SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1998
Commission File No. 0-27664
UNIDIGITAL INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-3856672
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
229 West 28th Street, New York, New York 10001
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(Address of Principal Executive Offices) (Zip Code)
(212) 244-7820
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(Issuer's Telephone Number,
Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each class on Which Registered
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- ---------------------------- ----------------------------------------
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
<PAGE>
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes: X No:
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its fiscal year ended August 31, 1998 were:
$47,389,000.
The aggregate market value of the voting and non-voting Common Stock held
by non-affiliates of the Issuer was: $7,906,342 at October 31, 1998 based on the
last sales price on that date.
State the number of shares outstanding of each of the Issuer's classes of
Common Stock, as of October 31, 1998:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 5,089,858
The following documents are incorporated by reference into the Annual
Report on Form 10-KSB: Portions of the Issuer's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................................. 1
2. Properties............................................... 10
3. Legal Proceedings........................................ 10
4. Submission of Matters to a Vote of Security Holders...... 10
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters...................................... 11
6. Selected Financial Data.................................. 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation....................... 15
7A. Quantitative and Qualitative Disclosures About Market
Risk..................................................... 24
8. Financial Statements and Supplementary Data.............. 24
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 24
PART III 10. Directors and Executive Officers of the Company........... 25
11. Executive Compensation.................................... 25
12. Security Ownership of Certain Beneficial Owners
and Management............................................ 25
13. Certain Relationships and Related Transactions............ 25
PART IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 26
SIGNATURES.............................................................. 27
EXHIBIT INDEX........................................................... 29
FINANCIAL STATEMENTS.................................................... F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
Unidigital Inc., together with its wholly-owned subsidiaries (collectively,
the "Company"), is a leading service business within the graphic arts industry
that provides imaging, reproduction and integrated media solution services to
advertising agencies, retailers, corporations, marketing/communications firms,
publishers, government agencies and financial institutions in the New York City,
Boston, San Francisco and London markets. Through active cross-selling among its
four divisions, Unison, KWIK, Elements and the Regent Group (collectively, the
"Unidigital Enterprise"), the Company, provides imaging, reproductive and
integrated media solutions to each of the large format, digital prepress and
digital printing segments of the industry. Cross-selling among the Unidigital
Enterprise offers a total solution for customers, which the Company believes,
creates a distinct advantage over competitors within the marketplace. Overall,
the Company serves a diverse client base, with the largest client accounting for
less than 4% of the Company's fiscal 1998 net sales.
ACQUISITION STRATEGY
The Company continues to review opportunities to expand its business and
markets in the large format, digital prepress and digital printing markets.
The Company seeks to acquire leading companies in its market while also
identifying and measuring the impact of operational synergies, cross-selling
potential, improved efficiencies and cost savings that any future acquisition
may have on the Company's operations as a whole. Implementing this strategy, the
Company has added new products and services and expanded existing ones to keep
pace with customer needs that are identified in its business segments. In
addition to the Company's continuous focus on its existing business segments,
the Company may seek to pursue future acquisitions and development in other
segments of the market.
THE DIVISIONAL BRANDING STRATEGY
The Company has implemented a divisional branding strategy to better market
the Company's diverse product and service offerings. This branding strategy
allows for the marketing of each division to the respective business segment
that the division primarily serves, thus building brand identity and loyalty for
each division. Each company within a division has at their disposal, and are
encouraged to sell, any product or service offered within the Unidigital
Enterprise. The broad range of products and services offered by the Company
enables each individual company to provide integrated graphic and media
solutions for their customers while still keeping each division's core
capabilities at the forefront.
<PAGE>
The Company currently utilizes four divisions:
Division Locations Primary Business Segments
- -------- --------- -------------------------
Unison New York City, Boston and Large Format
San Francisco
KWIK New York City High-End Digital Prepress
Elements New York City, San Francisco Digital Prepress/Digital
and London Printing
The Regent Group London Digital Printing and
Financial Printing
UNISON
Unison companies service media companies, corporate clients, retailers,
advertising agencies and marketing/communications professionals with a wide
range of large format printing solutions. Sales are consultative in nature,
largely project driven and are priced generally on a per project basis.
KWIK
KWIK companies provide creative retouching and digital prepress services to
firms in the advertising, health care and beauty industries, including several
Fortune 500 companies. Sales are consultative in nature and largely project
driven.
ELEMENTS
Elements companies provide digital prepress and digital printing products
and services primarily to graphic artists and marketing professionals who design
and prepare files for reproduction. Elements is typically open 24 hours a day, 6
days a week. Projects are priced from a published price list.
THE REGENT GROUP
The Regent Group supplies digital printing and financial printing services
to a diversified client base consisting of corporations, financial institutions
and government agencies. Sales are consultative in nature and project based.
MARKETS SERVED BY THE COMPANY
The Company, through its four divisions, currently services the large
format, digital prepress and digital printing segments of the graphic arts
industry.
LARGE FORMAT
Large format services consist of the printing of large graphics from
digital files. Various technologies and substrates are used to produce large
format images for retail point of purchase
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displays, posters, environmental graphics, wall murals and signage. Industry
analysts expect this business segment to exceed $10 billion in the United States
in the year 2000.
DIGITAL PREPRESS
The digital prepress segment of the graphics art industry is generally
defined as the necessary steps between the creative process and the actual
printing of a graphic design. Digital prepress services involve the preparation
of images and text for reproduction by any of several input, retouching,
proofing and output processes. Industry analysts expect this business segment to
exceed $5.2 billion in the United States in the year 2000.
DIGITAL PRINTING
Digital printing, also known as "on-demand" or "short-run" printing,
involves translating computer-generated graphic design and content into a color
or black and white printed image on a digital printing press. The key advantages
of the digital printing process is realized in time and cost savings by
replacing traditional color separations, metal printing plates and graphic
processes with digital technology. Industry analysts estimate that this business
segment will generate over $20 billion in revenues in the United States by the
year 2001.
SERVICES PROVIDED BY BUSINESS SEGMENT
LARGE FORMAT
The Company, primarily through the Unison division, produces large format
graphics from digital files that are printed to various substrates for specific
applications utilizing the latest in inkjet, electrostatic, dye sublimation and
laser technologies. The Company believes it has invested in the necessary
hardware devices and software programs to solve the most demanding large format
graphic display demands. Each of these devices has been specifically chosen to
satisfy application demands in the marketplace.
Large format graphics are produced for great advertising impact. They are
used for retail point of purchase displays, posters, signage, back-lit displays,
environmental graphics and grand wall scapes that hang on the sides of
buildings. Very large graphics are sometimes referred to as grand format. Grand
format sizes can be produced to over 30,000 square feet in size by sewing or
welding together pieces of the image that are output in sections. Unison engages
technology in pursuit of projects such as vehicle graphics, indoor or outdoor
large banners or event graphics.
The large/grand format business segment is one of the fastest growing
business segments in the graphic arts industry. The Company believes it will
continue to acquire businesses and add services to its existing facilities in
response to the increasing market demand of this business segment.
Customers
---------
Unison customers consist of media companies, corporate clients, retailers,
advertising agencies and marketing/communications professionals, as well as
businesses in a variety of industries
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requiring large display graphics. Unison receives individual orders from
customers on a project-by-project basis rather than under long-term service
contracts. Continued engagements for successive jobs are dependent primarily
upon a customer's satisfaction with the quality of previous services provided by
the division.
Unison draws customers for its large format product from a local, regional,
national and international client base. Customers of Unison may require: point
of purchase posters printed on paper stock; event banners printed on vinyl;
graphics printed on scrim material for theater productions; or images printed on
mesh installed on to the facades of buildings. Unison employees receive training
to advance their understanding of technical devices, and how to better service
and recognize customer needs.
Sales and Marketing
-------------------
Unison directly sells its large format services through a team of
salespersons lead by a director of sales in each of its locations. In its
operations, Unison has employed a consultative sales strategy and individualized
customer service that has resulted in long-standing relationships with its
customers. Unison uses various methods to market its services, including direct
mail, product samples, trade shows, promotions and internet sites. Extensive
collateral material on products and services offered, testimonials of previous
projects and "how to" sheets for file preparation are readily available for
distribution to customers. The Unison internet site is a repository for
information on products and services, employment opportunities, press releases,
up-coming events and industry news.
Competition
-----------
Unison competes in a large format marketplace that is rapidly growing. This
industry segment is characterized by many smaller companies often servicing
narrow market channels such as small design firms, local retailers and general
display markets. The Company enjoys a competitive advantage in the marketplace
through its ability to invest in output devices, software and intercompany high
speed networks resulting in cost efficiencies to its customers. Unison's
expertise, output devices, software and network enable the Company to produce
and manage large projects that are difficult for smaller companies to
administer. Customers seek out the Company's services and products offered by
its Unison division because of its vast array of technologically advanced
equipment, technical expertise, service orientation and capability to solve
unique challenges associated with large format graphics.
HIGH-END DIGITAL PREPRESS AND DIGITAL PREPRESS
The Company's Elements and KWIK divisions provide digital prepress services
to their respective customer bases. While they produce similar end-products,
Elements and KWIK each have distinct customer bases, sales methods and marketing
schemes. Each division also faces unique competitive forces. Both Elements and
KWIK provide a comprehensive array of digital prepress services, including the
input or scanning of photographic transparencies, negatives, prints or artwork,
retouching, imagesetting, the production of electronic color separations, the
production and finishing
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of high resolution color proofs and the production of plate-ready films. These
services are the necessary steps between the creative process and the
traditional printing of a graphic design.
The Company believes that its relationships with customers, many of which
are long-standing, and its reputation for quality of service are excellent.
Continued engagements for successive jobs are dependent primarily upon customer
satisfaction with the quality of previous services.
The digital prepress business segment is extremely fragmented and serviced
by numerous local and regional providers. The Company faces competition in this
segment from digital prepress firms whose primary function is to provide digital
prepress services, companies who provide digital prepress services along with a
variety of other digital output products and services and larger corporations
who produce digital prepress services in-house using common desktop equipment
and software.
ELEMENTS
Customers
---------
Elements services primarily graphic artists and marketing/communications
professionals who design and prepare files for reproduction. Customers generally
refer to a published price list for the cost of products and services. This
price list enables clients to cross-reference various turn-around times to a
corresponding cost allowing them to best satisfy their budget or deadline
requirements.
Sales and Marketing
-------------------
Elements actively markets its digital prepress services to its client base
by direct sales methods aimed at existing and potential customers. Salespersons
and a director of sales are utilized in each of the division's locations.
Various marketing methods including, direct mail, product samples, trade shows,
promotions and internet sites, are employed to attract new customers. Extensive
collateral material on products and services and "how to" sheets for file
preparation are distributed via direct mail. The Elements internet site is a
repository for information on products and services as well as its published
price list.
Competition
-----------
Elements competes for customers by offering an extensive array of devices
that are not generally available to design studios or in-house corporate graphic
departments. Typical digital prepress customers prepare their own files and
generally choose a vendor for turn-around time, price and quality consistency.
Expertise and capacity in preparing complicated or large projects are also
contributing factors to this segment's competitive landscape. Value-added
services, however, are not significant in a customer's decision-making process
when choosing a provider of digital prepress services.
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KWIK
Customers
---------
KWIK provides digital prepress services to firms in the advertising, health
care and beauty industries, including Fortune 500 companies. KWIK attracts
customers by offering them creative digital retouching capabilities, an industry
reputation for quality digital prepress services and personalized customer
service that caters to its customers' needs. Pricing is determined on a project
by project basis.
Sales and Marketing
-------------------
KWIK has built an expansive customer list by emphasizing a
relationship-based sales strategy which attracts new and retains existing
customers. Specifically, customers are assigned a dedicated account
representative who becomes familiar with the customers preferences, technical
requirements and graphic standards. Public relations, product collateral and an
internet presence fulfill KWIK's marketing objectives.
Competition
-----------
KWIK and its competitors are consultative in their sales methodologies,
supply a high level of technical expertise and provide many value-added services
such as premium retouching, color correction and creative input. Competitors vie
for many of the same high profile clients and projects. Some of these
competitors are larger and have greater financial resources than KWIK. When
determining a suitable digital prepress provider to suit their needs, customers
that KWIK may service generally tend to weigh the following criteria:
reputation, capacity, creative expertise, turn-around time and budget
considerations.
DIGITAL PRINTING
Digital printing, also known as "on-demand" or "short-run" printing,
involves translating computer-generated graphic design and content into a color
or black and white printed image on a digital printing press. The advantage of
the four color digital printing process is realized in time and cost savings to
clients by replacing traditional color separations, metal printing plates and
graphic processes with digital technology. The growth in this business segment
is also fueled by demands in the marketplace. Marketers and designers are
becoming increasingly aware of the advantages that short-run digital printing
brings them in speed to market, personalization and price values.
The Company, primarily through its Elements and Regent Group divisions,
supplies to the marketplace a comprehensive array of digital printing devices to
the marketplace. Each digital printing press fills a particular need in the
marketplace and several of the presses utilize the value-added benefit of
personalization software to address sophisticated marketing challenges.
Personalization software allows for each page of a document to be personalized,
employing variable text or image data base information of known buying habits
and relevant demographic information to the printed page. This personalization
or targeting results in higher success and response rates for brochures, direct
mail offers, as well as more effective presentation materials.
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<PAGE>
Customers
---------
While digital printing is sold across the Unidigital Enterprise, the
Elements and Regent Group consider digital printing a key component to their
product and services mix. Elements' customers primarily consist of graphic
design firms, marketing communications departments, advertising agencies,
pharmaceutical companies and individual graphic artists. The Company believes
that these customers, drawn from the on-going digital prepress customer base of
Elements, are likely to become users of digital printing services. The Regent
Group's client base primarily consists of corporations, financial institutions,
insurance companies and investment banks. The Regent Group sells digital black
and white and four color digital printing to its established client roster who
often require traditional offset printing and financial typesetting services.
Sales and Marketing
-------------------
Both Elements and the Regent Group sell their services through salespersons
that are led by a director of sales in each of their respective locations. In
developing their digital printing businesses, Elements and the Regent Group both
market to buyers of conventional color and black and white printing that may be
able to utilize digital printing to save money and time, or realize a digital
printing benefit. Elements uses various marketing methods including direct mail,
product samples, trade shows, promotions and the internet. In addition, Elements
mails out extensive collateral material on products and services offerings,
testimonials of previous projects and "how to" sheets for file preparation. The
Regent Group sales, however, are predominantly consultative and relationship-
based. The Regent Group promotes new client contacts by publishing descriptive
brochures that highlight its digital printing capabilities. In addition,
traditional methods of marketing, such as personalized correspondence and
telephone consultation, are used to attract new clients and maintain existing
ones.
Competition
-----------
Elements and the Regent Group both confront digital printing competition
from conventional printers which have added, or plan to add, digital presses.
Elements and the Regent Group have differing customer profiles, which is
reflected in the varied nature of their competitors. Elements faces competition
from digital prepress competitors and conventional printers that have purchased
digital presses. Elements believes that it has several competitive advantages
over conventional printers and digital prepress service providers. First,
Elements currently handles a large number of relatively small jobs and has the
capability to process such small jobs on a volume basis with the proper service
approach. Second, Elements has existing customers which it believes are likely
to become users of digital presses. Lastly, unlike certain of its competitors,
Elements presently possesses the computer hardware, software and expertise to
support digital printing.
The Regent Group faces competition from conventional and financial printers
that are investing in digital printing presses. Some of these companies are
larger, have greater financial resources and offer more comprehensive services
than the Regent Group. The Regent Group, however, uses its smaller size to more
effectively react to customer needs to provide better service to
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this market than its competitors. The Regent Group also offers the latest
digital advancements available to its growing customer base.
ANCILLARY PRODUCTS AND SERVICES
The Company also provides ancillary products and services associated with
its core services such as photographic printing and processing, financial
printing, interlinks and outsourcing.
PHOTOGRAPHIC PRINTING AND PROCESSING
The Company, through its Unison division, operates a commercial
photographic lab that produces traditional photographic printing and photo
processing.
FINANCIAL PRINTING
The Regent Group in London provides financial printing services that
include the production, formatting and printing of corporate finance and
research documents for corporate clients.
INTERLINKS
As a value-added service, the Company offers a remote output service via a
high speed telecommunications link between its New York City, Boston, San
Francisco and London offices, whereby a client with computer-generated files in
one location can have immediate access to output at the other location while
maintaining consistent quality control and customer service at stable prices.
OUTSOURCING
As many prospective customers progressively seek to preserve capital to
expand their core competencies, and accordingly, reduce their digital printing
requirements, increasingly they recognize the value of having a vendor that is a
single source for printing, finishing and integrated media solutions. The
Company attempts to provide these solutions for customers by using the various
capabilities of its divisions or by partnering with outside vendors.
The Company believes that to remain competitive in each of the foregoing
business segments it must maintain existing customer relationships and
recognize, develop and leverage new technologies and additional services which
meet the evolving needs of its client base. There can be no assurance that the
Company will be able to continue to compete successfully with existing and new
competitors in any of the Company's markets.
NEW PRODUCT DEVELOPMENT
The Company also believes that it must develop and implement new
technologies and additional services which meet the evolving needs of its
customer base. The Company continually invests in technology designed to provide
media solutions within the large format, digital prepress and digital printing
business segments. The Company focuses on understanding systems and the methods
available in the market to create solutions using off-the-shelf products,
customized to meet a variety of customer needs.
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GOVERNMENT REGULATION
The industry, while not heavily regulated, is subject to federal, state,
and local laws, regulations and ordinances governing the removal and handling of
hazardous waste. The Company believes it is in compliance in all material
respects with such laws, regulations and ordinances and maintains these
standards through internal control and disposal methods at each location.
Hazardous substances resulting from digital prepress, digital printing and
photographic processes are disposed of by third party vendors in each of the
local markets in which the Company conducts its operations. To date, the cost of
compliance with such laws, regulations and ordinances has not been material. In
the event the Company expands its operations, it may be subject to additional
environmental laws, regulations or ordinances, including requirements to obtain
certain environmental permits. The Company cannot predict the environmental
legislation or regulations that may be enacted in the future or how existing or
future laws or regulations will be administered or interpreted. Developments
such as additional requirements imposed by more stringent laws or regulations,
as well as vigorous enforcement policies of regulatory agencies or stricter
interpretation of existing laws may require additional expenditures by the
Company, some or all of which may be material.
EMPLOYEES
As of October 31, 1998, the Company employed 391 persons, approximately 381
of whom are full-time employees. Of such employees, 276 are employed in the
United States and 115 are employed in the United Kingdom. Forty-six of the
Company's employees at KWIK are covered by a collective bargaining agreement.
The Company considers its employee relations to be satisfactory.
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ITEM 2. PROPERTIES.
At August 31, 1998, the Company leased the office space set forth in the
following table:
SQUARE EXPIRATION
LOCATION FOOTAGE DATE DIVISION
- --------------------------------------------------------------------------------
20 West 20th Street - New York 21,800 2/28/03 Elements
Battery Park City - New York 1,500 6/30/99 Elements
229 West 28th Street - New York 43,200 2/28/09 KWIK
2,800 5/31/08 KWIK
577 Second Street - San Francisco 2,900 Month to Month Elements
451 D Street - Boston 37,500 12/31/98 Unison
48 Margaret Street - London UK 10,300 12/31/04 Elements
Truscott House 32-42 East Road -
London UK 8,900 3/31/08 Regent
Pegasus House 116-120 Golden
Lane - London UK 3,765 Month to Month Elements
Additionally, at August 31, 1998, the Company owned approximately 34,000
square feet of office space in New York City, which is utilized by Unison (NY).
Subsequent to the end of the fiscal year, the Company sold a portion of such
property for $800,000. Subsequent to August 31, 1998, in connection with
acquisitions of Hy Zazula Associates, Inc. and Mega Art Corp., the Company
acquired leased space of 9,500 square feet and 11,000 square feet, respectively,
in New York City. In connection with the acquisition of SuperGraphics Holding
Company, Inc., which was consummated subsequent to August 31, 1998, the Company
acquired leased space of 13,700 square feet in Sunnyvale, California. The
Company's interests in each of such leased and owned properties are subject to a
first priority lien held by Canadian Imperial Bank of Commerce as security for
the Company's borrowings under its credit facilities. The Company believes that
its current facilities are suitable and adequate for its current operations and
short-term foreseeable needs, and that it will be able to renew these leases or
obtain alternative space for such facilities upon the expiration of the current
leases. Additional facilities will be required to support growth as the Company
expands into new geographic areas.
ITEM 3. LEGAL PROCEEDINGS.
There is no material litigation pending to which the Company is a party or
to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to February 1, 1996, there was no established market for the
Company's Common Stock. Since February 1, 1996 the Common Stock has been quoted
on the Nasdaq National Market under the symbol "UNDG."
In the fourth quarter of fiscal 1998, the Company received notice from The
Nasdaq Stock Market, Inc. ("Nasdaq"), that the Company did not meet the net
tangible asset requirement under Maintenance Standard 1 or the market value of
public float requirement under Maintenance Standard 2 for continued listing on
the Nasdaq National Market. The Company has made application to the American
Stock Exchange ("AMEX") for listing of the Common Stock on AMEX and the Company
has received verbal approval from AMEX for such listing. To date, Nasdaq has not
delisted the Common Stock. There can be no assurance, however, that the Common
Stock will not be delisted from the Nasdaq National Market or that the Company
will receive written approval for listing of the Common Stock on AMEX.
The following table sets forth the high and low sales prices for the
Company's Common Stock for the quarters indicated since August 31, 1996 as
reported by the Nasdaq National Market. The quotes represent inter-dealer prices
without adjustments or mark-ups, mark-downs or commissions and may not represent
actual transactions.
Common Stock
Quarter ended High Low
---- ----
November 30, 1996........................ $6 3/4 $4 1/8
February 28, 1997........................ $6 1/8 $4 1/2
May 31, 1997............................. $5 7/8 $4 13/16
August 31, 1997.......................... $8 $5 3/8
November 30, 1997........................ $10 1/8 $7
February 28, 1998........................ $8 1/2 $4 1/2
May 31, 1998............................. $10 3/8 $5 1/2
August 31, 1998.......................... $9 $5 3/4
As of October 31, 1998 the approximate number of holders of record of the
Common Stock was 42 and the approximate number of beneficial holders of the
Common Stock was 400.
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The Company has not paid or declared cash dividends on its Common Stock
since its inception. The Company currently intends to retain any future earnings
to finance the growth of the business and, therefore, does not anticipate paying
any cash dividends in the foreseeable future. Furthermore, the Company's credit
facility contains a covenant which prohibits the Company from paying dividends
or making other distributions.
