SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1999
Commission File No. 1-14126
UNIDIGITAL INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-3856672
- ---------------------------------- --------------------------------------
(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
------------------------------------
(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
------------------- -------------------
Common Stock, $.01 par value American Stock Exchange
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- ---------------------------- ----------------------------------------
Securities registered under Section 12(g) of the Exchange Act:
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(Title of Class)
<PAGE>
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $10,975,743 at November 30, 1999 based on the last sales
price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 30, 1999:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 5,987,067
<PAGE>
TABLE OF CONTENTS
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Item Page
---- ----
PART I 1. Business.................................................. 1
2. Properties................................................ 12
3. Legal Proceedings......................................... 13
4. Submission of Matters to a Vote of Security Holders....... 13
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters....................................... 14
6. Selected Financial Data................................... 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................ 16
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 25
8. Financial Statements and Supplementary Data............... 25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 25
PART III 10. Directors and Executive Officers of the Company........... 26
11. Executive Compensation.................................... 29
12. Security Ownership of Certain Beneficial Owners
and Management............................................ 36
13. Certain Relationships and Related Transactions............ 37
PART IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 39
SIGNATURES............................................................... 40
EXHIBIT INDEX............................................................ 42
FINANCIAL STATEMENTS..................................................... F-1
-i-
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PART I
ITEM 1. BUSINESS.
GENERAL
Unidigital Inc., together with its subsidiaries (collectively, "Unidigital"
or the "Company") is a media services company that provides large and grand
format digital image solutions combined with a full suite of digital "premedia"
(previously referred to as prepress) services to advertising agencies,
retailers, publishers, graphic design firms, consumer product companies,
government agencies, individual graphic artists and marketing and communications
firms in both the United States and Europe. In the third quarter of fiscal 1999,
the Company began delivering its services through two principal business
divisions. The Media Solutions division creates and produces large and grand
format images for out-of-home advertising and develops new media concepts and
program solutions. The Premedia Services division provides digital premedia,
including retouching and short-run digital printing services.
The Media Solutions division uses new digital technologies and processes to
fulfill a customer's advertising and outdoor display requirements. The Company
has participated in the development of new methods and concepts for high impact
advertising such as wallscapes, vehicular graphics, construction barricades and
"station domination." The Media Solutions division is comprised of five
operating units: (i) MegaArt, which produces grand scale displays as large as
30,000 square feet; (ii) SuperGraphics, which produces printed vinyl wraps for
buses and other vehicles; (iii) Unison, which provides a wide range of large
scale photographic displays; (iv) M. Nur, which produces grand scale displays
for the European market; and (v) Big Bills, which provides a wide range of large
scale displays for the European market.
The Premedia Services division creates and manipulates digital images for a
wide range of marketing and advertising clients. The digital images are prepared
for use in specific media applications such as printed materials, the Internet,
video clips and CD-ROM files. Premedia services do not include the actual
printing of images for mass distribution. Prior to the use of computers in the
design of printed materials, prepress (now referred to as premedia) services
were labor-intensive mechanical processes. Technological advances make it
possible to replace largely manual and photography-based production methods with
computer-based, electronic means for producing four color masters faster and at
lower cost.
The Premedia Services division consists of five operating units: KWIK,
KWIK/Zazula and KWIK/X(+C) provide high-end digital premedia and retouching
services to advertising agencies and commercial clients in the metropolitan New
York area; KWIK/Progress, which provides similar premedia services to the music
industry; and Elements, which provides premedia services, short-run digital
printing and financial printing services in the United Kingdom.
<PAGE>
BUSINESS AND GROWTH STRATEGY
Management's strategy is to continue to develop Unidigital into a premier
digital media services company serving media, advertising and commercial clients
with a complete suite of large and grand format solutions and premedia services.
Key elements to this growth strategy include:
o INCREASE FOCUS ON MEDIA SOLUTIONS: The Company believes it has
established a reputation as an industry leader and innovator in the
grand format industry segment with developments such as the world's
first wallscapes, the first computer generated bus wraps and the
"station domination" concept. Due to the significant growth potential
of the Media Solutions business segment, the Company is increasing its
focus on developing new digital technologies, processes and media to
create exciting new concepts for high impact advertising.
o INCREASE SALES THROUGH INTERNAL LEVERAGING: The Company believes that
its positive relationship with its existing customer base creates an
opportunity for additional sales and marketing opportunities. Further,
the Company believes that the expansion of its international
operations allows the Company to service new and existing customers in
new locations. The broad range of products and services offered by the
Company enables the Company to provide full-service integrated graphic
and media solutions to its customers.
o TRANSITION TO PREMEDIA SERVICES: The Company intends to continue to
shift the prepress paradigm to a "premedia" model that encompasses
image creation for electronic distribution through the Internet,
CD-ROM files and other delivery methods.
o CONTINUE INTERNATIONAL EXPANSION: During the fourth quarter of fiscal
1999, the Company consummated three acquisitions in the European
market. The Company anticipates that additional expansion
opportunities will continue to become available as the European
marketplace continues to evolve.
o CONTINUE SELECTIVE ACQUISITIONS: The Company continues to focus on
growth through selective acquisitions. As part of this on-going
strategy, the Company continues to review opportunities to expand its
business and markets primarily in the large and grand format markets,
and, to a lesser extent, the digital premedia and digital printing
markets. Through its acquisitions, the Company expects to accomplish
several objectives, including adding new technologies and
capabilities, acquiring market leadership positions and long-term
customer relationships, enhancing profitability and expanding
geographically, both domestically and internationally.
Since September 1994, the Company has consummated 17 acquisitions. Each
acquisition has added significantly to the capabilities of the Company and
importantly,
2
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has added customers with long standing relationships. Unidigital has capitalized
on the opportunity to build a family of leading media solutions and premedia
services companies and has incorporated them under its two divisions. The
following table summarizes the Company's acquisition history, highlighting the
strategic acquisitions, which have accelerated the creation of the current
operating platform:
<TABLE>
<CAPTION>
ACQUISITION DATE LOCATION DESCRIPTION
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lyledale Limited Sep-94 London Financial printing
Regent Limited Mar-95 London Financial printing
TX Unlimited, Inc. Mar-96 San Francisco Digital printing
Cardinal Communications Group, Aug-96 New York Digital prepress, digital
Inc./C-Max Graphics, Inc. printing and large
format
Boris Image Group, Inc. Apr-97 Boston Commercial
photographic and digital
imaging
Libra City Corporate Printing Limited May-97 London Financial printing
Kwik International Color, Ltd. Mar-98 New York High-end digital
prepress and wide
format
Five Star Finishers, Ltd. Jul-98 London Premedia services
MegaArt Corp. Sep-98 New York Large/wide format
printing
Hy Zazula Associates, Inc. Oct-98 New York High-end digital
prepress and retouching
SuperGraphics Corporation Nov-98 San Francisco Large/wide format
printing
Peter X(+C) Limited Apr-99 New York Premedia services
Progress Graphics, Inc. Apr-99 New York Premedia services
Interface Graphics Limited Apr-99 Edinburgh, UK Premedia services
Pre-Press Services Limited Aug-99 Leeds, UK Premedia services
M. Nur Marketing & Kommunikation Aug-99 Kassel, Germany Large/wide format
GmbH printing
Big Bills Limited Aug-99 London Large/wide format
printing
</TABLE>
In furtherance of its strategy to focus on its Media Solutions division, in
August 1999, the Company sold (the "Elements Sale") substantially all the assets
of its wholly-owned subsidiary, Unidigital Elements (NY), Inc. ("Elements (NY)")
to a group comprised of that unit's management. Elements (NY) provided short-run
digital printing products and services primarily to graphic artists and
marketing professionals. The services previously provided by the Company through
Elements (NY) no longer constitute the core of the Premedia Services division's
services.
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SERVICE DESCRIPTION AND DELIVERY
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 the Media Solutions and the Premedia Services
divisions to the respective business segments that each of the divisions
primarily serves, thus building brand identity and loyalty for each division.
Each division has at its disposal, and is encouraged to sell, any product or
service offered within the Company. The broad range of products and services
offered by the Company enables the Media Solutions and Premedia Services
divisions to provide integrated graphic and media solutions for their customers
while still keeping each division's core capabilities at the forefront. The
following table delineates the capabilities of each division:
<TABLE>
<CAPTION>
DIVISION/
OPERATING UNIT LOCATIONS SERVICES OFFERED TYPES OF CLIENTS
- -------------- --------- ---------------- ----------------
MEDIA SOLUTIONS:
<S> <C> <C> <C>
MegaArt New York Grand format graphics Media companies,
corporations and
advertising agencies
SuperGraphics San Francisco Vehicle wraps and other graphics Media companies,
corporations and
advertising agencies
Unison Boston Large and grand format printing Corporations, retailers and
sports arenas and stadiums
M. Nur Kassel, Germany Grand format graphics Media companies,
corporations and
advertising agencies
Big Bills London Large and grand format printing Media companies and
corporations
PREMEDIA SERVICES:
KWIK New York High-end digital premedia and Advertising agencies and
retouching corporations
Elements London Digital premedia and financial Advertising
Edinburgh, UK printing agencies and
Leeds, UK UK financial
institutions and
corporations
</TABLE>
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MEDIA SOLUTIONS
The Media Solutions division provides a wide range of media and
photographic solutions focused on rapidly growing segments of the out-of-home
advertising market. The Company solves some of the most challenging large and
grand format graphic display demands by combining the latest digital
technologies with management expertise and creativity. This division, using
digital files and photographic films, produces large and grand format graphics
that are printed to various substrates for specific applications utilizing the
latest in inkjet, electrostatic, dye sublimation and laser technologies.
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, vehicular graphics and grand wallscapes that hang on the
sides of buildings. Very large graphics are sometimes referred to as grand
format and can cover over 30,000 square feet in size by sewing or welding
together pieces of the image that are output in sections. The Company has
invested significantly in the necessary hardware devices and software programs
to solve the most demanding large and grand format graphic display requirements.
The Company believes that the MegaArt Acquisition (as defined below) has
provided Unidigital with an opportunity to capture the leadership position in
the custom wallscape segment of the industry. In addition, MegaArt provides
cross-selling opportunities and access of new clients through existing
relationships. MegaArt operates out of a production facility in Manhattan.
SuperGraphics, which created and commercialized the first computer
generated vinyl bus wraps, presently operates as a stand-alone unit within the
Media Solutions division. The operations of SuperGraphics are based in
Sunnyvale, California.
Unison provides premium quality, customized photographic and digital
graphic solutions to corporations, retailers and sports arenas and stadiums.
Unison produces full-color graphics on an extensive array of innovative and
traditional substrates. Unison is a leader in the large format industry with
years of experience in complicated digital imaging.
In August 1999, the Company consummated the M. Nur Acquisition and the Big
Bills Acquisition (each, as defined below). These acquisitions launched the
expansion of the Company's Media Solutions division into Europe. M. Nur is a
leading European producer of wide format digital print graphics and has
pioneered many of the innovative and unique applications that have transformed
the large format outdoor advertising industry in Europe. Big Bills, based in
London, is a large and grand format graphics provider serving large British and
international clients with innovative indoor and outdoor media solutions.
5
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PREMEDIA SERVICES
The Premedia Services divisions consists of five operating units, three of
which, KWIK, KWIK/Zazula and KWIK/X(+C) provide high-end digital premedia and
retouching services to advertising agencies and commercial clients in the
metropolitan New York area and KWIK/Progress, which provides similar premedia
services to the music industry. The other unit is Elements, which provides
premedia services, short-run digital printing and financial printing services in
the United Kingdom.
Elements, acquired in 1994, provided the initial platform for the Premedia
Services division while the KWIK Acquisition (as defined below) extended the
Company's services into the high-end premedia and retouching services. Since
October 1998, Unidigital has consummated the Zazula Acquisition, the X+C
Acquisition, the Progress Acquisition, the Interface Acquisition and the
Pre-Press Acquisition (each, as defined below). The businesses acquired in the
Zazula Acquisition, the X+C Acquisition and the Progress Acquisition have been
folded into the KWIK operating unit while the Interface Acquisition has been
integrated under Elements. These acquisitions have further enhanced the
Company's creative and technical capabilities, broadened its client base within
the high-end digital premedia market and expanded the Company's premedia
services into the music industry and into new United Kingdom markets.
The premedia work performed by the operating units within this division is
comprised of two stages: (i) creative and retouching stage; and (ii) media
preparation stage. During the initial creative and retouching stage, images are
created and digitally optimized to accurately convey the impressions desired by
the client for the intended use of the image. In the media preparation stage,
the image is then prepared for the specific media application using certain
technical specifications such as resizing, color optimization, etc. The image is
finally transmitted through digital file or film to the client or relevant
production or transmission facility. Premedia services do not include the actual
printing of images for mass distribution. Some of the services provided by this
division are defined as follows:
o DIGITAL IMAGE SCANNING: The Company scans and color corrects
transparencies, photo prints or illustrations and produces a digital
image that can then be used in the creative and retouching stage.
o RETOUCHING: The Company provides its high-end customers with
electronic re-creation and retouching of visual images. In this stage,
the Company's artists implement the creative vision of their clients.
o PROOFING: For each digital image file produced, the Company offers a
variety of color proofing methods. These methods include direct
digital methods in which the digital file is output to a color proof
prior to final media output as well as conventional analog proofs in
which lithographic films are exposed onto color proofing materials.
These proofs visualize the actual retouching changes for the clients.
o PAGE ASSEMBLY: The Company places digital image files into customer
page layouts to form finished printable advertising materials. These
same digital files can also be re-formatted for output to a variety of
digital
6
<PAGE>
media. The Company utilizes a broad range of desktop publishing
platforms to ensure compatibility with its clients' software systems.
o ELECTRONIC OUTPUT: The Company outputs completed digital images files
to a variety of media, including regular and oversize lithographic
films, color transparencies, CD-ROM files and on-line images.
Additionally, this division provides digital printing services in the
United Kingdom. Digital printing, also known as "short-run" printing, involves
translating computer-generated graphic design and content into a 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. This division also provides financial printing services in the
United Kingdom including the production, formatting and printing of corporate
finance and research documents for corporate clients.
SALES, MARKETING AND OPERATIONS
MEDIA SOLUTIONS
The Media Solutions division performs primarily large and grand format
project work. Each project is very unique and customized with respect to the
work involved. Currently, each operating unit within the division services its
clients through a team of knowledgeable salespersons led by a director of sales.
This division 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. Once a customer completes a purchase order form,
execution within each unit generally involves the following steps:
o ASSIGNMENT: A production meeting is held at least once per day in
each unit within the division. A new project is typically assigned to
a production coordinator who schedules and tracks the order through
completion.
o PRODUCTION: Work throughout the division typically results in
finished, printed materials of one form or another. Customers
frequently review proofs. In many cases, a grand format work will be
produced on a smaller scale, on the actual mesh, to display the print
characteristics of the final work. Upon customer approval, the final
print is produced and the project is shipped to the installation
company and is subsequently installed in coordination with Unidigital.
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PREMEDIA SERVICES
Within the Premedia Services division, KWIK's business is typically
project-oriented with high invoice value while Elements' business is high volume
and transactional in nature with low invoice value. The Premedia Services
division actively markets its services to its existing and potential client base
by direct marketing methods including direct mail, product samples, trade shows,
promotions and Internet sites. Extensive collateral material on products and
services and "how to" sheets for file preparation are also distributed through
direct mail. Once a project is awarded, an order form is completed which then
leads to the following production steps:
o ASSIGNMENT: A production meeting is held at the beginning of each day
(the start of the 8 a.m. shift). Production managers review each job
and the skills required and match the job with the appropriate
craftsman/operator. All revisionary work is assigned to the original
craftsman/operator.
o PRODUCTION: The Premedia Services division handles a large volume of
jobs per day encompassing both new projects and revisions and
typically works three shifts to accommodate the high volume and
turn-around requirements. Each production manager is responsible for
the assigned project from start through to completion and communicates
directly with customers regarding any particular specifications or
instructions. Each completed job may be in any medium including disk,
film, electronic transmission or final printed form.
CUSTOMERS
The Media Solutions division's customers consist of media companies,
corporate clients, retailers, advertising agencies and businesses in a variety
of industries requiring large display graphics. Customers may be local,
regional, national or international. Each of the units within this division
receives individual orders from customers on a project-by-project basis. Many
client relationships within this division extend back over many years and are
the result of timely delivery of creative high quality services. Continued
engagements for successive jobs are dependent primarily upon a customer's
satisfaction with the quality of previous services provided by this division.
Revenues from The Gap accounted for 11% of the Company's revenues for the Media
Solutions division for fiscal 1999.
The Premedia Services divisions customers include advertising agencies,
graphic design firms, corporations in the health care and beauty industries and
financial institutions and corporations in the United Kingdom. Customers are
attracted to the Premedia Services division's creative digital retouching
capabilities, an industry reputation for quality digital premedia services and
personalized customer service that caters to each customer's individual needs.
Pricing is determined on a project-by-project basis.
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COMPETITION
The Media Solutions division competes in a large and grand 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. This division'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 Media Solutions division because
of its vast array of technologically advanced equipment, technical expertise,
service orientation and capability to solve unique challenges associated with
large and grand format graphics.
The Premedia Services division and its competitors that provide retouching
services 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. When determining a suitable digital
premedia provider to suit their needs, customers that the Premedia Services
division may service generally tend to weigh the following criteria: reputation,
capacity, creative expertise, turn-around time and budget considerations.
The Premedia Services division also confronts competition from conventional
printers which have added, or plan to add, digital presses. The Company believes
this division has several competitive advantages over conventional printers and
digital premedia service providers. First, the Premedia Services division
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, the Premedia Services division has existing customers which it believes
are likely to become users of digital presses. Lastly, unlike certain of its
competitors, the Premedia Services division presently possesses the computer
hardware, software and expertise to support digital printing.
Some of the Company's competitors are larger, have greater financial
resources and offer more comprehensive services than those currently offered by
the Company. The Company, however, believes that its smaller size allows it to
more effectively react to customer needs to provide better service to these
markets than its competitors.
