Section 7.2 of the Credit Agreement is
hereby amended in its entirety to read as follows:
Section 7.2 INTEREST COVERAGE RATIO. On each Computation Date,
Borrowers shall not permit the ratio of Consolidated EBITDA to
Consolidated Cash Interest Expense to be less than the amount set
forth below opposite such date.
<PAGE>
-7-
<TABLE>
<CAPTION>
COMPUTATION DATE
closest to RATIO
----------------- -------
<S> <C>
January 31, 1998 Not Applicable
April 30, 1998, July 31, 1998, 3.0 to 1.0
October 31, 1998
January 31, 1999 4.0 to 1.0
April 30, 1999 Not Applicable
July 31, 1999 Not Applicable
October 31. 1999 0.75 to 1.0
January 31, 2000 3.80 to 1.00
April 30, 2000 and each 5.0 to 1.0
Computation Date thereafter
</TABLE>
8. FIXED CHARGE COVERAGE. Section 7.3 of the Credit Agreement is hereby
amended in its entirety to read as follows:
Section 7.3 FIXED CHARGE COVERAGE. Borrower shall not permit the
Consolidated ratio of Cash Flow to Fixed Charges for the Reference
Period ending on the dates set forth below to be less than the amount
set forth opposite such date:
<TABLE>
<CAPTION>
COMPUTATION DATE
closest to RATIO
------------------ --------
<S> <C>
January 31, 1998, April 30, 1998, 1.25 to 1.0
July 31, 1998, October 31, 1998 and
January 31, 1999
April 30, 1999, July 31, 1999, and Not Applicable
October 31, 1999
January 31, 2000 2.60 to 1.00
April 30, 2000 and each 1.5 to 1.0
Computation Date thereafter
</TABLE>
9. DEBT TO EBITDA. Section 7.5 of the Credit Agreement is hereby amended
in its entirety to read as follows:
<PAGE>
-8-
Section 7.5 DEBT TO EBITDA. Borrower shall not permit the
Consolidated ratio of Indebtedness for Borrowed Money on such date to
EBITDA for the Reference Period ending on the dates set forth below to
be greater than the amount set forth opposite such date:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
COMPUTATION DATE
closest to RATIO
- -----------------------------------------------------------------------------
<S> <C>
3.50 to 1.00
October 31, 1997; January 31, 1998
- -----------------------------------------------------------------------------
April 30, 1998; July 31, 1998; 3.00 to 1.00
October 31, 1998 and January 31, 1999
- -----------------------------------------------------------------------------
April 30, 1999; July 31, 1999 and Not Applicable
October 31, 1999
- -----------------------------------------------------------------------------
January 31, 2000 and each 3.00 to 1.00
Computation Date thereafter
- -----------------------------------------------------------------------------
</TABLE>
10. 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.
11. CONDITIONS PRECEDENT TO CLOSING OF FOURTH AMENDMENT. On or prior to
the closing of this Fourth Amendment (hereinafter the "Fourth 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 Fourth 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 Fourth Amendment Closing Date.
(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.
<PAGE>
-9-
(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 Fourth
Amendment Closing Date, and no condition shall exist on the Fourth Amendment
Closing Date which constitutes a Default or an Event of Default.
(d) PROCEEDINGS AND DOCUMENTS. All corporate, governmental and other
proceedings in connection with the transactions contemplated on the Fourth
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.
(e) 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.
(f) AMENDMENTS TO WARRANTS/ISSUANCE OF ADDITIONAL WARRANTS.
Successories, Inc. shall have issued to Agent amendments to the four existing
Warrants issued to Provident Financial Group, Inc. ("PFGI") extending the
expiration date of each Warrant to June 30, 2005 and shall have issued to PFGI a
new Warrant, substantially in the form of the existing Warrants, for 300,000
shares at an exercise price of $2.50 per share.
(g) PAYMENT OF WAIVER AND AMENDMENT FEE. Borrower shall have paid
Agent a fee equal to one-half of one percent (0.5%) of the aggregate Credit
Commitments of the Lenders.
12. 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 Fourth
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 Fourth Amendment shall be governed by and shall be construed
and
<PAGE>
-10-
interpreted in accordance with the laws of the State of Ohio.
(d) This Fourth Amendment shall be binding upon and shall inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns.
(e) This Fourth 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.
IN WITNESS WHEREOF, this Fourth 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
<PAGE>
-11-
CELEX SUCCESSORIES, INC., a Canadian
corporation
By: /s/ Arnold M. Anderson
-------------------------------------------
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
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>
Fourth Amendment to Warrant Certificate No. 1 Warrants for 75,000 Shares
Original Issue Date: June 20, 1997
FOURTH 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. 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, 2005.
April 29, 1999 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
-------------------------------------------
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
Fourth Amendment to Warrant Certificate No. 2 Warrants for 50,000 Shares
Original Issue Date: June 20, 1997
FOURTH 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. 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, 2005.