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Item 6. Selected Financial Data.
The following table sets forth selected consolidated historical financial
data of the Company as of the dates and for the periods indicated. The selected
financial data set forth below for the Company as of August 31, 1997 and 1998
and for each of the three years ended August 31, 1998 are derived from the
audited financial statements included elsewhere herein. The selected financial
data set forth below for the Company as of August 31, 1994, 1995 and 1996 and
for each of the years ended August 31, 1994 and 1995 are derived from the
financial statements not included elsewhere herein. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere herein. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included elsewhere herein.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Net Sales $ 4,111 $ 8,542 $ 11,660 $ 27,262 $ 47,389
Expenses:
Cost of sales 1,740 3,901 5,622 14,450 25,305
Selling, general and administrative expenses 1,687 2,946 4,049 9,673 15,925
Expenses incurred due to restructuring -- -- -- -- 771
-------- -------- -------- -------- --------
Total operating expenses 3,427 6,847 9,671 24,123 42,001
-------- -------- -------- -------- --------
Income from operations 684 1,695 1,989 3,139 5,388
Interest expense (36) (195) (327) (1,095) (1,913)
Interest expense-deferred financing costs -- -- -- (138) (1,143)
Interest and other income -- -- 232 28 (75)
-------- -------- -------- -------- --------
Income before income taxes 648 1,500 1,894 1,934 2,257
-------- -------- -------- -------- --------
Provision for income taxes
(including nonrecurring provision relating
to termination of subchapter S status in 1996) 62 356 1064 593 978
-------- -------- -------- -------- --------
Net income before extraordinary item 586 1,144 830 1,341 1,279
Extraordinary item-loss on early retirement of
debt (net of income tax benefit of $137,000) -- -- -- -- (143)
-------- -------- -------- -------- --------
Net income $ 586 $ 1,144 $ 830 $ 1,341 $ 1,136
======== ======== ======== ======== ========
Basic earnings (loss) per common share(1):
Earnings before extraordinary item $ 0.54 $ 0.31 $ 0.42 $ 0.36
Extraordinary item -- -- -- (0.04)
-------- -------- -------- --------
Net income $ 0.54 $ 0.31 $ 0.42 $ 0.32
======== ======== ======== ========
Diluted earnings (loss) per common share(1):
Earnings before extraordinary item $ 0.54 $ 0.31 $ 0.41 $ 0.34
Extraordinary item -- -- -- (0.04)
-------- -------- -------- --------
Net income $ 0.54 $ 0.31 $ 0.41 $ 0.30
======== ======== ======== ========
Shares used to compute net income per share:
Basic 2,000 2,644 3,212 3,531
======== ======== ======== ========
Diluted 2,000 2,663 3,283 3,779
======== ======== ======== ========
Balance Sheet Data (at period end):
Working capital (deficit) $ 517 $ 22 $ 2,319 $ (2,189) $ 8,897
Total assets 2,065 6,550 17,623 33,033 67,315
Stockholders' equity 1,310 2,605 7,365 9,473 14,393
</TABLE>
(1) The 1995 and 1996 net income per share are pro forma amounts that give
effect to the historical combined results of operations adjusted for (i) the
reduced level of salaries paid to the principal stockholder/officer and the
former partner ($319,000 (1995) and $73,000 (1996)) and (ii) the income tax
effect of Elements (NY) changing from Subchapter S status, as if these had
occurred effective September 1, 1995 ($741,000 (1995) and $795,000 (1996)).
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The Company is a leading provider of imaging, reproduction and integrated
media solution services to advertising agencies, retailers, corporations,
marketing/communications firms, publishers, government agencies and financial
institutions in the New York City, Boston, San Francisco and London markets.
Through active cross-selling among the Unidigital Enterprise, the Company
provides imaging, reproductive and integrated media solutions to each of the
large format, digital prepress and digital printing segments of the industry.
Cross-selling among the Unidigital Enterprise offers a total media solution for
customers, which the Company believes, creates a distinct advantage over
competitors within the marketplace.
The statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission (the "SEC"), or press
releases or oral statements made by or with the approval of an authorized
executive officer of the Company. These forward-looking statements, such as
statements regarding anticipated future revenues, capital expenditures, Year
2000 compliance and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
to: (i) economic conditions, including economic conditions related to the
digital print industry; (ii) the availability of equipment from the Company's
vendors at current prices and levels; (iii) the intense competition in the
markets for the Company's products and services; (iv) the Company's ability to
integrate acquired companies and businesses in a cost-effective manner; (v) the
Company's ability to effectively implement its branding strategy; and (vi) the
Company's ability to develop, market, provide, and achieve market acceptance of
new service offerings to new and existing clients.
RESULTS OF OPERATIONS
The consolidated financial information includes both the Company's United
States operations and its United Kingdom operations. On August 9, 1996, the
Company acquired substantially all of the assets of Cardinal Communications
Group, Inc. and its affiliate C-Max Graphics, Inc., a New York City based
company which provides digital prepress, digital printing and large format
services in the New York metropolitan area (the "Cardinal Acquisition"). As a
result of such acquisition, the Company expanded its digital prepress and
digital print operations
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in the New York City and surrounding area. On April 4, 1997, the Company
acquired substantially all of the assets of Boris Image Group, Inc., a Boston,
Massachusetts based company which principally engaged in the business of
photographic, large format and digital imaging (the "Boris Acquisition"). On May
22, 1997, the Company acquired all of the capital stock of Libra City Corporate
Printing Limited, a London-based financial printer (the "Libra Acquisition")
and, as a result, currently provides financial printing services to the London
financial community. On March 25, 1998, the Company acquired substantially all
of the assets of Kwik International Color, Ltd. (the "Kwik Acquisition"). As a
result of such acquisition the Company has expanded its color separation and
large format printing services in the New York City and surrounding area. Such
acquisitions have been accounted for under the purchase method of accounting
and, therefore, results of operations from such acquisitions are included in the
Company's consolidated financial statements from the date of the respective
acquisition.
For a discussion of the operating performance of the Company by segments,
see Note 14 of the Notes to the Consolidated Financial Statements included
elsewhere in this Form 10-KSB.
COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
Net sales. Net sales for the fiscal year ended August 31, 1998 increased by
74%, or $20,127,000, to $47,389,000 from $27,262,000 for the fiscal year ended
August 31, 1997. Net sales for the Company's United States operations increased
by 93%, or $15,233,000, from $16,293,000 in the fiscal year ended August 31,
1997 to $31,526,000 in the fiscal year ended August 31, 1998. This increase was
attributable primarily to an increase in net sales resulting from the Kwik
Acquisition and, to a lesser extent, an increase in net sales in the Company's
other United States subsidiaries and the inclusion of net sales resulting from
the Boris Acquisition for a full year. Net sales for the Company's United
Kingdom operations increased by 45%, or $4,894,000, from $10,969,000 in the
fiscal year ended August 31, 1997 to $15,863,000 in the fiscal year ended August
31, 1998. This increase was attributable primarily to inclusion of net sales
resulting from the Libra Acquisition for a full year and internal growth in the
Company's UK operations.
COST OF SALES. Cost of sales for the fiscal year ended August 31, 1998
increased by 75%, or $10,855,000, to $25,305,000 from $14,450,000 for the fiscal
year ended August 31, 1997 and 1998. As a percentage of net sales, cost of sales
remained constant at 53% for the fiscal years ended August 31, 1997 and 1998.
Cost of sales for the Company's United States operations decreased as a
percentage of net sales from 48% for the fiscal year ended August 31, 1997 to
43% for the fiscal year ended August 31, 1998. Such decrease was attributable
primarily to the change in product mix in the Company's United States operations
to include more digital prepress services. Costs of sales for the Company's
United Kingdom operations increased as a percentage of net sales from 61% for
the fiscal year ended August 31, 1997 to 63% for the fiscal year ended August
31, 1998. Such increase was attributable primarily to the change in product mix
in the Company's United Kingdom operations to include more digital print and
financial print services. Digital print and financial print services have higher
costs of sales compared to digital prepress services.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased 65%, or $6,252,000, from $9,673,000
for the fiscal year ended August 31, 1997 to $15,925,000 for the fiscal year
ended August 31, 1998. Such increase was attributable primarily to the increased
level of operations resulting from the Kwik Acquisition, the Boris Acquisition
and the Libra Acquisition and, to a lesser extent, the hiring of additional
management and administrative personnel and costs associated with the Company
acquisitions. As a percentage of net sales, SG&A decreased slightly from 35% for
the fiscal year ended August 31, 1997 to 34% for the fiscal year ended August
31, 1998.
RESTRUCTURING EXPENSES. In connection with the Kwik Acquisition, the
Company has consolidated its New York operations. In addition, the Company
reduced the staff providing financial printing services in its United Kingdom
operations. As a result of such consolidation and staff reduction, the Company
incurred restructuring expenses of $771,000, consisting of approximately
$305,000 of termination benefits relating to the termination of 35 employees
providing similar services and approximately $466,000 of facility exit costs,
including $90,000 related to write-downs of leasehold improvements. At August
31, 1998, all termination benefits have been paid and approximately $78,000 of
accrued facility exit costs remain in accounts payable.
INCOME FROM OPERATIONS. Income from operations for the fiscal year ended
August 31, 1998 increased by 72%, or $2,249,000, to $5,388,00 from $3,139,000
for the fiscal year ended August 31, 1997. Of this amount, $4,514,000 was
contributed by the Company's United States operations and $874,000 by the
Company's United Kingdom operations. This increase resulted from higher net
sales offset, in part, by higher production costs associated with the changing
product mix of the Company's operations to include more digital print and
financial print services.
NET INTEREST EXPENSE. Net interest expense for the fiscal year ended August
31, 1998 increased by 60%, or $1,926,000, to $3,131,000 from $1,205,000 for the
fiscal year ended August 31, 1997. This increase resulted from increased
borrowings under the Company's credit facilities primarily relating to its
acquisitions.
INCOME TAXES. Income taxes for the fiscal year ended August 31, 1998
increased by 65%, or $385,000, to $978,000 from $593,000 for the fiscal year
ended August 31, 1997.
EXTRAORDINARY ITEM. In connection with the prepayment of $4,000,000 of
loans from private investors, the Company recorded an extraordinary loss of
$143,000, net of income tax benefit of $137,000 related to the write-off of
deferred financing costs.
NET INCOME. As a result of the factors described above, net income for the
fiscal year ended August 31, 1998 decreased by 15%, or $205,000, to $1,136,000
from $1,341,000 for the fiscal year ended August 31, 1997.
COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1997 AND AUGUST 31, 1996
NET SALES. Net sales for the fiscal year ended August 31, 1997 increased by
134%, or $15,602,000, to $27,262,000 from $11,660,000 for the fiscal year ended
August 31, 1996. Net sales for the Company's United States operations increased
by 193%, or $10,732,000, from $5,561,000 in the fiscal year ended August 31,
1996 to $16,293,000 in the fiscal year ended August 31, 1997. This increase was
attributable primarily to an increase in net sales resulting from the Cardinal
Acquisition, the Boris Acquisition and, to a lesser extent, the inclusion of net
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sales from the San Francisco operations for the fiscal year ended August 31,
1997. Net sales for the Company's United Kingdom operations increased by 80%, or
$4,870,000, from $6,099,000 in the fiscal year ended August 31, 1996 to
$10,969,000 in the fiscal year ended August 31, 1997. This increase was
attributable primarily to increases in the Company's short-run digital print and
prepress operations and, to a lesser extent, the inclusion of net sales
resulting from the Libra Acquisition.
COST OF SALES. Cost of sales for the fiscal year ended August 31, 1997
increased by 157%, or $8,828,000, to $14,450,000 from $5,622,000 for the fiscal
year ended August 31, 1996. As a percentage of net sales, cost of sales
increased from 48% for the fiscal year ended August 31, 1996 to 53% for the
fiscal year ended August 31, 1997. Cost of sales for the Company's United States
operations increased as a percentage of net sales from 44% for the fiscal year
ended August 31, 1996 to 48% for the fiscal year ended August 31, 1997. Such
increase was attributable primarily to higher costs associated with increased
digital print and large format services provided by the Company's United States
operations. Costs of sales for the Company's United Kingdom operations increased
as a percentage of net sales from 52% for the fiscal year ended August 31, 1996
to 61% for the fiscal year ended August 31, 1997. Such increase was attributable
primarily to the change in product mix in the Company's United Kingdom
operations to include more digital print and financial print services. Digital
print and financial print services have higher costs compared to digital
prepress services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased 139%, or $5,624,000, from $4,049,000
for the fiscal year ended August 31, 1996 to $9,673,000 for the fiscal year
ended August 31, 1997. Such increase was attributable primarily to the increased
level of operations which resulted from the Cardinal Acquisition, the Boris
Acquisition and the Libra Acquisition, the hiring of additional management and
administrative personnel, costs associated with the Company's acquisitions and
the Company's status as a publicly held company. As a percentage of net sales,
SG&A remained constant at 35% for the fiscal years ended August 31, 1996 and
1997.
INCOME FROM OPERATIONS. Income from operations for the fiscal year ended
August 31, 1997 increased 58%, or $1,150,000, to $3,139,000 from 1,989,000 for
the fiscal year ended August 31, 1996. Of this amount, $1,200,000 was
contributed by the Company's United States operations and $1,939,000 by the
Company's United Kingdom operations. This increase resulted from higher net
sales offset by higher production costs associated with the changing product mix
of the Company's operations to include more digital print and financial print
services.
NET INTEREST EXPENSE. Net interest expense for the fiscal year ended August
31, 1997 increased by $1,110,000, to $1,205,000 from $95,000 for the fiscal year
ended August 31, 1996. This increase resulted from increased borrowings under
the Company's credit facilities and capital leases assumed by the Company as
part of the Cardinal Acquisition, the Boris Acquisition and the Libra
Acquisition.
INCOME TAXES. Income taxes for the fiscal year ended August 31, 1997
decreased by 44%, or $471,000, to $593,000 from $1,064,000 for the fiscal year
ended August 31, 1996. The
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Company currently pays Federal, state and local income tax for its United States
operations where it previously paid only local corporate income tax on United
States operations through January 1996 as a result of its Subchapter S
corporation status. As a result of the termination of the Company's Subchapter S
corporation status in February 1996, the Company recorded a nonrecurring charge
to operations and liability of $367,000 for additional deferred Federal and
state income taxes on temporary differences in the recognition of revenues and
expenses for income tax and financial reporting purposes in the fiscal year
ended August 31, 1996.
NET INCOME. As a result of the factors described above, net income for the
fiscal year ended August 31, 1997 increased by 62%, or $511,000, to $1,341,000
from $830,000 for the fiscal year ended August 31, 1996.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
CASH FLOW. Net cash used in operations was $1,498,000 for the fiscal year
ended August 31, 1998. Net cash provided by operations was $489,000 and
$1,488,000 for the fiscal years ended August 31, 1997 and 1996, respectively.
Net cash used in investing activities was $23,363,000 and $6,897,000 for the
fiscal years ended August 31, 1998 and 1997, respectively. The Company used
$1,571,000 and $1,368,000 for the acquisition of property and equipment during
such respective periods. For the fiscal years ended August 31, 1998 and 1997,
the Company acquired equipment under capital leases of $1,797,000 and
$1,711,000, respectively, and made payments under capital leases of $2,691,000
and $1,761,000, respectively. Net bank borrowings provided funds of $24,620,000
and $7,443,000 for the fiscal years ended August 31, 1998 and 1997,
respectively. Subsequent to the end of the fiscal year, the Company sold a
portion of real property owned by it for $800,000.
BANK CREDIT FACILITIES. The Company has borrowing arrangements with
commercial banks in both New York and London. On March 24, 1998, the Company
terminated its financing facilities with its former New York bank and entered
into borrowing arrangements with its current New York bank (the "Bank") in the
aggregate amount of $40,000,000, which consist of a: (i) $25,000,000 term loan;
(ii) $10,000,000 revolving line of credit facility which is available for
working capital purposes; and (iii) $5,000,000 credit facility which is
available for corporate acquisition purposes. Such borrowings are guaranteed by
the Company's United States subsidiaries, including subsidiaries currently owned
and subsequently acquired. In addition, the Company pledged all of its equity
interests in its United States subsidiaries, including subsidiaries currently
owned and subsequently acquired, and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit facilities is, at the Company's option, at the Base
Rate or at the Eurodollar Rate, as defined, plus an Applicable Margin, as
defined, ranging from 0.75% to 3.0% depending on the Company's consolidated debt
to earnings ratio and the type of loan. As of August 31, 1998, the Company had
an outstanding balance of $25,000,000 under the term loan and $8,435,000 under
the revolving credit facility. A portion of the proceeds of such loans was used
to repay in full promissory notes previously issued by the Company in 1997 to
certain private investors in the aggregate principal amount of $4,000,000. In
connection therewith, the Company recorded an extraordinary loss of $143,000,
net of income tax benefit of $137,000 related to the write-off of deferred
financing costs.
The credit facilities contain covenants which require the Company to
maintain certain earnings and debt to earnings ratio requirements based on the
combined operations of the Company and its subsidiaries. The credit facilities
are secured by a first priority lien on all of the
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assets of the Company and its subsidiaries, including subsidiaries currently
owned and subsequently acquired. The Company, the Bank and Richard J. Sirota
("Sirota"), the sole shareholder of Kwik, entered into an intercreditor
subordination agreement with respect to the Bank's and Sirota's relative
interests in the Company. The Company's agreement with the Bank restricts the
Company's ability to pay dividends.
Subsequent to August 31, 1998, in order to consummate the acquisition (the
"Zazula Acquisition") of Hy Zazula Associates, Inc., a New York corporation
("Zazula"), the Company amended its credit facility with the Bank to increase
its revolving line of credit from $10,000,000 to $15,000,000. In addition,
subsequent to August 31, 1998, in order to consummate the acquisition (the
"SuperGraphics Acquisition") of SuperGraphics Holding Company, Inc., a Delaware
corporation ("SuperGraphics"), the Company further amended its credit facility
with the Bank to increase its term loan from $25,000,000 to $32,000,000. As a
result of the foregoing amendments, the Company's aggregate credit facilities
with the Bank increased from $40,000,000 to $52,000,000.
Subsequent to the end of the fiscal year, in November 1998, the Company
borrowed a principal amount of $10,000,000 pursuant to a subordinated unsecured
loan (the "Subordinated Loan"). The Subordinated Loan matures on March 31, 2004
and bears interest at a rate per annum equal to the sum of (i) 12.50% plus (ii)
an additional percentage amount equal to 0.25% commencing on November 30, 1999
and increasing by 0.25% following the last day of each 90-day period thereafter.
Until November 30, 1999, at the option of the lender, interest is payable in
additional notes, Common Stock of the Company or warrants to purchase Common
Stock of the Company. Thereafter, interest is payable in either additional notes
or cash, depending on certain coverage ratios and, in the case of cash interest
payments, the approval of the Bank. The Company will incur an additional premium
of 5.0% on any prepayments of the Subordinated Loan made prior to November 30,
1999. Such additional premium will be reduced by 100 basis points on December 1,
1999 and shall be reduced by such amount on each December 1st thereafter until
December 1, 2003. In connection with the Subordinated Loan, the Company issued
ten-year warrants to the lender to purchase 440,000 shares of the Company's
Common Stock at an exercise price not to exceed $5.00 per share. In the event
the Company has not paid
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the loan in full by November 30, 1999 (subject to extension in certain
instances), the Company will issue ten-year warrants to the lender to purchase
an additional 200,000 shares of the Company's Common Stock at an exercise price
not to exceed $5.00 per share. In the event the Subordinated Loan has not been
paid in full by May 31, 2001, the exercise price of such warrants shall be
reduced by $1.00 per share and, on each anniversary of such date, such exercise
price shall be reduced by an additional $1.00 per share. In addition, subject to
certain limitations, the Company granted registration rights, including "demand"
registration rights, to such lender.
The Company's credit facility with its London bank provides for combined
lines of credit of (pound)2,300,000 (approximately $3,800,000) for working
capital for its United Kingdom operations. Such credit facility was increased
from (pound)1,400,000 (approximately $2,338,000) on May 13, 1998. These lines of
credit renew annually and bear interest at 2.0% over the bank's Base Rate, as
defined. In addition, the Company is required to pay a service charge equal to
0.2% of invoice value. These lines of credit contain covenants which require the
Company's United Kingdom subsidiaries to maintain a minimum net worth of
(pound)500,000, limit borrowings up to specified amounts of accounts receivable
aged 120 days or less and are guaranteed by the Company for the principal amount
of up to (pound)500,000. Amounts outstanding are collateralized by substantially
all of the Company's United Kingdom assets. As of August 31, 1998, the Company
had an outstanding balance of (pound)1,275,000 (approximately $2,129,000) under
its United Kingdom credit facility.
In connection with its acquisition of certain of the assets (the "Five Star
Acquisition") of Five Star Finishers, Ltd., a United Kingdom corporation ("Five
Star"), the Company entered into a three-year term loan of (pound)400,000
(approximately $668,000) with its London bank. Such term loan bears interest at
2.4% over the bank's Base Rate, as defined, and contains covenants which require
the Company to maintain certain debt to earnings ratios and Net Tangible Assets,
as defined, and limits borrowings to 75% of Net Tangible Assets. The Company's
obligations under the term loan are guaranteed by its United Kingdom
subsidiaries. As of August 31, 1998, the Company had an outstanding balance of
(pound)389,000 (approximately $650,000) under the term loan.
As of August 31, 1998, the Company was not in compliance with one covenant
relating to capital expenditures under its credit facilities with its New York
bank, but received a waiver from such bank for such noncompliance.
The Company expects that cash flow from operations will be sufficient to
fund its capital lease obligations, debt service payments, potential earn-outs,
capital expenditures and operations for at least 12 months. The Company may
require additional financing to consummate future acquisitions or to repay its
bank loans. There can be no assurance that the Company will be able to secure
such additional financing on terms favorable to the Company.
WORKING CAPITAL. The Company's working capital at August 31, 1998 was
$8,897,000 compared to a working capital deficit of $2,189,000 at August 31,
1997.
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ACQUISITIONS. In March 1998, the Company, through its wholly-owned
subsidiary, Unison (NY), consummated the Kwik Acquisition. The purchase price
included cash payments of $20,590,000, issuance of a 5.7% subordinated
promissory note in the principal amount of $750,000 (payable in 36 monthly
installments commencing April 15, 1998), issuance of 649,841 shares of
restricted Common Stock of the Company and the assumption of certain trade
obligations of Kwik. Of the purchase price, $1,000,000 in cash and 190,589
shares of restricted Common Stock of the Company is being held in escrow for a
period of two years to satisfy any indemnification claims. The Company funded
the cash portion of the purchase price from proceeds of a $25,000,000 term loan
and a portion of a $10,000,000 revolving credit loan from the Bank.