SUPPLIERS
Each of the Company's divisions utilize their own key suppliers for their
various materials and services needs. The Company believes a decentralized
purchasing system is more appropriate for the Company's business due to the
different operating models as well as geographical and industry segments served
by the two divisions. Additionally, the different regional or geographic focus
of the divisions allows each operating unit to develop strong relationships with
its respective suppliers. However, the Company occasionally negotiates with
certain major suppliers on a centralized basis or in cases where centralized
purchasing is more economically feasible.
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The Company views several equipment and materials supply relations within
the Media Solutions division as strategic in nature and has developed and
perfected its processes in conjunction with these suppliers.
SYSTEMS AND TECHNOLOGY
The Company aggressively implements technological advances in order to
improve and expand its premedia and large and grand format printing services.
This commitment is demonstrated by the Company's development and use of unique
technology, equipment and software applications to produce unlimited size prints
for out-of-home advertising.
Additionally, each of the Company's facilities is connected by a data
network system that allows a client with computer-generated files in one
location to have immediate access to output at other locations within the United
States and Europe.
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 premedia, 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.
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EMPLOYEES
As of November 30, 1999, the Company employed 507 persons, approximately
486 of whom are full-time employees. Of the total, 295 are employed in the
United States, 193 are employed in the United Kingdom and 19 are employed in
Germany. The Company is subject to a collective bargaining agreement with 38
employees at KWIK. The Company considers its employee relations to be
satisfactory. The following table provides an employee breakdown by the various
divisions:
EMPLOYEE BREAKDOWN
DIVISION/OPERATING UNIT # OF EMPLOYEES
-------------------------------------------------------
MEDIA SOLUTIONS
MegaArt 76
SuperGraphics 31
Unison 90
M. Nur 19
Big Bills 19
--------------
SUB-TOTAL 235
PREMEDIA SERVICES
KWIK 89
Elements 174
--------------
SUB-TOTAL 263
Corporate 9
--------------
TOTAL 507
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ITEM 2. PROPERTIES.
At August 31, 1999, the Company leased the office space set forth in the
following table:
<TABLE>
<CAPTION>
SQUARE TERMINATION
LOCATION FOOTAGE DATE DIVISION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
229 West 28th Street - New York 46,000 2/28/09 Premedia
Services
Pier 40/West Side Highway - 35,000 8/31/02 Media
New York Solutions
155 L-2 Moffet Park Drive - Sunnyvale 13,600 7/31/04 Media
Solutions
451 D Street - Boston 32,000 12/31/03 Media
Solutions
48 Margaret Street - London UK 10,300 12/31/04 Premedia
Services
Truscott House 32-42 East Road - London UK 8,900 3/31/08 Premedia
Services
71A Leonard Street 1,350 12/31/00 Media
London UK Solutions
6 Leodis Court 7,825 11/09/03 Premedia
David Street Services
Leeds UK
4 Castle Road 4,640 1/10/03 Premedia
Edinburgh UK Services
Herwigsmuhlenweg 3C - 1,500 9/01/06 Media
Kassel, Germany Solutions
</TABLE>
Additionally, at August 31, 1999, the Company owned approximately 24,000
square feet of office space in New York City. In September and November 1999,
the Company sold such property for an aggregate purchase price of $2,435,000.
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.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
A dispute has arisen out of the Company's acquisition of Libra City
Corporate Printing Limited ("Libra") in the United Kingdom. The Company has
withheld a portion of the earn-out payment (approximately (pound)400,000 or
$640,000) because of a potential breach of a non-competition clause. The parties
attempted to resolve the dispute outside of litigation. However, certain of the
shareholders of Libra have filed suit against the
Company seeking the balance of the earn-out payment. The Company has made a
counterclaim against the parties filing suit.
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. From February 1, 1996 to February 7, 1999, the Common
Stock was 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. Thereafter the Company immediately made application to the
American Stock Exchange ("AMEX") for listing of the Common Stock on AMEX. On
February 4, 1999, the Company's application for listing of the Company's Common
Stock on AMEX was approved. The Company's Common Stock began trading on AMEX on
February 8, 1999.
The following table sets forth the high and low sales prices for the
Company's Common Stock for the quarters indicated from August 31, 1997 as
reported by the Nasdaq National Market until February 7, 1999 and thereafter as
reported by AMEX. 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, 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
November 30, 1998......................... $6 1/8 $3 7/8
February 28, 1999......................... $5 9/16 $4
May 31, 1999.............................. $6 7/8 $4
August 31, 1999........................... $6 1/8 $4 1/8
As of November 30, 1999 the approximate number of holders of record of the
Common Stock was 81 and the approximate number of beneficial holders of the
Common Stock was 800.
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.
14
<PAGE>
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, 1998 and
1999 and for each of the three years ended August 31, 1999 are derived from the
audited financial statements included elsewhere herein. The Company has restated
its consolidated statements of operations for the years ended August 31, 1997,
1998 and 1999 to reflect the results of the on-demand print and prepress
business as a discontinued operation. The selected financial data set forth
below for the Company as of August 31, 1995 and 1996 and for the years ended
August 31, 1995 and 1996 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,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUE:
Net Sales $ 8,542 $ 11,660 $12,569 $29,506 $ 62,774
EXPENSES:
Cost of sales 3,901 5,622 6,773 14,892 30,003
Selling, general and administrative
expenses 2,946 4,049 3,581 9,773 21,022
Expenses incurred due to restructuring -- -- -- 413 611
-------- -------- ------- ------- --------
Total operating expenses 6,847 9,671 10,354 25,078 51,636
-------- -------- ------- ------- --------
Income from operations 1,695 1,989 2,215 4,428 11,138
Interest expense (195) (327) (573) (1,353) (5,893)
Interest expense-deferred financing costs -- -- (138) (1,143) (491)
Interest and other (expenses) income -- 232 149 14 56
-------- -------- ------- ------- --------
Income from continuing operations before
income taxes and extraordinary item 1,500 1,894 1,653 1,946 4,810
-------- -------- ------- ------- --------
Provision for income taxes 356 1,064 486 854 2,349
-------- -------- ------- ------- --------
Net income from continuing operations
before extraordinary item 1,144 830 1,167 1,092 2,461
Discontinued operations:
Income (loss) from operations of
discontinued segment (net of tax
benefit of $107 (1997), $124 (1998)
and $1,038 (1999)) -- -- 174 187 (1,275)
Loss on disposal of segment (net of
tax benefit of $8,403) -- -- -- -- (10,317)
-------- -------- ------- ------- --------
Net income (loss) before extraordinary
item 1,144 830 1,341 1,279 (9,131)
Extraordinary item-loss on early
retirement of debt (net of income tax
benefit of $137 (1998) and $1,114
(1999)) -- -- -- (143) (1,828)
-------- -------- ------- ------- --------
Net income (loss) $ 1,144 $ 830 $ 1,341 $ 1,136 $(10,959)
======== ======== ======= ======= ========
Basic earnings (loss) per common share(1):
Earnings from continuing operations
before extraordinary item $ 0.54 $ 0.31 $ 0.36 $ 0.31 $ 0.47
Income (loss) from discontinued operations -- -- 0.05 0.05 (2.22)
Extraordinary item -- -- -- (0.04) (0.35)
-------- -------- ------- ------- --------
Net income (loss) $ 0.54 $ 0.31 $ 0.41 $ 0.32 $ (2.10)
======== ======== ======= ======= ========
Diluted earnings (loss) per common
share(1):
Earnings from continuing operations
before extraordinary item $ 0.54 $ 0.31 $ 0.36 $ 0.29 $ 0.47
Income (loss) from discontinued
operations -- -- 0.05 0.05 (2.22)
Extraordinary item -- -- -- (0.04) (0.35)
-------- -------- ------- ------- --------
Net income (loss) $ 0.54 $ 0.31 $ 0.41 $ 0.30 $ (2.10)
======== ======== ======= ======= ========
Shares used to compute net income per
share:
Basic 2,000 2,644 3,212 3,531 5,225
======== ======== ======= ======= ========
Diluted 2,000 2,663 3,283 3,779 5,225
======== ======== ======= ======= ========
15
<PAGE>
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit) $ 22 $ 2,319 $(2,189) $ 7,884 $ 3,509
Total assets 6,550 17,623 33,033 67,315 118,636
Stockholders' equity 2,605 7,365 9,473 14,393 16,311
</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)).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
The Company is a media services company that provides large and grand
format digital image solutions combined with a full suite of digital premedia
services to advertising agencies, retailers, publishers, graphic design firms,
consumer product companies, government agencies and marketing communications
firms in both the United States and United Kingdom. The Company delivers its
services through two principal divisions. The Media Solutions division creates
and produces large and grand format images for out-of-home advertising and
develops new media concepts. The Premedia Services division provides digital
premedia, including retouching and short-run digital printing services.
The statements contained in this Annual Report on Form 10-K/A 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.
16
<PAGE>
RESULTS OF OPERATIONS
The consolidated financial information includes both the Company's United
States operations and its United Kingdom operations.
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, a London-based financial printer (the "Libra Acquisition") and,
as a result, currently provides financial printing services to the London
financial community through its Premedia Services division.
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 expanded its color separation and large format printing
services in the New York City and surrounding area. In July 1998, the Company
acquired substantially all the assets of Five Star Finishers, Ltd. for a cash
payment of (pound)325,000 (approximately $543,000). On September 2, 1998, the
Company consummated the acquisition of all of the issued and outstanding capital
stock of MegaArt Corp. located in New York City (the "MegaArt Acquisition")
resulting in the expansion of its wide format, digital premedia and printing
services. On October 30, 1998, the Company, consummated the acquisition of Hy
Zazula Associates, Inc. located in New York City (the "Zazula Acquisition")
resulting in the expansion of its retouching and premedia services, primarily to
advertising agencies. On November 30, 1998, the Company consummated the
acquisition (the "SuperGraphics Acquisition") of all of the issued and
outstanding capital stock of SuperGraphics Holding Company, Inc. and its
wholly-owned subsidiary, SuperGraphics Corporation, located in San Francisco,
resulting in the expansion of its large format printing services.
In April 1999, the Company consummated the acquisition of (i) substantially
all of the assets of Peter X(+C) Limited (the "X+C Acquisition"), located in New
York City, (ii) substantially all of the assets of Progress Graphics, Inc. (the
"Progress Acquisition"), located in Jersey City, New Jersey, and (iii) all the
issued and outstanding shares of capital stock of Interface Graphics Limited
(the "Interface Acquisition"), a company located in Edinburgh, Scotland. Such
acquisitions have further enhanced the Company's creative and technical
capabilities, broadened its client base within the high-end digital premedia
market and expanded the Company's premedia services into the music industry and
into the United Kingdom market.
In August 1999, the Company consummated the acquisitions of (i) all the
issued and outstanding capital stock of Pre-Press Services Limited (the
"Pre-Press Acquisition"), M. Nur Marketing & Kommunikation GmbH (the "M. Nur
Acquisition") and Big Bills Limited (the "Big Bills Acquisition"). The Pre-Press
Acquisition continued the expansion of the Company's premedia services in the
United Kingdom. The M. Nur Acquisition and Big Bills Acquisition launched the
expansion of the Company's Media Solutions division into Europe.
17
<PAGE>
All of the foregoing 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.
In furtherance of its strategy to focus on its Media Solutions division, in
August 1999, the Company consummated the Elements Sale. Due to such sale, the
Company incurred a loss on the disposal of a business segment of $10,317,000,
net of a tax benefit of $8,403,000, and restated its consolidated statements of
operations for the years ended August 31, 1998 and 1997.
For a discussion of the operating performance of the Company by segments,
see Note 16 of the Notes to the Consolidated Financial Statements included
elsewhere in this Form 10-K/A.
COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1999 AND AUGUST 31, 1998
NET SALES. Net sales increased by 113%, or $33,268,000, from $29,506,000
for the fiscal year ended August 31, 1998 to $62,774,000 for the fiscal year
ended August 31, 1999. Net sales for the Company's United States operations
increased by 229%, or $34,272,000, from $14,979,000 in the fiscal year ended
August 31, 1998 to $49,251,000 in the fiscal year ended August 31, 1999. Net
sales for the Company's United Kingdom operations decreased by 7%, or
$1,004,000, from $14,527,000 in the fiscal year ended August 31, 1998 to
$13,523,000 in the fiscal year ended August 31, 1999. Net sales for the
Company's Media Solutions division increased by 211%, or $19,606,000, from
$9,275,000 in the fiscal year ended August 31, 1998 to $28,881,000 in the fiscal
year ended August 31, 1999. This increase was attributable primarily to an
increase in net sales resulting from the MegaArt Acquisition and the
SuperGraphics Acquisition. Net sales for the Company's Premedia Services
division increased by 68%, or $13,662,000, from $20,231,000 in the fiscal year
ended August 31, 1998 to $33,893,000 in the fiscal year ended August 31, 1999.
This increase was attributable primarily to a full twelve months of net sales
resulting from the Kwik Acquisition and, to a lesser extent, an increase in net
sales resulting from the Zazula Acquisition and the X+C Acquisition.
COST OF SALES. Cost of sales increased by 101%, or $15,111,000, from
$14,892,000 for the fiscal year ended August 31, 1998 to $30,003,000 for the
fiscal year ended August 31, 1999. Cost of sales decreased as a percentage of
net sales from 50% for the year ended August 31, 1998 to 48% for the year ended
August 31, 1999. Cost of sales for the Company's United States operations
increased as a percentage of net sales from 37% for the fiscal year ended August
31, 1998 to 45% for the fiscal year ended August 31, 1999. Costs of sales for
the Company's United Kingdom operations decreased as a percentage of net sales
from 63% for the fiscal year ended August 31, 1998 to 58% for the fiscal year
ended August 31, 1999. Cost of sales for the Company's Media Solutions division
increased as a percentage of net sales for such division from 48% in the fiscal
year ended August 31, 1998 to 51% August 31, 1999. Such increase was
attributable primarily to the change in product mix in the Company's United
States operations to include more large format services. Cost of sales for the
Company's Premedia Services division decreased as a percentage of net sales for
such division from 50% in the fiscal year ended August 31, 1998 to 45% in the
fiscal year ended August 31, 1999. Such decrease was attributable
18
<PAGE>
primarily to the change in product mix in the Company's United Kingdom
operations to include less financial print and traditional services as well as
the re-negotiation of certain of the Company's vendor contracts resulting in
reduced supply costs to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased 115%, or $11,249,000, from $9,773,000
for the fiscal year ended August 31, 1998 to $21,022,000 for the fiscal year
ended August 31, 1999. Such increase was attributable primarily to the increased
level of operations and costs associated with the Company's acquisitions and
hiring of additional management and administrative personnel. As a percentage of
net sales, SG&A remained constant at 33% for the fiscal years ended August 31,
1998 and 1999.
RESTRUCTURING EXPENSES. In connection with the consolidation of the
Company's United Kingdom operations, the Company incurred restructuring expenses
of $611,000 in the fiscal year ended August 31, 1999. In connection with the
consolidation of its New York operations, the Company incurred restructuring
expenses of $413,000 in the fiscal year ended August 31, 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased by 152%, or $6,710,000, from $4,428,000 for the fiscal year ended
August 31, 1998 to $11,138,000 for the fiscal year ended August 31, 1999. Of
this amount, $9,812,000 was contributed by the Company's United States
operations and $1,326,000 by the Company's United Kingdom operations. In
addition, of this amount, $5,140,000 was contributed by the Company's Media
Solutions division and $5,998,000 from the Company's Premedia Services division.
This increase resulted from higher net sales offset, in part, by higher
production costs associated with such net sales.
NET INTEREST EXPENSE. Net interest expense increased by 155%, or
$3,846,000, from $2,482,000 for the fiscal year ended August 31, 1998 to
$6,328,000 for the fiscal year ended August 31, 1999. This increase resulted
from increased borrowings under the Company's credit facilities and capital
leases assumed by the Company as part of the Company's acquisitions.
INCOME TAXES. Income taxes increased by 175%, or $1,495,000, from $854,000
for the fiscal year ended August 31, 1998 to $2,349,000 for the fiscal year
ended August 31, 1999.
DISCONTINUED OPERATIONS. In August 1999, the Company sold its New York
operations for on-demand print and prepress services. In addition, the San
Francisco and London on-demand print and prepress business ceased operations and
closed or reallocated their facilities to other segments, respectively, prior to
August 31, 1999. There were no remaining assets or liabilities related to the
discontinuance of the on-demand print and prepress business as of August 31,
1999. As a result, the Company incurred a loss of $11,592,000 on discontinued
operations for the fiscal year ended August 31, 1999.
EXTRAORDINARY ITEM. During fiscal 1999, in connection with the prepayment
of a subordinated loan, the Company recorded an extraordinary loss of
$1,828,000, net of income tax benefit of $1,114,000 related to the write-off of
the unamortized balance of
19
<PAGE>
deferred financing costs associated with such subordinated loan. During fiscal
1998, 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
decreased from $1,136,000 for the fiscal year ended August 31, 1998 to a net
loss of $10,959,000 for the fiscal year ended August 31, 1999.
COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 1998 AND AUGUST 31, 1997
NET SALES. Net sales increased by 135%, or $16,937,000, from $12,569,000
for the fiscal year ended August 31, 1997 to $29,506,000 for the fiscal year
ended August 31, 1998. Net sales for the Company's United States operations
increased by 481%, or $12,403,000, from $2,576,000 in the fiscal year ended
August 31, 1997 to $14,979,000 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 $4,534,000, from
$9,993,000 in the fiscal year ended August 31, 1997 to $14,527,000 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 United Kingdom operations.
COST OF SALES. Cost of sales increased by 120%, or $8,119,000, from
$6,773,000 for the fiscal year ended August 31, 1997 to $14,892,000 for the
fiscal year ended August 31, 1998. As a percentage of net sales, cost of sales
decreased from 54% for the fiscal year ended August 31, 1997 to 50% for the
fiscal year ended August 31, 1998. Cost of sales for the Company's United States
operations decreased slightly as a percentage of net sales from 38% for the
fiscal year ended August 31, 1997 to 37% 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. Cost of sales for the Company's United Kingdom operations increased as
a percentage of net sales from 58% 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased by 173%, or
$6,192,000, from $3,581,000 for the fiscal year ended August 31, 1997 to
$9,773,000 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 increased from 28% for the fiscal year ended August 31, 1997 to 33%
for the fiscal year ended August 31, 1998.
