<PAGE>
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for fiscal year ended March 31, 1997;
Commission file number: 1-12967
NEI WEBWORLD, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2524630
(State of (IRS employment
incorporation) identification no.)
4647 BRONZE WAY
DALLAS, TEXAS 75236 75236
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(214) 330-7273
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrants
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-B 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-KSB or any
amendment to this Form 10-KSB. [ ]
Registrant's revenue for the fiscal year ended March 31, 1997 was
$17,150,360.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 23, 1997 was approximately $4,067,000.
The number of shares of the registrant's common stock, $.01 par value,
outstanding as of June 23, 1997 was 3,719,778 shares.
Documents Incorporated by reference: None
Transmittal Small Business Disclosure Format: Yes NO X
--- ---
1
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
NEI WebWorld,Inc. (the "Company" or "WebWorld") owns and operates a
commercial printing facility and offers pre-press, printing and post-press
services to mid-and large-sized customers in the Southwestern United States.
Through its high production web presses, the Company offers a broad range of
services, including printing magazines, catalogs, tabloids, inserts and mail
wraps on a range of paper stocks. Through pre-press and post-press production
services, the Company provides customers with services such as converting
supplied data and information into printing plates and stapling, binding,
sorting and folding printed materials for mass mailing. The Company primarily
uses high production web presses to print materials which are often mass
produced and distributed; for example, the Company prints the weekly edition of
The Dallas Morning News TV Magazine.
The Company was incorporated in 1993 and acquired in 1994 the business of
Newspaper Enterprises, Inc., which primarily printed The Dallas Morning News TV
Magazine. Also in 1994, the Company acquired certain assets of Computer
Language Research, Inc., including three half-web presses and certain post-
production equipment. In September 1996, the Company purchased two full web
presses from The Webworks, Inc. ("Webworks"), a subsidiary of Morris Newspaper
Corporation, which has enabled the Company to increase operating efficiencies by
assigning presses to generally run specific types of paper stocks.
INDUSTRY BACKGROUND
The commercial printing industry is one of the largest and most fragmented
manufacturing industries in the United States, with total 1995 sales estimated
at $124 billion by Printing Industries of America, Inc. ("PIA"), a national
trade organization. PIA has estimated that there were approximately 25,174
commercial printing companies in the nation in 1995. Of these, approximately
13% (or 3,262) had over 20 employees. The printing services market includes
general commercial printing, financial printing, printing and publishing of
books, printing and publishing of newspapers and periodicals, quick printing,
and production of business forms and greeting cards. Within the printing
services market, the Company serves a portion of the general commercial printing
sector, which had total U.S. sales of approximately $40 billion in 1995, based
on PIA sources.
2
<PAGE>
BUSINESS STRATEGY
The Company plans to grow its business through the following expansion
strategy:
. IMPLEMENT INTEGRATED COMMERCIAL WEB PRESS FACILITY. With the acquisition
of the presses from Webworks and the planned relocation of these presses to
the Company's facilities, the Company will have nine presses, five of which
are high production web presses, in a centralized location. This critical
mass of printing capability will enable the Company to print a variety of
commercial, high volume materials and to dedicate presses to a particular
type of paper stock, reducing clean up time and achieving a higher press
utilization rate. In addition to expanded production capabilities, a
concentration of high production presses in one location as compared to
presses scattered among several locations will allow the Company to
minimize delivery and transportation costs and to achieve other operational
efficiencies. The Company intends to increase its pre-press and post-press
production services to appeal to a diversified customer base. The Company
believes that developing a series of high capacity, integrated web press
facilities capable of servicing the needs of most mid-to-large size users
of commercial printed materials will provide a sustainable, competitive
advantage.
. STRATEGIC ACQUISITIONS. The commercial printing industry is highly
fragmented and continues to undergo consolidation at all levels to meet
changing customer demands. The Company plans to target acquisitions of web
printers which will diversify its customer base, business mix and
geographical coverage.
. SINGLE-SOURCE SERVICE PROVIDER. WebWorld intends to expand its pre-
press and post-press capabilities to provide one-stop service for many of
its customers. The Company intends to purchase additional equipment to
expand the Company's pre-press and post-press production services such as
high speed binding and stitching, ink jetting, in-line finishing and
mailing. These value-added services often produce higher margins than
printing alone and are in demand by high-volume users.
. DEVELOP DIRECT MARKETING. In order to develop long-term relationships
with a broad and diverse customer base, WebWorld is expanding its in-house
marketing staff. The objective of this program is to produce a base of
recurring printing jobs on a regularly scheduled basis and then seek higher
margin value-added opportunities to utilize additional capacity. By
expanding the in-house marketing efforts, the Company plans to decrease its
historical pattern of using print brokers to fill excess capacity.
3
<PAGE>
PRINCIPAL SERVICES
The Company believes that by operating printing presses that vary in size
and capabilities, it can offer a broad range of printing and printing
related services. The Company's categories of printed materials are as
follows:
. MAGAZINES. The Company prints a variety of magazine products utilizing
various printing technologies. The Company is able to print materials that
combine different paper types and are bound and trimmed in a single
operation. Other magazines are produced on various presses and bound in
off line operations. Portions of magazines are also printed for inclusion
with other materials in a final product. Magazines are normally repetitive
and run on pre-defined schedules. The Company's customers in this area
include a daily newspaper and a large public university.
. CATALOGS. The Company prints a variety of catalogs, the basic
production of which is essentially the same as a magazine. This category
tends to be seasonal in nature and is much more sensitive to economic
conditions. The Company's customers in this category include local
community colleges and several large universities.
. TABLOIDS. The Company print a variety of tabloids which resemble
newspapers in various sizes. Tabloids range in size and complexity based
on subject matter. tabloids are often found inside of newspapers, in
magazine racks and are sold through subscription in highly targeted
markets. The Company's customers in this category include local daily
newspapers, a state lottery commission and local municipalities.
. INSERTS AND MAIL WRAPS. The Company prints inserts and mail wraps to
support the direct mail marketplace. The focus of this line is in smaller
to medium sized markets where a variety of products are required. the
Company's customers in this category include local daily newspapers and
marketing companies.
4
<PAGE>
CUSTOMERS
Due to the project-oriented nature of customers' requirements, sales to
particular customers may vary significantly from year to year depending upon the
number and size of their projects. The Company's single largest customer is The
Dallas Morning News, which accounted for approximately 56% and 55% of the
Company's sales in fiscal 1995 and 1996, respectively. Due to increased sales
volume to other customers, and a decrease in the printing of certain mail wrap
products, The Dallas Morning News accounted for approximately 35% of the
Company's sales in fiscal 1997.
Although the Company believes that its relations with its customers are
good, the termination of The Dallas Morning News TV Magazine contract or loss of
any other significant customer could have a material adverse effect on the
results of operation, financial condition and cash flows of the Company.
