SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. __)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
SEVEN OAKS INTERNATIONAL, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(3)
[ ] $500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3)
[x] Fee compute on the table below per Exchange Act Rules
14a-6(1)(4) and 0-11
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.10 per share
2) Aggregate number of securities to which transaction applies:
6,679,197
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:1
$414.15 (1/50 of 1% of $2,070,551, underlying
cash value for conversion of securities listed above, at $0.31 in
cash per share)
4) Proposed maximum aggregate value of transaction:
$2,070,551.00
1 Set forth the amount on which the filing fee is
calculated and state how it was determined.
[x] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
1) Amount Previously Paid:
$414.11
2) Form, Schedule or Registration Statement No.:
0-10633
3) Filing Party:
Seven Oaks International, Inc.
4) Date Filed:
September 25, 1995 - original filing ($390.20)
October 31, 1995 - Amendment No. 1 ($23.91)
November 13, 1995
Dear Seven Oaks International, Inc. Shareholder:
You are cordially invited to attend a Special Meeting of
Shareholders of Seven Oaks International, Inc. (the "Company") to
be held at the East Memphis Hilton, 5069 Sanderlin Avenue,
Memphis, Tennessee on November 27, 1995 at 10:00 a.m., local time
(the "Special Meeting").
At the Special Meeting, you will be asked to approve an
Agreement and Plan of Merger, dated as of September 8, 1995, as
amended on September 22, 1995 and October 30, 1995 (as amended,
the "Merger Agreement"), by and among the Company, JSM Newco,
Inc. and JSM Merger Sub, Inc. ("JSM Merger"), pursuant to which
JSM Merger will be merged with and into the Company (the
"Merger"), with the Company surviving the Merger. Pursuant to
the Merger, each outstanding share of the Company's common stock,
par value $0.10 per share (the "Common Stock"), other than
certain shares held by Peter R. Pettit, Tommy R. Thompson and
Frank A. Sullivan (or related parties), will be converted into
the right to receive $0.31 in cash per share of Common Stock
(including $0.01 in consideration of the redemption of the right
to acquire a share of Common Stock for $30 (subject to
adjustment) which is attached to each outstanding share of Common
Stock). Mr. Pettit is Chairman of the Board and Chief Executive
Officer of the Company, Mr. Thompson is President and a director
of the Company and Mr. Sullivan is Executive Vice President,
Chief Operating Officer and a director of the Company. These
individuals will remain employed with the Company after the
Merger. The accompanying Proxy Statement provides detailed
information concerning the proposed Merger Agreement and certain
additional information concerning the Special Meeting, all of
which you are urged to read carefully.
The affirmative vote of a majority of the outstanding shares
of Common Stock of the Company will be necessary for approval of
the Merger. Several shareholders, including management of the
Company, who own an aggregate of 50.2% of the outstanding shares
of Common Stock, have entered into agreements to vote their
shares in favor of the proposal. While these agreements make it
likely that the proposal will be approved by the requisite vote
of shareholders, management believes that it is important that
your Common Stock in the Company be represented at the Special
Meeting, regardless of the number of shares you hold. Therefore,
please sign, date and return your proxy card as soon as possible,
whether or not you plan to attend the Special Meeting. This will
not prevent you from voting your shares in person, however, if
you subsequently choose to attend the Special Meeting.
As outlined in the accompanying Proxy Statement, your Board
of Directors believes that the Merger is fair to, and in the best
interests of, the Company and its shareholders. The Board has
unanimously approved the Merger Agreement and unanimously
recommends that you vote FOR approval of the Merger Agreement.
Sincerely,
PETER R. PETTIT
Chairman of the Board and Chief
Executive Officer
SEVEN OAKS INTERNATIONAL, INC.
_________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 27, 1995
________________________
Notice is hereby given that a Special Meeting of
Shareholders (the "Special Meeting") of Seven Oaks International,
Inc. (the "Company") will be held at the East Memphis Hilton,
5069 Sanderlin Avenue, Memphis, Tennessee, on Thursday, November
27, 1995 at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve an
Agreement and Plan of Merger, dated as of September 8, 1995, as
amended on September 22, 1995 and October 30, 1995 (as amended,
the "Merger Agreement"), among JSM Newco, Inc. ("JSM Newco"), JSM
Merger Sub, Inc. ("JSM Merger") and the Company, pursuant to
which, among other things, (i) JSM Merger, a wholly-owned
subsidiary of JSM Newco, will merge with and into the Company
(the "Merger"), with the Company surviving the Merger, (ii) the
executive officers of the Company (or related parties) will
retain some or all of their shares (collectively, the "Surviving
Shares") of the Company's Common Stock, par value $0.10 ("Common
Stock"), as set forth in the Merger Agreement, and (iii) each
outstanding share of Common Stock (including the attached right
to acquire a share of Common Stock for $30, subject to
adjustment) other than the Surviving Shares will be converted
into the right to receive $0.31 in cash, without interest. The
closing sale price of the Company's Common Stock as reported on
the NASD OTC Bulletin Board on October 31, 1995 was $0.25.
2. To transact such other business as may properly come
before the Special Meeting and any adjournments thereof.
The Company's Board of Directors has fixed the close of
business on October 10, 1995 as the record date for the
determination of shareholders entitled to notice of and to vote
at the Special Meeting. Only shareholders of the Company of
record at such time will be entitled to notice of and to vote at
the Special Meeting and any adjournments thereof.
There is enclosed, as a part of this Notice, a Proxy
Statement, and the appendices thereto, which contains further
information regarding the Special Meeting, the Merger and other
related matters. A copy of the Merger Agreement is attached as
Appendix A to the Proxy Statement accompanying this Notice.
BY ORDER OF THE BOARD OF DIRECTORS
JIMMY H. CAVIN,
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer
Memphis, Tennessee
November 13, 1995
IMPORTANT
Shareholders who do not expect to attend the Special
Meeting are asked to complete, date, sign and return
the accompanying proxy in the enclosed envelope.
Shareholders who attend the Special Meeting may vote
in person even if they have already sent in a proxy.
SEVEN OAKS INTERNATIONAL, INC.
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is provided in connection with the
solicitation of proxies by the Board of Directors of Seven Oaks
International, Inc., a Tennessee corporation (the "Company"), for
use at the special meeting of shareholders to be held at the East
Memphis Hilton, 5069 Sanderlin Avenue, Memphis, Tennessee on
Thursday, November 27, 1995 at 10:00 a.m., local time (the
"Special Meeting"), and any adjournments thereof. The mailing
address of the principal executive offices of the Company is 700
Colonial Road, Suite 100, Memphis, Tennessee 38117. This Proxy
Statement and the Proxy Form and Notice of Special Meeting, all
enclosed herewith, are first being mailed to the shareholders of
the Company on or about November 13, 1995.
The Proposed Merger
At the Special Meeting, the Company's shareholders will
consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated September 8, 1995, as amended
on September 22, 1995 and October 30, 1995 (as amended, the
"Merger Agreement"), between JSM Newco, Inc., a newly formed
Tennessee corporation ("JSM Newco"), JSM Merger Sub, Inc., a
newly formed Tennessee corporation ("JSM Merger"), and the
Company and the transactions contemplated thereby. The Merger
Agreement provides for the merger of JSM Merger, a wholly-owned
subsidiary of JSM Newco, with and into the Company (the
"Merger"), with the Company being the surviving corporation of
the merger (the "Surviving Corporation"). Upon consummation of
the Merger, (a) all of the shares of JSM Merger Common Stock, no
par value, issued and outstanding at the effective time of the
Merger (the "Effective Time") will be exchanged for shares of the
Surviving Corporation on a one-for-one basis; (b) an aggregate of
1,960,375 shares of Common Stock owned (directly or through
related parties) currently by Peter R. Pettit, Chairman of the
Board and Chief Executive Officer of the Company, Tommy R.
Thompson, President and a director of the Company, and Frank A.
Sullivan, Executive Vice President, Chief Operating Officer and a
director of the Company (the "Surviving Shares") will remain
outstanding and held by such persons or entities; (c) each
outstanding right ("Right") to acquire one share of Common Stock
for $30 (subject to adjustment) issued under the Company's Rights
Agreement, dated August 22, 1988 ("Rights Agreement"), between
the Company and Third National Bank of Nashville (Rights Agent),
will have been redeemed immediately before the Effective Time, in
accordance with the terms of the Rights Agreement; and (d) each
share of the Company's Common Stock issued and outstanding at the
Effective Time other than the Surviving Shares will be converted
into the right to receive the sum of thirty-one cents ($0.31) in
cash per share, without interest, including $0.01 in
consideration of the redemption of the attached Right ("Cash
Merger Consideration"). It is anticipated that immediately
before the consummation of the Merger, there will be 8,639,572
shares of Common Stock and a like number of Rights issued and
outstanding. Under the Merger Agreement, the shareholders of the
Company who are eligible to convert their shares of Common Stock
into cash (the "Converting Shareholders") would receive in
exchange for such shares and Rights an aggregate of $2,070,551 in
Cash Merger Consideration.
Effective Time of the Merger
The Merger will become effective upon the filing of Articles
of Merger with the Secretary of State of the State of Tennessee
under the Tennessee Business Corporation Act, as amended (the
"TBCA"), or at such other time as may be specified in such
Articles of Merger. It is presently anticipated that if the
Merger Agreement is approved by the shareholders of the Company,
such filing will be made after the Company's Special Meeting on
November 27, 1995 and that the effective time of the Merger (the
"Effective Time") will occur on such date, although there can be
no assurance as to whether or when the Merger will occur. See
"Proposal: Merger Agreement and Plan of Merger-Conditions to the
Merger."
The Proxy
The solicitation of proxies is being made primarily by the
use of the mails. The cost of preparing and mailing this Proxy
Statement and accompanying material, and the cost of any
supplementary solicitations which may be made by mail, telephone,
telegraph or personally by officers and employees of the Company,
will be borne by the Company.
A form of proxy is enclosed. Please mark, sign, date and
return it promptly. The shareholder giving the proxy has the
power to revoke it either by delivering written notice of such
revocation to the Secretary of the Company before or at the
Special Meeting or by attending the Special Meeting and voting in
person. The proxy will be voted as specified by the shareholder
in the spaces provided on the Proxy Form or, if no specification
is made, it will be voted in accordance with the terms thereof.
With respect to the proposal to be voted upon, shareholders may
vote in favor of the proposal, against the proposal or may
abstain from voting on the proposal.
No person is authorized to give any information or to make
any representation not contained in this Proxy Statement and, if
given or made, such information or representation should not be
relied upon as having been authorized. This Proxy Statement does
not constitute the solicitation of a proxy, in any jurisdiction,
from any person to whom it is unlawful to make such proxy
solicitation in such jurisdiction. The delivery of this Proxy
Statement shall not, under any circumstances, imply that there
has not been any change in the information set forth herein since
the date of the Proxy Statement.
Each outstanding share of the Company's common stock, $0.10
par value (the "Common Stock"), is entitled to one vote. Only
shareholders of record at the close of business on October 10,
1995 (the "Shareholders") will be entitled to notice of, and to
vote at, the Special Meeting and any adjournments thereof. At
the close of business on October 31, 1995, the Company had
outstanding 8,639,572 shares of Common Stock.
Promptly after the Merger is consummated, a "Letter of
Transmittal" with instructions will be mailed to all shareholders
of record explaining the process by which Company stock
certificates must be surrendered. THE COMPANY'S SHAREHOLDERS
SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
The Company
The Company, a Tennessee corporation engaged in the coupon
processing industry, was organized and commenced clearinghouse
operations in 1971. The Company acts as a clearinghouse which
processes cents-off coupons from retail establishments throughout
the United States. Coupons are processed at its clearinghouse
processing facility located in Juarez, Mexico. The number of
coupons processed were 115 million and 305 million for the fiscal
years ended April 30, 1995 and 1994, respectively. The Company's
principal executive offices are located at 700 Colonial Road,
Suite 100, Memphis, Tennessee 38117, and its telephone number is
(901) 683-7055.
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange
Commission ("SEC"). Such reports, statements and information
filed with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549.
Board Recommendation
The Board of Directors unanimously approved and adopted the
Merger Agreement and the Merger and believes that the Merger and
the Cash Merger Consideration offered in the Merger are fair and
in the best interests of the Company's shareholders. THE BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S
SHAREHOLDERS VOTE IN FAVOR OF THE MERGER AGREEMENT AND THE
MERGER. For a discussion of the reasons considered by the Board
of Directors in reaching its determination, see "Proposal: Merger
Agreement and Plan of Merger Background of the Merger" and "-
Reasons for the Merger."
Mercer Capital Management, Inc. ("Mercer Capital") has acted
as the Company's financial advisor in connection with the Merger.
Mercer Capital has delivered its written opinion to the Company's
Board of Directors that the Cash Merger Consideration is fair,
from a financial point of view, to the shareholders of the
Company. The full text of the Mercer Capital opinion is included
in this Proxy Statement as Appendix B, and should be read in its
entirety for a description of the matters considered, assumptions
made and limits of review in arriving at the opinion. See
"Proposal: Merger Agreement and Plan of Merger - Opinion of
Mercer Capital."
Interests of Certain Persons in the Merger
In considering the recommendation of the Company's Board
with respect to the Merger Agreement, the shareholders should be
aware that certain members of the Company's management and Board
have certain interests that are in addition to the interests of
shareholders generally, which interests may conflict with those
of the shareholders. The Board consists of Messrs. Pettit,
Thompson and Sullivan, Mr. Jimmy H. Cavin, the Executive Vice
President, Chief Financial Officer, Secretary and Treasurer of
the Company, Mr. Earl C. May and Mr. Kenneth E. Story. Messrs.
Pettit, Thompson and Sullivan (or related parties) will continue
to own an aggregate of 1,960,375 (approximately 23%) of the
outstanding shares of Common Stock after the Merger, will
continue their employment with the Company after the Merger and
will receive an undetermined number of options to acquire Company
stock in the future. In addition, in connection with the Merger,
the Company's $750,000 of 12% debentures due 2012 (the
"Debentures") will be repaid. May & Camp, Inc. owns $75,000 of
the Debentures and customers of May & Camp, Inc. own the
remaining Debentures. Mr. May is Chairman of the Board of May &
Camp, Inc. See "Proposal: Merger Agreement and Plan of
Merger-Interests of Certain Persons in the Merger."
No Audit Opinion on 1995 and 1994 Financial Statements
The report of the Company's independent accountant
accompanying the consolidated financial statements included in
this proxy statement contains a disclaimer of an opinion on the
financial statements for fiscal years 1994 and 1995. Thus, the
auditor has not opined that the financial statements for 1994 and
1995 present fairly, in all material respects, the financial
position of the Company for such years in conformity with
generally accepted accounting principles. The procedures
followed by the independent accountants in conducting their
audits of the Company's financial statements, and its reasons for
disclaiming an opinion on the 1994 and 1995 consolidated
financial statements, are set forth in their report. The SEC has
advised the Company that regulations promulgated under the
federal securities laws generally require that an accountant's
report included in a proxy statement must contain an auditor's
opinion on the financial statements for the prior three fiscal
years. The SEC advised the Company that it was not in compliance
with the accountant's report requirements when, in accordance
with applicable rules, the Company filed preliminary copies of
this proxy statement with the SEC. While the Company's
management believes that the financial statements present fairly
the financial position of the Company, this proxy statement does
not comply fully with applicable regulations regarding the
accountant's report accompanying the Company's 1994 and 1995
financial statements.
Certain Consequences of the Merger
After the Merger, the Converting Shareholders will cease to
have any interest in the Company or its future earnings or
growth. However, the Board of Directors believes that the Merger
is more favorable for the shareholders than continuing their
equity interest in the Company primarily because the Board
believes that the prospect of generating a return for
shareholders greater than the Cash Merger Consideration is
unlikely in light of the history of consistent losses for the
Company, the continued deterioration of the Company's customer
base, the relatively small market capitalization of the Company
and the limited trading volume of the Common Stock. See
"Proposal: Merger Agreement and Plan of Merger-Background of the
Merger" and "-Reasons for the Merger."
After the Merger, the Company's Common Stock will be removed
from inclusion on the NASD OTC Bulletin Board, the registration
of the Company under the Exchange Act will be terminated and the
Company will cease to file periodic and other reports thereunder.
REQUIRED VOTE
Under Tennessee law and the Company's Charter and Bylaws,
the proposal regarding approval of the Merger Agreement requires
the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock.
The Board of Directors (or related parties) own an aggregate
of 2,766,612 shares of the Common Stock, representing
approximately 32% of the total currently outstanding shares of
Common Stock. Each of the directors (other than Mr. Cavin, who
owns no shares) have agreed with JSM Newco to vote their shares
FOR the Merger. Additionally, various other shareholders have
also agreed with JSM Newco to vote their shares of Common Stock
(an aggregate of 1,572,402 shares, or approximately 18.2%, of the
total number of shares currently outstanding) for the Merger.
These votes for the Merger will be counted for all purposes,
including the determination of whether the requisite vote has
been cast to approve the Merger Agreement and the Merger.
No specific provisions of the TBCA or the Company's Charter
or Bylaws address the issue of abstentions or broker non-votes.
Abstentions will not be counted "for" or "against" proposals, but
will be counted for the purpose of determining the existence of a
quorum. Brokers holding shares for beneficial owners must vote
those shares according to the specific instructions they receive
from the owners. However, brokers or nominees holding shares for
a beneficial owner may not have discretionary voting power and
may not have received voting instructions from the beneficial
owner of the shares. In such cases, absent specific voting
instructions from the beneficial owner, the broker may not vote
on these proposals. This results in what is known as a "broker
non-vote." A "broker non-vote" has the effect of a negative vote
when a majority of the shares outstanding and entitled to vote is
required for approval of a proposal.
MARKET PRICE AND DIVIDEND INFORMATION
Market Information. The Company's Common Stock was listed
on the Nasdaq National Market ("Nasdaq NMS") until March 30,
1994. On that date, the Company's Common Stock was delisted from
the Nasdaq NMS and is now included in the NASD OTC Bulletin
Board.
The following table sets forth the reported high and low bid
prices of the Company's Common Stock for the first three quarters
of the 1994 fiscal year as regularly quoted on the Nasdaq NMS.
Subsequent to the third quarter of 1994, the listed high and low
bid prices are as quoted on the NASD OTC Bulletin Board. These
over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
Fiscal year ended
April 30, 1994: High Low
First Quarter (May-July) 17/32 1/4
Second Quarter (August-October) 1/2 7/32
Third Quarter (November-January) 5/16 1/8
Fourth Quarter (February-April) 3/8 1/8
Fiscal year ended
April 30, 1995: High Low
First Quarter (May-July) 1/4 1/8
Second Quarter (August-October) 1 1/8
Third Quarter (November-January) 11/16 5/8
Fourth Quarter (February-April) 11/16 9/32
Fiscal year ended
April 30, 1996: High Low
First Quarter (May-July) 11/16 1/4
Second Quarter (August 1-October 31) 5/16 3/16
On August 29, 1995, the last full trading day prior to the
announcement of execution of a letter of intent with respect to
the proposed Merger, and on September 8, 1995, the last full
trading day prior to announcement of the execution of the Merger
Agreement, the closing sales prices per share as reported on the
NASD's OTC Bulletin Board were $0.25 and $0.3125, respectively.
As of October 31, 1995, there was approximately 630 holders of
record of the Company's Common Stock.
Dividends. The Company has declared no dividends for the
1994 fiscal year or the 1995 fiscal year and is unable to state
with any degree of certainty when or if it will resume dividend
payments.
PROPOSAL: MERGER AGREEMENT AND PLAN OF MERGER
General
The following summary is not intended to be complete and is
qualified by the more detailed information and financial
statements, including the notes thereto, included in the
Appendices hereto. All information concerning the Company
included in this Proxy Statement has been furnished by the
Company, and all information concerning JSM Newco and JSM Merger
included in this Proxy Statement has been furnished by JSM Newco.
Description of the Merger
At the Special Meeting, the Company's shareholders will
consider and vote upon a proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby. The Merger
Agreement provides for the Merger of JSM Merger with and into the
Company, with the Company being the Surviving Corporation. Upon
consummation of the Merger, (a) all of the shares of JSM Merger
Common Stock, no par value, issued and outstanding at the
Effective Time will be exchanged for shares of the Surviving
Corporation on a one-for-one basis; (b) an aggregate of 1,960,375
Surviving Shares of Common Stock currently owned (directly or
through related parties) by Fleming Companies, Inc. ("Fleming"),
Messrs. Pettit, Thompson, and Sullivan will remain outstanding
and held by such persons or entities; (c) each Right will have
been redeemed immediately before the Effective Time in accordance
with the Rights Agreement; and (d) each share of the Company's
Common Stock issued and outstanding at the Effective Time, other
than the Surviving Shares, will be converted into the right to
receive the Cash Merger Consideration ($0.31 per share, without
interest, including $0.01 in consideration of the redemption of
the attached Right).
Background of the Merger
The Company has reported losses for each of the eight years
in the period ended April 30, 1995 and the resulting decline in
net worth as set forth in the following table. Additionally, the
market capitalization of the Company has steadily declined as the
Company's size has contracted, although an increase in the per
share price was experienced when the Company announced the
Restructuring Transaction (as defined herein-see "Management's
Discussion and Analysis of the Company's Financial Condition and
Results of Operations") in September 1994, including the Fleming
Processing Agreement (as defined herein).
Shareholders' Equity Market
Fiscal Year Ended Loss (Deficiency in Assets) Capitalization 1/
April 30, 1988 $ (2,744) $ 39,629 $ 83,964
April 30, 1989 (6,833) 32,841 54,324
April 30, 1990 (2,688) 30,239 49,898
April 30, 1991 (12,361) 18,004 27,766
April 30, 1992 (6,014) 11,340 9,658
April 30, 1993 (4,423) 6,917 6,840
April 30, 1994 (8,220) (1,303) 1,610
April 30, 1995 (4,671) (5,811) 4,186
_________________
1/ Market capitalization is based on the average of the bid and
asked prices for the fourth fiscal quarter of each respective
year, multiplied by the number of shares then-outstanding.
The Company is an authorized clearinghouse for substantially
all major manufacturers which distribute coupons. The current
prevailing handling fee paid by manufacturers ("Gross Handling
Fee") is $0.08 per coupon. The Company provides its services
generally to two classifications of customers:
Funded Accounts: These are accounts in which the Company
pays the retailer the face value of coupons plus, in most cases,
a portion of the Gross Handling Fee that it will receive from
manufacturers. Retailers assign to the Company the retailers'
rights to receive payments from the manufacturers. After receipt
and verification of the coupons by the manufacturer, the
manufacturer pays the Company the face value plus the Gross
Handling Fee. Depending on its agreement with a particular
retailer, the Company may pay the retailer before or after
receipt of funds from the manufacturer. Generally, the
difference between the Gross Handling Fee and the portion thereof
paid to retailers is designed to compensate the Company for
services rendered plus any capital the Company has invested in or
as a result of its advance payments to the retailer.
Pay Direct Accounts: These are accounts in which the
Company processes the coupons for large retailer customers for a
contracted fee per 1,000 coupons. Title to the coupon is always
retained by the retailer, and the Company performs a service for
the retailer for the contracted fee. Coupons are shipped to and
invoiced to the manufacturer for the payment of their face value
plus the Gross Handling Fee directly to the retailer. The
Company is paid directly by its retailer customer for the
processing fee earned.
Generally, Funded Accounts are more lucrative for the
Company than Pay Direct Accounts because retailers are willing to
pay more to receive payments more quickly from the Company than
they would from manufacturers. The higher fee compensates the
Company for putting capital at risk and assuming the risk of non-
payment or slow-payment by manufacturers.
As a result of the poor financial results of the Company and
limited capital, management was forced to conserve capital by
slow paying many Funded Account customers who expected payment
when they shipped coupons to the Company. As a result, some of
the Company's customers ceased shipments of coupons or converted
to less lucrative Pay Direct Account arrangements. The Company's
inability to pay customers when due not only resulted in a loss
of customers but also impeded efforts to attract new customers.
The new customers that the Company has obtained, like Fleming and
the Fleming independent retailers, tend to be the less lucrative
Pay Direct customers. The erosion in the Company's customer base
has severely weakened the Company, preventing it from breaking
even and paying creditors when due. In September 1995, the
Company was unable to make an interest payment on its 12%
debentures due 2005 (the "Debentures"), which constituted a
default under the Debentures as well as its $1 million line of
credit (the "Line of Credit") with National Bank of Commerce,
Memphis, Tennessee ("NBC").
In December 1994, concurrent with the sale of its processing
facility in Delicias, Mexico, the Company's then-existing line of
credit was fully repaid and terminated. Since October 1994, the
Company has consistently and diligently sought to obtain a new
line of credit facility, including initiating discussions with
(i) Cambridge Capital Management, Inc. d/b/a Cambridge Factors,
(ii) Sirrom Capital, (iii) CIT Corporation, (iv) Congress
Financial, (v) Princeton Capital and (vi) several national banks.
The line of credit sought by the Company could have been
collateralized by the Company's trade receivables, primarily from
manufacturers. No financial institutions, however, would commit
to providing a line of credit until the Company achieved break-
even cash flow.
In March 1995 the Company was successful in securing
$750,000 of new capital through the issuance of its Debentures,
which included the issuance of 750,000 warrants to acquire the
Company's common stock for $0.15 a share. The Debentures were
sold to May & Camp, Inc. and customers of May & Camp, Inc. Earl
C. May, a director of the Company, is the Chairman of the Board
of May and Camp, Inc. Concurrently with the issuance of the
Debentures, the Company obtained the Line of Credit with NBC,
which also received warrants to acquire 100,000 shares of the
Company's Common Stock for $0.15 a share. The Line of Credit is
collateralized by the Company's accounts receivable and the
personal guaranties of eight individuals, including Mr. Pettit.
The guarantors (other than Mr. Pettit) received warrants to
acquire 360,000 shares of the Company's Common Stock for $0.15 a
share as an inducement to guarantee the Line of Credit.
During the fourth quarter of fiscal year 1995, the Company
held discussions with executive officers of Fleming seeking
additional capital, either through a loan, equity or some
combination thereof. Also during the fourth quarter of fiscal
year 1995, the Company held discussions regarding a possible
merger with another coupon clearinghouse company. The Company
did not receive an offer from the other company and the
discussions ceased. The Company also considered outsourcing the
processing of coupons during the fourth quarter of fiscal year
1995. Commencing in June 1995 and continuing through the
execution of the Merger Agreement, the Company sought additional
capital through a proposed private placement of notes in the
principal amount of up to $5 million, which would have been
secured by two promissory notes from the landlord of the
Company's Juarez, Mexico processing facility. The offering was
presented to over 30 venture capital firms and private investors.
All of these efforts were either unsuccessful or deemed by the
Board of Directors to be infeasible because of the unwillingness
of potential investors to commit needed capital or the inability
of potential acquirors to retain the tax benefits of the net
operating loss carry forwards that the Company has built up in
the last decade as a result of its consistent losses. In the
case of the June 1995 notes offering, investors also were
reluctant to invest because the collateral was speculative. The
promissory notes, with principal amounts aggregating $850,000 and
bearing interest at a rate of 9%, represent a portion of the
purchase price paid by the landlord when it acquired the plant
from the Company in a sale-leaseback transaction in February
1994. The promissory notes are payable in equal monthly
installments of principal and interest through February 2003.
The promissory notes provide that if the Company defaults on its
lease for the Juarez, Mexico plant, the landlord is not obligated
to pay the promissory notes. Because of the Company's poor
financial condition, and the resulting likelihood of a default
under the Juarez lease, the promissory notes are recorded as
assets on its balance sheet but have been fully reserved. The
Company did not solicit offers to acquire the Company because
management believed that it could successfully raise capital
through the $5 million private placement, which it believed would
permit the Company to return to profitability. When it had
become apparent that the private placement offering would not be
completed, the Company considered a number of options, which are
described below. Some of the options were pursued to varying
degrees and all of the options were either deemed not viable or
were rendered moot by the discussions and ultimate agreement
concerning the Merger.
Faced with the inability to raise needed additional capital
or to arrange a sale or merger, the Company's management
evaluated the alternative courses of action for the Company. In
a series of Board meetings, both in person and by telephone
conference call, management reviewed with the Board the pro forma
financial statements that it had prepared in connection with the
notes offering described above and the general state of the
Company's business. Management concluded, and the Board agreed,
that without substantial additional capital to reduce the
Company's debt burden, fund working capital properly, build net
asset value to a higher level and attract and retain profitable
Funded Account coupon clearinghouse business, the Company will
have exhausted its Line of Credit with NBC and will be forced to
cease operations, sometime in the fall of 1995. Management
discussed a plan consisting of not paying and slow paying most of
its accounts payable under which the Company may be able to
remain in operation until November 1995, if the Company can
assure creditors of a refinancing in the near term.
Management has also considered and discussed with the Board
the alternative of dramatically scaling down the Company and
remaining in business as a small enterprise. Such a plan would
require the elimination of its Funded Account business, the
further reduction of management overhead, substantial debt
forgiveness from its creditors, and the implementation of a slow
pay or no pay system with its accounts payables. The Board
considered the facts that (i) the potential of debt forgiveness
by creditors who have been owed for some time, and the success of
continued slow paying of creditors, is highly speculative and
(ii) a reduction in management overhead would likely require the
elimination of Mr. Pettit's position, in which event Fleming
would likely terminate the Fleming Processing Agreement which
currently accounts for approximately 80% of the Company's
revenues. The Board noted that such a termination would also
accelerate the Company's obligations to repay its remaining debt
to Fleming. The Board concluded that the likelihood of the
success of such a plan was low and, even if successful, without
the Funded Account business and the Fleming Processing Agreement,
the Company would have a dramatically smaller revenue base from
which to generate significant earnings for shareholders or to
repay creditors. Therefore, the Board concluded that such a
course is not in the best interests of the Company or its
shareholders or creditors.
The Board also considered whether a reorganization or
liquidation of the Company in bankruptcy would be consistent with
the best interests of its shareholders and creditors. The Board
concluded that bankruptcy would not be in their best interests.
All of the assets of the Company which could be liquidated
(whether in or out of bankruptcy) to pay creditors or maximize
shareholder value have already been sold or collateralized. The
Board determined that the Company's assets have no realizable
value in excess of book value to satisfy the claims of creditors
or shareholders. A bankruptcy, therefore, would not yield
creditors full payment of their claims and would result in a
total loss to the shareholders.