20
<PAGE>
RESTRUCTURING EXPENSES. In connection with the consolidation of its New
York operations, the Company incurred restructuring expenses of $413,000 in the
fiscal year ended August 31, 1998.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased by 100%, or $2,213,000, from $2,215,000 for the fiscal year ended
August 31, 1997 to $4,428,000 for the fiscal year ended August 31, 1998. Of this
amount, $3,650,000 was contributed by the Company's United States operations and
$778,000 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 increased by $1,920,000 from
$562,000 for the fiscal year ended August 31, 1997 to $2,482,000 for the fiscal
year ended August 31, 1998. This increase resulted from increased borrowings
under the Company's credit facilities primarily relating to its acquisitions.
INCOME TAXES. Income taxes increased by 76%, or $368,000, from $486,000 for
the fiscal year ended August 31, 1997 to $854,000 for the fiscal year ended
August 31, 1998.
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
decreased by 15%, or $205,000, from $1,341,000 for the fiscal year ended August
31, 1997 to $1,136,000 for the fiscal year ended August 31, 1998.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
CASH FLOW. Net cash used in operations was $838,000 and $1,498,000 for the
fiscal years ended August 31, 1999 and 1998, respectively. Net cash provided by
operations was $489,000 for the fiscal year ended August 31, 1997. Net cash used
in investing activities was $29,943,000, $23,363,000 and $6,897,000 for the
fiscal years ended August 31, 1999, 1998 and 1997, respectively. The Company
used $2,002,000, $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,
1999, 1998 and 1997, the Company acquired equipment under capital leases of
$4,848,000, $1,797,000 and $1,711,000, respectively, and made payments under
capital leases of $3,271,000, $2,691,000 and $1,761,000, respectively. Net bank
borrowings provided funds of $38,916,000, $24,620,000 and $7,443,000 for the
fiscal years ended August 31, 1999, 1998 and 1997, respectively.
BANK CREDIT FACILITIES. On May 12, 1999, the Company terminated its
existing financing facilities and entered into a new borrowing arrangement
consisting of a $65,000,000 revolving line of credit facility with Fleet Bank,
N.A. Subsequent to the end of the fiscal year, on September 30, 1999, the
revolving line of credit facility was increased to $80,000,000. The borrowings
are guaranteed by the Company's subsidiaries and the Company pledged all of its
equity interests in its United States subsidiaries and 65% of its equity
interests in its United Kingdom subsidiaries as collateral for such credit
facility. Interest under such credit facility is, at the Company's option, at
the Prime Rate
21
<PAGE>
or at the Eurodollar Rate, as defined, plus an Applicable Margin, as defined,
ranging from 1.0% to 3.25% depending on the Company's consolidated debt to
earnings ratio and the type of loan. As of August 31, 1999, the Company had an
outstanding balance of $64,375,000 under the revolving credit facility.
The credit facility contains covenants that 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 was in violation of
certain covenants and has obtained a waiver for such violations. The credit
facility is secured by a first priority lien on all of the assets of the Company
and its subsidiaries and restricts the Company's ability to pay certain
dividends without the bank's prior written consent.
In November 1998, the Company borrowed a principal amount of $10,000,000
pursuant to a subordinated unsecured loan. In connection with such 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 of $4.50 per share. In
September 1999, upon prepayment of such loan, the lender opted to have the
interest of such loan paid in warrants to purchase Common Stock of the Company.
As a result, the Company issued warrants to purchase 208,150 shares of the
Company's Common Stock at an exercise price of $0.01 per share to such lender.
Subject to certain limitations, the Company has granted registration rights,
including "demand" registration rights, to such lender.
The warrants issued in connection with such subordinated loan, which were
deemed to have a value of approximately $308,000, have been recorded as deferred
financing costs, and are being amortized on a straight-line basis over
approximately five years.
Subsequent to the end of the fiscal year, on September 14, 1999, the
Company borrowed a principal amount of $20,000,000 pursuant to another
subordinated unsecured loan (the "Subordinated Loan"). A portion of the proceeds
of such subordinated loan was used to prepay the Company's $10,000,000
subordinated loan. The Subordinated Loan matures on August 31, 2006 and bears
interest at 14% per annum. The Company is permitted to defer the payment of up
to 2/14ths of the amount of interest due on any regularly scheduled interest
payment date. Any such deferred interest shall be deemed to be included in the
principal amount of the Subordinated Loan. The Company is obligated to prepay
without premium the greater of (i) $10,000,000 or (ii) one-half of the then
outstanding principal amount of the Subordinated Loan on August 31, 2005. In
addition, on any prepayments of the Subordinated Loan made prior September 1,
2002, the Company will incur an additional premium equal to the Make Whole
Amount, as defined. For prepayments made after September 1, 2002, such
additional premium shall be 3.0%. Such additional premium shall be reduced by
100 basis points on each September 1 thereafter until September 1, 2005. In
connection with the Subordinated Loan, the Company issued seven-year warrants to
the lender to purchase 690,134 shares of the Company's Common Stock at an
exercise price of $5.425 per share. Subject to certain limitations, the Company
granted registration rights, including "demand" registration rights, to such
lender.
The Company expects that cash flow from operations and available borrowings
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
22
<PAGE>
require additional financing to consummate future acquisitions. 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, 1999 decreased
by $4,375,000 from $7,884,000 at August 31, 1998 to $3,509,000 at August 31,
1999.
ACQUISITIONS AND DISPOSITIONS. In August 1999, the Company consummated
three acquisitions in Europe. On August 27, 1999, the Company consummated the
acquisition of all the issued and outstanding shares of capital stock of
Pre-Press Services Limited (the "Pre-Press Acquisition"). The initial aggregate
purchase price was approximately (pound)750,000 (approximately $1,200,000) which
included the issuance of 80,000 shares (approximately (pound)240,000 or
$384,000) of restricted Common Stock of the Company. In addition, the purchase
price includes deferred cash payments of (pound)169,000, (pound)124,000,
(pound)186,000 (approximately $270,000, $198,000 and $298,000, respectively)
payable August 31, 2000, 2001 and 2002, respectively.
On August 31, 1999, the Company consummated the acquisition of all the
issued and outstanding shares of capital stock of M. Nur Marketing and
Kommunikation GmbH (the "M. Nur Acquisition"). The initial aggregate purchase
price was $1,200,000 which included the issuance of 40,850 shares (approximately
$200,000) of restricted Common Stock of the Company.
On August 31, 1999, the Company consummated the acquisition of all the
issued and outstanding shares of capital stock of Big Bills Limited (the "Big
Bills Acquisition"). The initial aggregate purchase price was (pound)250,000
(approximately $455,000) which included the issuance of 55,790 shares
(approximately (pound)150,000 or $273,000) of restricted Common Stock of the
Company. In addition, the purchase price includes deferred cash payments of
(pound)50,000 (approximately $80,000) payable on each of August 31, 2000 and
August 31, 2001.
In addition, in August 1999, the Company consummated the Elements Sale.
Elements (NY) was principally engaged in the digital printing business. Such
sale is consistent with the Company's commitment to focus on its higher-margin
businesses. The purchase price for such assets was (i) $500,000 in cash, (ii)
$1,500,000 payable pursuant to a 5% promissory note that matures on June 30,
2004, and (iii) $250,000 payable in digital print and premedia services.
23
<PAGE>
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 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.
The Company currently uses a commercially available general ledger and
internal accounting system. The modular nature of the system results in a
user-friendly system with complete functionality and flexibility to provide in
depth analytics regarding accounting, job cost control, project variance
control, items and materials tracking, payroll and labor cost control,
purchasing and inventory control. The Company has received compliance
certification from its vendors that its systems in the United States and the
United Kingdom are Year 2000 compliant.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
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-K/A. 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.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS
The current members of the Board of Directors and nominees for election to
the Board are as follows:
<TABLE>
<CAPTION>
SERVED AS A POSITIONS WITH
NAME AGE DIRECTOR SINCE THE COMPANY
- ---- --- -------------- -----------
<S> <C> <C> <C>
William E. Dye.................................. 37 1989 Chairman of the Board, Chief
Executive Officer and Director
Peter Saad...................................... 52 1996 President, Assistant Secretary
and Director
Anthony Manser.................................. 42 1995 Vice President and Director
Harvey Silverman................................ 58 1996 Director
David Wachsman.................................. 54 1996 Director
</TABLE>
Executive Officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. The
current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVED POSITION SINCE
- ---- --- ------------ --------------
<S> <C> <C> <C>
William E. Dye............................ 37 Chairman of the Board, Chief 1989
Executive Officer and Director
Peter Saad................................ 52 President, Assistant Secretary 1998 (Member of the
and Director Board since 1996)
Anthony Manser ........................... 42 Vice President and Director 1994 (Member of the
Board since 1995)
</TABLE>
There are no family relationships between any of the Directors, executive
officers or nominees for election to the Board of Directors of the Company.
The principal occupations and business experience, for at least the past
five years, of each Director, executive officer and nominee for election to the
Board of Directors is as follows:
26
<PAGE>
WILLIAM E. DYE has been a Director of the Company since its inception. In
addition, Mr. Dye has been Chief Executive Officer and Chairman of the Board of
Directors of the Company since its inception and also served as President from
that time until March 1998. Mr. Dye also served as the Company's Chief Financial
Officer from approximately July 1995 until July 1996. He has been President and
Chairman of the Board of Directors of LinoGraphics Corporation, a predecessor
company to the Company, since he co-founded it in 1989. From 1987 to 1989, he
was Executive Vice President of Micro Enhancement Systems, a computer firm
located in New York City providing consulting services to the graphic arts and
other industries. From 1986 to 1987, Mr. Dye served as Vice President and
General Manager of Tripledge Wiper Corp., an automobile parts manufacturer. From
1985 to 1986, Mr. Dye taught economics at the International School of Geneva,
Switzerland.
PETER SAAD has been a Director of the Company since February 1996 and has
served as President of the Company since March 1998. Mr. Saad has also served as
the Company's Assistant Secretary since April 1997. In addition, Mr. Saad served
as the Senior Vice President and Chief Operating Officer of the Company from
November 1996 to March 1998. Mr. Saad previously served as the Managing Director
of Martin Bierbaum Money Markets, Inc., a money management firm, from March 1993
to June 1997, and was a Director of Martin Brokers, Inc., a subsidiary of Trio
Holdings Plc, from March 1993 to June 1997. He is also the President of
Independence Group Inc., a New York-based owner of indoor sports facilities, a
position he has held since 1988.
ANTHONY MANSER has been Vice President and Director of the Company since
its inception. He has been the Managing Director of Elements (UK) Limited, a
wholly-owned U.K. subsidiary of the Company, since its inception
in 1994 and was a Director of Lyledale Limited ("Lyledale") since 1991 and a
Managing Director of Lyledale from 1993 to 1994. From 1985 to 1991, he was
Production Director of Fingerprint Graphics, a United Kingdom graphics company.
HARVEY SILVERMAN has been a Director of the Company since February 1996. He
has held various positions at Spear, Leeds & Kellogg, since 1963, and is
currently its Senior Managing Director. Spear, Leeds & Kellogg is a
broker-dealer engaged in the specialist and clearing businesses on major United
States stock exchanges. Mr. Silverman also serves as a Director of World Wide
Entertainment & Sports and as Vice Chairman, Director and member of the
Performance Committee of the Options Clearing Corporation.
DAVID WACHSMAN has been a Director of the Company since February 1996. He
is Chairman of the Board, President and Chief Executive Officer of Protex
International Corp., a New York-based manufacturer of security devices for
retail stores. He has been with Protex International Corp. since 1984. Mr.
Wachsman is a certified public accountant.
27
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, officers and Stockholders who
beneficially own more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act (collectively, the
"Reporting Persons") to file initial statements of beneficial ownership of
securities and statements of changes in beneficial ownership of securities with
respect to the Company's equity securities with the Securities and Exchange
Commission (the "SEC"). All Reporting Persons are required by SEC regulation to
furnish the Company with copies of all reports that such Reporting Persons file
with the SEC pursuant to Section 16(a).
Based solely on the Company's review of the copies of such forms received
by the Company and upon written representations of the Company's Reporting
Persons received by the Company, no Reporting Person failed to report on a
timely basis any 1999 transactions.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information concerning
compensation for services in all capacities awarded to, earned by or paid to (i)
the Company's Chief Executive Officer and (ii) the three most highly compensated
executive officers of the Company each of whose aggregate cash compensation
exceeded $100,000 and who were serving as executive officers at the end of
fiscal 1999 (collectively, the "Named Executives") during the fiscal years ended
August 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
------------------------------------------------------------------------
Awards
- --------------------------------------------------------------------------------------------------------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary Bonus Compensation Options
(a) (b) ($)(c) ($)(d) ($)(e)(1) (#)(g)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William E. Dye.................. 1999 400,000 -- -- 50,000
Chairman of the Board and 1998 300,000 --(3) -- 50,000
Chief Executive Officer (2) 1997 270,577 -- -- --
Peter Saad...................... 1999 459,615 -- -- 75,000
President and Assistant 1998 231,154 -- -- 25,000
Secretary (4) 1997 216,154 -- -- 100,000
Richard J. Sirota............... 1999 254,808 -- -- 20,000
Senior Vice President and 1998 110,769 -- -- --
Chief Operating Officer(5) 1997 -- -- -- --
Anthony Manser.................. 1999 254,280 -- -- 20,000
Vice President(6) 1998 200,400 -- -- 25,000
1997 177,120 -- -- --
- -------------------------------------------------------------------------------------- -----------------------------
</TABLE>
- --------------------
(1) The costs of certain benefits are not included because they did not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus as
reported above.
(2) William E. Dye entered into an Employment Agreement with the Company
effective January 1, 1996. See -- "Employment Contracts and Termination
of Employment, and Change-in-Control Arrangements."
(3) The $25,000 bonus granted to Mr. Dye by the Company's Board of Directors
was forgone by Mr. Dye.
(4) Peter Saad entered into a new Employment Agreement with the Company
effective December 15, 1998. See -- "Employment Contracts and Termination
of Employment, and Change-in-Control Arrangements."
(5) Richard J. Sirota resigned from all of his positions with the Company
effective September 30, 1999. See -- "Employment Contracts and Termination
of Employment, and Change-in-Control Arrangements."
(6) Anthony Manser entered into a new Employment Agreement with the Company
effective May 1, 1998. See --"Employment Contracts and Termination of
Employment, and Change-in-Control Arrangements."
29
<PAGE>
OPTION GRANTS IN FISCAL 1999
The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1997 Plan during fiscal 1999 to
each of the Named Executives. The Company has never granted any stock
appreciation rights.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------------------------------------------
Percent of
Total
Options
Number of Granted Exercise
Securities To or Potential Realizable Value At
Underlying Employees Base Assumed Annual Rates of Stock
Options In Fiscal Price Expiration Price Appreciation for Option
Name Granted (#) Year(%) ($/Sh) Date Term
---------------------------------
5%($)(3) 10%($)(3)
(a) (b) (c)(1) (d)(2) (e) (f) (g)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William E. Dye...... 50,000 (4) 8.5 4.3125 6/01/09 135,607 343,642
Peter Saad.......... 75,000 (5) 12.8 4.3125 6/01/09 203,410 515,462
Richard J. Sirota... 20,000 (4) 3.4 5.375 6/29/09 67,607 171,323
Anthony Manser...... 10,000 (4) 1.7 4.3125 6/01/09 27,121 68,728
10,000 (4) 1.7 5.375 6/29/09 33,803 85,661
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
(1) Based on an aggregate of 587,400 options granted to employees in 1999,
including options granted to the Named Executives.
(2) All options were granted pursuant to the Company's 1997 Plan at the
fair market value of the underlying securities on the date of grant as
determined by the Option Committee or the Board of Directors.
(3) The 5% and 10% assumed annual rates of compounded stock price
appreciation are prescribed by SEC rules and are calculated on the basis
of the fair market value of the underlying securities on the date of grant
as determined by the Option Committee. Actual gains, if any, on stock
option exercises and Common Stock holdings are dependent on the timing of
such exercise and the future performance of the Common Stock. There can be
no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciations over the
option term will be at the assumed 5% and 10% levels or at any other
defined level.
(4) Each of the foregoing options shall become exercisable and vested based
upon a two-year vesting schedule with one-third of each option grant
vesting immediately and one-third of each option grant vesting on the
first two anniversaries of the date of grant. The underlying shares of
Common Stock are subject to cancellation by the Company, to the extent
unvested, should the optionee cease employment. Each option has a
maximum term of ten years.
(5) The foregoing options became exercisable and vested immediately. The
options have a maximum term of ten years.
30
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of
options during fiscal 1999 by each of the Named Executives and the fiscal
year-end number and value of unexercised in-the-money options held by each of
the Named Executives.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of Unexercised
Unexercised In-The-Money Options
Options at Fiscal at Fiscal
Year-End Year-End
(#) ($)(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized ($) Unexercisable Unexercisable
(a) (#)(b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William E. Dye............. 11,592 18,113 38,409/49,999 $7,930/$52,083
Peter Saad................. 200,000 229,688 --/-- --/--
Richard J. Sirota.......... -- -- 6,667/13,333 $3,334/$6,667
Anthony Manser............. -- -- 43,333/21,667 $6,876/$13,749
- --------------------------------------------------------------------------------------------- -----------------------
</TABLE>
- ---------------
(1) Based on a closing price of $5.875 per share of Common Stock as listed on
the American Stock Exchange at August 31, 1999.
COMPENSATION OF DIRECTORS
Non-Employee Directors receive $250 per meeting attended and are eligible
to receive options pursuant to the 1997 Non-Employee Director Stock Option Plan
(the "Non-Employee Plan") as compensation for serving on the Company's Board of
Directors. All Directors are entitled to reimbursement for reasonable expenses
incurred in connection with attendance at meetings of the Board of Directors or
its Committees.