MARKETING AND SALES
The Company's business is service-oriented, and its primary marketing focus
is on responding rapidly to customer requirements. Responsiveness is essential
because of the typically short lead time on most printing jobs handled by the
Company. The Company's printing operations are designed to maintain maximum
flexibility to meet customer needs both on a scheduled and an emergency basis.
The Company targets those printing runs that will best utilize its equipment,
expertise and market orientation, and will maximize its profitability. Another
important aspect of the Company's marketing strategy is attention to quality and
price.
The Company initially focused its marketing efforts on its relationship
with The Dallas Morning News and filled excess capacity by selectively bidding
printing jobs through independent print brokers. The Company is now developing
an in-house professional marketing team and has recruited a sales staff of six
full time employees whose experience in the printing industry range from four to
30 years. The marketing team is led by a Vice President of Sales and Marketing
who has over 14 years of sales experience with commercial printers. Because the
printing business requires a great deal of interaction with customers, including
personal sales calls, art work reviews, reviews of color and other proofs and
"press checks" (customer approval of the printed piece while it is on the
printing press), the Company's increasing emphasis on in-house marketing efforts
rather than print brokers would allow the Company to develop more independent
client relationships and have greater interaction with the end user of the
printed products. Through its salespeople and other management professionals,
the Company will be able to develop stricter control of the printing process
from the time a prospective customer is introduced, through credit checks,
pricing, scheduling, pre-press, printing and post-press operations.
5
<PAGE>
PURCHASING AND RAW MATERIALS
The Company purchases various materials, including paper, ink, film, offset
plates, chemicals and solvents, glue and wire from a number of suppliers. The
Company's most significant expenditures are for paper. The Company purchases
paper directly from a number of manufacturers and distributors. In general, the
Company has not experienced any significant difficulty in obtaining raw
materials necessary for its operations. The price of paper, however, has
experienced much volatility in recent years, and future increases in the price
of paper could adversely impact the Company's operating costs and its financial
performance.
OPERATIONS
There are a number of different printing processes, each with its own
distinguishing qualities and appearance characteristics. Short to medium run-
length commercial work generally is printed on sheet-fed presses, while long-run
commercial printing projects typically are printed on web presses in which the
paper is fed through the press from a large roll. The ink on printed materials
may be air-dried, which is generally a lower cost method but creates a product
that can be easily smeared, such as newsprint. Alternatively, ink can be dried
in a heatset process which uses ovens to create a brighter, more durable finish.
Over 90% of the Company's press capabilities are heatset. Paper varies by type
and appearance, including newsprint, coated stock, off-set and hi-brite. Coated
stock is associated with a glossier, brighter finish such as for magazines and
some catalogues, while newsprint is used for newspapers and other mass-produced
products.
The Company currently operates nine presses that vary in size and speed and
can produce printed materials that range in page size, type of paper, number of
pages and the amount of color required. Of the nine presses, five are full web
presses, three are half web presses and one is a sheet fed press. The paper
used in a full web press is generally 35 inches in width, while the paper
printed on a half web press is generally 17 1/2 inches in width. All of the
Company's web presses use offset printing, which is a printing process involving
the transfer of an inked impression from a thin metal plate to a rubber blanket
and finally to the paper. In the web offset printing process, the paper is fed
through the press from a large roll of paper and is printed on both sides of the
paper. By varying the size and capabilities of its presses, the Company can
simultaneously perform a variety of printing jobs on a cost-effective basis.
The Company believes that it can compete effectively in the Southwestern United
States marketplace for many types of printing products having medium to large
print runs, as well as time sensitive products of any size.
6
<PAGE>
The Company currently operates the following presses:
<TABLE>
<CAPTION>
TYPE OF PRESS NAME SPECIFICATIONS
- ------------- ---- --------------
<S> <C> <C>
Full Web Presses: Hantscho Mark IV Web Heatset Perfecting Offset 22.75" Cutoff, 8 units
with 5 roll stands,
Inline fold, glue and
trim
Hantscho Mark II Web Perfecting Offset 22.75" Cutoff, 8 units
with 2 roll stands,
Inline fold
Harris 800 Heatset Web Perfecting Offset Double round 22.75"
Cutoff, 6 units with
3 roll stands, Inline
fold, glue and trim
Harris M200 Heatset Web Perfecting Offset 22.75" Cutoff, 8 units
with 2 roll stands,
Inline fold
Goss SSC Non-heatset Web Perfecting Offset 22.75" Cutoff, 8 units
with 3 roll stands,
Inline fold, glue and
trim
Half Web Presses: Didde Webcom 700 with U.V. dryers 22" cutoff, 8 units,
sheeter
Didde Glaser DG175-B Non-Heatset 22" cutoff, 4 units,
sheeter
Didde Glaser 860 Non-Heatset 22" cutoff, 4 units,
sheeter
Sheet Fed Press: AB Dick 9850 Press with T Head
</TABLE>
7
<PAGE>
Although the Company has to date been able to acquire its printing presses
at prices less than their replacement costs, there is no assurance that it will
continue to be able to do so. A new press offering comparable characteristics to
the full web heat set presses operated by the Company generally ranges in price
from $6 to $12 million.
WebWorld also offers services in the pre-press and post-press operations.
Commercial pre-press services involve photographically duplicating mechanical
images and/or digitally producing images, separating color images into process
colors, assembling films and burning the film images onto plates. The post-press
operations provided by the Company include cutting, trimming, folding, binding,
finishing and distributing the finished product. The Company has 10 major pieces
of post-press equipment to perform these functions. The Company plans to expand
its packaging and distribution services to handle bulk shipments and mass
mailings in order to meet customer needs and to increase its higher margin
services.
The Company's sense of urgency and scheduling flexibility allow it to
consistently react to its customer's requirements. Because of the need for rapid
implementation of printing projects from conception through delivery, the
Company must maintain physical plant and customer service staff, which allows it
to maximize work loads when called upon to do so. Consequently, the Company does
not always operate at full capacity.
The Company continuously reviews its printing equipment needs and evaluates
advances in computer software, hardware and peripherals, computer networking and
telecommunication systems as they relate to the Company's operations. WebWorld
is installing a printing software program and has hired a full-time employee to
integrate the program with the Company's production and financial systems in
order to develop a comprehensive management information system.
COMPETITION
The Company competes with a number of other commercial printers, some of
which are subsidiaries or divisions of companies having greater financial
resources than those of the Company. Because of the nature of the Company's
business, most of the Company's competition is in the local printing market. The
major competitive factors in the Company's commercial printing business are
ongoing customer service, quality of finished products and price. Customer
service often is dependent on production and distribution capabilities and
availability of printing time on equipment that is appropriate in size and
function for a given project. In addition, competition in the commercial
printing area is based upon the ability to perform the services described with
speed and accuracy. Price and the quality of supporting services are also
important in this regard. WebWorld believes it competes effectively on all of
these bases.