April 29, 1999 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
-------------------------------------------
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
Fourth Amendment to Warrant Certificate No. 3 Warrants for 25,000 Shares
Original Issue Date: June 20, 1997
FOURTH 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. 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, 2005.
April 29, 1999 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
-------------------------------------------
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
NEITHER THE RIGHTS REPRESENTED BY THIS WARRANT NOR THE SHARES ISSUABLE
UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED FOR OFFER OR SALE UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. SUCH RIGHTS AND SHARES MAY NOT
BE SOLD, EXCHANGED OR TRANSFERRED IN ANY MANNER, EXCEPT AS SPECIFIED
IN SECTION 4 HEREOF.
Warrant Certificate No. 5 Warrants for 300,000 Shares
Original Issue Date: April 29, 1999
WARRANT TO PURCHASE COMMON STOCK
OF
SUCCESSORIES, INC.
This certifies that PROVIDENT FINANCIAL GROUP, INC., an Ohio corporation,
or its registered assigns ("Holder"), is entitled, subject to the terms set
forth below, at any time during the Warrant Period to purchase from
SUCCESSORIES, INC. (the "Company"), an Illinois corporation, up to Three Hundred
Thousand (300,000) fully paid and non-assessable shares of the Company's common
stock ("Common Stock") upon surrender hereof, at the principal office of the
Company, with the subscription form annexed hereto duly executed, and
simultaneous payment therefor, at the purchase price of Two and 50/100 Dollars
($2.50) per share of Common Stock (the "Purchase Price"). For purposes of this
Warrant, "Outstanding Common Stock" shall be deemed to be that number of shares
of Common Stock then outstanding plus all shares of Common Stock that the
Company is obligated to issue at the time or in the future by any outstanding
warrant, option, convertible security or other agreement of any nature.
1. THE WARRANTS. This Warrant is issued to Holder in connection with a
certain Credit Agreement dated as of June 20, 1997, between the Company and The
Provident Bank, as amended (as the same may be amended or restated, the "Credit
Agreement"). The term "Warrants" as used herein shall include all Warrants
issued in connection with the Credit Agreement and also any warrants delivered
in substitution or exchange therefor as provided herein.
2. EXERCISE.
2.1 FULL EXERCISE. Subject to compliance with the provisions hereof,
this Warrant may be exercised by the Holder, in whole or in part, during the
Warrant Period, at any time or from time to time, on any business day, by
surrendering the Warrant at the principal office of the
<PAGE>
-2-
Company, 2520 Diehl Road, Aurora, Illinois 60504 with the form of Election to
Exercise in substantially the form of Exhibit A fully executed, together with
payment in cash or immediately available funds of the sum obtained by
multiplying: (a) the number of shares of Common Stock for which the Warrant
is being exercised; by (b) the Purchase Price, PROVIDED, however, that all or
part of such payment may be made by the surrender by such Holder to the
Company, at the aforesaid office or agency, of any instrument evidencing
indebtedness of the Company, or any other corporation of which the Company
owns in excess of fifty percent (50%) of the voting stock. All indebtedness
so surrendered shall be credited against such Purchase Price in an amount
equal to the outstanding principal amount thereof plus accrued but unpaid
interest to the date of surrender.
2.2 PARTIAL EXERCISE. This Warrant may be exercised for less than
the full number of shares of Common Stock or any fraction thereof called for
hereby, during the Warrant Period, at any time or from time to time, in the
manner set forth in Section 2.1. Upon any partial exercise, the number of
shares receivable upon the exercise of this Warrant as a whole, and the sum
payable upon the exercise of this Warrant as a whole, shall be proportionately
reduced. Upon such partial exercise, this Warrant shall be surrendered and a
new Warrant of the same tenor and for the purchase of the number of such shares
not purchased upon such exercise shall be issued by the Company to the
registered Holder hereof within five (5) days after such exercise. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above, and the
person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the Holder of such shares of
record as of the close of business on such date. As soon as practicable on or
after such date, but in any event within five (5) days after payment of the
Purchase Price pursuant to this Section 2, the Company shall issue and deliver
to the person or persons entitled to receive the same a certificate or
certificates for the number of full shares of Common Stock issuable upon such
exercise, together with cash, in lieu of any fraction of a share, equal to such
fraction of the then current Market Price (as defined in Section 2.3) of one (1)
full share.