In July 1998, the Company consummated the Five Star Acquisition in London,
England. The purchase price exclusively consisted of a cash payment of
(pound)325,000 (approximately $543,000). The Company funded the cash payment of
the purchase price from proceeds of a (pound)400,000 term note from its United
Kingdom bank.
Subsequent to the end of the fiscal year, in September 1998, the Company
acquired all of the issued and outstanding capital stock of Mega Art located in
New York City. As a result, Mega Art became a wholly-owned subsidiary of the
Company. The purchase price included an initial cash payment of $5,800,000 and
the issuance of 754,148 shares of restricted Common Stock of the Company
($5,000,000). In addition, the purchase price includes a deferred cash payment
of $1,200,000 (the "Deferred Payment"), payable 180 calendar days after the
closing date, and an earn-out payment of up to $1,200,000 in cash and $1,200,000
in Common Stock of the Company (the "Earn-Out Payment"), payable on or before
November 29, 1999. Each of the Deferred Payment and the Earn-Out Payment are
subject to adjustment based on the financial performance of Mega Art. In
addition, the Deferred Payment and the Earn-Out Payment may also be used to
satisfy any indemnification claims. The Company funded the cash portion of the
purchase price from proceeds of a $5,000,000 acquisition loan and a portion of a
$10,000,000 revolving credit loan from the Bank.
Subsequent to the end of the fiscal year, in October 1998, the Company
consummated the Zazula Acquisition. The purchase price included an aggregate
cash payment of $2,275,000 and the issuance of 433,076 shares of restricted
Common Stock of the Company ($2,275,000). Of the purchase price, $150,000 in
cash and 28,552 shares of restricted Common Stock of the Company is being held
in escrow for a period of two years to satisfy any indemnification claims. The
Company funded the cash portion of the purchase price from proceeds of a portion
of a $15,000,000 revolving credit loan from the Bank.
Subsequent to the end of the fiscal year, in November 1998, the Company
consummated the SuperGraphics Acquisition. The purchase price included a cash
payment of approximately $15,900,000, the issuance of 135,393 shares of
restricted Common Stock of the Company (approximately $600,000) and the issuance
of five-year warrants to purchase 225,000 shares of the Company's Common Stock
at an exercise price of $5.64 per share. The purchase price also includes a
deferred cash payment equal to the difference between (i) EBITDA, as defined,
multiplied by six and (ii) $16,500,000. Such deferred cash payment, if any, is
payable no later
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than March 15, 1999. In addition, subject to certain limitations, the Company
granted "piggyback" registration rights to the sellers of SuperGraphics. Of the
purchase price, approximately $233,000 in cash and 135,393 shares of restricted
Common Stock of the Company is being held in escrow for a period of one year to
satisfy any indemnification claims. The Company funded the cash portion of the
purchase price from proceeds of (i) a portion of a $32,000,000 term loan from
the Bank and (ii) the Subordinated Loan.
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND INTEREST RATE CHANGES.
Although the Company cannot accurately determine the precise effect thereof on
its operations, it does not believe inflation, currency fluctuations or interest
rate changes have historically had a material effect on revenues, sales or
results of operations. Inflation, currency fluctuations and changes in interest
rates have, however, at various times, had significant effects on the economies
of the United States and the United Kingdom and could adversely impact the
Company's revenues, sales and results of operations in the future. If there is a
material adverse change in the relationship between the Pound Sterling and the
United States Dollar, such change could adversely affect the results of the
Company's United Kingdom operations as reflected in the Company's financial
statements. The Company has not hedged its exposure with respect to this
currency risk, and does not expect to do so in the future, since it does not
believe that it is practicable for it to do so at a reasonable cost.
YEAR 2000 COMPLIANCE
The Company believes that it has sufficiently assessed its state of
readiness with respect to its Year 2000 compliance. The Company has developed or
is developing a program to address on a timely basis the risk that computer
applications developed, marketed, sold and delivered or used by the Company may
be unable to recognize and properly perform date-sensitive functions involving
dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The
Company does not believe that Year 2000 compliance will result in material
investments by the Company, nor does the Company anticipate that the Year 2000
Problem will have any adverse effects on the business operations or financial
performance of the Company. The Company does not believe that it has any
material exposure to the Year 2000 Problem with respect to its own information
systems. There can be no assurance, however, that the Year 2000 Problem will not
adversely affect the Company's business, operating results and financial
condition.
The Company believes that each of its products is Year 2000 compliant,
however, it has no control over whether software modification made by third
parties or the combination of its products with the software developed by third
parties and combined with the Company's products will be Year 2000 compliant.
Additionally, there can be no assurance that such potential instances of
non-compliance will not adversely affect the Company's business, operating
results and financial condition. The Company has established no reserve for
auditing its software products or for correcting Year 2000 compliance issues
with such products.
Although the Company believes its products are Year 2000 compliant, the
purchasing patterns of customers and potential customers may be affected by
issues associated with the Year 2000 Problem. As companies expend significant
resources to correct their current data storage
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solutions, these expenditures may result in reduced funds to purchase products
as those offered by the Company. There can be no assurance that the Year 2000
Problem will not adversely affect the Company's business, operating results and
financial condition. Conversely, the Year 2000 Problem may cause other companies
to accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for the Company's products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8 are
included in this Annual Report on Form 10-KSB. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-24-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
-25-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements on Page F-1.
(a) (2) Financial Statement Schedules.
Valuation And Qualifying Accounts
(a) (3) Exhibits.
Reference is made to the Exhibit Index on Page 29.
(b) Reports on Form 8-K.
On April 8, 1998, the Company filed a Current Report on Form 8-K with
the SEC relating to the Kwik Acquisition. Such Form 8-K also disclosed
the terms of certain loans made to the Company, the proceeds of which
the Company used to fund the purchase price of the Kwik Acquisition.
On June 8, 1998, the Company filed a Current Report on Form 8-K/A
containing required financial statements and pro forma financial
information relating to the Kwik Acquisition disclosed in its Current
Report on Form 8-K filed on April 8, 1998.
Subsequent to the end of the fiscal year, on September 14, 1998, the
Company filed a Current Report on Form 8-K with the SEC relating to
the Mega Art Acquisition. Such Form 8-K also disclosed the terms of
certain loans made to the Company, the proceeds of which the Company
used to fund the purchase price of the Mega Art Acquisition.
Subsequent to the end of the fiscal year, on November 16, 1998, the
Company filed a Current Report on Form 8-K/A with the SEC relating to
the Mega Art Acquisition containing financial statements and pro forma
financial information relating to the Mega Art Acquisition disclosed
in its Current Report on Form 8-K filed on September 14, 1998.
Subsequent to the end of the fiscal year, on November 16, 1998, the
Company filed a Current Report on Form 8-K relating to the Zazula
Acquisition. Such Form 8-K also disclosed the terms of certain loans
made to the Company, the proceeds of which the Company used to fund
the purchase price of the Zazula Acquisition.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 7th day of
December, 1998.
UNIDIGITAL INC.
By:/s/William E. Dye
--------------------
William E. Dye,
Chief Executive Officer
-27-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/William E. Dye Chief Executive December 7, 1998
- ----------------------
William E. Dye Officer and Chairman of the
Board of Directors (principal
executive, financial and
accounting officer)
/s/Peter Saad President and Director December 7, 1998
- ----------------------
Peter Saad
/s/Richard J. Sirota Senior Vice President, December 7, 1998
- ----------------------
Richard J. Sirota Chief Operating Officer
and Director
/s/Anthony Manser Vice President and Director December 7, 1998
- ----------------------
Anthony Manser
/s/Harvey Silverman Director December 7, 1998
- ----------------------
Harvey Silverman
/s/David Wachsman Director December 7, 1998
- ----------------------
David Wachsman
-28-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation. Incorporated by reference to Exhibit 3.1
to the Company's Registration Statement which became effective
February 1, 1996 (File number 33-99656).
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement which became effective February 1, 1996 (File
number 33-99656).
3.3 Certificate of Amendment of Certificate of Incorporation. Incorporated
by reference to Exhibit 3.3 to the Company's Registration Statement
which became effective February 1, 1996 (File number 33-99656).
4.1 Form of Representative's Warrant Agreement including form of
Representative's Warrant, between the Company and the Representative.
Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement which became effective February 1, 1996 (File number
33-99656).
4.2 Form of Warrant, together with Schedule of Holders. Incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
dated June 6, 1997.
4.3 Form of Warrant, together with Schedule of Holders. Incorporated by
reference to Exhibit 4.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended May 31, 1997.
4.4 Form of Registration Rights Agreement, together with Schedule of
Holders. Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K dated June 6, 1997.
4.5 Form of Registration Rights Agreement, together with Schedule of
Holders. Incorporated by reference to Exhibit 4.3 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended May 31, 1997.
4.6 Warrant dated November 26, 1997 issued by the Company to CIBC
Oppenheimer. Incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended February 28,
1998.
4.7 Stockholders' Agreement dated as of March 25, 1998 by and among
Unidigital Inc., William E. Dye and Richard J. Sirota. Incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated April 8, 1998.
-29-
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
4.8 Stockholders' Agreement dated as of September 2, 1998 by and between
Unidigital Inc. and Ehud Aloni. Incorporated by reference to Exhibit
4.1 the Current Report on Form 8-K dated September 14, 1998.
9.1 Voting Trust Agreement dated as of November 3, 1995 between William E.
Dye and Jeffrey W. Leiderman. Incorporated by reference to Exhibit 9.1
to the Company's Registration Statement which became effective
February 1, 1996 (File number 33-99656).
10.1* Employment Agreement dated as of November 2, 1995 between William E.
Dye and the Company. Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement which became effective February 1,
1996 (File number 33-99656).
l0.2* Employment Agreement dated March l, 1997 between Anthony Manser and
Elements (UK).
10.3* Employment Agreement dated as of March 1, 1997 by and between
Unidigital Inc. and Peter Saad. Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended May 31, 1997.
10.4* Employment Agreement dated as of March 25, 1998 by and between
Unidigital Inc. and Richard J. Sirota. Incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K dated April
8, 1998.
10.5* Employment Agreement dated as of September 2, 1998 by and between
Mega Art Corp. and Ehud Aloni. Incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K dated September 14,
1998.
10.6 Lease Agreement dated March 1994 between Dezer Properties and
LinoGraphics for Suite 1004. Incorporated by reference to Exhibit 10.7
to the Company's Registration Statement which became effective
February 1, 1996 (File number 33-99656).
10.7 Lease Agreement dated August 1995 between Dezer Properties and
LinoGraphics for Suite 504. Incorporated by reference to Exhibit 10.8
to the Company's Registration Statement which became effective
February 1, 1996 (File number 33-99656).
10.8 Lease Agreement dated as of April 20, 1995 between The Stock Exchange
(Holdings) Limited and Lyledale Limited for 69 Wilson Street.
Incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement which became effective February 1, 1996 (File
number 33-99656).
-30-
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.9 Lease Agreement dated as of December 25, 1994 between Collin Estates
Limited and Lyledale Limited for 48 Margaret Street. Incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement
which became effective February 1, 1996 (File number 33-99656).
10.10 Loft Lease dated March 1, 1997 between S.N.Y., Inc. and Kwik
International Color, Ltd. for the property located at 229 W. 28th
Street, New York, New York, on the fourth floor, known as Room
401-405. Incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K dated April 8, 1998.
10.11 Loft Lease dated March 1, 1997 between S.N.Y., Inc. and Kwik
International Color, Ltd. for the property located at 229 W. 28th
Street, New York, New York, on the seventh floor, known as Room
706-714 and 707-713. Incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated April 8, 1998.
10.12 Loft Lease dated March 1, 1997 between S.N.Y., Inc. and Kwik
International Color, Ltd. for the property located at 229 W. 28th
Street, New York, New York, on the eighth floor. Incorporated by
reference to Exhibit 10.6 to the Company's Current Report on Form 8-K
dated April 8, 1998.
10.13 Loft Lease dated March 1, 1997 between S.N.Y., Inc. and Kwik
International Color, Ltd. for the property located at 229 W. 28th
Street, New York, New York, on the ninth floor. Incorporated by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K
dated April 8, 1998.
10.14* 1995 Unidigital Inc. Long-Term Stock Investment Plan. Incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement
which became effective February 1, 1996 (File number 33-99656).
10.15* 1995 Directors Stock Option Plan. Incorporated by reference to Exhibit
10.12 to the Company's Registration Statement which became effective
February 1, 1996 (File number 33-99656).
10.16* 1997 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
February 28, 1997.
10.17* 1997 Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 1997.
-31-
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.18 Asset Purchase Agreement dated November 22, 1995 between LinoGraphics
and TX Unlimited, Inc. Incorporated by reference to Exhibit 10.13 to
the Company's Registration Statement which became effective February
1, 1996 (File number 33-99656).
10.19 Stock Purchase Agreement dated as of August 9, 1995 among Jeffrey W.
Leiderman, William E. Dye and Stephen J. McErlain. Incorporated by
reference to Exhibit 10.14 to the Company's Registration Statement
which became effective February 1, 1996 (File number 33-99656).
10.20 Share Purchase Agreement By Way of Deed dated as of August 9, 1995
among Jeffrey W. Leiderman, William E. Dye, Stephen J. McErlain and
Anthony Manser. Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement which became effective February 1,
1996 (File number 33-99656).
10.21 Asset Purchase Agreement dated as of August 2, 1996 by and among
Unidigital Inc., Unidigital/Cardinal Corporation, Cardinal
Communications Group Inc., C-Max Graphics, Inc., and each of Mark and
Sheldon Darlow. Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated August 19, 1996.
10.22 Asset Purchase Agreement dated as of April 4, 1997 by and among
Unidigital Inc., Unidigital/Boris Corporation, Boris Image Group,
Inc., Leslie W. Brewer, II and Michael Hartnett. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended February 28, 1997.
10.23 Share Purchase Agreement by Way of Deed dated May 22, 1997 by and
among Unidigital Inc., Elements (UK) Limited, Libra City Corporate
Printing Limited, Francis Allen, Robin Bishop, Kenneth Dellow, Edward
Tylee, Invesco English and International Trust, and Baronsmead
Investment Trust. Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated June 6, 1997.
10.24 Asset Purchase Agreement dated as of March 25, 1998 by and among
Unidigital Inc., Unison (NY), Inc., Kwik International Color, Ltd. and
Richard J. Sirota. Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 8, 1998.
10.25 Agreement of Purchase and Sale dated as of August 3, 1998 by and
among Unidigital Inc., Mega Art Corp., Ehud Aloni, Amit Primor,
Jeffrey E. Rothman and Seligson, Rothman & Rothman. Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K dated
September 14, 1998.
-32-
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.26 Agreement of and Plan of Merger dated as of October 30, 1998 by and
among Unidigital Inc., Unison (NY), Inc., Hy Zazula Associates, Inc.,
Hyman Zazula, Steven Zazula, David Zazula and Gary Feigenbaum.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K dated November 16, 1998.
10.27 Sales Ledger Financing Agreement between Barclays Commercial Service
Limited and Elements (UK) Ltd.
10.28 Barclays Treasury Loan dated June 26, 1998 between Barclays Bank PLC
and the Regent Group Ltd.
10.29 Subordinated Promissory Note dated March 25, 1998 of Unidigital Inc.
payable to Kwik International Color, Ltd. in the principal amount of
$750,000. Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated April 8, 1998.
10.30 Credit Agreement dated as of March 24, 1998 by and among Unidigital
Inc., the lenders from time to time parties thereto and Canadian
Imperial Bank of Commerce. Incorporated by reference to Exhibit 10.8
to the Company's Current Report on Form 8-K dated April 8, 1998.
10.31 Amendment No. 2 to Credit Agreement dated as of October 30, 1998 by
and among Unidigital Inc., and several lenders from time to time
parties thereto and Canadian Imperial Bank of Commerce. Incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form
8-K dated November 16, 1998.
10.32 Term Note dated March 24, 1998 of Unidigital Inc. payable to Canadian
Imperial Bank of Commerce in the principal amount of $25,000,000.
Incorporated by reference to Exhibit 10.9 to the Company's Current
Report on Form 8-K dated April 8, 1998.
10.33 Acquisition Note dated March 24, 1998 of Unidigital Inc. payable to
Canadian Imperial Bank of Commerce in the principal amount of
$5,000,000. Incorporated by reference to Exhibit 10.10 to the
Company's Current Report on Form 8-K dated April 8, 1998.
10.34 Revolving Credit Note dated March 24, 1998 of Unidigital Inc. payable
to Canadian Imperial Bank of Commerce in the principal amount of
$10,000,000. Incorporated by reference to Exhibit 10.11 to the
Company's Current Report on Form 8-K dated April 8, 1998.
10.35 Stock Pledge Agreement (U.S.) dated as of March 24, 1998 made by
Unidigital Inc. in favor of Canadian Imperial Bank of Commerce.
Incorporated by reference to Exhibit 10.12 to the Company's Current
Report on Form 8-K dated April 8, 1998.
10.36 Mortgage dated as of March 24, 1998 made by Unidigital Inc. in favor
of Canadian Imperial Bank of Commerce. Incorporated by reference to
Exhibit 10.13 to the Company's Current Report on Form 8-K dated April
8, 1998.
-33-
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.37 Security Agreement dated as of March 24, 1998 made by Unidigital Inc.
in favor of Canadian Imperial Bank of Commerce. Incorporated by
reference to Exhibit 10.14 to the Company's Current Report on Form 8-K
dated April 8, 1998.
10.38 Amendment to Security Agreement dated as of October 30, 1998 made by
Unidigital Inc. in favor of Canadian Imperial Bank of Commerce.
Incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K dated November 16, 1998.
10.39 Subsidiaries Guarantee dated as of March 24, 1998 made by each of
Unidigital Elements (NY), Inc., Unidigital Elements (SF), Inc., Unison
(NY), Inc. and Unison (MA), Inc., in favor of Canadian Imperial Bank
of Commerce. Incorporated by reference to Exhibit 10.15 to the
Company's Current Report on Form 8-K dated April 8, 1998.
10.40 Intercreditor and Subordination Agreement dated as of March 25, 1998
by and among Kwik International Color, Ltd., Unidigital Inc. and
Canadian Imperial Bank of Commerce. Incorporated by reference to
Exhibit 10.16 to the Company's Current Report on Form 8-K dated April
8, 1998.
10.41 Mortgage, Assignment of Leases and Rents and Security Agreement dated
as of March 24, 1998 between Unidigital Inc. and Canadian Imperial
Bank of Commerce. Incorporated by reference to Exhibit 10.17 to the
Company's Current Report on Form 8-K dated April 8, 1998.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
- ------------------------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 13(a) of Form 10-KSB.
-34-
<PAGE>
UNIDIGITAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets as of
August 31, 1998 and 1997..................................................F-3
Consolidated Income Statements for the
years ended August 31, 1998, 1997 and 1996................................F-4
Consolidated Statements of Cash Flows for the
years ended August 31, 1998, 1997 and 1996................................F-5
Consolidated Statements of Stockholders' Equity
for the years ended August 31, 1998, 1997 and 1996........................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Unidigital Inc.
We have audited the consolidated balance sheets of Unidigital Inc. as of
August 31, 1998 and 1997 and the consolidated statements of income, cash flows
and stockholders' equity for each of the three years in the period ended August
31, 1998. 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Unidigital Inc. at August 31, 1998 and 1997 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1998 in conformity with generally accepted accounting
principles.
November 19, 1998 Ernst & Young LLP
New York, New York
F-2
<PAGE>
Unidigital Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------
1998 1997
-------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 287,000 $ 3,203,000
Accounts receivable, net of allowance of $331,000
in 1998 and $266,000 in 1997 16,917,000 9,753,000
Deferred financing costs, net 1,013,000 464,000
Prepaid expenses 2,727,000 1,529,000
Other current assets 3,360,000 766,000
-------------------------------
Total current assets 24,304,000 15,715,000
Property and equipment, net 14,591,000 11,899,000
Intangible assets, net 28,107,000 5,331,000
Other assets 313,000 88,000
-------------------------------
Total assets $ 67,315,000 $ 33,033,000
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 8,571,000 $ 5,182,000
Current portion of capital lease obligations 1,935,000 1,998,000
Current portion of long-term debt 3,610,000 10,018,000
Income taxes payable 887,000 551,000
Deferred income taxes 249,000 -
Loans and notes payable to stockholders 155,000 155,000
-------------------------------
Total current liabilities 15,407,000 17,904,000
Capital lease obligations, net of current portion 2,830,000 2,876,000
Long-term debt, net of current portion 33,978,000 2,128,000
Deferred income taxes 500,000 445,000
Loans and notes payable to stockholders, net of current
portion 207,000 207,000
-------------------------------
Total liabilities 52,922,000 23,560,000
Stockholders' equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, par value $.01; 10,000,000 shares
authorized; 3,902,634 shares and 3,243,243 shares
issued and outstanding in 1998 and 1997, respectively 39,000 32,000
Additional paid-in capital 9,865,000 6,292,000
Retained earnings 4,374,000 3,238,000
Cumulative foreign translation adjustment 115,000 (89,000)
-------------------------------
Total stockholders' equity 14,393,000 9,473,000
-------------------------------
Total liabilities and stockholders' equity $ 67,315,000 $ 33,033,000
===============================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Unidigital Inc.