8
<PAGE>
EMPLOYEES
As of March 31, 1997, the Company had a total of 157 employees (of which 20
were in administration, seven in sales and marketing and 130 in operations), 42
of whom were salaried or commissioned employees and 115 of whom were hourly
employees. None of its employees are represented by a collective bargaining
agreement. The Company considers its relationship with its employees to be good.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to the environmental laws and regulations of the
United States and the state of Texas concerning emissions into the air,
discharges into waterways and the generation, handling and disposal of waste
materials. Responsible agencies include, but are not limited to, the U.S.
Environmental Protection Agency, the Texas Natural Resource Conservation
Commission and regulatory agencies at the county and local level. The printing
business generates substantial quantities of inks, solvents and other waste
products requiring disposal under the numerous federal, state and local laws and
regulations relating to the environment. The Company typically recycles waste
paper, returns salvageable waste ink to its suppliers and contract for the
removal of other waste products. The Company believes it is in substantial
compliance with all applicable air quality, waste disposal and other
environmental-related rules and regulations, as well as with other general
employee health and safety laws and regulations. However, there can be no
assurance that future changes in such laws and regulations will not have a
material effect on the Company's operations.
RISK FACTORS
The Company hereby cautions stockholders, prospective investors in the
Company and other readers of this report that the following important factors,
among others, could affect the Company's stock price or cause the Company's
actual results of operations to differ materially from those expressed in any
forward-looking statements, oral or written, made by or on behalf of the
Company.
NATURE OF COMMERCIAL PRINTING BUSINESS
The Company's quarterly operating results have fluctuated as a result of a
number of factors, including overall trends in the economy, acquisitions and
integration of new businesses and equipment and customer buying patterns. A fire
at the Company's facility in March 1996 had a significant adverse impact on the
Company's operations during the last quarter of fiscal 1996 and the first two
quarters of fiscal 1997. In particular, the Company's operating results for the
fourth quarter of fiscal 1997 were adversely impacted by higher labor costs
associated with temporarily maintaining two separate production facilities as a
result of the Webworks acquisition and a decrease in sales in January and
February of 1997.
9
<PAGE>
The Company competes in the general commercial printing sector, which is
characterized by individual orders from customers for specific printing projects
rather than long-term contracts, with continued engagement for successive jobs
dependent upon the customer's satisfaction with the services provided. As such,
WebWorld is unable to predict the number, size and profitability of printing
jobs in a given period. Consequently the timing of projects in any quarter could
have a significant impact on financial results in that quarter. In addition,
WebWorld has experienced some seasonality in its sales with the calendar fourth
quarter being the highest sales period and with January and July being the
lowest sales months. Quarterly results in the future may be influenced by these
or other factors, and accordingly, there may be significant variations in the
Company's quarterly operating results.
High production commercial printing facilities require significant capital
expenditures. Although the Company has to date been able to acquire printing
presses at prices less than their replacement costs, there is no assurance that
it will continue to be able to do so. New presses offering comparable
characteristics to those operated by the Company generally range in price from
$6 to $12 million.
RELIANCE ON KEY CUSTOMERS
WebWorld has an existing contract with The Dallas Morning News to print its
TV Magazine. The contract was originally entered into by the Company's
predecessor in 1978 and has been renewed for successive terms ranging from one
to three years in duration. The current contract expires in January 1998. The
Dallas Morning News represented approximately 55% of the Company's business in
fiscal 1996; however, because of increased sales volume to other customers and a
reduction in DMN mail wrap and printing, The Dallas Morning News accounted for
approximately 35% of the Company's sales in fiscal 1997. Although the Company
believes that its relations with its customers are good, the termination of The
Dallas Morning News TV Magazine contract or loss of any other significant
customer could have a material adverse effect on the results of operations,
financial condition and cash flows of the Company.
COMPETITION
The commercial printing industry is extremely competitive and fragmented.
The Company competes with numerous large and small printing companies, some of
which have greater financial resources. The Company competes on the basis of
ongoing customer service, quality of finished products and price. No assurance
can be given that the Company will be able to compete effectively in the future.
10
<PAGE>
ASSET RELOCATION
The Company's assets acquired from Webworks are located in a leased
facility, and the related lease expires in September 1997. The Company has
entered into a five-year lease for a facility adjacent (but not attached) to the
Company's existing operations. Additionally, the Company has entered into a
contract to purchase the facility by December 31, 1997. The Company is
relocating the former Webworks assets to its facilities prior to September 1997
and shifting certain of its administrative offices and pre-press and post-press
services to the new leased facility. In connection with relocating the assets
acquired from Webworks, the two printing presses acquired from Webworks will be
dismantled in the former Webworks facility and reassembled in the Company's
facilities. The Company estimates that each press will be out of operation for
two to six months in connection with the relocation, and the Company plans to
stagger the relocation of the presses so that one of the presses will be
operating at all times. Although the Company does not anticipate the relocation
of these presses to adversely impact its ability to service existing business,
the reduction in the Company's operating capacity during the relocation may
adversely impact the Company's abilities to attract or service new business and
to deliver services at the minimum operating costs. In addition, there can be no
assurance that the relocation will be timely completed, that the costs will not
be in excess of the Company's estimates or that the operation of printing
presses to be relocated will not be materially impaired as a result of the
relocation. If unexpected problems occur with the printing presses or the
relocation in general, the Company's operations and financial performance could
be materially and adversely impacted.
INTEGRATION OF ACQUISITIONS
A material element of WebWorld's growth strategy is to expand its existing
business in the Dallas-Fort Worth metropolitan area and, in the future, in other
geographic markets. This expansion may be made through internal growth or
through strategic acquisitions. While the Company continuously evaluates
opportunities to make strategic acquisitions, it has no present commitments or
agreements with respect to any material acquisitions. There can be no assurance
that the Company will be able to identify and acquire such companies or that it
will be able to successfully integrate the operations of any companies it
acquires. Further, any acquisition may initially have an adverse effect upon the
Company's operating results while the acquired businesses are adopting the
Company's management and operating practices. In addition, there can be no
assurance that the Company will be able to establish, maintain or increase
profitability of an entity once it has been acquired. Also, if WebWorld does not
have sufficient cash resources for any acquisition, its growth could be limited.
There can be no assurance that WebWorld will be able to obtain adequate
financing for any acquisition, or that, if available, such financing will be on
terms acceptable to WebWorld. The consent of the Company's primary lender will
be required to be obtained in order to consummate such acquisitions. In
addition, the fourth quarter of fiscal 1997 was adversely effected by
difficulties in integrating equipment and personnel associated with the purchase
of assets from Webworks in September, 1996. A larger than anticipated seasonal
sales reduction in January and February increased the negative effects of the
integration.