On October 28, 1996 the Board of Directors adopted, and on January 30, 1997
the Stockholders approved, the Non-Employee Plan. The Non-Employee Plan provides
for the grant of options to purchase a maximum of 75,000 shares of Common Stock
of the Company to Non-Employee Directors of the Company. The Non-Employee Plan
is administered by the Board of Directors. The following Directors have been
granted options under the Non-Employee Plan during fiscal 1999:
31
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING EXERCISE PRICE
DIRECTOR OPTIONS GRANTED GRANT DATE PER SHARE
- -------- --------------- ---------- ---------
<S> <C> <C> <C>
Harvey Silverman 2,500 January 4, 1999 $5.53
David Wachsman 2,500 January 4, 1999 $5.53
</TABLE>
Under the terms of the Non-Employee Plan, each Non-Employee Director who
was a member of the Board of Directors on the effective date of the Company's
initial public offering and remained a member of the Board of Directors after
the approval of the Non-Employee Plan by the Company's Stockholders on January
30, 1997 (the "Approval Date") was automatically granted, as of the Approval
Date, an option to purchase 5,000 shares of Common Stock, at an exercise price
per share equal to the then fair market value of the shares. In addition, each
Non-Employee Director who first becomes a member of the Board of Directors after
the Approval Date, shall automatically be granted, on the date such person
becomes a member of the Board of Directors, an option to purchase 2,500 shares
of Common Stock, at an exercise price per share equal to the then fair market
value of the shares. Each Non-Employee Director who is a member of the Board of
Directors on the first trading day of each year, commencing in January 1998,
shall also automatically be granted on such date, without further action by the
Board of Directors, an option to purchase 2,500 shares of Common Stock, at an
exercise price per share equal to the then fair market value of the shares.
Unless a shorter period is provided by the Board of Directors, all options
become exercisable three months after the date of grant, provided that the
optionee remains a Director at such time. The right to exercise annual
installments of options will be reduced proportionately based on the optionee's
actual attendance at Directors' meetings if the optionee fails to attend at
least 80% of the Board of Directors' meetings held in any fiscal year. The term
of each option will be for a period of ten years from the date of grant, unless
sooner terminated in accordance with the Non-Employee Plan. Options may not be
transferred except by will or by the laws of descent and distribution or
pursuant to a domestic relations order and are exercisable to the extent vested
at any time prior to the scheduled expiration date of the option. The
Non-Employee Plan terminates on the earlier of January 30, 2007 or at such time
as all shares of Common Stock currently or hereafter reserved for issuance shall
have been issued.
In addition to the foregoing options, on June 2, 1999, each of Messrs.
Silverman and Wachsman were granted an option to purchase 20,000 shares of
Common Stock, at an exercise price of $4.3125 per share, under the 1997 Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
Effective January 1, 1996 the Company entered into a five-year employment
agreement with William E. Dye, pursuant to which he currently serves as Chief
Executive Officer of the Company. Mr. Dye's agreement provides for an annual
base salary and annual bonus at the discretion of the Board of Directors. In
fiscal 1998, the Compensation Committee increased Mr. Dye's annual base salary
to $400,000 for fiscal
32
<PAGE>
1999. The Compensation Committee has increased Mr. Dye's annual base salary to
$500,000 for fiscal 2000. In addition, Mr. Dye will be entitled to severance
compensation in an amount equal to his annual base salary for the remainder of
the term or 2.49 times his annual base salary whichever is greater in the event
his employment is terminated by the Company without cause or if the Company
materially breaches the agreement or if Mr. Dye is not elected a Director. In
the event Mr. Dye is terminated by the Company coincident with a "change of
control," he will be entitled to severance compensation equal to 2.99 times his
annual base salary. The agreement contains confidentiality provisions and a
non-compete provision which prohibits Mr. Dye from competing with the Company
for a period of two years subsequent to termination of employment. The Company
may terminate the agreement for cause upon material breach of the employment
agreement, willful misconduct or felony conviction.
Effective December 15, 1998, the Company entered into an employment
agreement with Peter Saad, pursuant to which he currently serves as the
President of the Company. The agreement, which expires on December 31, 2000,
provides for a base annual salary of $500,000 and contains non-competition,
non-solicitation and confidentiality provisions.
Effective May 1, 1998, the Company entered into a two-year employment
agreement with Anthony Manser, pursuant to which he serves on a full-time basis
as Vice President and a Director of U.K. operations. The agreement provides for
a base annual salary of (pound)156,000, utilizing the 12-month average exchange
rate in place at August 31, 1999, $259,000, and contains non-competition,
non-solicitation and confidentiality provisions.
Effective March 25, 1998, the Company entered into a three-year employment
agreement with Richard J. Sirota, pursuant to which he served as Senior Vice
President and Chief Operating Officer of the Company. The agreement provided for
a base annual salary of $250,000 and contains non-competition, non-solicitation
and confidentiality provisions. On September 30, 1999, Mr. Sirota resigned his
positions as an employee, officer and director of the Company. The
non-competition, non-solicitation and confidentiality provisions of Mr. Sirota's
employment agreement survive the termination of his employment agreement.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee has furnished the following report:
The Company's executive compensation policy is designed to attract and
retain highly qualified individuals for its executive positions and to provide
incentives for such executives to achieve maximum Company performance by
aligning the executives' interest with that of stockholders by basing a portion
of compensation on corporate performance.
The Compensation Committee generally determines base salary levels for
executive officers of the Company, at or about the start of the fiscal year and
determines actual bonuses after the end of the fiscal year based upon Company
and individual performance. Each of Messrs. Dye, Saad, Sirota and Manser
executed employment agreements with the
33
<PAGE>
Company as described in this Proxy under "Employment Contracts and Termination
of Employment, and Change in Change-in-Control Arrangements.
The Company's executive officer compensation program is comprised of base
salary, conditional cash bonuses, stock options granted at the discretion of the
Option Committee and various other benefits, including medical insurance and a
401(k) Plan which are generally available to all employees of the Company.
Salaries, whether established pursuant to contract or otherwise, are
established in accordance with industry standards through review of publicly
available information concerning the compensation of officers of comparable
companies. Consideration is also given to relative responsibility, seniority,
individual experience and performance. Salaries for each of Messrs. Dye, Saad,
Sirota and Manser and are determined by the Compensation Committee. Salary
increases for other executives are generally made based on increases in the
industry for similar companies with similar performance profiles and/or
attainment of certain division or Company goals.
The stock option programs are designed to relate executives' long-term
interests to stockholders' long-term interests. Stock options will be awarded on
the basis of individual performance and/or the achievement of internal strategic
objectives.
Based on review of available information, the Committee believes that the
Chief Executive Officer's total annual compensation is reasonable and
appropriate given the size, complexity and historical performance of the
Company's business, the Company's position as compared to its peers in the
industry, and the specific challenges faced by the Company during the year, such
as changes in the market for digital print, digital prepress and large format
services, as well as the marketplace affecting mergers and acquisitions and the
financing thereof, and other industry factors. No specific weight was assigned
to any of the criteria relative to the Chief Executive Officer's compensation.
Compensation Committee Members
William E. Dye
Harvey Silverman
David Wachsman
34
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Company's Common Stock with the cumulative total return on the AMEX Composite
Index and a Peer Group Index (capitalization weighted) for the period beginning
on the date on which the SEC declared effective the Company's Form 8-A
Registration Statement pursuant to Section 12 of the Exchange Act and ending on
the last day of the Company's last completed fiscal year. The stock performance
shown on the graph below is not indicative of future price performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG THE COMPANY, THE
AMEX COMPOSITE INDEX, THE NASDAQ COMPOSITE INDEX AND THE PEER
GROUP INDEX (1)(2)(3)(4)(5)
PLEASE INSERT PERFORMANCE GRAPH HERE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
2/1/96 8/31/96 8/31/97 08/31/98 8/31/99
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unidigital Inc.................. $100.00 $106.25 $129.17 $100.00 $ 92.16
- ------------------------------------------------------------------------------------------------------------
AMEX Composite Index(3)......... $100.00 $100.11 $116.89 $101.59 $139.40
- ------------------------------------------------------------------------------------------------------------
Nasdaq Composite Index.......... $100.00 $106.74 $148.42 $140.19 $256.14
- ------------------------------------------------------------------------------------------------------------
Peer Group Index(4)............. $100.00 $ 90.49 $140.19 $127.15 $114.02
- ------------------------------------------------------------------------------------------------------------
New Peer Group Index (5)........ $100.00 $ 95.92 $179.34 $125.35 $ 84.40
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Graph assumes $100.00 invested on February 1, 1996 in the Company's Common
Stock, the AMEX Composite Index, the Nasdaq Composite Index and the Peer
Group Index (capitalization weighted).
(2) Cumulative total return assumes reinvestment of dividends.
(3) The Company has selected the AMEX Composite Index for fiscal 1999 because
of the Company's listing on AMEX as of February 8, 1999.
(4) The Company has constructed a Peer Group Index of publicly-held,
independent prepress companies and commercial printers with digital imaging
capabilities consisting of Applied Graphic Technologies, Inc., Schawk,
Inc., Banta Corporation, Katz Digital Technologies, Inc. (other than for
fiscal 1999), and Big Flower Press Holdings, Inc. (other than for fiscal
1999). The Company believes that these companies most closely resemble the
Company's business mix and that their performance is representative of the
Company. Katz Digital Technologies, Inc. was not included in the Peer Group
Index for fiscal 1999 because of its acquisition by another entity. Big
Flower Press Holdings, Inc. was not included in the Peer Group Index for
fiscal 1999 because it is no longer publicly held.
(5) Such New Peer Group Index consists of Applied Graphics Technologies, Inc.,
Schawk, Inc., Banta Corporation and Cunningham Graphics International, Inc.
The Company constructed the New Peer Group Index because, as stated above,
Katz Digital Technologies, Inc. was acquired by another entity and Big
Flower Press Holdings, Inc. is no longer publicly held. Cunningham Graphics
International, Inc. was not included in fiscal 1996 or fiscal 1997 because
it first became publicly traded in April 1998.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There are, as of December 15, 1999, approximately 81 holders of record and
approximately 800 beneficial holders of the Company's Common Stock. The
following table sets forth certain information, as of December 15, 1999,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to beneficially own more than 5% of the total number
of shares of Common Stock outstanding as of such date, (ii) each of the
Company's Directors (which includes all nominees) and Named Executives, and
(iii) all Directors and current executive officers as a group. Unless indicated
otherwise, the address of each of these persons is c/o Unidigital Inc., 229 West
28th Street, New York, New York 10001.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER (1) OF BENEFICIAL OWNERSHIP(1) OF CLASS(2)
- ----------------------- -------------------------- -----------
(i) Certain Beneficial Owners:
<S> <C> <C>
Ehud Aloni ................................... 763,650 12.5
Stephen J. McErlain........................... 612,130(3) 10.0
31 West 10th Street
New York, New York 10011
CWG Capital Corp.............................. 650,850(4) 9.7
425 Lexington Avenue, 9th Floor
New York, New York 10017
(ii) Directors (which includes all nominees)
and Named Executives:
William E. Dye................................ 1,101,222(5) 18.0
Richard J. Sirota............................. 486,508(6) 8.0
Peter Saad.................................... 250,000 4.1
Anthony Manser................................ 197,060(7) 3.2
Harvey Silverman.............................. 45,000(8) *
120 Broadway
New York, New York 10271
David Wachsman................................ 45,000(8) *
180 Keyland Court
Bohemia, New York 11716
(iii) All Directors and current executive
officers as a group (5 persons).......... 1,638,282(5)(7)(8) 26.2
</TABLE>
- -------------------
* Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such Stockholder.
36
<PAGE>
(2) Applicable percentage of ownership is based on 6,087,067 shares of Common
Stock outstanding on December 15, 1999, plus any presently exercisable
stock options or warrants held by each such holder and options or warrants
which will become exercisable within 60 days after such date.
(3) Includes 6,000 shares of Common Stock subject to options which are
exercisable at December 15, 1999 or which will become exercisable within 60
days of such date.
(4) Represents 650,850 shares of Common Stock subject to warrants which are
exercisable at December 15, 1999 or which will become exercisable within 60
days of such date.
(5) Includes 59,000 shares of Common Stock owned by Jeffrey Leiderman, and
transferees of Mr. Leiderman, over which Mr. Dye exercises voting control.
For a description of this voting trust arrangement, see -- "Certain
Relationships and Related Transactions". Also includes 38,409 shares of
Common Stock subject to options which are exercisable at December 15, 1999
or which will become exercisable within 60 days of such date.
(6) Includes 6,667 shares of Common Stock subject to options which are
exercisable at December 15, 1999 or which will become exercisable within 60
days of such date.
(7) Includes 43,333 shares of Common Stock subject to options which are
exercisable at December 15, 1999 or which will become exercisable within 60
days of such date.
(8) Represents 45,000 shares of Common Stock subject to warrants or options
which are exercisable at December 15, 1999 or which will become exercisable
within 60 days of such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain transactions involving Messrs. Dye, Saad, Sirota and Manser are
reported in "Executive Compensation -- Employment Contracts and Termination of
Employment, and Change-in-Control Arrangements."
The Company was indebted to Mr. Dye in an aggregate principal amount of
approximately $362,000, of which approximately $155,000 was payable on demand
and approximately $207,000 was due in November 1999. Such loans have been paid
in full by the Company.
In connection with Mr. Sirota's resignation from the Company, the Company
agreed to pay Mr. Sirota consulting fees of $75,000 for consulting services to
be provided by Mr. Sirota to the Company through September 30, 2000 and the
Company agreed to pay Mr. Sirota quarterly payments of $60,000 for such
consulting services through September 30, 2000 and agreed to continue to
maintain Mr. Sirota's employee benefit package through March 24, 2001. As
partial consideration for the foregoing, Mr. Sirota agreed to forgive the
Company's debt owing to Kwik International Color, Ltd, of which Mr. Sirota was
the President and sole shareholder, in a principal amount of approximately
$400,000.
The Company leases certain of its real property from S.N.Y., Inc. of which
Mr. Sirota is the holder of approximately one-third of the outstanding equity
securities. The Company pays approximately $665,000 to S.N.Y., Inc. in annual
rent under such leases. The Company believes that the terms of such leases are
at least as favorable to the Company as the terms that may have been available
from unrelated third parties.
Pursuant to a Voting Trust Agreement dated August 9, 1995, between Mr. Dye
and Jeffrey Leiderman, a holder of the Company's Common Stock, Mr. Dye has the
right to vote shares of Common Stock owned by Mr. Leiderman or any transferee of
Mr. Leiderman. The voting trust will expire in 2005 unless terminated sooner by
its terms.
37
<PAGE>
Pursuant to a Separation Agreement between the Company and Stephen J.
McErlain dated as of July 15, 1996, if Mr. McErlain proposes to transfer all or
any part of his shares of Common Stock, the Company may elect to purchase all,
but not less than all, of the shares of Common Stock to be transferred by Mr.
McErlain for the price and upon the terms of the proposed transfer. If the
Company does not elect to purchase the shares of Common Stock proposed to be
transferred by Mr. McErlain, Mr. Dye may elect to purchase such shares of Common
Stock for the price and upon the terms of the proposed transfer. Neither the
Company nor Mr. Dye has exercised such rights to date.
38
<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 42.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the Company's fourth fiscal
quarter.
39
<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 29th day of
December, 1999.
UNIDIGITAL INC.
By: /s/ William E. Dye
-------------------------------
William E. Dye, Chief Executive
Officer
40
<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
- -----------------------
William E. Dye Chief Executive December 29, 1999
Officer and Chairman of the
Board of Directors (principal
executive, financial and
accounting officer)
/s/ Peter Saad
- ------------------------
Peter Saad President and Director December 29, 1999
/s/ Anthony Manser
- ------------------------
Anthony Manser Vice President and Director December 29, 1999
/s/ Harvey Silverman
- ------------------------
Harvey Silverman Director December 29, 1999
/s/ David Wachsman
- ------------------------
David Wachsman Director December 29, 1999
41
<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).
3.4+ Certificate of Amendment of Certificate of Incorporation, as
previously amended.
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 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.
4.8 Form of Warrant Agreement issued to the stockholders of
SuperGraphics Holding Company, Inc. Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated on
December 14, 1998.
42
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
4.9 Warrant Agreement issued to CIBC Wood Gundy Capital Corp.
Incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K dated on December 14, 1998.
4.10 Registration and Equity Rights Agreement dated as of
November 25, 1998 by and between Unidigital Inc. and CIBC Wood
Gundy Capital Corp. Incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K dated on December 14,
1998.
4.11 Form of Warrant issued to Massachusetts Mutual Life Insurance
Company and certain of its affiliates. Incorporated by reference
to Exhibit 4.11 to the Company's Annual Report on Form 10-K for
the period ended August 31, 1999.
4.12 Registration Rights Agreement dated September 14, 1999 by among
Unidigital Inc. and Massachusetts Mutual Life Insurance Company
and certain of its affiliates. Incorporated by reference to
Exhibit 4.12 to the Company's Annual Report on Form 10-K for the
period ended August 31, 1999.
4.13 Form of $20,000,000 14% Senior Subordinated Notes due August 31,
2006 issued by Unidigital Inc. and its subsidiaries in favor of
Massachusetts Mutual Life Insurance Company and certain of its
affiliates. Incorporated by reference to Exhibit 4.13 to the
Company's Annual Report on Form 10-K for the period ended August
31, 1999.
4.14 Revolving Credit Promissory Note dated May 12, 1999 made by
Unidigital Inc. in favor of Fleet Bank, N.A. in the principal
amount of $40,000,000, together with Swing Line Promissory Note
dated May 12, 1999 made by Unidigital Inc. in favor of Fleet
Bank, N.A. in the principal amount of $3,000,000. Incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1999.
4.15 Revolving Credit Promissory Note dated May 12, 1999 made by
Unidigital Inc. in favor of Bank Austria Creditanstalt Corporate
Finance, Inc. in the principal amount of $15,000,000.
Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999.
4.16 Revolving Credit Promissory Note dated May 12, 1999 made by
Unidigital Inc. in favor of Merrill Lynch Business Financial
Services Inc. in the principal amount of $10,000,000.
Incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999.
4.17 Revolving Credit Promissory Note dated September 29, 1999 made by
Unidigital Inc. in favor of Fleet Bank, N.A. in the principal
amount of $5,000,000. Incorporated by reference to Exhibit 4.17
to the Company's Annual Report on Form 10-K for the period ended
August 31, 1999.
43
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
4.18 Revolving Credit Promissory Note dated September 29, 1999 made by
Unidigital Inc. in favor of People's Bank of California in the
principal amount of $5,000,000. Incorporated by reference to
Exhibit 4.18 to the Company's Annual Report on Form 10-K for the
period ended August 31, 1999.
4.19 Revolving Credit Promissory Note dated September 29, 1999 made by
Unidigital Inc. in favor of Sovereign Bank in the principal
amount of $5,000,000. Incorporated by reference to Exhibit 4.19
to the Company's Annual Report on Form 10-K for the period ended
August 31, 1999.
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 December 15, 1998 by and between
Unidigital Inc. and Peter Saad.
10.4* 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.
10.5 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).
10.6 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.
10.7 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.
44
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
10.8 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.
10.9 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.
10.10* 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).
10.11* 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).
10.12* 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.
10.13* 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.
10.14 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).
10.15 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).
10.16 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.
10.17 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.
45
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
10.18 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.
10.19 Agreement for Purchase and Sale of Stock dated as of November 16,
1998 by and among Unidigital Inc., SuperGraphics Holding Company,
Inc. ("Holding"), SuperGraphics Corporation and the stockholders
of Holding. Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated on December 14, 1998.
10.20 Asset Purchase Agreement dated as of March 26, 1999 by and
among Unidigital Inc., Unison (NY), Inc., Peter X(+C) Limited and
Peter Ksiezopolski. Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 1999.
10.21 Share Purchase Agreement By Way of Deed dated December 21, 1998
by and among the Shareholders of Interface Graphics Limited,
Elements (UK) Limited and Interface Graphics Limited.
Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999.
10.22 Asset Purchase Agreement dated as of April 8, 1999 by and among
Unidigital Inc., Unison (NY), Inc., Progress Graphics Inc. and
Mario DeVita. Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended May
31, 1999.
10.23 Credit Agreement dated as of May 12, 1999 among Unidigital Inc.,
Fleet Bank, N.A., Bank Austria Creditanstalt Corporate Finance,
Inc. and the Banks, Financial Institutions and Other
Institutional Lenders Named Therein. Incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1999.
10.24 Amendment No. 1 to Credit Agreement dated as of July 23, 1999
among Unidigital Inc., Fleet Bank, N.A., Bank Austria
Creditanstalt Corporate Finance, Inc. and the Banks, Financial
Institutions and other Institutional Lenders named therein.
Incorporated by reference to Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the period ended August 31, 1999.
10.25 Amendment No. 2 to Credit Agreement dated as of September 29,
1999 among Unidigital Inc., Fleet Bank, N.A., Bank Austria
Creditanstalt Corporate Finance, Inc. and the Banks, Financial
Institutions and other Institutional Lenders named therein.
Incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the period ended August 31, 1999.
10.26 General Security Agreement (Borrower) dated May 12, 1999 by
Unidigital Inc. in favor of Fleet Bank, N.A. Incorporated by
reference to Exhibit 10.8 to the Company's Quarterly Report on
Form 10-Q for the quarter ended May 31, 1999.
46
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
10.27 General Security Agreement (Guarantors) dated May 12, 1999 by
Unidigital Elements (NY), Inc., Unison (NY), Inc., Unison (MA),
Inc., Unidigital Elements (SF), Inc., Mega Art Corp.,
SuperGraphics Holding Company, Inc. and SuperGraphics Corporation
in favor of Fleet Bank, N.A. Incorporated by reference to Exhibit
10.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 31, 1999.
10.28 Pledge and Security Agreement dated May 12, 1999 by Unidigital
Inc. in favor of Fleet Bank, N.A. Incorporated by reference to
Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1999.
10.29 Pledge and Security Agreement (Subsidiary) dated May 12, 1999 by
SuperGraphics Holding Company, Inc. in favor of Fleet Bank, N.A.
Incorporated by reference to Exhibit 10.11 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999.
10.30 Guaranty dated May 12, 1999 made by Unidigital Inc., Unidigital
Elements (NY), Inc., Unison (NY), Inc., Unison (MA), Inc.,
Unidigital Elements (SF), Inc., Mega Art Corp., SuperGraphics
Holding Company, Inc. and SuperGraphics Corporation in favor of
Fleet Bank, N.A. Incorporated by reference to Exhibit 10.12 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1999.
10.31 Foreign Guaranty dated May 12, 1999 made by Elements (UK)
Limited in favor of Fleet Bank, N.A. Incorporated by reference to
Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for
the quarter ended May 31, 1999.
10.32 Trademark Collateral Assignment and Security Agreement dated as
of May 12, 1999 by and between Unidigital Inc. and Fleet Bank,
N.A. Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1999.
10.33 Subsidiary Trademark Collateral Assignment and Security Agreement
dated as of May 12, 1999 by and between Unison (NY), Inc. and
Fleet Bank, N.A. Incorporated by reference to Exhibit 10.15 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1999.
10.34 Subsidiary Trademark Collateral Assignment and Security Agreement
dated as of May 12, 1999 by and between SuperGraphics Corporation
and Fleet Bank, N.A. Incorporated by reference to Exhibit 10.16
to the Company's Quarterly Report on Form 10-Q for the quarter
ended May 31, 1999.
10.35 Asset Purchase Agreement dated as June 15, 1999 among I.A.T.,
LLC, Unidigital Elements (NY), Inc., Unison (NY), Inc. and
Unidigital Inc. Incorporated by reference to Exhibit 10.36 to the
Company's Annual Report on Form 10-K for the period ended August
31, 1999.
10.36 Securities Purchase Agreement among Unidigital Inc. and its
subsidiaries and Massachusetts Mutual Life Insurance Company and
certain of its affiliates. Incorporated by reference to Exhibit
10.37 to the Company's Annual Report on Form 10-K for the period
ended August 31, 1999.
47
<PAGE>
Exhibit
No. Description of Exhibit
- --------- ----------------------
21 Subsidiaries of the Company. Incorporated by reference to Exhibit
21 to the Company's Annual Report on Form 10-K for the period
ended August 31, 1999.
23+ Consent of Ernst & Young LLP.
27.1+ Restated Financial Data Schedule for the period ended August 31,
1999.
27.2+ Restated Financial Data Schedule for the period ended August 31,
1998.
27.3+ Restated Financial Data Schedule for the period ended August 31,
1997.
- ----------------------------------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit and deemed filed herewith, pursuant to Item 4(a) of
Form 10-K.
+ Filed herewith.
48
<PAGE>
Unidigital Inc.
Financial Statements
August 31, 1999
CONTENTS
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of
August 31, 1999 and 1998................................................. F-3
Consolidated Statements of Operations for the
years ended August 31, 1999, 1998 and 1997............................... F-4
Consolidated Statement of Cash Flows for the
years ended August 31, 1999, 1998 and 1997............................... F-5
Consolidated Statement of Stockholders' Equity
for the years ended August 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements............................... F-8
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, 1999 and 1998 and the consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended August 31,
1999. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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, 1999 and 1998 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
December 3, 1999
New York, New York
F-2
<PAGE>
Unidigital Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31
--------------------------------------
1999 1998
--------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 734,000 $ 287,000
Accounts receivable, net of allowance
of $744,000 in 1999 and $581,000 in 1998 16,788,000 16,917,000
Building available for sale 1,488,000 -
Prepaid expenses 2,600,000 2,727,000
Other current assets 2,356,000 3,360,000
Deferred tax asset 2,000,000 -
--------------------------------------
Total current assets 25,966,000 23,291,000
Property and equipment, net 15,920,000 14,591,000
Deferred tax asset 5,606,000
Deferred financing costs, net 1,550,000 1,013,000
Intangible assets, net 67,672,000 28,107,000
Other assets 1,922,000 313,000
======================================
Total assets $ 118,636,000 $ 67,315,000
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 16,198,000 $ 8,571,000
Current portion of capital lease obligations 3,157,000 1,935,000
Current portion of long-term debt 1,384,000 3,610,000
Income taxes payable 1,065,000 887,000
Deferred income taxes - 249,000
Loans and notes payable to stockholders 619,000 155,000
Other current liabilities 34,000 -
--------------------------------------
Total current liabilities 22,457,000 15,407,000
Capital lease obligations, net of current portion 2,898,000 2,830,000
Long-term debt, net of current portion 76,263,000 33,978,000
Deferred income taxes - 500,000
Loans and notes payable to stockholders, net of current portion - 207,000
Other non-current liabilities 707,000 -
--------------------------------------
Total liabilities 102,325,000 52,922,000
Stockholders' equity:
Preferred stock, par value $.01; 10,000,000 shares and 5,000,000 shares
authorized in 1999 and 1998, respectively; none issued and outstanding - -
Common stock, par value $.01; 25,000,000 shares and 10,000,000 shares
authorized in 1999 and 1998, respectively; 5,926,618 shares and
3,902,634 shares issued and outstanding in 1999 and 1998, respectively 59,000 39,000
Issuable common stock 1,450,000
Additional paid-in capital 21,729,000 9,865,000
Retained earnings (deficit) (6,585,000) 4,374,000
Accumulated other comprehensive (loss) income (342,000) 115,000
--------------------------------------
Total stockholders' equity 16,311,000 14,393,000
--------------------------------------
Total liabilities and stockholders' equity $ 118,636,000 $ 67,315,000
======================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-3
<PAGE>
Unidigital Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Net sales $ 62,774,000 $ 29,506,000 $ 12,569,000
EXPENSES
Cost of sales 30,003,000 14,892,000 6,773,000
Selling, general and administrative expenses 21,022,000 9,773,000 3,581,000
Expenses incurred due to restructuring 611,000 413,000 -
--------------------------------------------------------
Total operating expenses 51,636,000 25,078,000 10,354,000
--------------------------------------------------------
Income from continuing operations 11,138,000 4,428,000 2,215,000
Interest expense (5,893,000) (1,353,000) (573,000)
Interest expense-deferred financing costs (491,000) (1,143,000) (138,000)
Interest and other income 56,000 14,000 149,000
--------------------------------------------------------
Income from continuing operations before income
taxes and extraordinary item 4,810,000 1,946,000 1,653,000
Provision for income taxes 2,349,000 854,000 486,000
--------------------------------------------------------
Net income from continuing operations
Before extraordinary item $ 2,461,000 $ 1,092,000 $ 1,167,000
Discontinued operations (Note 9):
(Loss) income from operations of discontinued
segment (net of tax benefit of $1,038,000 (1999),
$124,000 (1998) and $107,000 (1997)) (1,275,000) 187,000 174,000
Loss on disposal of segment (net of tax benefit of
$8,403,000) (10,317,000) - -
--------------------------------------------------------
Net (loss) income before extraordinary item (9,131,000) 1,279,000 1,341,000
Extraordinary item--loss on early retirement of debt
(net of income tax benefit of $1,114,000 (1999)
and $137,000 (1998)) (1,828,000) (143,000) -
--------------------------------------------------------
Net (loss) income $ (10,959,000) $ 1,136,000 $ 1,341,000
Basic earnings (loss) per common share:
Earnings from continuing operations before
extraordinary item $ 0.47 $ 0.31 $ 0.36
(Loss) income from discontinued operations (2.22) 0.05 0.05
Extraordinary item (0.35) (0.04) -
--------------------------------------------------------
Net (loss) income $ (2.10) 0.32 0.41
========================================================
Diluted earnings (loss) per common share:
Earnings from continuing operations
Before extraordinary item $ 0.47 0.29 0.36
(Loss) income from discontinued operations (2.22) 0.05 0.05
Extraordinary item (0.35) (0.04) -
========================================================
Net income $ (2.10) 0.30 0.41
========================================================
Shares used to compute net (loss) income per share:
Basic 5,225,294 3,530,836 3,212,098
========================================================
Diluted 5,225,294 3,779,438 3,283,279
========================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-4
<PAGE>
Unidigital Inc.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (10,959,000) $ 1,136,000 $ 1,341,000
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,921,000 3,954,000 2,194,000
(Gain) loss on sale of property and equipment (146,000) 11,000 -
Provision for deferred income taxes (8,355,000) 300,000 24,000
Provision for bad debts 321,000 115,000 102,000
Loss on disposal of segment 15,676,000 - -
Stock compensation 160,000 50,000 50,000
Changes in assets and liabilities net of effects of businesses acquired:
Accounts receivable (4,889,000) (5,680,000) (3,242,000)
Prepaid expenses and other current assets 824,000 (2,393,000) (5,046,000)
Other assets (1,128,000) (1,354,000) (171,000)
Accounts payable and accrued expenses 1,375,000 2,053,000 5,008,000
Income taxes payable 362,000 310,000 229,000
--------------------------------------------------
Net cash (used in) provided by operating activities (838,000) (1,498,000) 489,000
--------------------------------------------------
INVESTING ACTIVITIES
Additions to property and equipment (2,002,000) (1,571,000) (1,368,000)
Proceeds from sale of property and equipment 976,000 10,000 -
Proceeds from disposal of segment 500,000 - -
Business acquisitions (29,417,000) (21,802,000) (5,529,000)
--------------------------------------------------
Net cash used in investing activities (29,943,000) (23,363,000) (6,897,000)
--------------------------------------------------
FINANCING ACTIVITIES
Payments of capital lease obligations (3,271,000) (2,691,000) (1,761,000)
Payments for cancellation of options - - (213,000)
Proceeds from long-term debt 94,875,000 37,186,000 7,521,000
Payments of long-term debt (55,959,000) (12,566,000) (78,000)
Stockholder repayments (418,000) - -
Payment of deferred financing costs (4,071,000) - -
Proceeds from sale of common stock, net of issuance costs 72,000 20,000 (36,000)
--------------------------------------------------
Net cash provided by financing activities 31,228,000 21,949,000 5,433,000
--------------------------------------------------
Effect of foreign exchange rates on cash - (4,000) 32,000
--------------------------------------------------
Net increase(decrease) in cash and cash equivalents 447,000 (2,916,000) (943,000)
Cash and cash equivalents at beginning of year 287,000 3,203,000 4,146,000
--------------------------------------------------
Cash and cash equivalents at end of year $ 734,000 $ 287,000 $ 3,203,000
==================================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 5,897,000 $ 1,614,000 $ 1,261,000
==================================================
Income taxes paid $ 436,000 $ 232,000 $ 726,000
==================================================
Non-cash transactions:
Equipment acquired under capital lease obligations $ 4,848,000 $ 1,797,000 $ 1,711,000
==================================================
Stock issued for business acquisitions $ 9,895,000 $ - $ -
==================================================
Warrants issued for business acquisition $ 281,000 $ - $ -
==================================================
Warrants issued for additional financing $ 308,000 $ - $ -
==================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
UNIDIGITAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
COMMON STOCK ISSUABLE PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT COMMON STOCK CAPITAL (DEFICIT) (LOSS) INCOME EQUITY
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 3,189,216 $ 32,000 $ - $ 5,463,000 $ 1,897,000 $ (27,000) $ 7,365,000
Issuance of common stock in
connection with the Boris Image
Group, Inc. asset acquisition 45,480 249,000 249,000
Additional Initial Public Offering
costs (72,000) (72,000)
Issuance of 440,000 warrants in
Connection with financing 602,000 602,000
Issuance of common stock as
employee compensation 8,547 50,000 50,000
Comprehensive income:
Net income 1,341,000 1,341,000
Foreign currency translation
adjustment (62,000) (62,000)
----------
Comprehensive income 1,279,000
--------------------------------------------------------------------------------------------------
Balance at August 31, 1997 3,243,243 32,000 - 6,292,000 3,238,000 (89,000) 9,473,000
Issuance of common stock in
connection with the Kwik
International Color Ltd. Asset
acquisition 649,841 7,000 3,403,000 3,410,000
Issuance of common stock as
employee compensation 6,051 50,000 50,000
Issuance of 25,000 warrants in
connection with investment
banking services 100,000 100,000
Issuance of common stock in
connection with exercise of
stock options 3,499 20,000 20,000
Comprehensive income:
Net income 1,136,000 1,136,000
Foreign currency translation
adjustment 204,000 204,000
----------
Comprehensive income 1,340,000
--------------------------------------------------------------------------------------------------
Balance at August 31, 1998 3,902,634 39,000 - 9,865,000 4,374,000 115,000 14,393,000
Issuance of common stock in
connection with the Mega Art
Corp. asset acquisition 804,148 8,000 1,450,000 5,217,000 6,675,000
Issuance of common stock in
connection with the
Hy Zazula Associates asset
acquisition 433,076 4,000 2,271,000 2,275,000
Issuance of common stock and
225,000 warrants issued in
connection with the SuperGraphics
acquisition 135,393 1,000 891,000 892,000
F-6
<PAGE>
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
COMMON STOCK ISSUABLE PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT COMMON STOCK CAPITAL (DEFICIT) (LOSS) INCOME EQUITY
--------------------------------------------------------------------------------------------------
Issuance of common stock in
connection with the Peter
X+C asset acquisition 40,000 200,000 200,000
Issuance of common stock in
connection with the Progess
Graphics, Inc. asset acquisition 86,059 1,000 499,000 500,000
Issuance of common stock in
connection with the Interface
Graphics Limited asset acquisition 49,695 1,000 218,000 219,000
Issuance of common stock in
connection with the exercise of
stock options 211,592 2,000 993,000 995,000
Issuance of common stock in
connection with the Prepress
Services asset acquisition 80,000 1,000 391,000 392,000
Issuance of common stock in
settlement of a liability 35,584 - 173,000 173,000
Issuance of common stock in
connection with the M. Nur
Marketing & Kommunication GmbH
asset acquisition 40,850 1,000 200,000 201,000
Issuance of common stock in
connection with the Big Bills
Ltd. asset acquisition 55,790 1,000 273,000 274,000
Issuance of 440,000 warrants
in connection with financing 308,000 308,000
Issuance of common stock as
employee compensation 34,102 160,000 160,000
Issuance of common stock in
connection with exercise of
warrants 17,895 70,000 70,000
Comprehensive income:
Net loss (10,959,000) (10,959,000)
Foreign currency translation
adjustment (457,000) (457,000)
-------------
Comprehensive loss (11,416,000)
--------------------------------------------------------------------------------------------------
Balance at August 31, 1999 5,926,618 $59,000 $1,450,000 $21,729,000 $(6,585,000) (342,000) $ 16,311,000
==================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-7
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
1. ORGANIZATION
Unidigital Inc. ("Unidigital" or the "Company") a Delaware corporation, is a
media services company that provides large and grand format digital image
solutions combined with a full suite of digital "premedia" (previously referred
to as high-end prepress) services to advertising agencies, retailers,
publishers, graphic design firms, consumer product companies, government
agencies, and marketing and communications firms in both the United States, the
United Kingdom and Germany. During 1999 the Company began delivering its
services through two principal business divisions: (i) the Media Solutions
division creates and produces large and grand format images for out-of-home
advertising and develops new media concepts and (ii) the Premedia Services
division provides digital premedia, including retouching and short-run digital
printing services. During 1999 the various operating subsidiaries of the Company
were grouped into the aforementioned business divisions and the Company
discontinued its on-demand print and prepress business segment (See Note 9).