2.3 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the
contrary, if the Market Price (as defined below) for one share of Common Stock
is greater than the Purchase Price (on the date of exercise of all or a part of
this Warrant), in lieu of exercising this Warrant and purchasing the Warrant
Stock for cash, the Holder may elect to receive Warrant Stock equal to the value
(as determined below) of this Warrant (or the portion thereof being exercised)
by surrender of this Warrant at the principal office of the Company, together
with the form of Election to Exercise attached hereto fully executed, in which
event the Company shall issue to the Holder that number of Shares of Warrant
Stock computed using the following formula:
X = Y x (A-B) / A
<PAGE>
-3-
Where Y = the aggregate number of Shares of Warrant Stock
purchasable under this Warrant or, if only a portion of this
Warrant is being exercised, the number of Shares of Warrant Stock
for which this Warrant is being exercised (at the date of such
calculation)
A = Market Price of one Share of Common Stock (at the date of
such calculation)
B = Purchase Price (as adjusted to the date of such
calculation).
For the purposes of this Section 2.3, "Market Price" shall mean, if the
Warrant Stock is traded on a national securities exchange, the NASDAQ National
Market System or the over-the-counter market, the last reported price on the
date of valuation at which the Warrant Stock has traded on the NASDAQ National
Market System or the average of the bid and asked prices on the over-the-counter
market on the date of valuation or, if no sale took place on such date, the last
date on which a sale took place. If the Warrant Stock is not so traded, "Market
Price" shall be the value of one share of Warrant Stock as determined by
agreement of the parties hereto, or if the parties hereto cannot reach
agreement, then such value shall be determined by appraisal by an independent
investment banking firm selected by the Company and acceptable to the Holder;
provided, however, that if the Holder and the Company cannot agree on such
investment banking firm, such appraised value shall be determined by averaging
the appraised values calculated by (i) an independent investment banking firm
selected by the Company; (ii) an independent investment banking firm selected by
the Holder; and (iii) an independent investment banking firm selected by the
investment banking firms selected by the Company and the Holder. Each such
appraisal shall be at the Company's expense.
3. PAYMENT OF TAXES. All shares of Common Stock issued upon the exercise
of a Warrant shall be validly issued, fully paid and non-assessable and free of
any security interest or other adverse claims or encumbrances and free of claims
of pre-emptive rights. The Company shall pay all issuance taxes and similar
governmental charges that may be imposed in respect of the issue or delivery
thereof, but in no event shall the Company pay a tax on or measured by the net
income or gain attributed to such exercise. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
of a Warrant or any transfer involved in the issue of any certificate for shares
of Common Stock in any name other than that of the registered Holder of the
Warrant surrendered in connection with the purchase of such shares, and in such
case the Company shall not be required to issue or deliver any stock certificate
until such tax or other charge has been paid or it has been established to the
Company's reasonable satisfaction that no tax or other charge is due.
4. UNREGISTERED SECURITIES. The Holder acknowledges that, in taking
unregistered Warrants, it must continue to bear the economic risk of its
investment for an indefinite period of time
<PAGE>
-4-
because of the fact that such Warrants have not been registered under the
Securities Act and further realizes that such Warrants cannot be sold unless
they are subsequently registered under the Securities Act or an exception or
exemption from such registration is available. The Holder also acknowledges
that appropriate legends reflecting the status of the Warrants under the
Securities Act may be placed on the face of the Warrant certificates at the
time of their transfer and delivery to the Holder hereof. The transfer of
this Warrant and the shares issuable upon exercise of this Warrant is subject
to the terms of this Warrant.
5. EXCHANGES. This Warrant is exchangeable in accordance with Section 4
hereof, upon the surrender hereof by the Holder at the principal office of the
Company together with the form of transfer authorization attached hereto as
Exhibit B duly executed, for new Warrants for the same aggregate number of
shares of Warrant Stock, each new Warrant to represent the right to purchase
such number of shares as the Holder shall designate at the time of such
exchange.
6. ADJUSTMENTS.
6.1 ADJUSTMENTS FOR ISSUE OR SALE OF COMMON STOCK AT LESS THAN MARKET
PRICE OR PURCHASE PRICE. If the Company shall issue or sell shares of its
Common Stock (other than those excepted by Section 6.1(j)) for a consideration
per share less than the lesser of the Purchase Price or the Market Price (or, if
an Adjusted Purchase Price shall be in effect by reason of a previous adjustment
under this Section 6.1 as provided below then less than such Adjusted Purchase
Price), then and in each such case the holder of this Warrant, upon the exercise
hereof as provided in Section 2, shall be entitled to receive, in lieu of the
shares of Common Stock theretofore receivable upon the exercise of this Warrant,
a number of shares of Common Stock determined by (a) dividing the Purchase Price
by an Adjusted Purchase Price to be computed as provided below in this
Section 6.1, and (b) multiplying the resulting quotient by the number of shares
of Common Stock called for on the face of this Warrant. Such "Adjusted Purchase
Price" shall be computed (to the nearest cent, a half cent or more being
considered a full cent) by dividing:
(A) the sum of (x) the result obtained by multiplying the number of
shares of Common Stock of the Company outstanding immediately prior to such
issue or sale by the Purchase Price (or, if an Adjusted Purchase Price
shall be in effect by reason of a previous adjustment under this
Section 6.1, by such Adjusted Purchase Price), and (y) the consideration,
if any received by the Company upon such issue or sale of Common Stock; by
(B) the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
No adjustment of the Purchase Price, or Adjusted Purchase Price if in effect,
however, shall be made in an amount less than $.01 per share, but any such
lesser adjustment shall be carried forward and
<PAGE>
-5-
shall be made at the time and together with the next subsequent adjustment
which together with any adjustments as so carried forward shall amount to
$.01 per share or more.