11
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success is largely dependent on the skills, experience and
performance of certain key members of its management, including particularly
Richard J. Wiencek, the Company's Chief Executive Officer. The loss of the
services of any of these key employees could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows. WebWorld has not obtained key man life insurance on the lives of these
individuals. The Company has entered into a three year employment contract with
Mr. Wiencek, and the Company has not entered into employment agreements with any
of its other employees. The Company's future success and plans for growth also
depend on its ability to attract, train and retain skilled personnel in all
areas of its business.
GEOGRAPHIC CONCENTRATION AND ECONOMIC CONDITIONS
The Company's operations are located in the Dallas-Fort Worth metroplex,
and the majority of its customers are located in the Southwestern United States.
The Company and its profitability may be susceptible to the effects of
unfavorable or adverse local economic factors and conditions affecting these
geographic regions.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
WebWorld is subject to the environmental laws and regulations of the United
States and Texas concerning emissions into the air, discharges into waterways
and the generation, handling and disposal of waste materials. While the Company
believes it is currently in substantial compliance with these laws and
regulations, there can be no assurance that future changes in such laws and
regulations will not have a material effect on the Company's operations.
TECHNOLOGICAL CHANGES
Production technology in the printing industry has evolved and continues to
evolve. The Company does not consider itself a technology leader and does not
attempt to be a leader in this area. WebWorld invests in technology improvements
after such improvements have been proven to be cost-effective. The Company is
currently evaluating digital imaging technology, along with new finishing
technology for inclusion in its service facility. WebWorld will continue to add
technology as the needs occur.
The printing industry has experienced significant changes due to
technological changes. Because of advances in computer and related communication
technologies, certain products that were once printed by commercial printers are
now generated on computers through word processing or desktop publishing
software. In addition, some information is now disseminated in a digital or
electronic format rather than disseminated in a paper format, and this trend
could continue in the future.
12
<PAGE>
VOLATILITY OF PAPER PRICES
A material component of the Company's operating costs is the price of
paper, a commodity that has experienced significant price volatility in recent
years. WebWorld anticipates that fluctuations in the price of paper will
continue in the future. Although increased paper prices potentially affect
operating margins, such increases are typically an expense of the Company's
customers. Nevertheless, increased paper prices could decrease orders for
printing services or the size of such orders.
NO DIVIDENDS
The Company has not declared or paid any cash dividends on its common stock
since its inception. The Company currently intends to retain all earnings for
the operation and expansion of its business and does not anticipate paying any
dividends in the foreseeable future. In addition, the Company's credit agreement
prohibits the payment of dividends.
CONTROL BY PRINCIPAL SHAREHOLDERS AND CERTAIN TRANSACTIONS
The directors and executive officers of the Company own approximately 71%
of the outstanding common stock of the Company. As a result, these shareholders
will be able to control the management and policies of the Company through the
ability to determine the outcome of elections for the Company's Board of
Directors and other matters requiring the vote or consent of shareholders of the
Company.
The Company is a party to a management agreement with Conrad/Collins
Merchant Banking Group Ltd. ("MBG"), of which Barry B. Conrad, the Chairman of
the Board of the Company, and Floyd W. Collins, a director of the Company, are
principals. Under the terms of the agreement, MBG provides supervisory
management services to the Company, including the negotiation, financing and
consummation of acquisitions made by the Company. MBG has earned as fees
$100,000, $100,000, and $150,000 during fiscal years 1995, 1996 and 1997,
respectively. In addition, the Company previously was a party to a consulting
agreement with Robert D. Kopitke who is also a director of the Company. This
agreement was terminated in April 1997. The Company also has an employment
agreement with Richard J. Wiencek, the Company's President and Chief Executive
Officer and a director, which provides for an annual base salary of $168,000,
subject to possible adjustment. Although the Company believes that the terms of
these agreements are no less favorable to the Company than those available from
unaffiliated third parties, the terms of these agreements were not subject to
arm's length negotiations and necessarily involve conflicts of interest.
13
<PAGE>
PREFERRED STOCK AUTHORIZED
The Company's Articles of Incorporation authorizes the issuance of
2,000,000 shares of preferred stock, the rights, preferences and privileges of
which are to be determined by the Company's Board of Directors. Although the
Company has no intention at the present to issue any preferred stock, the
Company may in the future issue and sell preferred stock, which will likely have
dividend, distribution and liquidation preferences senior to common shareholders
and voting rights which may dilute the common shareholder voting rights.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES AND CAPABILITIES
The Company owns a 60,000-square foot facility on six acres of land in an
industrial park located in Dallas, Texas. Approximately three acres are
available for expansion. The original 45,000 square foot building was
constructed in 1971 and additional 15,000 square feet were added in 1981. A
portion of this facility was damaged in a fire in March 1996. Although the fire
resulted in substantial damage to the electrical and mechanical systems of
several of the Company's large web presses, these systems have now been repaired
and up-graded. Congress Financial Corporation (Southwest) ("Congress") has a
lien on this property.
In September 1996, the Company entered into a one-year lease with Webworks
to continue the operation of the presses purchased from Webworks in its existing
facility until the Company's facilities could be expanded to consolidate all
operations. The Company has entered into a five-year lease for an approximately
84,000 square foot building adjacent (but not attached) to the Company's owned
facility, and a contract to purchase the facility by December 31, 1997. The
Company is relocating the former Webworks assets to the Company's facilities
prior to September 1997. In connection with relocating the assets acquired from
Webworks to the Company's facilities, the two printing presses acquired from
Webworks will be dismantled in the existing facility and reassembled in the
Company's other facilities. The Company estimates that each press will be out of
operation for two to six months. In connection with the relocation, the Company
plans to stagger the relocation of the presses so one of the presses will be in
operation at all times.
WebWorld does not anticipate the relocation of these presses to adversely
impact its ability to service existing business. Excess capacity is currently
being reserved, at the expense of new sales, to ensure its ability to meet all
customer commitments. Proper scheduling of existing resources and negotiations
with clients should allow for some excess capacity during this period. Potential
negative sales impact may be felt in the Company's ability to rapidly respond to
new short-term sales opportunities. In addition, there can be no assurance that
the relocation will be timely completed, that the costs will not be in excess of
estimated costs or that the operation of printing presses to be relocated will
not be materially impaired as a result of the relocation. If
14
<PAGE>
unexpected problems occur with the printing presses or the relocation in
general, the Company's operations and financial performance will be materially
and adversely impacted.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. While the
Company maintains insurance coverage against potential claims in an amount which
it believes to be adequate, there can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities arising out of such
claims or that any such claims will be covered by the Company's insurance. While
the outcome of lawsuits or other proceedings against the Company cannot be
predicted with certainty, the Company does not believe these matters will have a
material adverse effect on its business or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On May 21, 1997, the Company completed its initial public offering of
shares of its common stock and redeemable common stock purchase warrants
("Warrants"). These securities are traded over-the-counter in the Nasdaq Small
Cap Market under the symbols "NEIP" and "NEIPW" and the Boston Stock Exchange
under the symbols "NEI" and "NEIW".