Mr. John Moll was a potential investor with whom Mr. Pettit
discussed the $5 million notes offering described above. On
August 11, 1995, Messrs. Moll, Pettit and Thompson met at the
Company's office in Memphis, Tennessee. The participants
reviewed the financial statements (including pro forma
statements) prepared in connection with the notes offering, as
well as the condition of the Company, the coupon redemption
business and the Company's prospects. Mr. Moll indicated an
interest in the Company. However, because of the price of the
Company's stock, Mr. Moll expressed interest in acquiring all of
the outstanding stock through a tender offer or cash merger
rather than investing in the Company's debt. Mr. Moll indicated
that one condition to such an acquisition would have to be that
all outstanding options and warrants would be canceled. Mr. Moll
left the meeting stating that he would seek counsel as to his
preferred form of acquisition and canvass the food industry to
gauge the viability of a turnaround by the Company if it had
access to his capital and contacts. On August 22, the Company
received a term sheet from John and Steven Moll relating to a
cash merger in which all shares, other than certain shares held
by Messrs. Pettit, Thompson and Sullivan and Fleming, would be
acquired for cash.
At a board meeting on August 23, 1995, management presented
the merger proposal to the Company's Board. The Board reviewed
the proposal, the history of the Company summarized above, the
prospects for alternative courses of action and the prospects for
the Company, and determined that the proposal should be pursued.
However, the Board determined that management should inquire if
the Molls were willing to increase their offer to $0.31 per
share, in consideration of the many shareholders who bought their
shares at higher prices and because certain shareholders would,
under the proposal, be required to cancel options and warrants to
purchase Common Stock, including some options and warrants that
could be exercised for a price less than the price being offered
by the Molls. The Board set its counter-offer at $0.31 a share
because that was the last reported closing sales price for the
Company's Common Stock on the NASD OTC Bulletin Board before the
Board meeting. The Board authorized management to retain Mercer
Capital to evaluate the fairness of the consideration offered.
At a board meeting on August 30, 1995, management reported
that the Molls had increased their offer to $0.31 per share. At
this meeting, Mercer Capital reviewed with the Board its
determination that the cash consideration offered by the Molls
was fair to the Company's shareholders from a financial point of
view. See "- Fairness Opinion of Mercer Capital." Counsel for
the Company reviewed a preliminary draft of a merger agreement
with the Board, reviewed the obligations of the members of the
Board in connection with their review of the proposal and
answered certain questions from Board members concerning their
obligations and the conduct of a merger under Tennessee law.
Certain Board members have interests that are in addition to the
interests of shareholders generally. See "Proposal: Merger
Agreement and Plan of Merger-Interests of Certain Persons in the
Merger." The Board considered establishing a special committee
of non-interested directors, a special committee of shareholders
or an independent representative to review and pass upon the
Merger Agreement. The Board determined not to establish a
special committee or retain an independent representative because
of (a) the need to complete the transaction as quickly as
possible, in light of the financial condition of the Company and
the requirements of JSM Merger and JSM Newco, (b) the Board's
determination that no other alternatives exist for the Company
and (c) the Board's confidence, after reviewing the condition of
the Company, the opinion of Mercer Capital and the Merger
proposal itself, that the Merger is fair to and in the best
interests of the shareholders. The Board had further discussions
about the merits of the offer and the potential for success under
various other alternatives which had been discussed previously.
The Board authorized management to commence preparation of the
appropriate documentation and enter into a letter of intent
concerning the Merger. A letter of intent was executed on August
30, 1995.
On September 7, 1995, Messrs. John and Steven Moll, Pettit
and Thompson flew to El Paso, Texas to tour the Company's
processing facility in Juarez, Mexico. Mr. Sullivan accompanied
the group. During the course of the day, the Molls indicated
that the only surviving shareholders would be Messrs. Pettit,
Thompson and Sullivan (and certain parties related to them), that
such persons would remain in the employ of the Company after the
Merger and that their existing employment and severance
agreements would be canceled for no consideration. The parties
also discussed the steps needed to turn the Company's business
around and the form and minimum amounts of capital that would be
required to do so. After the tour and the discussion, the Molls
indicated their willingness to proceed with the Merger proposal.
Approval by the Company's Board; Recommendation of the Board of
Directors; Reasons for the Merger
At a special telephonic meeting of the Board of Directors
held on September 7, 1995, the Company's Board of Directors
determined the Merger to be fair to, and in the best interests
of, the Company and its shareholders, and advisable on
substantially the terms and conditions set forth in the draft
Merger Agreement, which the Board had reviewed with counsel.
Therefore, the Board of Directors approved and adopted the Merger
Agreement and the Merger, authorized management to complete and
execute the Merger Agreement with such changes as it deemed
necessary and prudent and directed that the Merger Agreement and
Merger be submitted for consideration by the shareholders at a
special meeting of the shareholders. On September 8, 1995, the
Merger Agreement was executed by the parties. The Merger
Agreement was amended subsequently by the parties on September
22, 1995 and October 30, 1995. The first amendment provided for
the addition of certain conditions to the Molls' obligation to
consummate the Merger (which have been described herein) and the
second amendment provided for the redemption of the Rights and
that Fleming would exchange, and not retain, its shares of Common
Stock for the Cash Merger Consideration.
In reaching its determination, the Company's Board of
Directors consulted with management of the Company, as well as
its financial, accounting and legal advisors, and considered a
number of factors, including, without limitation, the following:
1. The Company's critical need for capital as evidenced
by:
(i) the Company's inability to make payments when due
to its customers;
(ii) the Company's default on September 1, 1995 of the
semi-annual interest payment on the Debentures and the resulting
cross-default under the Line of Credit;
(iii) continuing operating losses, in spite of the
Company's exclusive coupon processing relationship with Fleming
under the Fleming Processing Agreement and additional revenue
received under the Fleming Processing Agreement from serving as
the exclusive processor under Fleming's independent retailer
coupon program; and
(iv) management's conclusion that the Company would be
forced to cease operations by November 1995 (at the latest) if
additional capital was not raised;
2. The thorough and continuous efforts by the Company to
raise capital and the Board's analysis of the Company's
alternatives, as discussed under " Background of the Merger;"
3. The Company's inability to secure a replacement line of
credit as a result of the disclaimer of an opinion expressed by
the Company's independent accountants in 1994 and 1995 due to
substantial doubt about the Company's ability to continue as a
going concern (See "Management's Discussion and Analysis of the
Company's Financial Condition and Results of Operations -
Liquidity and Capital Resources");
4. The presentations to the Board by counsel in which
various legal alternatives were reviewed;
5. The opinion of Mercer Capital, the Company's financial
advisor, that the $0.31 Cash Merger Consideration is fair, from a
financial point of view, to shareholders;
6. The fact that the Merger Agreement permits the Board,
under certain circumstances, to negotiate with third parties and
to accept more favorable proposals, if any are received;
7. The proposal by JSM Newco and JSM Merger to make
available to the Company after the Merger up to $3 million of new
capital and to repay or refinance the Line of Credit, which will
enhance the Company's ability to meet its liabilities as they
come due and finance its processing operations, and which is
generally expected to improve results from continuing operations
in the future;
8. The determination that the Merger presented the
greatest likelihood of payment of the Company's creditors and of
continued employment for Company employees; and
9. The principal owners of JSM Newco and JSM Merger would
bring to the Company expertise in the food industry and numerous
contacts with decision-makers at retail grocery chains and
manufacturers, which could potentially create the necessary
growth of the Company to achieve profitability.
In view of the wide variety of factors considered by the
Board of Directors in connection with its evaluation of the
Merger and the Cash Merger Consideration, the Board of Directors
did not find it practicable to quantify or otherwise attempt to
assign relative weights to the specific factors considered in
making its determination, nor did it evaluate whether such
factors were of equal weight. As a general matter, the Board of
Directors believes that the factors discussed in paragraphs (1)
through (6) above support its decision (a) that the Cash Merger
Consideration is fair to and in the best interests of the
Company's shareholders and (b) to approve the Merger. The Board
determined, in sum, that (a) the Cash Merger Consideration is
fair to shareholders as the Company currently has little or no
value and (b) the Merger is in the best interests of shareholders
as the Company believes it has exhausted all other alternatives
or deemed them clearly inferior to the Merger proposal. The
factors in paragraphs (7) through (9) do not support its decision
that the Merger is fair to and in the best interests of those
shareholders of the Company who will receive the Cash Merger
Consideration in exchange for their shares and not continue their
investment in the Company. However, the Company believes that
the factors in paragraphs (7) through (9) support its decision
that the Merger presents the best opportunity for repayment of
creditors and continued employment of the Company's employees.
The Board consists of Messrs. Pettit, Thompson, Sullivan, Cavin,
May and Mr. Kenneth E. Storey. Messrs. Pettit, Thompson,
Sullivan, Cavin and May each have certain interests which may
present them with possible conflicts of interest in connection
with the Merger. See "The Proposed Merger Interests of Certain
Persons in the Merger." The full Board was apprised of each
conflict. In determining to approve the Merger, the Board
considered that the Company has little or no equity value and
that management has exhausted all other viable alternatives. No
independent committee was formed because the Board believed that
it was unnecessary in light of its conclusion that other viable
prospects were non-existent and that the Cash Merger
Consideration clearly exceeded the Company's equity value as
measured by the financial statements or other interest (or the
lack thereof) in the Company.
APPROVAL OF THE MERGER AGREEMENT IN THIS PROPOSAL REQUIRES
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES OF COMMON STOCK. SEE "REQUIRED VOTE." THE
BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL OF THE MERGER AGREEMENT AND CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED THEREBY.
The Board of Directors (or related parties) own an aggregate
of 2,766,612 shares of the Common Stock, representing
approximately 32% of the total currently outstanding shares of
Common Stock. Each of the directors (other than Mr. Cavin, who
owns no shares) have agreed with JSM Newco to vote their shares
FOR the Merger. Additionally, Fleming and various other
shareholders have also agreed with JSM Newco to vote their shares
of Common Stock (an aggregate of 1,572,402 shares, or
approximately 18.2% of the total number of shares currently
outstanding) for the Merger. The shares committed to vote for
the merger constitute a majority of the outstanding shares of
Common Stock and if voted in accordance with the agreements, will
be sufficient to approve the proposal. These votes FOR the
Merger will be counted for all purposes, including the
determination of whether the requisite vote has been cast to
approve the Merger Agreement and the Merger.
Fairness Opinion of Mercer Capital
Mercer Capital has delivered a written opinion to the
Company's Board of Directors dated September 25, 1995, as updated
through November 9, 1995, that the Cash Merger Consideration
offered in the Merger is fair, from a financial point of view, to
the Company's shareholders. No limitations were imposed by the
Company's Board upon Mercer Capital with respect to the
investigations made or procedures followed by Mercer Capital in
rendering such opinions. The full text of the opinion of Mercer
Capital, which sets forth the assumptions made, matters
considered and limits on the review undertaken by Mercer Capital,
is attached hereto as Appendix B and incorporated by reference
herein. THE COMPANY'S SHAREHOLDERS ARE URGED TO READ THE
OPINION.
The Board of Directors engaged Mercer Capital because it
believed that Mercer Capital is one of the larger independent
business valuation firms in the nation. Mercer Capital has
rendered opinions in many public (as well as private)
transactions, including mergers. As noted under the caption
"- Reasons for the Merger," the fairness opinion of Mercer Capital
was only one of several factors considered by the Company's Board
of Directors in determining to approve the Merger.
The opinion is directed only to the fairness, from a
financial point of view, to the Company's shareholders of the
Cash Merger Consideration and does not address the Company's
underlying business decision to effect the Merger. Mercer
Capital's opinion was delivered pursuant to its engagement by the
Company's Board on behalf of the shareholders. Mercer Capital's
opinion was not rendered with a view toward serving as or
constituting a recommendation to any shareholder of the Company
as to how such shareholder should vote with respect to the
Merger.
In conducting its analysis and arriving at its opinion,
Mercer Capital reviewed and analyzed, among other things: (a) the
Merger Agreement; (b) the form of the Plan of Merger attached as
an exhibit to the Merger Agreement; (c) certain publicly
available information concerning the Company, including the
Annual Report on Form 10-KSB for the fiscal year ended April 30,
1995; (d) certain financial information concerning the business,
operations, assets and prospects of the Company, furnished to
Mercer Capital by the senior management of the Company; (e)
certain publicly available information concerning the trading of,
and the trading market for, the Company's Common Stock; (f)
whether there existed other companies that Mercer Capital
believed to be comparable to the Company; (g) the state of the
national economy and prevailing industry conditions; (h) attempts
by management to recapitalize and consideration by management of
recapitalization, sale, merger, bankruptcy and liquidation
options; and (i) other factors and financial analyses that the
Company deemed relevant or necessary to its inquiry. Mercer
Capital also reviewed the minutes of the Board of Directors and
participated in a meeting and discussions with the officers and
directors of the Company and its counsel. Mercer Capital also
took into account its experience in securities valuation
generally.
Mercer Capital's opinion necessarily is based upon
conditions as they existed and could be evaluated by Mercer
Capital as of the date of its opinion. In arriving at its
opinion, Mercer Capital performed a variety of financial and
other analyses. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant
methods of analyses and the application of those methods to
particular circumstances and, therefore, such an opinion is not
readily susceptible to summary description. Furthermore, in
arriving at its opinion, Mercer Capital did not attribute any
particular weight to any analysis or factor considered by it, but
rather made qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, Mercer
Capital believes that its analyses must be considered as a whole
and that considering any portion of such analyses or the factors
considered therein, without considering all analyses and factors,
could create a misleading or incomplete view of the process
underlying its opinion. Mercer Capital assumed and relied upon
the accuracy and completeness of all of the financial and other
information provided by or on behalf of the Company or publicly
available and it did not assume any responsibility of independent
verification of any such information or any independent
evaluation or appraisal of the assets or liabilities of the
Company.
Summary of Conclusions Underlying Opinion
Mercer Capital concluded that the Company's Common Stock has
no or nominal value. Therefore, Mercer Capital opined that the
Cash Merger Consideration is fair, from a financial point of
view, to the Company's shareholders. In concluding that the
Company has no demonstrable value, Mercer Capital considered,
among other things, that the Company had (i) consistent operating
losses over the last eight years; (ii) a retained earnings
deficit of more than $19 million; (iii) a net book value of
negative $5.8 million; (iv) failed in its attempts to raise new
capital; (v) no prospects for a recapitalization other than in
connection with the Merger; (vi) very low prospects for
continuing its current business without a recapitalization; (vii)
no value to be realized in liquidation and (viii) Common Stock
which trades infrequently in small amounts on an inefficient
market.
Financial Results
Mercer Capital concluded that the Company has been severely
weakened over the past decade by over $30 million in cumulative
losses. Mercer Capital noted that the Company recorded losses
for fiscal years 1995 and 1994 of approximately $4.7 million and
$8.2 million, respectively. Management informed Mercer Capital
that many customers have left the Company, fearing that the
Company will soon go out of business, and that new business has
been difficult to attract for the same reason. Mercer Capital
observed that the Company's assets as reflected in its financial
statement consist primarily of accounts receivable from
manufacturers. Management informed Mercer Capital that the
Company had gradually sold off all of its previous real estate
and other holdings in an effort to overcome operating losses and
create working capital. Liabilities, which substantially exceed
assets, consist primarily of current items, most of which are
accounts payable. The excess of liabilities over assets is
reflected in the Company's retained earnings deficit of
approximately $19.4 million, which as of April 30, 1995 resulted
in a book value of approximately negative $5.8 million.
Recapitalization/Refinancing Attempts
Mercer Capital reviewed management's efforts to seek capital
in two separate private placement offerings within the past year,
both of which failed. In March 1995, the Company successfully
placed its 12% Debentures. Mercer Capital noted that the
Debentures were placed to a group headed by Mr. May, who is a
shareholder and member of the Board of Directors of the Company.
Management informed Mercer Capital that the Company has sought to
merge with another coupon processor and has considered other
options as well, such as bankruptcy. None of these succeeded or
were deemed by management to be in the best interests of the
shareholders. Other than the offer by JSM Newco to merge with
the Company, there do not appear to be any other offers
forthcoming for the recapitalization or refinancing of the
Company, and management has exhausted its efforts to find ways to
avoid bankruptcy. Mercer Capital concluded that without the
Merger, the Company cannot survive beyond the immediate future.
Prospects of a Sale or Merger
Mercer Capital also considered the potential that a willing
buyer might be interested in purchasing the operations of the
Company to add revenue to an existing coupon clearinghouse
business, which revenue could generate additional income for the
business. Mercer Capital's review of the financial statements
did not support this option, as marginal costs in the Pay Direct
coupon clearinghouse business approximate marginal revenues. Pay
Direct accounts have constituted an increasing percentage of the
Company's revenue base; the Company has lost a significant
portion of its more profitable Funded Account business due to its
financial difficulties. Such an acquisition would not be likely
to add to another company's earnings and could, in fact, have a
dilutive effect. Other than the offer by JSM Newco to merge with
the Company, there do not appear to be any other offers
forthcoming for the sale or merger of the Company.
Prospects for Continuing the Business
Management delivered to Mercer Capital detailed monthly pro
forma income statements and balance sheets, which it represented
that it had originally prepared in connection with an attempted
equity private placement earlier in 1995. Mercer Capital
independently analyzed management's pro forma financial
statements to examine the potential of the Company to continue
operating under current conditions. Having forecast pro forma
financial statements on a month-by-month basis assuming that no
merger would take place and that, thus, no additional capital
would be infused into the business, Mercer Capital concluded that
the Company's cash flow requirements would within a few months
fully exhaust the Company's working capital. Given the negative
level of equity as reflected on the Company's audited balance
sheet, the lack of sufficient monthly revenues to meet fixed
monthly expenses, and the lack of any working capital which would
allow it to sustain operations, Mercer Capital determined that
the Company would, among other things, have to cease operating
its Funded Account business, and that it would default on the
Debentures.
In sum, based upon its review of the pro forma financial
statements, Mercer Capital confirmed management's assertion that,
without substantial additional capital to reduce the Company's
debt burden, fund working capital properly, build net asset value
to a higher level and attract and retain profitable Funded
Account coupon clearinghouse business, the Company will have
exhausted its Line of Credit with NBC, and thus have to cease
operations, sometime in September or October of 1995. Management
informed Mercer Capital of a plan, consisting of not paying and
slow paying most of its accounts payable, under which the Company
may be able to remain in operation until November, 1995. It is
Mercer Capital's opinion that the success of the plan requires
the Company to assure creditors of a refinancing in the near
term.
Mercer Capital considered the possibility that the Company
could remain in business if it were to eliminate its Funded
Account business, reduce management overhead further, receive
some debt forgiveness from its creditors, and implement a slow
pay or no pay system with its accounts payables. Mercer Capital
considered that some possibility exists that such a course could
prolong the existence of the Company and even return it to a
modest level of profitability. Mercer Capital also considered,
however, that the potential of debt forgiveness by creditors who
have been owed for some time, and the success of continued slow
paying of creditors, is highly speculative. Mercer Capital also
concluded that since a reduction in management overhead would
likely lead to the elimination of Mr. Pettit's position, Fleming
could terminate the Fleming Processing Agreement, which currently
accounts for approximately 80% of the Company's revenues. Such a
termination would accelerate the Company's obligation to repay
its remaining debt to Fleming. Without the Funded Account
business and the Fleming Processing Agreement, the Company would
have a dramatically smaller revenue base with which to generate
significant earnings for shareholders or to repay creditors.
Therefore, Mercer Capital concluded that such a course is not in
the best interests of the Company or its shareholders or
creditors.
Liquidation or Reorganization in Bankruptcy
Mercer Capital's review of the audited financial statements
of the Company confirmed management's representation that all of
the assets of the Company which could be liquidated (whether in
or out of bankruptcy) to satisfy cash requirements or maximize
shareholder value have already been sold or collateralized.
Moreover, Mercer Capital considered the potential for the Company
to reorganize in bankruptcy. Mercer Capital concluded that the
nature of the Company's business is partially that of a financial
intermediary between the coupon issuer and the coupon redeemer.
As such, the Company's financial condition is an important factor
in its ongoing operations. Given this, Mercer Capital concluded
that bankruptcy would likely cause the Company's major customers,
including Fleming, to cease doing business with the Company.
Furthermore, Mercer Capital concluded that the loss of major
customers and the permanent detriment to the Company's reputation
that would result from bankruptcy would render it highly unlikely
that the Company could build shareholder value to a level that is
currently being offered in the Merger. Thus, Mercer Capital
concluded that an attempted reorganization in bankruptcy would
not, at this point, yield any advantage for the shareholders and
could result in a total loss to the shareholders. Mercer Capital
also concluded that based upon the probability that the Company
would not survive past the immediate future without a
recapitalization, and the Company's unsuccessful recent attempts
to raise new capital, consideration of the prospects for
continuing to operate and liquidating in the future (i.e. two or
five years from now) was not warranted.
Public Trading of the Company's Stock
Mercer Capital reviewed the history and performance of the
market price and trading volume of the Company's Common Stock.
The Company began trading as a public company in 1981 in the over
the counter market. In 1994, the Company's Common Stock was
delisted from the Nasdaq NMS and now trades on the NASD OTC
Bulletin Board under the ticker symbol "QPON."
Mercer Capital considered that Bulletin Board trading is
characterized by wide spreads (the difference between the highest
bid and lowest ask prices) and thin volumes. Traders are only
obligated to honor published bid and ask prices for the first 100
shares, and there is only one known market maker for the
Company's Common Stock. Mercer Capital noted that trades of
substantial blocks of stock would likely take place only at less
favorable prices than those published, and the transaction costs
would likely be very high for the amount of capital involved.
Mercer Capital concluded that even though recent published
bid prices on shares of the Company's Common Stock fluctuated
modestly above and below $0.31, it would be difficult to execute
a substantial trade at that price. Minority shareholders with
large blocks of shares trying to liquidate their holdings in the
Company would probably depress share prices and raise transaction
costs. Mercer Capital believed, therefore, that it was not
logical to treat shares of the Company's stock as readily
tradable at published prices, because (i) the Company is small,
(ii) the NASD OTC Bulletin Board is an inefficient market, (iii)
there is only one known market maker for the Common Stock and
(iv) the typically thin level of trading volume prohibits the
acquisition or disposition of substantial blocks of shares of the
Company's Common Stock at published (particularly favorable)
prices.
Other Considerations
Mercer Capital conducted a search for, but did not find,
publicly traded companies in a similar line of business that
could be used for comparison purposes. A.C. Nielsen & Co., a
subsidiary of Dun & Bradstreet, which is a publicly traded
entity, has a coupon clearinghouse operation. Mercer Capital
noted, however, that coupon processing constitutes a relatively
minor portion of Dun & Bradstreet's total business and that
Nielsen does not constitute the primary portion of Dun &
Bradstreet's business. Mercer Capital concluded, therefore, that
it is not sufficiently comparable to the Company to warrant
comparison.
Mercer Capital noted that because of its history of losses,
the Company has amassed large net operating losses ("NOLs"),
which can generally be used by the Company as a credit against
future income taxes. As of April 30, 1995, the NOLs amounted to
over $25.2 million. Mercer Capital concluded, after discussions
with the Company's auditors and counsel, however, that a purchase
of the Company would likely result in a severe limitation on the
Company's ability to use the NOLs in the future. The value of
the NOLs as an off balance sheet asset of the Company, therefore,
is limited.
Payment of Mercer Capital's Fees and Expenses
Pursuant to the terms of an engagement letter dated August
22, 1995, the Company has agreed to pay Mercer Capital $15,000
for rendering its opinion and to pay or reimburse Mercer
Capital's reasonable expenses. No additional fees will be paid
to Mercer Capital for its opinion.
Redemption of Rights
In connection with the Merger, the Company will redeem all
outstanding Rights. The Rights will be redeemed immediately
before the Effective Time and $0.01 of the Cash Merger
Consideration is consideration for the redemption of the Rights.
The Rights were issued under the Rights Agreement, which was
adopted by the Board of Directors of the Company in August 1988.
Each Right entitles the holder, upon the occurrence of certain
events, to acquire a share of Common Stock for $30, which price
is subject to adjustment. The Rights currently are attached to
the certificates representing the outstanding Common Stock, are
not exercisable and cannot be separately transferred. Generally,
upon a person's acquisition or planned acquisition of 20% or more
of the Common Stock, the Rights separate from the Common Stock
and become exercisable and separately transferable. If a person
acquires 20% or, in connection with a tender or exchange offer,
10% of the Common Stock, the exercise price of each Right (other
than those held by the acquiror) will adjust to the greater of
10% of the current market price or the par value. If after the
stock acquisitions the Company was acquired in a merger or other
business combination or 50% of the Company's assets or earning
power was sold or transferred, each holder of a Right (other than
those held by the acquiror) would have the right to receive upon
exercise of the Rights common stock of the acquiror having a
value equal to two times the original exercise price (i.e., $60).
At any time prior to the date that a person acquires stock in a
manner that would result in an adjustment to the exercise price
as described above, the Board of Directors may redeem the Rights
for $0.01 per Right. The Company's Board of Directors, in
accordance with the Rights Agreement, resolved to redeem the
Rights immediately before the Effective Time, conditioned upon
the shareholders' approval of the Merger and the consummation
thereof.
Interests of Certain Persons in the Merger
Certain members of the Company's management and Board of
Directors may be deemed to have interests in favor of the Merger
in addition to their interests, if any, as shareholders of the
Company generally. In each case, the Company's Board was aware of
these factors and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated
thereby.
Retention of Certain Shares in the Company by Management.
The Merger Agreement provides that Mr. Thompson (and his father-
in-law, who is a former officer and director of the Company, and
a trust for the benefit of Mr. Thompson's children) and Mr.
Sullivan will retain all of the shares of Common Stock currently
owned by them (an aggregate of 760,375 shares) and will not
surrender such shares for the Cash Merger Consideration. The
Merger Agreement also provides that Acorn Holdings, LLC
("Acorn"), a shareholder of the Company, of which Mr. Pettit is a
member and is Chief Manager, will surrender 559,837 shares of the
Common Stock that it currently owns for the Cash Merger
Consideration (a total of $173,549) and retain the remaining
1,200,000 shares that it currently owns. As a group, these
persons and entities will retain the 1,960,375 Surviving Shares,
which will represent approximately 23% of the total number of
shares of Common Stock that will be outstanding upon consummation
of the Merger. These persons and entities will participate in
any future earnings and growth of the Company, which could be
substantial. Following consummation of the Merger, all other
shareholders of the Company (i.e., the Converting Shareholders)
who do not pursue statutory dissenters' rights authorized by
Tennessee law (see "Dissenters' Rights") shall have the right to
receive the $0.31 per share Cash Merger Consideration, and such
Converting Shareholders will cease to have any direct interest in
the Company or its future earnings or growth.
Elections to Board of Directors. The Merger Agreement
provides that Messrs. Pettit, Thompson and Sullivan, who are
currently directors of the Company, will continue to serve on the
Board of Directors of the Surviving Corporation following the
consummation of the Merger.
Certain Employment Arrangements. Following the consummation
of the Merger, Mr. Pettit will serve as Vice Chairman, Mr.
Thompson will serve as Chief Executive Officer, Mr. Sullivan will
serve as President and Mr. Cavin will serve as Chief Financial
Officer and Secretary of the Surviving Corporation. The terms of
employment, including salaries, of such individuals after the
consummation of the Merger are anticipated to be substantially
similar to their current terms of employment, but have not yet
been determined. In connection with the Merger, Messrs. Pettit,
Thompson and Sullivan have agreed to terminate any existing
employment or severance agreements between them and the Company,
without additional consideration. The employment of such
individuals with the Surviving Corporation initially will not be
the subject of employment agreements.
Stock Option Arrangements. All options and warrants that
are currently outstanding to purchase shares of Common Stock,
whether or not such options or warrants are vested currently,
will be canceled for no additional consideration, including those
held by officers, directors and employees of the Company. JSM
Newco has agreed that the Surviving Corporation will adopt a
stock option plan for management of the Company, including but
not limited to Messrs. Pettit, Thompson and Sullivan. The number
of shares that each will be entitled to purchase, and the
purchase price, will be determined after the Merger.
Redemption of Repayment of Debentures. The consummation of
the Merger is conditioned upon redemption or repayment of the
Company's 12% Debentures, which are outstanding in the aggregate
principal amount of $750,000, or the provision therefor in a
manner satisfactory to the Company and the holders of the
Debentures. May & Camp, Inc. owns Debentures in the aggregate
principal amount of $75,000, and customers of May & Camp, Inc.
own the remaining Debentures. Earl May, a director of the
Company, is Chairman of the Board of May & Camp.
Effective Time of the Merger
The Effective Time of the Merger will occur upon the filing
of Articles of Merger with the Secretary of State of the State of
Tennessee under the TBCA, or at such other time as may be
specified in such Articles of Merger. It is presently anticipated
that if the Merger Agreement is approved by the shareholders of
the Company, such filing will be made after the Company's Special
Meeting on November 27, 1995 and that the Effective Time will
occur on such date, although there can be no assurance as to
whether or when the Merger will occur. See "Conditions to the
Merger." The redemption of the Rights will become effective
immediately before the Effective Time.
Conversion of Common Stock by Converting Shareholders
At the Effective Time, each share of Common Stock of the
Company other than the Surviving Shares (including each Right,
which will have been redeemed immediately before the Effective
Time) will be converted into the right to receive the Cash Merger
Consideration ($0.31, without interest, including $0.01 in
consideration of the redemption of the attached Right immediately
before the Effective Time), payable to the holder thereof upon
surrender of the certificate evidencing such share in the manner
provided below.
Surrender of Stock Certificates
Following the Merger, an exchange agent (the "Exchange
Agent") will mail to all holders of record of Common Stock of the
Company at the close of business on the Effective Time a "Letter
of Transmittal" to be used in surrendering to the Exchange Agent
their stock certificates. The "Letter of Transmittal" will
provide instructions to the shareholders concerning the surrender
of stock certificates. STOCK CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. DO NOT
SEND STOCK CERTIFICATES WITH YOUR PROXY. If payment is to be
made to a person other than the person in whose name a
surrendered certificate is registered, the certificate must be
endorsed and otherwise be in proper form for transfer. The
person requesting such payment must pay any resulting transfer
taxes or must establish that such taxes either have been paid or
are not due. The Exchange Agent will pay the cash consideration
to a holder of a stock certificate which has been lost or
destroyed only upon receipt of satisfactory evidence of ownership
and after appropriate indemnification.
Any proceeds that remain unclaimed with the Exchange Agent
on and after one hundred eighty (180) days following the
Effective Time can be released and repaid by the Exchange Agent
to the Surviving Corporation, after which time a former
shareholder may look to the Surviving Corporation for payment in
respect of its shares as a result of the Merger only as a general
creditor of Purchaser, subject to applicable abandoned property,
escheat or similar laws.
Representations and Warranties
The representations and warranties of the Company and of JSM
Newco and JSM Merger contained in the Merger Agreement include
various representations and warranties typical in such
agreements. None of the respective warranties or representations
of the Company and of JSM Newco and JSM Merger survive the
consummation of the Merger nor the termination of the Merger
Agreement.
