FORM 10-KSB - ANNUAL OR TRANSITIONAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File Number: 0-24188
JOTAN, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3181162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
118 WEST ADAMS STREET, SUITE 900
JACKSONVILLE, FLORIDA 32202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 904-355-2592
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check 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 [ ]
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this Form, and no
disclosure will be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes [x] No [ ]
Registrant's revenues for the fiscal year ended December 31, 1996
were $11,659,754.
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of December 31, 1996 (last price
sold in December) was $12,244,810.
The number of shares outstanding of Common Stock, $.01 par value,
as of February 1, 1997: 5,679,411.
Documents Incorporated by Reference
Portions of the Jotan, Inc. Proxy Statement dated March 22, 1996
are incorporated by reference in Part II and Part III.
Traditional Small Business Disclosure Format (check one):
Yes [ ] No [x]
<PAGE>
Jotan, Inc.
Form 10-KSB
Table of Contents Page
PART I
Item 1. Description of Business....................................... 1
Item 2. Description of Property....................................... 5
Item 3. Legal Proceedings............................................. 5
Item 4. Submission of Matters to a Vote of Security
Holders...................................................... 6
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.................................. 6
Item 6. Management's Discussion and Analysis or Plan
of Operations................................................ 6
Item 7. Financial Statements..........................................13
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................13
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons, Compliance with Section
16(a) of the Exchange Act....................................14
Item 10. Executive Compensation........................................15
Item 11. Security Ownership of Certain Beneficial Owners
and Management...............................................15
Item 12. Certain Relationships and Related Transactions................15
Item 13. Exhibits and Reports on Form 8-K..............................15
<PAGE>
PART I
Item 1. Description of Business
Business Development
Jotan, Inc. (the Company) is primarily engaged in the business of distributing
packaging and shipping supplies through its service and distribution centers
located in the southeastern United States. The Company was originally
organized on December 5, 1988 under the laws of the State of Idaho as Antelope
Resources, Inc. The Company had a limited operating history in the mining and
mineral exploration business and was inactive for several years prior to
March, 1994.
In March, 1994, the Company entered into a transaction whereby it acquired all
the issued and outstanding shares of the capital stock of Jotan, Inc., a
Florida corporation (Jotan-Florida), in exchange for 4,750,000 shares (post-
split as hereinafter defined) of authorized but previously unissued common
stock of the Company. As a result of this transaction, Jotan-Florida became a
wholly owned subsidiary of the Company and the Company changed its corporate
name to Jotan, Inc.
Following the acquisition of Jotan-Florida, the Company, through its wholly
owned subsidiary Jotan-Florida, has become actively engaged in the business of
distributing packaging and shipping supplies. Jotan-Florida was created in
1993 and currently consists of four subsidiary service and distribution
centers located in three states; Atlantic Bag & Paper Company (Florida),
Jotan Thomasville (Georgia), Jotan Auburndale (Florida) and Jotan Greenville
(South Carolina). Each distribution center services customers in its general
geographical area. The Company anticipates adding new operating locations as
business demands warrant and as funds become available to the Company for
expansion.
For the period 1991-1994 during the development of the Jotan system, the
nature of the business of Atlantic Bag & Paper Company changed from being
primarily a distributor of restaurant and industrial supplies in Northeast
Florida, of which packaging and corrugated products was a small portion of the
overall product mix, to being primarily a Just On Time supplier of packaging
products. This change was completed during 1994 after the acquisition of
Atlantic Bag & Paper by Jotan.
On May 14, 1996 the stockholders approved a proposal to change the Company's
state of incorporation from Idaho to Florida (the Reincorporation) and to
increase the Company's authorized shares of common stock from ten million
(10,000,000) to forty million (40,000,000) and to authorize a class of blank-
check preferred stock. The Reincorporation and the change in authorized shares
was accomplished by merging the Company into the Company's wholly-owned
subsidiary, Jotan-Florida.
The Company's principal executive offices are located at 118 West Adams
Street, Suite 900, P.O. Box 836, Jacksonville, Florida 32201, and its
telephone number is (904) 355-2592.
<PAGE>
Present Business Activities
The Company is engaged in distributing to service businesses, agricultural
enterprises, and manufacturers of consumer and industrial products, through
the Company's service and distribution centers located in the southeastern
United States, packaging and shipping supplies such as corrugated boxes,
bubble and shrink wrap, foam filling, packing peanuts, pallet wrap and
related equipment. The Company offers its customers a comprehensive line of
products and services on a "Just On Time As Needed" (Jotan) basis, whereby the
Company determines the daily packaging and shipping supply demands of its
customers and delivers to the customer, as needed, the finished packaging and
shipping products tailored to the customer's needs. The Company designs a
supply system for each customer based on "just in time" inventory management
by providing all of the customer's packaging and shipping supplies as needed.
The Company has developed a supply system of inventory management which
provides a single source for all of its customers' packaging and shipping
supplies and which is designed to save the customer time, effort, storage
space and money. By using the Company's services, a customer can eliminate its
packaging and shipping supplies inventories thereby freeing up warehouse
space, reducing labor costs and reducing required capital. Customers can
fulfill their packaging and shipping supply needs on a schedule tailored to
their specific production runs and manufacturing systems. Common problems
encountered by manufacturers such as procurement, storage, delivery and
financing of packaging and shipping supplies, become the responsibility of the
Company.
Typically, when a new customer selects the Company to provide all of its
packaging and shipping supplies, the Company, in order to fully understand the
customer's business requirements, determines the daily needs of the customer
based on its historical buying cycle for supplies. The Company offers to its
customers a variety of products and services including new products, new uses
for existing products, and new product methodologies. Also, the Company can
provide its customers with packaging equipment and services related to product
testing, package design, artwork and inventory control. The Company then is
able to supply its customers, as needed, all of their packaging and shipping
supplies customized to each individual customer's specifications.
Products
The Company is a service oriented business that provides to its customers all
of their packaging and shipping supplies and related products. All of the
Company's products are acquired from corrugated products manufacturers and
packaging and shipping supply manufacturers. Special and customized products
which are designed by the Company are also ordered directly from the
manufacturers. All products are shipped directly from the suppliers to the
Company's local service and distribution centers where they are stored until
needed by the Company's customers. The products are then delivered to the
respective customers "as needed".
The Company currently purchases its products primarily from five major
packaging and shipping products manufacturers possessing sufficient production
capacities to meet the demands of the Company and its customers. These
companies are Stone Container (which supplies approximately 35% of purchases),
Inland Container (which supplies approximately 34% of purchases), Union Camp,
<PAGE>
Tenneco Packaging and Jefferson Smurfit. These suppliers manufacture container
board, corrugated containers, Kraft paper, paper and poly bags, newsprint,
specialties, market pulp, flexible packaging and wood products. The Company
also purchases from its suppliers specific products such as bubble and shrink
wrap, foam filling, packing peanuts, pallet wrap, tape, labels, and related
packaging equipment. Because there are many manufacturers of its products, the
Company does not rely on any single supplier or limited source in order to
meet customer demands and the Company has available to it several practical
alternative sources for all of its products. Due to the competitive nature of
the business and the immediate availability of products, the Company is
confident that in the event of any unusual disruption of supply, it will be
able to locate alternative sources.
Research and Development
The Company has not allocated funds for conducting research and development
activities and, because of the nature of the Company's business, it is not
anticipated that funds will be allocated for research and development in the
immediate future. Development of special or customized products for a customer
is usually facilitated through the Company's representatives working closely
with the customer to design the specific product required to meet the
customer's needs.
Marketing and Distribution
The Company is currently operating in the southeastern United States and has
established four service and distribution centers located in Northern and
Central Florida, Southern Georgia and South Carolina. The Company holds itself
out to be a service organization acting as an extension of its customers'
purchasing, warehousing, shipping and manufacturing departments. From its
corporate headquarters in Jacksonville, Florida, the Company provides its
distribution centers with planning and budgeting services, financial controls,
procurement, information systems, personnel training and guidance in the
marketing of specialized product lines. Inventory maintained at each of the
Company's facilities is based on customers' requirements including the type
of product needed and optimal production runs. The Company is able to purchase
supplies from the lowest cost producer locally, regionally or nationally, and
then deliver the products to its customers as needed.