Consolidated Income Statements
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------
1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
REVENUES
Net sales $ 47,389,000 $ 27,262,000 $ 11,660,000
EXPENSES
Cost of sales 25,305,000 14,450,000 5,622,000
Selling, general and administrative expenses 15,925,000 9,673,000 4,049,000
Expenses incurred due to restructuring 771,000 - -
---------------------------------------------------
Total operating expenses 42,001,000 24,123,000 9,671,000
---------------------------------------------------
Income from operations 5,388,000 3,139,000 1,989,000
Interest expense (1,913,000) (1,095,000) (327,000)
Interest expense-deferred financing costs (1,143,000) (138,000) -
Interest and other (expenses) income - net (75,000) 28,000 232,000
---------------------------------------------------
Income before income taxes 2,257,000 1,934,000 1,894,000
Provision for income taxes (including
nonrecurring provision relating to
termination of subchapter S status in 1996) 978,000 593,000 1,064,000
---------------------------------------------------
Net income before extraordinary item 1,279,000 1,341,000 830,000
Extraordinary item - loss on early retirement of
debt (net of income tax benefit of $137,000) (143,000) -- --
---------------------------------------------------
Net income $ 1,136,000 $ 1,341,000 $ 830,000
==================================================
Basic earnings (loss) per common share:
Earnings before extraordinary item $ 0.36 $ 0.42 $ 0.31
Extraordinary item (0.04) - -
-------------------------------------------------
Net income $ 0.32 $ 0.42 $ 0.31
====================================================
Basic earnings (loss) per common share:
Earnings before extraordinary item $ 0.34 $ 0.41 $ 0.31
Extraordinary item (0.04) -- --
Net income $ 0.30 $ 0.41 $ 0.31
====================================================
Shares used to compute net income per share:
Basic 3,530,836 3,212,098 2,643,828
===================================================
Diluted 3,779,438 3,283,279 2,662,908
===================================================
<S> <C>
Pro forma income data (Notes 2 and 10):
Historical income before income taxes $ 1,894,000
Pro forma adjustment for principal
stockholder/officers' compensation 73,000
---------------
Pro forma income before income taxes 1,967,000
Pro forma income taxes 795,000
---------------
Pro forma net income $ 1,172,000
===============
Pro forma net income per common share:
Basic $ 0.44
===============
Diluted $ 0.44
===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Unidigital Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,136,000 $ 1,341,000 $ 830,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,954,000 2,194,000 1,057,000
Loss on sale of property and equipment 11,000 - -
Provision for deferred income taxes 300,000 24,000 415,000
Provision for bad debts 115,000 102,000 104,000
Stock compensation 50,000 50,000 -
Changes in assets and liabilities net of effects
of businesses acquired:
Accounts receivable (5,680,000) (3,242,000) (964,000)
Prepaid expenses and other current assets (2,393,000) (5,046,000) (566,000)
Other assets (1,354,000) (171,000) (22,000)
Accounts payable and accrued expenses 2,053,000 5,008,000 730,000
Income taxes payable 310,000 229,000 (96,000)
--------------------------------------------------
Net cash (used in) provided by operating activities (1,498,000) 489,000 1,488,000
--------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (1,571,000) (1,368,000) (1,279,000)
Proceeds from sale of property and equipment 10,000 - -
Business acquisitions (21,802,000) (5,529,000) (1,777,000)
--------------------------------------------------
Net cash used in investing activities (23,363,000) (6,897,000) (3,056,000)
--------------------------------------------------
FINANCING ACTIVITIES
Payments of capital lease obligations (2,691,000) (1,761,000) (692,000)
Payments for cancellation of options - (213,000) (356,000)
Proceeds from long-term debt 37,186,000 7,521,000 2,636,000
Payments of long-term debt (12,566,000) (78,000) (178,000)
Stockholder repayments - - (328,000)
Dividends paid - - (750,000)
Proceeds from sale of common stock, net of
issuance costs 20,000 (36,000) 5,224,000
--------------------------------------------------
Net cash provided by financing activities 21,949,000 5,433,000 5,556,000
--------------------------------------------------
Effect of foreign exchange rates on cash (4,000) 32,000 (29,000)
--------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,916,000) (943,000) 3,959,000
Cash and cash equivalents at beginning of year 3,203,000 4,146,000 187,000
--------------------------------------------------
Cash and cash equivalents at end of year $ 287,000 $ 3,203,000 $ 4,146,000
==================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 1,614,000 $ 1,261,000 $ 258,000
==================================================
Income taxes paid $ 232,000 $ 726,000 $ 890,000
==================================================
Non-cash transactions
Equipment acquired under capital lease obligations $ 1,797,000 $ 1,711,000 $ 1,014,000
==================================================
Dividends payable as note $ - $ - $ 498,000
==================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Unidigital Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1995
(combined predecessors) $ 3,000 $ 163,000 $2,451,000 $ (12,000) $ 2,605,000
Cost of cancellation of options to
purchase an additional interest
in Elements (163,000) (119,000) (282,000)
Exchange of S corporation stock (3,000) (17,000) (20,000)
Formation (including merger of
Elements (NY), Elements (UK) and
Elements (SF)) 20,000 20,000
Issuance of 1,150,000 shares of
common stock in connection with
the Initial Public Offering 12,000 5,213,000 5,225,000
Issuance of 39,216 shares of
common stock in connection with
the Unison (NY) asset acquisition 250,000 250,000
Dividends paid (1,248,000) (1,248,000)
Net income 830,000 830,000
Foreign currency translation
adjustment (15,000) (15,000)
-------------------------------------------------------------------
Balance at August 31, 1996 32,000 5,463,000 1,897,000 (27,000) 7,365,000
Issuance of 45,480 shares of
common stock in connection with
the Unison (MA) asset acquisition 249,000 249,000
Additional Initial Public Offering
costs (72,000) (72,000)
Issuance of 400,000 warrants in
connection with financing 602,000 602,000
Issuance of 8,547 shares of common
stock as employee compensation 50,000 50,000
Net income 1,341,000 1,341,000
Foreign currency translation
adjustment (62,000) (62,000)
-------------------------------------------------------------------
Balance at August 31, 1997 32,000 6,292,000 3,238,000 (89,000) 9,473,000
Issuance of 649,841 shares of
common stock in connection with
the Kwik International Color
asset acquisition 7,000 3,403,000 3,410,000
Issuance of 6,051 shares of common
stock as employee compensation 50,000 50,000
Issuance of 25,000 warrants in
connection with investment
banking services 100,000 100,000
Issuance of 3,499 shares of common
stock in connection with
exercise of stock options 20,000 20,000
Net income 1,136,000 1,136,000
Foreign currency translation
adjustment 204,000 204,000
-------------------------------------------------------------------
Balance at August 31, 1998 $ 39,000 $9,865,000 $4,374,000 $ 115,000 $ 14,393,000
====================================================================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
Unidigital Inc.
Notes to Consolida ted Financial Statements
August 31, 1998
1. ORGANIZATION
Unidigital Inc., a Delaware corporation, is the parent holding company of six
wholly-owned operating subsidiaries, Unidigital Elements (NY), Inc., ("Elements
(NY)"), Elements (UK) Limited ("Elements (UK)"), Unidigital Elements (SF), Inc.,
("Elements (SF)"), Unison (NY), Inc., ("Unison (NY)"), Unison (MA), Inc.,
("Unison (MA)"), and Mega Art Corp. ("Mega Art") which was acquired subsequent
to August 31, 1998. Elements (NY) engages in the on-demand print and digital
prepress business in New York City. Elements (UK) engages in the on-demand print
and digital prepress business and, through its wholly-owned subsidiary, Regent
Communications (UK) Limited ("Regent"), operates a financial digital print
business in London. Elements (UK) also provides printing services to the London
financial community. Elements (SF) owns and operates the San Francisco on-demand
prepress business and retouching studio. Unison (NY) engages in the digital
prepress and digital printing business services to advertising agencies and
corporations in the New York City area. Unison (MA) engages in the business of
digital imaging and photographic processing in the Boston area.
In February 1996, Unidigital completed an Initial Public Offering (the "PI") of
1,150,000 shares of its Common Stock at a price of $6.00 per share, realizing
aggregate net proceeds of approximately $5,200,000. The Company used a portion
of the net proceeds of the PI to repay certain indebtedness under the Company's
credit facilities.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Highly liquid investments with a maturity of three months or less when purchased
are considered to be cash equivalents.
F-7
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Credit is extended based on an evaluation of the customer's financial
conditions, and generally advance payment is not required. Anticipated credit
losses are provided for in the consolidated financial statements and
consistently have been within management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives ranging from: three years for vehicles and computer software, five to
seven years for machinery and equipment, furniture and office equipment, 40
years for real property including related improvements and leasehold
improvements over the lesser of the estimated useful life of the leasehold
improvement or the term of the related lease.
INTANGIBLE ASSETS
Intangible assets represent the excess of purchase price over the fair value of
the net tangible assets acquired, ("goodwill"), which is being amortized over 15
to 25 years. Amortization of approximately $797,000, $269,000 and $67,000 was
recorded for the years ended August 31, 1998, 1997 and 1996, respectively.
Accumulated amortization at August 31, 1998 and 1997 was approximately
$1,133,000 and $336,000, respectively.
It is the Company's policy to account for goodwill at amortized cost. As part of
an ongoing review of the valuation and amortization of intangible assets,
management assesses the carrying value of the Company's intangible assets if
facts and circumstances suggest that it may be impaired. If this review
indicates that the intangibles will not be recoverable as determined by a
non-discounted cash flow analysis of the Company over the remaining amortization
period, the carrying value of the Company's intangibles would be reduced to its
estimated realizable value.
DEFERRED FINANCING COSTS
Deferred financing costs relate to costs incurred in connection with debt
financing which are amortized over the term of the related debt.
F-8
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK OPTIONS
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") compensation costs for stock is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire that stock.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation," ("FAS 123") which establishes
financial accounting and reporting standards for stock based employee
compensation plans and the issuance of warrants and similar instruments. The
Company has elected the disclosure only provisions of FAS 123 and to continue
accounting for the stock based compensation under the provisions of APB 25.
RECLASSIFICATION OF CERTAIN FINANCIAL INFORMATION
Certain amounts have been reclassified to conform with the current year
presentation.
FOREIGN CURRENCY TRANSLATION
The portion of the Company's financial statements relating to the United Kingdom
operations are translated into U.S. dollars using period exchange rates
((pound)1= $1.67 and $1.62 at August 31, 1998 and 1997, respectively, for
balance sheet accounts) and average exchange rates ((pound)1= $1.66, $1.64 and
$1.55 for the years ended August 31, 1998, 1997 and 1996, respectively, for the
income statement accounts). The translation difference is reflected as a
separate component of stockholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments approximate their estimated fair
value as a result of variable market interest rates and/or the short term
maturity of these instruments.
INCOME STATEMENT--PRO FORMA INFORMATION
The 1996 pro forma information on the income statement gives effect to the
historical combined results of operations adjusted for (i) the reduced level of
salaries paid to the principal stockholder/officer and the former partner and
(ii) the income tax effect of Elements (NY) changing from Subchapter S status,
as if these had occurred effective September 1, 1995 (see Note 10). Pro forma
net income per common share is based on pro forma net income and the weighted
average number of common shares outstanding.
F-9
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method as required by
Statement of Financial Accounting Standards Board Statement No. 109 ("FAS 109"),
"Accounting for Income Taxes." FAS 109 requires an asset and liability approach
to financial accounting and reporting for income taxes. Under this approach,
differences between financial statement and tax bases of assets and liabilities
are determined, and deferred income tax assets and liabilities are recorded for
those differences that have future tax consequences. Valuation allowances are
established, if necessary, to reduce any deferred tax asset recorded to an
amount that will more likely than not be realized in future periods. Income tax
expense is composed of the current tax payable or refundable for the period plus
or minus the net change in deferred tax assets and liabilities.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriately, restated
to conform to the Statement 128 requirements.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 superseded
FASB Statement 14, "Financial Reporting for Segments of a Business Enterprise."
Statement 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that these enterprises report selected information about operating
segments in interim financial reports. Statement 131 also establishes standards
for related disclosures about product and services, geographic areas, and major
customers. Effective August 31, 1998, the Company adopted Statement 131 which
did not affect results of operations or financial position, but did effect the
disclosure of segment information. See Note 14.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
must first be applied in
F-10
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
the first quarter of fiscal years that begin after June 15, 1999, and in
general, requires that entities recognize all derivative financial instruments
as assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities. SFAS 133 also provides
that changes in the fair value of assets or liabilities being hedged with
recognized derivative instruments be recognized and included in earnings.
Management has not completed its review of SFAS No. 133 but does not anticipate
that it will have a material affect on the Company's consolidated financial
statements.
3. ACQUISITIONS
As part of the purchase of Regent in March 1995, two of its former stockholders
were each granted an option to acquire for (pound)50,000 an additional 6-1/2%
share interest in Elements exercisable upon a public floatation of its stock. In
November 1995, the options were canceled in consideration for payments of
approximately (pound)180,000 (approximately $282,000).
In March 1996, the Company purchased certain assets for $170,000 and assumed
certain liabilities aggregating $140,500 of TX Unlimited Inc., a San Francisco,
California based graphics arts company. The purchase price included an $85,000
payment at closing and a $85,000 note.
In August 1996, the Company acquired certain assets of Cardinal Communications
Group, Inc. and C-Max Graphics, Inc. The purchase price included cash payments
of $1,450,000, issuance of $250,000 of restricted Common Stock of the Company
(39,216 shares) and the assumption of certain liabilities. During 1997, the
final determination of the fair value of the net assets acquired were completed.
The final purchase price of $2,040,000, which includes costs incurred in
connection with the acquisition approximated the fair value of the net tangible
assets acquired. The purchase agreement requires additional payments based on
the future five year performance. The potential earn-out will be recorded as
additional purchase price when earned.
In April 1997, the Company purchased certain assets and assumed certain
liabilities of Boris Image Group, Inc. The aggregate purchase price consisted of
the following: (i) cash payments of $1,725,000; (ii) an aggregate of $300,000 in
guaranteed future payments of Boris Image Group and its management team; (iii)
$250,000 in restricted common Stock of the Company (45,480 shares); (iv) an
earn-out payment of up to $500,000 payable 90 days after the end of the
Company's 1998 fiscal year; and (v) options to purchase 50,000 shares of the
Company's common stock at fair market value. The total purchase price of
$2,511,000, which includes costs incurred in connection with the acquisition,
exceeded the net tangible net assets
F-11
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
acquired by approximately $2,601,000, which has been recorded as goodwill. The
potential earn-out will be recorded as additional purchase price when earned.
In May 1997, the Company acquired all of the issued and outstanding capital
stock of Libra City Corporate Printing Limited ("Libra"). The aggregate purchase
price consisted of cash payments of (pound)1,823,750 (approximately $2,972,000)
and an earn-out payment of up to (pound)500,000 (approximately $815,000). The
total purchase price of approximately (pound)2,208,000 (approximately
$3,577,000), which includes costs incurred in connection with the acquisition,
exceeded the tangible net assets acquired by approximately (pound)1,280,000
(approximately $2,074,000), which has been recorded as goodwill. Libra's
operations subsequently were consolidated with the operations of Regent.
In March 1998, the Company purchased certain assets and assumed certain
liabilities of Kwik International Color, Ltd. The aggregate purchase price
consisted of the following: (i) cash payments of $20,590,000; (ii) note payable
in the principal amount of $750,000; and (iii) $3,410,000 in restricted common
stock of the Company (649,841 shares). The total purchase price of $25,458,000,
which includes costs incurred in connection with the acquisition, exceeded the
net tangible assets acquired by approximately $22,107,000, which has been
recorded as goodwill. Of the purchase price, $1,000,000 in cash and 190,589
shares of restricted Common Stock of the Company is being held in escrow for a
period of two years to satisfy any indemnification claims.
In July 1998, Regent purchased certain assets of Five Star Finishers, Ltd. The
total purchase price consisted of a cash payment of (pound)325,000
(approximately $543,000). The purchase price approximated the fair value of the
tangible assets acquired.
During the year ended August 31, 1998 the Company recorded approximately
$1,249,000 of additional goodwill relating to earn-outs achieved. At August 31,
1998 the maximum remaining potential earn-out relates to the Cardinal Group and
C-Max Graphics, Inc., aggregating $600,000.
The aforementioned acquisitions were accounted for using the purchase method of
accounting and the results of operations have been included in the accompanying
financial statements from their respective dates of acquisitions.
F-12
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
The following unaudited pro forma information is presented as if the Company had
completed the aforementioned acquisitions, and the related borrowings at the
beginning of the respective periods.
AUGUST 31,
1998 1997
----------------------------------
Net sales $ 54,615,000 $ 48,837,000
Net income (loss) $ 691,000 $ (39,000)
Net income per share:
Basic $ 0.17 $ (0.01)
Diluted $ 0.16 $ (0.01)
4. RESTRUCTURING CHARGES
During the third and fourth quarter of fiscal 1998, management authorized and
committed the Company to: (i) consolidate Elements (NY) and Unison (NY)
operations in connection with the acquisition of Kwik international Color, Ltd.;
and (ii) reduce the staff providing financial printing services at Regent,
respectively. In connection with the consolidation and reduction of a service
line the Company incurred approximately $305,000 of termination benefits
relating to the termination of 35 employees providing similar services and
incurred facility exit costs of approximately $466,000, including $90,000
related to write-downs of leasehold improvements. At August 31, 1998 all
termination benefits have been paid and included in accounts payable is
approximately $78,000 of facility exit costs.
F-13
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
AUGUST 31,
1998 1997
---------------------------------
Buildings $ 2,252,000 $ 2,173,000
Machinery and equipment 15,133,000 10,163,000
Furniture and office equipment 1,187,000 1,694,000
Computer software 1,438,000 1,219,000
Leasehold improvements 1,565,000 719,000
Vehicles 163,000 192,000
----------------------------------
Total 21,738,000 16,160,000
Less accumulated depreciation and
amortization (7,147,000) (4,261,000)
----------------------------------
$14,591,000 $11,899,000
==================================
F-14
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FACILITY
AMOUNT AMOUNT OUTSTANDING
AUGUST 31, AUGUST 31,
1998 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Credit facilities in the United Kingdom; interest at
the bank's overdraft rate plus 3%; facility amount
was approximately (pound)1,145,000 ($1,969,400) $ 1,784,000
Credit facilities in the United Kingdom; interest at
the bank's overdraft rate plus 2%; facility amount
is approximately (pound)2,300,000 ($3,840,000) $ 3,840,000 $ 2,135,000
Revolving line of credit; interest at Alternate Base
Rate or Adjusted LIBO Rate, as defined, plus 1/4%
in the United States plus 2.25% in the United
Kingdom 1,725,000
Term loan, matures September 1997; monthly interest
at prime 1,400,000
Lines of credit; interest at Alternate Base Rate or
Adjusted LIBO Rate, as defined, plus 1/4% in the
United States, plus 2.25% in the United Kingdom 2,710,000
Term loan, matures in March 2003; payable in sixteen
quarterly installments ranging from $750,000 to
$1,500,000, commencing in June 1999, with a
balloon payment of $7,000,000 in March 2003, plus
interest at the Base Rate or at the Eurodollar Rate,
as defined, plus an Applicable Margin, as defined,
ranging from 0.75% to 3.0% 25,000,000 25,000,000
Revolving line of credit; matures in March 2003,
interest at the Base Rate or at the Eurodollar Rate,
as defined, plus an Applicable Margin, as defined,
ranging from 0.75% to 3.0% 10,000,000 8,435,000
Acquisition line of credit; matures in March 2003,
payable in eleven quarterly installments of 5.0%
of the outstanding balance in March 2000 commencing
in June 2000 and one installment of 45.0% of the
outstanding balance in March 2000, plus interest at
the Base Rate or at the Eurodollar Rate, as defined,
plus an Applicable Margin, as defined, ranging from
0.75% to 3.0% 5,000,000
SBA loan; monthly payments of $3,665, interest at prime
rate plus 2.74% 334,000
Installment note due seller of Elements (SF); payable
in eight quarterly installments of $11,600 including
interest at 6% 11,000 43,000
Loans from private investors, beginning in May 1997,
originally maturing between May 2002 and August 2002;
interest at 10% for first six months, 11% for second
six months and 12% thereafter 4,000,000
Installment note due seller of Unison (MA), matures in
January 1999, payable in two annual installments of
$75,000 including interest at 8.0% 75,000 150,000
F-15
<PAGE>
Notes payable for certain equipment, maturing on dates
between October, 1998 and September, 2003, payable
in monthly installments of $22,000 until October
1998 and $14,000 thereafter, including interest at
8.54% and 8.4%, respectively. 618,000
Treasury loan facility in United Kingdom, Matures in
July 2001, payable in monthly installments of
$19,000 plus interest of LIBOR, as defined, plus the
Banks Margin of 2.4% 651,000
Note payable, payable in monthly installments of
approximately $1000 including interest at 10.35% 17,000
Installment note due seller of Kwik International;
matures in April 2001, payable in thirty-six monthly
installments of approximately $21,000 including
interest at 5.7% 646,000
--------------------------
37,588,000 12,146,000
Less current portion 3,610,000 10,018,000
--------------------------
$33,978,000 $ 2,128,000
==========================
</TABLE>
In March 1998, the Company terminated its existing bank financing facilities and
entered into borrowing arrangements with Canadian Imperial Bank of Commerce
("CIBC") in the aggregate amount of $40,000,000, consisting of a: (i)
$25,000,000 term loan; (ii) $10,000,000 revolving line of credit facility which
is available for working capital purposes; and (iii) $5,000,000 credit facility
which is available for corporate acquisition purposes. Such credit facilities
are guaranteed by the Company's United States subsidiaries. In addition, the
Company pledged all of its equity interests in its United States subsidiaries
and two-thirds of its equity interests in its wholly-owned United Kingdom
subsidiary as collateral for such credit facilities. The credit facilities
contain covenants which require the Company to maintain certain earnings and
debt to earnings ratio requirements based on the combined operations of the
Company and its subsidiaries. The Company's agreement with CIBC restricts the
Company's ability to pay dividends. The credit facilities are secured by a first
priority lien on all of the assets of the Company and its subsidiaries.
The Company utilized proceeds of the borrowings from CIBC to prepay the
$4,000,000 of loans from private investors. In connection therewith, the Company
recorded an extraordinary loss of $143,000, net of income tax benefit of
$137,000 related to the write-off of deferred financing costs.
As of August 31, 1998, the Company's line of credit with its London bank
provides for combined lines of credit of (pound)2,300,000 (approximately
$3,840,000) for working capital for its United Kingdom operations. Such credit
facility was increased from (pound)1,400,000 (approximately $2,340,000) on May
13, 1998. The line of credit is renewable annually and contains covenants which
require the Company's United Kingdom subsidiaries to maintain a minimum net
worth of (pound)500,000, limit borrowings up to specified amounts of accounts
receivable, as defined, and are guaranteed by the Company for the principal
amount of up to (pound)500,000. Amounts outstanding are collateralized by
substantially all of the Company's United Kingdom assets.
F-16
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
AUGUST 31, 1998
-----------------
Year ending August 31
1999 $ 3,610,000
2000 4,123,000
2001 5,740,000
2002 6,416,000
2003 17,699,000
-----------------
$ 37,588,000
=================
7. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain property and equipment which have been classified as
capital leases. At August 31, 1998 the cost and accumulated depreciation and
amortization of such assets was approximately $9,746,000 and $3,023,000,
respectively. At August 31, 1997 the cost and accumulated depreciation and
amortization of such assets was approximately $7,179,000 and $1,080,000,
respectively.