Conditions to the Merger
The obligation of the Company to perform its obligations
under the Merger Agreement is subject to the following
conditions: (i) the Merger shall have been approved by the
requisite vote of the Company's shareholders; (ii) all approvals
and authorizations of, filings and registrations with, and
notifications to, all federal and state authorities required for
the consummation of the Merger shall have been duly obtained or
made; (iii) the Board of Directors of JSM Newco, as sole
shareholder of JSM Merger, shall have taken all corporate action
necessary to effectuate the Merger; (iv) all representations and
warranties of JSM Newco set forth in the Merger Agreement shall
be true and correct; (v) all of JSM Newco's covenants and
agreements pursuant to the Merger Agreement shall have been
performed and complied with in all material respects; (vi) the
Company shall have received a written legal opinion, dated as of
the Closing Date, of Burch, Porter & Johnson, PLC, as to certain
matters; and (vii) prior to the Closing, the Company shall be
provided with reasonably satisfactory evidence regarding (a)
repayment or refinancing of the Company's existing Line of Credit
with NBC, (b) the Surviving Corporation's access to new capital
in the aggregate amount of at least $3 million and (c) the
release, as of the Effective Time, of the current guarantors of
the Line of Credit, who include Mr. Pettit.
The obligation of JSM Newco to perform its obligations under
the Merger Agreement is subject to the following conditions: (i)
all approvals and authorizations of, filings and registrations
with, and notifications to, all federal and state authorities
required for the consummation of the Merger shall have been duly
obtained or made; (ii) the Company's Board of Directors shall
have taken all corporate action necessary to effectuate the
Merger; (iii) the Company's shareholders shall have approved the
Merger and approved and adopted the Merger Agreement; (iv) the
Company's representations and warranties set forth in the Merger
Agreement shall be true and correct; (v) the Company's covenants
and agreements to be performed or complied with pursuant to the
Merger Agreement prior to the Effective Time shall have been duly
performed and complied with in all material respects; (vi) no
material adverse change in the financial condition or results of
operations of the Company and any subsidiary on a consolidated
basis between April 30, 1995 and the Effective Time shall have
occurred; (vii) JSM Newco shall have received a written legal
opinion, dated the Closing Date, of Hunton & Williams or other
reasonably satisfactory counsel as to certain matters customary
in transactions of this nature, including that the Company is
duly organized and validly existing, that the Company's execution
of the Merger Agreement was authorized, that the Merger Agreement
is a valid and binding obligation enforceable against the Company
in accordance with its terms, that the Company's performance of
the Merger Agreement will not violate the Company's Charter or
Bylaws or applicable law and that the necessary consents to the
Merger have been obtained, and opinions with respect to the
Company's compliance with applicable federal securities laws in
connection with the disclosure included in this proxy statement;
(viii) prior to the Closing Date, the Company and JSM Newco shall
have reached a satisfactory agreement regarding the repayment of
the Company's debentures and; (ix) prior to the Closing Date, JSM
Newco shall have received the consent of Inmobiliaria Axial, S.A.
de C.V. to the continuation after the Closing Date of the
Company's lease agreement for use of the Company's facilities in
Juarez, Mexico; (x) JSM Newco shall have received the consent of
Fleming to the continuation of Fleming's existing exclusive
processing agreement with the Company and its wholly-owned
subsidiary, Coupon Redemption, Inc.; (xi) the Company shall have
canceled all options and warrants presently outstanding, and any
registration rights agreements, in a manner that does not create
any rights in such holders to obtain Common Stock, cash or
replacement instruments; (xii) JSM shall receive reasonably
satisfactory evidence regarding (a) repayment or refinancing of
the Line of Credit with NBC and (b) the Surviving Corporation's
access to new capital in the aggregate amount of at least $3
million; (xiii) holders of no more than 10% of the Company's
outstanding Common Stock shall have elected to exercise
dissenters' rights as provided in the TBCA; (xiv) a shareholder's
agreement shall be entered into by certain holders of the
Company's stock who will hold shares following consummation of
the Merger; (xv) the Company shall terminate its Rights Agreement
or amend or take such action as to waive application of the
Rights Agreement to the Merger, in any event without the payment
of any additional consideration by the Company or JSM in addition
to the Cash Merger Consideration; and (xvi) certain legal
proceedings shall be resolved prior to consummation of the Merger
and shall result in liabilities not exceeding $100,000 in the
aggregate or, if not resolved, shall result in liabilities not
exceeding $100,000 in the aggregate.
It is anticipated that all conditions to the consummation of
the Merger will be satisfied. Moreover, any condition, other
than the requisite shareholder approval, may be waived by the
party entitled to the benefit of such condition.
Regulatory Approvals
No federal or state regulatory requirements must be complied
with, nor must federal or state regulatory approvals be obtained
in connection with the Merger Agreement or the transactions
contemplated thereby.
Conduct of Business Prior to the Effective Time
Prior to the earlier of the Effective Time or the
termination of the Merger Agreement (see "-Termination"), the
Company has agreed, among other things, to: (i) carry on its
business in the usual, regular, and ordinary course in
substantially the same manner as heretofore conducted and to use
all reasonable efforts to preserve intact its present business
organizations and assets, keep available the services of its
present officers and employees, and preserve its relationships
with customers, suppliers, and others having business dealings
with it; (ii) not declare any dividends on or make other
distributions in respect of its Common Stock or to amend its
charter or by-laws; (iii) not issue, grant, pledge, or sell, or
authorize or propose the issuance of, or split, combine,
reclassify or redeem, purchase, or otherwise acquire or propose
the purchase of, any shares of its capital stock or any class of
securities convertible into, or rights, warrants, or options or
enter into any arrangement or contract regarding the issuance of,
any such shares or other convertible securities or make any other
change in its equity capital structure or issue any stock
appreciation rights; (iv) use its best efforts to comply promptly
with all requirements which federal or state law may impose on it
with respect to the Merger; (v) use its best efforts to obtain
any consents, authorizations, approvals or exemptions by any
governmental authority or agency, or other third party, required
to be obtained in connection with the Merger; (vi) not acquire
direct or indirect control over any other corporation,
association, firm, or organization, other than in connection with
activities otherwise permitted by the Merger Agreement; (vii) not
sell, lease, or otherwise dispose of or encumber any of its
assets which are material to its business; (viii) not assume,
guarantee, endorse, or otherwise become liable, for any other
party's obligations or make any loans, advances, or capital
contributions to, or investments in, any other person or entity;
(ix) not make any capital expenditures except for certain
previously authorized capital expenditures; (x) not incur any
additional debt obligations or other obligation for borrowed
money in excess of its remaining borrowing capacity under its
Line of Credit; and (xi) as to its employees, (a) not grant any
increase in compensation as a class, pay any bonus or accelerate
or effect any change in any employee or retirement benefits for
any employees or officers (unless such change is required by
applicable law or regulation), (b) amend any existing employment
contract unless required by law or regulation or enter into any
new employment contract with any person, or (c) adopt any new
employee benefit plan or make any change in any existing employee
benefit plans other than any as required by law or regulation or
that is necessary or advisable to maintain the tax-qualified
status of any such plan.
Termination
The Merger Agreement provides that, notwithstanding any
other provision of the Merger Agreement or the Plan of Merger,
and notwithstanding the approval of the Merger and this Agreement
by the shareholders of the Company and/or JSM Newco, the Merger
Agreement may be terminated and the Merger abandoned: (i) by
mutual written consent of JSM Newco and the Company; (ii) by a
vote of a majority of the Boards of Directors of both the Company
and JSM Newco; (iii) by a vote of a majority of the Board of
Directors of the Company, in the event of a material breach of
the Agreement by JSM Newco; (iv) by a vote of a majority of the
Board of Directors of JSM Newco, in the event of a material
breach of the Agreement by the Company; (v) by a vote of a
majority of the Board of Directors of either the Company or JSM
Newco in the event: (a) the Merger shall not have been
consummated on or before December 31, 1995; (b) any approval of
any governmental or other regulatory authority required for the
consummation of the Merger and the other transactions
contemplated hereby shall have been denied by final non-
appealable action of such authority; or (c) in the event that the
board of directors of JSM Newco or the Company have reasonably
determined that (1) the Merger has become impracticable because
of war, national emergency, banking moratorium or similar
occurrence or, (2) in the case of the Company, that a material
adverse change in the financial condition or results of
operations has occurred with respect to JSM Newco or JSM Merger,
or, in the case of JSM Newco, that a material adverse change in
the financial condition or results of operations has occurred
with respect to the Company or any subsidiary of the Company;
(vi) if the Merger is not approved by the holders of at least a
majority of the outstanding shares of Common Stock of the
Company; (vii) by JSM Newco if the Board of Directors of the
Company has recommended to its shareholders the approval of a
bona fide proposal to acquire all of the outstanding capital
stock or assets of Seven Oaks and its subsidiaries, which the
Board of Directors believes, in good faith after consultation
with its financial advisors, is more favorable from a financial
point of view to the shareholders of the Company than the
proposal set forth in the Agreement; or (viii) by JSM Newco if
the Board of Directors of the Company, in the exercise of its
fiduciary duties upon the written advice of counsel, has
withdrawn, amended or modified in any manner adverse to JSM
Newco, its favorable recommendation of the transactions
contemplated by this Agreement and the Plan of Merger.
A provision which would permit JSM Newco to terminate the
Merger Agreement without recourse for any reason has now expired
and, therefore, is no longer applicable.
In the event of termination of the Merger Agreement by
either JSM Newco or the Company as provided above, the Merger
Agreement shall become void, and no liability shall be incurred
on the part of either JSM Newco or the Company, except as to the
obligation of each party to maintain the confidentiality of
confidential information. In addition, if the Company agrees in
writing to sell its stock or assets to a party other than JSM
Newco or JSM Merger prior to the termination of the Agreement,
the Company must reimburse JSM Newco for its out-of-pocket costs
reasonably incurred in connection with the Merger.
Limitation on Discussions with Third Parties
In order to induce JSM Newco to make its offer, the Company
agreed that, until consummation of the Merger or the earlier
termination of the Merger Agreement, it will not directly or
indirectly, through any director, officer, employee, agent,
financial advisor or otherwise, solicit, initiate or encourage
the submission of an offer or proposal from any person, or engage
in negotiations, furnish confidential information or have
discussions relating to the acquisition of all or a material
portion of the assets of the Company (whether through an
acquisition of assets of, or an equity interest in, or a merger,
exchange offer, tender offer or other business combination
involving the Company) (any of the foregoing being herein
referred to as an "Acquisition Proposal"). However, if the Board
of Directors determines in good faith and is advised by outside
legal counsel that its fiduciary obligations to the shareholders
so require, it may respond to, and negotiate with, third parties
concerning such matters. The Company has agreed to promptly
notify JSM Newco in the event that the Company should receive any
form of Acquisition Proposal from another party.
Accounting Treatment
The Merger will be accounted for by the "Purchase Method" of
accounting, whereby the purchase price will be allocated in
general based upon the relative fair value of assets acquired and
liabilities assumed.
Federal Income Tax Consequences
The following discussion summarizes the material federal
income tax consequences of the Merger to holders of Common Stock.
No opinion of counsel has been obtained with respect to the tax
consequences of the Merger to the Company's shareholders, and the
following summary is not based on any opinion of counsel. The
summary does not discuss all potentially relevant federal income
tax matters, consequences to any shareholders subject to special
tax treatment (for example, tax-exempt organizations and foreign
persons), or consequences to shareholders who acquired their
Common Stock through the exercise of employee stock options or
otherwise as compensation. As described below, the federal
income tax consequences to a shareholder who receives cash for
his Common Stock will depend on whether the shareholder or
certain related shareholders continue to own stock of the Company
after the Merger.
Redemption of Rights
The federal income tax treatment of the receipt of $0.01 in
redemption of each Right is not clear. Because the Rights will
be redeemed in connection with the Merger and the Rights have not
been separated from the Common Stock, the receipt of cash for
Rights probably should be treated as part of the amount received
for Common Stock in the Merger. It is possible, however, that
the receipt of cash for Rights could be treated as the receipt of
a dividend, which would be taxable as ordinary income to the
extent considered distributed from the Company's earnings and
profits (as computed for federal income tax purposes). To the
extent not distributed from earnings and profits, a dividend
distribution would reduce the federal income tax basis of a
shareholder's Common Stock and, thus, be treated in effect as
part of the amount received for Common Stock.
Shareholders Who Receive Cash for Common Stock And Do Not
Continue To Own Any Company Stock
A shareholder's receipt of cash for his shares of Common
Stock pursuant to the Merger or the exercise of dissenters'
rights will constitute a taxable sale of such stock if the
shareholder does not own, either actually or under the
constructive ownership rules of Section 318(a) of the Internal
Revenue Code (the "Code") any stock of the Company after the
Merger. Consequently, such a shareholder generally will
recognize taxable gain or loss equal to the difference between
the amount of cash received and his tax basis in the shares
exchanged therefor. If a shareholder holds his Common Stock as a
capital asset at the time of the Merger, any gain or loss
recognized will be capital gain or loss. Capital gain or loss
will be long-term with respect to shares of Common Stock held for
more than one year at the time of the Merger and short-term with
respect to shares held for a shorter period.
Shareholders Who Receive Cash for Common Stock And Continue To
Own Common Stock
Different rules may apply to a Company shareholder who
receives cash for his shares of Common Stock in the Merger or
pursuant to the exercise of dissenters' rights and who actually
or constructively owns any stock of the Company after the Merger.
Cash received by such a shareholder generally will be taxed as
ordinary dividend income to the extent that the cash is
considered distributed from the Company's earnings and profits
(as computed for federal income tax purposes), unless the
shareholder's receipt of cash for his Common Stock results in at
least a "meaningful reduction" in the percentage of Common Stock
actually and constructively owned by the shareholder. Any
shareholder who will actually or constructively own any stock of
the Company after the Merger should consult his tax advisor about
the tax consequences of receiving cash for his Common Stock.
Under Section 318(a) of the Code, a shareholder is treated
as owning (i) stock that the shareholder has an option or other
right to acquire, (ii) stock owned by the shareholder's spouse,
children, grandchildren, and parents, and (iii) stock owned by
certain trusts of which the shareholder is a beneficiary, any
partnership or "S corporation" in which the shareholder is a
partner or shareholder, and any non-S corporation of which the
shareholder owns at least 50% in value of the stock. A
shareholder that is a partnership or S corporation, estate,
trust, or non-S corporation is treated as owning stock owned (as
the case may be) by partners or S corporation shareholders, by
estate beneficiaries, by certain trust beneficiaries, and by 50%
shareholders of a non-S corporation shareholder. Stock
constructively owned by a person generally is treated as being
owned by that person for the purpose of attributing ownership to
another person. In certain cases, a shareholder who will
actually own no Company stock after the Merger may be able to
avoid application of the family attribution rules of Section 318
of the Code by filing a timely waiver agreement with the Internal
Revenue Service pursuant to Section 302(c)(2) of the Code and
applicable regulations.
Shareholders Who Receive No Cash
A shareholder who does not receive any cash for his shares
of Common Stock and thus continues to own such stock after the
Merger will not recognize gain or loss as a result of the Merger.
The preceding discussion summarizes for general information
the material federal income tax consequences of the Merger to the
Company's shareholders. The tax consequences to any particular
shareholder may depend on the shareholder's circumstances. The
Company's shareholders are urged to consult their own tax
advisors with regard to federal, state, and local tax
consequences.
DISSENTERS' RIGHTS
The Company's shareholders are entitled to exercise
dissenters' rights under the applicable provisions of the TBCA.
The dissenters' rights available under the TBCA are summarized
below. The preservation and exercise of dissenters' rights are
conditioned on strict adherence to the applicable provisions of
the TBCA.
Under Section 48-23-102 of the TBCA, shareholders have the
right to dissent from adoption of the Merger Agreement and demand
payment of the fair value of their shares. In order to properly
exercise this right, BEFORE THE VOTE ON THE MERGER AGREEMENT IS
TAKEN AT THE SPECIAL MEETING, (i) each dissenting shareholder
must give the Company a written notice of his intent to dissent
from the Merger Agreement proposal and to demand payment for his
shares if the Merger is effectuated, and (ii) each dissenting
shareholder MUST NOT VOTE IN FAVOR OF THE MERGER AGREEMENT. Any
dissenting shareholder who fails to satisfy the foregoing
requirements as they apply to his shares will not be entitled to
payment for his shares and will be bound by the terms of the
Merger Agreement.
If the Merger Agreement is adopted by the requisite
shareholder vote at the Special Meeting, the Company, as the
Surviving Corporation will mail a written dissenters' notice
within 10 days after the Special Meeting date to each shareholder
who satisfied the demand requirements. The dissenters' notice
will (i) state where a demand for payment of fair value must be
sent, (ii) state where and when certificates representing the
dissenters' Common Stock must be deposited, (iii) include a form
to be used by a dissenting shareholder to demand payment and (iv)
state the date by which the payment demand must be received by
the Surviving Corporation, which date will not be fewer than one
(1) nor more than two (2) months after the date the dissenters'
notice is delivered. The dissenters' notice will also state
where and when the dissenters' certificates must be deposited
with the Surviving Corporation.
A shareholder receiving a dissenters' notice must demand
payment of the fair value of his Common Stock, certify that he
acquired beneficial ownership of his shares before the first date
the terms of the Merger Agreement were first announced to the
public, and must deposit his share certificates in the manner set
forth in the dissenters' notice or he will not be entitled to
payment for his shares. A demand for payment filed by a
shareholder may not be withdrawn unless the Surviving Corporation
consents to the withdrawal.
Upon receipt of a valid payment demand from a dissenting
shareholder and upon compliance by such shareholder with the
procedure for deposit of his share certificates, the Surviving
Corporation will pay to such shareholder, as soon as the Merger
is effectuated or upon receipt of a payment demand (whichever is
later), the amount the Surviving Corporation estimates to be the
fair value of his shares, plus accrued interest. Such payment
will be accompanied by, among other things, a statement of the
dissenting shareholder's right to demand additional payment for
his shares and certain financial information specified by the
TBCA.
If a dissenting shareholder wishes to demand additional
payment for his shares, he must do so in writing within one (1)
month after the Surviving Corporation made or offered payment for
his shares to him or he will not be able to demand such
additional payment. If a demand for additional payment cannot be
settled within two (2) months after the demand is received by the
Surviving Corporation, the Surviving Corporation may commence a
proceeding in the Chancery Court for Shelby County, Tennessee to
resolve all unsettled demands of any former shareholder of the
Surviving Corporation. If such an action is not commenced by the
Surviving Corporation within such time period, the TBCA requires
the Surviving Corporation to pay all unsettled demands in the
amounts demanded.
The Chancery Court for Shelby County, Tennessee will
determine the fair value of the Company's Common Stock with
respect to which payment demands remains unsettled, and the court
may appoint appraisers to assist it in this regard. Costs of
such a proceeding will be determined by the court and may be
assessed against the Surviving Corporation or, under certain
circumstances, the dissenting shareholder(s), or both.
THE PROVISIONS OF THE TBCA REGARDING DISSENTERS' RIGHTS ARE
TECHNICAL AND COMPLEX AND ANY SHAREHOLDER OF THE COMPANY
CONTEMPLATING THE EXERCISE OF SUCH RIGHTS IS URGED TO CONSULT
WITH HIS OR HER LEGAL COUNSEL.
THE COMPANY
General
The Company, a Tennessee corporation which is engaged in the
coupon processing industry, was organized and commenced
clearinghouse operations in 1971. The Company's wholly-owned
subsidiaries, which are included in the consolidated financial
statements, are Coupon Redemption, Inc., which performs coupon
clearinghouse functions (as described below); Siete Robles
Internacional, S.A. de C.V., which is the Company's Mexican
coupon processing subsidiary; and Trebor Services de Mexico, S.A.
de C.V., which is an inactive Mexican subsidiary that previously
processed coupons for the Company's redemption agency operating
and engaged in the Company's promotion fulfillness operations,
which were sold in December 1989. Effective May 31, 1995, two
former wholly-owned subsidiaries of the Company were merged into
the Company.
The Company acts as a clearinghouse which processes cents-
off coupons from retail establishments throughout the United
States. Coupons are processed at its clearinghouse processing
facility, which is located in Juarez, Mexico. The number of
coupons processed by the Company were 115 million and 305 million
for the fiscal years ended April 30, 1995 and 1994, respectively.
The Coupon Industry
The coupon processing industry consists of companies that
perform one or both of two principal intermediary functions:
Clearinghouse functions: Clearinghouse companies generally
count, verify and sort coupons submitted to them by retailers and
ship the sorted coupons to the appropriate manufacturer-issuer
for payment. In addition, many clearinghouses pay some or all of
their retailer customers the face value of the coupon plus, in
many cases, a portion of the handling fee within a period of time
determined by agreement with the retailer. This period of time
in some cases is shorter than the period in which the retailer
would receive payment if it forwarded the coupons directly to the
manufacturer.
Redemption agent functions: Redemption agents perform a
sort-and-verification function for manufacturer-issuers to whom
coupons are submitted by clearinghouses and retailers for
collection. Redemption agents are also authorized to make
payments on behalf of the manufacturer-issuer for validly
presented coupons. Redemption agents also customarily provide
manufacturer-issuers with statistical and other data to enable
them to evaluate their coupon promotion efforts.
The Company's Clearinghouse Operations
The Company receives coupons shipped to it by retailers
throughout the United States and provides the following services:
- Counts, sorts and batches coupons received according to
the issuing manufacturer and the denomination of the coupons;
- Verifies the value of coupons to be redeemed;
- Provides an invoice or report to the issuing manufacturer
that includes the number and value of coupons and the identity of
the retailer; and
- Ships the sorted coupons to the issuing manufacturer or
its redemption agent.
The Company is an authorized clearinghouse for substantially
all major manufacturers which distribute coupons. The current
prevailing handling fee paid by manufacturers ("Gross Handling
Fee") is $0.08 per coupon. The Company provides its services
generally to two classifications of customers:
Funded Accounts: These are accounts in which the Company
pays the retailer the face value of coupons plus, in most cases,
a portion of the Gross Handling Fee that it will receive from
manufacturers. Retailers assign to the Company the retailers'
rights to receive payments from the manufacturers. After receipt
and verification of the coupons by the manufacturer, the
manufacturer pays the Company the face value plus the Gross
Handling Fee. Depending on its agreement with the retailer, the
Company may pay the retailer before or after receipt of funds
from the manufacturer. Generally, the difference between the
Gross Handling Fee and the portion thereof paid to retailers is
designed to compensate the Company for services rendered plus any
capital the Company has invested in or as a result of its advance
payments to the retailer.
Pay Direct Accounts: These are accounts in which the
Company processes the coupons for large retailer customers for a
contracted fee per 1,000 coupons. Title to the coupon is always
retained by the retailer, and the Company performs a service for
the retailer for the contracted fee. Coupons are shipped to and
invoiced to the manufacturer for the payment of their face value
plus the Gross Handling Fee directly to the retailer. The
Company is paid directly by its retailer customer for the
processing fee earned.
The Company recognizes revenue, for financial reporting
purposes, when the process of coupon verification has been
completed. The Company's accounts receivable is composed of the
full face value of verified coupons plus the per coupon Gross
Handling Fee for Funded Accounts, and the processing fee earned
by the Company for Pay Direct Accounts. The Company's actual
revenue, however, is the portion of the Gross Handling Fee
retained by the Company (and not paid to retailers), in the case
of Funded Accounts, or the processing fee paid to the Company by
retailers, in the case of Pay Direct accounts. Thus, there is a
high level of accounts receivable relative to actual revenues.
Most payment plans for the Company's Funded Account
clearinghouse customers require the Company to pay the customers
within 42 days of its receipt of coupons. The time period
between the time of the Company's receipt of coupons from
retailers until the invoicing of manufacturers ranges from ten
days to two weeks, depending upon the Company's processing
efficiency. The Company collects most of its receivables from
manufacturers within five to six weeks after the manufacturer is
billed for coupons processed by the Company. The advance
payments to the Company's retail customers constitute the
principal demands on its liquidity and are financed through funds
from borrowings. If a manufacturer refuses to redeem any coupons
shipped to it by the Company, the Company has recourse against
the retailer for amounts advanced to it with respect to the
unredeemed coupons. Such amounts normally are deducted from the
advance payment made to the retailer for its next shipment.
During the 1995 and 1994 fiscal years, the aggregate face value
and handling fees of coupons which manufacturers refused to
redeem represented approximately 5%-10% of receivables from
manufacturers. In the Company's fiscal years ended April 30,
1993, 1994 and 1995, the Company's revenue was derived
approximately 9%, 12% and 19%, respectively, from Pay Direct
accounts, which generally results in the Company's receipt of a
smaller processing fee, but requires no investment of capital by
the Company in the form of advance payments to the retail
customer. As the Company's financial position has deteriorated,
the Company's Funded Account business has also deteriorated. As
a result, approximately 60% of the Company's revenue for the
quarter ended July 31, 1995 was derived from (less profitable)
Pay Direct accounts.
Dependence on Major Customers
During the year ended April 30, 1995, Fleming accounted for
approximately 17% of the Company's revenue. This percentage is
expected to increase in the near term because (i) the phase-in of
coupon shipments to the Company under its agreement to process
coupons for Fleming (the "Fleming Processing Agreement") was
completed in the first quarter of fiscal year 1996, (ii) the
Company began processing coupons for Fleming's independent
retailers in the first quarter of fiscal 1996 and (iii) the
Company expects to continue to lose other customers as a result
of its financial condition and resulting slow- or non-payment of
customers. Fleming is a major creditor of the Company and owns
approximately 386,306 (or approximately 4.47%) of the outstanding
shares of Common Stock, which stock will be exchanged in the
Merger for Cash Merger Consideration. Fleming will continue to
be a creditor of the Company and ship coupons under the Fleming
Processing Agreement after the Merger. See "Management's
Discussion and Analysis of the Company's Financial Condition and
Results of Operation-Managerial Restructuring." Acu-Trac
Services, Inc., which accounted for 12% of the Company's revenue
in fiscal years 1995 and 1994, ceased doing business with the
Company during the first quarter of the year ended April 30,
1995. Acu-Trac Services, Inc. was not and is not affiliated with
the Company.
Mexican Operations
The Company conducts counting and sorting operations in
Mexico where less expensive labor is available. The Company
conducts clearinghouse operations at a location in Juarez, Mexico
and in the fourth quarter of the 1994 fiscal year terminated
operations at another leased facility in Juarez. See
"-Properties." Employees at the Mexican facility generally are
paid wages equal to or slightly in excess of the minimum wage
required by law in Mexico. The Company's operations in Mexico
are subject to certain of the normal risks of operating in a
foreign country, including currency fluctuations and changes in
foreign law. In addition, in recent years Mexico has experienced
high inflation and substantial devaluation of its currency.
During the second and third quarters of the 1995 fiscal year, the
Mexican peso was significantly devalued, resulting in reduced
costs of operations in Mexico. Historically, the devaluations
have more than offset the effects of high inflation, and the
overall impact of these factors on the Company has not been
adverse. The Company is unable to predict the effect of
inflation and currency devaluation on its future operations. The
Company is also unable to predict with certainty the effects that
the North American Free Trade Agreement ("NAFTA") will have on
its Mexican operations, but anticipates that agreement will
eventually increase its employee costs in Mexico.
Competition
The Company believes that its market share is less than 5%
and the Company experiences significant competition in its
clearinghouse operations. The principal competitive factors in
the clearinghouse business are price, customer service and
payment terms. The Company considers that it has at least five
principal competitors and believes that an affiliate of The Dun &
Bradstreet Corporation and Carolina Coupon Clearing, Inc. are the
dominant companies in the clearinghouse business. Technological
developments may occur in the future that could be used to
increase productivity in the coupon processing industry, the
implementation of which might require substantial capital
investment. The Company believes that The Dun & Bradstreet
Corporation and Carolina Coupon Clearing, Inc. have substantially
greater financial resources than the Company. The Company's
current financial position would prevent it from committing any
significant amount to investment in any such developments.
Industry surveys have concluded that, prior to the 1992
calendar year, the number of coupons distributed by manufacturers
had generally continued to rise each year, but since then the
rate of growth had slowed. Total expenditures related to the
portion of manufacturers' marketing programs allocated to coupons
had risen at a higher rate, however, because of increases in the
average value of redeemed coupons. Management believes that for
clearinghouses such as Seven Oaks, the slower growth in coupon
distribution led to more competition. In turn, more competition
resulted in difficulty in increasing handling fees sufficiently
to compensate for the additional expense generally associated
with financing coupons with higher face values for Funded
Accounts.
During the 1994 calendar year, the number of coupons
distributed by manufacturers increased to approximately to 309.7
billion in 1994, following a decrease from approximately 310
billion in 1992 to approximately 298.5 billion in 1993. The
Company believes that the 1993 decrease was largely due to the
decisions by some manufacturers, especially cigarette
manufacturers, to concentrate marketing efforts on initial price
reductions rather than couponing. In spite of the increase in
the number of coupons distributed, the number of redemptions in
1994 decreased approximately 8.8% - from approximately 6.8
billion to approximately 6.2 billion - which has exacerbated the
effects on the Company of the intense competition.
Employees
As of October 1, 1995, the Company employed approximately
240 persons, of whom approximately 210 were employed in its
sorting facilities in Mexico. The remaining employees are
executive, administrative, sales, customer service, and data
processing personnel located in the Company's Memphis and El Paso
offices.
Properties
The Company's principal executive offices are located in
Memphis, Tennessee in approximately 6,000 square feet of space
which is currently leased month-to-month following the expiration
of its lease for the space in September 1995. The Company
processes coupons in a two building complex containing
approximately 98,000 square feet located on approximately 3.7
acres in Juarez, Mexico. This facility was held in trust for the
Company's benefit by a Mexican bank, prior to the fourth quarter
of the 1994 fiscal year, at which time the Company sold the
facility and leased it back for a nine year term from the
purchaser. The Company has a five year renewal option under that
lease. The Company's management believes that this facility is
adequate to meet its processing requirements for the foreseeable
future.
In the 1994 fiscal year, the Company leased approximately
7,765 square feet of space in El Paso to house its operations
there. Subsequent to the signing of NAFTA, the Company's
management determined that its entire operation, with the
exception of those functions conducted in the Memphis location,
could be handled from its facility in Juarez, Mexico. Therefore,
the Company is in the process of moving from the El Paso
location, which is expected to be completed in October 1995. In
late July 1994, the Company closed the sale of an approximately
70,000 square foot building in El Paso, Texas. The purchase
price for this facility was $1.5 million, the net proceeds of
which were paid to the lender which held a deed of trust on the
facility. This building had served as an administrative and
operations office for the Company's clearinghouse operations, and
had housed its data processing center.
In the fourth quarter of the 1994 fiscal year, the Company
ceased clearinghouse activities in an approximately 37,000 square
foot leased facility in another location in Juarez, and the
Company's lease obligations were fully satisfied in November
1994. In December 1994, the Company closed the sale of a
facility in Delicias, Mexico which had been formerly used in its
processing operations. The sale price of the facility was $1.125
million, the net proceeds of which were paid to the former
principal lender of the Company. The proceeds fully repaid that
lender and the Company's financing agreement with that lender was
concurrently terminated.