The Company maintains a direct sales force that solicits business from
potential customers within the immediate area of each respective service and
distribution center. Each of the Company's representatives work closely with
their customers to develop a customized plan to maximize the efficiency of
inventory control for packaging and shipping supplies.
Each of the Company's service and distribution centers concentrates on
attracting and retaining customers from within the general geographical area
of the facility. Because of the nature of the Company's business of providing
its customers with needed supplies on a timely basis, the Company believes
that the ideal marketing area is within a 150 mile radius of each service
and distribution center. The Company markets its products and services to a
wide variety of manufacturers and businesses including service businesses,
agricultural enterprises, and manufacturers of consumer and industrial
products and therefore, management believes that it is not dependent on any
single customer or account.
<PAGE>
Competition
The Company is in direct competition with manufacturers of corrugated boxes
and other manufacturers of packaging and shipping products that market
directly to end users. Many of the Company's competitors possess greater
financial and personnel resources than the Company. The Company's main
competitors are production oriented and are not intent on offering their
customers the specialized and individual service upon which the Company bases
its business. Management believes that there exists a viable market place for
consolidating the packaging and shipping needs of customers and providing
these customers with customized products as needed by the individual
customers. Management further believes that the Company is able to compete
with these other companies because of its more personalized service and
because of its ability to deliver packaging and shipping materials to its
customers at a competitive price on a just-on-time-as-needed basis. Such
ability to compete, however, depends upon the ability of the Company to
finance its acquisition of inventory sufficient to satisfy the customer.
Patents and Trademarks
The Company does not hold nor has it applied for any patents on any of its
products and the Company's business is not dependent on any patent, royalty
agreement, franchise or license. The Company has filed a trademark application
or the name "Jotan", which application is still pending.
Government Regulation
The distribution of packaging and shipping supplies is not specifically
regulated by any particular government agency, either federally or locally.
Aside from the general business regulatory requirements, the Company is not
aware of any specific governmental approvals or licenses that must be obtained
or maintained.
Employees
As of the date hereof, the Company employs 28 people full-time, consisting of
10 in marketing and management, 5 clerical persons, and 13 drivers and
warehouse persons. Management currently anticipates hiring additional
employees as business warrants and as funds are available.
Facilities
The Company's principal executive offices are located in Jacksonville,
Florida. Each of the Company's service and distribution centers occupy
separate warehouse facilities. For a more detailed description of these
facilities, please refer to Item 2, "Description of Property". On December 23,
1996, the Company entered into a lease of warehouse space in Dallas, Texas,
which will house a new distribution center serving the Texas and Oklahoma
markets. This center is scheduled to begin operations during the first quarter
of 1997. Management believes that its present office facilities are adequate
for the Company's current business operations. Additional facilities will be
added as business warrants and as funds are available.
<PAGE>
Industry Segments
No information is presented as to industry segments as it is not applicable.
The Company is presently engaged in the principal business of distributing
packaging and shipping supplies and related products. Reference is made to
page F-3 of this Form 10-KSB for the Company's statement of operations.
Item 2. Description of Property
The Company's principal place of business and executive offices are located at
118 West Adams Street, Jacksonville, Florida 32202 and consist of 5,000 square
feet of office space which is subject to a five year lease expiring in 1999.
Each of the Company's service and distribution centers lease or own separate
warehouse and office space in their respective cities of operation. Jotan,
Inc. purchased and currently occupies a facility of approximately 75,550
square feet in Thomasville, Georgia. Jotan's Auburndale operations occupies
approximately 28,360 square feet in Auburndale, Florida which is subject to a
three year lease expiring July 31, 1998. Jotan Greenville operations occupies
approximately 39,000 square feet in Spartanburg, South Carolina which is
subject to a three-year lease expiring August 26, 1997. Atlantic Bag & Paper
occupies approximately 60,000 square feet in Jacksonville which is subject to
a ten-year lease expiring 2004. In December, 1996, the Company entered into a
two-year lease of 21,692 square feet of warehouse space in Dallas, Texas
expiring in December 31, 1998. This distribution center is expected to
open in the first quarter of 1997.
Each of the Company's facilities is deemed adequate for its current business,
although the Company will expand or move to larger facilities as its business
warrants and as funds are available. In the opinion of management, the
Company's properties are adequately covered by insurance.
The Company does not anticipate investing in or purchasing assets and/or
property for the purpose of capital gains. It is the Company's intention to
purchase assets and/or property for the purpose of enhancing its primary
business operations. The Company is not limited as to the percentage amount of
the Company's assets it may use to purchase any additional assets or
properties.
Item 3. Legal Proceedings
On July 18, 1996, The February One Group, Inc. (February One) filed suit
against the Company in a dispute over the repayment of a loan that February
One made to the Company. The Company believes that it has an offsetting claim
against February One in a dispute over a failed financing attempt by Coleman &
Co. The Company believes that any liabilities to February One have been
adequately provided for in its financial statements.
There are presently no other material pending legal proceedings to which the
Company or any of its subsidiaries is a party or to which any of its property
is subject and, to the best of its knowledge, no such actions against the
Company are contemplated or threatened.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Information required by this item number has been omitted because it is
inapplicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
There has not been an established public trading market for the shares of the
Company's common stock. Quotations on the Company's common stock, when
available, are published on the OTC Bulletin Board under the symbol "JTAN",
and in the National Quotation Bureau, Inc. (NQB) "pink sheets" under "Jotan,
Inc."
As of December 31, 1996, there were 145 holders of record of the common stock,
which figure does not take into account those shareholders whose certificates
may be held in the name of broker-dealers.
Dividend Policy
The Company has not declared or paid cash dividends or made distributions in
the past, and the Company does not anticipate that it will pay cash dividends
or make distributions to holders of the Company's common stock in the
foreseeable future. The Company, except as discussed below, currently intends
to retain and reinvest future earnings to finance its operations.
On May 16, 1996, the Company signed an agreement which resulted in the sale of
1,265,823 shares of Series A Convertible Preferred Stock to F-Jotan, L.L.C. an
affiliate of Fairview Capital L.L.C. a Raleigh, North Carolina based private
investment company. The Series A Convertible Preferred Stock carries an 8%
annual dividend payable in additional shares of preferred stock, beginning
January 1, 1997.
On February 28, 1997, the Company entered into an agreement with Rice Partners
II, L.L.P. to purchase $10 million of Series B Preferred Stock. The Series B
Preferred Stock will accrue dividends at a rate of 8.0% per annum, payable
quarterly in cash or, at the Company's option, in kind by the issuance of
additional shares of Series B Preferred Stock. (for a more complete discussion
of the Fairview and Rice transactions see the Liquidity and Capital Resources
section included in Item 6 below).
Item 6. Management's Discussion and Analysis or Plan of Operation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-
KSB. As set forth in Item I above, prior to the acquisition of Jotan-Florida,
the Company had no operating history. Therefore, all discussions below
concerning the Company prior to March 31, 1994 relate to the operations of
Jotan-Florida and its subsidiaries including Atlantic Bag and Paper Company.
<PAGE>
Results of Operations
The following table sets forth the percentage relationship to total revenues
of principal items in the Company's Statement of Operations for each of the
three years in the period ended December 31, 1996. It should be noted that
percentages throughout this analysis are stated on an approximate basis.
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994
---------- ---------- ----------
<C> <C> <C> <C>
Sales 100% 100% 100%
Costs of sales 75 79 82
Gross profit 25 21 18
Operating expenses 22 25 26
Operating income/(loss) 3 (4) (8)
Other expenses (2) (1) (2)
Income/(loss) before taxes 1 (5) (10)
Income tax expense - - -
Net Income/(loss) 1 (5) (10)
</TABLE>
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Net sales increased to $11.7 million, or 12.5% for the year ended December 31,
1996 from $10.4 million for the year ended December 31, 1995. The increase in
sales resulted from new business at the Company's four existing distribution
centers, which more than offset the impact of the closure of the Chattanooga
distribution center during the third quarter of 1995, and the decline in
corrugated prices that occurred during the first six months of 1996. The
Company's existing distribution centers experienced increased sales in 1996 of
$2.2 million, a 23.2% increase compared to the year ended December 31, 1995.