AUGUST 31, 1998
-----------------
Year ending August 31,
1999 $ 2,306,000
2000 1,764,000
2001 927,000
2002 311,000
2003 153,000
-----------------
Total 5,461,000
Less amount representing interest (696,000)
-----------------
Present value of minimum lease payments 4,765,000
Less current maturities 1,935,000
-----------------
$ 2,830,000
=================
F-17
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
8. LOANS AND NOTES PAYABLE TO STOCKHOLDERS
Loans payable to stockholders consist of two loans aggregating approximately
$362,000 of which approximately $155,000 is payable on demand and approximately
$207,000 is due in November 1999. The loans bear interest at 8% per annum.
9. STOCK OPTIONS
Unidigital's Board of Directors has adopted, and the stockholders of Unidigital
have approved the following stock option plans: (i) the 1995 Unidigital Inc.
Long-Term Stock Investment Plan (the "1995 Stock Plan"); (ii) the 1995 Directors
Stock Option Plan (the "1995 Directors Plan"); (iii) the 1997 Equity Incentive
Plan (the "1997 Plan"); and (iv) the 1997 Non-Employee Director Stock Option
Plan (the "1997 Non-Employee Director Plan"), collectively, the ("Stock Option
Plans"). The total aggregate number of shares of Common Stock for which options
may be granted under the Stock Option Plans is 875,000.
Under the Stock Option Plans as of August 31, 1998, the Company has committed to
grant options to purchase Common Stock as follows: (i) 226,717 shares at
exercise prices ranging from $4.50 to $7.75 per share, vesting six months after
the date of grant under the 1995 Stock Plan; (ii) no shares have been granted
under the 1995 Directors Plan; (iii) 410,199 shares at exercise prices ranging
from $5.25 to $9.63 per share, vesting, in part, on the date of grant under the
1997 Plan and; (iv) 15,000 shares at an exercise prices ranging from $5.13 to
$5.53 per share, vesting three months from the date of grant under the 1997
Non-Employee Director Plan. All stock options were issued at fair market value
at the date of grant and have a ten year term. The options terminate upon
termination of employment.
In connection with the acquisition of Elements (UK), a former shareholder was
issued options, outside the plans, which expire in February 2002, to purchase
50,000 shares of Unidigital Common Stock at an exercise price of $6.00 per
share.
F-18
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended August 31, 1998, 1997 and 1996 is as follows:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------------------------------------
Outstanding--September 1, 1995 50,000 $ 6.00
Granted 160,167 6.75
--------------------------------------
Outstanding--August 31, 1996 210,167 6.57
Granted 174,103 4.88
Forfeited (28,500) 6.75
--------------------------------------
Outstanding--August 31, 1997 355,770 5.73
Granted 384,999 6.89
Exercised (3,499) 5.82
Forfeited (74,204) 6.62
--------------------------------------
Outstanding--August 31, 1998 663,066 $ 6.31
======================================
Exercisable--August 31, 1998 409,733 $ 5.93
======================================
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of FAS 123. The fair value
for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted-average assumptions for August
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
AUGUST 31,
ASSUMPTION 1998 1997 1996
----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-free rate 5.5 - 6.9% 5.9 - 6.9% 6.7 - 6.9%
Dividend yield - - -
Volatility factor of the expected market
price of the Company's common stock .4 - 1.1 .4 - .6 .6
Average life 5 years 5 years 5 years
</TABLE>
F-19
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------------------------------------
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 954,000 $ 1,142,000 $ 524,000
Pro forma net income per share:
Basic $ 0.27 $ 0.36 $ 0.20
Diluted $ 0.25 $ 0.35 $ 0.20
</TABLE>
The weighted average fair value of options granted during the years ended August
31, 1998, 1997 and 1996 were $4.46, $2.50 and $3.13, respectively. The weighted
average remaining contractual life of the options outstanding at August 31, 1998
is 8.49 years.
F-20
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The following comprises income tax expense:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
U.S. income taxes:
Current $ 239,000 $ 9,000 $ 437,000
Deferred 249,000 44,000 358,000
---------------- --------------- ---------------
488,000 53,000 795,000
---------------- --------------- ---------------
United Kingdom income taxes:
Current 302,000 538,000 212,000
Deferred 51,000 2,000 58,000
---------------- --------------- ---------------
353,000 540,000 270,000
================ =============== ===============
Total $ 841,000 $ 593,000 $ 1,064,000
================ =============== ===============
</TABLE>
The following reconciles income tax expense, computed at the statutory United
States Federal corporate rate, to income tax expense:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Income taxes at United States Federal $ 623,000 $ 644,000 $ 644,000
statutory rate
State and local income taxes 95,000 56,000 149,000
Nondeductible expenses and differences
between United States and United Kingdom
tax rates 123,000 (107,000) 16,000
Effect of Subchapter S status - - (112,000)
Effect of termination of Subchapter S
election - - 367,000
------------------------------------------
Total $ 841,000 $ 593,000 $ 1,064,000
==========================================
</TABLE>
F-21
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The liability for deferred income taxes is based on U.S. and United Kingdom
income tax rates applied to temporary differences in the recognition of income
and expenses for income tax and financial accounting purposes as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Use of cash basis for United
States income tax purposes $ 88,000 $ 175,000 $ 316,000
Difference in depreciation and
amortization methods 905,000 591,000 261,000
-------------------------------------------
Total deferred tax liability 993,000 766,000 577,000
Less deferred tax asset:
Allowance for doubtful accounts (143,000) (122,000) (60,000)
Other (105,000) (199,000) -
-------------------------------------------
Net deferred tax liability $ 745,000 $ 445,000 $ 517,000
===========================================
</TABLE>
As part of the Company's initial public offering in February 1996, Elements (NY)
terminated its S Corporation election. Elements (NY) previously filed federal
and state income tax returns under Subchapter S of the Internal Revenue Code in
which its income was reportable by and taxed to its stockholders. Accordingly,
$367,000 of federal, state and local income taxes, applicable to temporary
differences in the recognition of income and expenses for financial accounting
and income tax reporting purposes existing at February 1, 1996, was recorded and
charged to operations for the year ended August 31, 1996. These non-recurring
charges result solely from the termination of the Subchapter S status in the
United States. Subsequent to February 1, 1996 income taxes on U.S. earnings are
taxed at the federal, state and local levels, whereas previously, only local
income taxes on U.S. earnings were payable at the corporate level.
F-22
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY
SHARES RESERVED
As of August 31, 1998, the Company has reserved for issuance approximately
1,439,000 shares of Common Stock as follows: (i) 872,000 shares of Common Stock
upon exercise of options granted or to be granted under its Stock Option Plans;
(ii) issuance of 50,000 shares of Common Stock upon exercise of options granted
in connection with the acquisition of Elements (UK) (see Note 9); (iii) 92,000
shares of Common Stock upon exercise of warrants issued to the managing
underwriter in connection with the PI, exercisable at a price of $7.20 per share
for a period of four years commencing in February 1997; (iv) 400,000 shares of
Common Stock upon exercise of warrants issued in connection with loans to the
Company; and (v) 25,000 shares of Common Stock issuable upon exercise of
warrants issued to CIBC Oppenheimer in connection with the Company's engagement
of CIBC Oppenheimer as its investment banker.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share-net income
available for common stockholders $1,136,000 $1,341,000 $ 830,000
===========================================
Denominator:
Denominator for basic earnings per
share weighted average shares 3,530,836 3,212,098 2,643,828
Effect of dilutive securities:
Stock options 74,971 34,760 19,080
Warrants 173,631 36,421 -
-------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions 3,779,438 3,283,279 2,662,908
===========================================
</TABLE>
F-23
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
12. EARNINGS PER SHARE (CONTINUED)
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Stock options 41,000 125,000 75,000
Warrants 117,000 92,000 92,000
</TABLE>
13. COMMITMENTS
The Company leases their premises under operating lease agreements which expire
at various dates through February 2009. The Company also leases certain
production equipment under operating leases which expire at various dates
through August 2001.
Aggregate minimum rental payments for premises and equipment under operating
leases are approximately as follows:
<TABLE>
<CAPTION>
TOTAL PREMISES EQUIPMENT
--------------------------------------------
<S> <C> <C> <C> <C>
Year ending August 31,
1998 $ 2,074,000 $1,522,000 $ 552,000
1999 1,820,000 1,344,000 476,000
2000 1,603,000 1,332,000 271,000
2001 1,362,000 1,362,000 -
2002 1,161,000 1,161,000 -
Thereafter 4,444,000 4,444,000 -
--------------------------------------------
Total $12,464,000 $11,165,000 $ 1,299,000
============================================
</TABLE>
Aggregate rental expense for the years ended August 31, 1998, 1997 and 1996
approximated $1,077,000, $515,000 and $378,000, respectively.
F-24
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
14. SEGMENT INFORMATION
The Company's reportable segments are divisions that offer different products
and services. The reportable segments are each managed separately because they
produce and distribute distinct products with different production processes.
The Company has four reportable segments: large format, financial and digital
print, high end prepress and on-demand print and prepress. The Company's large
format division consists of Unison (MA) which provides digital imaging and
photographic processing in the Boston area. The Company's financial and digital
print division consists of Regent and provides financial digital print business
and printing services in London. The Company's high end prepress division
consists of Unison (NY) which provides digital prepress and digital printing to
advertising agencies and corporations in the New York City area. The Company's
on-demand print and prepress consists of Elements (NY), Elements (UK) and
Elements (SF) which provides on-demand print, digital prepress and retouching in
New York, London and San Francisco. In addition the Company also has geographic
segments: United States and United Kingdom.
The Company evaluates performance and allocates resources based on profit or
loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are recorded
at the Company's cost; there is no intercompany profit or loss on intersegment
sales or transfers.
The following summarizes the operations by geographic segment for the years
ended August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
AUGUST 31,
1998 1997 1996
---------------------- ----------------------------- ---------------------------
UNITED UNITED UNITED UNITED UNITED UNITED
STATES KINGDOM STATES KINGDOM STATES KINGDOM
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $31,526,000 $15,863,000 $16,293,000 $10,969,000 $ 5,561,000 $ 6,099,000
Income from
operations 4,514,000 874,000 1,200,000 1,939,000 763,000 1,226,000
Identifiable assets 56,528,000 10,787,000 24,309,000 8,724,000 13,334,000 4,290,000
Depreciation and
amortization 2,743,000 1,211,000 1,315,000 879,000 588,000 469,000
Capital expenditures 2,459,000 909,000 1,983,000 1,096,000 856,000 1,437,000
</TABLE>
F-25
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
14. SEGMENT INFORMATION (CONTINUED)
The following summarizes operations by industry segment for the years ended
August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
AUGUST 31, 1998
----------------------------------------------------------------------------
ON DEMAND
FINANCIAL HIGH END PRINT AND
LARGE FORMAT AND DIGITAL PREPRESS PREPRESS
SEGMENT PRINT SEGMENT SEGMENT SEGMENT TOTAL
---------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales $ 9,275,000 $10,836,000 $ 8,154,000 $ 19,124,000 $ 47,389,000
Income from
operations 950,000 122,000 2,236,000 2,080,000 5,388,000
Identifiable assets 18,763,000 10,461,000 9,701,000 28,390,000 67,315,000
Depreciation and
amortization 940,000 570,000 622,000 1,822,000 3,954,000
Capital expenditures 329,000 827,000 130,000 2,082,000 3,368,000
AUGUST 31, 1997
----------------------------------------------------------------------------
ON DEMAND
FINANCIAL HIGH END PRINT AND
LARGE FORMAT AND DIGITAL PREPRESS PREPRESS
SEGMENT PRINT SEGMENT SEGMENT SEGMENT TOTAL
---------------- -------------- ------------- -------------- ---------------
Net sales $ 3,227,000 $ 6,460,000 $ - $ 17,575,000 $ 27,262,000
Income from
operations 655,000 405,000 - 2,079,000 3,139,000
Identifiable assets 6,651,000 5,119,000 - 21,263,000 33,033,000
Depreciation and
amortization 319,000 284,000 - 1,591,000 2,194,000
Capital expenditures 147,000 706,000 - 2,226,000 3,079,000
AUGUST 31, 1996
----------------------------------------------------------------------------
ON DEMAND
FINANCIAL HIGH END PRINT AND
LARGE FORMAT AND DIGITAL PREPRESS PREPRESS
SEGMENT PRINT SEGMENT SEGMENT SEGMENT TOTAL
----------------------------------------------------------------------------
Net sales $ - $ 2,274,000 $ - $ 9,386,000 $ 11,660,000
Income from
operations - 137,000 - 1,852,000 1,989,000
Identifiable assets - 2,610,000 - 15,014,000 17,624,000
Depreciation and
amortization - 202,000 - 855,000 1,057,000
Capital expenditures - 612,000 - 1,681,000 2,293,000
</TABLE>
F-26
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements (continued)
15. EMPLOYEE BENEFIT PLAN
The Company adopted a 401(k) Plan effective January 1, 1996, in which
substantially all of the Company's U.S. employees are eligible to participate.
Although the Plan provides for discretionary employer contributions, there were
none for the years ended August 31, 1998, 1997 and 1996.
16. SUBSEQUENT EVENTS
On September 2, 1998, the Company purchased certain assets and assumed certain
liabilities of Mega Art Corporation. The aggregate purchase price consists of
(i) cash payments of $5,800,000, (ii) issuance of 754,148 shares of restricted
Common Stock of the Company ($5,000,000), (iii) a potential earn-out payment of
$1,200,000 payable 180 days after the date of purchase and (iv) a potential
earn-out payment of $1,200,000 and $1,200,000 of Common Stock payable in
November 1999. The Company funded the cash portion of the purchase price from
their revolving line of credit.
On October 30, 1998, the Company purchased certain assets and assumed certain
liabilities of Hy Zazula Associates, Inc. The aggregate purchase price consists
cash of $2,275,000 and the issuance of 433,076 shares of in restricted Common
Stock of the Company ($2,275,000). The Company funded the cash portion of the
purchase price from their revolving line of credit. Of the purchase price,
$150,000 in cash and 28,552 shares of restricted Common Stock ($150,000) is
being held in escrow for a period of two years to satisfy any indemnification
claims.
In November 1998, the Company sold one of its three floors in a building for
$800,000 and entered into letters of intent to sell the remaining two floors for
$1,900,000.
F-27
<PAGE>
Report of Independent Auditor
We have audited the consolidated financial statements of Unidigital, Inc., as of
August 31, 1998 and 1997, and for each of the three years in the period ended
August 31, 1998 and have issued our report thereon dated November 19, 1998
(included elsewhere in this Annual Report). Our audits also included the
financial statement schedule listed in item 14(a) of this Annual Report. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
November 19, 1998
New York, New York
<PAGE>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
UNIDIGITAL INC.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Additions - Deductions
Balance at Charged to - Write-off Balance at
Beginning Costs and of Accounts End of
Description of Period Expenses Receivable Period
- ---------------------------------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 266,000 $ 115,000 $ 50,000 $ 331,000
YEAR ENDED AUGUST 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 201,000 $ 102,000 $ 37,000 $ 266,000
YEAR ENDED AUGUST 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 110,000 $ 104,000 $ 13,000 $ 201,000
</TABLE>
Agreement Date 199
-------------------------- ---
Sales Ledger Financing Agreement
Between
Barclays Commercial Services Limited
And
Elements (UK) Ltd
Commencement Date
199
---------------------------- --
<PAGE>
SALES LEDGER FINANCING AGREEMENT
--------------------------------
A. PARTIES AND DATE
----------------
This Agreement is made between:
(1) WE/US: BARCLAYS COMMERCIAL SERVICES LIMITED
AND
(2) YOU: THE CLIENT NAMED IN THE CLIENT PARTICULARS BELOW
on the day that the last of either you or us signs it.
B. INTRODUCTION
------------
B.1 The purpose of this Agreement is to set out the terms upon which we will
purchase the Debts due to you from your Debtors.
B.2 References to lettered Clauses are to those in this document. References to
the Schedule are to the Schedule appearing at section I of this document.
References to numbered Conditions are to those in the separate document
provided by us entitled "Terms and Conditions of Business". Words with
special meanings are explained in Condition 24.1.
B.3 The Debts to which this Agreement applies are shown in the Schedule,
together with such other Debts as we may subsequently agree with you in
writing. We agree to purchase from you and you agree to sell to us all
Debts to which this Agreement applies:
(i) which are in existence on the Commencement Date shown in the Schedule;
and
(ii) all such Debts created in future.
B.4 The facilities which we will provide to you are stated in the Schedule.
B.5 The whole agreement between you and us shall be comprised only by:
(i) this document;
(ii) our document entitled "Terms and Conditions of Business";
<PAGE>
(iii) our Letter of Offer (if any) whose date appears in the Schedule;
(iv) our Computer User Guide (if we are to provide you with our
computerised facilities);
all of which have been supplied or are available to you upon your request.
References to "the Agreement" shall include all or any of the above
together with any variation, amendment or extension of it. The terms of
this document and the Conditions shall prevail over any inconsistency shown
in any other document. All earlier agreements between you and us and all
discussions, quotations, warranties and representations by us however made
shall be of no effect, except the Letter of Offer (if any).
C. START AND LENGTH OF OUR RELATIONSHIP
------------------------------------
The contractual relationship between you and us set out in this Agreement
shall begin on the Commencement Date and then continue for the Minimum
Period, both of which are set out in the Schedule. It will then continue
until ended by either you or us giving to the other not less than the
Minimum Period of Notice specified in the Schedule which must expire at the
end of a calendar month. Such notice may be given at any time, even during
the Minimum Period. We shall also have the right immediately to terminate
this Agreement by written notice to you at any time following a Termination
Event. During any period of notice, you will continue to deliver
Notification Schedules.
D. OWNERSHIP OF DEBTS
------------------
The ownership of each Outstanding Debt and its Related Rights shall vest in
us on the Commencement Date, where the Debt exists at that date, or at the
moment the Debt is created, if that is after the Commencement Date.
E. POWER TO ACT IN YOUR NAME
-------------------------
E.1 By way of security for the performance of your obligations to us and for
all sums which shall become due to us, you irrevocably appoint us and our
directors, company secretary and other officers, at any time, jointly and
each of them severally, as your true and lawful attorneys to act as we or
they consider necessary or appropriate in order to:
(a) obtain payment of and give valid discharges for any Debt (including
re-assigned Debts); or
(b) deal with any Debt; or
(c) perfect our title to any Debt; or
<PAGE>
(d) secure performance of any of your obligations to us or to any
Customer.
For these purposes your attorneys may do any of the following:
(i) execute all necessary deeds, agreements and documents;
(ii) complete, negotiate or endorse all necessary instruments;
(iii) conduct or defend any proceedings;
(iv) settle any indebtedness;
(v) take all other steps they consider requisite.
E.2 This appointment shall continue both during and after the ending of this
Agreement, until all sums due to us have been paid.
E.3 You also irrevocably appoint any assignee of ours as your attorney to
perform any of the acts set out above.
E.4 We may appoint and remove a substitute attorney for any of the above
matters. You will ratify and confirm whatever shall be done under these
powers.
F. GOVERNING LAW AND JURISDICTION
------------------------------
Our relationship with you is to be governed and interpreted by English law.
You will submit to the jurisdiction of the English courts. However we may,
in our discretion, use the courts of any other jurisdiction.
G 01 CONDITIONS PRIOR TO COMMENCEMENT
-------------------------------
G 09 We receive written acknowledgement from your bankers that copy statements
for all accounts held by you will be sent, when produced, directly to us.
The draft wording for this acknowledgement is enclosed.
G 10 We receive written confirmation from your bankers of your revised banking
facilities including whether your bankers will be registering any charge or
debenture over the assets of the company. In such a case, it may be
necessary to obtain a waiver in respect of the book debts.
<PAGE>
G 11 We receive an unaddressed General Notice of Assignment letter (draft format
enclosed).
G 21 We receive a Full Guarantee and Indemnity from Regent Communications (UK)
Limited, Libra City Corporate Printing Limited, Unidigital Inc and
Unidigital (UK) Ltd in the format provided.
G 28 We receive a copy of your latest management accounts.
G 29 We receive a master debtor name and address listing, marked with
anticipated funding line requirements for each debtor.
G 37 Your sales ledger is fully reconciled, clearly identifying all outstanding
invoices and credit notes in an open item format with all cash and other
credit terms allocated to the appropriate invoices.
G 38 We receive an all asset debenture to be registered in our favour.
G 52 1. Barclays Bank plc to be appointed as principle bankers to Unidigital
(UK) Ltd group.
2. Unidigital Inc. confirms to us that we will be informed in advance of
the level of loan and loan repayment rate in respect of the loan from
Unidigital Inc. to Unidigital (UK) Ltd group. In addition Unidigital Inc.
confirms to us that this loan will not be repaid such that repayment will
cause cashflow problems to Unidigital (UK) Ltd group.
3 Unidigital Inc. provide us with a guarantee and indemnity limited to
(pound)500K in respect of this facility.
4.The Unidigital (UK) Ltd group retains a minimum Net Worth of (pound)500k
( calculated by the sum of paid up share capital plus retained profits and
parental loan).
5. You understand that the figures shown in clauses I 08 and I 23 of this
agreement are the total amounts to be apportioned across our agreements
with Elements UK Ltd, Regent Communications (UK) Ltd and Libra City
Corporate Printing Ltd.
G 53 You accept that if this document is signed and returned to us after the 18
December 1997 we can advise you before the first pre-payment is made, that
this agreement shall be of no effect.
NB Please note that any information requested must prove satisfactory to
ourselves.
<PAGE>
H 01 CONDITIONS APPLYING AT ALL TIMES
H 06 Debts assigned are to be evidenced by copy invoices and credit notes, or
suitable sales daybook listings, being supplied to ourselves along with the
appropriate schedule of debts. We should be supplied with copies of any
credit notes that are raised on any debtor where there are debts
outstanding that have been assigned to us.
H 07 We will require to visit you from time to time in order to confirm that the
ledger is being operated in accordance with the agreement and to fulfil our
audit requirements.
H 08 You will provide by the 10th of each month, a sales ledger reconciliation
as at the last working day of each month previous, such reconciliation to
include:-
1. fully posted aged debtor analysis
2. copy open item statements for each debtor, on a monthly basis, showing
details of the outstanding debts assigned to us
3. fully posted aged creditors analysis
4. month end reconciliation form duly signed and authorised by an official
signatory of the company.