The Company also owns two parcels of unimproved real estate
totaling approximately 30 acres in the Las Cruces, New Mexico
vicinity. This land, acquired in a like-kind exchange and held
for investment purposes, is encumbered by a deed of trust
securing payment to the holders of the Company's Debentures.
In the first quarter of the 1988 fiscal year, the Company
entered into a lease for an approximately 40,000 square foot
facility in Memphis, Tennessee to house its telemarketing
facilities, and in the third quarter of fiscal 1988 entered into
an amendment to this lease for additional adjacent space of
approximately 26,000 square feet (together, the "Telemarketing
Lease"). The Telemarketing Lease is for a term which expires
April 14, 1998. The Company sold substantially all of the assets
of its telemarketing subsidiary on April 30, 1989.
Simultaneously with the sale, the Company subleased the space to
the purchaser of the assets for a 60-month term commencing May 1,
1989. In April 1994, the Company entered into an amendment to
this sublease with the successor in interest to the original
sublessee, extending the term of the sublease through April 30,
1996, and further granting the successor an option to extend the
sublease term through April 30, 1998. During the 24-month
extended term of the sublease, the sublessee has agreed to
fulfill the Company's obligations under the Telemarketing Lease.
The sublessee has no obligation for the Telemarketing Lease
during the last approximately 23 1/2 months of the Telemarketing
Lease, unless it elects to exercise its renewal option. The
Company remains obligated under the Telemarketing Lease to the
extent that the sublease is terminated or expires before the
termination of the Telemarketing Lease or the sublessee fails to
satisfy its obligations under the sublease.
Legal Proceedings
On or about June 10, 1988, El Paso Saddle Blanket Company,
Inc. ("Saddle Blanket") amended its suit pending in the District
Court of El Paso County, Texas, to join the Company in that case
as a co-defendant with the original defendant, Frank Winslett, a
former employee of General Letter Service, Inc. ("GLS"). GLS, a
former subsidiary of the Company, was dissolved in the last
quarter of the Company's fiscal year ended April 30, 1986.
Saddle Blanket alleged that a mailing list used by GLS that was
the property of Saddle Blanket was purposely or negligently
permitted to fall into the hands of one of its competitors
through the actions of Mr. Winslett. Saddle Blanket sued for in
excess of $400,000 actual damages plus punitive damages. On
October 10, 1995, the parties executed a settlement agreement
resolving all of the relevant issues and providing a full release
of the claims against the Company. Under the settlement
agreement, the Company paid Saddle Blanket $10,000 and agreed to
pay Saddle Blanket $10,000 on each of November 10, and December
10, 1995. Upon completion of the scheduled payments, the parties
have agreed that the lawsuit will be dismissed, with prejudice.
Amelia Hill is the former wife of Harold Hill, a former
employee of Seven Oaks International, Inc. Mr. Hill is entitled
to payments under an Agreement Concerning Compensation,
Consulting, Confidentiality and Non-Competition. Ms. Hill
alleges that she is entitled to payments under a settlement with
Mr. Hill. She alleges that because of the Company's late
payments under this agreement all payments due under this
agreement are accelerated. She asks for judgment in the amount
of $297,500. In the opinion of management, there is no basis for
acceleration of these payments.
A former customer, Navarro Discount Pharmacies, has
threatened legal action against the Company if the Company does
not adhere to the repayment schedule proposed by the Company in
the Summer of 1995. That customer is owed approximately $71,000.
The Company settled a threatened lawsuit by Kaplan,
Thomashower & Landau, attorneys representing a group of 20 stores
owed past due moneys. This group of stores had ceased doing
business with the Company and were due approximately $168,000.
The settlement on May 5, 1995 included payment in six (6) monthly
installments of the principal amount due, plus interest at 12%.
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain historical financial
information for the Company. The selected historical financial
information for the years ended April 30, 1993, 1994 and 1995 are
based on, derived from, and should be read in conjunction with,
the historical consolidated financial statements of the Company,
and the related notes thereto, included in Appendix C. See
"Appendix C - Financial Statements of Seven Oaks International,
Inc." The selected historical financial information for the
years ended April 30, 1991 and 1992 are derived from the
historical consolidated financial statements of the Company, and
the related notes thereto, which were included in the annual
reports filed with the SEC by the Company under the Exchange Act.
The selected financial data for the three month periods ended
July 31, 1994 and 1995 are derived from unaudited internal
statements of operations by the Company. In the opinion of
management, the unaudited interim financial information includes
all adjustments (consisting only of normal recurring adjustments)
necessary to fairly present the information set forth therein.
The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the
financial statements and notes thereto in Appendix C.
SELECTED HISTORICAL FINANCIAL DATA
(amounts in thousands, except per share data)
Three Months Year Ended
Ended July 31 April 30
1995 1994 1995 1994 1993 1992 1991
(unaudited)
Statement of
Operations Data:
Revenues $ 524 $ 762 $2,144 $4,385 $7,740 $7,878 $11,922
Net loss (624) (1,000) (4,671) (8,220) (4,423) (6,014) (12,361)
Per Share
Loss (0.07) (0.16) (0.60) (1.28) (0.69) (0.93) (1.92)
Dividends 0 0 0 0 0 0 0
Balance Sheet Data:
Total
Assets $2,752 $8,557 $4,499 $9,977 $26,752 $47,679 $55,196
Current Lia-
bilities 7,384 10,538 7,519 10,944 19,449 35,877 37,332
Long-Term Lia-
bilities 1,803 322 2,791 336 386 462 510
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Summary
The Company and its wholly-owned subsidiaries process cents-
off coupons, principally as a clearinghouse between product
manufacturers and retailers throughout the United States. The
Company sorts coupons for retailers and submits the sorted
coupons to manufacturers for reimbursement. For Funded Accounts,
the Company makes advance payments to retailers consisting of the
face value of the coupon plus an amount equal to a portion of the
per coupon handling fee to be paid to the Company by the
manufacturers. The Company invoices the manufacturers (or their
agents) and receives and retains the face value of the coupons
and the handling fee, thereby effectively retaining a portion of
the per coupon handling fee. The Company also markets its Pay
Direct processing services to both retailers and manufacturers on
a contractual basis not directly related to the per coupon
handling fee, for a specified fee per 1,000 coupons processed.
Pay Direct customers are reimbursed directly by manufacturers for
submitted coupons without any advance payments by the Company.
Pay Direct accounts typically produce less average revenue per
coupon.
The portion of the handling fee retained by the Company for
Funded Accounts varies by customer according to the volume of
coupons submitted and certain other factors. The Company
typically retains less of the handling fee, and consequently
recognizes less average revenue per coupon, from large chains and
associations of retail stores than from smaller, independent
retailers. Changes in the customer mix can affect the Company's
average revenue per coupon, which had averaged less than $0.02
per coupon for the past several years and the first quarter of
fiscal 1995. The average exceeded $0.02 per coupon in the third
quarter of 1995. The average declined to less than $0.02 per
coupon in the fourth quarter, primarily because of increased
processing for Fleming and other customers supplied by Fleming on
a Pay Direct basis during the quarter. Revenue from processing
coupons under the Fleming Processing Agreement for Fleming and
other customers supplied by Fleming represented 44% of revenue
for the fourth quarter and 17% of revenue for the fiscal year
ended April 30, 1995.
When acting as a clearinghouse between retailers and
manufactures, the Company records as revenue only the portion of
the per coupon handling fees that it retains. Neither the face
value of the coupons processed nor the portion of the handling
fees received by retailers is recorded as revenue by the Company.
The full face value of the coupons and the total per coupon
handling fees are accounted for as trade receivables, however,
since the Company is acting as a collection agent. Therefore,
when the Company's revenue is compared to total receivables, the
turnover in receivables appears considerably lower than the
Company's actual turnover.
The Company's collection period for receivables has averaged
between five and six weeks in recent years. The principal factor
determining the length of this period is the time required by
manufacturers, or their agents, to process coupons submitted by
the Company. Manufacturers collect marketing information about
redemption activity and verify the coupons submitted for payment
by retailers or clearinghouses such as the Company.
Results of Operations
Three Months Ended July 31, 1995 v. Three Months Ended July
31, 1994
The number of coupons processed for the quarter ended July
31, 1995, was 36 million, down 35% from the quarter ended July
31, 1994. Revenue for the quarter ended July 1995 decreased
$238,000 (31%) to $524,000, compared to $762,000 for the quarter
ended July 1994, primarily because of the Company's decision to
terminate a processing agreement with a privately-held coupon
processor during the first quarter of the prior fiscal year.
Processing costs for the quarter ended July 31, 1995,
declined $518,000 (49%) to $547,000, compared to $1,065,000 for
the quarter ended July 31, 1994. A reduction in workforce,
reduced labor costs associated with a significant devaluation of
the Mexican peso in late 1994 and early 1995, and the termination
of a lease on a processing plant in Juarez, Mexico accounted for
the significant decline in processing costs. General, selling
and administrative expenses for the quarter ended July 31, 1995
decreased $103,000 (16%) to $528,000, compared to $631,000 for
the quarter ended July 31, 1994. Reductions in bank charges,
consulting fees, advertising, and promotion costs accounted for
the majority of the decline.
Reduced borrowing levels reduced interest expense $38,000
(41%) for the quarter ended July 31, 1995 versus the comparable
quarter ended July 31, 1994.
The number of coupons processed during the quarter ended
July 31, 1995 increased 32% from the quarter ended April 30,
1995. This increase is attributed primarily to coupons received
under the Fleming Processing Agreement. Receipt of coupons from
Fleming has been phased in over several months. In September
1995, Fleming indicated that it would commence full shipments to
the Company. The coupons processed under this Pay Direct service
agreement are (as is typically the case with Pay Direct accounts)
at a lesser fee than that received under Funded Account
agreements. Consequently, the increased volume at a lower fee
reduced the average fee per coupon for the quarter ended July 31,
1995 versus the quarter ended April 30, 1995. Gross revenue for
the quarter increased $27,000 (5.5%) from the quarter ended April
30, 1995, primarily because of the increased number of coupons
processed for Fleming.
On May 10, 1995, the Company signed a letter agreement, and
on July 31, 1995 a formal agreement was executed, to become the
exclusive processor for Fleming's independent retailer coupon
program. This agreement is expected to increase the number of
coupons the Company processes for Fleming by 200% over the number
of coupons expected to be processed for the Fleming under the
Fleming Processing Agreement (on a fully phased-in basis). The
Company commenced processing coupons under this agreement late in
May 1995. Like the Fleming Processing Agreement, this
arrangement is on a Pay Direct basis, which is generally less
lucrative than processing coupons on a Funded Account basis. The
number of coupons processed for Fleming during the quarter ended
July 31, 1995 increased 45% compared to the quarter ended April
30, 1995. The Company is soliciting new accounts to continue to
rebuild its coupon volume, but is having difficulty enticing new
customers and retaining existing customers because of their
concerns about the Company's financial stability. At an average
of $0.02 in revenue per coupon, the Company would need to process
5.6 million additional coupons a month to achieve break-even.
This is an increase of 24% over the anticipated volume expected
under the fully phased-in Fleming Processing Agreement and the
Fleming independent retailer coupon program.
The net loss of $624,000 for the quarter ended July 31, 1995
was a reduction of $530,000 (46%) compared to the loss of
$1,154,000 for the quarter ended April 30, 1995. Excluding a
one-time charge of $337,000 in the quarter ended April 30, 1995,
which was associated with the consolidation of the Company's El
Paso, Texas operations into the Juarez, Mexico facility, the
reduction in loss was $193,000 (24%). Processing expenses were
reduced $51,000, and general, selling and administrative expenses
were reduced $54,000, in the quarter ended July 31, 1995 compared
to the quarter ended April 30, 1995.
Results of Operations
Year Ended April 30, 1995 v. Year Ended April 30, 1994
For the year, the number of coupons processed by the Company
declined 63% from the number processed in the year ended April
30, 1994, primarily because of the Company's decision to
terminate an arrangement with a privately-held coupon processor
(as described above). Processing under that agreement, which was
not as profitable as anticipated when the agreement was signed,
terminated in the first quarter of the 1995 fiscal year.
Revenue for the year decreased $2,241,000 (51%) from the
previous year, reflecting the decrease in coupons processed,
partly offset by a 30% increase in average revenue per coupon.
The number of coupons processed decreased because the Company is
having difficulty retaining existing customers who are concerned
about the Company's deteriorating financial position and its
failure to make payments to customers according to previously
agreed payment schedules. For these same reasons, the Company is
having difficulty enticing new customers, even though it is
actively soliciting new accounts.
Processing costs decreased $1,449,000 (29%) in 1995, from
$4,691,000 to $3,242,000, principally due to reductions in the
processing workforce, reduced occupancy costs of processing
facilities sold and reduced supply costs. These expense
reductions were not sufficient to offset the 51% decline in
revenue.
General, administrative and selling expenses were reduced
$641,000 (20%) in 1995, through reductions in salaries and wages,
insurance expense, depreciation, professional fees, occupancy
expenses and various other categories. Excluding significant
unusual items (primarily, loss on real estate, write-off of
intangibles and bad debt write-offs), in both years, operating
expenses declined $2,804,000 (33%) for the year ended April 30,
1995.
The operating loss of $4,671,000 for the year ended April
30, 1995 was $3,549,000, (43%) less than the $8,220,000 loss for
the year ended April 30, 1994. The year ended April 30, 1994
included significant unusual items (primarily, loss on real
estate, write-off of intangibles, and bad debt write-offs)
totaling $4,133,000, versus the year ended April 30, 1995 non-
recurring items totaling $1,049,000. Excluding the non-recurring
items, the fiscal year 1995 loss declined by $465,000 (11%)
compared to the loss for the year ended April 30, 1994.
Year Ended April 30, 1994 v. Year Ended April 30, 1993
The number of coupons processed by the Company for the year
ended April 30, 1994 was 305 million, a decline of 44% from 540
million processed during the prior year. During 1994, two
customers accounted for 28% (14% each) of the coupons processed.
One of the customers accounting for 14% of coupons processed
ceased doing business with the Company in February 1994.
Revenue for the fiscal year ended April 30, 1994 was
$4,385,000, a decrease of $3,355,000 (43%) from the prior year
ended April 30, 1993. The average revenue per coupon processed
remained unchanged for the fiscal years ended April 30, 1994 and
1993; consequently, the revenue decline was wholly caused by the
decline in the volume of coupons processed, as described above.
Direct processing costs declined from $6,211,000 during
fiscal 1993 to $4,691,000 in fiscal 1994. Although the Company
continued to take steps to reduce costs and increase efficiency
during fiscal 1994, the positive effect of those actions was not
sufficient to offset the 44% decline in the number of coupons
processed.
General, administrative and selling expenses were reduced
26% or $1,147,000, from $4,434,000 in fiscal 1993 to $3,287,000
in 1994. Significant reductions were achieved in salaries and
wages, insurance, rent, supplies and depreciation expense;
however, revenues declined at a greater rate, resulting in lower
operating margins for the period.
Interest expense for the year ended April 30, 1994 was
$397,000, a 43% decline from the prior year, on reduced borrowing
levels and a slightly lower average interest rate.
Significant unusual expenses recorded during 1994 included
$1,257,000 in bad debts provision, a $1,630,000 loss on three
real estate transactions and, a $1,167,000 write-off of
intangibles. The bad-debts provision related to problems in
verifying coupons submitted from certain retailers, loss of
significant customers and reductions in payments from product
manufacturers which could not be charged back to the Company's
customers.
The net loss of $8,220,000 for 1994 exceeded the loss in
1993 of $4,423,000.
Managerial and Financial Restructuring
In a transaction completed on September 7, 1994 (the
"Restructuring Transaction"), Acorn and Fleming acquired newly
issued Common Stock representing an aggregate of 25% of the total
number of outstanding shares of Common Stock. Mr. Pettit is a
member and Chief Manager of Acorn. Under the terms of the
Restructuring Transaction, the Company issued 1,759,837 shares of
Common Stock to Acorn and 386,306 shares to Fleming, in
consideration of the discharge of $150,000 of the amount owed by
the Company to Fleming and Fleming's agreement to modify and
extend the repayment terms of the remaining $1,644,258 owed to
the Company by Fleming. Mr. Pettit was named Chairman of the
Board and Chief Executive Officer of the Company and the Company
granted Mr. Pettit options which are exercisable over five years
under certain conditions, which would allow him to purchase an
additional 3,626,605 shares of Common Stock at $0.1705 a share.
Fleming was granted anti-dilution warrants to purchase, at
$0.1705 per share, such number of additional shares necessary to
maintain its percentage ownership of the Company's outstanding
Common Stock in the event that any then-outstanding options,
including those granted to Mr. Pettit, were exercised. On May
10, 1995, Mr. Pettit relinquished options to acquire 2,336,283
shares of the Company's Common Stock. Upon the exercise of the
options and warrants issued to and retained by Fleming and Mr.
Pettit, Acorn, Fleming and Mr. Pettit would own an aggregate of
approximately 37% of the Company's currently outstanding Common
Stock. In connection with the issuance of the shares to Fleming
and Acorn, and the grant of the option to Mr. Pettit, the Board
of Directors amended the Company's Rights Agreement so that its
provisions would not apply to those transactions. In connection
with the Merger, all outstanding warrants and options to purchase
the Company's Common Stock, including those held by Fleming and
Mr. Pettit, will be canceled for no consideration. Mr. Pettit
and certain other employees of the Surviving Corporation will be
granted options to acquire shares after the Merger. The number
of shares that such persons can acquire, and the purchase price
will not be determined until after the Merger. See "Interests of
Certain Persons in the Merger."
As part of the Restructuring Transaction, Fleming and the
Company entered into the Fleming Processing Agreement providing
that the Company would serve as the exclusive coupon processor
for Fleming and its subsidiaries and that a portion of the
processing fee that the Company would receive from Fleming under
the agreement would be applied to reduce the remaining debt owed
to Fleming. Fleming agreed not to seek repayment of the
remaining debt owed by the Company to Fleming by other means
while the Fleming Processing Agreement is in effect. The term of
the Fleming Processing Agreement expires on May 10, 1998 and the
current balance of the debt owed to Fleming is approximately $1.6
million, which has been classified as long-term debt. The
Fleming Processing Agreement may be terminated by Fleming in the
event of the termination of Mr. Pettit's employment with the
Company and upon certain other defaults. Any part of the debt
owed by the Company to Fleming which is not paid under this
arrangement is payable in full upon termination of the Fleming
Processing Agreement. At the current time, the Company is not in
default under the Fleming Processing Agreement. Fleming owns
386,306 (or approximately 4.47%) of the outstanding shares of
Common Stock of the Company, which will be exchanged for Cash
Merger Consideration in the Merger. Fleming will continue to be
a major creditor of the Company and to ship coupons under the
Fleming Processing Agreement after the Merger.
Liquidity and Capital Resources
For most of the Company's fiscal year ended April 30, 1995
and continuing through September 22, 1995, the Company's
liquidity has not been sufficient to continue generally meeting
payment schedules established for its clearinghouse customers.
As of July 31, 1995, the Company's current liabilities exceeded
current assets by $5.8 million. In July 1995, the Company
formulated a plan to repay its clearinghouse customers all
amounts in arrears, which approximated $2.2 million at July 31,
1995, along with 9% interest. The repayments, which began in
July 1995, are scheduled to be made over various payout periods.
The Company suspended payouts under the program in August 1995,
due to insufficient capital to continue the payments.
As of July 31, 1995, the Company had $645,000 of outstanding
borrowings under its $1.0 million line of credit and $750,000 of
12% Debentures outstanding. The Company defaulted on its semi-
annual interest payment due September 1, 1995 under the terms of
the indenture governing the Debentures. The accrued, but unpaid
interest on the Debentures amounted to $45,000 at that date. The
default had not been cured as of September 22, 1995. Under the
documents governing the Company's Line of Credit, a cross-default
occurs when the Company defaults on its Debentures under the
terms of its indenture. Since the Company does not have waivers
on the above debt defaults, all amounts outstanding at July 31,
1995, totaling $1,395,000 have been classified as current
liabilities.
Trade receivables, which represent a major component of the
Company's balance sheet, totaled $1.0 million as of July 31,
1995, down from $2.8 million at April 30, 1995. The reduction of
$1.8 million in trade receivables principally reflected a higher
percentage of coupons being handled on a "Pay Direct" basis
(which typically earns lower per coupon fees for the Company than
"Funded Accounts"), a somewhat faster collection period (from
manufacturers) and a loss of customers.
The Company and its subsidiaries have pledged substantially
all of their assets in connection with the financings described
above, except operating assets in its plant in Juarez, Mexico and
two notes receivable from the sale/leaseback of that plant. The
notes receivable balances at July 31, 1995 total $785,000, but
should the Company default under its lease agreement these notes
would be deemed to have been satisfied. Because of the
uncertainty of the Company's ability to continue to make the
lease payments, these notes receivable balances have been fully
reserved in the Company's financial statements (and are not
reflected as an asset).
As of July 31, 1995, the Company's deficiency in working
capital was $5.8 million, including short-term debt of $1.4
million which became due when the Company defaulted on its
debenture interest payment, as discussed above. Additionally,
the deficiency in assets was $6.4 million at that date. The
Company attempted to raise up to $5 million in new capital
through its private placement memorandum, dated August 3, 1995,
which offered its 10% serial notes with principal due September
1, 2000. The notes were offered to more than 30 potential
investors, one of whom was John Moll. Several potential
investors, other than Mr. Moll, indicated a willingness to invest
in the Company's serial notes. However, the cumulative
investment of those investors was not sufficient to satisfy the
$2 million minimum investment threshold described in the private
placement memorandum.
At the initial meeting between officers of the Company and
Mr. Moll on August 11, 1995, Mr. Moll expressed an interest in
pursuing an equity investment in the Company instead of
purchasing the Company's notes. That initial discussion
subsequently led to John Moll's and J. Steven Moll's offer to
acquire controlling interest in the Company. As discussed under
"Approval by the Company's Board; Recommendation of the Board of
Directors; Reasons for the Merger", the Molls have offered to
invest sufficient capital in the Company to pay all past due
amounts to creditors and provide a sufficient line of credit to
fund operations in the future.
Income Taxes
As of July 31, 1995, the Company had NOL carryforwards of
approximately $25.2 million for income tax reporting purposes.
Future tax liabilities of the Company may be offset by the
carryforwards. However, the effect of these carryforwards in
adding to the Company's cash flow is dependent on the Company's
ability to restore and maintain operating profitability.
Moreover, the carryforwards are not transferable and the Code
will significantly limit the Company's ability to use the
carryforwards after one or more acquirors have acquired stock in
the Company through a "change of control" transaction (as defined
in the Code).
Inflation
Inflation is not presently having a material effect on the
Company's operations in the United States. The wages to Mexican
employees represent approximately 38% of the Company's processing
costs and are dependent on the exchange rate of the Mexican peso.
There was no significant change in the value of the peso relative
to the dollar during the three months ended July 31, 1995.
JSM NEWCO AND JSM MERGER
JSM Newco is a newly formed Tennessee corporation wholly-
owned by J. Steven Moll, with John Moll providing the capital for
the formation of JSM Newco. John Moll is a private investor and
former President of Fleming and Malone & Hyde, Inc. J. Steven
Moll, the son of John Moll, is a private investor and former
president of Fleming International, LTD.
JSM Newco has formed JSM Merger, which will be merged with
and into the Company. JSM Newco will contribute to the Company,
either directly or through JSM Merger, the Cash Merger
Consideration to be paid to the Converting Shareholders of the
Company in the Merger, and JSM Merger will exchange its shares on
a one for one basis for the 6,292,891 shares to be converted by
the Converting Shareholders into the right to receive the Cash
Merger Consideration. These shares will represent approximately
73% of the shares of the Surviving Corporation to be outstanding
after the Merger. The remaining 27% of the outstanding shares
will be held by Fleming and Messrs. Pettit (through Acorn),
Thompson (or his father-in-law or a trust for the benefit of his
children) and Sullivan, who will retain such shares under the
terms of the Merger Agreement.
The Board of Directors of the Surviving Corporation will
consist of John Moll, J. Steven Moll, Peter Pettit, Tommy R.
Thompson and Frank A. Sullivan. The officers of the Surviving
Corporation will be J. Steven Moll -Chairman; Mr. Pettit - Vice-
Chairman; Mr. Thompson - Chief Executive Officer; Mr. Sullivan -
President; Mr. Cavin - Chief Financial Officer and Secretary.
JSM Newco and JSM Merger currently have nominal
capitalization and no operating histories. Consequently, no
meaningful historical financial data exists and is not presented
herein. The source of the capital required to (a) fund the Cash
Merger Consideration to be paid to Converting Shareholders in the
Merger and (b) provide the Surviving Corporation with access to
new capital of at least $3 million, as provided in the Merger
Agreement, has not been identified to the Company. Mr. Moll,
however, is believed by management of the Company to have
substantial net worth and access to capital. Therefore, the
Company believes that the ability of JSM Newco and JSM Merger to
carry out their obligations under the Merger Agreement is
reasonably assured.
OWNERSHIP OF THE COMPANY'S COMMON STOCK
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of
October 31, 1995 regarding the beneficial ownership of the
Company's Common Stock, $0.10 par value, by (i) each person who
is known by the Company to have owned beneficially more than 5%
of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each executive officer of the Company whose
annual salary exceeds $100,000, and (iv) all directors and such
officers of the Company as a group.
Except as otherwise indicated, the individuals named below
have sole voting and dispositive power with regard to the number
of shares set forth next to their names.
Amount and Nature Approximate
of Beneficial Percent of
Name and Address Ownership Class(1)
Peter R. Pettit
111 Cherry Road
Memphis, TN 38117 3,050,159(2) 30.7%
Earle C. May
May & Camp, Inc.
15924 S.W. Quarry Road
Lake Oswego, OR 97035 1,053,000(3) 11.6%
Tommy R. Thompson
5666 Vantage Point
Memphis, TN 38120 850,845(4) 9.4%
Kenneth E. Storey 10,125 *
All directors and named
executive officers as
a group 5,321,934(2)(3)(4) 46.3%
______________________________
(1) Assumes that all options or warrants held by the named
person that are exercisable within 60 days of October 31, 1995
have been exercised. The total number of shares of Common Stock
used in calculating the percentages assumes that no options or
warrants held by other persons are exercised.
(2) Includes 1,759,837 shares owned by Acorn Holdings, LLC, in
which Mr. Pettit is a member and is the chief manager, and
1,290,322 shares issuable upon the exercise of options granted to
Mr. Pettit under the Company's Employee Stock Option Plan
("ESOP").
(3) Based on information contained in a Schedule 13D filed by
Mr. May and May & Camp, Inc. with the SEC on June 14, 1993, as
most recently amended by an amendment filed with the SEC on May
3, 1995. Mr. May is Chairman of the Board of May & Camp, Inc.,
which is a registered investment advisor and broker/dealer.
Includes (a) 556,835 shares held directly by Mr. May and members
of his immediate family, (b) 75,000 shares issuable upon the
exercise of warrants held by Mr. May and members of his immediate
family, (c) 13,165 shares held directly by May & Camp, Inc., (d)
33,000 shares held by accounts over which May & Camp, Inc. has
discretionary authority and (d) 375,000 shares issuable upon the
exercise of warrants held in accounts over which May & Camp, Inc.
has discretionary authority.
(4) Includes 116,325 shares owned by Mr. Thompson's spouse,
227,185 shares held in trust for Mr. Thompson's children, as to
which shares Mr. Thompson disclaims beneficial ownership, 47,335
shares with respect to which Mr. Thompson shares voting and
dispositive power with his spouse and 463,000 shares issuable
upon the exercise of options granted to Mr. Thompson under the
ESOP.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP has served as the Company's independent
public accountants for the 1995 fiscal year and will continue to
do so for the fiscal year ending April 30, 1996 until and unless
changed by action of the Board of Directors. The Company's
independent public accountants disclaimed an opinion on the
Company's 1995 and 1994 consolidated financial statements. A
representative of Deloitte & Touche LLP is expected to be present
at the Special Meeting, will have the opportunity to make a
statement if he desires to do so, and is expected to be available
to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR ANNUAL MEETING
Because of the nature of the Special Meeting, the date for the
next Annual Meeting has not been established. If the Merger is
approved, no meeting will be held. However, if it is not
approved, the Board of Directors will make provisions for
presentation of proposals by shareholders at the next annual
meeting, provided that such proposals are submitted by eligible
shareholders who have complied with the relevant regulations of
the SEC. Shareholder proposals intended to be submitted for
presentation at the next annual meeting of shareholders of the
Company must be in writing and must be received by the Company at
its executive offices no later than 60 days prior to the date of
the Annual Meeting.
OTHER MATTERS
The Board of Directors knows of no other business to be
brought before the Special Meeting. If any other matters
properly come before the Special Meeting, the proxies will be
voted on such matters in accordance with the judgment of the
persons named as proxies therein, or their substitutes, present
and acting at the meeting.
The Company will furnish to each beneficial owner of Common
Stock entitled to vote at the Special Meeting, upon written
request to Jimmy H. Cavin, the Company's Executive Vice
President, Chief Financial Officer, Secretary and Treasurer, at
700 Colonial Road, Suite 100, Memphis, Tennessee 38117, telephone
(901) 683-7055, copies of the Company's Annual Report on Form 10-
KSB for the fiscal year ended April 30, 1995 and Quarterly Report
on Form 10-QSB for the three months ended July 31, 1995,
including the financial statements and financial statement
schedules filed therewith by the Company with the SEC.
BY ORDER OF THE BOARD OF DIRECTORS
JIMMY H. CAVIN,
Executive Vice President, Chief
Financial Officer Secretary and
Treasurer
Memphis, Tennessee
November 13, 1995
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is made
and entered into this 8th day of September, 1995 by and between
JSM Newco, Inc., a Tennessee corporation ("JSM"), JSM Newco
Merger Sub, Inc., a Tennessee corporation ("JSM Merger"), and
Seven Oaks International, Inc., a Tennessee corporation with its
principal executive offices at 700 Colonial Road, Suite 100,
Memphis, Tennessee 38117 ("Seven Oaks").
W I T N E S S E T H :
WHEREAS, the respective Boards of Directors of JSM and Seven
Oaks are of the opinion that the transactions described herein
are in the best interests of the parties to this Agreement and
their respective shareholders; and
WHEREAS, JSM has heretofore formed JSM Merger under the
Tennessee Business Corporation Act (the "Act") for the purpose of
effecting a merger (the "Merger") with and into Seven Oaks
pursuant to the applicable provisions of the Act so that Seven
Oaks will continue as the surviving corporation of the Merger;
and
WHEREAS, the respective Boards of Directors of JSM and Seven
Oaks have approved the Merger, and the terms and provisions of
this Agreement, pursuant to which (i) certain holders of
outstanding shares of the Common Stock of Seven Oaks, par value
$0.10 per share ("Seven Oaks Common Stock"), will retain some or
all of their Seven Oaks Common Stock and (ii) the remainder of
the holders of Seven Oaks Common Stock will be entitled to
receive cash in the amount of $0.31 for each issued and
outstanding share of Seven Oaks Common Stock held by such holder,
in the manner provided for herein; and
WHEREAS, the Merger is subject to the approval of the
shareholders of Seven Oaks and satisfaction of certain other
conditions described in this Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual representations, warranties, covenants, and agreements
herein contained and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I.