Cost of goods sold increased from $8.2 million, or 79.4% of sales, for the
year ended December 31, 1995 to $8.8 million, or 75.1% of sales, for the year
ended December 31, 1996. The decline in cost of goods sold as a percentage of
sales from 1995 to 1996 reflects the decrease in cost of corrugated and
packaging products which occurred during the first six months of 1996. While a
significant portion of those decreases were passed on to customers, the
Company was able, through better defined product sourcing, increased inventory
turns, and the improved financial condition of the Company, to improve its
gross profit margins.
Operating expenses declined 3.6% to $2.5 million for the year ended December
31, 1996 as compared to $2.6 million for the same period in 1995. Several
factors contributed to this decrease including the closure of the Chattanooga
distribution center and lower expenses related to the collection of accounts
receivables.
As a result of the foregoing factors, the Company had a profit from operations
of $382,000 for the year ended December 31, 1996 compared to a loss from
operations of $472,158 for the year ended December 31, 1995.
Interest expense increased $45,897 to $271,138 for the year ended December 31,
1996 due principally to an increase in average debt outstanding. The increased
borrowings were incurred primarily to fund internal growth of the Company.
Other income declined to $63,107 in 1996 from $170,077 for the year ended
December 31, 1995, reflecting the completion of the vendor settlement project
in 1995.
As a result of the foregoing, the Company had net income of $173,658 or
primary earnings per share of $.03 for the year ended December 31, 1996
compared to a net loss of $527,322 or $.10 a share for the year ended December
31, 1995.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Net sales decreased to $10.4 million or 15.1% for the year ended December 31,
1995 from $12.2 million for the year ended December 31, 1994. The decline in
sales primarily resulted from the closure of distribution centers in Nashville
and Knoxville, and the sale of the assets of Source of Supply, Inc., a wholly
owned Jotan subsidiary, all of which occurred in the fourth quarter of
1994 as part of the Company's overall plan to reduce expenses. In August 1995,
the Company closed its distribution center in Chattanooga. This center was no
longer economically viable as a result of increased competition in the poultry
packaging market which made up more than 85% of the Chattanooga location's
sales. For the year ended December 31, 1994, sales from distribution centers
subsequently closed represented 22.8% of consolidated sales.
Sales increased for the year ended December 31, 1995 compared to the same
period in 1994 at the Company's distribution centers in Thomasville (30%),
Auburndale (27%), and Greenville (353%), which opened in May of 1994,
partially offsetting the decline in sales resulting from the Company's cost
cutting measures. Sales at Atlantic Bag & Paper, a subsidiary of the Company
declined by 45% for the year ended December 31, 1995. This decrease resulted
from restructuring the Atlantic Bag & Paper warehouse from a general
distribution center to a packaging products distribution center.
Cost of goods sold decreased to $8.2 million or 79.4% of sales for the year
ended December 31, 1995 from $10.0 million or 81.6% of sales for the year
ended December 31, 1994. This improvement reflected the decrease in cost due
to the softening of demand in the nationwide corrugated and packaging markets
that occurred during the second half of 1995.
Operating expenses decreased to $2.6 million for the year ended December 31,
1995 from $3.2 million for the same period in 1994, a 19.1% decrease. This
decrease reflects the impact of the Company's cost cutting efforts that began
during the fourth quarter of 1994.
Other income improved to $179,296 for the year ended December 31, 1995 from
$69,571 for the year ended December 31, 1994. This increase reflected the
favorable settlement of disputed amounts owed to vendors.
Interest expense increased to $225,241 for the year ended December 31, 1995
compared to $185,157 for the same period in 1994. This increase reflected the
increased cost of borrowing related to The CIT Group/Credit Finance, Inc. line
of credit that was entered into at the end of the second quarter of 1995. The
loss on sale of assets improved from $102,904 for the year ended December 31,
1994 to $9,219 for the same period in 1995. The loss in 1994 primarily related
to the sale of the assets of Source of Supply, Inc., a wholly-owned subsidiary.
<PAGE>
As a result of the foregoing factors, a net loss of $527,322, or $.10 a share
was incurred for the year ended December 31, 1995. This compares to a net loss
of $1,203,863, or $.25 per share for the year ended December 31, 1994.
Subsequent Events
The Company entered into a Share Purchase Agreement, dated as of December 19,
1996, among the Company, Southland Holding Company (Southland) and the
shareholders of Southland (the Share Purchase Agreement) to acquire all of the
issued and outstanding shares of common stock of Southland for an aggregate
purchase price of approximately $27.5 million (subject to adjustment) (the
Acquisition). In connection with the Acquisition, Jotan is paying non-
competition fees to the shareholders of Southland in the aggregate amount of
$6.6 million. Southland is a leading supplier of corrugated packaging products
to the moving and storage industry, as well as to companies in the air freight
and perishable food markets, with operations in eleven strategic markets in
the United States. Management believes that the acquisition of Southland will
allow the Company to leverage its service strategy into additional markets,
will allow the Company to market more attentively to national accounts, will
facilitate purchasing efficiency through increased volume discounts and will
provide opportunities to capture administrative operating efficiencies, as
well as providing a base for the acquisition of further strategic assets
focused on the packaging industry. Southland's revenues for the year ended
April 30, 1996 were $62.5 million. The transaction closed on March 4, 1997
with an effective date of February 28, 1997.
Liquidity and Capital Resources
Through September 8, 1994, the Company had borrowed money from Total Supply
pursuant to an arrangement similar to a line-of-credit. In addition, on
December 31, 1993, the Company issued a note payable for $750,000 to Total
Supply for the purchase of Atlantic Bag & Paper. On September 8, 1994, the
Company refinanced its line-of-credit arrangement and the $750,000 note
payable with Total Supply by issuing to Total Supply a convertible
subordinated debenture which carried an interest rate of prime plus one
percent and which was convertible into the Company's common stock at any time
at the conversion rate of $5.00 per share.
On February 22, 1995, the Company entered into a new financing agreement with
Total Supply, Inc., which replaced the previous convertible debenture which
provided for interest at prime plus 1% and conversion at the option of the
holder at $5 per common share. The new agreement, converted a portion of the
face value ($919,833) into shares of common stock at fair value (as determined
by valuation on February 17, 1995). The balance of $750,000 was non-
convertible and payable over a 81-week period beginning February 27, 1995 at
$10,000 per week including interest at 9.25%, payment of which was completed in
September, 1996. In April 1995, the fair value of the stock, for purposes
of this transaction, was determined and 306,611 shares of common stock were
issued in cancellation of $919,833 of convertible subordinated debenture.
Also, during 1995, the Company sold 204,100 shares of common stock and
received $402,000 in proceeds.
On June 14, 1995, the Company entered into a long-term financing agreement
with The CIT Group/Credit Finance, Inc. (The CIT Group). This agreement
provided an asset based credit line of up to $2,000,000 with advances against
the line based on percentages of accounts receivable and inventory. The
<PAGE>
interest rate for this credit line is 3% over the prime rate announced by the
Chemical Bank of New York. Certain fees relating to obtaining this credit
facility are being amortized over the three year life of the agreement. As
collateral for the credit line, the Company pledged a security interest in its
assets. The Company used some of the proceeds from this facility to buy back
receivables and cancel an existing factoring arrangement with Cambridge
Factors.
On May 14, 1996, shareholders authorized the change in the Company's state of
incorporation through the merger of Jotan, Inc. an Idaho corporation (Jotan-
Idaho) into Jotan, Inc., a Florida corporation and wholly owned subsidiary of
Jotan-Idaho (Reincorporation Merger). The Reincorporation Merger was completed
on May 16, 1996.
This change in capital structure allowed the Company to arrange for the sale
of a preferred class of stock. On May 16, 1996, the Company signed an
agreement to sell up to $6,000,000 in Series A Convertible Preferred Stock to
an affiliate of Fairview Capital L.L.C., a Raleigh, North Carolina based
private investment company. The initial funding closed May 16, 1996 and
provided the Company $2,000,000 through the sale of 1,265,823 shares of Series
A Convertible Preferred Stock to F-Jotan, L.L.C., the Fairview affiliate.