H 09 Your invoice stationery is printed with the full and correct company style,
terms of trade and VAT number.
H 10 You, as agent for ourselves, continue to collect monies from debtors in
respect of assigned debts. Monies from such debtors should then be
deposited by you for the credit of an account specified by us, with copies
of the debtors' remittance advices (or full details of items paid)
forwarded to us with the counterfoil paying in slip.
The Banking of debtor cheques, or other forms of payment, into any bank
account other than the Trust Account is strictly prohibited.
All company bank statements, relating to all accounts, must be made
available on request.
H 11 Debt verification will be undertaken on your sales ledger. This procedure
may be undertaken at your premises with the assistance of your personnel
or, alternatively, through a third party acting on our behalf.
H 14 An essential feature of the confidential facility is that although invoices
will be assigned to us, the sales ledger will be maintained by you for and
on behalf of us, the ledger items should therefore be clearly marked to
identify the debts that have been assigned to ourselves.
<PAGE>
H 20 No deposits are taken from debtors. Should any debtor choose to pay a
deposit then we should be notified immediately. We may consider the need to
hold a reserve against availability in respect of the deposit to protect
ourselves against any possible offset claim by the debtor.
H 35 We are provided with management accounts on a monthly basis in order that
we can monitor your progress.
H 42 Copies of debtors' signed delivery notes and /or carriers' receipt notes
are held to our order.
H 78 That no:
1) debtors are to be handled on both cash and credit basis
2) invoices are to be raised on sale or return trading terms
3) goods are to be provided on an evaluation or trial basis.
H 79 The maximum terms of trade should not exceed Net 60 days as terms in excess
of these may result in the debtor concerned being handled on an unapproved
basis only.
H103 You maintain written records detailing all written and verbal communication
with debtors in relation to the collection of domestic debts. These records
must be kept separately for each debtor and must be held to our order.
H104 a We shall carry out monthly audits of the business until the Proof of debt
system is satisfactory for our purposes
b We receive quarterly accounts of Unidigital Inc
THE SCHEDULE
------------
I 01 FACILITIES SELECTED
(Conditions 1.2 and 1.3)
Early Payment Facility You will have the benefit of an Early
Payment from us, towards the Purchase
Price of Approved Debts, at the
percentage set out in clause I 07
Recourse Facility At the expiry of the Recourse Period
Early Payment in respect an Outstanding
Debt to has be returned to us.
<PAGE>
Computerised Facilities From the installation you will have the
benefit of our computerised facilities
described in our Computer User Guide.
I 02 Commencement Date 199
(Clauses C and D) ------------- ---
I 03 Minimum Period of this Agreement 6 months.
(Clause C)
I 04 Minimum Notice Period to 3 months.
Terminate this Agreement
(Clause C)
I 05 Date of Letter of Offer: Inapplicable.
(Clause B.5(iii))
I 06 Payment Account Credit Date: (a) For all Debts - the date of receipt
(Condition 5.2) by us of payment for value from the
Debtor.
I 07 Early Payment Percentage 75 % of Approved and Covered Debts
(Condition 5.7(ii)) within the BCSL Credit Line.
I 08 Early Payment Ceiling (pound) 1,400,000
(Condition 5.7(i))
I 10 Discount - 2 % above Base Rate.
(Condition 6.1)
I 11 Notice of Assignment Provisions No notice of assignment will be given,
(Condition 7.1) unless your Agency to collect Debts
shall be withdrawn.
I 12 Your Business (Condition 13.2(g)) The supply of pre press services.
I 13 Your Payment Terms (Condition 30 days from end of month in which
13.2(l)) invoice is generated.
I 14 Permitted Currencies in addition None.
to Sterling (Condition 13.2(m))
<PAGE>
I 15.01 Non-Notifiable Debts We do not require to be notified of
(Condition 14.1(e)(iii)) sales to the following debtors:
We shall supply you with these names
from time to time.
Please note that:
I 15.02 We do not require to be notified of
sales to associated companies.
I 15.03 We do not require to be notified of cash
sales.
I 15.18 We do not require to be notified of
sales to private individuals.
I 15.19 We do not require to be notified of
proforma sales.
TERMS APPLICABLE ONLY TO
------------------------
U.K. DEBTS
----------
I 16 U.K. Debts to which this All U.K. Debts.
Agreement applies:
(Clause B.3)
I 18 Recourse Period for each 90 days from the last day of the month
U.K. Recourse Debt. of issue of the relative invoice.
(Conditions 5.3 and 5.4(iv))
I 20 Service Charge for each 0.20 % of the Notified Value of each
Notified U.K. Debt Debt.
(Condition 6.2 and 6.3)
I 21 Minimum Level of Service (pound)10,000 in each period of 12
Charges for U.K. Debts months.
(Conditions 6.3 and 6.4)
<PAGE>
J. CLIENT PARTICULARS
------------------
Company Name Elements (UK) Ltd
Company registration number 2888039
Principal place of business 48 Margaret Street, London, W1N 7FD
Business or trading style (if any) -
TO CONFIRM the respective consent of each party to this Agreement
(including the Terms and Conditions of Business and all other documents
referred to in Clause B5 above) AND TO ACKNOWLEDGE the opportunity to take
independent legal advice as to all its terms both parties have executed
this document as indicated below.
<PAGE>
SIGNED as a Deed on the
1st day of December 199 7 on behalf of
- ----- ----------------- ---
BARCLAYS COMMERCIAL SERVICES
LIMITED
acting by
----------------------------------
Wendy Mary Poole /s/ Wendy Mary Poole
- --------------------------------------- ----------------------------------
Signature of Attorney
----------------------------------
and
Duncan MacCormick /s/ Duncan MacCormick
- --------------------------------------- ----------------------------------
Signature of Attorney
its duly appointed attornies in the presence of :
Witness' Signature /s/ Deborah Tribe
---------------------------------------
Witness' Name Deborah Tribe
---------------------------------------
Aquila House, Breeds Place
Witness' Address Hastings, East Sussex
TN34 3DG
Occupation Sales Support Team
---------------------------------------
CORPORATE CLIENT
- ----------------
SIGNED and DELIVERED as a Deed on the
26th day of November 199 7 by you
- ------ ----------- ---
Elements (UK) Ltd
acting by
------------------------------------
*
Anthony Manser /s/ Anthony Manser
- ----------------------------------------- ------------------------------------
(a Director) Signature of Director
------------------------------------
and *
Colan Parl Martin /s/ P. Martin
- ----------------------------------------- ------------------------------------
(a **Director) Signature of **Director
Key: * Please print names.
- --- **Delete as applicable.
<PAGE>
BARCLAYS COMMERCIAL SERVICES LIMITED
Millenium House, 99 Bell Street, Reigate, Surrey RH2 7AN
Telephone: (01737) 755600
Mr Tony Manser, Group Managing Director
Regent Group Limited
48 Margaret Street
London W1N 7FD
Date: 13 May 1998
Dear Tony,
I write following receipt of your request for an increase in the payment ceiling
on the Invoice Discounting facility held with Barclays Commercial Services. I am
pleased to confirm that I have gained sanction to increase the current group
limit of (pound)1,400,000.
Your cash flows indicate the combined cash requirement for The Regent Group Ltd
and Elements (UK) Ltd to be in the region of (pound)2,200,000 accordingly a new
group ceiling of (pound)2,300,000 will be marked.
There are a number of conditions of sanction which should be met by the
following deadlines;
- -- Full cash flows detailing requirements for the next twelve months are
provided by the 30/6/98.
- -- An update of the loan repayments to Unidigital Inc. is provided by the
30/6/98.
- -- A new (original) General Notice of Assignment is provided for Elements (UK)
Ltd, faxed copy attached.
In addition to the above BCS will continue to mark forward monthly audit visits
in order that the development and performance of the group can be monitored.
I trust that the above is self explanatory however if you have any queries
please do not hesitate contact me at Reigate.
In order that the amendment can be actioned could I ask that the indemnifiers to
the facility sign the attached copy of this letter and return it completed for
my attention.
Yours sincerely,
/s/ Andy Pope
Andy Pope
Relationship Manager
- --------------------------------------------------------------------------------
BARCLAYS TREASURY LOAN
DATED 26TH JUNE 1998
<PAGE>
BARCLAYS TREASURY LOAN
OFFER LETTER
Barclays Bank PLC (the "Bank") is pleased to offer a Barclays Treasury Loan
Facility (the "Facility"), on the terms and conditions set out in this document
and the attached further Special Conditions (if any), to:
Name(s) REGENT GROUP LTD Address 48 MARGARET STREET LONDON W1N 7FD
Company Registration No. 2339001 (the "Borrower")
Type of Borrower: Company
References in this document to Conditions are references to the numbered terms
and conditions set out below.
Conditions precedent
- --------------------
The following documents, each in form and substance satisfactory to the Bank,
shall be delivered to the Bank prior to drawdown of the Facility, in addition to
those specified in Condition 2.1:
Completion of a guarantee from Unidigital Inc in the sum of (pound) 400,000.
together with a legal opinion containing the ability of the guarantor to give
the guarantee
Completion of a cross guarantee and debenture from:
Regent Group Ltd Company No 2339001
Elements UK Ltd Company No 2888039
Regent Communications (UK) Ltd Company No 1525936
If interest is to be calculated initially on a Fixed Rate Basis, a Maximum Rate
Basis or a Minimax Rate Basis pursuant to the provisions set out below under the
heading "Interest", no drawdown shall be permitted until the Borrower and the
Bank have agreed the relevant fixed rate, maximum rate and/or minimum rate (as
the case may be), and the Borrower has paid to the Bank the relevant interest
rate management fee (if any), in accordance with those provisions.
Amount, term and drawdown
- -------------------------
Amount: (pound) 400,000.
Term: 3 (Three) years from first drawdown.
The Facility may be drawn in one amount by 23rd July 1998 (the "Final Drawdown
Date").
Purpose of facility
- -------------------
The Facility shall be used only for the following purpose(s):
<PAGE>
The purchase of the assets of Five Star Finishers Ltd and to cover the
refurbishment cost of Regent Group Ltd
Repayment
- ---------
Repayment shall be made:
in 36 instalments of principal of (pound) 11,111.11, payable monthly
commencing 1 month after first drawdown (with interest debited to current
account).
Where relevant, the instalment amounts specified above are subject to adjustment
under Condition 3.
Prepayment
- ----------
Prepayment is permitted, in full or in minimum amounts of (pound) 11,111.11 and
multiples of (pound)11,111.11, in accordance with Condition 4. A prepayment fee
will be payable on the date of each prepayment, in accordance with Condition 4.3
or 4.4.
Fees
- ----
The Borrower shall pay to the Bank:
(a) an arrangement fee of (pound) 3,000. and a security fee of (pound) 200 on
acceptance of this offer, by debit to current account;
(b) an agreed management fee of (pound) 0 per annum (subject to review in
accordance with Condition 6.2) payable annually in arrears, by debit to
current account;
Interest
- --------
Interest shall be payable in accordance with Condition 5. The Bank's margin in
respect of the Facility (the "Margin) shall be 2.4 % per annum. Subject to the
provisions of Condition 5, during the period commencing on the date of first
drawdown and ending on the last Business Day of the period specified below (the
"First Interest Review Date"), interest shall be calculated:
LIBOR Basis (other than Maximum Rate basis or Minimax Rate Basis): at a
rate equal to the aggregate of (i) the Margin, (ii) LIBOR (the London
Inter-Bank Offered Rate) and (iii) the Associated Costs Rate, during the
period ending on the third anniversary of the date of this offer.
Following the First Interest Review Date, interest shall be calculated on
the basis and at the rates established in accordance with Condition 5.
Condition 5 contains provisions under which the basis on which interest is
calculated may change from time to time during the term of the Facility -
see Condition 5.3 to 5.5.
Unless the Bank otherwise agrees in writing, interest shall be debited
either to current account or to Loan account, as specified above under the
heading "Repayment", throughout the term of the Facility, save that during
any period while interest is calculated on a Maximum Rate Basis or a
Minimax Rate Basis interest shall be debited to current account.
<PAGE>
Security/Guarantee(s)
- ---------------------
The Borrower's obligations in respect of the Facility (and all other present and
future obligations of the Borrower to the bank) are to be secured/guaranteed by:
A cross guarantee and debenture from the following companies
Regent Group Ltd
Regent Communications (UK) Ltd
Elements (UK) Ltd
A parental guarantee from Unidigital Inc
and any other security/guarantees now or hereafter held by the Bank. The bank
may from time to time require any security to be professionally valued, at the
Borrower's expense.
Financial Covenants
- -------------------
The Borrower/Parent shall procure that:
(a) Total Operating Profit for each Relevant Period shall exceed five times
Gross Financing Costs for such Relevant Period (Gross Interest Cover);
(b) Net Tangible Assets shall at all times exceed:
(i) (pound) 2,000,000. (Minimum NTA);
(c) Gross Borrowings shall not at any time exceed 75 % of Net Tangible Assets
(Gross Borrowings Gearing);
Covenants (a), (b), and (c) above shall apply to the Borrower and its
Subsidiaries and shall be tested by reference to the accounts of the Borrower or
(as the case may be) the Parent in accordance with Condition 11 (and the
definitions set out in Condition 1.1).
Meaning of "Relevant Parties" and "The Parent"
- ----------------------------------------------
In this document (and the attached further Special Conditions, if any):
(a) "Relevant Parties" means, where referred to in Conditions 10 (General
Undertakings) and 12 (Events of Default):
(i) the Borrower, each guarantor (if any) named above under the heading
"Security/Guarantee(s)" and, where named in paragraph (b) below, the
Parent;
(ii) UK/all Subsidiaries of the Borrower
(each a "Relevant Party");
<PAGE>
(b) "Parent" means
Unidigital Inc (Name)
of 545 West 45th Street, New York, NY 10036, U.S.A (Address)
(Parent Company Registration No. 13-3856672 (IRS Employer ID))
Barclays Treasury Loan
----------------------
Terms and Conditions
--------------------
1. Definitions and Interpretation
------------------------------
1.1 In this document, expressions defined in the attached Offer Letter have
the meanings given to them there and in addition:
"Associated Costs Rate" means the percentage rate per annum (rounded up to
---------------------
the next 1/16%) calculated in accordance with the Bank's standard formula
current from time to time to reflect its costs resulting from requirements
of the Bank of England or other regulatory authorities or agencies,
whether having the force of law or otherwise, affecting the conduct of the
Bank's business;
"Base Rate" means the rate of interest published by the Bank as its
----------
base rate from time to time;
"Base Rate Basis" means a basis for calculating interest on the Loan at a
---------------
rate equal to the aggregate of the Margin and the Base Rate;
"Business Day" means a day (other than a Saturday or Sunday) on which
-------------
the Bank is open for business;
"Cumulative Retained Profits" means the cumulative aggregate of the
-----------------------------
consolidated retained profits (after tax and dividends) of the Borrower
and its Subsidiaries (or, where the Financial Covenants are expressed in
the Offer Letter to apply to the Parent and its Subsidiaries, the Parent
and its Subsidiaries) in each financial year of the Borrower or (as the
case may be) the Parent ending after the date of its most recent audited
consolidated accounts as at the date of this offer and a copy of which has
been delivered to the Bank. For the purposes of this definition, in
calculating consolidated profits, any consolidated losses shall be
ignored;
"Encumbrance" includes any mortgage, charge, pledge, lien (other than a
-----------
lien arising solely by operation of law in the ordinary course of business
and securing amounts not more than 90 days overdue for payment),
assignment by way of security, hypothecation, security interest or other
agreement or arrangement which results in (or has substantially the same
commercial effect as) the creation of security (but excluding title
retention agreements or arrangements entered into in the ordinary course
of trading and not otherwise falling within this definition) and any right
on the part of any person to call for the creation of any of the
foregoing, in each case whether relating to existing or future assets;
<PAGE>
"Event of Default" means any one of the events mentioned in Condition
----------------
12;
"Financial Covenants" means the covenants set out in the Offer Letter
--------------------
in paragraphs (a), (b), (c) and (d) under the heading "Financial
Covenants";
"Fixed Rate Basis" means a basis for calculating interest on the Loan
----------------
at a fixed rate over a fixed period;
"Gross Borrowings" means all indebtedness incurred in respect of borrowed
----------------
money (together with any fixed premium on repayment) of the Borrower and
its Subsidiaries (or, where the Financial Covenants are expressed in the
Offer Letter to apply to the Parent and its Subsidiaries, the Parent and
its Subsidiaries) and shall be deemed to include (without limitation):
(i) the capitalised value of obligations under any hire purchase
agreements and finance leasing agreements (as determined in
accordance with applicable accounting standards);
(ii) indebtedness evidenced by bonds, debentures, loan stock, notes,
commercial paper or similar instruments;
(iii) the nominal amount of any share capital expressed to be
redeemable;
(iv) indebtedness (including contingent liabilities) arising under or
by virtue of (a) acceptance credits, (b) debt factoring, invoice
or bill discounting or note purchase facilities (save to the
extent that there is no right of recourse against the Borrower
(or, as the case may be, the Parent) or any of its Subsidiaries),
(c) deferred payment for assets or services (other than normal
trade credit), (d) guarantees, indemnities or other assurances
against financial loss in respect of any indebtedness specified
in this definition of any other person, (e) counter-indemnities
in respect of letters of credit, bonds, guarantees, indemnities
or similar obligations issued or created in favour of third
parties and (f) any other transaction having substantially the
same commercial effect as any of the foregoing, including
(without limitation) those where liabilities are not shown as
borrowings on a balance sheet by reason of being contingent,
conditional or otherwise;
"Gross Financing Costs" means in respect of any Relevant Period, all
-----------------------
interest, acceptance commission, payments under interest rate management
arrangements (whether by way of swap, cap, collar, floor, option, forward
rate agreement or otherwise) and other continuing regular or periodic
costs, charges and expenses in the nature of interest (whether paid,
payable or capitalised and including the interest element in hire purchase
and finance leasing charges) incurred by the Borrower and its Subsidiaries
(or, where the Financial Covenants are expressed in the Offer Letter to
apply to the Parent and its Subsidiaries, the Parent and its Subsidiaries)
during such Relevant Period in effecting, servicing or maintaining
borrowings or borrowing facilities;
"Interest Period" means for so long as a LIBOR Basis applies, a period of
---------------
three, six or twelve months (or such other period as may be agreed between
the Borrower and the Bank) commencing on the date on which the Facility is
first drawn down or (where a LIBOR Basis is selected after first drawdown
pursuant to Condition 5.3 or 5.5) on the date upon which such LIBOR Basis
first takes effect or on the last day of the immediately preceding
Interest Period (as the case may be), in each case as selected by the
<PAGE>
Borrower by notice received by the Bank not later than 12.00 noon on the
first day of the relevant Interest Period, provided that:
(i) while interest is capitalised and debited to Loan account, or a
Maximum Rate Basis or a Minimax Rate Basis applies, each Interest
Period shall be a period of 3 months;
(ii) if the Borrower fails to select the duration of an Interest
Period in the manner and by the time mentioned above, the
duration of that Interest Period shall be 3 months;
(iii) an Interest Period that would otherwise extend beyond an Interest
Review Date or the final date for repayment of the Loan shall be
shortened to end on such date;
(iv) in respect of second and subsequent drawings under the Facility
made while a LIBOR Basis applies, the first Interest Period
relating to the remainder of the Loan so that all drawings shall
be consolidated;
(v) if a repayment date (other than the final repayment date) falls
during an Interest Period, the Loan shall be divided into two
tranches, one being of an amount equal to that to be repaid on
such repayment date and having an Interest Period ending on such
repayment date and the other being of an amount equal to the
remainder of the Loan and having an Interest Period of a duration
established in accordance with the other provisions of this
definition;
(vi) the duration of any Interest Period may be adjusted by the Bank
in accordance with Condition 7.3; and
(vii) following a demand for repayment of the Loan pursuant to
Condition 12, each Interest Period for any unpaid amount shall be
of such duration as the Bank may in its sole discretion deem
appropriate;
"Interest Review Date" means the First Interest Review Date and any
----------------------
subsequent date on which the basis for calculating interest is to be
reviewed under Condition 5.3(c);
"LIBOR" means, in relation to any Interest Period:
-----
(i) for so long as a Maximum Rate Basis or a Minimax Rate Basis
applies, the percentage rate per annum determined by the Bank to
be its offered quotation for 3 month sterling deposits which
appears on the display designated as page "LIBP" on the Reuter
Monitor Money Rates Service (or such other page or service as the
Bank may notify to the Borrower as having replaced such page or
service for the purpose of displaying London Inter-Bank Offered
Rates) as at 11.00 a.m. on the first day of the relevant Interest
Period; or
(ii) for so long as (a) a LIBOR Basis (other than a Maximum Rate Basis
or a Minimax Rate Basis) applies or (b) a Maximum Rate Basis or a
Minimax Rate Basis applies but no such display rate, as is
mentioned in (i) above is available at the relevant time, the
percentage rate per annum at which the Bank offers sterling
deposits (in amounts comparable to the Loan or the relevant part
of it) to prime banks in the London Inter-Bank Market (or, if the
<PAGE>
Bank is not offering such deposits, the percentage rate per annum
determined by the Bank to be its cost of funds from whatever
source it may select) on the first day of the relevant Interest
Period for a period equal or comparable to such Interest Period;
"LIBOR Basis" means a basis for calculating interest on the Loan at a rate
-----------
equal to the aggregate of (i) the Margin, (ii) LIBOR and (iii) the
Associated Costs Rate (whether or not LIBOR is subject to a Maximum Rate
and/or a Minimum Rate);
"Loan" means the aggregate principal amount (including any interest
----
capitalised and debited to Loan account and any other amount debited to
Loan account pursuant to Condition 7.2) drawn and for the time being
outstanding under the Facility;
"Management Fee Review Date" means an Interest Review Date and, in
-----------------------------
addition, if the period from any Interest Review Date to the next Interest
Review Date shall be longer than 3 years, the last Business Day of each
consecutive period of 3 years during such period;
"Maximum Rate" means, in relation to any period while interest on the Loan
------------
is calculated on a Maximum Rate Basis or a Minimax Rate Basis, the maximum
rate for LIBOR agreed between the Bank and the Borrower in accordance with
the provisions overleaf under the heading "Interest" or the provisions of
Condition 5.3 or 5.6;
"Maximum Rate Basis" means a LIBOR Basis in respect of which the Bank and
-------------------
the Borrower have agreed that LIBOR shall be subject to an agreed maximum
rate (but not a minimum rate) for an agreed period;
"Minimax Rate Basis" means a LIBOR Basis in respect of which the Bank and
-------------------
the Borrower have agreed that LIBOR shall be subject to an agreed maximum
rate and an agreed minimum rate for an agreed period;
"Minimum Rate" means, in relation to any period while interest on the Loan
------------
is calculated on a Minimax Rate Basis, the minimum rate for LIBOR agreed
between the Bank and the Borrower in accordance with the provisions in the
Offer Letter under the heading "Interest" or the provisions of Condition
5.3 or 5.6;
"Net Tangible Assets" means the aggregate of the amount paid up or
---------------------
credited as paid up on the issued share capital and the amount standing to
the credit of the consolidated capital and revenue reserves (including
share premium account, capital redemption reserve and profit and loss
account) of the Borrower and its Subsidiaries (or, where the Financial
Covenants are expressed in the Offer Letter to apply to the Parent and its
Subsidiaries, the Parent and its Subsidiaries) but after deducting:
(i) goodwill (including goodwill arising on consolidation) and other
intangible assets;
(ii) (to the extent included) any reserve created by any upward
revaluations of fixed assets made after the date of its most
recent audited accounts as at the date of this offer and a copy
of which has been delivered to the Bank;
(iii) (to the extent included) amounts attributable to minority
interests and deferred taxation;
<PAGE>
(iv) any debit balance on profit and loss account, (but so that no
amount shall be included or excluded more than once);
"Potential Event of Default" means an event which, with the giving of
----------------------------
notice, the lapse of time or the making of any determination, would or
might constitute an Event of Default;
"Property Value" means the aggregate value (as determined from time to
---------------
time by the Bank or, at the expense of the Borrower, by professional
valuers acceptable to the Bank on such bases and assumptions as the Bank
may in its discretion require) of each freehold and leasehold property
from time to time charged to the Bank by way of first charge as security
for the Borrower's obligations hereunder;
"Relevant Periods" means each consecutive period of three months during a
-----------------
financial year of the Borrower (or, where the Financial Covenants are
expressed in the Offer Letter to apply to the Parent and its Subsidiaries,
the Parent) and, in addition, each period of twelve months ending on the
last day of a financial year of the Borrower (or, as the case may be, the
Parent) (each a "Relevant Period");
"Subsidiary" means a subsidiary undertaking as defined in Section 258 of
----------
the Companies Act 1985 and "Subsidiaries" shall be construed accordingly;
"Total Liabilities" means the aggregate amount of all liabilities
-------------------
(including, without limitation, any amounts attributable to minority
interests, deferred taxation, provisions and share capital expressed to be
redeemable) of the Borrower and its Subsidiaries (or where the Financial
Covenants are expressed in the Offer Letter to apply to the Parent and its
Subsidiaries, the Parent and its Subsidiaries), to the extent that they
would be included in a balance sheet under accounting principles and
practices generally accepted in the United Kingdom;
"Total Operating Profit" means in respect of any Relevant Period, the
------------------------
consolidated total operating profit for continuing operations,
acquisitions (as a component of continuing operations) and discontinued
operations (as set out in Financial Reporting Standard No. 3) of the
Borrower and its Subsidiaries (or, where the Financial Covenants are
expressed in the Offer Letter to apply to the Parent and its Subsidiaries,
the Parent and its Subsidiaries) but ignoring any exceptional items; and
"VAT" means value added tax or any similar tax substituted for it from
---
time to time.