THE MERGER
1.01. Incorporation of JSM Merger. JSM has heretofore
organized JSM Merger under the Act and will provide it with
minimum capital required under the Act and cause it to adopt the
Plan of Merger referred to in Section 1.02 hereto. Promptly
after approval of this Agreement by its Board of Directors, JSM,
as sole shareholder of JSM Merger, will approve the Plan of
Merger in the manner provided in Section 48-21-104 of the Act.
1.02. The Merger. Subject to the terms and conditions of
this Agreement and the Plan of Merger attached hereto as Exhibit
I (the "Plan of Merger"), JSM Merger shall be merged with and
into Seven Oaks in accordance with the applicable provisions of,
and with the effect provided in, the Act. Seven Oaks shall be
the surviving corporation of the Merger (the "Surviving
Corporation") and the separate existence of JSM Merger shall
cease. Upon consummation of the Merger, the charter and by-laws
of JSM Merger prior to the Effective Time (as defined in Section
2.02) of the Merger shall constitute the charter and by-laws of
the Surviving Corporation immediately after the Effective Time.
The Plan of Merger provides for the terms of the Merger and the
mode of carrying the same into effect. The Merger shall be
consummated at the Effective Time.
1.03. Directors and Officers of the Surviving Corporation.
Following the Merger, (i) John Moll, J. Steven Moll, Peter R.
Pettit, Tommy R. Thompson and Frank A. Sullivan shall serve as
the directors of the Surviving Corporation and (ii) the persons
set forth on Schedule 1.03 shall serve in the offices identified
next to their names, each to serve thereafter in accordance with
the charter and by-laws of the Surviving Corporation.
1.04. Manner of Converting Shares.
(a) All of the shares of JSM Common Stock issued and
outstanding at the Effective Time shall remain issued and
outstanding after the Effective Time and shall be unaffected by
the Merger.
(b) All of the outstanding shares of Common Stock, no par
value per share, of JSM Merger at the Effective Time shall at the
Effective Time be exchanged for shares of the Surviving
Corporation on a one-for-one basis.
(c) The manner and basis of converting the shares of the
capital stock of Seven Oaks upon consummation of the Merger shall
be as follows:
(i) Seven Oaks Common Stock Conversion into Cash.
Except as otherwise provided in this Section 1.04(c), each share
of Seven Oaks Common Stock issued and outstanding at the
Effective Time shall, as of the Effective Time, by virtue of the
Merger and without any action on the part of the holder
thereof, be converted into the right to receive the sum of
thirty-one/one-hundredths cents ($0.31) cash.
(ii) Authorized and Unissued Shares. Any and all
authorized and unissued shares of Common Stock of Seven Oaks and
any Seven Oaks Subsidiary (as defined in Section 3.02) shall be
canceled and retired at the Effective Time, and no
consideration shall be issued in exchange therefor.
(iii) Surrender of Certificates.
(A) Prior to the Effective Time, Seven Oaks
agrees to appoint Trust Company Bank, Atlanta, Georgia or a
comparable firm (the "Agent") to act as agent in connection with
the Merger. Except as otherwise provided in Section 1.04(c)(ii)
or (v) hereto, from and after the Effective Time, each holder of
a certificate which immediately prior to the Effective Time
represented outstanding shares of Seven Oaks Common Stock (the
"Certificates") shall be entitled to exercise its right to
receive in exchange therefor (except as provided in Section
1.04(c)(iv) hereto), upon surrender thereof to the Agent, a check
for the aggregate amount of cash representing the consideration
which such holder has the right to receive under Section
1.04(c)(i) hereto in the Merger. Immediately prior to the
Effective Time, JSM will deliver to the Agent, in trust for the
benefit of the holders of Seven Oaks Common Stock, the sum of
$1,950,796 representing the aggregate consideration to the
holders of issued and outstanding Seven Oaks Common Stock
necessary to make the exchanges contemplated by Section
1.04(c)(i) hereto on a timely basis.
(B) Promptly after the Effective Time, the Agent
shall mail to each record holder of Seven Oaks Common Stock as of
the Effective Time, a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to
Certificates shall pass, only upon proper delivery of the
Certificates to the Agent) and instructions for use in effecting
the surrender of Certificates in exchange for the consideration
specified in Section 1.04(c)(i) hereto. Upon surrender to the
Agent of a Certificate, together with such letter of transmittal
duly executed, and any other required documents, the holder of
such Certificate shall be entitled to receive in exchange
therefor such cash consideration as set forth in the Plan of
Merger, and such Certificate shall forthwith be canceled. Until
surrendered in accordance with the provisions of this Section
1.04(c)(iii), each Certificate shall represent for all purposes
only the right to receive the cash consideration provided in
Section 1.04(c)(i) hereto, without any interest thereon.
(C) Any remaining sums of the aggregate cash
consideration specified in Section 1.04(c)(iii)(A) hereto held by
the Agent that remains unclaimed by the former shareholders of
Seven Oaks on the first anniversary of the Effective Time shall
be delivered by the Agent to JSM. Any former shareholders of
Seven Oaks who have not theretofore complied with this Section
1.04(c)(iii) shall thereafter look only to JSM for satisfaction
of their claim for the consideration set forth in the Plan of
Merger, without any interest thereon. Notwithstanding the
foregoing, JSM shall not be liable to any holder of shares of
Seven Oaks Common Stock for any moneys to be issued as
consideration for the Merger delivered to a public official
pursuant to any applicable abandoned property, escheat or similar
law.
(iv) Dissenting Seven Oaks Shareholders. Each
outstanding share of Seven Oaks Common Stock, the holder of which
has demanded and perfected his demand for payment of the fair
value of such share in accordance with Sections 48-23-101 through
48-23-302 of the Act (the "Dissenter Provisions") and has not
effectively withdrawn or lost his right to such payment, shall
not be converted into or represent a right to receive the
consideration specified in Section 1.04(c) hereto pursuant to the
foregoing provisions of this Section 1.04(c) and the Plan of
Merger, but shall represent only the rights granted with respect
to such dissenting shares of Seven Oaks Common Stock pursuant to
the Dissenter Provisions. Seven Oaks shall give prompt notice
upon receipt by Seven Oaks of any written demands for payment of
the fair value of shares of Seven Oaks Common Stock and of
withdrawals of such demands and any other written communications
provided in accordance with or pursuant to the Dissenter
Provisions (any shareholder duly making such a demand being
hereinafter called a "Dissenting Shareholder"); and JSM shall
promptly receive from Seven Oaks copies of such notice(s), and
have the right to participate in all negotiations and proceedings
with respect to any Dissenting Shareholder. Seven Oaks agrees
that it will not, except with the prior written consent of JSM,
make any determination of fair value, any payment with respect
to, or settle or offer to settle any matter arising out of, any
dissent, unless it is reasonably advised by its counsel that it
is required by law to act and that JSM is unreasonably
withholding its consent. Each Dissenting Shareholder, if any,
who becomes entitled to payment for his shares of Seven Oaks
Common Stock pursuant to the Dissenter Provisions shall receive
payment therefor from JSM (but only after the amount thereof
shall have been agreed upon or finally determined pursuant to the
Dissenter Provisions) and such dissenting shares of Seven Oaks
Common Stock shall be canceled. If any holder of shares of Seven
Oaks Common Stock who demands payment of the fair value of his
shares under the Dissenter Provisions shall effectively withdraw
or lose (through failure to perfect or otherwise) his right to
such payment at or prior to the Effective Time, the shares of
Seven Oaks Common Stock of such holder shall be converted into a
right to receive the cash consideration provided for in Section
1.04(c)(i) in accordance with the applicable provisions of this
Section 1.04(c) and the Plan of Merger.
(v) Notwithstanding Sections 1.04(c)(i) and (iii),
each person set forth on Schedule 1.04(c)(v) shall retain, and
not surrender, Certificates representing the number of
outstanding shares of Seven Oaks Common Stock set forth next to
their name on such schedule, and the shares represented by such
Certificates shall remain outstanding. These shares shall
represent the percentages of outstanding Common Stock of the
Surviving Corporation at the Effective Time set forth on Schedule
1.04(c)(v).
ARTICLE II.
CLOSING AND EFFECTIVE TIME
2.01. Time and Place of Closing. Unless otherwise mutually
agreed upon in writing by officers of JSM and Seven Oaks who are
authorized to execute this Agreement, the closing (the "Closing")
of the transactions contemplated herein will be held at 11:00
a.m. Memphis, Tennessee local time (or such other time as may be
agreed between the parties hereto), on such date as may be agreed
between the parties hereto (the "Closing Date"). The place of
Closing shall be at such place as may be agreed between the
parties hereto.
2.02. Effective Time. The Merger and other transactions
contemplated by this Agreement and the Plan of Merger shall
become effective on the date and at the time specified in the
Articles of Merger reflecting the Merger (the "Effective Time"),
which shall be filed by the Secretary of State of the State of
Tennessee as soon as all actions required to be taken at the
Closing have been completed. Unless the parties otherwise agree
in writing, the Articles of Merger shall specify that the
Effective Time shall be the time of their filing by the Secretary
of State.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF SEVEN OAKS
Seven Oaks represents and warrants to JSM, with such
exceptions as are stated in this Article III or set forth in the
disclosure schedules delivered by Seven Oaks simultaneously
herewith, as follows:
3.01. Organization and Authority.
(a) Seven Oaks is a corporation duly organized, validly
existing, and in good standing under the laws of the State of
Tennessee, is duly qualified to do business and is in good
standing in the states of the United States and foreign
jurisdictions where its ownership or leasing of material amounts
of property or the conduct of a material portion of its
business requires it to be so qualified, and has the corporate
power and authority to own its properties and assets, to carry on
its business as it is now being conducted, and to execute and
deliver this Agreement and the Plan of Merger (assuming Seven
Oaks shareholder approval of the Plan of Merger) and carry out
its obligations under each. Seven Oaks has in effect all
material federal, state, local, and foreign governmental
authorizations necessary for it to own or lease its properties
and assets and to carry on its business as it is now being
conducted.
(b) Seven Oaks previously has delivered to JSM complete and
correct copies of its charter and all amendments thereto to the
date hereof and its by-laws, as presently in effect, and Seven
Oaks is not in default in the performance, observation, or
fulfillment of any provision of its charter or, in any material
respect, of its by-laws.
(c) The minute books (containing the records of meetings of
the shareholders, the board of directors, and any committees of
the board of directors) of Seven Oaks and each Seven Oaks
Subsidiary are correct and complete in all material respects.
3.02. Seven Oaks Subsidiaries. For purposes of this
Agreement, the term "Seven Oaks Subsidiary" shall mean any
corporation, association, subsidiary, or other entity of which
Seven Oaks owns or controls, directly or indirectly, more than 5%
of the outstanding equity securities. Schedule 3.02 hereto sets
forth a correct and complete list of all Seven Oaks Subsidiaries
as of the date of this Agreement. No equity securities of any
Seven Oaks Subsidiary are or may become required to be issued
(other than to Seven Oaks) by reason of any options, warrants,
scrip, rights to subscribe to, calls, or commitments of any
character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock
of any Seven Oaks Subsidiary; and there are no contracts,
commitments, understandings, or arrangements by which any Seven
Oaks Subsidiary is bound to issue (other than to Seven Oaks)
additional shares of its capital stock or options, warrants, or
rights to purchase or acquire any additional shares of its
capital stock. All of the shares of capital stock of each Seven
Oaks Subsidiary are fully paid and nonassessable and, to the
extent owned by Seven Oaks, are owned free and clear of any
claim, lien, encumbrance, or agreement of any kind with respect
thereto. Each Seven Oaks Subsidiary is duly organized, validly
existing, and in good standing under the laws of its state of
incorporation; is duly qualified to do business and is in good
standing in the states of the United States and foreign
jurisdictions where its ownership or leasing of material amounts
of property or the conduct of a material portion of its business
requires it to be so qualified, has the corporate power and
authority necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted;
and has in effect all material federal, state, local, and foreign
governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now
being conducted. Neither Seven Oaks nor any Seven Oaks
Subsidiary controls directly or indirectly or has any direct or
indirect equity participation in any corporation, partnership,
trust or other business associations other than those set forth
on Schedule 3.02.
3.03. Capitalization of Seven Oaks. As of the date of this
Agreement, the authorized capital stock of Seven Oaks consists of
20,000,000 shares of Seven Oaks Common Stock, $0.10 par value, of
which 8,639,572 shares are issued and outstanding and 11,360,428
authorized and unissued shares. All outstanding shares of Seven
Oaks Common Stock have been duly issued and are validly
outstanding, fully paid, and nonassessable. None of the issued
and outstanding shares of Seven Oaks Common Stock have been
issued in violation of any preemptive right of the current or
former shareholders of Seven Oaks. As of the date of this
Agreement, Seven Oaks has reserved an aggregate of 5,635,322
shares of Seven Oaks Common Stock for issuance in connection with
outstanding stock options and warrants to purchase Seven Oaks
Common Stock. Except as set forth in Schedule 3.03 hereto, as of
the date of this Agreement, there are no shares of capital stock
or other equity securities of Seven Oaks outstanding and no
outstanding options, warrants, scrip, rights to subscribe to,
calls, or commitments of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares
of the capital stock of Seven Oaks, or contracts, commitments,
understandings, or arrangements by which Seven Oaks was or may
become bound to issue additional shares of its capital stock or
options, warrants, or rights to purchase or acquire any
additional shares of its capital stock. As of the date of this
Agreement, except as set forth in Schedule 3.03 hereto, there are
no contracts, commitments, understandings, or arrangements by
which Seven Oaks or any Seven Oaks Subsidiary is or may become
bound to transfer any shares of the capital stock or other
securities of any Seven Oaks Subsidiary, except for a transfer to
Seven Oaks or JSM.
3.04. Authorization.
(a) The execution, delivery, and performance of this
Agreement and the Plan of Merger by Seven Oaks and the
consummation of the transactions contemplated hereby and thereby
have been duly authorized by the Board of Directors of Seven Oaks
and, except for the approval of this Agreement and the Plan of
Merger by Seven Oaks' shareholders (in their capacity as
shareholders and not as directors), no other corporate
proceedings on the part of Seven Oaks are necessary to authorize
this Agreement or the Plan of Merger and the transactions
contemplated hereby and thereby. This Agreement is a valid and
binding obligation of Seven Oaks, enforceable against it in
accordance with its terms (except as such enforceability may be
limited by legal and equitable limitations or the availability of
specific performance and other equitable remedies, and by laws or
court decisions which may be applicable limiting the
enforceability of indemnification provisions).
(b) Except as otherwise noted in Schedule 3.04 hereto,
neither the execution, delivery, and performance by Seven Oaks of
this Agreement or the Plan of Merger, nor the consummation of the
transactions contemplated hereby and thereby, nor compliance by
Seven Oaks with any of the provisions hereof or thereof, will (i)
violate, conflict with, result in a breach of any provision of,
constitute a default (or an event that, with or without notice or
lapse of time or both, would constitute a default) under, result
in the termination of, accelerate the performance required by, or
result in a right of termination or acceleration, or the creation
of any lien, security interest, charge, or encumbrance upon any
of the properties or assets of Seven Oaks, under any of the
terms, conditions, or provisions of:
(x) its charter or by-laws; or
(y) any agreement or instrument set forth on a schedule
to this Agreement; or
(z) or any other note, bond, mortgage, indenture, deed
of trust, license, lease, agreement, or other instrument or
obligation to which Seven Oaks is a party, or by which Seven Oaks
may be bound, or to which Seven Oaks or any Seven Oaks Subsidiary
or the properties or assets of any of them may be subject, and
that would, in any such event, have a material adverse effect on
the financial condition or results of operations of Seven Oaks or
any Seven Oaks Subsidiary
or (ii) subject to compliance with the statutes, rules and
regulations to which Section 3.04(c) refers, violate any
judgment, ruling, order, writ, injunction or decree, or, to Seven
Oaks' knowledge, any constitution, statute, rule, regulation or
other restriction of any government or government agency
applicable to Seven Oaks or any Seven Oaks Subsidiaries or any of
their respective properties or assets.
(c) Other than (i) any applicable requirements of the
Securities Exchange Act of 1934 and the regulations
promulgated thereto, as amended (the "Exchange Act") and any
applicable filings under state securities, "Blue Sky" or takeover
laws, the rules of the National Association of Securities
Dealers, Inc. ("NASD"), the NASD OTC Bulletin Board, (ii) the
filing and recordation of articles of merger as required by the
Act, (iii) those required filings, registrations, consents and
approvals listed on Schedule 3.04 hereto, (iv) notices to or
filings with the Internal Revenue Service (the "IRS") or the
Pension Benefit Guaranty Corporation (the "PBGC") with respect to
any employee benefit plans and (v) such other filings,
registrations, consents, approvals, permits and authorizations
which, if not obtained or made, will not have a material adverse
effect on the financial condition or results of operations of
Seven Oaks or any Seven Oaks Subsidiary, no notice to, filing
with, authorization of, exemption by, or consent or approval of
any public body or authority is necessary for the consummation by
Seven Oaks of the transactions contemplated by this Agreement and
the Plan of Merger.
3.05. Regulatory Reports; Seven Oaks Consolidated Financial
Statements. Except as set forth on Schedule 3.05, since
January 1, 1992, Seven Oaks and all Seven Oaks Subsidiaries have
timely filed all reports, registrations, information statements,
and all other documents, together with any amendments required to
be made thereto, required to be filed with the appropriate state
and federal agencies having jurisdiction over them, including the
Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"), and
the Exchange Act (collectively, the "Reports," and in the case of
Seven Oaks, the "Seven Oaks Reports"). Each of the Reports has
complied, or will comply, as the case may be, with the applicable
provisions of the Securities Act and the Securities Exchange Act,
in all material respects. Seven Oaks has heretofore furnished to
JSM the audited consolidated balance sheets of Seven Oaks and the
Seven Oaks Subsidiaries at April 30, 1993, 1994 and 1995 and the
unaudited balance sheets of Seven Oaks and the Seven Oaks
Subsidiaries at July 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity, and
changes in financial position for the periods then ended, and the
notes thereto. Such financial statements are collectively
referred to herein as the "Seven Oaks Consolidated Financial
Statements." Except as set forth in Schedule 3.05 hereto, the
Seven Oaks Consolidated Financial Statements for April 30, 1995
and July 31, 1995, fairly presented, or will fairly present, as
the case may be, the financial position of Seven Oaks and the
Seven Oaks Subsidiaries as at the dates mentioned and the results
of operations and changes in financial position for the period
then ended. Each of the financial statements (including the
related notes and schedules) included in the Seven Oaks Reports
and for the quarter ended July 31, 1995 (i) complied as to form
with the applicable accounting requirements and rules and
regulations of the SEC, and (ii) was prepared in accordance with
generally accepted accounting principles consistently applied
during the periods presented, except as otherwise noted therein
and subject to normal year-end and audit adjustments in the case
of any unaudited interim financial statements. Except as set
forth in Schedule 3.05 hereto, the Seven Oaks Consolidated
Financial Statements for the years ended April 30, 1993, 1994 and
1995 and the quarter ended July 31, 1995 accurately present the
revenues and expenses of Seven Oaks as at the dates mentioned and
the results of operations. Except as set forth in Schedule 3.05
hereto, as of their respective dates, the Reports and the Seven
Oaks Consolidated Financial Statements did not, or will not, as
the case may be, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.06. Absence of Certain Changes or Events. Except as set
forth in the Seven Oaks Reports or the Seven Oaks Consolidated
Financial Statements filed prior to the date of this Agreement or
as otherwise disclosed in Schedule 3.06 hereto, since April 30,
1995, there has not been, occurred, or arisen: (i) any damage,
destruction, loss, or casualty, whether or not covered by
insurance, which has had or is reasonably likely to have a
material adverse effect on the business of Seven Oaks or any
Seven Oaks Subsidiary; (ii) any declaration, setting aside, or
payment of any dividend or distribution (whether in cash stock,
or property) in respect of the Seven Oaks Common Stock (other
than regular cash dividends) or any redemption or other
acquisition of the Seven Oaks Common Stock by Seven Oaks, or any
split, combination, or reclassification of shares of Seven Oaks
Common Stock declared or made; (iii) any extraordinary losses
suffered not adequately reserved against, whether or not in the
ordinary course of business; (iv) any material assets mortgaged,
pledged, or subjected to any lien, charge, or other encumbrance;
(v) any agreement to do any of the foregoing; or (vi) any other
event, development, or condition of any character including any
change in results of operations, financial condition, method of
accounting or accounting practices, nature of the business, or
manner of conducting the business of Seven Oaks that has had, or
is reasonably likely to have, a material adverse effect on the
financial condition or results of operations of Seven Oaks or any
Seven Oaks Subsidiary.
3.07. Merger Proxy Statement. None of the information with
respect to Seven Oaks or the Merger to be included in the proxy
statement to be distributed to the shareholders of Seven Oaks in
connection with the special meeting of shareholders to consider
and vote upon the Merger (the "Merger Proxy Statement") will, in
the case of the Merger Proxy Statement or any amendments thereof
or supplements thereto, at the time of the mailing of the Merger
Proxy Statement or any amendments thereof or supplements thereto,
and at the time of the special meeting of the shareholders of
Seven Oaks, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The
Merger Proxy Statement will comply in all material respects with
the provisions of the Exchange Act and the rules and regulations
promulgated thereunder, except that no representation is made by
Seven Oaks with respect to information supplied in writing by JSM
or any affiliate of JSM for inclusion in the Merger Proxy
Statement.
3.08. Tax Matters.
(a) All federal, state, local, and foreign tax returns
required to be filed by or on behalf of Seven Oaks and all Seven
Oaks Subsidiaries have been timely filed or requests for
extensions have been timely filed, granted, and have not expired
for periods ending on or before December 31, 1994, and all
returns filed are complete and accurate. All taxes shown on
filed returns have been paid. As of the date hereof, there is no
audit examination, deficiency, or refund litigation or matter in
controversy with respect to any taxes that might result in a
determination adverse to Seven Oaks except as indicated in
Schedule 3.08 hereto. All taxes, interest, additions, and
penalties due with respect to completed and settled examinations
or concluded litigation have been paid. No federal income tax
returns for Seven Oaks were examined by the IRS in 1994 and 1995.
(b) Except as set forth in Schedule 3.08 hereto, neither
Seven Oaks nor any Seven Oaks Subsidiary has executed an
extension or waiver of any statute of limitations on the
assessment or collection of any tax due that is currently in
effect.
(c) To the extent any federal, state, local, or foreign
taxes are due from Seven Oaks through and including the Effective
Time, adequate provision on an estimated basis has been made for
the payment of such taxes except as set forth in Schedule 3.08
hereto.
(d) Deferred taxes of Seven Oaks and the Seven Oaks
Subsidiaries have been reasonably estimated as shown on Schedule
3.08 hereto.
(e) Each of Seven Oaks and the Seven Oaks Subsidiaries is
in material compliance with, and its records contain all
information and documents (including, without limitation,
properly completed IRS Forms W-8 and Forms W-9) necessary to
comply in all material respects with, all applicable information
reporting and tax withholding requirements under federal, state,
local and foreign laws;
(f) Each of Seven Oaks and the Seven Oaks Subsidiaries has
collected or withheld all taxes required to be collected or
withheld by it, and all such taxes have been paid to the
appropriate governmental authority in the proper manner or set
aside in appropriate accounts for future payment when due.
3.09. Legal Proceedings. Except as set forth in Schedule
3.09 hereto, neither Seven Oaks nor any Seven Oaks Subsidiary is
a party to or has received written notice of any pending or
threatened claim, action, suit, investigation, or proceeding
("Legal Proceedings"), nor to the knowledge of Seven Oaks are any
Legal Proceedings otherwise threatened or unasserted but
considered by Seven Oaks to be probable of assertion against any
of them, nor is any of them subject to any order, judgment, or
decree ("Orders") which, if finally determined adversely, might
have, either individually or in the aggregate, a material adverse
effect on the business, properties, financial condition, or
results of operations of Seven Oaks or any Seven Oaks Subsidiary.
Neither Seven Oaks or any Seven Oaks Subsidiary is subject to any
order, judgment, decree or obligation that would materially limit
the ability of Seven Oaks or any Seven Oaks Subsidiary to operate
their respective businesses in the ordinary course.
3.10. Compliance with Laws. Except as set forth in Schedule
3.10 hereto, Seven Oaks and all Seven Oaks Subsidiaries have all
material permits, licenses, certificates of authority, orders,
and approvals of, and have made all filings, applications, and
registrations with, federal, state, local, and foreign
governmental or regulatory bodies that are required to permit
them to carry on their respective businesses as presently
conducted; all such material permits, licenses, certificates of
authority, orders, and approvals are in full force and effect;
and to the knowledge of Seven Oaks no suspension or cancellation
of any of them is threatened. Except for statutory or regulatory
restrictions of general application and as disclosed on Schedule
3.10 hereto, no federal, state, local, or other governmental
authority has placed any restrictions on the business of Seven
Oaks or any Seven Oaks Subsidiary. Except as disclosed in
Schedule 3.10 hereto, Seven Oaks has received no written notice
of any investigation or review by any governmental entity with
respect to Seven Oaks or any Seven Oaks Subsidiary and, to the
knowledge of Seven Oaks, no such investigation or review is
pending or threatened. Neither Seven Oaks nor any Seven Oaks
Subsidiary is, to the knowledge of Seven Oaks, and except as
disclosed in Schedule 3.10 hereto, in violation of any applicable
law or regulation.
3.11. Environmental Matters. Except as set forth on Schedule
3.11 neither Seven Oaks nor any of the Seven Oaks Subsidiaries is
in violation of or subject to any existing, pending or, to Seven
Oaks' knowledge, threatened investigation or inquiry by any
federal, state or local governmental authority or any response
costs or remedial obligations under any applicable laws or
regulations pertaining to the health or the environment or
hazardous substances as such are defined in the federal
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Hazardous Materials Transportation
Act, the Resource Conservation and Recovery Act, or any related
regulations thereto, or any similar laws or regulations of any
state or subdivision thereof (collectively, the "Environmental
Laws"). Neither Seven Oaks nor any of the Seven Oaks
Subsidiaries has obtained or is required to obtain any permits,
licenses or similar authorizations to construct, occupy, operate
or use any buildings, improvements, fixtures and equipment
forming a part of their business by reason of any applicable
Environmental Laws. Seven Oaks has taken all steps necessary to
determine and has determined, to the best of its knowledge, that
no oil, toxic or hazardous substances or solid wastes (all within
the meaning of the applicable Environmental Laws) have been
disposed of or otherwise released by Seven Oaks or any of the
Seven Oaks Subsidiaries. The operation and ownership by Seven
Oaks and the Seven Oaks Subsidiaries of Seven Oaks' business has
not resulted in the disposal or other release of any oil, toxic
or hazardous substances or solid waste.
3.12. Labor Matters. Except as set forth on Schedule 3.12,
Seven Oaks and each of the Seven Oaks Subsidiaries is in
compliance with all federal, state or other applicable laws
respecting employment and employment practices, terms and
conditions of employment and wages and hours, and has not and is
not engaged in any unfair labor practice. No unfair labor
practice complaint against Seven Oaks or any of the Seven Oaks
Subsidiaries is pending or is threatened. Seven Oaks is not a
party to any collective bargaining agreement and no collective
bargaining agreement is currently being negotiated by Seven Oaks.
There is no labor strike, dispute, slowdown or stoppage or union
organization effort pending or, to the best of Seven Oaks'
knowledge, threatened against Seven Oaks or any of the Seven Oaks
Subsidiaries. Neither Seven Oaks nor any of the Seven Oaks
Subsidiaries has experienced any material labor difficulty during
the last three years.
3.13. Employee Benefit Plans.
(a) Seven Oaks has delivered to JSM prior to the execution
of this Agreement copies of all material pension, retirement,
profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus or other material
incentive plan, any other material written employee program,
arrangement or agreement, whether arrived at through collective
bargaining or otherwise, any material medical, vision, dental or
other health plan, any life insurance plan, or any other material
employee benefit plan or fringe benefit plan, including, without
limitation, any "employee benefit plan" as that term is defined
in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by Seven Oaks
or affiliates thereof or any corporation which is or was a member
of a controlled group of corporations which included Seven Oaks
for the benefit of employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries and
under which employees, retirees, dependents, spouses, directors,
independent contractors or other beneficiaries are eligible to
participate (collectively, the "Seven Oaks Benefit Plans") and
the most recent actuarial report for any Seven Oaks Benefit Plan
that is a defined benefit pension plan or funded welfare benefit
plan. Any of the Seven Oaks Benefit Plans which is an "employee
pension benefit plan," as that term is defined in Section 3(2) of
ERISA, is referred to herein as an "ERISA Plan." No Seven Oaks
Benefit Plan is or has been a multi-employer plan within the
meaning of Section 3(37) of ERISA.
(b) All Seven Oaks Benefit Plans are in compliance with the
applicable provisions (including, without limitation, any funding
requirements or limitations) of ERISA, the Internal Revenue Code
of 1986, as amended (the "Code") and any other applicable laws,
the breach or violation of which could result in a material
liability to Seven Oaks.
(c) No Seven Oaks ERISA Plan which is a defined benefit
pension plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, and the present fair
market value of the assets of any such plan exceeds the plan's
"benefit liabilities," as that term is defined in Section
4001(a)(16) of ERISA, when determined under actuarial factors
that would apply if the plan terminated in accordance with all
applicable legal requirements.
(d) Seven Oaks has reserved unto its Board of Directors, or
a committee or officer duly authorized by its Board of Directors,
the authority to amend or terminate the Seven Oaks Benefit Plans
at any time without limitation, and neither the consideration or
implementation of the Merger contemplated under this Agreement
nor the amendment or termination of any or all of the Seven Oaks
Benefit Plans on or after the date of this Agreement will
increase (i) Seven Oaks' obligation to make contributions or any
other payments to fund benefits accrued under such plans as of
the date of this Agreement, or (ii) the benefits accrued or
payable with respect to any participant under such plans.
3.14. Material Contracts. As of the date of this Agreement,
except for this Agreement and the agreements referred to in
Schedule 3.14 hereto and in the Seven Oaks Reports, neither Seven
Oaks nor any Seven Oaks Subsidiary is a party to or is bound by
(a) any material agreement, arrangement, or commitment, (b) any
agreement, arrangement, or commitment relating to the employment,
election, or retention in office of any person; or (c) any
contract, agreement, or understanding with any labor union. True
copies of all agreements and other instruments to which Schedule
3.14 hereto refers have been or will be furnished to JSM to the
extent requested.