The following states the range of the high and low sales prices for the
Company's Common Stock as reported by Nasdaq:
Fiscal 1998 High Low
----------- ---- ---
From May 21, 1997..to..June 24, 1997 5 3/16 3 5/8
The Company believes that it has approximately 600 beneficial holders of
its common stock.
The Company has not declared or paid any cash dividends on its common stock
since inception. The Company currently intends to retain all earnings for the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. In
15
<PAGE>
addition, the Company's credit agreement with its senior lender restricts the
payment of dividends.
Since March 31, 1994, the Company has not sold any unregistered securities
other than the issuance of 416,250 shares of common stock in April 1996 upon the
exercise (at $.30 per share) of options granted in February 1994. The Company
relied on the exemption provided by Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), and, with respect to a portion of the shares,
Rule 701 promulgated under the Securities Act. Each of the purchasers of these
shares was, or was an affiliate of, a member of the Board of Directors of the
Company and therefore an "accredited investor" as defined in the regulations
promulgated under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The historical data set forth below and the following discussion should be
read in conjunction with the information contained in the financial statements,
including the notes thereto, and the other financial information appearing
elsewhere in this Form 10-KSB.
GENERAL
WebWorld is a high-volume commercial printer specializing in the printing
of multi-color freestanding magazines, catalogs, tabloids, inserts and mail
wraps. Historically, the Company has concentrated on the newsprint magazine
sector of the printing industry. Contracts with local newspapers for the
printing of weekly television guides accounted for 72% and 61% of the gross
sales for the fiscal years ended March 31, 1995 and 1996, respectively, and 35%
of gross sales for the year ended March 31, 1997.
In March 1996, the Company experienced a fire that adversely affected its
operations for approximately six months. In September 1996, the Company
purchased certain assets of Webworks, which will allow it to expand more rapidly
into the coated paper segment of the commercial printing market. The Company
expects to realize significant economies of scale through combined plant
operations, information systems and accounting functions and through increased
operation of under-utilized equipment. The asset acquisition will also expand
the Company's post-press production services, such as stapling, binding, sorting
and folding printed materials for mass mailings.
The existing contract for production and sale of the weekly The Dallas
Morning News TV Magazine expires January 1998. Other than this annual contract,
the Company has no significant long-term printing contracts. Most sales come
from individual orders for specific printing projects. Customer satisfaction
with the quality, pricing and delivery of each job is required for continued
engagement.
16
<PAGE>
Paper is the largest cost component of the Company's sales. The price of
paper is volatile and may cause significant fluctuations in sales and cost of
sales. Paper prices, specifically newsprint prices, increased consistently
through the Company's fiscal year ended March 31, 1995 to a peak in July and
August 1995. Prices from September 1995 to December 1996 decreased as paper mill
production increased and have now generally stabilized. The Company generally is
able to pass paper cost increases to its customers and conversely paper cost
decreases. There can be no assurance that future price increases can be passed
through to customers.
17
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
FISCAL YEARS ENDED MARCH 31
---------------------------------
1995 1996 1997
------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $12,006 $ 14,286 $ 17,150
Cost of sales......................................... 9,776 12,240 14,588
------- ---------- ----------
Gross profit.......................................... 2,230 2,046 2,562
Operating expenses.................................... 1,663 1,966 2,680
------- ---------- ----------
Operating income (loss)............................... 567 80 (118)
Other income(expense)................................. (417) (419) (225)
------- ---------- ----------
Income (loss) before income tax expense and extra-
ordinary item......................................... 150 (339) (343)
Income tax (benefit) expense.......................... 48 (29) 45
------- ---------- ----------
Income (loss) before extraordinary item............... 102 (310) (388)
Extraordinary item.................................... ---- ---- (109)
------- ---------- ----------
Net income (loss)..................................... $ 102 $ (310) $ (497)
======= ========== ==========
Earnings (loss) per share(1):
Loss before extraordinary item........................ ---- $ (.011) $ (.14)
Net loss.............................................. ---- (.011) (.18)
Common shares outstanding............................. ---- 2,719,778 2,719,778
OTHER DATA:
EBITDA (2)............................................ $ 1,177 $ 723 $ 635
Net cash provided by (used for) operating activities.. (73) 31 852
Net cash used for investing activities................ (151) (245) (266)
Net cash provided by (used for) financing activities (154) 213 (544)
Depreciation and amortization......................... $ 611 $ 643 $ 753
BALANCE DATA SHEET:
Working capital (deficit)............................. $ 354 $ 142 $ (1,934)
Total assets.......................................... 6,534 6,220 8,463
Long-term debt, less current portion.................. 3,456 3,020 3,218
Shareholders' equity.................................. $ 1,002 $ 692 $ 145
</TABLE>
(1) Earnings per share give effect to a 3.3 for one stock split in March 1997
and the conversion of the outstanding shares of the Company's preferred
stock that occurred upon the effectiveness of the Company's initial public
offering in May 1997.
(2) EBITDA represents operating income excluding interest, taxes, depreciation,
and the amortization of goodwill and other intangible assets (as presented
on the face of the income statement). EBITDA is not a substitute for net
cash provided by operating activities or operating income in accordance
with generally accepted accounting principles. EBITDA is presented because
management believes that it is a widely accepted financial indicator of a
company's ability to service and/or incur indebtedness, maintain current
operating levels of fixed assets and acquire additional operations and
businesses. Accordingly, significant uses of EBITDA include, but are not
limited to, interest and principal payments on long-term debt, including
indebtedness under the Company's credit agreement and capital expenditures.
Items
18
<PAGE>
excluded from EBITDA, such as interest, taxes, depreciation and
amortization, are significant components of the Company's operations and
should be considered in evaluating the Company's financial performance.