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.
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.
F-8
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 relate to 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 $2,614,000, $797,000 and $269,000 was
recorded for the years ended August 31, 1999, 1998 and 1997, respectively.
Accumulated amortization at August 31, 1999 and 1998 was approximately
$3,747,000 and $1,133,000, 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-9
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
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 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. The Company has elected the disclosure
only provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," ("FAS 123") and continue accounting
for the stock based compensation under the provisions of APB 25.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's United Kingdom and Germany subsidiaries
are translated using year-end exchange rates. Statements of operations accounts
are translated at monthly average exchange rates. The resulting translation
adjustment is recorded in a separate component of stockholders equity called
"Accumulated other comprehensive income (loss)" and is included in determining
comprehensive income (loss).
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.
F-10
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
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
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("Statement 128").
Basic earnings per share is calculated by dividing income available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted earnings per share includes the dilutive effect of all potentially
dilutive securities.
SEGMENT INFORMATION
The Company accounts for segment information in accordance with 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.
F-11
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COMPREHENSIVE INCOME
As of September 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 established new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 has had no effect on
the Company's net income or stockholder's equity. Statement 130 requires the
Company's foreign currency translation adjustment which, prior to adoption, was
recorded separately in stockholders' equity, to be included in other
comprehensive income or loss. Amounts reported in prior year financial
statements have been reclassified to conform to the requirements of Statement
130. As of August 31, 1999, the cumulative other comprehensive loss consisted
solely of the Company's foreign currency translation adjustment.
3. ACQUISITIONS
In 1996 the Company purchased certain assets of Cardinal Communications Group,
Inc. and C-Max Graphics, Inc. The purchase price included a potential earn-out
of a maximum of $600,000. During 1999 the Company settled this earn-out and paid
the owners $150,000.
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 to Boris Image Group and its management team; (iii)
$250,000 in restricted common stock of the Company (45,480 shares); (iv) a
potential 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 tangible net assets acquired by approximately $2,601,000, and has
been recorded as goodwill. An earn-out of $414,000 was paid for the year ended
August 31, 1998.
F-12
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
3. ACQUISITIONS (CONTINUED)
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), and has been recorded as goodwill. An earn-out of
$825,000 was paid for the year ended August 31, 1998,
In March 1998, the Company purchased certain assets and assumed certain
liabilities of Kwik International Color, Ltd ("Kwik"). 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 assets acquired by approximately $22,107,000, which has been
recorded as goodwill. Of the purchase price, $1,000,000 of restricted Common
stock of the Company (190,589 shares) is being held in escrow for a period of
two years to satisfy any indemnification claims.
In July 1998, the Company 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
tangible assets acquired.
In September 1998, the Company purchased all of the issued and outstanding
capital stock of Mega Art Corp. ("Mega Art"). The purchase price included an
initial cash payment of $6,050,000 and the issuance of 804,148 shares of
restricted Common stock of the Company ($5,225,000). In addition, the purchase
price included a deferred cash payment of $1,300,000 (including a $100,000 late
fee) which was paid in fiscal 1999; a cash earn-out payment of $1,300,000
(including a $100,000 late fee) which was paid in fiscal 1999; and $1,450,000 in
restricted Common stock of the Company (the "Earn-Out Payment") which was earned
and is included in stockholders' equity on the accompanying balance sheet at
August 31, 1999.
F-13
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
3. ACQUISITIONS (CONTINUED)
In October 1998, the Company purchased all of the issued and outstanding common
stock of Hy Zazula Associates, Inc. ("Zazula"). 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
($150,000) is being held in escrow for a period of two years to satisfy any
indemnification claims.
In November 1998, the Company purchased all of the issued and outstanding common
stock of SuperGraphics. The purchase price included a cash payment of
approximately $15,989,000, the issuance of 135,393 shares of restricted Common
stock of the Company (approximately $611,000) 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 of $100,000 was paid in
June 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 warrants were deemed to have a value of
approximately $281,000 based on an independent appraisal.
In April 1999, the Company acquired substantially all of the assets of Peter
X(+C) Limited ("X+C). The purchase price included an initial cash payment of
$70,000 and the issuance of 40,000 shares ($200,000) of restricted Common stock
of the Company. In addition, the purchase price included a deferred cash payment
of $100,000 payable on April 1, 2000, and an earn-out payment of up to
$1,000,000 in cash or in some combination of cash and restricted Common stock of
the Company in the event X+C achieves certain financial performance objectives.
In April 1999, the Company, acquired substantially all of the assets of Progress
Graphics, Inc. ("Progress"). The purchase price included the issuance of 86,059
shares ($500,000) of restricted Common stock of the Company. In addition, the
purchase price includes earn-out payments in cash, restricted Common stock of
the Company or some combination thereof in the event Progress attains revenues
in excess of $3,000,000 in any of the first three years following the closing.
F-14
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
3. ACQUISITIONS (CONTINUED)
In April 1999, the Company acquired all the issued and outstanding shares of
capital stock of Interface Graphics Limited ("Interface"). The initial aggregate
purchase price was (pound)425,000 (approximately $700,000) which included the
issuance of 49,695 shares (approximately (pound)132,000 or $219,000) of
restricted Common stock of the Company. In addition, the purchase price includes
deferred cash payments of (pound)20,000 payable on each of January 31, 2000 and
January 31, 2001, and earn-out payments of up to (pound)55,000 per year in the
event Interface achieves certain financial performance objectives in either of
the first two years following the closing.
In August 1999, the Company acquired all the issued and outstanding shares of
capital stock of Pre-Press Services Limited ("Pre-Press"). The initial aggregate
purchase price was approximately (pound)750,000 (approximately $1,200,000) which
included the issuance of 80,000 shares (approximately (pound)240,000 or
$392,000) of restricted Common stock of the Company. In addition, the purchase
price includes deferred cash payments of (pound)169,000, (pound)124,000,
(pound)186,000 payable during the years ended August 31, 2000, 2001 and 2002,
respectively.
In August 1999, the Company acquired all the issued and outstanding shares of
capital stock of M. Nur Marketing and Kommunikation GmbH ("M. Nur"). The initial
aggregate purchase price was $1,200,000 which included the issuance of 40,850
shares (approximately or $201,000) of restricted Common stock of the Company.
In August 1999, the Company acquired all the issued and outstanding shares of
capital stock of Big Bills Limited ("Big Bills"). The initial aggregate purchase
price was (pound)250,000 (approximately $455,000) which included the issuance of
55,790 shares (approximately (pound)150,000 or approximately $274,000) of
restricted Common stock of the Company. In addition, the purchase price includes
deferred cash payments of (pound)50,000 payable on each of August 31, 2000 and
August 31, 2001.
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. During 1999
the preliminary allocation of purchase price may change upon final determination
of the fair value of the net assets acquired.
F-15
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
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.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------
<S> <C> <C>
Net sales $ 79,738,000 $ 55,324,000
Net income from continuing operations before
extraordinary item 1,090,000 1,389,000
Net (loss) income (9,488,000) 1,433,000
Net (loss) income per share from continuing
operations before extraordinary item:
Basic $ 0.19 $ 0.39
Diluted $ 0.19 $ 0.37
Net (loss) income per share:
Basic $ (1.67) $ 0.41
Diluted $ (1.67) $ 0.38
</TABLE>
4. RESTRUCTURING CHARGES
During the first and second quarter of fiscal 1999, management authorized and
committed the Company to: (i) consolidate their premedia operation in the UK,
which was later discontinued in the fourth quarter of fiscal 1999 (see Note 9)
and (ii) continue to reduce the staff providing financial printing services. In
connection with the consolidation and continued reduction of staff the Company
incurred approximately $376,000 of termination benefits relating to the
termination of 28 employees providing similar services and incurred other
related costs of approximately $235,000. All such costs were paid during fiscal
1999.
During the third and fourth quarter of fiscal 1998, management authorized and
committed the Company to: (i) consolidate their premedia services in connection
with the acquisition of Kwik and (ii) reduce the staff providing financial
printing services in the UK, 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 other related costs of approximately $466,000,
including $90,000 related to write-downs of leasehold improvements. Included in
accounts payable at August 31, 1998 was approximately $78,000 of facility exit
costs. Of this amount, approximately $358,000 was reclassified to discontinued
operations.
F-16
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
August 31
-------------------------------------
1999 1998
-------------------------------------
<S> <C> <C>
Buildings $ - $ 2,252,000
Machinery and equipment 19,747,000 15,133,000
Furniture and office equipment 1,506,000 1,187,000
Computer software 1,651,000 1,438,000
Leasehold improvements 2,713,000 1,565,000
Vehicles 259,000 163,000
-------------------------------------
Total 25,876,000 21,738,000
Less accumulated depreciation and amortization (9,956,000) (7,147,000)
-------------------------------------
$15,920,000 $ 14,591,000
=====================================
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Facility
Amount Amount Outstanding
-------------------------------
August 31, August 31,
1999 1999 1998
----------------------------------------------------
<S> <C> <C> <C>
Revolving line of credit, interest at the prime rate or at
the eurodollar rate, as defined, plus an applicable
margin, all as defined, ranging from 1.0% to 3.25%. $ 65,000,000 $ 64,375,000 $ -
Credit facility in the United Kingdom interest at the bank's
overdraft rate plus 2.75%. Facility is secured by the
assets of Interface Graphics. 241,000 241,000 -
Credit facilities in the United Kingdom, interest at either
the bank's overdraft rate plus 2% or 2.5%. - - 2,135,000
Credit facilities in the United Kingdom; interest at the
bank's overdraft rate plus 1.85%. Facility is secured by
the accounts receivable of Pre-Press. 642,000 621,000 -
</TABLE>
F-17
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
6. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
Facility Amount Amount Outstanding
-------------------------------
August 31, August 31,
1999 1999 1998
------------------------------------------------------
<S> <C> <C> <C>
Credit facilities in the United Kingdom; interest at the
bank's overdraft rate plus 2.00%. Facility is secured
by the accounts receivable of Big Bills. 321,000 236,000 -
Term loan, matures March 2003; payable in sixteen
quarterly installments of ranging from $960,000 to
$1,920,000 in March 2003, plus interest at the Base
Rate or the Eurodollar Rate, as defined, plus an
Applicable Margin, as defined, ranging from 0.75% to 3.0%. - - 25,000,000
Revolving line of credit; matures in March 2003, interest
at the Base Rate or at the dollar rate as defined. - - 8,435,000
Subordinated loan matures in March 2004; base interest of
12 1/2%; plus 0.25% the first day after the first
anniversary of the Note; plus 0.25% following the last
day of each 90 day period until payment in full. 10,000,000 10,000,000 -
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. - 454,000 618,000
Loan facility in United Kingdom; matures in July 2001,
payable in monthly installment of $19,000 plus interest
of LIBOR, as defined, plus the Banks Margin of 2.4%. - - 651,000
Senior subordinated note investment fee, due May 2001. - 1,500,000 -
Installment note due to seller of Kwik; matures in
April 2001, payable in thirty-six monthly installments
of approximately $21,000 including interest at 5.7%. - - 646,000
Other. 312,000 220,000 103,000
------------------------------------------------------
77,647,000 37,588,000
Less: current portion of long-term debt 1,384,000 3,610,000
======================================================
Long-term debt $ $ 76,263,000 $ 33,978,000
======================================================
</TABLE>
F-18
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
6. LONG-TERM DEBT (CONTINUED)
On May 12, 1999, the Company terminated its existing $25,000,000 term loan,
$10,000,000 revolving line of credit facility and $5,000,000 credit facility,
and entered into a new borrowing arrangement consisting of a $65,000,000
revolving line of credit facility. The revolving line of credit facility may be
increased to $80,000,000 in the event the Company raises subordinated debt net
proceeds of a least $20,000,000 (see note 19). The borrowings are guaranteed by
the Company's subsidiaries and the Company pledged all of its equity interests
in is United States subsidiaries and 65% of its equity interests in its United
Kingdom subsidiaries as collateral for such credit facility. Interest under such
credit facility is payable, at the Company's option, at the prime rate or at the
eurodollar rate, as defined, plus an Applicable Margin, as defined, ranging from
1.0% to 3.25% depending on the Company's consolidated debt to earnings ratio and
the type of loan.
The credit facility contains covenants that 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 was in violation of
certain covenants and has obtained a waiver for such violations. The credit
facility is secured by a first priority lien on all of the assets of the Company
and its subsidiaries and restricts the Company's ability to pay certain
dividends without the bank's prior written consent.
In November 1998, the Company borrowed $10,000,000 pursuant to a subordinated
unsecured loan (the "Subordinated Loan"). The Subordinated Loan originally
matured 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. 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. The
warrants were deemed to have a value of approximately $308,000, based on an
independent appraisal. In addition, subject to certain limitations, the Company
granted registration rights to such lender. In September 1999 the Company repaid
this debt with the proceeds of the $20 million senior subordinated notes (see
note 19).
F-19
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
6. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt are as follows:
AUGUST 31,
1999
-----------------
Year ending August 31
2000 $ 1,384,000
2001 1,437,000
2002 6,437,000
2003 11,264,000
2004 57,125,000
-----------------
$ 77,647,000
=================
7. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain property and equipment which have been classified as
capital leases. At August 31, 1999, the cost and accumulated depreciation and
amortization of such assets was approximately $14,406,000 and $5,476,000,
respectively. At August 31, 1998 the cost and accumulated depreciation and
amortization of such assets was approximately $9,746,000 and $3,023,000,
respectively. Future minimum payments under these leases are as follows:
AUGUST 31,
1999
----------------
Year ending August 31,
2000 $ 3,256,000
2001 1,969,000
2002 1,096,000
2003 703,000
2004 127,000
----------------
Total 7,151,000
Less amount representing interest (1,096,000)
----------------
Present value of minimum lease payments 6,055,000
Less current maturities 3,157,000
----------------
$ 2,898,000
================
F-20
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
8. LOANS AND NOTES PAYABLE TO STOCKHOLDERS
Loans payable to stockholders consist of four loans aggregating approximately
$619,000 on August 31, 1999, are payable on demand and bear interest at
approximately 8% per annum. Subsequent to August 31, 1999 $519,000 was repaid.
9. DISCONTINUED OPERATIONS
On July 15,1999, the Company adopted a plan to discontinue it's on demand print
and prepress business segment that had primarily served the independent graphic
artists in the New York, San Francisco and London markets. The Company has
restated the consolidated statements of operations for the years ended August
31, 1999, 1998 and 1997 to reflect the results of the on demand print and
prepress business as a discontinued operation.
The revenues of the on demand print and prepress business were approximately
$10,436,000, $19,124,000 and $17,575,000 for the years ended August 31, 1999,
1998 and 1997.
On August 18, 1999, the Company sold their New York operations for on demand
print and prepress for $2,250,000 in exchange for $500,000 in cash, a $1,500,000
note receivable and $250,000 in services. The San Francisco and London on demand
print and prepress business ceased operations and the closed or reallocated
their facilities to other segments, respectively, prior to August 31, 1999.
There were no remaining assets or liabilities related to the discontinuance of
the on demand print and prepress business as of August 31, 1999.
10. OTHER ASSETS
Included in other assets is a $1,500,000 note receivable related to the sale of
the New York on demand and prepress business. The note receivable requires
quarterly payments of principal and interest of $62,500 through June 2004 and a
balloon payment of $500,000 in June 2004.
F-21
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
11. 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 1,375,000.
Under the Stock Option Plans as of August 31, 1999 the Company granted options
to purchase Common stock as follows: (i) 106,667 shares at exercise prices
ranging from $4.50 to $7.75 per share, vesting six months after the date of
grant and are exercisable under the 1995 Stock Plan; (ii) no shares have been
granted under the 1995 Directors Plan; (iii) 756,857 shares at exercise prices
ranging from $4.00 to $9.63 per share, vesting, in part, on the date of grant
exercisable under the 1997 Plan and; (iv) 60,000 shares at an exercise prices
ranging from $4.31 to $5.53 per share, vesting on the date of grant and are
exercisable 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 Stock Option Plans, which expire in February 2002,
to purchase 50,000 shares of common stock at $6.00 per share.