3.15. Contract Defaults. Neither Seven Oaks nor any Seven
Oaks Subsidiary is in default under any contract, agreement,
commitment, arrangement, lease, insurance policy, or other
instrument to which they are a party or by which their respective
assets, business, or operations may be bound or affected or under
which they or their respective assets, business, or operations
receive benefits, and there has not occurred any event that with
the lapse of time or the giving of notice or both would
constitute such a default, which default would have a material
adverse affect on the financial condition or results of
operations of Seven Oaks or any Seven Oaks Subsidiary, and to the
knowledge of Seven Oaks no other party to any such instrument is
in default thereunder.
3.16. Brokers and Finders. Neither Seven Oaks nor any of its
respective officers, directors, or employees, has employed any
broker or finder or incurred any liability for any financial
advisory fees (except as to Mercer Capital, with respect to its
opinion regarding the fairness of the consideration for the
Merger to the shareholders of Seven Oaks), whose fee shall be
paid by Seven Oaks, brokerage fees, commissions, or finder's fees
and no broker or finder has acted directly or indirectly for
Seven Oaks in connection with this Agreement or any of the
transactions contemplated hereby.
3.17. Transactions With Affiliates. Except as set forth in
Schedule 3.17 hereto, since April 30, 1995, Seven Oaks has not,
in the ordinary course of business or otherwise, purchased,
leased or otherwise acquired any material property or assets or
obtained any material services from, or sold, leased or otherwise
disposed of any material property or assets or provided any
material services to (except with respect to remuneration for
services rendered as a director, officer or employee of one or
more of Seven Oaks) (a) any holder of 5% or more of the voting
securities of Seven Oaks, (b) any director or executive officer
of Seven Oaks or any of the Seven Oaks Subsidiaries, (c) any
person, firm or corporation that directly or indirectly controls,
is controlled by or is under common control with Seven Oaks or
any of the Seven Oaks Subsidiaries or (d) any member of the
immediate family of any of such persons (collectively, for
purposes of this Section, an "Affiliate"). Except as set forth
in Schedule 3.17 hereto, (a) the material contracts of Seven Oaks
do not include any obligation or commitment between Seven Oaks or
any of the Seven Oaks Subsidiaries and any Affiliate, and (b) the
assets of Seven Oaks do not include any receivable or other
obligation or commitment from an Affiliate to Seven Oaks or any
of the Seven Oaks Subsidiaries.
3.18. Insurance. Listed on Schedule 3.18 are all property,
casualty and such other major insurance policies (the "Existing
Policies") currently covering Seven Oaks and each of the Seven
Oaks Subsidiaries. The Existing Policies are in full force and
effect and all premiums required to be paid thereunder have been
paid in full. Seven Oaks has not received any notice that any
coverage under any Existing Policies will be terminated or not
renewed.
3.19. Absence of Undisclosed Liabilities. Seven Oaks does
not have any liabilities or obligations of any kind, whether
absolute, accrued, asserted or unasserted, contingent or
otherwise, except for liabilities disclosed on the consolidated
balance sheet of Seven Oaks prepared as of April 30, 1995, or
that were incurred after the date of such balance sheet in the
ordinary course of business and consistent with past practices,
and except for any such liabilities or obligations which,
individually or in the aggregate (i) would not have a material
adverse effect on Seven Oaks and (ii) exceed $10,000.
3.20. Accuracy of Information. This Agreement, and those
other documents relating to Seven Oaks and the Seven Oaks
Subsidiaries and their respective businesses provided by Seven
Oaks or their employees or agents to JSM in connection with the
transactions contemplated herein, when considered together, do
not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained
therein not misleading.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF JSM
JSM represents and warrants to Seven Oaks, with such
exceptions as are stated in this Article IV or set forth in the
disclosure schedules delivered by JSM simultaneously herewith, as
follows:
4.01. Organization and Authority. JSM is a corporation duly
organized, validly existing, and in good standing under the laws
of the State of Tennessee, and JSM is duly qualified to do
business and is in good standing in the states of the United
States and foreign jurisdictions where its ownership or leasing
of material amounts of property or the conduct of a material
portion of its business requires it to be so qualified, and has
the corporate power and authority to own its properties and
assets, and to carry on its business as it is now being
conducted, and to execute and deliver this Agreement and the Plan
of Merger and carry out its obligations under each. JSM has in
effect all material federal, state, local, and foreign
governmental authorizations necessary for it to own or lease its
properties and assets and to carry on its business as it is now
being conducted.
4.02. Capitalization of JSM. As of the date of this
Agreement, the authorized capital stock of JSM consists of (a)
10,000 shares of Common Stock, no par value, of which 1,000
shares are issued and outstanding. All outstanding shares of
stock have been duly issued and are validly outstanding, fully
paid, and nonassessable. As of the date of this Agreement, there
are no outstanding options to purchase any shares of JSM Common
Stock. Other than to John Moll or Steve Moll, as of the date of
this Agreement, there are no shares of capital stock or other
equity securities of JSM outstanding and no outstanding options,
warrants, scrip, rights to subscribe to, calls, or commitments of
any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, shares of the capital stock
of JSM, or contracts, commitments, understandings, or
arrangements by which JSM was or may become bound to issue
additional shares of its capital stock or options, warrants, or
rights to purchase or acquire any additional shares of its
capital stock. Other than to John Moll or Steve Moll, as of the
date of this Agreement, there are no contracts, commitments,
understandings, or arrangements by which JSM or any JSM
Subsidiary is or may become bound to transfer any shares of the
capital stock or other securities of any JSM Subsidiary, except
for a transfer to JSM.
4.03. Authorization.
(a) The execution, delivery, and performance of this
Agreement and Plan of Merger by JSM and JSM Merger and the
consummation of the transactions contemplated hereby and thereby
have been duly authorized by the Boards of Directors of JSM and
JSM Merger and no other corporate proceedings on the part of JSM
and JSM Merger are necessary to authorize this Agreement or the
Plan of Merger and the transactions contemplated hereby and
thereby. This Agreement is the valid and binding obligation of
JSM and JSM Merger enforceable against them in accordance with
its terms (except as such enforceability may be limited by legal
and equitable limitations on the availability of specific
performance and other equitable remedies, and by laws or court
decisions which may be applicable limiting the enforceability of
indemnification provisions).
(b) Neither the execution, delivery, and performance by JSM
and JSM Merger of this Agreement or the Plan of Merger, nor the
consummation of the transactions contemplated hereby and thereby,
nor compliance by JSM and JSM Merger with any of the provisions
hereof or thereof, will violate, conflict with, result in a
breach of any provision of, constitute a default (or an event
that, with or without notice or lapse of time or both, would
constitute a default) under, result in the termination of,
accelerate the performance required by, or result in a right of
termination or acceleration, or the creation of any lien,
security interest, charge, or encumbrance upon any of the
properties or assets of JSM and JSM Merger, under any of the
terms, conditions, or provisions of:
(x) its charter or by-laws; or
(y) any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement, or other instrument or
obligation to which JSM is a party, or by which JSM may be bound
and that would, in any such event, have a material adverse effect
on the financial condition or results of operations of JSM or any
JSM Subsidiary,
4.04. Brokers and Finders. Neither JSM nor any of its
respective officers, directors, or employees, have employed any
broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees, and
no broker or finder has acted directly or indirectly for JSM in
connection with this Agreement or any of the transactions
contemplated hereby.
4.05. Accuracy of Information. This Agreement, and those
other documents relating to JSM and JSM Subsidiaries and their
respective businesses provided by JSM or their employees or
agents to JSM in connection with the transactions contemplated
herein, when considered together, do not contain an untrue
statement of a material fact or omit to state a material fact
necessary to make the statements contained therein not
misleading.
ARTICLE V.
COVENANTS
5.01. Covenants of Seven Oaks. During the period commencing
on the date hereof and continuing until the earlier of the
Effective Time or the termination of this Agreement, Seven Oaks
agrees (except as expressly contemplated by this Agreement or to
the extent that JSM shall otherwise consent in writing) that:
(a) Seven Oaks will carry on its business in, and only in,
the usual, regular, and ordinary course in substantially the same
manner as heretofore conducted and, to the extent consistent with
such business, use all reasonable efforts to preserve intact its
present business organizations and assets, keep available the
services of its present officers and employees, and preserve its
relationships with customers, suppliers, and others having
business dealings with it.
(b) Seven Oaks will not declare any dividends on or make
other distributions in respect of the Seven Oaks Common Stock.
Seven Oaks will not amend its charter or by-laws as in effect on
the date hereof.
(c) Seven Oaks will not issue, grant, pledge, or sell, or
authorize or propose the issuance of, or split, combine,
reclassify or redeem, purchase, or otherwise acquire or propose
the purchase of, any shares of its capital stock or any class of
securities convertible into, or rights, warrants, or options
(including employee stock options) to acquire, or enter into any
arrangement or contract with respect to the issuance of, any such
shares or other convertible securities or make any other change
in its equity capital structure or issue any stock appreciation
rights.
(d) Seven Oaks will use its best efforts to comply promptly
with all requirements which federal or state law may impose on it
with respect to the Merger and will promptly cooperate with and
furnish information to JSM in connection with any such
requirements imposed upon JSM or Seven Oaks in connection with
the Merger.
(e) Seven Oaks will use its, and will cause the Seven Oaks
Subsidiaries to use their, best efforts to obtain (and to
cooperate with JSM in obtaining) any consent, authorization, or
approval of, or any exemption by, any governmental authority or
agency, or other third party, required to be obtained or made by
Seven Oaks (or by JSM) in connection with the Merger or the
taking of any action contemplated by this Agreement. Seven Oaks
will promptly advise JSM of any notice, complaint, or other
communication which it receives from any regulatory agency with
respect to any of the transactions contemplated in this
Agreement.
(f) Seven Oaks will not acquire direct or indirect control
over any other corporation, association, firm, or organization,
other than in connection with the creation of new wholly-owned
subsidiaries organized to conduct or continue activities
otherwise permitted by this Agreement.
(g) Seven Oaks will not sell, lease, or otherwise dispose
of or encumber any of its assets which are material, individually
or in the aggregate, to the business of Seven Oaks.
(h) Seven Oaks will not assume, guarantee, endorse, or
otherwise become liable, whether directly, contingently, or
otherwise, for the obligation of any other party.
(i) Seven Oaks will not make any loans, advances, or
capital contributions to, or investments in, any other person or
entity.
(j) Seven Oaks will not make any capital expenditures
except for capital expenditures authorized prior to the date of
this Agreement or that are the subject of binding contractual
commitments entered into prior to the date of this Agreement,
and, in each case, which are identified on Schedule 5.01(j).
(k) Seven Oaks will not incur any additional debt
obligation or other obligation for borrowed money (other than in
replacement of existing short term debt with other short term
debt) in excess of the remaining borrowing capacity under its
Line of Credit on the date hereof.
(l) Seven Oaks will not grant any increase in compensation
to its employees as a class; pay any bonus or accelerate or
effect any change in any employee or retirement benefits for any
employees or officers (unless such change is required by
applicable law or regulation).
(m) Seven Oaks will not amend any existing employment
contract (unless such amendment is required by law or regulation)
or enter into any new employment contract with any person.
(n) Seven Oaks will not adopt any new employee benefit plan
or make any change in or to any existing employee benefit plan
other than any such change that is required by law or regulation
or that, in the opinion of counsel, is necessary or advisable to
maintain the tax-qualified status of any such plan.
(o) Seven Oaks will promptly advise JSM orally and in
writing of any change in the business of Seven Oaks which is or
may reasonably be expected to be materially adverse to either
Seven Oaks or any Seven Oaks Subsidiary.
(p) Seven Oaks will not take, agree to take, or knowingly
permit to be taken any action, or do or knowingly permit to be
done anything in the conduct of the business of Seven Oaks, or
otherwise, which would (i) be contrary to or in breach of any of
the terms or provisions of this Agreement, (ii) cause any of the
representations of Seven Oaks contained herein to be or become
untrue in any material respect, (iii) adversely affect the
ability of either Seven Oaks or JSM to obtain any necessary
approvals of governmental authorities or other third parties
required for the transactions contemplated hereby or (iv)
adversely affect the ability of Seven Oaks to perform its
covenants and agreements under this Agreement and the Plan of
Merger.
(q) As promptly as possible following the close of each
month which may occur prior to the Closing Date, Seven Oaks will
provide JSM a true copy of its financial statements for such
month, including a balance sheet and income statement, and any
supporting information reasonably requested by JSM.
(r) Seven Oaks will not enter into any contract or
agreement other than in connection with the transactions
contemplated by this Agreement.
(s) Seven Oaks will not effect any change in accounting
policies, practices or procedures, except to the extent required
by applicable accounting pronouncements.
(t) Seven Oaks will not make any tax election or settle or
compromise any material federal, state, local or foreign income
tax liability; notwithstanding the foregoing, Seven Oaks, may pay
up to $10,000 in connection with the settlement of the matter
referred to in Schedule 3.08.
(u) Seven Oaks will not hold any meeting of its
shareholders except to the extent required by the request of the
shareholders entitled to call a meeting under such its Bylaws or
the Act.
(v) Seven Oaks shall use its best efforts to cause to be
delivered to JSM a letter of Deloitte & Touche, dated a date
within two business days before the Closing Date, in form and
substance reasonably satisfactory to JSM and customary in scope,
relating to the unaudited financial statements of Seven Oaks for
the quarter ended July 31, 1995 and for subsequent periods and
substance for letters delivered by independent public accountants
in connection with transactions like the transactions
contemplated by this Agreement.
5.02. Covenants of JSM. During the period commencing on the
date hereof and continuing until the earlier of the Effective
Time or the termination of this Agreement, JSM agrees (except as
expressly contemplated by this Agreement or to the extent that
Seven Oaks shall otherwise consent in writing) that:
(a) JSM will use its best efforts to comply promptly with
all requirements which federal or state law may impose on it with
respect to the Merger and will promptly cooperate with and
furnish information to Seven Oaks in connection with any such
requirements imposed upon Seven Oaks or JSM in connection with
the Merger.
(b) JSM will use its, and will cause the JSM Subsidiaries
to use their, best efforts to obtain (and to cooperate with Seven
Oaks in obtaining) any consent, authorization, or approval of, or
any exemption by, any governmental authority or agency, or other
third party, required to be obtained or made by JSM (or by Seven
Oaks) in connection with the Merger or the taking of any action
contemplated by this Agreement. JSM will promptly advise Seven
Oaks of any notice, complaint, or other communication which it
receives from any regulatory agency with respect to any of the
transactions contemplated in this Agreement.
(c) JSM will promptly advise Seven Oaks orally and in
writing of any change in the business of JSM which is or may
reasonably be expected to be materially adverse to either JSM or
any JSM Subsidiary.
(d) JSM will not take, agree to take, or knowingly permit
to be taken any action, or do or knowingly permit to be done
anything in the conduct of the business of JSM, or otherwise,
which would (i) be contrary to or in breach of any of the terms
or provisions of this Agreement, (ii) cause any of the
representations of JSM contained herein to be or become untrue in
any material respect, (iii) adversely affect the ability of
either JSM or Seven Oaks to obtain any necessary approvals of
governmental authorities or other third parties required for the
transactions contemplated hereby, or (iv) adversely affect the
ability of JSM to perform its covenants and agreements under this
Agreement and the Plan of Merger.
5.03. Notice; Efforts to Remedy. Each party hereto shall
promptly give written notice to the other party hereto upon
becoming aware of the impending occurrence of any event which
would cause or constitute a breach of any of the representations,
warranties, or covenants of the first such party contained or
referred to in this Agreement or the Plan of Merger and shall use
its best efforts to prevent or promptly remedy the same.
ARTICLE VI.
ADDITIONAL AGREEMENTS
6.01. Investigation; Confidentiality. Prior to the Effective
Time, Seven Oaks and JSM may make or cause to be made such
investigation, if any, of the business and properties of the
other and of the other's financial and legal condition as such
party reasonably deems necessary or advisable to familiarize
itself and its advisers with such business, properties, and other
matters, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not
interfere unnecessarily with normal operations. Seven Oaks and
JSM each agrees to furnish the other and the other's advisers
with such financial and operating data and other information with
respect to its businesses, properties, and employees as Seven
Oaks or JSM shall from time to time reasonably request. Seven
Oaks agrees to permit JSM and its officers and agents full access
to its premises, properties, personnel, books, records (including
tax records), contracts, and documents of or pertaining to Seven
Oaks or any Seven Oaks Subsidiary, during normal business hours
upon reasonable notice. No investigation by one party hereto
shall affect the representations and warranties of the other
party, and each such representation and warranty shall survive
any such investigation. Each party hereto shall, and shall cause
its advisers to, maintain the confidentiality of all confidential
information furnished to it by the other party hereto concerning
such other party's business, operations, and financial condition,
and shall not use such information for any purpose for a period
of five years after the date hereof, except in furtherance of the
transactions contemplated by this Agreement. If this Agreement
is terminated prior to the Effective Time, each party hereto
shall, and shall cause its advisers to, promptly return all
documents and copies of, and all drafts and working papers
containing, confidential information received from the other
party hereto.
6.02. No Solicitation. Seven Oaks shall not, after the date
hereof and before the Effective Time, directly or indirectly,
through any officer, director, employee, agent or otherwise,
solicit, initiate or encourage submission of proposals or offers
from any person relating to any acquisition or purchase of all or
(other than in the ordinary course of business) a substantial
portion of the assets of, or any equity interest in, Seven Oaks
or any business combination involving Seven Oaks or, except to
the extent required by fiduciary obligations under applicable law
as advised by counsel, participate in any negotiations regarding,
or furnish to any other person any information with respect to,
or otherwise cooperate in any way with, or assist or participate
in, facilitate or encourage, any effort or attempt by any other
person to do or seek any of the foregoing. Seven Oaks shall
promptly advise JSM if any such proposal or offer, or any inquiry
or contact with any person with respect thereto, is made, shall
promptly inform JSM of all the terms and conditions thereof, and
shall furnish to JSM copies of any such written proposal or offer
and the contents of any communications in response thereto.
Seven Oaks shall not waive any provisions of any "standstill"
agreements between it or any Seven Oaks Subsidiary and any party,
except to the extent that such waiver is, as advised by counsel,
required by fiduciary obligations under applicable law.
6.03. Shareholder Approval; Board Recommendation. Seven Oaks
shall cause a meeting of its Shareholders to be held no later
than November 30, 1995 for the purpose of voting upon and
approving the Merger and approving and adopting this Agreement
and the Plan of Merger. The Board of Directors will recommend
approval of the Merger to the Seven Oaks shareholders.
6.04. Current Information. During the period from the date
of this Agreement to the Effective Time, Seven Oaks and JSM each
shall cause one or more of its representatives to confer on a
regular and frequent basis with representatives of the other and
to report on the general status of its ongoing operations. Each
of Seven Oaks and JSM shall promptly notify the other of any
material change in the normal course of its business or in the
operation of its properties and of any governmental complaints,
investigations, or hearings (or communications indicating that
the same may be contemplated), or the institution or the threat
of material litigation involving such party, and will keep the
other fully informed with respect to such events.
6.05. Articles of Merger. The parties agree that pursuant to
the Act, JSM shall deliver appropriate Articles of Merger to the
Secretary of State of the State of Tennessee to be filed promptly
following the Closing.
6.06. Expenses. Each party hereto shall pay its own expenses
incident to preparing for, entering into, and carrying out this
Agreement and to consummating the Merger and Seven Oaks may pay
its reasonable costs and expenses from the assets of Seven Oaks
prior to the Closing. Notwithstanding the foregoing, if prior to
the termination of this Agreement Seven Oaks agrees in writing to
sell its stock or assets to a party other than JSM or JSM Merger,
Seven Oaks will reimburse JSM for its out of pocket costs
reasonably incurred in connection with the Merger.
6.07. Press Releases. Seven Oaks and JSM shall consult with
each other as to the form and substance of any press release or
other public disclosure of matters related to this Agreement or
any of the transactions contemplated hereby; provided, however,
that nothing in this Section 6.07 shall be deemed to prohibit any
party hereto from making any disclosure which its counsel deems
necessary or advisable to fulfill such party's disclosure
obligations imposed by law. Any such disclosure will be
transmitted in writing or read orally to the other party or its
counsel prior to its publication.
6.08. Miscellaneous Agreements and Consent. Subject to the
terms and conditions of this Agreement, each of the parties
hereto agrees to use all reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and
regulations to consummate and make effective, as soon as
practicable after the date hereof, the transactions contemplated
by this Agreement and the Plan of Merger, including, without
limitation, taking all appropriate actions to lift or rescind any
injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the
transactions contemplated hereby. Seven Oaks and JSM shall each
take all appropriate actions to obtain consents of all third
parties and governmental bodies necessary or desirable for the
consummation of the transactions contemplated by this Agreement
and the Plan of Merger and to remove any condition or state of
facts pertaining to either of them or their respective
subsidiaries that otherwise would make consummation of the
transactions contemplated hereby a violation of applicable law.
ARTICLE VII.
CONDITIONS
7.01. Conditions to Obligations of Seven Oaks to Effect the
Merger. The obligations of Seven Oaks to effect the Merger shall
be subject to the fulfillment, or waiver by Seven Oaks, at or
prior to the Closing of the following conditions:
(a) Permits, Consents, and Approvals. All approvals and
authorizations of, filings and registrations with, and
notifications to, all federal and state authorities (including
the SEC and state "Blue Sky" authorities, as applicable) and
other third parties required for the consummation of the Merger
shall have been duly obtained or made and shall be in full force
and effect and all waiting periods required by law shall have
expired.
(b) Corporate Action. The Board of Directors of JSM
(acting as such and as sole shareholder of JSM Merger) shall have
taken all corporate action necessary to effectuate the Merger and
the other transactions contemplated hereby, and JSM shall have
furnished Seven Oaks with certified copies of the resolutions
duly adopted by JSM's Board of Directors
evidencing the same.
(c) Representations and Warranties. The representations
and warranties of JSM set forth in this Agreement were true and
correct as of the date of this Agreement, except for any such
representations and warranties waived in writing by Seven Oaks;
and JSM shall have delivered to Seven Oaks a certificate to that
effect, such certificate being dated the Closing Date and signed
by JSM's President. Such certificate may state, as appropriate,
that it is given to the best of such officer's knowledge.
(d) Covenants. Each and all of the covenants and
agreements of JSM to be performed or complied with pursuant to
this Agreement and the Plan of Merger prior to the Effective Time
shall have been duly performed and complied with in all material
respects or waived in writing by Seven Oaks, and JSM shall have
delivered to Seven Oaks a certificate to that effect dated the
Closing Date and signed by JSM's President.
(e) No Injunction; Permissible Transactions. Neither Seven
Oaks nor JSM shall be prohibited by any order, ruling, consent
decree, judgment, or injunction of a court or regulatory agency
of competent jurisdiction from consummating the Merger or the
other transactions contemplated by this Agreement, and
consummation of the Merger and the other transactions
contemplated hereby shall be legally permissible pursuant to
applicable law.
(f) Material Adverse Changes. There shall have been no
reasonable determination by the Board of Directors of Seven Oaks
that the Merger or the other transactions contemplated by this
Agreement have become impractical because any state of war,
national emergency, or banking moratorium shall have been
declared in the United States or a general suspension or trading
on the New York Stock Exchange shall have occurred. There shall
have been no reasonable determination by the Board of Directors
of Seven Oaks that consummation of the Merger or the other
transactions contemplated by this Agreement is not in the best
interests of Seven Oaks or its shareholders by reason of the
occurrence of a material adverse change in the financial
condition or results of operations of JSM and the JSM
Subsidiaries on a consolidated basis between the date hereof and
the Closing Date.
(g) Opinions of Counsel. JSM shall have delivered to Seven
Oaks an opinion, dated the Closing Date, of Burch, Porter &
Johnson, PLC, or of other counsel reasonably satisfactory to
Seven Oaks and its counsel.
(h) Repayment/Refinancing of Line of Credit;
Capitalization. Prior to the Closing, Seven Oaks shall be
provided with evidence reasonably satisfactory to Seven Oaks
regarding (i) repayment or refinancing of the Seven Oaks'
existing $1 million line of credit ("Line of Credit") with
National Bank of Commerce, Memphis, Tennessee ("NBC"), including
the written consent or agreement of NBC to such repayment or
refinancing, (ii) the Surviving Corporation's access to new
capital in the aggregate amount of at least $3 million and (iii)
the release, as of the Effective Time, of all of the current
guarantors of the Line of Credit, who are listed on Schedule
7.01(h).
(i) Valuation/Opinion of Financial Advisor. Seven Oaks
shall have received the opinion of Mercer Capital to the effect
that the consideration contemplated by the Plan of Merger is fair
to the holders of shares of Seven Oaks Common Stock from a
financial point of view.
(j) Shareholders Agreement.The persons listed on Schedule
1.04(c)(v) shall have entered into a shareholders agreement
covering, among other customary matters, (i) rights to purchase
shares from terminated, resigned, deceased or incapacitated
employees, (ii) restrictions on transfers of shares and (iii)
elections and removals of directors.
(k) JSM Schedules. The completion and attachment to this
Agreement of all Exhibits and Schedules hereto required to be
provided by JSM shall be a condition precedent to the completion
of the transactions contemplated herein at Closing.
7.02. Conditions to Obligations of JSM to Effect the Merger.
The obligations of JSM to effect the Merger shall be subject to
the fulfillment, or waiver by JSM, at or prior to the Closing of
the following conditions:
(a) Permits, Consents, and Approvals. All approvals and
authorizations of, filings and registrations with, and
notifications to, all federal and state authorities (including
the SEC and state "Blue Sky" authorities, as applicable) and
other third parties required for the consummation of the Merger
shall have been duly obtained or made and shall be in full force
and effect and all waiting periods required by law shall have
expired.
(b) Corporate Action. The Board of Directors of Seven Oaks
shall have taken all corporate action necessary to effectuate the
Merger and the other transactions contemplated hereby, and Seven
Oaks shall have furnished JSM with certified copies of the
resolutions duly adopted by Seven Oaks' Board of Directors
evidencing the same.
(c) Shareholder Approval. The shareholders of Seven Oaks
shall have approved the Merger and approved and adopted this
Agreement and the Plan of Merger, and the transactions
contemplated thereby, as and to the extent required by law and by
the provisions of any governing instruments, and Seven Oaks shall
have furnished JSM with certified copies of the resolutions duly
adopted by the Seven Oaks shareholders approving the Merger and
approving and adopting this Agreement and the Plan of Merger.
(d) Representations and Warranties. The representations
and warranties of Seven Oaks set forth in this Agreement shall be
true and correct as of the date of this Agreement and as of the
Closing Date with the same effect as though all such
representations and warranties had been made on and as of the
Closing Date, except for any such representations and warranties
waived in writing by JSM and except for any such representations
and warranties made as of a specific date, which shall be true
and correct in all respects as of such date, and Seven Oaks shall
have delivered to JSM (i) a certificate to that effect as to
Seven Oaks' representations and warranties, which may state, as
appropriate, that it is given to the best of the knowledge of the
officer signing the certificate, and (ii) a certificate to the
effect that, other than as set forth on Schedule 3.06, there has
been no material adverse change in the financial condition or
results of operations of Seven Oaks and the Seven Oaks
Subsidiaries on a consolidated basis from April 30, 1995, to the
Closing Date, each such certificate being dated the Closing Date
and signed by Seven Oaks' President.
(e) Covenants. Each and all of the covenants and
agreements of Seven Oaks to be performed or complied with
pursuant to this Agreement and the Plan of Merger prior to the
Effective Time shall have been duly performed and complied with
in all material respects or waived in writing by JSM, and Seven
Oaks shall have delivered to JSM a certificate to that effect
dated as of the Effective Time and signed by its President.
(f) No Injunction; Permissible Transactions. Neither JSM
nor Seven Oaks shall be prohibited by any order, ruling, consent
decree, judgment, or injunction of a court or regulatory agency
of competent jurisdiction from consummating the Merger or the
other transactions contemplated by this Agreement, and
consummation of the Merger and the other transactions
contemplated hereby shall be legally permissible pursuant to
applicable law.
(g) Material Adverse Changes. There shall have been no
reasonable determination by the Board of Directors of JSM that
the Merger or the other transactions contemplated by this
Agreement have become impractical because any state of war,
national emergency, or banking moratorium shall have been
declared in the United States or a general suspension of trading
on the New York Stock Exchange shall have occurred. There shall
have been no reasonable determination by the Board of Directors
of JSM that consummation of the Merger or the other transactions
contemplated by this Agreement is not in the best interests of
JSM or its shareholders by reason of the occurrence of a material
adverse change in the financial condition or results of
operations of Seven Oaks and any Seven Oaks Subsidiary on a
consolidated basis between April 30, 1995 and the Effective Time.
(h) Opinions of Counsel. Seven Oaks shall have delivered
to JSM an opinion, dated the Closing Date, of Hunton & Williams
or of other counsel reasonably satisfactory to JSM and its
counsel.
(i) Repayment of Debentures. Prior to the Closing, Seven
Oaks and JSM shall have reached a satisfactory agreement
regarding the repayment of Seven Oaks' debentures listed on
Schedule 3.03 hereto and cancellation of all outstanding
warrants.
(j) Consent to Continuation and Assumption of Lease.
Prior to the Closing, Seven Oaks shall have obtained and
delivered to JSM the consent of Inmobiliaria Axial, S.A. de C.V.
("Lessor") to the continuation after the Closing, of that certain
lease agreement between Seven Oaks and Lessor for use of Seven
Oaks facilities located in Juarez, Mexico.
(k) Consent to Continuation and Assignment of Processing
Agreement. Seven Oaks shall have obtained and delivered to JSM
the consent of Fleming to the continuation and assumption of that
certain First Amended and Restated Processing Agreement, dated as
of July 31, 1995, by and among Fleming, certain subsidiaries of
Fleming, Seven Oaks and Coupon Redemption, Inc.
(l) Cancellation of Options and Warrants. Seven Oaks shall
have canceled or caused the cancellation of the options and
warrants held by persons listed on Schedule 3.03, in a manner
that does not create any rights in such holders to obtain Seven
Oaks Common Stock, cash or replacement instruments.
(m) Repayment/Refinancing of Line of Credit; Capitalization.
Prior to the Closing, JSM shall be provided with evidence
reasonably satisfactory to JSM regarding (i) repayment or
refinancing of the Seven Oaks' Line of Credit, including the
written consent or agreement of NBC to such repayment or
refinancing and (ii) the Surviving Corporation's access to new
capital in the aggregate amount of at least $3 million.
(n) Dissenters. The holders of no more than 10% of the
outstanding Seven Oaks Common Stock shall have elected to
exercise their statutory dissenter's rights as provided in the
Act; only holders who have provided notice of the exercise of
their dissenter's rights in the form and within the time periods
required by the Act shall be included in the calculation provided
for by this Section 5.02(o).