Under the terms of the Series A Convertible Preferred Stock Purchase
Agreement, the Company may sell an additional $4,000,000 of Series A Convertible
Preferred Stock to the investors subject to certain conditions set
forth in the Series A Convertible Preferred Stock Purchase agreement. The
Series A Convertible Preferred Stock has voting rights equivalent to the
common stock and carries an 8% annual dividend, which is payable beginning
January 1, 1997, in additional shares of preferred stock.
In order to obtain financing for the Southland transaction and fund future
expansion, the Company signed an agreement on February 28, 1997 with Rice
Capital II L.L.P. to purchase $9 million of senior subordinated debt and $10
million of senior redeemable preferred stock (Series B Preferred Stock).
F-Southland, L.L.C., a North Carolina limited liability company, and FF-
Southland Limited Partnership, a North Carolina limited partnership
(collectively, the Southland Purchasers), entities affiliated with Franklin
Street/Fairview Capital, L.L.C. (Fairview), will purchase an aggregate amount
of $2 million of such senior subordinated debt and $2 million of such senior
redeemable preferred stock in lieu of Rice. Rice and the Southland Purchasers
are using working capital derived from partner or member contributions as the
source of the consideration to be paid by them for the senior subordinated
debt and senior redeemable preferred stock.
The senior subordinated debt will bear interest at a rate of 12.5% per annum,
with a default rate of 15.5% per annum. Interest is payable quarterly for
eight years, with principal due in equal quarterly installments beginning in
the seventh for a two-year period. Prepayments of the subordinated debt are
allowed but are subject to premiums ranging from 12.5% during the first year
to 0% commencing in the sixth year. The senior subordinated debt is
subordinated to the Company's senior debt and is unsecured. Rice and the
Southland Purchasers will be paid pro rata portions of a fee of $225,000 for
providing the subordinated debt financing, of which $75,000 has been paid to
Rice. The documentation for the subordinated debt includes customary
restrictive covenants and agreements by the Company, including financial
covenants and limitations on the Company's debt, disposition of assets,
incurrence of liens and encumbrances, payment of dividends, investments and
executive compensation.
<PAGE>
In addition to the senior subordinated debt, Rice and the Southland Purchasers
will also receive pro rata portions of warrants to purchase 3,227,471 shares
of Common Stock, representing 13.5% of the outstanding Common Stock on a fully
diluted basis, which will be exercisable for a term of ten years (the 13.5%
warrants). The total exercise price of the 13.5% warrants is a maximum of
$100. The warrants will be recorded at estimated fair market value and the
related discount amortized to interest expense over the term of the senior
subordinated debt. The Common Stock issuable upon exercise of the 13.5%
warrants is subject to registration rights that will allow the holders to
require the registration of such shares on not more than two occasions, and to
include such shares in other registrations by the Company, subject to certain
restrictions.
The 13.5% warrants include customary antidilution provisions and allow the
holder to sell (put) the 13.5% warrants to the Company at a price equal to the
greater of their book value or their fair market value (the Put Price) at any
time after the earlier to occur of (i) the fifth anniversary of closing, (ii)
prepayment of the Subordinated debt in full, (iii) a material change in the
ownership of the Company, (iv) a merger or sale of all or a majority of the
Company's assets, or (v) the Company's default in performing certain covenants
contained in the documents governing the Subordinated debt. The Company will
have the right to purchase (call) the 13.5% warrants at any time after the
sixth anniversary of closing for a price equal to the Put Price. As long as
the Subordinated debt is outstanding, Rice and Fairview will each have the
right to attend and observe all meetings of the Board of Directors.
The Series B Preferred Stock will accrue dividends at a rate of 8.0% per
annum, payable quarterly in cash or, at the Company's option, in kind by the
issuance of additional shares of Series B Preferred Stock. Series B Preferred
Stock will have a liquidation preference over all other shares of Common Stock
and preferred stock, including the Series A Convertible Preferred Stock that
is currently held by F-Jotan, an affiliate of Fairview. The Series B Preferred
Stock may be redeemed by the Company at any time, but subject to premiums
ranging from 12.5% during the first year to 0% commencing in the sixth year.
Redemption of the Series B Preferred Stock is mandatory on the eighth
anniversary of closing. Rice and the Southland Purchasers will be paid pro
rata portions of a fee at closing of $250,000 for providing the Series B
Preferred Stock financing. The Series B Preferred Stock will entitle the
holders thereof at all times that it is outstanding to elect the majority of
the Board of Directors.
In addition to the Series B Preferred Stock, Rice and the Southland Purchasers
will also receive pro rata portions of warrants to purchase 11,953,596 shares
of Common Stock, representing approximately 50% of the issued and outstanding
Common Stock on a fully diluted basis, which will be exercisable for a term of
ten years (the 50% Warrants). The total exercise price of the 50% warrants is
a maximum of $100. The portion of the 13.5% warrants and the 50% warrants
being acquired by Rice, in the aggregate, will allow Rice to acquire upon
exercise approximately 50.5% of the outstanding Common Stock on a fully
diluted basis. Through conversion of the Series A Convertible Preferred Stock
and exercise of the portion of the 13.5% warrants and the 50% warrants being
acquired by the Southland Purchasers, affiliates of Fairview will after the
closing of the Proposed Transactions have the right to acquire approximately
24.12% of the outstanding Common Stock, on a fully diluted basis. The Common
Stock issuable upon exercise of the 50% warrants is subject to registration
rights that will allow the holders to require the registration of such shares
on not more than two occasions, and to include such shares in other
registrations by the Company, subject to certain restrictions. The put and
call rights associated with the 50% warrants are identical to the similar
rights of the 13.5% warrants described above.
<PAGE>
The former holders of Common Stock will collectively own approximately 25.38%
of the outstanding shares of Common Stock on a fully diluted basis after
giving effect to the proposed transactions. Rice will be the Company's largest
holder, beneficially owning approximately 50.5% of the outstanding shares
of Common Stock on a fully diluted basis after giving effect to the proposed
transactions. In addition, the Southland purchasers will beneficially own
approximately 13% of the outstanding shares of Common Stock and F-Jotan will
beneficially own approximately 11.12% of the outstanding shares of Common
Stock on a fully diluted basis after giving effect to the proposed transactions.
Each of Rice and the Southland purchasers will be required to
file with the Securities and Exchange Commission (the Commission) statements
reporting their respective beneficial ownership of Common Stock pursuant to
Section 13(d) of the Exchange Act. For purposes of Section 13(d), each of the
Southland purchasers and F-Jotan will be deemed to beneficially own the full
24.12% of the outstanding Common Stock on a fully diluted basis as a result of
their affiliate status due to their common manager.
The Company signed an agreement with Banque Paribas on February 28, 1997 to
obtain up to $12 million in a senior revolving credit facility and $27 million
in senior term/acquisition credit facilities. As part of the Banque Paribas
financing agreement, the Company has terminated its long term financing
arrangement with CIT and paid off other long term credit facilities resulting
in $2,098,184 being reclassified as short term debt as of December 31, 1996.
These facilities were terminated on February 28, 1997.
As a result of the foregoing transactions, the Company believes it will have
adequate capital resources for the foreseeable future.
Net Operating Losses
The Company has accumulated approximately $1.9 million of net operating loss
carryforwards as of December 31, 1995 which began to offset taxable income in
1996 and will reduce income taxes in future years. At the end of 1996, $1.7
million of net operating loss carryforwards were still available. The use of
these losses to reduce future income taxes will depend on the generation of
sufficient taxable income prior to the expiration of the net operating loss
carryforwards. The carryforwards begin to expire in the year 2008.
Environmental Matters
The Company recently discovered ground water contamination at its Thomasville,
Georgia facility which is reportable under Georgia law. The Company has not
yet made a determination as to whether any remediation will be required and
therefore is unable to estimate the range of loss, if any, at the present
time.
New Accounting Pronouncements
The FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment
losses to be recorded on identifiable long-lived assets used in operations and
related goodwill when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
<PAGE>
than the assets' carrying amount. If an asset is determined to be impaired, a
loss is to be recorded based upon the difference between fair value of the
asset and its carrying value. Fair value is to be estimated based on estimated
selling prices or discounted future cash flows. Statement No. 121 also
addresses the accounting for the expected disposition of long-lived assets.
The Company has adopted Statement No. 121 effective January 1, 1996, and the
effect of adoption was not material to the financial position or the results
of operations of the Company.