F-22
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
11. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended August 31, 1999, 1998 and 1997 is as follows:
Weighted Average
Options Exercise Price
-----------------------------------------
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
Granted 606,667 $4.51
Exercised (211,592) $4.70
Forfeited (84,617) $6.74
========================================
Outstanding--August 31, 1999 973,524 $5.49
========================================
Exercisable--August 31, 1997 299,103 $5.54
========================================
Exercisable--August 31, 1998 409,733 $5.93
========================================
Exercisable--August 31, 1999 602,586 $5.72
========================================
Pro forma information regarding net income (loss) and earnings (loss) 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, 1999, 1998 and 1997:
ASSUMPTION 1999 1998 1997
---------------------------------------------------
Risk-free rate 4.5 - 5.9% 5.5 - 6.9% 5.9 - 6.9%
Dividend yield - - -
Volatility factor of the
expected market price of
the Company's common stock .6 - .8 .4 - 1.1 .4 - .6
Average life 5 years 5 years 5 years
F-23
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
11. 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,
-----------------------------------------------------
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
Pro forma net (loss) income $(11,565,000) $954,000 $1,142,000
Pro forma net (loss) income per share:
Basic $(2.21) $0.27 $0.36
Diluted $(2.21) $0.25 $0.35
</TABLE>
The weighted average fair value of options granted during the years ended August
31, 1999, 1998 and 1997 were $2.85, $4.46 and $2.50, respectively. The weighted
average remaining contractual life of the options outstanding at August 31, 1999
is 8.6 years.
F-24
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
12. INCOME TAXES
The following comprises income tax expense related to continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998 1997
-----------------------------------------------------------
<S> <C> <C> <C>
U.S. income taxes:
Current $1,302,000 $ 252,000 $ 9,000
Deferred 851,000 249,000 44,000
-----------------------------------------------------------
2,153,000 501,000 53,000
-----------------------------------------------------------
United Kingdom income taxes:
Current 65,000 302,000 431,000
Deferred 131,000 51,000 2,000
-----------------------------------------------------------
196,000 353,000 433,000
-----------------------------------------------------------
Total $2,349,000 $ 854,000 $ 486,000
===========================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
Year ended August 31,
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Use of cash basis for United States income tax
purposes $ - $ 88,000 $ 175,000
Difference in depreciation and amortization methods 1,925,000 905,000 591,000
-------------------------------------------------
Total deferred tax liability 1,925,000 993,000 766,000
Less deferred tax asset:
Allowance for doubtful accounts (249,000) (143,000) (122,000)
Net operating loss (9,246,000)
Primarily difference in reporting of royalty - (101,000) (199,000)
Other (36,000) - -
-------------------------------------------------
Net deferred tax liability $ (7,606,000) $ 749,000 $ 445,000
=================================================
</TABLE>
F-25
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
12. INCOME TAXES (CONTINUED)
At August 31, 1999 the Company has net operating loss carryforwards of
approximately $20,152,000 which expires in 2019.
The following reconciles income tax expense, computed in the United States
Federal statutory rate to income tax expense.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Income taxes at United States Federal statutory rate $ 1,635,000 $ 636,000 $ 537,000
State and local income taxes 671,000 95,000 56,000
Nondeductible expenses and differences between
United States and United Kingdom tax rates 43,000 123,000 (107,000)
------------------------------------------------------
Total $ 2,349,000 $ 854,000 $ 486,000
======================================================
</TABLE>
13. STOCKHOLDERS' EQUITY
AMENDMENT TO CERTIFICATE OF INCORPORATION
In May, 1999, the Company filed an amendment to its Certificate of Incorporation
increasing the Company's authorized shares of Common stock from 10,000,000 to
25,000,000 and the Company's authorized shares of Preferred Stock from 5,000,000
to 10,000,000
SHARES RESERVED
As of August 31, 1999, the Company has reserved for issuance of 2,607,000 shares
of common stock as follows: (i) 1,375,000 shares of common stock issuable upon
exercise of options granted or allowed to be granted under its Stock Option
Plans; (ii) 50,000 shares of common stock upon exercise of options granted in
connection with an acquisition in the UK; (iii) 92,000 shares of common stock
issuable upon exercise of warrants issued to the managing underwriter in
connection with the initial public offering, exercisable at a price of $7.20 per
share in February 2001; (iv) 400,000 shares of common stock issuable upon
exercise of warrants issued in connection with loans to the Company; (v) 25,000
shares of common stock upon exercise of warrants (vi) 225,000 shares of common
stock issuable upon exercise of warrants issued to the stockholder of
SuperGraphics and (vii) 440,000 shares of common stock upon exercise of the
warrants issue in connection with the November 1998 financing.
F-26
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share pursuant to FASB Statement No. 128, "Earnings per Share":
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share-net (loss) income
available for common stockholders $(10,959,000) $1,136,000 $1,341,000
======================================================
Denominator:
Denominator for basic earnings per
share weighted average shares 5,225,294 3,530,836 3,212,098
Effect of dilutive securities:
Stock options -- 74,971 34,760
Warrants -- 173,631 36,421
------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 5,225,294 3,779,438 3,283,279
======================================================
</TABLE>
The following securities have been excluded from the dilutive per share
computation, as they are antidilutive:
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
Stock options 974,000 41,000 125,000
Warrants 1,182,000 117,000 92,000
F-27
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
15. 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:
TOTAL PREMISES EQUIPMENT
-------------------------------------------------
Year ending August 31,
2000 $ 3,037,000 $ 2,189,000 $ 848,000
2001 2,858,000 2,162,000 696,000
2002 2,653,000 2,170,000 483,000
2003 1,843,000 1,399,000 444,000
2004 1,366,000 1,057,000 309,000
Thereafter 3,483,000 3,435,000 48,000
---------------------------------------------------
Total $ 15,240,000 $ 12,412,000 $ 2,828,000
===================================================
Aggregate rental expense for the years ended August 31, 1999, 1998 and 1997
approximated $2,198,000, $1,077,000 and $515,000, respectively.
16. 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 two reportable segments: the media solutions division and
premedia services division. The segment information for 1998 and 1997 has been
restated to conform to the 1999 segment reporting format.
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.
F-28
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
16. SEGMENT INFORMATION (CONTINUED)
The following summarizes the operations by geographic segment for the years
ended August 31, 1998, 1998 and 1997:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------
UNITED UNITED UNITED UNITED UNITED UNITED
STATES KINGDOM STATES KINGDOM STATES KINGDOM
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 49,251,000 $ 13,523,000 $ 14,979,000 $ 14,527,000 $ 2,576,000 $ 9,993,000
Income from operations 9,812,000 1,326,000 3,650,000 778,000 538,000 1,677,000
Identifiable assets 99,432,000 19,204,000 56,528,000 10,787,000 24,309,000 8,724,000
Depreciation and
amortization 4,493,000 1,428,000 2,742,000 1,212,000 1,376,000 818,000
Capital expenditures 1,410,000 592,000 1,095,000 476,000 904,000 464,000
</TABLE>
The following summarizes operations by industry segment for the years ended
August 31, 1999, 1998 and 1997:
AUGUST 31, 1999
-------------------------------------------------
Media Premedia
Solutions Services Total
-------------------------------------------------
Net sales $ 28,881,000 $ 33,893,000 $ 62,774,000
Income from
operations 5,140,000 5,998,000 11,138,000
Identifiable assets 69,650,000 48,986,000 118,636,000
Depreciation and
amortization 2,333,000 3,588,000 5,921,000
Capital expenditures $ 1,038,000 $ 964,000 $ 2,002,000
F-29
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
16. Segment Information (continued)
AUGUST 31, 1998
------------------------------------------------------
MEDIA PREMEDIA
SOLUTIONS SERVICES TOTAL
------------------------------------------------------
Net sales $ 9,275,000 $ 20,231,000 $ 29,506,000
Income from
operations 951,000 3,477,000 4,428,000
Identifiable assets 18,763,000 48,552,000 67,315,000
Depreciation and
amortization 940,000 3,014,000 3,954,000
Capital expenditures 237,000 1,334,000 1,571,000
AUGUST 31, 1997
------------------------------------------------------
MEDIA PREMEDIA
SOLUTIONS SERVICES TOTAL
------------------------------------------------------
Net sales $ 3,227,000 $ 9,342,000 $ 12,569,000
Income from
operations 655,000 1,560,000 2,215,000
Identifiable assets 6,651,000 26,382,000 33,033,000
Depreciation and
amortization 319,000 1,875,000 2,194,000
Capital expenditures 147,000 1,221,000 1,368,000
17. 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, 1999, 1998 and 1997.
F-30
<PAGE>
Unidigital Inc.
Notes to Consolidated Financial Statements
August 31, 1999
18. EXTRAORDINARY ITEM
In connection with the termination of its existing credit facility (see Note 6),
the Company recorded an extraordinary loss of $1,828,000, net of an income tax
benefit of $1,114,000, related to the write-off of the unamortized balance of
deferred financing costs associated with its existing credit facility.
19. LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business and have not been adjudicated. In the opinion of
management, settlement of these actions, when ultimately concluded, will not
have a material adverse effect on the results of operations, cash flows or
financial condition of the Company.
20. SUBSEQUENT EVENTS
In September 1999, the Company issued $20 million of senior subordinated notes
of which $10 million matures in 2005 and 2006. The notes bear interest at 14%
per annum, comprised of a 12% payable semiannually and a 2% payment-in-kind
coupon. The Company used $11.5 million of the proceeds from such notes to repay
the existing subordinated loan ($10,000,000) plus the related investment fee
($1,500,000).
In September and November 1999, the Company sold its remaining two floors in a
building for $2,435,000.
F-31
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
UNIDIGITAL INC.
<TABLE>
<CAPTION>
Additions - Additions - Deductions
Balance at Charged to Charged to -Write-off Balance at
Beginning Costs and Other of Accounts end of
Description of Period Expenses Accounts Receivable Period
----------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED AUGUST 31, 1999
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts 581,000 321,000 370,000 1 528,000 744,000
YEAR ENDED AUGUST 31, 1998
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts 266,000 115,000 250,000 2 50,000 581,000
YEAR ENDED AUGUST 31, 1997
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts 201,000 102,000 - 37,000 266,000
</TABLE>
1) Part of Net Assets acquired from SuperGraphics, Interface Graphics,
PrePress Services, and Big Bills
2) Part of Net Assets acquired from Kwik
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION, AS AMENDED
OF
UNIDIGITAL INC.
Pursuant to Section 242 of the Delaware General Corporation Law, the
undersigned corporation executes this Certificate of Amendment to its
Certificate of Incorporation, as amended.
1. Article SIXTH of the Corporation's Certificate of Incorporation, as
amended, is amended to provide in its entirety:
"SIXTH: CAPITAL STOCK
The aggregate number of shares of all classes of capital stock which
the Corporation shall have authority to issue is thirty-five million
(35,000,000) shares, of which twenty-five million (25,000,000) shares
shall be common stock, par value $0.01 per share (the "Common Stock"), and
ten million (10,000,000) shares shall be preferred stock, par value $0.01
per share (the "Preferred Stock").
Shares of Preferred Stock may be issued in one or more series. The
number of shares included in any series of Preferred Stock and the full or
limited voting rights, if any, the cumulative or non-cumulative dividend
rights, if any, the conversion, redemption or sinking fund rights, if any,
and the priorities, preferences and relative, participating, optional and
other special rights, if any, in respect of the Preferred Stock, any
series of Preferred Stock or any rights pertaining thereto, and the
qualification, limitations or restrictions on the Preferred Stock, any
series of Preferred Stock or any rights pertaining thereto, shall be those
set forth in the resolution or resolutions providing for the issuance of
the Preferred Stock or such series of Preferred Stock adopted at any time
and from time to time by the affirmative vote of a majority of the total
number of directors which the Corporation would have if there were no
vacancies on the Board of Directors of the Corporation (the "Board") at
the time of the vote (the "Whole Board") on such resolution or resolutions
and filed with the Secretary of State of the State of Delaware. The Board
is hereby expressly vested with authority, to the full extent now or
hereafter provided by the Law, to adopt any such resolution or
resolutions."
<PAGE>
2. The foregoing amendment has been duly adopted in accordance with the
provisions of Section 242 of the Delaware Corporation Law.
*******
<PAGE>
IN WITNESS WHEREOF, this Certificate of Amendment is made this 14th day
----
of May, 1999.
---
UNIDIGITAL INC.
By:/s/William E. Dye
------------------------------------
William E. Dye, Chairman of
the Board and Chief Executive Officer
ATTEST:
By:/s/Peter Saad
-------------------------------
Peter Saad, Assistant Secretary
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of this 15th day of
December, 1998, is by and between Unidigital Inc., a Delaware corporation with
an office for purposes of this Agreement at 20 West 20th Street, New York, New
York 10011 (hereinafter the "Company" or "Employer") and Peter Saad with an
address at 328 Albany Street, New York, New York 10280 (hereafter the
"Employee").
W I T N E S S E T H :
WHEREAS:
(a) Company wishes to engage the services of Employee to render services
for and on its behalf in accordance with the following terms, conditions and
provisions; and
(b) Employee wishes to perform such services for and on behalf of the
Company, in accordance with the following terms conditions and provisions.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
herein contained the parties hereto intending to be legally bound hereby agree
as follows:
1. EMPLOYMENT
----------
Company hereby employs Employee and Employee accepts such employment and
shall perform his duties and the responsibilities provided for herein in
accordance with the terms and conditions of this Agreement principally in New
York City, New York.
1
<PAGE>
2. EMPLOYMENT STATUS
-----------------
Employee shall at all times be Company's employee subject to the terms and
conditions of this Agreement.
3. TERM
----
The term of this Agreement shall commence on December 15, 1998, and shall
terminate on December 31, 2000, (the "Term"), and may be extended upon mutually
agreed to terms and conditions.
4. POSITION
--------
During Employee's employment hereunder, Employee shall serve as President
of the Company. In such positions, Employee shall have the customary powers,
responsibilities and authorities of officers in such positions of corporations
of the size, type and nature of the Company. Employee shall perform such duties
and exercise such powers commensurate with his position and responsibilities as
shall be reasonably determined from time to time by William Dye, currently the
Chairman of the Board, President and Chief Executive Officer of the Company and
shall report directly to William Dye and only to William Dye. Employee shall be
provided with an office, staff and other working facilities consistent with his
position and as required for the performance of his duties and as reasonably
determined by William Dye. Employee will continue to serve on the Company's
Board of Directors during the Term and so long as he is employed by the Company
hereunder. At such time as Employee's employment
2
<PAGE>
hereunder ceases, for any reason whatsoever, Employee shall immediately submit
his resignation as a member of the Company's Board of Directors.
5. COMPENSATION
------------
(a) For the performance of all of Employee's services to be rendered
pursuant to the terms of this Agreement, Company will pay and Employee will
accept the following compensation:
Base Salary. During the Term, Company shall pay the Employee an initial
-------------
base annual salary of $500,000 (the "Base Salary") payable in regular
installments in accordance with the Company's usual payment practices (which
currently is in equal biweekly installments). Employee shall be entitled to such
further increases, if any, in his Base Salary as may be determined from time to
time in the sole discretion of William Dye; but, in any event, Employee shall be
entitled to receive an annual increase equal to the increase in the CPI for the
New York Metropolitan Area over the base period, as hereinafter used, on an
annual basis. The base period for determining whether Employee shall be entitled
to any increase in the Base Salary shall be the month of December 1998. The
increase in the Base Salary, if any, will be based upon the amount the CPI
increased from December 1998 to December 1999 and if there is an increase it
shall be effective in January 1999. Employee's Base Salary, as in effect from
time to time, is hereinafter referred to as the "Employee's Base Salary".
(b) Company shall deduct and withhold from Employee's compensation all
required taxes, including but not limited to Social Security, withholding and
otherwise, and any other applicable amounts required by law or any taxing
authority.
3
<PAGE>
6. EMPLOYMENT BENEFITS
-------------------
During the Term hereof and so long as Employee is not terminated, Employee
shall receive and be provided health insurance benefits including medical and
hospitalization, and other such programs established by the Company,
(collectively "Employee Benefits") on the same basis as those other benefits are
generally made available to the executives of the Company provided Employee
qualifies for them.
Pursuant to a prior employment agreement between the parties, the terms of
which are superseded by this Agreement, Employee received the option to purchase
125,000 shares of the Company's common stock. Those options are now fully vested
Upon the execution of this Agreement, Employee shall receive the option to
purchase a further 75,000 shares of the common stock of the Company in
accordance with the procedures and provisions of the Company's current Stock
Option plan. Said options shall vest immediately upon the execution of this
Agreement.
In the event this Agreement is terminated:
(a) by Employer with cause, any stock option rights that are then vested
shall remain vested in Employee consistent with the terms of this Agreement and
any unvested stock option rights shall be forfeited ab initio;
(b) by Employer without cause, any stock option rights that are then
vested and any stock options rights that will be vested within three (3) months
from the date of the termination shall be and remain vested in Employee
consistent with the terms of this Agreement and any unvested stock option rights
not due to vest within three (3) months shall be forfeited ab initio;
4
<PAGE>
(c) by Employee, any stock option rights that are then vested shall
remain vested in Employee consistent with the terms of this Agreement and any
unvested stock option rights shall be forfeited ab initio; and
(d) by virtue of the expiration of the Term, Employee shall retain all
vested option rights for a period of ninety (90) days if the shares underlying
the options have been registered and for a period of two (2) years for the
options on underlying shares that are unregistered. Employee shall be entitled
to receive not less than six weeks vacation for year one and four weeks vacation
for year two during the Term and Employee may accrue vacation or receive
compensation for unused vacation at the current level.
7. BUSINESS EXPENSES AND PERQUISITES
---------------------------------
(a) Employee shall be entitled to receive reimbursement from the
Company for reasonable travel (business class), entertainment and other business
expenses incurred by Employee in the performance of his duties hereunder and
such amount shall be reimbursed by the Company on a monthly basis and in
accordance with Company policies then in effect.
(b) Employee shall be entitled to an automobile allowance of $750 per
month during the Term and so long as Employee's employment hereunder is not
terminated.
8. TERMINATION
-----------
(a) For Cause by the Company
------------------------
(i) Employee's employment hereunder may be terminated by the Company
for cause. For purposes of this Agreement, "cause" shall mean (u) Employee's
willful
5
<PAGE>
dishonesty that is serious enough to have a materially detrimental effect upon
the Company's best interests, (v) Employee's gross negligence provided such acts
relate to the Company, (w) Employee's breach of a material term or provision of
this Agreement which is not cured or ceased within thirty (30) days after
forwarding to Employee written notice setting forth the breach, (x) Employee's
misconduct of a nature that is serious enough to have a materially detrimental
effect upon the Company's best interest, (y) Employee's unjustified failure to
perform his duties hereunder or to follow reasonable directions of William Dye,
the Company's Board of Directors, which is not cured or ceased within thirty
(30) days after forwarding to Employee written notice setting forth the breach,
and (z) Employee's conviction of, or plea of nolo contendere to, any crime
constituting a felony under the laws of the United States or any State thereof,
or any crime constituting or involving moral turpitude.