(o) Cold Comfort. JSM shall have received the letter of
Deloitte & Touche on the unaudited financial statements of Seven
Oaks for the quarter ended July 31, 1995, in form and substance
as is customary in transactions like the Merger and as acceptable
to JSM in the exercise of its reasonable discretion.
(p) Valuation/Opinion of Financial Advisor. Seven Oaks
shall have received the opinion of Mercer Capital to the effect
that the consideration contemplated by the Plan of Merger is fair
to the holders of shares of Seven Oaks Common Stock from a
financial point of view.
(q) Shareholders Agreement.The persons listed on Schedule
1.04(c)(v) shall have entered into a shareholders agreement
covering, among other customary matters, (i) rights to purchase
shares from terminated, resigned, deceased or incapacitated
Seven Oaks employees, (ii) restrictions on transfers of shares
and (iii) elections and removals of directors.
(r) Termination of Certain Agreements. All employment and
severance agreements between Peter R. Pettit, Tommy R. Thompson
and Frank A. Sullivan and Seven Oaks shall have been canceled.
(s) Seven Oaks Schedules. The completion and attachment to
this Agreement of all Exhibits and Schedules hereto required to
be provided by Seven Oaks shall be a condition precedent to the
completion of the transactions contemplated herein at Closing.
ARTICLE VIII.
TERMINATION, AMENDMENT, AND WAIVER
8.01. Termination. Notwithstanding any other provision of
this Agreement or the Plan of Merger, and notwithstanding the
approval of the Merger or adoption or approval of this Agreement
or the Plan of Merger by the shareholders of Seven Oaks and/or
JSM, this Agreement may be terminated and the Merger abandoned:
(a) upon the written notice of JSM delivered to Seven Oaks
on or before September 22, 1995; or
(b) by mutual written consent of JSM and Seven Oaks; or
(c) by a vote of a majority of the Boards of Directors of
both Seven Oaks and JSM; or
(d) by a vote of a majority of the Board of Directors of
Seven Oaks, in the event of a material breach of this
Agreement by JSM; or
(e) by a vote of a majority of the Board of Directors of
JSM, in the event of a material breach of this Agreement by Seven
Oaks; or
(f) by a vote of a majority of the Board of Directors of
either Seven Oaks or JSM in the event: (i) the Merger shall not
have been consummated on or before December 31, 1995; (ii) any
approval of any governmental or other regulatory authority
required for the consummation of the Merger and the other
transactions contemplated hereby shall have been denied by final
non-appealable action of such authority; or (iii) in the event of
an occurrence described in Section 7.01(f) in the case of Seven
Oaks or Section 7.02(g) in the case of JSM; or
(g) if the Merger shall have been voted on by holders of
Seven Oaks Common Stock at a meeting duly convened therefor, and
the votes shall not have been sufficient to satisfy the condition
set forth in Section 7.02(c) hereof; or
(h) by JSM if the Board of Directors of Seven Oaks has
recommended to its shareholders the approval of a bona fide
proposal to acquire all of the outstanding capital stock or
assets of Seven Oaks and the Seven Oaks Subsidiaries, which the
Board of Directors believes, in good faith after consultation
with its financial advisors, is more favorable from a
financial point of view to the shareholders of Seven Oaks than
the proposal set forth in this Agreement; or
(i) by JSM if the Board of Directors of Seven Oaks, in the
exercise of its fiduciary duties upon the written advice of
counsel, has withdrawn, amended or modified in any manner adverse
to JSM, its favorable recommendation of the transactions
contemplated by this Agreement and the Plan of Merger.
8.02. Effect of Termination. In the event of termination of
this Agreement by either JSM or Seven Oaks as provided above,
this Agreement shall forthwith become void and there shall be no
liability on the part of either JSM or Seven Oaks, except as set
forth in the last two sentences of Section 6.01 and in the last
sentence of Section 6.06.
8.03. Amendment. This Agreement and the Exhibits hereto may
be amended by the parties hereto, by action taken by or on behalf
of their respective Boards of Directors, at any time before or
after approval of the Merger and the approval and adoption of
this Agreement and the Plan of Merger by the shareholders of
Seven Oaks and/or JSM; provided, however, that after such
approval by the Seven Oaks shareholders no such amendment shall
reduce the amount or change in a materially adverse way the form
of the consideration to be delivered to Seven Oaks' shareholders
as provided in Section 1.04 of this Agreement.
8.04. Extensions and Waivers. Each party hereto, by written
instrument signed by its Chairman, Vice Chairman, President, or
Chief Financial Officer, may extend the time for the performance
of any of the obligations or other acts of the other party hereto
and may waive (a) any inaccuracies of the other party in the
representations or warranties contained in this Agreement or in
any document delivered pursuant hereto, (b) compliance with any
of the covenants or agreements of the other party contained in
this Agreement, (c) the performance (including performance to the
satisfaction of a party or its counsel) by the other party of any
of its obligations set out herein, and (d) the satisfaction of
any condition to the obligations of the waiving party pursuant
hereto.
8.05. Amendments, Consents, and Approvals. Any amendment of
this Agreement and any consent or approval of a party required or
permitted pursuant to this Agreement shall be effective only when
it is in writing signed by an executive officer of such party
holding the title of Chairman, Vice Chairman, President, or Chief
Financial Officer.
ARTICLE IX.
GENERAL PROVISIONS
9.01. Knowledge. "The knowledge of Seven Oaks" and "the
knowledge of Seven Oaks and the Seven Oaks Subsidiaries" shall
mean the actual knowledge of the persons listed on Schedule 9.01.
9.02. Specific Enforceability. The parties recognize and
hereby acknowledge that it would be impossible to measure in
monetary terms the damages which would result to a party hereto
by reason of the failure of any of the parties hereto to perform
any of the obligations imposed on it by this Agreement.
Accordingly, if after the Seven Oaks shareholders' meeting any
party hereto should institute an action or proceeding seeking
specific enforcement of the provisions hereof, each party hereto
against which such action or proceeding is brought hereby waives
the claim or defense that the party instituting such action or
proceeding has an adequate remedy at law and hereby agrees not to
urge in any such action or proceeding the claim or defense that
such a remedy at law exists.
9.03. Termination of Representations and Warranties;
Survival of Certain Covenants. The respective representations
and warranties of Seven Oaks and JSM contained in this Agreement
and the Plan of Merger and in the instruments and certificates
delivered pursuant hereto or thereto shall expire on, and be
terminated and extinguished at, the earlier of (i) the
termination of this Agreement in accordance with its terms or
(ii) the Effective Time; provided, however, that any
representation or warranty in any agreement, contract, report,
opinion, undertaking, or other document or instrument delivered
hereunder in whole or in part by any person other than Seven Oaks
or JSM (or directors of officers thereof in their capacities as
such) shall not so terminate and shall not be so extinguished;
and provided further that, in the event that the Merger is
consummated, no representation or warranty of Seven Oaks or JSM
contained herein shall be deemed to be terminated or extinguished
so as to deprive JSM or Seven Oaks of any defense at law or in
equity which it otherwise would have to any claim against it by
any person, including, without limitation, any shareholder or
former shareholder of Seven Oaks, the representations and
warranties aforesaid (except to the extent that they shall have
been waived in accordance herewith) being material inducements to
the consummation by Seven Oaks and JSM of the Merger and other
transactions contemplated hereby.
9.04. Brokerage Fees and Commissions. No broker, finder or
investment banker (other than Mercer Capital, whose fees shall be
paid by Seven Oaks) is entitled to any brokerage, finder's or
other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or
on behalf of Seven Oaks; and no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of
JSM.
9.05. Notices. Any notice or other communication required or
permitted under this Agreement or the Plan of Merger shall be
effective only when it is in writing and actually delivered
either (a) by hand, (b) by telegram or facsimile transmission, or
(c) by registered or certified mail, postage prepaid, return
receipt requested, addressed as follows:
(a) If to Seven Oaks:
Seven Oaks International, Inc.
700 Colonial Road, Suite 100
Memphis, Tennessee 38117
Attention: Chairman and Chief Executive Officer
With a copy to:
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Attention: Thurston R. Moore, Esq.
(b) If to JSM:
1510 Ferdinand Street
Coral Gables, Florida 33134
Attention: Mr. Steve Moll
With a copy to:
Burch, Porter & Johnson, PLC
Morgan Keegan Tower
50 North Front Street
Memphis, Tennessee 30103
Attention: Laurel C. Williams, Esq.
or such other address or firm as any such party may designate by
notice to the other party, and shall be deemed to have been given
as of the date received.
9.06. Parties in Interest. This Agreement is binding upon
and is for the benefit of the parties hereto and their respective
successors, legal representatives, and assigns, and no person not
a party hereto shall have any rights or benefits under this
Agreement, either as a third party beneficiary or otherwise.
9.07. Exhibits and Schedules. Each and all of the exhibits
and schedules referred to herein and attached hereto are hereby
incorporated into this Agreement for all purposes as fully as if
set forth herein.
9.08. Severability; Invalid Provisions. If any provision
hereof is held to be illegal, invalid or unenforceable by a court
of competent jurisdiction under present or future laws effective
during the term hereof, 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 hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom.
In lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as a part hereof a provision as
similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
9.09. Headings. The headings in this Agreement are inserted
for convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this
Agreement.
9.10. Subsidiaries. For the purpose of this Agreement and
the Plan of Merger, any reference to any subsidiary shall also
refer to and include any subsidiaries of such subsidiaries.
9.11. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
9.12. Time of Essence. Time is of the essence as to each and
every provision of this Agreement.
9.13. Entire Agreement. This Agreement and the Plan of
Merger constitute the entire agreement and supersede any and all
prior agreements and understandings, both written and oral, among
the parties, or any of them, with respect to the subject matter
hereof and thereof.
9.14. Applicable Law. This Agreement and the Plan of Merger
shall be governed by the laws of the State of Tennessee,
regardless of the laws that would otherwise govern under
applicable principles of conflicts of laws thereof, except to the
extent that federal law shall be controlling.
9.15. Delivery by Telecopier. This Merger Agreement shall
become effective upon execution and delivery hereof by all the
parties hereto; delivery of this Merger Agreement may be made by
telecopier to the Parties with original copies promptly to follow
by overnight courier.
IN WITNESS WHEREOF, JSM, JSM Merger and Seven Oaks each have
caused this Agreement to be executed and delivered by its
respective duly authorized officers, all as of the date first
written above.
JSM NEWCO, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title: President
JSM MERGER SUB, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title: President
SEVEN OAKS INTERNATIONAL, INC.
By: /s/ PETER R. PETTIT
Printed Name: Peter R. Pettit
Title: Chairman and CEO
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this
"Amendment"), is made and entered into this 22nd day of
September, 1995 by and between JSM Newco, Inc., a Tennessee
corporation ("JSM"), JSM Merger Sub, Inc., a Tennessee
corporation ("JSM Merger"), and Seven Oaks International, Inc., a
Tennessee corporation with its principal executive offices at 700
Colonial Road, Suite 100, Memphis, Tennessee 38117 ("Seven
Oaks").
W I T N E S S E T H :
WHEREAS, the parties hereto entered into an Agreement and
Plan of Merger dated September 8, 1995 (the "Merger Agreement")
for the purpose of effecting a merger (the "Merger") of JSM
Merger with and into Seven Oaks pursuant to the applicable
provisions of the Tennessee Business Corporation Act so that
Seven Oaks will continue as the surviving corporation of the
Merger; and
WHEREAS, the parties desire to amend the Merger Agreement,
as set forth herein;
NOW, THEREFORE, in consideration of the premises, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties do hereby agree as
follows:
1. Amendments to Section 7.02. Section 7.02 of the Merger
Agreement is hereby further amended (a) by adding the words "and
shall have terminated any and all registration rights agreements"
to the end of the sentence found at subsection (l) of Section
7.02; and (b) by adding the following new provisions in their
entirety:
(t) Termination of Rights Agreement. Prior to consummation
of the Merger, Seven Oaks shall terminate its Rights Agreement
dated August 12, 1988 or otherwise amend or take such action as
to waive the application of such Rights Agreement to the
transactions contemplated hereby, in any such event without the
payment of any additional consideration by Seven Oaks or JSM in
addition to the cash consideration specified in Section
1.04(c)(i) hereto.
(u) Status of Certain Legal Proceedings. The Texas
franchise tax return deficiency proceedings disclosed in Schedule
3.08 hereto and the El Paso Saddle Blanket Company, Inc. legal
proceedings in the District Court of El Paso County, Texas
disclosed in Schedule 3.09 hereto shall be resolved prior to
consummation of the Merger and shall have resulted in liabilities
not exceeding $30,000 as to the El Paso Saddle Blanket Company,
Inc. legal proceedings and $70,000 as to the Texas franchise tax
return proceedings and, if not so resolved, JSM shall reasonably
determine to its satisfaction that such proceedings shall not
result in liabilities exceeding $30,000 as to the El Paso Saddle
Blanket Company, Inc. legal proceedings and $70,000 as to the
Texas franchise tax return proceedings.
2. Continued Validity of Merger Agreement. Except as
amended herein, all other provisions of the Merger Agreement
remain in full force and effect.
3. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
4. Time of Essence. Time is of the essence as to each and
every provision of this Amendment.
IN WITNESS WHEREOF, JSM, JSM Merger and Seven Oaks each have
caused this Amendment to be executed and delivered by its
respective duly authorized officers, all as of the date first
written above.
JSM NEWCO, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title: President
JSM MERGER SUB, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title President
SEVEN OAKS INTERNATIONAL, INC.
By: /s/ PETER R. PETTIT
Printed Name: Peter R. Pettit
Title: Chairman and CEO
SECOND AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this
"Amendment"), is made and entered into this 30th day of October,
1995 by and between JSM Newco, Inc., a Tennessee corporation
("JSM"), JSM Merger Sub, Inc., a Tennessee corporation ("JSM
Merger"), and Seven Oaks International, Inc., a Tennessee
corporation with its principal executive offices at 700 Colonial
Road, Suite 100, Memphis, Tennessee 38117 ("Seven Oaks").
W I T N E S S E T H :
WHEREAS, the parties hereto entered into an Agreement and
Plan of Merger dated September 8, 1995, as amended by Amendment
to Agreement and Plan of Merger dated September 22, 1995 (as
amended, the "Merger Agreement"), for the purpose of effecting a
merger (the "Merger") of JSM Merger with and into Seven Oaks
pursuant to the applicable provisions of the Tennessee Business
Corporation Act so that Seven Oaks will continue as the surviving
corporation of the Merger; and
WHEREAS, the parties wish to further amend the Merger
Agreement, as set forth below.
NOW, THEREFORE, in consideration of the premises, and other
good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties do hereby agree as
follows:
1. Amendment to Whereas clause. Clause (ii) of the third
Whereas clause shall be deleted in its entirety and replaced with
the following:
"(ii) the remainder of the holders of Seven Oaks Common
Stock will be entitled to receive (a) cash in the amount of $0.30
for each issued and outstanding share of Seven Oaks Common Stock
and (b) $.01 for each outstanding "Right," as defined in the
Rights Agreement between Seven Oaks and Third National Bank In
Nashville (Rights Agent), dated August 12, 1988 (the "Rights
Agreement"), one of which is attached to each issued and
outstanding share of Seven Oaks Common Stock."
2. Amendments to Section 1.04
(a) The heading of Section 1.04 shall be amended to
"Manner of Converting Shares and Redeeming Rights."
(b) Section 1.04(c)(i) shall be deleted in its
entirety and restated as follows:
"(c) The manner and basis of (i) converting the
outstanding shares of the capital stock of Seven Oaks upon
consummation of the Merger and (ii) redeeming the outstanding
Rights to acquire shares of the capital stock of Seven Oaks,
shall be as follows:
(i) Seven Oaks Common Stock Conversion into
Cash and Rights Redemption. Except as otherwise provided in this
Section 1.04(c),
(A) each share of Seven Oaks Common
Stock issued and outstanding at the Effective Time shall, as of
the Effective Time, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the
right to receive the sum of thirty cents ($0.30) cash and
(B) each "Right," as defined in the
Rights Agreement, attached to each share of Seven Oaks Common
Stock issued and outstanding immediately before the Effective
Time shall be redeemed immediately before the Effective Time and
the holders thereof shall have the rights to receive in exchange
therefor $.01 per Right, in accordance with Section 23 of the
Rights Agreement.
(c) Section 1.04(c)(iii)(A) shall be deleted in its
entirety and restated as follows:
"Prior to the Effective Time, Seven Oaks
agrees to appoint Trust Company Bank, Atlanta, Georgia or a
comparable firm (the "Agent") to act as agent in connection with
the Merger. Except as otherwise provided in Section 1.04(c)(ii)
or (v) hereto, from and after the Effective Time, each holder of
a certificate which immediately prior to the Effective Time
represented outstanding shares of Seven Oaks Common Stock and
related Rights (the "Certificates") shall be entitled to exercise
its right to receive in exchange therefor (except as provided in
Section 1.04(c)(iv) hereto), upon surrender thereof to the Agent,
a check for the aggregate amount of cash representing the
consideration which such holder has the right to receive under
Section 1.04(c)(i) hereto in the Merger. Immediately prior to
the Effective Time, JSM will deliver to the Agent, in trust for
the benefit of the holders of Seven Oaks Common Stock, the sum of
$2,070,551 representing the aggregate consideration to the
holders of issued and outstanding Seven Oaks Common Stock
necessary to make the exchanges contemplated by Section
1.04(c)(i) hereto on a timely basis.
(d) The following sentence shall be added to Section
1.04(c)(v):
"Notwithstanding that such Certificates shall
not be surrendered and that such shares shall remain outstanding,
the Rights attached to such shares shall be redeemed immediately
before the Effective Time and each such person shall be deemed to
have waived their right to receive the consideration to which
they are entitled under Section 1.04(c)(i)(B).
3. Amendments to Schedule 1.04(c)(v). Schedule 1.04(c)(v)
shall be deleted in its entirety and replaced with Exhibit A
hereto.
4. Continued Validity of Merger Agreement. Except as
amended herein, all other provisions of the Merger Agreement
remain in full force and effect.
5. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
6. Time of Essence. Time is of the essence as to each and
every provision of this Amendment.
IN WITNESS WHEREOF, JSM, JSM Merger and Seven Oaks each have
caused this Amendment to be executed and delivered by its
respective duly authorized officers, all as of the date first
written above.
JSM NEWCO, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title: President
JSM MERGER SUB, INC.
By: /s/ J. STEVEN MOLL
Printed Name: J. Steven Moll
Title: President
SEVEN OAKS INTERNATIONAL, INC.
By: /s/ PETER R. PETTIT
Printed Name: Peter R. Pettit
Title: Chairman and CEO
APPENDIX B
MERCER CAPITAL
5860 Ridgeway Center Parkway, Suite 410
Memphis, Tennessee 38120-4048
(901) 685-2120
Telecopier (901) 685-2199
November 9, 1995
Board of Directors
Seven Oaks International, Inc.
700 Colonial Road, Suite 100
Memphis, TN 38117
Gentlemen:
Mercer Capital Management, Inc. ("Mercer Capital") has been
retained by the Board of Directors of Seven Oaks International,
Inc. ("Seven Oaks" or "the Company") to provide our opinion on
behalf of the Company's shareholders of the fairness, from a
financial point of view, of the proposed acquisition of the
Company by a new entity ("JSM Newco, Inc." or "the Purchaser") to
be formed by Mr. John Moll.
The Company has entered into an Agreement and Plan of Merger
("the Agreement") dated September 7, 1995. Under the terms of
the Agreement, JSM Newco, Inc. and Seven Oaks have agreed:
1. Seven Oaks will merge with and into JSM Merger Sub,
Inc., a subsidiary of JSM Newco, Inc. with Seven Oaks to be the
surviving corporation.
2. Owners of Seven Oaks outstanding common stock, except
for management and the Fleming Companies, Inc., will be entitled
to receive cash in the amount of $0.31 per share.
3. The Company's loan with the National Bank of Commerce
will be paid or refinanced and the Company will have received
assurance of new working capital financing of at least
$3,000,000.
To adopt a stock option plan for management.
Under the terms of the Agreement, Seven Oaks agrees:
1. That all warrants and stock options for the purchase of
common stock would be canceled for no consideration from the
Company or the Purchaser.
Board of Directors
November 9, 1995
Page Two
2. That the Company's Board of Directors will recommend
the merger to Seven Oaks' shareholders.
3. That the Agreement includes a "no shop" clause.
4. JSM Newco, Inc.'s obligations would be conditioned on
the holders of not more than ten percent (10%) of the stock
electing dissenters' rights.
In connection with this engagement, representatives of Mercer
Capital visited with management, directors, and legal advisors to
the Company. An on-sight meeting was held at the Company's
headquarters in Memphis, Tennessee to discuss the financial and
operating characteristics of the Company. Factors considered in
the preparation of this opinion include:
1. A review of the Company's financial performance for the
fiscal years ended April 30, 1991 through 1995 and the three
months ended July 31, 1995;
2. Proforma income statement and balance sheet projections
based upon the Company's current capital structure and business
environment;
3. Recent trading history of shares of the Company's
common stock (as quoted on the NASDAQ Bulletin Board under the
ticker symbol "QPON");
4. A review of the investment characteristics of the
Company, including the industry outlook and the Company's
financial management policies;
5. A review of attempts by management to recapitalize
and/or sell the Company since July, 1994;
6. The process which the Board undertook to reach the
Agreement;
7. Review of the documents listed in Appendix A;
8. On-site interviews with management of Seven Oaks;
9. Review of the national economy and prevailing industry
conditions;
10. Interviews and meetings with legal counsel and external
accountants for Seven Oaks;
11. Analysis of proforma earnings, cash flow, and balance
sheet;
Board of Directors
November 9, 1995
Page Three
12. Consideration of valuation under standard of fair value
as determined under Tennessee law;
13. Review of the history of negotiations; and,
14. Other factors and financial analyses deemed relevant or
necessary to render this opinion.
Mercer Capital did neither compile nor audit the Company's
financial statements, nor have we independently verified the
information reviewed. We have relied upon such information as
being complete and accurate in all material respects. We have
not made an appraisal of the Company's assets, nor have we
determined the liquidation value of the Company's assets.
Based upon our analysis of the Agreement, it is our opinion that
the consideration to be received in the acquisition of the
Company by JSM Newco, Inc. is fair from a financial point of view
to the Company's shareholders.
We consent to the use of this letter in the proxy statement to be
sent to the shareholders of Seven Oaks International, Inc.
Sincerely yours,
MERCER CAPITAL MANAGEMENT, INC.
/s/ Kenneth W. Patton
Kenneth W. Patton, ASA
Executive Vice President
/s/ Matthew R. Crow
Matthew R. Crow
Financial Analyst
APPENDIX C
CONSOLIDATED FINANCIAL STATEMENTS
OF
SEVEN OAKS INTERNATIONAL, INC.
Annual Consolidated Financial Statements
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . .C-2
Consolidated Balance Sheets as of April 30, 1995
and April 30, 1994 . . . . . . . . . . . . . . . . . . . . . .C-3
Consolidated Statements of Operations for the years ended
April 30, 1993, 1994 and 1995. . . . . . . . . . . . . . . . .C-5
Consolidated Statement of Changes in Deficiency in Assets
for the years ended April 30, 1995, 1994 and 1993 . . . . . .C-6
Consolidated Statements of Cash Flows for the years ended
April 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . . .C-7
Notes to Consolidated Financial Statements . . . . . . . . . .C-9
Interim Consolidated Financial Statements
Consolidated Balance Sheets as of July 31, 1995
and April 30, 1995 (unaudited). . . . . . . . . . . . . . . .C-20
Consolidated Statements of Operations for the
three months ended July 31, 1995 and 1994 (unaudited) . . . .C-21
Consolidated Statements of Cash Flows for the three
months ended July 31, 1995 and 1994 (unaudited) . . . . . . .C-22
Notes to Consolidated Financial Statements (unaudited) . . . C-23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Seven Oaks International, Inc.
We have audited the accompanying consolidated balance sheets of
Seven Oaks International, Inc. and subsidiaries as of April 30,
1995 and 1994, and the related consolidated statements of
operations, deficiency in assets and cash flows for each of the
three years in the period ended April 30, 1995. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the 1993 consolidated financial statements
present fairly, in all material respects, the results of Seven
Oaks International, Inc. and subsidiaries operations, their
deficiency in assets, and their cash flows as of and for the year
ended April 30, 1993 in conformity with generally accepted
accounting principles.
The accompanying 1995 and 1994 consolidated financial statements
have been prepared assuming that the Company will continue as a
going concern. As discussed in Notes 2 and 12 to the financial
statements, the Company's recurring losses from operations,
negative working capital, deficiency in assets, its difficulties
in meeting its financing needs and various legal contingencies
raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also
described in Notes 2 and 12. The consolidated financial
statements do not include any adjustments that might result from
the outcome of these uncertainties.
Because of the possible material effects of the uncertainties
referred to in the preceding paragraph, we are unable to express,
and we do not express, an opinion on the consolidated financial
statements for 1995 and 1994.
DELOITTE & TOUCHE LLP
Memphis, Tennessee
July 7, 1995 (as to Note
13 November 8, 1995)
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1995 AND 1994
Amounts in thousands of dollars
ASSETS 1995 1994
CURRENT ASSETS (Notes 6 and 8):
Cash and cash equivalents $ 60 $ 169
Trade receivables:
Coupons processed 1,521 3,259
Coupons on-hand 1,191 833
Retailers 176 502
Allowance for doubtful accounts ( 82) (96)
Total trade receivables 2,806 4,498
Other receivables (Notes 3 and 8) 237 588
Prepaid expenses & other assets 232 92
Total current assets 3,335 5,347
ASSETS HELD FOR SALE
(Notes 2, 3 and 6) 194 3,056
INTANGIBLES AND OTHER ASSETS
(Note 4) 39 126
PROPERTY AND EQUIPMENT:
(Notes 3 and 6)
Leasehold improvements 150 223
Data processing equipment 3,453 3,933
Furniture and other equipment 2,187 2,869
Total 5,790 7,025
Less accumulated depreciation 4,859 5,577
Property and equipment, net 931 1,448
TOTAL $ 4,499 $ 9,977
See notes to consolidated financial statements.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
APRIL 30, 1995 AND 1994
Amounts in thousands of dollars
LIABILITIES AND
DEFICIENCY IN ASSETS 1995 1994
CURRENT LIABILITIES:
Notes payable (Notes 2 and 6) $ 0 $ 2,893
Accounts payable - retail stores (Note 2) 4,476 4,936
Accrued expenses (Note 8) 1,113 1,267
Due to affiliate (Notes 2 and 5) 133 325
Retail store deposits 1,797 1,523
Total current liabilities 7,519 10,944
LONG-TERM LIABILITIES (Notes 2, 5 and 6):
12% Debentures payable 750
Revolving line of credit 197
Due to affiliate 1,514
Other long-term liabilities 330 336
Total long-term liabilities 2,791 336
COMMITMENTS AND CONTINGENCIES (Notes 2, 3,
5, 6, 10 and 12)
DEFICIENCY IN ASSETS (Note 2):
Common stock, authorized 20,000,000 shares;
$0.10 par value; 8,639,572 and 6,438,429
shares issued and outstanding in 1995 and
1994, respectively 864 644
Additional paid-in capital 12,725 12,782
Deficit (19,400) (14,729)
Total deficiency in assets (5,811) (1,303)
TOTAL $ 4,499 $ 9,977
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS
EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1995
Amounts in thousands, except per share amounts
1995 1994 1993
REVENUE (Note 11) $2,144 $4,385 $7,740
COSTS AND EXPENSES:
Processing costs 3,242 4,691 6,211
General, administrative
and selling (Note 2) 2,646 3,287 4,434
Bad debt expense 190 1,558 185
Interest 214 397 702
Restructuring cost 673
Loss on real estate (Note 3) 550 1,630
Write off of intangibles (Note 4) 1,167
Total 6,842 12,730 12,205
LOSS FROM OPERATIONS (4,698) (8,345) (4,465)
OTHER INCOME, NET 27 125 42
NET LOSS $(4,671) $(8,220) $(4,423)
NET LOSS PER SHARE $ (0.60) $ (1.28) $ (0.69)
WEIGHTED AVERAGE SHARES OUTSTANDING 7,807 6,438 6,438
See notes to consolidated financial statements.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIENCY IN ASSETS
EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1995
Amounts in thousands, except share amounts
Additional
Common Stock Paid-in
Shares Amount Capital Deficit
BALANCE, April 30, 1992 6,438,429 $ 644 $ 12,782 $(2,086)
Net loss for the year (4,423)
BALANCE, April 30, 1993 6,438,429 644 12,782 (6,509)
Net loss for the year (8,220)
BALANCE, April 30, 1994 6,438,429 644 12,782 (14,729)
Common stock issued 2,146,143 215 (65)
Stock options exercised 55,000 5 8
Net loss for the year (4,671)
BALANCE, April 30, 1995 8,639,572 $ 864 $ 12,725 $(19,400)
See notes to consolidated financial statements.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1995
(Amounts in thousands of dollars)
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,671) $(8,220) $(4,423)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Depreciation and amortization 490 997 1,011
Write-off of intangible asset 1,167
(Gain) loss on sale of equipment 19 (30) (5)
Loss on assets held for sale 87
Provision for loss:
Trade receivables 190 1,558 185
Notes receivables 842
Real estate held for sale 462 657
Increase (Decrease) in cash resulting
from changes in assets and liabilities:
Trade receivables 1,502 9,215 20,005
Other assets 298 720 (133)
Accounts payable -
retail stores 1,061 (6,928) (8,004)
Retail store deposits 274 759 (451)
Other liabilities (160) (1,232) (417)
Net cash provided by (used
in) operating activities (448) (495) 7,768
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (37) (450) (101)
Proceeds from sale of equipment 60 155
Proceeds from sale of real estate 2,298 1,350 13
Net cash provided by (used
in) investing activities 2,321 1,055 (88)
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on short term line of
credit - net (2,893) (1,154) (7,632)
Borrowings under long term
line of credit 197
Proceeds from debentures issued 750
Payments on affiliate debt (49)
Proceeds from issuance of stock 13
Net cash used in financing
activities (1,982) (1,154) (7,632)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (109) (594) 48
CASH, BEGINNING OF YEAR 169 763 715
CASH, END OF YEAR $ 60 $ 169 $ 763
See notes to consolidated financial statements.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1995
(Amounts in thousands of dollars)
1995 1994 1993
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 197 $ 400 $ 706
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Conversion of accounts payable -
retailers during 1995 to:
Common stock $ 150
Due to affiliate $ 1,696
See notes to consolidated financial statements.
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation - The consolidated financial
statements include the accounts of the Company and its domestic
and foreign majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Business - The Company and its subsidiaries process cents-off
coupons for retail stores and manufacturers. See Note 11.