Also, the Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation which requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The Company did not change
its method of accounting for stock-based employee compensation arrangements
and has adopted the disclosure requirements of Statement No. 123 effective
January 1, 1996, which are included in Note 9.
Plan of Operation
As a result of the acquisition of Southland Holding Company (Southland), the
Company anticipates spending approximately $300,000 to upgrade information
systems at Southland and its subsidiaries. The Company also plans to add
additional management personnel as needed to respond to the needs of the new
larger organization. Management believes that cash flows from operations
will be sufficient to fund the future needs of the combined operations of both
Jotan and Southland.
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
Item 7. Financial Statements
See the financial statements included herein on pages F-1 through F-14.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Information required in response to Item 8 is set forth under "Proposal No. 3
for Ratification of Selection of Independent Public Accountants" in the
Company's definitive proxy statement to be filed pursuant to Regulation 14A,
which information is incorporated herein by reference.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
(a) Directors and Executive Officers
Information with respect to the members of the Board of Directors of the
Company is set forth under the caption "Proposal No. 1 - Election of
Directors" in the Company's definitive proxy statement to be filed pursuant to
<PAGE>
Regulation 14A, which information is incorporated herein by reference.
<TABLE>
Executive officers of the Company and their ages are as follows:
<CAPTION>
Name Age Position
- ----------------------- ---- ---------------------------------
<S> <C> <C>
Shea E. Ralph 36 President, Chairman, Chief
Executive Officer
Alton E. Thompson, Jr. 40 Vice President of Sales &
Operations
David Freedman 47 Vice President, Chief
Financial Officer,
Secretary
John P. Moore 37 Treasurer
</TABLE>
None of the officers of the Company are officers or directors of any other
publicly traded corporation, nor have any of the officers, nor any of the
affiliates or promoters of the Company, filed any bankruptcy petition, been
convicted in or been the subject of any pending criminal proceedings, or the
subject of any order, judgment, or decree involving the violation of any
state or federal securities laws.
The business experience of each of the persons listed above during the past
five years is as follows:
Shea E. Ralph has been the President, Chief Executive Officer and a director
of the Company since March, 1994. Mr. Ralph served as Vice President of
Atlantic Bag & Paper Company from 1988 to 1994 and was the founder of Jotan-
Florida in 1993. Mr. Ralph attended The University of Florida from 1980 to
1983.
Alton E. Thompson, Jr. was promoted to Vice President of Sales & Operations in
August 1995. He joined Jotan, Inc. as General Manager of its Auburndale
distribution center in September 1993. Prior to joining Jotan he worked for
over 19 years with Jefferson Smurfit Corp. in various manufacturing and sales
capacities. Mr. Thompson attended Florida Community College.
David Freedman has been Vice President and Chief Financial Officer of Jotan
since May 1994. Prior to joining Jotan, he was president of Tax Concepts, a
tax research and consulting company. Before founding Tax Concepts, he was
Assistant Vice President-Tax, CSX Corporation. Mr. Freedman graduated from
City College of New York in 1971 and received his M.B.A. from Nova University
in 1977.
John P. Moore was hired as corporate controller April 1, 1995. Prior to
joining Jotan, he was controller of Connerty & Associates, a regional
franchisor of Outback Steakhouse and Hooters restaurants. Mr. Moore graduated
from Auburn University receiving a B.S. degree in Accounting in June 1982, and
has been registered as a C.P.A. with the Alabama State Board since May 1985.
(b) Compliance with Section 16(a) of the Exchange Act
Information with respect to compliance with Section 16(a) of the Exchange Act
is set forth under the caption "Compliance with Section 16(a) of the Exchange
<PAGE>
Act" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A, which information is incorporated herein by reference.
Item 10. Executive Compensation
Information with respect to compensation paid to directors and executive
officers is set forth under the caption "Compensation of Directors and
Executive Officers," in the Company's definitive proxy statement to be filed
pursuant to Regulation 14A, which information is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to the security ownership of certain beneficial
owners and management is set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management," in the Company's definitive proxy
statement to be filed pursuant to Regulation 14A, which information is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions is
set forth under the caption "Certain Relationships and Related Transactions,"
in the Company's definitive proxy statement to be filed pursuant to Regulation
14A, which information is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
(a) Exhibits
<CAPTION>
Exhibit
No. Exhibit Name
- ------- ------------------------------------------------------------------
<S> <C>
3.1 Articles of Incorporation, as amended, is incorporated herein by
reference from Exhibit 3.1 to the Company's Registration Statement
on Form 10-SB, File No. 0-24188.
3.2 The Articles of Exchange are incorporated herein by reference from
Exhibit 3.2 to the Company's Registration Statement on Form 10-SB,
File No. 0-24188.
3.3 The By-Laws of the Company, as amended and restated, are
incorporated herein by reference from Exhibit 3.3 to the Company's
Registration Statement Form 10-SB, File No. 0-24188.
10.1 Employment Agreement with Shea E. Ralph is incorporated herein by
reference from Exhibit 10.1 to the Company's Registration Statement
Form 10-SB, File No. 0-24188.
10.2 Employment Agreement with Jeffrey Allen Barnett is incorporated
herein by reference from Exhibit 10.2 to the Company's Registration
Statement Form 10-SB, File No. 0-24188.
<PAGE>
Exhibit
No. Exhibit Name
- ------- ------------------------------------------------------------------
10.3 Employment Agreement with David Freedman is incorporated herein by
reference from Exhibit 10.3 to the Company's Form 10-KSB for the
year ended December 31, 1994.
10.4 Lease Agreement for Atlantic Bag & Paper Company is incorporated
herein by reference from Exhibit 10.3 to the Company's Registration
Statement Form 10-SB, File No. 0-24188.
10.5 Lease Agreement for Jotan Auburndale is incorporated herein by
reference from Exhibit 10.4 to the Company's Registration Statement
Form 10-SB, File No. 0-24188.
10.6 Lease Agreements for Jotan Nashville is incorporated herein by
reference from Exhibit 10.5 to the Company's Registration Statement
Form 10-SB, File No. 0-24188.
10.7 Lease Agreement for Jotan Chattanooga is incorporated herein by
reference from Exhibit 10.6 to the Company's Registration Statement
Form 10-SB, File No. 0-24188.
10.8 1994 Stock Option Plan is incorporated herein by reference from
Exhibit 10.7 to the Company's Registration Statement Form 10-SB,
File No. 0-24188.
10.9 Lease Agreement for principal place of business and executive
offices is incorporated herein by reference from Exhibit 10.8 to
the Company's Registration Statement Form 10-SB, File No. 0-24188.
10.10 Release from Employment Agreement with Jeffrey Allen Barnett dated
August 19, 1995 is included in this Form 10-KSB.
10.11 CIT Loan and Security Agreement is incorporated herein by reference
from Item 6 of the Company's Form 10-QSB for the period ended
June 30, 1995, File No. 0-24188.
10.12 CIT Guaranty is incorporated herein by reference from Item 6 of the
Company's Form 10-QSB for the period ended June 30, 1995,
File No. 0-24188.
10.13 CIT Subordination Agreement is incorporated herein by reference
from Item 6 of the Company's Form 10-QSB for the period ended
June 30, 1995, File No. 0-24188.
10.14 Total Supply System Approval of CIT transaction is incorporated
herein by reference from Item 6 of the Company's Form 10-QSB for
the period ended June 30, 1995, File No. 0-24188.
<PAGE>
Exhibit
No. Exhibit Name
- ------- ------------------------------------------------------------------
10.15 Total Supply Debt Restructuring Agreement is incorporated herein by
reference from Item 6 of the Company's Form 10-QSB for the period
ended June 30, 1995, File No. 0-24188.
10.16 Employment Agreements with Shea E. Ralph, David Freedman, and
Alton Thompson
10.17 Form 8-K filed December 24, 1996 -- Share Purchase Agreement
10.18 Form 8-K filed March 17, 1997 -- Southland Acquisition documents
11 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
(Registrant) Jotan, Inc.