The following sets forth information regarding certain percentages of
net sales based on the Company's statements of operations for the years
indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31
-----------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 81.4 85.7 85.1
----- ----- -----
Gross profit.............................................. 18.6 14.3 14.9
Selling, general and administrative expenses.............. 7.6 8.1 10.4
Depreciation and amortization............................. 5.1 4.5 4.4
Management and consulting fees............................ 1.2 1.1 .8
----- ----- -----
Operating income (loss)................................... 4.7 0.6 (.7)
Interest expense.......................................... (3.5) (3.1) (3.1)
Other income.............................................. 0.0 0.1 1.8
----- ----- -----
Income (loss) before income taxes and extraordinary item.. 1.2 (2.4) (2.0)
Income taxes.............................................. 0.4 (0.2) .3
----- ----- -----
Income (loss) before extraordinary item................... 0.8 (2.2) (2.3)
===== ===== =====
</TABLE>
Fiscal Year Ended March 31, 1997 compared to Fiscal Year Ended March 31, 1996
Sales increased 20% from $14.3 million for fiscal 1996 to $17.2 million for
fiscal 1997. Sales increased primarily due to increases in the sale of magazine
and catalogue product services utilizing coated and other premium papers. Sales
to the Dallas Morning News decreased 24% to $6 million from $7.9 million in
fiscal 1996 due to decreased paper cost passed on to the TV Guide Magazine
(approximating $965,000) and the loss of certain "wrap" or free standing insert
product services totaling $1 million. Sales to other customers increased 74%
and $4.8 million during the same period. The increase occurred primarily in the
sale of coated and other premium product services.
Gross profit increased 25% from $2.0 million and 14.3% of sales for fiscal
1996 to $2.6 million and 14.9% of sales for fiscal 1997. The gross profit margin
increase reflects a decrease in paper costs as a percent of sales offset to some
degree by an increase in direct labor, ink and other products and job costs.
Paper costs decreased to approximately 46% of sales in fiscal 1997 compared to
56% in fiscal 1996. This decrease is due to a reduction in newsprint prices of
approximately 25% beginning in August 1995 and continuing through December 1996
and the increased sales of higher margin coated and premium paper product
services. Other job and material costs increased approximately 4% as a percent
of sales in fiscal 1997, reflecting increased costs of ink, plates, outbound
freight costs and other repair and supply costs. Labor costs increased
approximately 6% as a percentage of sales in fiscal 1997 due to several
factors. Labor costs on certain jobs utilizing newsprint paper increased as a
percent of sales due to decreased paper cost pass through provisions included in
some production contracts and the decreasing newsprint paper costs. This caused
the constant labor cost to be allocated to a
19
<PAGE>
decreased sales total. Additional margin degradation was caused by an increase
in overtime and the labor cost associated with maintaining two separate
production facilities for the second half of fiscal 1997.
Although the gross profit margin for fiscal 1997 improved .6% as a percentage of
sales as compared to fiscal 1996, in the fourth quarter of fiscal 1997, the
gross profit margin was 8.2% of sales as compared to 17.2% for the nine months
ended December 31, 1996. The 9.0% margin loss was due primarily to an increase
in labor costs. Labor costs totaled approximately 27.9% of sales for the fourth
quarter of 1997 as compared to 18.8% for the nine months ended December 31,
1996. The increase was caused primarily by a larger than anticipated seasonal
decrease in sales in January and February which was not matched by a
commensurate decrease in direct labor.
Additional inefficiencies occurred due to the continued assimilation of the
Webworks' assets and personnel. Other job and material costs increased to 24.2%
of sales in the fourth quarter compared to 12% for the nine months ended
December 31, 1996. This increase was caused by increases in ink cost,
inventoried materials and outbound freight charges.
Selling, General, and Administrative expenses increased as a percentage of
sales from $1.16 million and 8.1% for fiscal 1996, to $1.79 million and 10.4%
for fiscal 1997. The $630,000 increase in costs is due primarily to increases in
sales and marketing and administrative labor costs and property taxes associated
with the operation of a second manufacturing facility for six months, and the
related assimilation of approximately $1.6 million of printing equipment
acquired. Non-production labor increased to $1.12 million and 6.5% of sales in
fiscal 1997 from $822,000 and 6.2% in fiscal 1996 and property taxes increased
to $211,000 and 1.2% in fiscal 1997 from $99,000 and .7% in fiscal 1996.
Property taxes increased due to the addition of over $2 million of personal
property during fiscal 1997.
During the fourth quarter of fiscal 1997, the Company incurred selling
general and administrative costs of $625,000 and 14.4% of sales for the fourth
quarter as compared to costs of $1.17 million and 9.1% for the nine months ended
December 31, 1996. This increase is a result of two factors: a planned increase
in the Company's sales and marketing and customer service efforts (accounting
for approximately $217,000 and 5% of sales), and more significantly, the
continued excess non-production labor, lease and other operating costs
associated with the maintenance of separate plant and administrative facilities.
The Company expects to vacate the temporary facility by September 1997.
Operating income decreased as a percentage of sales from $80,000 and .6% of
sales for fiscal 1996 to ($118,334) and (.7%) of sales for fiscal 1997. The
operating income decrease is due to the factors discussed above. Interest
expense remained flat at 3.1% of sales despite a 20% and $2.9 million increase
in sales. The $86,000 interest expense increase primarily reflects the
increased debt incurred as a result of the purchase of the Webworks assets in
September 1996.
20
<PAGE>
Other income increased as a percentage of sales from .1% for fiscal 1996 to
1.8% for fiscal 1997 primarily due to the gain on insurance settlement for a
claim arising from a fire in March, 1996 at the Company's main plant.
An extraordinary loss of $109,000 was recorded for fiscal 1997 resulting from
an early retirement of debt.
Fiscal Year Ended March 31, 1996 Compared to Fiscal Year Ended March 31, 1995
Sales increased 19% from $12.0 million for fiscal 1995 to $14.3 million for
fiscal 1996 due to increased sales levels. Sales to The Dallas Morning News
increased 18% from $6.7 million to $7.9 million for fiscal 1995 and fiscal 1996,
respectively. Sales to other customers increased 21% and $1.1 million during
the same period. The increase was due to an increase in sales and marketing
efforts and to higher pass-through paper prices.
Gross profit decreased 8% from $2.2 million for fiscal 1995 to $2.05 million
for fiscal 1996. Gross profit decreased as a percent of sales from 18.6% for
fiscal 1995 to 14.3% for fiscal 1996 due to increases in paper prices and labor.
Material costs, including paper, ink, plates and supplies increased as a percent
of sales from 60.1% for fiscal year 1995 to 63.7% for fiscal 1996 due to an
increase in the average cost of paper, primarily newsprint, in fiscal 1996 as
compared to fiscal 1995. Labor costs as a percent of sales increased from 14.7%
for fiscal 1995 to 15.2% for fiscal 1996 due to increased overtime hours worked.
Selling, general and administrative costs increased as a percent of sales
from 7.6% for fiscal 1995 to 8.1% for fiscal 1996 due primarily to an increase
in the sales and marketing and executive staff.
Based on the above factors, operating income decreased 86% from $567,000 for
fiscal 1995 to $80,000 for fiscal 1996.