The following amounts due are included in trade receivables at
the face value of the coupons, plus a handling fee:
Coupons processed is the amount due from manufacturers that
has been invoiced.
Coupons on-hand is the amount due from manufacturers that
has not been invoiced.
Retailers is the net amount due from retail stores for
certain coupons paid for by the Company, but not redeemed by the
manufacturers.
The above amounts due from the processing of coupons are
covered by contracts signed with retailers (retailer service
agreements). The total amount due as of April 30, 1995 under
these retail service agreements is subject to group
concentrations of credit risk as covered by Financial Accounting
Standards Board Statement No. 105. This group concentration of
credit risk relates to all amounts due from the various
manufacturers and/or retailers as of April 30, 1995.
Accounts payable - retail stores is the amount due to
retailers at specified times in the future. Accounts payable -
retail stores include $3,085,000 in 1995 and $939,000 in 1994 of
bank overdrafts resulting from checks written which have not been
presented for payment.
Retail store deposits is the amount held by the Company from
certain retailers to be offset against future coupons paid for by
the Company but not redeemed by the manufacturers.
Foreign Operations - A wholly-owned Mexican subsidiary of the
company processes coupons for the Company under a cost-plus fixed
fee arrangement. All of the foreign subsidiary's revenue is from
the parent company and is used to pay costs of processing
coupons. The parent paid the subsidiary $2.3, $3.3, and $3.9
million during the years ended April 30, 1995, 1994 and 1993,
respectively. The financial statements of the Mexican
subsidiary, which are included in the consolidated financial
statements, have been translated to U.S. dollars. The
subsidiary's monetary assets and liabilities are translated at
year end exchange rates and its fixed assets and monetary assets
and liabilities are translated at historical rates. Income and
expense accounts are translated at the average rates in effect
for the applicable period. Realized exchange gains and losses
(immaterial in amount) and any translation adjustments
(immaterial in amount) are included in current operations. Net
assets of the Mexican subsidiary, excluding inter-company
accounts, were $ .3 and $1.3 million at April 30, 1995 and 1994,
respectively.
Revenue Recognition - The Company recognizes revenue when the
process of coupon verification has been completed.
Property and Equipment - Property and equipment is stated at
cost. Assets held for sale are stated at estimated net
realizable value. Depreciation is computed by using the
straight-line method based on the estimated useful lives of the
depreciable assets. Furniture and fixtures and data processing
equipment is depreciated over 3-10 years. Leasehold and
improvements are amortized over the useful lives of the assets or
the lease terms, whichever is shorter.
Income Taxes - During 1994, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes"(SFAS No. 109) which did not have a material impact on the
Company's financial position or results of operations as of and
for the year ended April 30, 1994. Under SFAS No. 109, the
amounts provided for income taxes are based on the amounts of
current and deferred taxes payable or refundable at the date of
the financial statements as a result of all events recognized in
the financial statements as measured by the provision of enacted
tax laws.
Per Share Amounts - Net loss per share has been computed based
on the weighted average number of common shares outstanding
during each period.
Cash Equivalents - The Company considers deposits in banks and
short-term marketable securities with original maturities of
three months or less as cash and cash equivalents.
Reclassifications - Certain amounts in prior years have been
reclassified to conform to the current year presentation.
2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
(1) The Company's consolidated financial statements have been
presented on the basis that it is a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets amounts
or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern.
Over the last three years, the Company has incurred net
losses totaling $17 million. As a result, working capital has
decreased from $1.5 million at the close of fiscal 1992 to
working capital deficits of $4.2 million, $5.6 million and $2.0
million for fiscal years 1995, 1994 and 1993, respectively. The
Company's deficiency in assets was $5.8 million and $1.3 million
for fiscal 1995 and 1994, respectively.
(2) As part of a management and financial restructuring
agreement completed in September 1994, the Company entered an
agreement with its largest trade creditor ("Affiliate") to repay
approximately $1.8 million over a period of up to four years,
without interest. The repayment is to be made out of part of the
processing fee that the Company earns from processing coupons for
the Affiliate and its subsidiaries. The Affiliate received 4.5%
(386,306 shares) of the Company's unregistered common stock in
exchange for debt of $27,000.
The Company issued an additional 20.4% (1,759,837 shares)
of unregistered common stock to an entity controlled by the
Chairman and CEO concurrent with entering into the agreement
described above in exchange for debt of $123,000. There was no
gain or loss recorded by the Company relating to the
restructuring.
(3) In December 1994, the Company completed the sale of real
property located in Delicias, Mexico for an aggregate sales price
of $1.1 million, and pursuant to an agreement with the Company's
former line of credit lender, the net proceeds from the sale were
paid to the lender. The line of credit was fully repaid and the
Company's agreement with that lender was terminated.
(4) On March 1, 1995, the Company privately placed $750,000
of its 12%, interest-only, debentures due December 31, 1999. On
the same date the Company entered into a loan agreement with a
national bank which provides the Company with a $1.0 million line
of credit, bearing interest at prime plus 1%. The line of credit
expires September 1, 1996.
(5) The Company has implemented a plan to combine its
customer service and information services operations, currently
located in El Paso, Texas, into its office facility in Juarez,
Mexico. This consolidation is part of management's ongoing
efforts to reduce operating costs and return the Company to
profitability. Effective April 30, 1995 the Company provided
$337,000 for future costs of the relocation, including future
mainframe computer lease expense and occupancy costs for the
premises to be vacated in El Paso. A lease buyout was negotiated
with the computer vendor, with the settlement price to be paid
out over 15 months commencing September 1, 1995. Future
information services will be provided by Company-owned computer
equipment located in Juarez.
(6) In May 1995, the Company entered into a letter agreement
with Affiliate to modify it September 1994 agreement to become
the exclusive processor of coupons under its Affiliate's
independent retailer program.
(7) In June 1995, the Company offered up to $1.0 million
serial notes -twenty units of $50,000 - due September 1, 2000,
bearing interest of 10% ("Offering"). Each subscriber is
entitled to receive 25,000 warrants to purchase the Company's
common stock for $0.25, exercisable up to five years. The
Offering, which expires September 1, 1995, requires a minimum
subscription of ten units. The Offering may be extended beyond
September 1, 1995 at the Company's discretion.
(8) The Company has experienced intermittent cash flow
problems during fiscal 1995 and 1994 which has prevented the
Company from consistently meeting the payment schedule specified
with all clearing house customers. In July 1995, the Company
formulated a plan to repay its customers all amounts in arrears,
which approximated $2.2 million, along with 9% interest. The
weekly repayments, which began in July 1995, are over various
payout periods.
3. LOSS ON REAL ESTATE
In March 1994, the Company sold buildings located in Mexico
for $2,350,000. The Company received cash of $1,500,000 and two
notes from the buyer totaling $850,000. The notes are to be paid
over a nine year period. The book value of the property sold was
approximately $2,350,000 resulting in no gain (loss) on the sale.
The buildings housed the Company's Mexican processing and
administrative facilities and the Company entered into a nine
year lease with the buyer. Annual lease payments under the lease
approximate $476,000 per year, subject to All Items Consumer
Price Index adjustments each calendar year. Under the lease
agreement, failure to pay monthly lease payments or a decision by
the Company to terminate the lease agreement result in a penalty
equal to the outstanding balance of the notes receivable from the
buyer. Due to the probable inability to meet future scheduled
lease payments and the resultant uncertainty of collecting the
notes receivable, the Company recorded an allowance of
approximately $842,000 as of April 30, 1994. During year ended
April 30, 1995, the Company received principal of $45,000 on the
two notes receivable. At April 30, 1995 the balance of these
notes was $797,000, which is fully reserved. The Company is
current on lease payments under this lease agreement.
At April 30, 1994, assets held for sale included three
properties which were offered for sale. Based on management's
analysis of the market value of these properties, the Company
increased their provision for loss on disposal by approximately
$657,000 during the fourth quarter of fiscal 1994. Two of the
properties sold during fiscal 1995, resulting in an additional
realized loss of $87,000.
During fiscal 1994, the Company consolidated all of its
Mexican operations into one plant, resulting in a leased plant
facility becoming vacant. During the fourth quarter of fiscal
1994, the Company recorded a loss of approximately $130,000, for
lease payments through the remaining term of the lease which
terminated in November 1994.
The Company obtained an independent appraisal of the estimated
market value of land owned in New Mexico and increased their
provision for loss on disposal by approximately $462,000 during
the third quarter of fiscal 1995.
4. WRITE OFF OF INTANGIBLES
Intangibles resulting from a past acquisition of the retail
accounts of another clearinghouse in the amount of $1,167,000
were written off during the fourth quarter of fiscal 1994. In
management's opinion, the intangible no longer had value based on
the deterioration of the business generated from these accounts
and the uncertainty of future financing needed to maintain and/or
grow the business generated from these and similar accounts.
5. LONG-TERM PAYABLE - AFFILIATE
At August 2, 1994, the Company was in arrears $2.0 million to
a large clearing house customer. As part of a management and
financial restructuring agreement completed September 7, 1994,
the Company entered an agreement with this customer ("Affiliate")
to repay approximately $1.8 million, which had previously been
carried as Accounts Payable - Retailers, over a period of up to
four years. The repayment is to be made out of part of the
processing fee that the Company will receive from processing
coupons for the Affiliate and its subsidiaries. The Affiliate
received 4.5% of the Company's unregistered common stock in
exchange for debt of $27,000 and the Company granted an anti-
dilution warrant allowing the Affiliate to purchase additional
shares of the Company's common stock to maintain its 4.5%
ownership interest in the Company.
As of April 30, 1995, the Company owed approximately
$1,647,000 under this agreement, of which $1,514,000 was
classified as long-term. Under certain circumstances, including
but not limited to, the termination of employment of the Chairman
of the Board and Chief Executive Officer, a default would occur
under this agreement that would accelerate the entire
indebtedness then outstanding.
6. LONG-TERM DEBT
On March 1, 1995 the Company privately placed $750,000 of its
12%, interest-only, debentures due December 31, 1999, which
provide for semi-annual interest payments on March 1 and
September 1. The debentures were issued to a group of the
Company's largest shareholders, of which one individual in the
group became a member of the Company's Board of Directors in May
1995. The debentures are collateralized by a first priority
security interest in all of the Company's furniture, fixtures and
equipment located in the United States, a first priority mortgage
on approximately 30 acres of land located in New Mexico, and a
second security interest in trade accounts receivable.
Additionally, the Company issued to the debenture holders
warrants to purchase in the aggregate 750,000 shares of the
Company's common stock for $0.15 per share, exercisable at any
time prior to March 1, 2000.
On March 1, 1995, the Company entered into a loan agreement
with a national bank which provides the Company with a $1,000,000
line of credit, bearing interest at prime plus 1%. The line of
credit matures on September 1, 1996. The agreement includes a
one-half percent service fee payable monthly on the previous
month's average principal outstanding balance. The loan is to be
used exclusively to provide for the Company's working capital
needs and is collateralized by a first security interest in trade
accounts receivable, a $51,000 certificate of deposit, any sums
of the Company on deposit with the lender, and guarantees from
individuals aggregating $1,000,000.
The Chairman of the Board of Directors and Chief Executive
Officer of the Company guaranteed $500,000 of the above bank
loan. As an inducement for the bank and guarantors to enter this
transaction, the Company issued warrants to purchase in the
aggregate 460,000 shares of common stock at $0.15 a share,
exercisable through March 1, 2000. The bank received 100,000
warrants, individuals guaranteeing $500,000 of the loan received
200,000 warrants (of which $200,000 of the guarantee and 80,000
warrants relate to an outside member of the Board of Directors),
and two individuals, who have guaranteed liquidity of collateral
pledged by the Chairman of the Board of Directors, received
160,000 warrants.
Information relating to borrowing agreements for the years
ended April 30 is as follows:
1995 1994 1993
Average month-end balance $1,265,000 $3,510,000 $6,005,000
Weighted average interest rate 11.17% 10.53% 10.74%
Maximum month-end balance $2,579,000 $4,754,000 $12,100,000
Weighted average interest rate
at end of period 11.58% 9.75% 9.00%
The average month-end balance and the weighted average
interest rate are calculated based upon the actual period of
borrowings, which was twelve months during each of the three
years in the period ended April 30, 1995.
7. INCOME TAXES
The Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109)
effective May 1, 1993, the first day of fiscal 1994. Prior to
May 1, 1993, the Company accounted for income taxes under the
provision of Accounting Principles Board Opinion No. 11. Under
SFAS No. 109, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The implementation of
SFAS No. 109 and the effect of adoption were not material to the
Company's financial statements.
The tax effects of significant items comprising the Company's
net deferred tax assets as of April 30, 1995 are as follows:
Assets Liabilities Total
Allowance for doubtful accounts $ 32,800 $ 32,800
Restructuring cost 134,800 134,800
Less valuation allowance (167,600) (167,600)
Current deferred taxes -- --
Allowance for note receivable 318,800 318,800
Amortization of intangibles 368,400 368,400
Net operating loss carryforward 9,842,000 9,842,000
Alternative minimum tax credit 120,000 120,000
Charitable contribution
carryforward 6,000 6,000
Installment sale (81,600) (81,600)
Property and equipment
basis difference (13,600) (13,600)
Less valuation allowance (10,560,000) (10,560,000)
Non-current deferred taxes 95,200 (95,200) --
Total deferred taxes $ 95,200 $(95,200) $ --
The Company has net operating loss carryforwards available for
future reductions of federal income taxes at April 30, 1995 as
follows:
Expiration Net Operating
Years Loss Carryforwards
2006 $ 6,299,000
2007 6,465,000
2008 4,051,000
2009 4,099,000
2010 3,691,000
Total $24,605,000
The Company also has alternative minimum tax net operating
loss carryforwards of approximately $24.9 million at April 30,
1995. Minimum tax credit carryforwards of $120,000 also exist as
of April 30, 1995.
8. VALUATION ALLOWANCES
The Company's valuation allowances for each of the three years
in the period ended April 30, 1995, were as follows:
1995 1994 1993
(Amounts in Thousands)
Allowance for doubtful
accounts receivable:
Balance at beginning of year $ 96 $ 195 $ 582
Additions:
Charged expense 190 1,558 185
Charged to other accounts 4 103 360
Deduction for write-off of bad
accounts and reduction of
allowance (208) (1,760) (932)
Balance at end of year $ 82 $ 96 $ 195
Allowance for doubtful
notes receivable:
Balance at beginning of year $ 842 $ - $ -
Charged to loss on real estate 842
Recovery ( 45)
Balance at end of year $ 797 $ 842 $ -
1995 1994 1993
(Amounts in Thousands)
Provision for loss on real estate
and restructuring costs:
Balance at beginning of year $1,347 $1,363 $ 700
Additions charged to restructuring
costs 673
Additions charged to loss on
real estate 337 657
Deduction (1,347) (673) (10)
Balance at end of year $ 337 $ 1,347 $ 1,363
Additions charged to restructuring costs in fiscal 1993 relate
primarily to the further automation of the Company's coupon
processing system, the change to a more efficient and cost
effective date processing system, including the anticipated costs
of terminating certain computer leases prior to the end of the
lease period. The additions charged to loss on real estate
during fiscal 1995 and 1994 relate primarily to management's
estimates of the loss on the sale of assets held for sale and the
termination of real estate and computer leases prior to the end
of their lease period.
9. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which covers all full-
time employees of the Company and its domestic subsidiaries with
one year of service. The Company's annual contribution to the
plan is at the discretion of the Company's Board of Directors and
cannot exceed 15% of eligible compensation. Employees who
participate in a qualified plan may contribute up to 10% of their
aggregate annual compensation for all years since they became a
participant. On October 31, 1991, an amendment was made to the
profit sharing plan adding an elective deferral 401(K) plan.
Eligible participants may elect to contribute up to 15% of their
current annual compensation, not to exceed that allowed by
federal tax laws. No Company contributions were made to the plan
during each of the three years in the period ended April 30,
1995.
The Company has an employee stock option plan under which
1,942,176 shares were reserved for issuance to officers and key
employees. The option price corresponds to the market value of
the stock on the dates the options were granted. Stock option
transactions for each of the three years in the period ended
April 30, 1995, are as follows:
Average
Number Option Price
of Shares Per Share
Options outstanding, April 30, 1992 268,437
Cancelled (13,250) $6.44
Options outstanding, April 30, 1993 255,187
Granted 240,000 $0.25
Cancelled (283,687) $4.05
Options outstanding, April 30, 1994 211,500
Granted 3,626,605 $0.17
Exercised (55,000) $0.25
Cancelled (46,500) $1.61
Options outstanding, April 30, 1995 3,736,605
Options covering 1,396,822 shares are exercisable at April 30,
1995, at option prices of $0.17, $0.25, $1.50, $3.25 and $6.88 a
share.
In May 1993, 240,000 options were issued to officers and key
employees at an option price of $0.25 per share. In September
1994, 3,626,605 options were issued to the Chairman of the Board
and Chief Executive Officer at the option price of $0.17 per
share. In May 1995 the Chairman relinquished options for
2,336,283 shares, which were included in options granted to
officers and key employees totaling 3,025,000 shares at the
option price of $0.25 per share.
The Company also maintains an unfunded executive supplemental
retirement plan which provides benefits payable by the Company to
certain former key employees (two former key employees at April
30, 1995). Eligible participants or their designated
beneficiaries receive benefits upon a participant's (i)
retirement or death after reaching retirement age, as defined in
the plan, or (ii) death while employed by the Company prior to
reaching retirement age. Fixed amounts of benefits are
established for separate classes of participants, depending upon
the level of executive and managerial responsibility achieved by
the participants. The benefits are payable in monthly
installment and, in certain cases, the participant may elect to
receive an actuarial equivalent of these benefits over a definite
period. The Company has purchased life insurance on the lives of
eligible participants in order to partially defray the cost of
funding the benefits payable. The Company's future unfunded
obligation of $330,000 under this plan has been accrued in the
consolidated financial statements as of April 30, 1995.
10. COMMITMENTS
The Company and its subsidiaries lease various equipment and
office space under agreements expiring at various dates through
fiscal 2003.
Future minimum lease commitments at April 30, 1995, for all
noncancellable operating leases, reduced by minimum amounts to be
paid by third parties under a sublease agreement, are as follows:
Minimum Net
Lease Less Lease
Year Ending April 30 Commitments Sublease Commitments
1996 $1,370,000 $ (602,000) $ 768,000
1997 1,094,000 1,094,000
1998 988,000 988,000
1999 476,000 476,000
2000 476,000 476,000
Thereafter 1,268,000 1,268,000
Total $5,672,000 $ (602,000) $5,070,000
Rent expense amounted to $1,140,000 in 1995, $473,000 in 1994,
and $835,000 in 1993. Rent expense does not include amounts paid
by third parties under the sublease agreement which requires the
sub-lessee to pay directly to the Landlord. These payments
amounted to $602,000 for 1995, $585,000 for 1994, and $551,000 in
1993.
The Chairman and Chief Executive Officer, the President and
the Executive Vice President and Chief Operating Officer all have
one-year employment contracts with the Company which are
automatically renewable absent written 30-day notice by the
Officers or the Company. The contracts provide them with
termination benefits equal to their full base salary for the year
in which termination occurs. The processing agreement which was
part of the management and financial restructuring agreement,
discussed in Notes 2 and 5, provides for termination of the
processing agreement should the Chairman cease to be employed by
the Company.
The President has an agreement with the Company which provides
him benefits in the event of a change in control of the Company
or his termination. In the event that he remains with the
Company for a period of six months after a change in control of
the Company, he will receive a cash payment in the amount of
$80,000. Under the agreement the cessation of the listing of the
Company's outstanding common stock on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ")
which occurred on March 30, 1994 was considered a change in
control of the Company. Therefore, the change of control benefit
of $80,000 became payable on September 30, 1994 and was accrued
at year ended April 30, 1994. As part of the management and
financial restructuring agreement entered into September 7, 1994
(See note 2) the payment of the change of control benefit due to
the cessation of listing on the "NASDAQ" was waived by the
President (in exchange for the one-year employment contract
disclosed above), and the $80,000 accrual of April 30, 1994 was
reversed in fiscal 1995. In addition, if he is terminated by the
Company or terminates his employment after a decrease in his
responsibilities or level of compensation at any time during the
two years following the change in control, he will receive an
$80,000 termination payment and a sum equal to six months' salary
plus one additional week's salary for each year of service with
the Company. At April 30, 1995, the maximum amount of severance
benefits which would be payable under this plan would be
approximately $159,000.
11. BUSINESS SEGMENT AND MAJOR CUSTOMER
During each of the three years in the period ended April 30,
1995, the Company engaged in one dominant industry which was the
processing of cents-off coupons for retail stores and
manufacturers. During the year ended April 30, 1995 one customer
(an Affiliate) accounted for approximately 17% of the Company's
revenue. A second major customer who accounted for 12% of the
Company's revenue in 1995 and 1994, ceased doing business with
the Company during the first quarter of the year ended April 30,
1995. A major customer who accounted for 18% and 19% of the
Company's revenue in the fiscal years ended April 30, 1994 and
1993, respectively, ceased doing business with the Company in
1994.
12. LITIGATION AND CONTINGENCIES
During the year ended April 30, 1989, the Company was named as
a defendant in a lawsuit alleging damages of $450,000, punitive
damages and treble damages resulting from negligence by a former
employee of a former subsidiary. Management believes the Company
has valid defenses and the Company is vigorously contesting the
lawsuit. Trial is scheduled for the Fall of 1995. In the
opinion of management, the likelihood of this proceeding
resulting in a loss in a material amount is remote.
The State of Texas has performed an audit of the Company's
Texas franchise tax returns for fiscal years 1987 through 1990
resulting in a tax due notice that determined the liability,
including interest and penalties, to be approximately $350,000.
13. SUBSEQUENT EVENTS
In regard to the lawsuit disclosed in Note 12, the Company has
reached a $30,000 settlement payable in three equal installments
ending on December 1, 1995.
The Company is in the final stages of an appellate process to
resolve the above State of Texas audit relating to the Company's
Texas franchise tax returns for fiscal years 1987 through 1990.
The Company has not recorded a liability at April 30, 1995 or
subsequent to year ended April 30, 1995 because the amount
involved in the appellate process to settle this matter in the
opinion of management is not a material amount.
On September 1, 1995, the Company defaulted by not making its
semi-annual interest payment due on its 12%, $750,000 Debentures.
The interest accrued, but unpaid at September 1, 1995, was
$45,000. The Company remains in default with respect to the
interest payment at October 30, 1995. A cross-default under the
Company's line of credit occurs when the Company defaults on the
payment of obligations due under its indentures. All amounts
under the above loan agreements are current liabilities as of
October 30, 1995.
As disclosed in Note 2, the Company has been in the process of
obtaining adequate financing to fund Company operations and to
meet other future cash requirements. On September 7, 1995, the
Company's Board of Directors approved a merger agreement dated
September 8, 1995 and amended on September 22, 1995 and October
30, 1995 with JSM Newco and JSM Merger. On September 25, 1995,
the Company filed a preliminary proxy statement which fully
describes this merger. The affirmative vote of a majority of the
outstanding shares of common stock of the Company will be
necessary for approval of this merger.
The Company's consolidated financial statements for the year
ended April 30, 1995 and for the quarter ended July 31, 1995
included in the Company's preliminary proxy statement filed on
September 25, 1995 have been presented on the basis that the
Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course
of business as more fully described in Note 2. If the Company
does not conclude this proposed merger or a transaction which
will provide similar amounts of operating capital to the Company
within the time frame covered in the Company's preliminary proxy
statement, the presentation of the Company's future consolidated
financial statements on a going concern basis may not be
appropriate.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
July 31 April 30
1995 1995
(Amounts in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 172 $ 60
Trade receivables:
Coupons processed 596 1,521
Coupons on-hand 289 1,191
Retailers 214 176
Allowance for doubtful accounts ( 105) (82)
Total trade receivables 994 2,806
Other receivables (Note 2) 243 237
Prepaid expenses & other assets 221 232
Total current assets 1,630 3,335
ASSETS HELD FOR SALE 194 194
INTANGIBLES AND OTHER ASSETS 39 39
PROPERTY AND EQUIPMENT:
At cost 5,762 5,790
Less accumulated depreciation 4,873 4,859
Property and equipment, net 889 931
TOTAL $ 2,752 $ 4,499
CURRENT LIABILITIES:
Accounts payable - retail stores $ 3,131 $ 4,476
Accrued expenses 933 1,113
Due to affiliate (Note 3) 133 133
Retail store deposits 1,792 1,797
Short-term debt - in default 1,395 --
Total current liabilities 7,384 7,519
LONG-TERM LIABILITIES:
Long-term debt -- 947
Due to affiliate (Note 3) 1,487 1,514
Other long-term liabilities 316 330
Total liabilities 9,187 10,310
DEFICIENCY IN ASSETS:
Common stock 864 864
Additional paid-in capital 12,725 12,725
Deficit (20,024) (19,400)
Total deficiency in assets (6,435) (5,811)
TOTAL $ 2,752 $ 4,499
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
July 31,
1995 1994
(Amounts in Thousands,
except per share amounts)
REVENUE $ 524 $ 762
COSTS AND EXPENSES:
Processing costs 547 1,065
General, administrative
and selling 528 631
Bad debt expense 18 18
Interest 54 92
Total 1,147 1,806
LOSS FROM OPERATIONS ( 623) (1,044)
OTHER INCOME, NET ( 1) 44
NET LOSS $( 624) $(1,000)
NET LOSS PER SHARE $ (0.07) $ (0.16)
WEIGHTED AVERAGE SHARES OUTSTANDING 8,640 6,438
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
July 31,
1995 1994
(Amounts in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (624) $(1,000)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 95 144
(Gain) loss on sale of equipment 2 ( 1)
Provision for loss on trade receivables 18 18
Increase (Decrease) in cash
resulting from changes in assets
and liabilities:
Trade receivables 1,794 836
Other assets 5 294
Accounts payable - retail
stores (1,345) ( 531)
Retail store deposits (5) ( 220)
Other liabilities (194) 1,252
Net cash provided by (used in)
operating activities (254) 792
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (55) ( 2)
Proceeds from sale of equipment 1
Net cash used in
investing activities (55) ( 1)
CASH FLOW FROM FINANCING ACTIVITIES:
Net (borrowings) payments on notes payable 448 (920)
Payments on affiliate debt (27)
Net cash provided by (used in)
financing activities 421 ( 920)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 112 ( 129)
CASH, BEGINNING OF YEAR 60 169
CASH, END OF YEAR $ 172 $ 40
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 54 $ 91
SEVEN OAKS INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of July 31, 1995,
the consolidated statements of operations for the three months
ended July 31, 1995 and 1994, and the consolidated statements of
cash flows for the three months then ended have been prepared by
the Company, without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Company
at July 31, 1995, and for all other periods presented have been
made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto
included in the Company's year end April 30, 1995, on Form 10-
KSB. The results of operations for the period ended July 31,
1995, are not necessarily indicative of the operating results for
the full year.
2. OTHER RECEIVABLES
During the quarter ended July 31, 1995, the Company received
$12,000 of principal from two notes receivable previously written
off at April 30, 1994. At July 31, 1995, the balance of these
notes was $785,000, which was fully reserved because of the
uncertainty of the Company's ability to continue to make lease
payments under its sale-leaseback agreement with respect to its
processing plant in Juarez, Mexico. Failure to make monthly
lease payments or a decision by the Company to terminate the
lease agreement would result in a cancellation and satisfaction
of the outstanding balance of the notes receivable from the owner
of the processing plant. The Company is currently performing
under the terms of its lease agreement.
3. LONG-TERM PAYABLE - AFFILIATE
As part of a management and financial restructuring agreement
completed September 7, 1994, the Company entered an agreement
with its largest trade creditor (hereinafter "Affiliate") to
repay approximately $1.8 million, which had previously been
carried as Accounts Payable - Retailers, over a period of up to
four years. The repayment is to be made out of part of the
processing fee that the Company will receive from processing
coupons for the Affiliate and its subsidiaries. As of July 31,
1995, the Company owed approximately $1.6 million under this
agreement, of which 92% was classified as long-term. Under
certain circumstances, including but not limited to the
termination of employment of the Chairman of the Board and Chief
Executive Officer, there would be a default under this agreement
that could accelerate the entire indebtedness then outstanding.
4. SUBSEQUENT EVENTS
On September 1, 1995, the Company defaulted by not making its
semi-annual interest payment due on its 12%, $750,000 Debentures.
The interest accrued, but unpaid at September 1, 1995, was
$45,000. The Company remains in default with respect to the
interest payment at September 13, 1995. A cross-default under
the Company's line of credit ($645,000 at July 31, 1995) occurs
when the Company defaults on the payment of obligations due under
its indentures. Since the Company does not have waivers on the
above debt defaults, all amounts outstanding at July 31, 1995,
totaling $1,395,000, have been classified as current liabilities.
On September 8, 1995, the Company entered into a definitive
merger agreement with JSM Newco, Inc. and JSM Merger Sub, Inc.
("JSM"), wherein JSM upon closing the merger agreement would:
a. Acquire for $0.31 a share all outstanding shares of the
Company, except that a small number of shareholders, including
the executive officers and a major customer of the Company, would
retain some or all of their common stock in the Company;
b. Provide access to a minimum of $3 million of capital to
the Company;
c. Repay principal and interest to the Company's
debentureholders; and,
d. Repay or refinance the Company's outstanding line of
credit. The transaction is subject to approval of the
shareholders of the Company.
______________________
PROXY
______________________
SEVEN OAKS INTERNATIONAL, INC.
700 COLONIAL ROAD, SUITE 100
MEMPHIS, TENNESSEE 38117
SPECIAL MEETING OF SHAREHOLDERS - NOVEMBER 27, 1995
The undersigned hereby appoints Peter R. Pettit and Jimmy H.
Cavin, or either of them, with full power of substitution in
each, proxies (and if the undersigned is a proxy, substitute
proxies) to vote all Common Stock of the undersigned in Seven
Oaks International, Inc. at the Special Meeting of Shareholders
to be held at the East Memphis Hilton, 5069 Sanderlin Avenue,
Memphis, Tennessee at 10:00 a.m., local time, on Thursday,
November 27, 1995, and at any adjournments thereof, as specified
below:
(a) ADOPTION OF AGREEMENT AND PLAN OF MERGER
FOR AGAINST ABSTAIN
(b) In their discretion, the proxies (and if the undersigned is
a proxy, any substitute proxies) are authorized to vote upon such
other business as may properly come before the meeting.
[Please sign and date on reverse side of this proxy.]
This proxy, when properly executed, will be voted in the
manner directed herein by the undersigned shareholder.
Dated:_______________________, 1995
Please sign name exactly as
it appears on stock certificate.
Only one of several joint owners
need sign. Fiduciaries should
give full title.
___________________________________
Signature
___________________________________
Title
This proxy is solicited by the Board of Directors.
If no specification is made,
this Proxy will be voted FOR the Proposal.