By (Signature and Title)___Jeffrey P. Sangalis____________
Jeffrey P. Sangalis, Chairman, Chief Executive Officer and Director
Date March 21, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)___Jeffrey P. Sangalis_____________
Jeffrey P. Sangalis, Chairman, Chief Executive Officer and Director
Date March 21, 1996
By (Signature and Title)___Jeremiah M. Callahan____________
Jeremiah M. Callahan, Acting President, Chief Operating Officer
and Director
Date March 21, 1996
By (Signature and Title)__Shea E. Ralph____________________
Shea E. Ralph, Vice Chairman and Director
Date March 21, 1996
By (Signature and Title)__David Freedman___________________
David Freedman, Vice President, Chief Financial Officer,
Secretary (Principal Financial Officer and Accounting Officer)
By (Signature and Title)___John P. Moore___________________
John P. Moore, Treasurer and Controller
By (Signature and Title)__James P. Wilson__________________
James P. Wilson, Director
By (Signature and Title)__Philip A. Davidson_______________
Philip A. Davidson, Director
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 7, ITEM 13(a)(1)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<PAGE>
EXHIBIT 11 - Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
_______________________
<S> <C> <C>
Primary:
Average shares outstanding 5,676,598 5,497,127
Net effect of dilutive stock options --
based on the treasury stock method using
average market price 28,393 -
_______________________
Total 5,704,991 5,497,127
========================
Net income (loss) $173,658 $(527,322)
========================
Per share amount $.03 $(.10)
========================
Fully diluted:
Average shares outstanding 5,676,598 5,497,127
Net effect of dilutive stock options --
based on the treasury stock method using
year end market price, if higher than
average market prices 71,722 -
------------------------
Total 7,343,604 5,497,127
========================
Net income (loss) $173,658 $(527,322)
========================
Per share amount $.02 $(.10)
========================
</TABLE>
<PAGE>
SCHEDULE 21.1
Registrant
Jotan, Inc.
Subsidiaries
Atlantic Bag & Paper Company
<PAGE>
Jotan, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1996 and 1995
The following financial statements of Jotan, Inc. are included in Item 7:
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
Report of Independent Auditors
Board of Directors
Jotan, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Jotan, Inc.
and subsidiaries (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Jotan, Inc. and subsidiaries as of December 31, 1996 and December
31, 1995, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
Jacksonville, Florida
February 10, 1997, except for
Note 11 as to which the
date is March 4, 1997
<PAGE>
<TABLE>
Jotan, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31
1996 1995
__________ __________
<S> <C> <C>
Assets
Current assets:
Cash $1,403,214 $ 21,771
Accounts receivable, less allowance
for doubtful accounts of $33,170 in
1996 and $68,000 in 1995 1,553,224 956,426
Inventory 1,181,642 1,261,937
Other current assets 323,949 217,840
---------- ----------
Total current assets 4,462,029 2,457,974
Property and equipment:
Land 110,000 110,000
Buildings and leasehold improvements 502,255 498,954
Vehicles 251,974 262,975
Furniture, fixtures and equipment 361,383 334,839
---------- ----------
Total property and equipment 1,225,612 1,206,768
Less accumulated depreciation (386,858) (285,416)
---------- ----------
Net property and equipment 838,754 921,352
Capitalized acquisition costs 660,296 -
Other assets 36,979 70,831
---------- ----------
Total assets $5,998,058 $3,450,157
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $1,525,941 $1,209,020
Accrued expenses 221,557 58,862
Current maturities of notes payable
and line of credit 1,716,332 160,571
Subordinated debenture - payable
to related party - 353,749
---------- ----------
Total current liabilities 3,463,830 1,782,202
Notes payable, less current maturities 506,097 533,730
Line of credit - 1,107,378
Stockholders' equity:
Series A convertible preferred stock,
10,000,000 shares authorized;
1,265,823 and -0- shares issued and
outstanding at 1996 and 1995,
respectively 12,658 -
Voting common stock, $.01 par value;
10,000,000 shares authorized;
5,679,411 and 5,664,311 shares issued
and outstanding at 1996 and 1995,
respectively 56,794 56,643
Additional paid-in capital 3,963,983 2,149,166
Retained deficit (2,005,304) (2,178,962)
---------- ----------
Total stockholders' equity 2,028,131 26,847
---------- ----------
Total liabilities and
stockholders' equity $5,998,058 $3,450,157
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Jotan, Inc. and Subsidiaries
Consolidated Statements of Operations
<CAPTION>
Years ended December 31
1996 1995
----------- -----------
<S> <C> <C>
Sales $11,659,754 $10,366,050
Cost of sales 8,758,248 8,225,477
----------- -----------
Gross profit 2,901,506 2,140,573
Operating expenses 2,519,506 2,612,731
----------- -----------
Operating income (loss) 382,000 (472,158)
Other income (expense):
Interest expense (271,138) (225,241)
Other income 63,107 179,296
Loss on sale of assets (311) (9,219)
----------- -----------
Total other expense (208,342) (55,164)
----------- -----------
Income (loss) before income taxes 173,658 (527,322)
Income tax expense - -
----------- -----------
Net income (loss) $ 173,658 $ (527,322)
=========== ===========
Income (loss) per share:
Primary $ .03 $ (.10)
=========== ============
Fully diluted $ .02 $ (.10)
=========== ============
Weighted average number of shares
outstanding:
Primary 5,704,991 5,497,127
=========== ===========
Fully diluted 7,343,604 5,497,127
=========== ===========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Jotan, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1996 and 1995
<CAPTION>
Series A Total
Voting Convertible Additional Retained Stockholders'
Common Stock Preferred Stock Paid-In Earnings Equity
Shares Amount Shares Amount Capital (Deficit) (Deficit)
--------- ------- --------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1995 5,153,600 $51,536 - $ - $ 832,447 $(1,651,640) $(767,657)
Voting
common
stock
issued 204,100 2,041 - - 399,959 - 402,000
Voting
common stock
issued in
conversion of
subordinated
debenture 306,611 3,066 - - 916,760 - 919,826
Net loss - - - - - (527,322) (527,322)
--------- ------- --------- ------- ---------- ------------ ----------
Balance at
December
31, 1995
5,664,311 56,643 - - 2,149,166 (2,178,962) 26,847
Voting
common
stock
issued 15,100 151 - - 7,399 - 7,550
Series A
preferred
stock
issued - - 1,265,823 12,658 1,807,418 - 1,820,076
Net income - - - - - 173,658 173,658
Balance at
December 31,
1996 --------- ------- --------- ------- ---------- ------------ ----------
5,679,411 $56,794 1,265,823 $12,658 $3,963,983 $(2,005,304) $2,028,131
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Jotan, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31
1996 1995
----------- -----------
<S> <C> <C>
Operating activities
Net income (loss) $ 173,658 $ (527,322)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Directors stock compensation 7,550 -
Loss on sale of assets 311 9,219
Depreciation and amortization 161,756 152,241
Changes in operating assets
and liabilities:
(Increase) decrease in accounts
receivable (596,798) 265,270
Decrease (increase) in inventory 80,295 (29,323)
Increase in other current assets (144,109) (52,075)
Decrease (increase) in other assets 33,852 (86,664)
(Increase) in capitalized acquisition
costs (660,296) -
Increase (decrease) in accounts
payable 316,921 (786,771)
Increase (decrease) in accrued
expenses 162,695 (118,550)
---------- -----------
Total cash flows used in
operating activities (464,165) (1,087,311)
Investing activities
Proceeds from disposition of equipment 13,220 47,349
Purchases of property and equipment (54,689) (44,516)
---------- ----------
Total cash flows used in
investing activities (41,469) (83,831)
Financing activities
Advances on the convertible subordinated
debenture - 64,191
Repayments of convertible subordinated
debenture (353,749) (391,714)
Proceeds from line of credit and notes
payable 486,698 1,252,379
Proceeds from stock issuance 1,820,076 402,000
Principal payments on notes payable (65,948) (150,000)
---------- ----------
Total cash flows provided from
financing activities 1,887,077 1,176,856
---------- ----------
Net increase in cash 1,381,443 5,714
Cash at beginning of year 21,771 16,057
---------- ----------
Cash at end of year $1,403,214 $ 21,771
========== ==========
Supplementary schedule of non-cash
investing and financing activities:
Conversion of debt to shares
of common stock $ - $ 919,826
========== ==========
Cash paid during the year for:
Interest $ 261,123 $ 226,752
========== ==========
See accompanying notes.