For the purpose of this Section 6.1, the following paragraphs 6.1(a) to 6.1(k)
shall be applicable;
(a) (i) DIVIDENDS IN COMMON STOCK OR CONVERTIBLE SECURITIES. If
the Company shall declare any dividend or order any other distribution,
upon any stock of the Company of any class payable in Common Stock, or in
any stock or other securities directly or indirectly convertible into or
exchangeable for Common Stock (any such stock or other securities being
hereinafter called "Convertible Securities"), such declaration or
distribution shall be deemed to be an issue and sale (as of the record
date), without consideration, of such Common Stock or the Common Stock
covered by such Convertible Securities, as the case may be.
(ii) DIVIDENDS IN OTHER STOCK, SECURITIES OR PROPERTY. If the
Company shall declare any dividend or order any other distribution, upon
any class of stock of the Company payable in stock of the Company of a
different class (other than Common Stock or Convertible Securities covered
by Section 6.1(a)(i)), other securities of the Company or other property of
the Company (other than cash), such declaration or distribution shall be
deemed an issue and sale, without consideration, of shares of Common Stock
in an amount determined as follows:
(A) the value of such distribution stock, securities, or
property shall be determined in good faith by the Board of Directors
of the Company as of the record date of the dividend or distribution;
(B) the value of a share of the Common Stock shall be
determined in good faith by the Board of Directors of the Company as
of the record date of the aforesaid dividend or distribution;
(C) the amount determined under clause (A) shall be divided
by the amount determined under clause (B) and the quotient to the next
higher full number shall be deemed the number of shares of Common
Stock of the Company issued, without consideration, by reason of said
dividend or distribution.
Provided, however, that in the event of a distribution to
shareholders of stock of a subsidiary or securities convertible into
or exercisable for such stock, the holder of this Warrant, upon the
exercise hereof as provided in Section 2, at any time after such
distribution, shall be entitled to receive the stock or other
securities to which such holder would have been entitled if such
holder had exercised this Warrant
<PAGE>
-6-
immediately prior thereto all subject to further adjustment as
provided in Section 6.1 and no Common Stock shall have been deemed
to have been issued.
(iii) DIVIDENDS IN CASH OUT OF CAPITAL OR SURPLUS. Other than
dividends on the Company's Preferred Stock outstanding on the date hereof,
if the Company shall declare any dividend or order any other distribution
upon any stock of the Company, in cash paid or payable out of stated
capital or paid-in surplus or surplus created as a result of a re-
evaluation of property (determined in each case on a consolidated basis)
then to the extent that the amount so paid or payable shall exceed the
earned surplus on a consolidated basis, calculated in accordance with GAAP,
such excess shall be deemed an issue and sale (as of the record date),
without consideration, of shares of Common Stock in an amount determined as
follows:
(A) the value of a share of Common Stock, as of the record
date, shall be determined in good faith by the Board of Directors of
the Company;
(B) amount of said excess shall be divided by the value
determined under clause (A) and the quotient so determined to the next
higher whole number shall be deemed the number of shares of Common
Stock issued and sold without consideration.
(iv) RECLASSIFICATION. If the Company shall order any
distribution of any stock of the Company (including Common Stock) or other
securities (including Convertible Securities) or property (including cash)
by way of stock split, spin-off, split-up, reclassification, reverse stock
split, combination of shares or similar corporate rearrangement, such
distribution shall be deemed an issue and sale, without consideration, of
shares of Common Stock as follows:
(A) in the case of a distribution in shares of the Common
Stock in the amount of said distribution;
(B) in the case of a distribution of Convertible Securities
as provided in Section 6.1(b);
(C) in the case of a distribution of other stock, securities
or property (including cash) as provided in Section 6.1(a)(ii) (for
this purpose treating cash as other property).
(b) ISSUANCE OR SALE OF CONVERTIBLE SECURITIES. If the Company shall
issue or sell any Convertible Securities, there shall be determined the
price per share for which Common
<PAGE>
-7-
Stock is issuable upon the conversion or exchange thereof, such
determination to be made by dividing (i) the total amount received or
receivable by the Company as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or
exchange thereof by (ii) the maximum number of shares of Common Stock of
the Company issuable upon conversion or exchange of all of such
Convertible Securities; and such issue or sale shall be deemed to be an
issue or sale for cash (as of the date of issue or sale of such
Convertible Securities) of such maximum number of shares of Common Stock at
the price per share so determined, unless the price per share for Common
Stock into which the Convertible Shares are to be converted to Common Stock
can only be determined at the time of conversion, in which case the
requisite determination for purposes of this Section 6 shall be made at the
time of conversion.