Interest expense increased 6% from $421,000 for fiscal 1995 to $445,000 for
fiscal 1996, primarily due to a higher average loan balance outstanding for
fiscal 1996 as compared to the average loan balance outstanding for fiscal 1995.
Principal payments made on term debt during fiscal 1996 of $637,000 were
mitigated by a net increase of $850,000 on the revolving line of credit and
equipment-backed term debt.
21
<PAGE>
Liquidity and Capital Resources
The Company has historically met its liquidity and capital investment
requirements through internally generated funds and external financing. Cash
flow provided by operations was $31,445 and $852,458 for fiscal 1996 and 1997,
respectively. Working capital was $142,000 on March 31, 1996 and ($1,934,000)
at March 31, 1997. The change in the working capital balance is due primarily
to the acquisition of $1.6 million in Webworks' equipment and related increases
in short term notes payable and accounts payable, the recognition of accrual for
equipment installation costs and the ($497,000) net loss incurred in fiscal
1997.
The Company had net accounts receivable of $ 1.72 million and $2.37 million at
March 31, 1996 and 1997, respectively. The increase in these receivables reduced
the net cash provided by operating activities during fiscal year 1997. The
average collection period for the Company's accounts receivable for fiscal year
1996 and 1997 was 43 and 50 days, respectively. The increase in the average
collection period was attributable to the decline, as a percentage of sales, in
print jobs for local newspapers (which generally provide for payment within 20
days from date of invoice), as contrasted with typical payment terms of 45 to 60
days for other customers.
Congress has provided the Company revolving credit, equipment, real estate
and future capital expenditure financing facilities totaling $ 9.0 million, of
which $5.0 million was drawn at March 31, 1997. An additional $1.9 million was
available on such date under such revolving credit facility, and an additional
$2.0 million was available through the capital expenditure facility. The
capital expenditure facility's term runs concurrently with the term of the
revolving credit facility and provides financing for up to 85% of the value of
the equipment purchased. These borrowings would be payable over five years or
by the termination of the facilities. The indebtedness to Congress is secured
by a lien on all of the Company's assets, including a mortgage on the Company's
printing facility. In May, 1997, the Congress revolver and real estate loan
were fully repaid for $2.7 million, a note issued in connection with the
purchase of Newspaper Enterprises was fully repaid for $.2 million and a note
payable to Webworks was fully repaid in June 1997 for $.5 million. The source
of funds of these repayments were from the net proceeds of the Company's initial
public offering in May 1997.
Financing activities during fiscal 1997 related primarily to the December
1996 refinancing of the indebtedness associated with the purchase of assets from
Webworks and replacing the Company's revolving credit line with a senior lender
and retiring subordinated debt.
Investment activities included capital expenditures of $ 266,000 and $628,000
for fiscal 1996 and 1997, respectively. The $2.1 million increase in gross fixed
assets in fiscal 1997, includes $1.6 million in assets purchased from Webworks
and $396,000 in expenditures to replace equipment and repair building damage
related to the March 1996 fire. The remaining capital expenditures reflect
normal and customary costs associated with the continued operation and upgrading
of existing machines.
22
<PAGE>
The Company plans to make additional capital purchases after completion of
the relocation of certain of its assets to a new facility to increase its pre-
press and post-press capabilities.
The Company has also executed an agreement to lease, and a contract to
purchase, a facility adjacent to its existing building to accommodate the
Company's expansion for the acquisition of the Webworks assets and additional
post-press equipment. The purchase price (if the purchase is consummated) and
the cost of upgrading leasehold improvements should approximate $1.7 million and
$250,000, respectively. Capital expenditures, the building purchase and
improvements and additional asset acquisitions are expected to be financed
through internally generated funds, long-term borrowings, the proceeds from the
Company's initial public offering and funds available under the Congress
revolving credit facility.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, together with the audit report
thereon, required by this item are included in the Appendix attached hereto and
incorporated by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information concerning the persons who
are (i) executive officers, (ii) key employees or (iii) directors.
NAME AGE POSITION
- ---- --- --------
Barry B. Conrad 56 Chairman of the Board and Director
Richard J Wiencek 58 Chief Executive Officer, President and
Director
Bruce E. Fredriks 48 Vice President-Finance and Administration,
Chief Financial Officer, Treasurer and
Secretary
Charles B. Combs, Jr. 64 Vice President-Engineering
Christopher A. Schall 41 Vice President-Sales and Marketing
Dale H. Davenport 49 Vice President-Operations
Floyd W. Collins 44 Director
Brian A. Harpster 52 Director
Robert D. Kopitke 55 Director
Barry B. Conrad has served as Chairman of the Board and a director of the
Company since the Company's inception. Mr. Conrad is a co-founder and Managing
Partner of Conrad/Collins Merchant Banking Group Ltd., ("MBG") a Dallas, Texas-
based merchant bank formed in 1988 that is active in leveraged buyouts of
middle-market companies in the Southwestern United States. Mr. Conrad has
extensive experience in investment banking, including more than five years as
head of corporate finance for Rauscher Pierce Refsnes, Inc. Prior to joining
Rauscher Pierce Refsnes, Inc. in 1983, he served for approximately ten years as
Chief Executive Officer of Hart Delta, Inc., a pharmaceutical manufacturing
firm. He also serves on the Board of DSI Toys, Inc.
Richard J.Wiencek had been the President and Chief Executive Officer of the
Company and a director since the Company's inception. Prior to co-founding the
Company, Mr. Wiencek served in various executive positions with Computer
Language Research, Inc., a software development company, for 15 years, most
recently as Group Vice President, Corporate Operations. Mr. Weincek's
responsibilities at Computer Language Research, Inc. included managing print
operations, telecommunications and product marketing, as well as implementing a
corporate automation strategy connecting clients and employees nationwide
through common communications networks and standardized application software.
Prior to joining Computer Language Research, Inc., Mr. Wiencek served for
approximately 14 years in various financial and operations management positions
with Texas Instruments, Inc.
24
<PAGE>
Bruce E.Frediks has served as the Vice President-Finance and Administration
and Chief Financial Officer of the Company since May 1996. Prior to joining the
company, he was an account executive with Business Systems Engineering, Inc.
From 1972 through November 1995, Mr. Fredriks was with Caltex Petroleum
Corporation, an international petroleum company, where he held various executive
and managerial positions both domestically and internationally, most recently as
Coordinator in Accounting Policies and Controls. Mr. Fredriks is a certified
public accountant.
Charles B. Combs, Jr. has served as the Vice President-Engineering since
1995. He has over 40 years experience in the printing industry, including all
aspects of printing such as pre-press, press finishing and administration.
Prior to joining the Company, he was the Chief Operating Officer for Anchor
Press, a commercial printing company in Fort Worth, from 1993 to 1994. From
1987 to 1993, Mr. Combs owned and operated his own company, Combs International
Graphics which designed, constructed and installed large printing facilities in
the United States and Africa.