</TABLE>
<PAGE>
Jotan, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Business and Organization
Jotan, Inc. and subsidiaries (the Company) is engaged primarily in the sale of
paper products and corrugated boxes in the southeastern United States. The
Company's warehouses are strategically located to service an approximate 150
mile area. The Company extends credit terms to a diversified group of
customers, primarily businesses. Credit is extended based on an evaluation of
each customer's financial condition. One of the Company's customers accounted
for 19.1% and 21.3% of total revenues during 1996 and 1995, respectively. The
trade receivables are not collateralized.
On March 31, 1994, Antelope Resources, Inc. (Antelope) acquired all of the
outstanding stock of the Jotan, Inc. of Florida (Jotan-Florida) in exchange
for 4,750,000 shares of authorized but previously unissued shares of Antelope
common stock. Subsequent to this transaction, Antelope's corporate name was
changed to Jotan, Inc. For accounting purposes, the acquisition has been
treated as a recapitalization of Jotan-Florida with Jotan-Florida as the
acquirer (reverse acquisition).
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Jotan, Inc. (the
Parent) and its wholly-owned subsidiaries. All material intercompany
transactions have been eliminated in consolidation.
Inventory
Inventory is stated at lower of weighted average cost or market, determined by
the first-in, first-out method.
Income Taxes
The Company accounts for income taxes under Financial Accounting Standards
Board Statement No. 109, Accounting for Income Taxes. SFAS No. 109 requires
income taxes to be recognized using the liability method. Specifically,
deferred tax assets and liabilities are determined based on estimated future
tax effects attributable to temporary differences in assets and liabilities
for income tax purposes.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the respective assets.
The estimated useful lives of the vehicles, furniture, fixtures and equipment
vary from five to fifteen years, buildings are depreciated over forty years
and leasehold improvements are depreciated over the shorter of the lease term
or the estimated useful life.
Deferred Acquisition Costs
The costs incurred related to acquisitions, which consist primarily of legal
and accounting fees, are deferred until the acquisition is completed and then
amortized over the estimated useful life. Costs incurred related to
acquisitions which will not be completed are expensed.
Revenue Recognition
The Company recognizes revenue when inventory is delivered to the customer or
when all contractual obligations have been fulfilled.
Fair Value of Financial Instruments
During 1995, the Company adopted Statement of Financial Accounting Standards
No. 107, Disclosures About Value of Financial Instruments. The reported
amounts in the balance sheets at December 30, 1996 and 1995, respectively, for
cash, accounts receivable, accounts payable, barter credits, line of credit,
and note payable approximates fair value.
Income (Loss) Per Share
Income (loss) per share is based on the weighted average number of common and
common equivalent shares outstanding during the year. Fully diluted earnings
per share assumes that the Series A Convertible Preferred Stock were converted
into common stock as of the date of issuance.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements
The FASB issued Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment
losses to be recorded on identifiable long-lived assets used in operations and
related goodwill when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. If an asset is determined to be impaired, a
loss is to be recorded based upon the difference between fair value of the
asset and its carrying value. Fair value is to be estimated based on estimated
selling prices or discounted future cash flows. Statement No. 121 also
addresses the accounting for the expected disposition of long-lived assets.
The Company has adopted Statement No. 121 effective January 1, 1996, and the
effect of adoption was not material to the financial position or the results
of operations of the Company.
Also, the Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation which requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them. The Company did not change
its method of accounting for stock-based employee compensation arrangements
and has adopted the disclosure requirements of Statement No. 123 effective
January 1, 1996, which are included in Note 9.
3. Related Party Transactions
On December 31, 1993, Jotan, Inc. purchased all of the outstanding stock of
Atlantic Bag & Paper (AB&P) from Total Supply, Inc. (Total Supply) in exchange
for a $750,000 note payable and a security interest in its assets. The
acquisition was accounted for on a basis similar to a pooling of interests.
The note payable of $750,000 was recorded as a distribution from stockholders'
equity in the accounting records of the Company. The amount of the excess
($337,761) of the $750,000 purchase price over the balance of stockholders'
equity was recorded as a reduction in the additional paid-in capital of the
Company.
During 1994, the Company received advances from Total Supply in an arrangement
similar to a line of credit. The advance was added to the face value of the
note payable. In 1995, a portion of the debt was converted to shares of common
stock (see Note 4). The owner of Total Supply and father of the Company's
president, owns 456,611 shares of common stock of the Company. The Company
also leases two warehouses from this individual. The leases, which expire in
the year 2004, call for monthly lease payments of approximately $4,000 and
$1,000. Rent expense under these leases was $63,900 in both 1995 and 1996.
<PAGE>
3. Related Party Transactions (continued)
On October 31, 1994, the Company sold all the assets of Source of Supply,
Inc., a wholly-owned subsidiary, to Total Supply, Inc. for a promissory note
receivable totaling $64,191. The note was paid off February 22, 1996 as part
of the new financing agreement with Total Supply, Inc. and interest income of
$1,330 was recognized in 1995.
During 1996, the Company paid a Board member approximately $44,000 for
consulting services rendered in connection with the acquisition of Southland
Holding Company. These costs have been capitalized and are reflected as a
noncurrent asset in the balance sheet.
4. Debt
Convertible Subordinated Debenture Payable to Related Party
On February 22, 1995, Jotan, Inc. entered into a new financing agreement with
Total Supply and the previous debt agreements (convertible debenture,
security, etc.) were canceled. The previous convertible debenture provided for
interest at prime plus 1%, conversion at the option of the holder at $5 per
common share and prepayment by the issuer was allowed. The new agreement,
converted a portion of the face value ($919,833) into shares of common stock
at fair value (as determined by valuation on February 17, 1995) and the
balance of $750,000 is payable over a 81-week period beginning February 27,
1995 at $10,000 per week including interest at 9.25%.
Principal payments on the new note totaled approximately $392,000 in 1995,
leaving a principal balance due of $353,749 at December 31, 1995 which was
paid off during 1996.
Line of Credit with CIT Group
On June 14, 1995, the Company entered into a three-year agreement ending in
June 1998, with The CIT Group/Credit Finance, Inc. for a $2,000,000 line of
credit. The amounts outstanding at December 31, 1996 and 1995 were $1,594,076
and $1,107,378, respectively. The amount outstanding at December 31, 1996 has
been classified as a current liability as this line of credit was terminated
by the Company in February 1997. The amount to be drawn upon is based on
percentages of accounts receivable and inventory. Amounts borrowed under the
agreement are secured by the Company's assets and bear interest at prime plus
3%. Interest under the agreement ranged from 11.25% to 11.5% for the year
ended December 31, 1996.
<PAGE>
4. Debt (continued)
Notes Payable
<TABLE>
Notes payable as of December 31 consisted of:
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Mortgage note payable with interest at prime
plus 2% (8.25%), principal and interest of
$5,000 due monthly until March 1999;
collateralized by a first mortgage on the
property with a carrying amount of $542,547
and personal guarantee of the president of
the Company. $504,083 $511,736
Notes payable, interest rates ranging from
7.85% to 17.1%, with various principal and
interest amounts due monthly, with maturity
dates from 1997 to 1998; collateralized by
vehicles and equipment with a net book
value of $13,767. 17,689 63,252
Capital lease obligations with interest
ranging from 6.0% to 16.3%; principal and
interest of $382 due monthly until April
1999, collateralized by equipment with a
net book value of $10,826. 11,581 24,313
Notes payable, interest at 12%, payable on
demand. 95,000 95,000
---------- ----------
628,353 694,301
Less debt due within one year 122,256 160,571
---------- ----------
$ 506,097 $ 533,730
========== ==========
</TABLE>
<TABLE>
Long-term debt matures as follows:
<S> <C>
1997 $122,256
1998 17,093
1999 489,004
---------
Total $628,353
</TABLE>
<PAGE>
5. Income Taxes
The provision for income taxes differs from the amount computed by applying
the statutory rate to pre-tax income as follows:
<TABLE>
1996 1995
---------- ----------
<S> <C> <C>
Income tax provision at the U.S.
federal statutory rate $ 59,044 $ (179,289)
State tax (benefit), net of federal
benefit 6,304 (19,142)
Meals and entertainment 6,785 9,780
Increase in (utilization of) net
operating loss carryforward (72,133) 188,651
---------- ----------
Total $ - $ -
========== ==========
</TABLE>
The temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 1996 and 1995, are presented below.