If such Convertible Securities shall by their terms provide for an
increase or increases, with the passage of time, in the amount of
additional consideration, if any, payable to the Company, or in the rate of
exchange, upon the conversion or exchange thereof, the Adjusted Purchase
Price shall, forthwith upon any such increase becoming effective, be
readjusted (but to no greater extent than previously adjusted to account
for such issuance) to reflect the same.
If any rights of conversion or exchange evidenced by such Convertible
Securities shall expire without having been exercised, the Adjusted
Purchase Price shall forthwith be readjusted to be the Adjusted Purchase
Price which would have been in effect had an adjustment been made on the
basis that the only shares of Common Stock actually issued or sold were
those issued upon the conversion or exchange of such Convertible
Securities, and that they were issued or sold for the consideration
actually received by the Company upon such conversion or exchange, plus the
consideration, if any, actually received by the Company for the issue or
sale of each of the Convertible Securities as were actually converted or
exchanged.
(c) GRANT OF RIGHTS, WARRANTS OR OPTIONS FOR COMMON STOCK. If the
Company shall grant any rights, warrants or options to subscribe for,
purchase or otherwise acquire Common Stock (other than those excepted by
Section 6.1(j)), there shall be determined the minimum price per share for
which Common Stock is issuable upon the exercise of such rights, warrant or
options, such determination to be made by dividing (i) the total amount, if
any, received or receivable by the Company as consideration for the
granting of such rights, warrants or options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the exercise
of such rights, warrants or options, by (ii) the maximum number of shares
of Common Stock of the Company issuable upon the exercise of such rights,
warrant or options; and such grant shall be deemed to be an issue or sale
for
<PAGE>
-8-
cash (as of the date of the granting of such rights, warrants or
options) of such maximum number of shares of Common Stock at the price per
share so determined.
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the Adjusted Purchase Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than previously
adjusted to account for such issuance) to reflect the same.
If any such rights, warrants or options shall expire without having
been exercised, the Adjusted Purchase Price shall forthwith be readjusted
to the Adjusted Purchase Price which would have been in effect had an
adjustment been made on the basis that the only shares of Common Stock so
issued or sold were those actually issued or sold upon the exercise of such
rights, warrants or options and that they were issued or sold for the
consideration actually received by the Company upon such exercise, plus the
consideration, if any, actually received by the Company for the granting of
all such rights, warrants or options
(d) GRANT OF RIGHTS, WARRANTS OR OPTIONS FOR CONVERTIBLE SECURITIES.
If the Company shall grant any rights, warrants or options to subscribe
for, purchase or otherwise acquire Convertible Securities, such Convertible
Securities shall be deemed, for the purpose of Section 6.1(b), to have been
issued and sold (as of the actual date of issue or sale of such rights,
warrants or options to subscribe for, purchase or otherwise acquire such
Convertible Securities) for the total amount received or receivable by the
Company as consideration for the granting of such rights, warrants or
options plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise of such rights, warrants or
options.
If such rights, warrants or options shall by their terms provide for
an increase or increases, with the passage of time, in the amount of
additional consideration payable to the Company upon the exercise thereof,
the Adjusted Purchase Price shall, forthwith upon any such increase
becoming effective, be readjusted (but to no greater extent than previously
adjusted to account for such issuance) to reflect the same.
If any such rights, warrants or options shall expire without having
been exercised, the Adjusted Purchase Price shall forthwith be readjusted
to be the Adjusted Purchase Price which would have been in effect had an
adjustment been made upon the basis that the only Convertible Securities so
issued or sold were those issued or sold upon the exercise of such rights,
warrants or options and that they were issued or sold for the consideration
actually received by the Company for the granting of such rights, warrants
or options actually exercised.
<PAGE>
-9-
(e) DILUTION IN CASE OF OTHER STOCK OR SECURITIES. In case any shares
of stock or other securities, other than Common Stock of the Company, shall
at the time be receivable upon the exercise of this Warrant, and in case
any additional shares of such stock or any additional such securities (or
any stock or other securities convertible into or exchangeable for any such
stock or securities) shall be issued or sold for a consideration per share
such as to dilute the purchase rights evidenced by this Warrant, then and
in each such case the Adjusted Purchase Price and the number of shares of
Warrant Stock shall forthwith be adjusted, substantially in the manner
provided for above in this Section 6.1, so as to protect the holders of the
Warrants against the effect of such dilution.