1.2 References to statutory provisions are references to provisions of United
Kingdom statutes and shall include references to any amended, extended or
re-enacted version with effect from the date on which it comes into force.
1.3 References to the Borrower, the Parent or the Bank shall include
references to their respective successors and assigns.
1.4 If the Borrower is a partnership or otherwise comprises more than one
person, the obligations of each such person shall be joint and several
obligations and references to the Borrower shall be construed as including
a reference to each such person. In the event of death, bankruptcy,
<PAGE>
winding up or dissolution of any one or more such persons, the obligations
of the other such persons shall continue in full force and effect.
1.5 References to "indebtedness" shall include any obligation for the payment
or repayment of money (whether present or future, actual or contingent).
1.6 References to a time of the day are references to the time in London.
1.7 Headings are for ease of reference only and shall be ignored in construing
this document.
2. Drawdown
--------
2.1 Conditions Precedent: The Facility will become available to the Borrower
---------------------
for drawing only upon receipt by the Bank of the following in form and
substance satisfactory to the Bank:
(a) this document signed by or on behalf of the Borrower (and, if the
Borrower comprises more than one person, by or on behalf of each
such person) and, where applicable, the Parent;
(b) if the Borrower is or includes a company, a certified true copy of a
resolution of its board of directors:
(i) accepting the Facility on the terms and conditions set out
herein;
(ii) authorising a specified person or persons to countersign
this document;
(iii) specifying the names of those officers of the Borrower whose
instructions (jointly or alone) the Bank is authorised to
accept in all matters concerning the Facility, together with
confirmed specimen signatures of those officers and each of
the persons referred to in (ii) above, if not already known
to the Bank;
(c) where the Parent is named in this document, a certified true copy of
a resolution of the board of directors of the Parent approving this
document and authorising a specified person or persons to
countersign it;
(d) the security/guarantee documents (if any) referred to in the Offer
Letter under the heading "Security/Guarantee(s)" duly executed by
the chargors/guarantors specified therein together with such other
documents relating to them as the Bank may require; and
(e) the additional documents (if any) specified in the Offer Letter
under the heading "Conditions Precedent".
2.2 Drawdown Requests: Each request by the Borrower for a drawing under the
------------------
Facility shall be made by the Borrower giving notice to the Bank (which
shall be irrevocable), specifying the drawdown date (being a Business Day
on or before the Final Drawdown Date) and the amount required, by not
later than 10.00 a.m. on (a) the proposed drawdown date if interest is to
be calculated on a Base Rate Basis or (b) the second Business Day prior to
the proposed drawdown date if interest is to be calculated on a Fixed Rate
<PAGE>
Basis or a LIBOR Basis. Drawings will be made available by the Bank by
credit to the Borrower's current account with the Bank.
2.3 Time and Amounts: No drawings may be made otherwise than in accordance
----------------
with the provisions in the Offer Letter under the heading "Amount, Term
and Drawdown". If interest is to be calculated initially on a Fixed Rate
Basis, a Maximum Rate Basis or a Minimax Rate Basis pursuant to the
provisions overleaf under the heading "Interest", the Borrower shall
request drawings on the date or dates (and in the amount or amounts)
agreed between the Bank and the Borrower when the relevant fixed rate or
(as the case may be) maximum or minimum rate was agreed or (where
applicable) on the drawdown dates (and in the amounts) specified in the
attached Special Conditions, if any); drawings on any other date or dates
(or in other amounts) may not be made without the consent of the Bank. In
the event of any breach of this Condition 2.3, the Borrower shall
indemnify the Bank in accordance with Condition 15.1 and shall, in
addition, pay to the Bank on demand an administration fee of (pound)250.
2.4 Default: No drawing may be made if, as of the drawdown date, an Event of
-------
Default or Potential Event of Default shall have occurred and shall not
have been remedied to the satisfaction of the Bank or would occur if such
drawing were made.
3. Repayment
---------
3.1 Time and Amounts: Subject to the provisions of this Condition 3, the
-----------------
Borrower shall repay the Loan at the times and in the amounts specified or
referred to in the Offer Letter under the heading "Repayment".
3.2 Reduction of Instalments: If the whole of the Facility shall not have been
------------------------
drawn down by the Final Drawdown Date and the Loan is to be repaid in
instalments, the repayment instalments specified or referred to in the
Offer Letter under the heading "Repayment" shall be reduced pro rata.
3.3 Review of Instalments: If the Bank agrees that interest on the Loan is to
---------------------
be capitalised and debited to Loan account, the amount of each repayment
instalment specified or referred to in the Offer Letter under the heading
"Repayment" will be reviewed by the Bank annually and also on each
Interest Review Date and on each occasion that the basis on which interest
on the Loan is calculated changes in accordance with Condition 5. The Bank
will advise the Borrower of any variation to the repayment instalments and
the Borrower shall thereafter be bound to repay the Loan in such
instalments.
4. Prepayment and cancellation
---------------------------
4.1 Prepayment: The Borrower may at any time prepay all or (except while
----------
interest is calculated on a Fixed Rate Basis, a Maximum Rate Basis or a
Minimax Rate Basis) any part (being in the minimum amount and multiple
specified in the Offer Letter under the heading "Prepayment") of the Loan,
together with (a) interest accrued to the date of prepayment on the amount
prepaid if required by the Bank, (b) the fee calculated in accordance with
Condition 4.3 or 4.4 and (c) any amount payable pursuant to Condition 15,
on giving not less than 7 days' notice in writing to the Bank (which shall
be irrevocable), provided that while interest is calculated on a LIBOR
Basis prepayment may be made only on the last day of an Interest Period
relating to the amount prepaid.
<PAGE>
4.2 Application: Any amount prepaid pursuant to Condition 4.1 shall satisfy,
-----------
to the extent of such prepayment, the Borrower's obligations under
Condition 3 and such amount shall be applied so as to reduce those
obligations in reverse order. No amount prepaid may be redrawn.
4.3 Prepayment Fee (Fixed Rate Basis/Minimax Rate Basis): The amount of the
------------------------------------------------------
repayment fee payable in respect of any prepayment (whether pursuant to
Condition 4.1 or otherwise) made while interest is calculated on a Fixed
Rate Basis or a Minimax Rate Basis shall be (pound)250, together with any
amount payable pursuant to Condition 15.
4.4 Prepayment Fee (LIBOR Basis/Base Rate Basis): The amount of the prepayment
--------------------------------------------
fee payable in respect of any prepayment (whether pursuant to Condition
4.1 or otherwise) made while interest is calculated on LIBOR Basis (other
than a Minimax Rate Basis) or a Base Rate Basis shall be an amount equal
to 0% flat on the amount prepaid, together with any amount payable
pursuant to Condition 15.
4.5 Cancellation: The Borrower shall be entitled, subject to the prior payment
------------
to the Bank of any amount payable pursuant to Condition 15.1 in connection
with such cancellation, to cancel the whole or any part of the undrawn
Facility (being in a multiple of (pound)1,000) by giving not less than 7
days' notice in writing to the Bank, whereupon the amount of the Facility
shall be reduced accordingly.
5. Interest
--------
5.1 Basis and Rate: The Borrower shall pay interest on the daily outstanding
--------------
amount of the Loan at the rate and times and in the manner specified in
this Condition. Subject to the provisions of this Condition 5, interest
will be calculated until the First Interest Review Date on the basis
specified in the Offer Letter under the heading "Interest" and thereafter
on the basis and at the rates established in accordance with Condition
5.3.
5.2 (a) Base Rate Basis: If and for so long as a Base Rate Basis applies,
interest shall accrue at the rate per annum equal to the aggregate of
the Margin and the Base Rate from time to time.
(b) Fixed Rate Basis: If and for so long as a Fixed Rate Basis applies,
-----------------
interest shall accrue at the fixed rate of interest per annum
established in accordance with the provisions overleaf under the
heading "Interest" or (as the case may be) agreed pursuant to
Condition 5.3 or 5.4.
(c) LIBOR Basis: If and for so long as a LIBOR Basis applies, interest
------------
shall be calculated by reference to Interest Periods and shall accrue
in respect of each Interest Period at the rate per annum equal to the
aggregate of (i) the Margin, (ii) LIBOR for that Interest Period and
(iii) the Associated Costs Rate, provided that (aa) while a Maximum
Rate Basis or a Minimax Rate Basis applies, if LIBOR for any Interest
Period is higher than the applicable Maximum Rate, such Maximum Rate
shall be substituted for LIBOR in respect of that Interest Period, and
(bb) while a Minimax Rate Basis applies, if LIBOR for any Interest
Period is lower that the applicable Minimum Rate, such Minimum Rate
shall be substituted for LIBOR in respect of that Interest Period.
<PAGE>
(d) Payment Dates: Interest at the rates so determined will, subject to
the provisions of Condition 5.8, be payable in arrear by the Borrower
on (i) in the case of a Base Rate Basis, the Bank's usual quarterly
charging dates in March, June, September and December in each year,
(ii) in the case of a LIBOR Basis, the last day of each Interest
Period (and, in the case of an Interest Period of longer than six
months, also at the end of each period of six months during such
Interest Period) or (iii) in the case of a Fixed Rate Basis, at the
end of each consecutive period of 1 or 3 months (which period the
Borrower shall irrevocably elect before the commencement of such Fixed
Rate Basis) from the date of commencement of such Fixed Rate Basis
and, in each case, on the day on which the Loan is finally repaid.
5.3 (a) Interest Review: Shortly before each Interest Review Date, the
---------------- Bank will notify the Borrower in writing of its right
to select the basis on which interest will be charged until the next
Interest Review Date (or, where relevant, until the final repayment
date). Such basis will be at the option of the Borrower and will be
either (i) a Base Rate Basis or (ii) a Fixed Rate Basis at a
percentage rate per annum fixed for a fixed period, within the
remaining term of the Facility, of between one and ten years (or such
other period as the Bank may at its discretion offer) or (iii) (unless
a Base Rate Basis applied immediately prior to such Interest Review
Date and the amount of the Loan is less than(pound)100,000) a LIBOR
Basis (which may, at the discretion of the Bank, include a Maximum
Rate Basis and/or a Minimax Rate Basis for a fixed period, within the
remaining term of the Facility, of between one and ten years (or such
other period as the Bank may at its discretion offer)). If the period
from the relevant Interest Review Date to the final repayment date is
less than one year, the Borrower will not have the option of selecting
a Fixed Rate Basis, a Maximum Rate Basis or a Minimax Rate Basis.
(b) Selection of Basis: The Borrower must notify the Bank of the basis so
------------------
selected by it (and, if the Borrower selects a Fixed Rate Basis, a
Maximum Rate Basis or a Minimax Rate Basis, the Borrower and the Bank
must have agreed the relevant period and fixed rate, maximum rate or
maximum rate and minimum rate (as the case may be) and the Borrower
must have paid the relevant interest rate management fee (if any)), in
each case by not later than 10.00 a.m. on the Interest Review Date,
failing which interest will be calculated on a Base Rate Basis from
the Interest Review Date until (subject to Conditions 5.4, 5.5 and
5.6) the next following Interest Review Date.
(c) Review Dates: The basis for calculating interest on the Loan shall be
------------
reviewed under this Condition 5.3 on the First Interest Review Date,
at the end of any period for which a Fixed Rate Basis, a Maximum Rate
Basis or a Minimax Rate Basis applies and at the end of each period of
three years during which a LIBOR Basis (other than a Maximum Rate
Basis or a Minimax Rate Basis) or a Base Rate Basis applies.
5.4 Change to Fixed Rate Basis: The Borrower shall have the right, at any time
--------------------------
after the Final Drawdown Date while interest is calculated on a Base Rate
Basis and during the last 5 Business Days of any Interest Period while
interest is calculated on a LIBOR Basis (other than a Maximum Rate Basis
or a Minimax Rate Basis), to request the Bank to quote fixed percentage
rates per annum for a fixed period, within the remaining term of the
Facility, of between one and ten years (or such other period as the Bank
may at its discretion offer). If the Bank and the Borrower shall agree
that any such fixed rate shall apply, a Fixed Rate Basis at the relevant
fixed rate shall apply for the relevant period with effect from:
<PAGE>
(a) the date of such agreement where interest is then calculated on a
Base Rate Basis; or
(b) the last day of the then current Interest Period where interest is
then calculated on a LIBOR Basis.
5.5 Change to LIBOR Basis: The Borrower shall have the right, at any time
----------------------
after the Final Drawdown Date while interest is calculated on a Base Rate
Basis (provided that the amount of the Loan is then not less than
(pound)100,000 and that the period from the date with effect from which a
LIBOR Basis would apply as mentioned below to the final repayment date of
the Loan is not less than 12 months), to require the basis on which
interest on the Loan is calculated to be changed to a LIBOR Basis (but
not, under this Condition 5.5, to a Maximum Rate Basis or a Minimax Rate
Basis). Such right shall be exercisable by the Borrower giving not less
than 30 days' notice in writing to the Bank specifying the date (being a
Business Day) upon which such change is to take effect. Interest shall
thereafter be calculated on a LIBOR Basis until (subject to Conditions 5.4
and 5.6) the next Interest Review Date.
5.6 Change to Maximum Rate Basis or Minimax Rate Basis: The Borrower shall
---------------------------------------------------
have the right, at any time after the Final Drawdown Date while interest
is calculated on a Base Rate Basis and during the last 5 Business Days of
any Interest Period while interest is calculated on a LIBOR Basis (other
than a Maximum Rate Basis or a Minimax Rate Basis) (provided in each case
that the amount of the Loan is then not less than (pound)100,000 in the
case of a change to a Maximum Rate Basis and (pound)250,000 in the case of
a change to a Minimax Rate Basis) to request the Bank to quote maximum
and/or maximum and minimum LIBOR rates (and associated interest rate
management fees) that the Bank would offer for a fixed period, within the
remaining term of the Facility, of between one and ten years (or such
other period as the Bank may at its discretion offer). If the Bank and the
Borrower shall agree that any such maximum rate or maximum and minimum
rate shall apply and the Borrower shall pay to the Bank the relevant
interest rate management fee, a Maximum Rate Basis or (as the case may be)
Minimax Rate Basis shall apply for the relevant period with effect from:
(a) the date of such agreement where interest is then calculated on a
Base Rate Basis; or
(b) the last day of the then current Interest Period where interest is
then calculated on a LIBOR Basis.
5.7 Accrual; Default Rate: Interest shall accrue from day to day (as well
-----------------------
after as before judgement) and be calculated on the basis of the actual
number of days elapsed and a 365 day year. Any sum (whether in respect of
interest, fees, costs or otherwise) which the Borrower fails to pay when
due may, at the discretion of the Bank, be treated as if it were part of
the Loan for the purposes of this Condition 5 and the Bank shall be
entitled to increase the rate of interest payable on any such sum by 1%
per annum from the date on which the relevant sum became payable. The Bank
shall be entitled, on or at any time after the Borrower's failure to pay
any sum due in respect of the Facility on the due date or the occurrence
of any other Event of Default while a LIBOR Basis or a Fixed Rate Basis
applies, by notice to the Borrower to change the basis on which interest
is charged (either in relation to the unpaid sum only or in relation to
all sums then outstanding in respect of the Facility) to a Base Rate
Basis. If the Bank so changes the basis on which interest is charged in
relation to the whole or part of the Loan before the end of an agreed
period for which a Fixed Rate Basis, a Maximum Rate Basis or a Minimax
Rate Basis applies, the Borrower shall be deemed, for the purposes only of
<PAGE>
Conditions 4.3, 4.4 and 15.1 to have prepaid the Loan or the relevant part
of it on the date on which the Bank notifies the Borrower of such change
and accordingly a prepayment fee shall be payable on such date in
accordance with Condition 4.3 or (as the case may be) 4.4 together with
any sums payable pursuant to Condition 15.
5.8 Capitalisation: The Bank may (except while interest on the Loan is
--------------
calculated on a Maximum Rate Basis or a Minimax Rate Basis), at its
discretion, permit the whole or any part of the interest accruing on the
Loan to be capitalised, in which event the amount of any such interest
shall be added to the principal amount of the Loan and shall accordingly
be debited to the Borrower's Loan account on such dates as the Bank may
require. Repayment instalments thereafter shall be reviewed by the Bank
periodically in accordance with Condition 3.3.
6. Fees
----
6.1 General: The Borrower shall pay the fees specified in the Offer Letter
-------
under the heading "Fees".
6.2 Review of Agreed Management Fees: The Bank shall be entitled, with effect
--------------------------------
from any Management Fee Review Date, from time to time to review and vary
the amount of the agreed management fee payable pursuant to paragraph (b)
under the heading "Fees" in the Offer Letter, by notice to the Borrower
given shortly before the relevant Management Fee Review Date. Unless the
whole of the Loan shall be prepaid in accordance with Condition 4.1 during
the period of 90 days following the relevant Management Fee Review Date,
the Borrower shall thereafter be obliged to pay the management fee as so
notified by the Bank. In the absence of any such notification prior to a
Management Fee Review Date, the amount of the management fee payable by
the Borrower until the next following Management Fee Review Date shall be
that specified in the Offer Letter or, if higher, the amount (if any) most
recently so notified by the Bank.
6.3 Non-utilisation Fee: The non-utilisation fee will be calculated on a daily
-------------------
basis from the date falling 3 months after the date of acceptance by the
Borrower of this offer on the undrawn and uncancelled portion of the
Facility and will be payable quarterly in arrear and on the Final Drawdown
Date or (if earlier) the date on which the Facility becomes fully drawn.
6.4 Interest Rate Management Fee: The Borrower shall pay to the Bank, on the
------------------------------
date on which any Maximum Rate Basis or Minimax Rate Basis is agreed
between the Bank and the Borrower, a non-returnable interest rate
management fee in the amount (if any) required by the Bank in
consideration of its agreement to charge interest on the Loan in
accordance with the relevant Maximum Rate Basis or a Minimax Rate Basis.
7. Payments
--------
7.1 No withholding: All payments by the Borrower under the Facility, whether
--------------
of principal, interest, fees, costs or otherwise, shall be made in full,
without set-off or counterclaim and free and clear of any deduction or
withholding on account of tax or otherwise. If the Borrower is required by
law to make any deduction or withholding from any payment under the
Facility, the sum due from the Borrower in respect of such payment shall
be increased to the extent necessary to ensure that, after the making of
such deduction or withholding, the Bank receives a net sum equal to the
sum which it would have received had no such deduction or withholding been
required.
<PAGE>
7.2 Debits: Without prejudice to Condition 5.8, the Bank may, at its
------
discretion, debit any sums (whether in respect of principal, interest,
fees, costs or otherwise) due from the Borrower to the Bank under the
Facility to any account of the Borrower with the Bank, notwithstanding
that any such debit results in a debit balance or an increased debit
balance on the relevant account.
7.3 Adjustment of Dates: The Bank shall be entitled to adjust the dates for
--------------------
the making of payments under the Facility, and the duration of Interest
Periods, where in the Bank's opinion it is necessary to do so in order to
comply with the practice from time to time prevailing in the London
Inter-Bank Market or any other financial market relevant for the purposes
of the Facility.
7.4 VAT
---
All sums payable by the Borrower to the Bank in connection with the
Facility shall be paid together with any VAT that may be payable on such
sums, at the rate then required by law.