<TABLE>
1996 1995
---------- -----------
<S> <C> <C>
Allowance for uncollectible
accounts receivable $ 12,475 $ 25,588
Inventory valuation allowances 15,086 11,289
Depreciation 15,306 13,386
Net operating loss carryforward 637,734 701,079
Other 4,779 6,171
---------- ----------
685,380 757,513
Valuation allowance (685,380) (757,513)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
The Company had a net operating loss carryforward for tax purposes as of
December 31, 1996 and 1995 of approximately $1,695,000 and $1,863,000,
respectively, that may be offset against future taxable income through the
year 2010. No tax benefit has been recorded in the 1996 and 1995 consolidated
financial statements because the realization of the carryforward is not
considered more likely than not at the present time. Accordingly, the deferred
tax asset relating to the loss carryforward has been offset by a valuation
allowance in the same amount.
<PAGE>
6. Operating Leases
The Company leases warehouse and office facilities under operating leases
expiring at various dates through 2004. The leases have renewal options
ranging from one to two years. Rent expense under these leases was $244,582
and $241,520 for the years ended December 31, 1996 and 1995, respectively.
During 1995, the Company entered into noncancelable operating leases for five
trucks which expire in 2002. Rent expense under these leases was $90,683 and
$30,228 for the years ended December 31, 1996 and 1995, respectively.
At December 31, 1996, future minimum lease payments for non-cancelable
operating leases for the next five years were as follows:
<TABLE>
<S> <C>
1997 $ 406,835
1998 341,050
1999 215,169
2000 160,590
2001 160,590
Subsequent years 252,689
----------
$1,536,923
==========
</TABLE>
7. Employment Agreements
The Company does not have a bonus, profit sharing, or deferred compensation
plan for the benefit of its employees, officers or directors. During 1996, the
Company entered into three-year employment agreements with Shea E. Ralph,
David Freedman, and Alton Thompson pursuant to which they will receive an
annual salary of $85,000, $85,000, and $80,000, respectively, subject to
adjustment by the Board of Directors. The employment agreements prohibit the
employee from directly or indirectly competing with the Company during and for
a period of two years following termination of their employment with the
Company. In addition, the employment agreement requires the Company to pay the
employees their salary for the remaining portion of the three-year term in the
event their employment is terminated without cause (as such term is defined in
the employment agreement).
<PAGE>
8. Shareholders' Equity
On May 16, 1996, Jotan, Inc. (the Company) signed an agreement to sell up to
$6,000,000 in Series A Convertible Preferred Stock to an affiliate of Fairview
Capital L.L.C., a Raleigh, N.C. based private investment company. The initial
funding closed May 16, 1996, and provided the Company $1,820,076, net of
expenses, through the sale of 1,265,823 shares of Series A Convertible
Preferred Stock to F-Jotan, L.L.C., the Fairview affiliate. Under the terms of
the Series A Convertible Preferred Stock Purchase Agreement, the Company may
sell an additional $4,000,000 of Series A Convertible Preferred Stock to the
investors subject to certain conditions set forth in the Series A Convertible
Preferred Stock Purchase Agreement. The Series A Convertible Preferred Stock
has voting rights equivalent to the common stock and carries an 8% annual
dividend, which is payable beginning January 1, 1997 in additional shares of
preferred stock. If all shares of the Series A convertible preferred stock are
issued, this class of stock will represent approximately 28% of the Company's
outstanding shares on a fully diluted basis.
In 1995, the Company issued 5,000 warrants, which expire March 29, 2000, to
purchase the Company's common stock at a price equaling one hundred ten
percent (110%) of the fair value of the common stock on March 28, 1995 ($5.16
per share).
9. Employee Stock Incentives
The Company has stock options outstanding to participants under the Company's
1996 long-term incentive plan, approved by stockholders on July 10, 1996.
Under this stockholder-approved plan, the option price per share shall be at
least 100 percent of the fair market value of the common stock on the date of
grant. All the options have a 10-year term and become exercisable with
continued employment as follows:
<TABLE>
<CAPTION>
Full Years Percentage of
Elapsed Since Shares Which
Date of Grant May Be Exercised
----------------- --------------------
<S> <C>
1 25%
2 50%
3 75%
4 100%
</TABLE>
<PAGE>
9. Employee Stock Incentives (continued)
In accordance with the terms of APB No. 25, the Company records no
compensation expense for its stock option awards. As required by SFAS No. 123,
the Company provides the following disclosure of hypothetical values for these
awards. The weighted-average grant-date value of options granted during 1996
was estimated to be $.43 under the long-term incentive plan. This value was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yields of 0%, expected
volatility of 34%, risk-free interest rate of 7.5%, and a weighted-average
expected life of the option of 5 years. Had compensation expense been recorded
based on these hypothetical values, the Company's 1996 net income would have
been $142,658, or primary and fully diluted earnings per share of $.02.
Because options vest over several years and additional option grants are
expected, the effects of these hypothetical calculations are not likely to be
representative of similar future calculations.
Following is a summary of the option transactions for the year ended December
31, 1996:
<TABLE>
<CAPTION>
Exercise
Shares Price
--------- --------
<S> <C> <C>
Balance at December 31, 1995 - $-
Granted 278,550 1
Exercised - -
Forfeited (4,400) 1
--------- --------
Balance at December 31, 1996 274,150 $1
========= ========
Exercisable at December 31, 1996
Weighted average remaining
contractual life 9.5 years
==========
Shares reserved for future
issuance 740,000
</TABLE>
10. Contingency
The Company recently discovered ground water contamination at its Thomasville,
Georgia facility which is reportable under Georgia law. The Company has not
yet made a determination as to whether any remediation will be required and
therefore is unable to estimate the range of loss, if any, at the present
time.
11. Subsequent Event (Unaudited)
On March 4, 1997, the Company completed the acquisition of Southland Holding
Company (Southland) with an effective date February 28, 1997. The aggregate
purchase price for all of the issued and outstanding shares of common stock of
Southland was approximately $27.5 million (subject to adjustment). In
connection with the Acquisition, Jotan is paying non-competition fees to the
shareholders of Southland in the aggregate amount of approximately $6.6
million.
<PAGE>
11. Subsequent Event (Unaudited) (continued)
Southland is a leading supplier of corrugated packaging products to the moving
and storage industry as well as to companies in the air freight and perishable
food markets. To finance this transaction, the Company has received financing
from Rice Capital through the purchase of $9 million of senior subordinated
debt and $10 million of senior redeemable preferred stock. F-Southland,
L.L.C., a North Carolina limited liability company, and FF-Southland Limited
Partnership, a North Carolina limited partnership (collectively, the Southland
Purchasers), entities affiliated with Franklin Street/Fairview Capital, L.L.C.
(Fairview), will purchase an aggregate amount of $2 million of such senior
subordinated debt and $2 million of such senior redeemable preferred stock in
lieu of Rice Capital. The Company has also received $12 million in a senior
revolving credit facility and $27 million in senior term/acquisition credit
facilities from Bankque Paribas.
Management anticipates that the transaction will be accounted for as a
purchase. Net sales, earnings from operations and net income for Southland for
the year ended April 30, 1996 amounted to $62,520,932, $2,570,527 and
$1,024,961, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,403,214
<SECURITIES> 0
<RECEIVABLES> 1,586,394
<ALLOWANCES> 33,170
<INVENTORY> 1,181,642
<CURRENT-ASSETS> 4,462,029
<PP&E> 1,225,612
<DEPRECIATION> 386,858
<TOTAL-ASSETS> 5,998,058
<CURRENT-LIABILITIES> 3,463,830
<BONDS> 0
0
12,658
<COMMON> 56,794
<OTHER-SE> 1,958,679
<TOTAL-LIABILITY-AND-EQUITY> 5,998,058
<SALES> 11,659,754
<TOTAL-REVENUES> 11,659,754
<CGS> 8,758,248
<TOTAL-COSTS> 8,758,248
<OTHER-EXPENSES> 2,519,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,138
<INCOME-PRETAX> 173,658
<INCOME-TAX> 0
<INCOME-CONTINUING> 173,658
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,658
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
</TABLE>