(f) DETERMINATION OF CONSIDERATION. Upon any issuance or sale for a
consideration other than cash, or a consideration part of which is other
than cash, of any shares of Common Stock or Convertible Securities or any
rights or options to subscribe for, purchase or otherwise acquire any
Common Stock or Convertible Securities, the amount of the consideration
other than cash received by the Company shall be deemed to be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company. In case any Common Stock or Convertible
Securities or any rights or options to subscribe for, purchase or otherwise
acquire any Common Stock or Convertible Securities shall be issued or sold
together with other stock or securities or other assets of the Company for
a consideration which covers both, the consideration for the issue or sale
of such Common Stock or Convertible Securities or such rights or options
shall be deemed to be the portion of such consideration allocated thereto
in good faith by the Board of Directors of the Company.
(g) RECORD DATE DEEMED ISSUE DATE. In case the Company shall take a
record of the holders of shares of its stock of any class for the purpose
of entitling them (a) receive a dividend or a distribution payable in
Common Stock or in Convertible Securities, or (b) to subscribe for,
purchase or otherwise acquire Common Stock of Convertible Securities, then
such record date shall be deemed to be the date of the issue or sale of the
Common Stock issued or sold or deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution, or
the date of the granting of such rights or subscription, purchase of other
acquisition, as the case may be.
(h) SHARES CONSIDERED OUTSTANDING. The number of shares of Common
Stock outstanding at any given time shall include shares issuable in
respect to scrip certificates issued in lieu of fractions of shares of
Common Stock, but shall exclude shares held in the treasury of the Company
or by subsidiaries of the Company.
(i) DURATION OF ADJUSTMENT PURCHASE PRICE. Following each
computation or readjustment of an Adjusted Purchase Price as provided in
this Section 6.1, the new Adjusted
<PAGE>
-10-
Purchase Price shall remain in effect until a further computation or
readjustment thereof is required by this Section 6.1.
(j) EXCEPTED ISSUES AND SALES. No adjustments pursuant to this
Section 6.1 shall be made in respect of the issuance of shares of Common
Stock upon exercise of or issuances pursuant to: (A) Warrants issued
pursuant to the Agreement; (B) employee stock options issued pursuant to
the Company's Stock Option Plan pursuant to any amendment, (not to exceed
1,700,000) generally available to the Company's employees outstanding on
the date hereof; (C) convertible preferred stock outstanding on the date
hereof; (D) the employee stock purchase plan of the Company effective on
the date hereof or any amendment, replacement or similar plan generally
available to the Company's employees; (E) options and warrants outstanding
in connection with certain subordinated debt outstanding on the date
hereof; and (F) 60,000 stock options to James Beltrame, 20,000 stock
options to Arnold Anderson and the deferred issuance of 133,650 shares of
Common Stock to Arnold Anderson. The number of shares of Common Stock
referred to in this subparagraph shall be proportionately adjusted to
reflect any reclassification, subdivision or combination of Common Stock or
any distribution or dividends on the Common Stock, payable in Common Stock.
6.2 REORGANIZATION, CONSOLIDATION, MERGER. In the event of any
reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant),
or the Company (or any such other corporation) shall consolidate with or merge
into another corporation or convey all or substantially all of its assets to
another corporation, then and in each such case the Holder of this Warrant, upon
the exercise hereof as provided in Section 2, at any time after the consummation
of such reorganization, consolidation, merger or conveyance, shall be entitled
to receive, in lieu of the stock or other securities and property receivable
upon the exercise of this Warrant prior to such consummation, the stock or other
securities or property to which such Holder would have been entitled upon such
consummation if such Holder had exercised this Warrant immediately prior
thereto, all subject to further adjustment as provided in this Section 6. In
each such case the terms of this Warrant shall be applicable to the shares of
stock or other securities or property receivable upon the exercise of this
Warrant after such consummation; PROVIDED, however, that if such reorganization,
consolidation or merger is with any entity affiliated with the Company or any of
its officers or directors, and would result in the elimination of all or
substantially all of the rights to voting interests of the Holder in the
surviving corporation, such Holder upon exercise hereof after such
reorganization, consolidation, or merger shall be entitled to receive, at the
Holder's option, in lieu of the stock or other securities or property to which
such Holder would have been entitled upon such consummation if such Holder had
exercised this Warrant immediately prior thereto, cash or voting securities in
the proportions that the Holder may elect in the surviving corporation in an
amount equivalent to the fair market value of
<PAGE>
-11-
the voting interest in the Company that such Holder would have received had
the Warrant been exercised prior to such consummation.
6.3 OTHER ADJUSTMENTS. In case at any time conditions arise by
reason of action taken by the Company which, in the opinion of its Board of
Directors (recognizing the fiduciary duty, hereby assumed and acknowledged, of
the Board of Directors to the Holders of the Warrants) or in the opinion of the
Holders of Warrants representing a majority of the shares of Warrant Stock
issuable upon exercise of such Warrants, are not adequately covered by the other
provisions of this Section 6 and which might materially and adversely affect the
exercise rights of the Holders of the Warrants, then the Board of Directors of
the Company shall appoint a firm of independent certified public accountants of
recognized national standing (other than the accountants then auditing the books
of the Company) to determine the adjustment, if any, on a basis consistent with
the standards established in the other provisions of this Section 6, necessary
with respect to the Purchase Price or adjusted Purchase Price, as so to
preserve, without dilution, the exercise rights of the Holders of the Warrants.