(ii) If Employee is terminated for cause, he shall be entitled to
receive Employee's Base Salary from Company through the date of termination and
Employee shall be entitled to no other payments of Employee's Base Salary under
this Agreement. Under all circumstances Employee shall keep his options which
have vested. All other benefits, if any, due Employee following Employee's
termination of employment pursuant to this Subsection 8 (a) shall be determined
in accordance with the plans, policies and practices of the Company for
executives.
(b) Disability or Death.
--------------------
(i) Employee's employment hereunder shall terminate upon his death
or if Employee becomes physically or mentally incapacitated and is therefore
unable (or will as a result thereof, be unable) for a period of four (4)
consecutive months or for an
6
<PAGE>
aggregate of eight (8) months in any twenty-four (24) consecutive month period
to perform his duties (such incapacity is hereinafter referred to as
"Disability"). Any question as to the existence of the Disability of Employee as
to which Employee and the Company cannot agree shall be determined in writing by
a qualified independent physician mutually acceptable to Employee and the
Company. If Employee and the Company cannot agree as to a qualified independent
physician, each shall appoint such a physician and those two physicians shall
select a third who shall make such determination in writing to the Company and
Employee shall be final and conclusive for all purposes of this Agreement.
(ii) Upon termination of Employee's employment hereunder during the
Term as a result of death, Employee's estate or named beneficiary (ies) shall
receive from the Company (x) Employee's Base Salary at the rate in effect at the
time of Employee's death through the end of the month in which his death occurs
and (y) the proceeds of any life insurance policy maintained for his benefit by
the Company.
(iii) All other benefits, if any, due Employee following Employee's
termination of employment pursuant to this Subsection 8 (b) shall be determined
in accordance with the plans, policies and practices of the Company.
(c) Without Cause by the Company.
-----------------------------
(i) If Employee's employment is terminated by the Company without
cause (other than by reason of Disability or death), then Employee shall be
entitled to payment from the Company, in an amount equal to six (6) months of
Employee's Base Salary to be paid to Employee during immediately succeeding next
bi-weekly intervals. All other benefits, if any, due Employee following
Employee's termination of
7
<PAGE>
employment pursuant to this Subsection 8 (c) (i) shall be paid for the first six
(6) months immediately following Employee's termination hereunder. Also, any
stock options rights that are then vested and any stock option rights that will
be vested within three months from the date of the termination shall be and
remain vested in Employee consistent with the terms of this agreement. If
Employer lawfully terminates employment hereunder, Employee shall have two (2)
years from the date of termination to exercise vested options, if any, if the
underlying shares are unregistered; and if the underlying share are registered,
then Employee shall have ninety (90) days from the date of termination to
exercise vested options, if any.
(d) Termination by Employee. If Employee wishes to terminate his
-------------------------
employment with the Company for any reason, Employee must afford Company with at
least three full months written notice of termination. Such termination by
Employee shall not be deemed a breach of this Agreement. If Employee lawfully
terminates his employment hereunder, Employee shall have two (2) years from the
date of termination to exercise vested options, if any, if the underlying shares
are unregistered; and if the underlying shares are registered, then Employee
shall have ninety (90) days from the date of termination to exercise vested
options, if any.
(e) Change of Control. For purpose of this Agreement "Change of Control"
-----------------
shall mean (i) any transaction or series of transactions (including, without
limitation, a tender offer, merger or consolidation) the result of which is that
any "person" or "Group" (within the meaning of Sections 13(d) and 14(d) (2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), becomes
the "beneficial" owners (as defined in Rule 13 (d) (3) under the Securities
Exchange Act of 1934) of more than fifty percent
8
<PAGE>
(50%) of the total aggregate voting power of all classes of the voting stock of
the Company and/or warrants or options to acquire such voting stock, calculated
on a fully diluted basis, or (ii) a sale of assets constituting all or
substantially all of the assets of the Company (determined on a consolidated
basis). In the event of such a Change of Control the new entity shall be
obligated to perform the Company's obligation under the terms of this Agreement.
9. NON-DISCLOSURE OF INFORMATION
-----------------------------
Employee acknowledges that by virtue of his position he will be privy to
the Company's trade secrets including but not limited to Company's customer list
and private processes, as they may exist or as Company may determine from time
to time, and that such secrets are valuable, special, and unique assets of
Company's business and constitute confidential information and trade secrets of
Employer (hereafter collectively "Confidential Information"). Employee shall
not, while employed hereunder and for a period of twenty four (24) months
thereafter, intentionally disclose all or any part of the Confidential
Information to any person, firm, corporation, association or any other entity
for any reason or purpose whatsoever, nor shall Employee and any other person
by, through or with Employee, while employed hereunder and for a period of
twenty four months (24) thereafter, intentionally make use of any of the
Confidential Information for any purpose or for the benefit of any other person
or entity, other than Company, under any circumstances. Company and Employee
agree that a violation of the foregoing covenants will cause irreparable injury
to the Company, and that in the event of a breach
9
<PAGE>
or threatened breach by Employee of the provisions of this Section, Company
shall be entitled to an injunction restraining Employee from:
(a) Disclosing, in whole or in part, any Confidential Information to any
person, firm, corporation, association or other entity to whom any such
information, in whole or in part, has been disclosed or is threatened to be
disclosed in violation of this Agreement.
(b) Continuing such injurious actions.
Nothing herein stated shall be constructed as prohibiting the Company from
pursuing any other rights and remedies, at law or in equity, available to the
Company for such breach or threatened breach, including the recovery of damages
from the Employee.
10. RESTRICTIVE COVENANT.
---------------------
Without the prior written approval of the Company's Board of Directors
first obtained:
(a) For a period of three (3) months after the termination of this
Agreement irrespective of whether Employee is desirous of extending the Term or
Employer is desirous of extending the Term, Employee covenants and agrees that,
within a radius of twenty five (25) miles from each of the then present place
(s) of Company's business or any other area in which Company is engaged in
business, he shall not own, manage, operate, control, be employed by,
participate in, or be connected in any manner with the ownership, management,
operation, or control, whether directly or indirectly, as an individual on his
own account, or as a partner, member, joint venture, officer, director or
shareholder of a corporation or other entity (this excludes ownership of less
than five
10
<PAGE>
(5%) percent of any public company), of any business similar to or competitive
with the type of business conducted by Company at the time of the termination or
expiration of this Agreement and for an additional three (3) months immediately
thereafter Employee further covenants and agrees he shall not, directly or
indirectly, in any manner whatsoever interfere with, solicit or disrupt or
attempt to interfere with, solicit or disrupt the relationship, contractual or
otherwise, between Company and any customer, supplier, lessee or employee of
Company, its parent or subsidiaries. Employer shall have the absolute right to
extend the three (3) month non-compete, non-solicitation period for up to an
additional eighteen (18) months upon the transmission of written notice to
Employee. Employer shall notify Employee of its intent to exercise the option at
the expiration of the initial three (3) month cumulative period. If the Employer
chooses to extend the initial three (3) month period then the Employer shall
make the contemporaneous payment to Employee of a sum equal to fifty (50%)
percent of Employee's Base Salary for the period that Employer is desirous of
extending the period. Such right may be exercised on a month-to-month basis by
Employer upon 30 days notice.
(b) For the periods set forth in the immediately preceding subparagraph
(a) Employee covenants and agrees that within a radius of twenty-five (25) miles
from each of the then present place (s) of Company's business or any other area
in which Company is engaged in business, he shall not render any services to any
person, firm, corporation, association or other entity to whom any confidential
information in whole or in part, has been disclosed or is threatened to be
disclosed in violation of this Agreement.
11
<PAGE>
(c) Company and Employee agree that a violation of either of the foregoing
covenants will cause irreparable injury to the Company, and that in the event of
a breach or threatened breach by Employee of the provisions of this Section,
Company shall be entitled to an injunction.
(d) Employee acknowledges that the restrictions contained in this
Paragraph 10 are reasonable. In that regard, it is the intention of the parties
to this Agreement that the provisions of this Paragraph 10 shall be enforced to
the fullest extent permissible under the law and public policy applied in each
jurisdiction in which enforcement is sought. Accordingly, if any portion of this
Paragraph 10 shall be adjudicated or deemed to be invalid or unenforceable, the
remaining portions shall remain in full force and effect, and such invalid or
unenforceable portion shall be limited to the particular jurisdiction in which
such adjudication is made.
11. BREACH OR THREATENED BREACH OF COVENANTS.
-----------------------------------------
In the event of Employee's actual or threatened breach of his obligations
under either Paragraph 9 or 10, or both, of this Agreement, in addition to any
other remedies Company may have, Company shall be entitled to obtain a temporary
restraining order and a preliminary and/or permanent injunction restraining the
other from violating these provisions. Nothing in this Agreement shall be
constructed to prohibit Company from pursuing and obtaining any other available
remedies which Company may have for such breach or threatened breach, whether at
law or in equity, including the recovery of damages from the other.
12
<PAGE>
12. REPRESENTATIONS AND WARRANTIES BY EMPLOYEE.
-------------------------------------------
Employee hereby warrants and represents that he is not subject to or a
party to any restrictive covenants or other agreements that in any way preclude,
restrict, restrain or limit him (a) from being an Employee of Company, (b) from
engaging in the business of Company in any capacity, directly or indirectly, and
(c) from competing with any other persons, companies, businesses or entities
engaged in the business of Company.
13. NOTICES.
--------
Any notice required, permitted or desired to be given under this Agreement
shall be sufficient if it is in writing and (a) personally delivered to Employee
or an authorized member of Company, (b) sent by overnight delivery, or (c) sent
by registered or certified mail, return receipt requested, to Employer's or
Employee's address as provided in this Agreement or to a different address
designated in writing by either party. In all instances of notices to be given
to Company, a copy by like means shall be delivered to Company's counsel care of
Buchanan Ingersoll, College Centre, 500 College Road East, Princeton, New Jersey
08540. In all instance of notices to be given to Employee, a copy by like means
shall be delivered to Employee's counsel care of Kleinberg, Kaplan, Wolff &
Cohen, P.C., 551 Fifth Avenue, New York, New York 10176, Attn: Fredric A.
Kleinberg, Esq.. Notice is deemed given on the day it is delivered personally or
by overnight delivery, or five (5) business days after it is received, if
transmitted by the United States Post Office.
13
<PAGE>
14. ASSIGNMENT.
-----------
Employee acknowledges that his services are unique and personal.
Accordingly, Employee may not assign his rights or delegate his duties or
obligations under this Agreement. Company's rights and obligations under this
Agreement shall inure to the benefit of and shall be binding upon the Company's
successors and assigns. Company has the absolute right to assign it's rights and
benefits under the terms of this Agreement.
15. WAIVER OF BREACH.
-----------------
Any waiver of a breach of a provision of this Agreement, or any delay or
failure to exercise a right under a provision of this Agreement, by either
party, shall not operate or be construed as a waiver of that or any other
subsequent breach or right.
16. ENTIRE AGREEMENT.
-----------------
This Agreement contains the entire agreement of the parties. It may not be
changed orally but only by an agreement in writing which is signed by the
parties. The parties hereto agree that any existing employment agreement between
them shall terminate as of the date of this Agreement. All options allocated for
the Term as a non-executive director are to be granted on a pro rata basis for
the time served by Employee in such capacity. These options vest upon the grant
and employee shall have ten (10) years from the date of this Agreement to
exercise these options irrespective of Employee's relationship with the Company.
14
<PAGE>
17. GOVERNING LAW.
--------------
This Agreement shall be construed in accordance with and governed by the
internal laws of the State of New York.
18. SEVERABILITY
------------
The invalidity or non-enforceability of any provision of this Agreement or
application thereof shall not affect the remaining valid and enforceable
provisions of this Agreement or application thereof.
19. CAPTIONS
--------
Captions in this Agreement are inserted only as a matter of convenience and
reference and shall not be used to interpret or construe any provisions of this
Agreement.
20. GRAMMATICAL USAGE
-----------------
In construing or interpreting this Agreement, masculine usage shall be
substituted for those feminine in form and vise versa, and plural usage shall be
substituted or singular and vice versa, in any place in which the context so
requires.
21. CAPACITY.
---------
Employee has read and is familiar with all of the terms and conditions of
this Agreement and has the capacity to understand such terms and conditions
hereof. By executing this Agreement, Employee agrees to be bound by this
Agreement and the terms and conditions hereof.
15
<PAGE>
22. COUNTERPARTS
------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be original, but all of which together shall constitute one
and the same Agreement.
23. ARBITRATION
-----------
Notwithstanding anything herein to the contrary, but except for any
injunction provisions provided for in this Agreement, any claim, dispute or
controversy arising from, related to, involving or pertaining to the terms or
provisions of or relationship created by this Agreement shall be submitted to
binding arbitration under the rules of the American Arbitration Association then
obtaining in the County, City and State on New York and any award or
determination by the American Arbitration Association shall be final and binding
upon the parties. Any such award or determination shall be capable of being
submitted to the United States District Court Southern District of New York or
the New York State Supreme Court for the County of New York as a final judgment
- -- and the parties hereto consent to the jurisdiction of said courts as the
Courts with the sole and exclusive jurisdiction. Each party shall bear his or
its own costs, including but not limited to attorneys' fees, of such arbitration
proceedings.
16
<PAGE>
24. REPRESENTATIVE BY THE COMPANY.
------------------------------
Company hereby represents that this Agreement is duly and validly
authorized and enforceable against the Company in accordance with its terms;
similarly all options granted herein have been duly and validly authorized.
25. SUPERSEDING AGREEMENT. The parties understand and agree that this
------------------------
Agreement contains the entire agreement of the parties with respect to the
subject matter hereof and supersedes all previous agreements and
understandings between the parties with respect to its subject matter.
IN WITNESS WHEREOF, each of the parities hereto has executed this Agreement
as of the date first hereinabove written.
UNIDIGITAL INC.
/s/ William E. Dye
-----------------------------
By: William E. Dye
/s/ Peter Saad
-----------------------------
Peter Saad
17
<PAGE>
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
report dated December 3, 1999, 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, 1999.
Ernst & Young LLP
December 29, 1999
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, 1999 and for the twelve month
period ended August 31, 1999 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-31-1999
<PERIOD-START> Sep-01-1998
<PERIOD-END> Aug-31-1999
<EXCHANGE-RATE> 1
<CASH> 734,000
<SECURITIES> 0
<RECEIVABLES> 17,532,000
<ALLOWANCES> (744,000)
<INVENTORY> 0
<CURRENT-ASSETS> 25,966,000
<PP&E> 25,876,000
<DEPRECIATION> (9,956,000)
<TOTAL-ASSETS> 118,636,000
<CURRENT-LIABILITIES> 22,457,000
<BONDS> 0
0
0
<COMMON> 59,000
<OTHER-SE> 16,252,000
<TOTAL-LIABILITY-AND-EQUITY> 118,636,000
<SALES> 62,774,000
<TOTAL-REVENUES> 62,774,000
<CGS> 30,003,000
<TOTAL-COSTS> 30,003,000
<OTHER-EXPENSES> 21,633,000
<LOSS-PROVISION> 321,000
<INTEREST-EXPENSE> 6,384,000
<INCOME-PRETAX> 4,810,000
<INCOME-TAX> 2,349,000
<INCOME-CONTINUING> 2,461,000
<DISCONTINUED> (11,592,000)
<EXTRAORDINARY> (1,828,000)
<CHANGES> 0
<NET-INCOME> (10,959,000)
<EPS-BASIC> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements at August 31, 1998 and for the twelve month
period ended August 31, 1998 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> 287,000
<SECURITIES> 0
<RECEIVABLES> 17,498,000
<ALLOWANCES> (581,000)
<INVENTORY> 0
<CURRENT-ASSETS> 23,291,000
<PP&E> 21,738,000
<DEPRECIATION> (7,147,000)
<TOTAL-ASSETS> 67,315,000
<CURRENT-LIABILITIES> 15,407,000
<BONDS> 0
0
0
<COMMON> 39,000
<OTHER-SE> 14,354,000
<TOTAL-LIABILITY-AND-EQUITY> 67,315,000
<SALES> 29,506,000
<TOTAL-REVENUES> 29,506,000
<CGS> 14,892,000
<TOTAL-COSTS> 14,892,000
<OTHER-EXPENSES> 10,186,000
<LOSS-PROVISION> 115,000
<INTEREST-EXPENSE> 2,496,000
<INCOME-PRETAX> 1,946,000
<INCOME-TAX> 854,000
<INCOME-CONTINUING> 1,092,000
<DISCONTINUED> 187,000
<EXTRAORDINARY> (143,000)
<CHANGES> 0
<NET-INCOME> 1,136,000
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
<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-31-1997
<PERIOD-START> Sep-01-1996
<PERIOD-END> Aug-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,203,000
<SECURITIES> 0
<RECEIVABLES> 10,019,000
<ALLOWANCES> (266,000)
<INVENTORY> 0
<CURRENT-ASSETS> 15,251,000
<PP&E> 16,160,836
<DEPRECIATION> (4,261,361)
<TOTAL-ASSETS> 33,033,000
<CURRENT-LIABILITIES> 17,904,000
<BONDS> 0
0
0
<COMMON> 32,000
<OTHER-SE> 9,441,000
<TOTAL-LIABILITY-AND-EQUITY> 33,033,000
<SALES> 12,569,000
<TOTAL-REVENUES> 12,569,000
<CGS> 6,733,000
<TOTAL-COSTS> 6,733,000
<OTHER-EXPENSES> 3,581,000
<LOSS-PROVISION> 102,000
<INTEREST-EXPENSE> 711,000
<INCOME-PRETAX> 1,653,000
<INCOME-TAX> 486,000
<INCOME-CONTINUING> 1,167,000
<DISCONTINUED> 174,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,341,000
<EPS-BASIC> .41
<EPS-DILUTED> .41
</TABLE>