8. Representations and Warranties
------------------------------
8.1 Representations: By accepting this offer, the Borrower represents and
---------------
warrants (or, if the Parent is named in the Offer Letter, the Borrower and
the Parent jointly and severally represent and warrant) that:
(a) Power and Authority: the Borrower is legally empowered to borrow the
-------------------
full amount of the Facility on the terms set out herein and the
Borrower (and, where applicable, the Parent) has taken all necessary
action to authorise the acceptance of the Facility and the performance
of its obligations hereunder and under the other documents to be
entered into by it in connection with the Facility and that there is
no legal or other restriction whatsoever on its ability to perform its
obligations in respect of the Facility;
(b) Power of Guarantors: any person named in the Offer Letter under the
--------------------
heading "Security/Guarantee(s)" is legally empowered to give the
security or guarantee referred to therein; and
(c) No Default: no Event of Default or Potential Event of Default has
-----------
occurred and is continuing.
8.2 Repetition: The foregoing representations and warranties shall be deemed
----------
to be repeated on the date of the first drawing under the Facility and on
each day thereafter, by reference to the circumstances then existing.
9. Information
-----------
The Borrower (and, where the Parent is named in the Offer Letter, the
Parent) will provide the Bank with:
(a) Accounts: copies of its audited (or, if the Borrower is a partnership,
--------
certified) accounts, including a balance sheet and profit and loss
account (or, if the Borrower is a trustee, income and expenditure
accounts), consolidated if the Borrower or (as the case may be) the
Parent has Subsidiaries, as soon as they are available and not later
than 180 days from the end of each of its financial years and its
<PAGE>
unaudited interim statements (if they are required by the Bank) within
90 days after the end of each half year;
(b) Management Accounts: if any of the Financial Covenants apply to the
--------------------
Facility, copies of its unaudited quarterly management accounts
relating to each Relevant Period, including a balance sheet and profit
and loss account, consolidated if the Borrower or (as the case may be)
the Parent has Subsidiaries, as soon as they are available and not
later than 30 days from the end of the Relevant Period to which they
relate; and
(c) Other Information: any other information which the Bank may request
------------------
from time to time.
10. General Undertakings
--------------------
While any part of the Loan is outstanding or the Facility remains
available for drawing, the Borrower undertakes (and, if the Parent is
named in the Offer Letter, the Borrower and the Parent jointly and
severally undertake) to procure that unless the Bank in its absolute
discretion otherwise agrees in writing:
(a) Pari Passu Ranking: the obligations of the Borrower (and, if
--------------------
applicable, the Parent) in respect of the Facility shall at all times
rank at least pari passu with all its other present and future
unsecured obligations;
(b) Negative Pledge: no Relevant Party shall create or agree to create or
---------------
permit to subsist (other than in favour of the Bank) any Encumbrance,
except Encumbrances in existence at the date of this offer and full
details of which were disclosed in writing to the Bank prior to the
date provided that the amount secured by any such Encumbrance is not
at any time increased;
(c) Disposals: no Relevant Party will sell, transfer or otherwise dispose
---------
of the whole or any substantial part of its undertaking, property,
assets or revenues, whether by a single transaction or a number of
transactions (other than in the ordinary course of trading);
(d) Change of Business: no Relevant Party will make any material change in
------------------
the scope or nature of its business;
(e) Insurance: each Relevant Party shall maintain adequate insurance in
---------
relation to its business and assets with reputable underwriters or
insurance companies against risks usually insured by persons carrying
on a business such as that carried on by such Relevant Party and such
other risks as the Bank may from time to time reasonably require;
(f) Litigation: it will forthwith, upon becoming aware of it, inform the
---------
Bank of any material litigation, arbitration or administrative
proceeding pending or, to the best of its knowledge, information and
belief, threatened against any Relevant Party;
<PAGE>
(g) Notification of Event of Default: it will forthwith, upon becoming
---------------------------------
aware of it, inform the Bank of the occurrence of any Event of Default
or Potential Event of Default (and the steps, if any, being taken to
remedy it);
(h) Change in Partnership: if the Borrower is a partnership, the Borrower
---------------------
shall notify the Bank in writing immediately of any change in the
membership of the partnership and whenever possible such notification
shall be given in advance of such change; and
(i) Change of Trustee: if the Borrower comprises one or more trustees, the
-----------------
Borrower shall give to the Bank not less than 28 days' prior written
notice of the proposed retirement of any trustee or the appointment of
any new trustee (which shall not be effected without the prior written
consent of the Bank) and shall notify the Bank in writing immediately
upon the death of any trustee or the dissolution of any firm or
corporation acting as trustee.
11. Financial covenants
-------------------
11.1 Testing: The Financial Covenants shall be tested by reference to the most
-------
recent audited accounts (or, where appropriate, audited consolidated
accounts) or unaudited interim statements of the Borrower or (as the case
may be) the Parent from time to time delivered to the Bank pursuant to
Condition 9 (a) or by reference to the quarterly management accounts of
the Borrower or (as the case may be) the Parent. Notwithstanding the
foregoing, the Financial Covenants set out in paragraphs (b) and (c) in
the Offer Letter are to be satisfied at all times and the Borrower or (as
the case may be) the Parent shall if so required by the Bank from time to
time provide the Bank with evidence of such satisfaction acceptable to the
Bank.
11.2 Changes in Accounting Principles: The Borrower or (as the case may be) the
--------------------------------
Parent shall promptly notify the Bank of any proposed change in accounting
principles to be adopted for the purposes of its audited accounts from
those on the basis of which it is most recent audited accounts as at the
date of this offer were prepared. If the Bank is of the opinion that any
such change materially affects any of the Financial Covenants, it shall be
entitled to require such covenants to be amended in such manner as it may
deem appropriate to reflect such change.
11.3 Calculations: All calculations for the purposes of the Financial Covenants
------------
and the related expressions defined in Condition 1.1 shall be in
accordance with accounting principles and practices generally accepted in
the United Kingdom consistently applied.
12. Events of default
-----------------
In the event of:
(a) Payment Default: failure by the Borrower to make any repayment of
----------------
principal, or payment of interest or other sum, in respect of the
Facility on its due date; or
(b) Other Breaches: a breach by any Relevant Party in the performance of
---------------
any other obligation, covenant or undertaking under or in connection
with the Facility or any guarantee or security held by the Bank in
respect of the Facility; or
<PAGE>
(c) Cross Default: any indebtedness of any Relevant Party becoming
--------------
immediately due and payable, or capable of being declared so due and
payable, prior to its stated maturity by reason of the occurrence of
any event of default (howsoever described), or any Relevant Party
failing to discharge any indebtedness on its due date (other than a
liability which such Relevant Party shall then be contesting in good
faith on the basis of favourable legal advice); or
(d) Misrepresentation: any representation or warranty made, or any
-----------------
information provided, by any Relevant Party in connection with the
Facility being incorrect in any material respect when made or repeated
or provided; or
(e) Winding-up and Administration: a petition being presented, an order
------------------------------
being made or an effective resolution being passed for winding up any
Relevant Party (except for the purposes of a reconstruction or
amalgamation on terms previously approved in writing by the Bank) or a
petition being presented for an administration order in respect of any
Relevant Party; or
(f) Appointment of Liquidator: an encumbrancer taking possession or a
--------------------------
liquidator, provisional liquidator, administrator, receiver, trustee,
sequestrator or similar officer being appointed in respect of all or
any of the assets of any Relevant Party; or
(g) Legal Process: a distress, execution, attachment or other legal
--------------
process being levied, enforced or sued out against any of the assets
of any Relevant Party and not being discharged or paid within seven
days; or
(h) Suspension of Payments: any Relevant Party suspending payment of its
----------------------
debts or being unable to pay its debts as they fall due or being
deemed, under Section 123 of the Insolvency Act 1986, to be unable to
pay its debts; or
(i) Rescheduling of Debts: any Relevant party proposing or entering into a
---------------------
voluntary arrangement (within the meaning of Section 1 of the
Insolvency Act 1986) or taking or being subjected to any proceedings
under any law, or commencing negotiations with one or more of its
creditors, for the readjustment, rescheduling or deferment of all or a
material part of its debts, or proposing or entering into any general
assignment or composition with or for the benefit of its creditors; or
(j) Bankruptcy, Death or Mental Disorder: the presentation of a bankruptcy
------------------------------------
petition against, or the application for an interim order under
Section 253 of the Insolvency Act 1986 in respect of, or in the
insolvency, death or mental disorder (within the meaning of the Mental
Health Act 1983) of, any Relevant Party; or
(k) Cessation of Consents; Invalidity: the cessation or revocation for any
---------------------------------
reason of any consent, authorization, licence and/or exemption which
is required to enable any Relevant Party to carry on all or any
material part of its business, or to ensure that the terms of this
document or any security or guarantee held by the Bank in relation to
the Facility are valid, binding and enforceable, or it becoming
unlawful for any Relevant Party to perform all or any of its
obligations hereunder or thereunder or any such document not being or
ceasing to be legal, valid and binding on it; or
<PAGE>
(l) Termination of Guarantee: any guarantor giving or purporting to give
notice to terminate its liabilities under any guarantee in respect of
the Facility; or
(m) Material Adverse Change: there being an adverse change in the
-------------------------
financial or trading position or prospects of any Relevant Party
which, in the Bank's reasonable opinion, is material; or
(n) Change of Control: if the Borrower is a company, control of the
------------------
Borrower (or, if the Parent is named in the Offer Letter, the Parent)
passing or having passed to any person or persons, acting either
individually or in concert, who did not control the Borrower (or, as
the case may be, the Parent) at the date of this offer, without the
prior written consent of the Bank ("control" having the meaning
ascribed to it in relation to a body corporate by Section 840 of the
Income and Corporation Taxes Act 1988); or
(o) Change in Partnership: if a Relevant Party is a partnership, a change
---------------------
in the partnership which constitutes such Relevant Party for any
reason, without the prior written consent of the Bank; or
(p) Change of Trustee: if the Borrower comprises one or more trustees, any
-----------------
trustee ceases to act as such or any new trustee is appointed, without
the prior written consent of the Bank; or
(q) Analogous Events: any event occurring in relation to any Relevant
-----------------
Party in any applicable jurisdiction which has an effect substantially
similar to any of the events specified above, then, in any such case,
the Bank's commitment to advance any undrawn balance of the Facility
shall cease and the sole amount of the outstanding Loan and all
accrued interest and other amounts owing under the Facility will
become repayable forthwith on demand in writing being made by the Bank
at any time.
13. Costs and exprenses
-------------------
The Borrower shall reimburse to the Bank on demand on a full indemnity
basis (whether or not the Facility is drawn down) all valuation and legal
fees and other out of pocket expenses (including VAT) incurred by the Bank
in connection with any revaluation of any security held by the Bank or the
enforcement or preservation by the Bank of its rights under this document
(and the documents referred to herein).
14. Change of circumstances
-----------------------
14.1 Increased Cost: In the event of any change in applicable law or regulation
--------------
or the existing requirements of, or new requirements being imposed by, the
Bank of England or other regulatory authority (whether or not having the
force of law) the result of which, in the sole opinion of the Bank, is to
increase the cost to it of funding, maintaining or making available the
Loan (or any undrawn amount of the Facility) or to reduce the effective
return to the Bank, then the Borrower shall pay to the Bank on demand such
sum as may be certified by the Bank to the Borrower as being necessary to
compensate the Bank for such increased cost or such reduction.
<PAGE>
14.2 Illegality: If it is or becomes unlawful for the Bank to give effect to
----------
its obligations in respect of the Facility or to fund or maintain the
Facility, the Bank may notify the Borrower to that effect, whereupon the
Borrower shall immediately repay the Loan together with all other amounts
payable by the Borrower in respect of the Facility.
15. Indemnities
-----------
15.1 General: The Borrower shall indemnify the Bank on demand (without
-------
prejudice to the Bank's other rights) for any cost, expense, loss or
liability suffered or incurred by the Bank in consequence of, (a) the
Borrower breaching its obligations under Condition 2.3 or otherwise not
drawing down the full amount of the Facility (where relevant, in the
amounts and on the dates specified in the attached Special Conditions (if
any) or otherwise agreed between the Bank and the Borrower) after agreeing
a Fixed Rate Basis or a LIBOR Basis (whether or not a Maximum Rate Basis
or a Minimax Rate Basis) with the Bank in accordance with the provisions
in the Offer Letter under the heading "Interest", (b) any default or delay
by the Borrower in the payment of any amount when due in respect of the
Facility, (c) the occurrence or continuance of any Event of Default or
Potential Event of Default, (d) all or part of the Loan being prepaid or
becoming repayable, while interest is calculated on a LIBOR Basis or after
a LIBOR Basis has been agreed in accordance with the provisions in the
Offer Letter under the heading "Interest" or Condition 5, otherwise than
on the last day of the then current Interest Period (or, while interest is
calculated on a Maximum Rate Basis or a Minimax Rate Basis, otherwise than
on the dates and in the amounts required in accordance with these
Conditions) or (e) all or part of the Loan being prepaid or becoming
repayable, while interest is calculated on a Fixed Rate Basis or after a
Fixed Rate Basis has been agreed in accordance with the provisions in the
Offer Letter under the heading "Interest" or Condition 5, otherwise than
on the dates and in the amounts required in accordance with these
Conditions.
15.2 Losses Covered: Without derogation from the generality of Condition 15.1,
--------------
the indemnity contained in that Condition shall extend to any loss
(including loss of margin), expense or liability sustained or incurred by
the Bank in liquidating or re-deploying funds acquired or committed to
make, fund or maintain the Loan or any part of it, or in liquidating or
varying transactions entered into in order to match, hedge or fund the
Loan or any part of it and shall also extend to interest, fees and
expenses paid or payable by the Bank on account of any funds borrowed in
order to fund any unpaid amount arising as a result of non-payment by the
Borrower of any amount due from it hereunder.
15.3 Calculations: In calculating amounts payable under Conditions 15.1 and
------------
15.2 the Bank may:
(a) make or attempt to make arrangements from time to time such as hedging
or swap arrangements to ensure the payment to it of all or part of the
sums contemplated by this document or the financial equivalent;
(b) refer from time to time to any agreement or agreements to which it is
a party providing for transactions which are substantially the reverse
of or hedge or fund in whole or in part the transactions contemplated
herein; and
(c) take all reasonable steps to make arrangements to avoid, mitigate or
reduce the losses or the risk of losses which would or which, in the
opinion of the Bank, might otherwise arise from termination of any
such arrangements; and losses arising therefrom shall be treated as
losses incurred as a result of the matters referred to in Conditions
15.1 and 15.2 after taking into account, as far as appropriate, the
discharge or reduction of the obligations of the Bank and other such
factors as the Bank shall reasonably determine to be relevant.
15.4 Currency Indemnity: If, for any reason, any amount payable by the Borrower
------------------
in respect of the Facility is paid or recovered in a currency (the "other
currency") other than that in which it is required to be paid (the
"contractual currency"), then, to the extent that the payment to the Bank
(when converted at the then applicable rate of exchange) falls short of
the amount unpaid, the Borrower shall, as a separate and independent
obligation, fully indemnify the bank on demand against the amount of the
shortfall. For the purposes of this paragraph the expression "rate of
exchange" means the rate at which the Bank is able as soon as practicable
after receipt to purchase the contractual currency in London with the
other currency.
16. Miscellaneous
-------------
16.1 Notifications Binding: All notifications or determinations (including,
----------------------
without limitation, any determination of an amount payable pursuant to
Condition 15) given or made by the Bank shall be conclusive and binding on
the Borrower, except in the case of manifest error.
16.2 Assignment: The Borrower may not assign or transfer any of its rights in
----------
respect of the Facility. The Bank may assign or transfer all or any of its
rights and/or obligations in respect of the Facility, in whole or in part,
to any person or persons and may disclose to any actual or prospective
assignee or transferee (or to any other person (i) in connection with a
securitisation of all or any part of the Bank's loan assets from time to
time or (ii) who may otherwise enter into contractual relations with the
Bank in relation hereto) any information relevant to the Facility in the
Bank's possession relating to the Borrower, the Parent and their
respective Subsidiaries on terms that such recipient is to treat in
confidence any confidential information so disclosed to it.
16.3 Set-off: Any sum of money at any time standing to the credit of the
-------
Borrower with Bank in any currency upon any account or otherwise may be
applied by the Bank, at any time after the occurrence of an Event of
Default (without notice to the Borrower), in or towards the payment or
discharge of any indebtedness now or subsequently owing to the Bank by the
Borrower and the Bank may use any such money to purchase any currency or
currencies required to effect such application.
16.4 Remedies: No delay or omission on the part of the Bank in exercising any
--------
right or power in respect of the Facility shall impair such right or
power, and any single or partial exercise shall not preclude any other or
further exercise of any such right or power or the exercise of any other
right or power. The rights and remedies of the Bank in respect of the
Facility are cumulative and not exclusive of any right or remedy provided
by law.
16.5 Failure to Agree: The Bank shall not be under any liability to the
------------------
Borrower in the event of any failure to agree a fixed rate, a maximum
and/or minimum rate or an interest rate management fee pursuant to the
provisions on in the Offer Letter under the heading "Interest" or
Condition 5.
<PAGE>
17. Notices
-------
Every notice, request or other communication shall:
(a) be in writing delivered personally or by prepaid first class letter or
facsimile transmission;
(b) be deemed to have been received by the Borrower, in the case of a
letter when delivered personally or 48 hours after it has been sent by
first class post or, in the case of a facsimile transmission, at the
time of transmission (provided that if the date of transmission is not
a Business Day it shall be deemed to have been received at the opening
of business on the next Business Day); and
(c) be sent (i) to the Borrower at its address specified overleaf; and
(ii) to the Bank at the branch address specified overleaf or to such
other address in England as may be notified in writing by the relevant
party to the other.
All communications to the Bank shall be effective only on actual receipt
by the Bank.
18. Law
---
This document and the agreement constituted by the Borrower's (and, where
applicable, the Parent's) acceptance of this offer shall each be governed
by and construed in accordance with English law.
<PAGE>
Barclays Treasury Loan
----------------------
Acceptance
----------
- --------------------------------------------------------------------------------
THIS OFFER WILL LAPSE IF NOT ACCEPTED WITHIN ONE MONTH OF THE DATE OF THE BANK'S
SIGNATURE BELOW. ACCEPTANCE SHALL BE SIGNIFIED BY THE BORROWER (AND THE PARENT,
WHERE NAMED IN THE OFFER LETTER) SIGNING BELOW AND RETURNING THIS DOCUMENT
UNAMENDED TO THE BANK AT THE BRANCH ADDRESS SHOWN BELOW. THE FACILITY WILL NOT
BE AVAILABLE FOR DRAWDOWN UNTIL THE REQUIREMENTS OF CONDITION 2.1 AND THE
PROVISIONS IN THE OFFER LETTER UNDER THE HEADING "CONDITIONS PRECEDENT" HAVE
BEEN SATISFIED.
- --------------------------------------------------------------------------------
SIGNATURES
Signed for on behalf of
BARCLAYS BANK PLC 54 Lombard Street
London
By EC3V 9EX
Adrian John Sainsbury
Corporate Relationship Director
26th June 1998
- --------------------------------------- -------------------------------------
The Borrower, having read all of the *The Parent, having read all of the
terms and conditions of this document terms and conditions of this
and the attached further Special document and the attached further
Conditions (if any), hereby accepts Special Conditions (if any), hereby
the offer set out herein. Where the accepts the obligations expressed
Borrower is a company, this document to be undertaken by the Parent
is to be signed for and on behalf of herein. This document is to be
the Borrower by a person or persons signed for and on behalf of the
duly authorised pursuant to a Parent by a person or persons duly
resolution of its Board of authorised pursuant to a resolution
Directors. In other cases, where the of its Board of Directors.
Borrower comprises more than one
person, all such persons(including
all partners or trustees) must sign.
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
By (Signature) By (Signature)
------------------------------------- ----------------------------------
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
(Print name and title) (Print name and title)
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
(Signature) (Signature)
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
(Print name and title) (Print name and title)
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
(Date) (Date)
- --------------------------------------- -------------------------------------
* Bank to delete as appropriate
- --------------------------------------- -------------------------------------
Subsidiaries of the Registrant
------------------------------
Unidigital Elements (NY), Inc., a New York corporation
Unidigital Elements (SF), Inc., a Delaware corporation, doing business as TX,
Unidigital California, Inc. and Unison (SF) in California
Unison (NY), Inc., a Delaware corporation
Unison (MA), Inc., a Delaware corporation
Mega Art Corp., a New York corporation
SuperGraphics Holding Company, Inc., a Delaware corporation
SuperGraphics Corporation, a California corporation, and wholly-owned
subsidiary of SuperGraphics Holding Company, Inc.
Elements (UK) Limited, a United Kingdom corporation
Regent Group Limited, a United Kingdom corporation, and wholly-owned subsidiary
of Elements (UK) Limited
Consent of Independent Auditor
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No: 333-25657) of Unidigital, Inc. and in the related Prospectus of our
reports dated November 19, 1998, with respect to the consolidated financial
statements and schedule of Unidigital, Inc. included in this Annual Report (Form
10-K) for the year ended August 31, 1998.
Ernst & Young LLP
December 3, 1998
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements at August 31, 1997 and for the twelve month
period ended August 31, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001003934
<NAME> Unidigital Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Aug-31-1998
<PERIOD-START> Sep-01-1997
<PERIOD-END> Aug-31-1998
<EXCHANGE-RATE> 1
<CASH> 287,372
<SECURITIES> 0
<RECEIVABLES> 17,497,391
<ALLOWANCES> (580,839)
<INVENTORY> 0
<CURRENT-ASSETS> 24,303,353
<PP&E> 25,712,928
<DEPRECIATION> (11,121,729)
<TOTAL-ASSETS> 67,315,588
<CURRENT-LIABILITIES> 15,407,245
<BONDS> 0
0
0
<COMMON> 39,026
<OTHER-SE> 9,865,040
<TOTAL-LIABILITY-AND-EQUITY> 67,315,588
<SALES> 47,389,401
<TOTAL-REVENUES> 47,502,022
<CGS> 25,305,103
<TOTAL-COSTS> 25,305,103
<OTHER-EXPENSES> 16,695,691
<LOSS-PROVISION> 202,481
<INTEREST-EXPENSE> 3,055,657
<INCOME-PRETAX> 2,257,215
<INCOME-TAX> 978,541
<INCOME-CONTINUING> 992,674
<DISCONTINUED> 0
<EXTRAORDINARY> (143,000)
<CHANGES> 0
<NET-INCOME> 1,135,674
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.30
</TABLE>