Upon receipt of such opinion, the Board of Directors of the Company shall
forthwith make the adjustments described in such report.
6.4 NO DILUTION OR IMPAIRMENT. The Company will not, by amendment or
restatement of its certificate of incorporation or by-laws or through
reorganization, consolidation, merger, dissolution, issue or sale of securities,
sale of assets or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of the Warrants, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate in order to
protect the rights of the Holders of the Warrants against dilution or other
impairment.
6.5 ACCOUNTANTS' CERTIFICATE AS TO ADJUSTMENTS. In each case of an
adjustment in the shares of Warrant Stock or other stock, securities or property
receivable on the exercise of the Warrants, the Company at its expense shall
cause a firm of independent certified public accountants of recognized standing
selected by the Company (who may be the accountants then auditing the books of
the Company except in the circumstances set forth in Section 6.3 above) to
compute such adjustment in accordance with the terms of the Warrants and prepare
a certificate setting forth such adjustment and showing in detail the facts upon
which such adjustment is based, including a statement of: (a) the consideration
received or to be received by the Company for any additional shares of Warrant
Stock issued or sold or deemed to have been sold; and (b) the number of shares
of Warrant Stock outstanding or deemed to be outstanding. The Company will
forthwith mail a copy of each certificate to each Holder of a Warrant at the
time outstanding.
6.6 NOTICES OF RECORD DATE. If and when the Company shall establish
a record date for the Holders of its Stock (or such other securities at the time
receivable upon the exercise of the Warrants) for the purpose:
<PAGE>
-12-
(a) of determining the Holders entitled to receive any
dividend or other distribution, or any right to subscribe for or purchase
any shares of stock of any class or any securities, or to receive any other
right; or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation, except for mergers
into the Company of subsidiaries whose assets are less than ten percent
(10%) of the total assets of the Company and its consolidated subsidiaries,
or any conveyance of all or substantially all of the assets of the Company
to another corporation; or
(c) of any voluntary dissolution, liquidation or winding-up
of the Company;
then, and in each such case, the Company will mail or cause to be mailed, to
each Holder of a Warrant at the time outstanding a notice specifying, as the
case may be, the record date established with respect to such dividend,
distribution, voting or other right, and stating the amount and character of
such dividend, distribution, voting or other right, or the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any,
to be fixed as of which the Holders of record of Stock (or such other securities
at the time receivable upon the exercise of the Warrants) shall be entitled to
vote upon or exchange their shares of Stock (or such other securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be mailed at least thirty (30) days prior to the
dates therein specified. The rights to notice provided in this Section 6.6 are
in addition to the rights provided elsewhere herein.
7. LOSS OR MUTILATION. Upon receipt by the Company of evidence
satisfactory to it in the exercise of reasonable discretion, of the ownership of
and the loss, theft, destruction or mutilation of any Warrant and, in the case
of loss, theft or destruction, of indemnity satisfactory to it in the exercise
of reasonable discretion, and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof a new
Warrant of like tenor.
8. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants and the issuance of all shares
of Warrant Stock.
9. TRANSFERS; NOTICE OF PROPOSED TRANSFERS; OPINION OF COUNSEL.
<PAGE>
-13-
9.1 Subject to the provisions of this Section 9, this Warrant and all
rights hereunder are transferable on the books of the Company by any Holder
hereof in person or by duly authorized attorney upon surrender of this Warrant
at the principal office of the Company, together with the form of transfer
authorization attached hereto as Exhibit B duly executed, provided that all
conditions set forth below have been met. Absent any such transfer, the Company
may deem and treat the Holder of this Warrant at any time as the absolute owner
hereof for all purposes and shall not be affected by any notice to the contrary.
9.2 Prior to any sale, transfer or other disposition of the Warrant
or any shares issued or issuable upon exercise hereof, the Holder shall give ten
(10) days' notice to the Company of such Holder's intention to effect such
transfer. Each such notice shall describe the manner and circumstances of the
proposed transfer and shall be accompanied by an opinion, addressed to the
Company and reasonably satisfactory in form and substance to it, of counsel for
such Holder, stating whether, in the opinion of such counsel, such transfer will
be a transaction exempt from registration under the Securities Act and any state
Blue Sky or securities law.
9.3 If such sale, transfer or other disposition may in the opinion of
such counsel be effected without registration under the Act and any state Blue
Sky or securities laws, such Holder shall thereupon be entitled to transfer this
Warrant and Warrant Stock in accordance with the terms of the notice delivered
by such Holder to the Company, and the Company shall promptly register such
sale, transfer or disposition in its security register. If in the opinion of
such counsel such transfer may not be effected without registration under the
Securities Act, such Holder shall not be entitled to transfer this Warrant or
Warrant Stock unless the Company files a registration statement relating to the
proposed transfer and such registration statement has become effective under the
Act, either pursuant to an election of the Company or pursuant to the terms
hereof. Notwithstanding any provision of this Section 9 to the contrary, the
Company shall have no obligation to file a registration statement relating to
this Warrant or Warrant Stock, except as specifically provided in the
Registration Rights Agreement between the Holder and the Company dated as of the
date hereof.
10. DEFINITIONS. For purposes of this Warrant the terms capitalized
herein have the meanings set forth below.
"Generally Accepted Accounting Principles" shall mean accounting
principles which are (i) consistent with the principles promulgated or
adopted for the United States by the Financial Accounting Standards Board
and its predecessors in effect from time to time, (ii) applied on a basis
consistent with prior periods, and (c) such that a certified public account
would, insofar as the use of accounting principles is pertinent, be in a
position to deliver an unqualified opinion as to financial statements in
which such principles have been properly applied.
<PAGE>
-14-
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any successor federal statute, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect at the time.
"Warrant Period" shall mean the period commencing on the date
hereof and ending on July 16, 2005.
"Warrant Stock" shall mean Common Stock issuable upon exercise of
this Warrant in accordance with its terms and any capital stock or other
securities into which or for which such Common Stock shall have been
converted or exchanged pursuant to any recapitalization, reorganization or
merger of the Company.
11) INFORMATION. The Company shall furnish each Holder of Warrants with
copies of all reports, proxy statements, and similar materials that it furnishes
to Holders of its Stock. In addition, it shall furnish to each such Holder of
Warrants copies of all reports filed by it with the Securities and Exchange
Commission.
12) NOTICES. All notices and other communications under this Warrant
shall be in writing and shall be mailed by first-class registered or certified
mail, postage prepaid, addressed (a) if to the Holder, at the registered address
furnished to the Company in writing by the Holder of this Warrant, or (b) if to
the Company, to the attention of its Chief Executive Officer at its principal
office located at 2520 Diehl Road, Aurora, Illinois 60504, or such other
location of its principal office as shall be furnished to the Holder in writing
by the Company.
13) CHANGE, WAIVER. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement by the change, waiver,
discharge or termination is sought.
14) HEADINGS. The headings in this Warrant are for purposes of
convenience of reference only and shall not be deemed to constitute a part
hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]
<PAGE>
LAW GOVERNING. This Warrant is delivered in the State of Ohio and
shall be construed and enforced in accordance with and governed by the internal
substantive laws of such State.
April 29, 1999 SUCCESSORIES, INC.
By: /s/ Arnold M. Anderson
-----------------------------------
Name: Arnold M. Anderson
Title: Chairman and Chief Executive Officer
<PAGE>
EXHIBIT A
[SUBSCRIPTION FORM TO BE EXECUTED UPON EXERCISE OF WARRANT]
The undersigned registered Holder or assignee of such registered Holder of
the within Warrant, hereby (1) subscribes for _______________ shares which the
undersigned is entitled to purchase under the terms of the within Warrant, (2)
makes payment of the Purchase Price called for by the within Warrant, and (3)
directs that the shares issuable upon exercise of said Warrant be issued as
follows:
----------------------------------------------
(Name)
----------------------------------------------
(Address)
Signature:
-----------------------------------
Dated: , 199_
----------------
<PAGE>
EXHIBIT B
[ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER
TO ENACT A TRANSFER OF THE WITHIN WARRANT)
FOR VALUE RECEIVED, ______________________________ hereby sells, assigns,
and transfers unto ______________________________ of
______________________________, the right to purchase shares evidenced by the
within Warrant, and does hereby irrevocably constitute and appoint
______________________________ to transfer such right on the books of Company,
with full power of substitution.
Dated: , 199_
---------------
-----------------------------------------
Signature
WITNESS:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 1,400,000
<SECURITIES> 0
<RECEIVABLES> 4,036,000
<ALLOWANCES> 731,000
<INVENTORY> 9,634,000
<CURRENT-ASSETS> 16,854,000
<PP&E> 19,152,000
<DEPRECIATION> 9,573,000
<TOTAL-ASSETS> 33,428,000
<CURRENT-LIABILITIES> 13,787,000
<BONDS> 0
0
0
<COMMON> 69,000
<OTHER-SE> 15,271,000
<TOTAL-LIABILITY-AND-EQUITY> 33,428,000
<SALES> 12,056,000
<TOTAL-REVENUES> 12,211,000
<CGS> 5,262,000
<TOTAL-COSTS> 7,124,000
<OTHER-EXPENSES> 19,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363,000
<INCOME-PRETAX> (557,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (557,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (557,000)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