Christopher A. Schall joined the Company in June 1996 as Vice President-Sales
and Marketing. Prior to joining the Company, he was Vice President of Sales
with Proctor Press, Inc., a printing company, from 1994 to 1996. Prior to
joining Proctor Press, Inc., he was a Senior Sales Representative with
Hoechstetter Printing Company, a commercial printing company, from 1990 to 1994.
Dale H. Davenport joined the Company in February 1997 as the Vice
President-Operations. He has over 25 years experience in the printing industry,
including sales, operations and administration. Prior to joining the Company,
he was the Plant Manager for KOPCO, Inc., a printing company, from 1994 to 1997.
From 1992 to 1994, Mr. Davenport was the General Manager for Sierra Press, a
printing company.
Floyd W. Collins has served as a director of the Company since March 1997.
Mr. Collins has been a co-founder and Managing Partner of MBG since 1988. Mr.
Collins has an extensive background in private equity investing, including
service as Executive Vice President of Hickory Venture Capital Corporation and
General Partner of Sunwestern Investment Group.
Brian A. Harpster has served as a director since February 1994. Mr. Harpster
has been engaged in investment and financial consulting for more than the past
five years through the ownership and management of Holly Investments, L.P. and
Offshore Consulting Services, Inc.
Robert D. Kopitke has served as a director since February 1994. Mr. Kopitke
has been engaged in general business consulting for more than five years as
President of The Gensal Group, Inc.
25
<PAGE>
BOARD OF DIRECTORS
The Board of Directors of the Company consists of five members. Each
director holds office until the annual meeting of the shareholders of the
Company next following his or her election, until his or her successor is
elected and qualified. The holders of the shares of Common Stock, voting
separately as a class, will be entitled to elect all of the directors. The
representatives of the underwriters for the Company's initial public offering
have the right to nominate an advisory director to the Company's Board of
Directors. Jesse Shelmire currently serves as the representatives advisory
director.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive an annual fee of $5,000 as compensation for his or her
services as a member of the Board of Directors. All directors of the Company
are reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors, or committees thereof, and for other expenses incurred in
their capacities as directors of the Company. Directors will also be eligible
to participate in the Company's stock option plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company did not complete its initial public offering until after
completion of fiscal 1997. As a result, none of the Company's executive
officers, directors and 10% shareholders were subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934, as amended,
during the Company's last fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the total annual
compensation paid or accrued by the Company to or for the account of the Chief
Executive Officer who was the only executive officer of the Company whose total
cash compensation exceeded $100,000 for fiscal years ended March 31, 1995, 1996
and 1997,:
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION (1)
PRINCIPAL POSITION YEAR ($) $ ----------------
------ --------- -------
<S> <C> <C> <C> <C>
Richard J. Wiencek, 1997 $168,000 $ 1,615 $5,172
President and CEO 1996 $168,000 $26,813 $5,102
1995 $160,000 $12,944 $4,453
</TABLE>
(1) Represents the Company's contribution under the Company's 401(k) savings
plan and premiums paid by the Company on a life insurance policy, the
beneficiary of which is Mr. Wiencek's estate.
26
<PAGE>
The Company entered into an employment agreement with Richard J. Wiencek, the
Company's President and Chief Executive Officer, in February 1994. The
agreement provided for an initial term of five years and an automatic renewal
for additional successive one year terms. The agreement also provided for a
base salary of $160,000 (subject to annual increases in the discretion of the
Company's Board of Directors) and annual bonuses equal to 25% of the Company's
"free cash flow" as defined in the agreement. In April 1997, the Company
amended and restated the Employment Agreement with Mr. Wiencek to provide for a
three year term ending March 31, 2000. The new agreement provided for a base
salary of $168,000 (subject to annual increase in the discretion of the
Compensation Committee of the Company's Board of Directors) and the right to
participate in such bonus and other benefit plans as determined by the
Compensation Committee.
STOCK OPTION PLAN
The Company maintains the NEI WebWorld, Inc. Stock Option Plan (the "Option
Plan"), which provides for the grant of options to eligible employees and
directors for the purchase of Common Stock of the Company. The Option Plan
covers, in the aggregate, a maximum of 350,000 shares of Common Stock. The
Option Plan provides for the granting of both incentive stock options (as
defined in Section 422 of the Internal Revenue Code of 1986) and nonqualified
stock options (options which do not meet the requirements of Section 422).
Under the Option Plan, the exercise price may not be less than the fair market
value of the Common Stock on the date of the grant of the option. No options
have been granted under the Option Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 1, 1997 for (1) each person
known by the Company to own beneficially 5% or more of the Common Stock, (2)
each director and executive officer of the Company and (3) all directors and
executive officers of the Company as a group. Except pursuant to applicable
community property laws and except as otherwise indicated, each shareholder
identified in the table possesses sole voting and investment power with respect
to its or his shares.
27
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OWNED
NUMBER OF AFTER
NAME SHARES OFFERING
---- --------- --------
<S> <C> <C>
Barry B. Conrad(1)........................ 1,423,463 38.3%
Floyd W. Collins(1)....................... 1,422,463 38.2
Brian A. Harpster(2)...................... 669,609 18.0
Richard J. Wiencek(3)..................... 417,250 11.2
Bruce E. Fredriks......................... 0 0
Robert D. Kopitke(4)...................... 124,875 3.4
All directors, nominees for director and
executive officers as a group
(six individuals)......................... 2,635,197 70.9
</TABLE>
(1) Includes 1,339,213 shares owned of record by Conrad/Collins Merchant
Banking Fund Ltd., a Texas limited partnership ("MBF") of which MBG is the
general partner. The general partner of MBG is Conrad Collins, Inc., a
Texas corporation, of which Messrs. Conrad and Collins are the sole
directors and shareholders. Also includes 83,250 shares owned by MBG. The
address of Messrs. Conrad and Collins is 700 N. Pearl, Suite 1910, Dallas,
Texas 75201.
(2) Consists of 669,609 shares held by Holly Investments, L.P., of which Mr.
Harpster's spouse is the beneficial owner. Mr. Harpster's address is 1324
E. Grand Avenue, Ponca City, Oklahoma 74601.
(3) Mr. Wiencek's address is 4647 Bronze Way, Dallas, Texas 75236.
(4) Includes 41,625 shares held by The Gensal Group, Inc., of which Mr. Kopitke
is the principal shareholder, and 83,250 shares owned by Mr. Kopitke
directly.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company believes that all of the transactions set forth below were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principle shareholders and affiliates,
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors, and will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
In April 1996, the Board of Directors of the Company vested all of the
outstanding options granted in 1994 (covering an aggregate of 416,250 shares of
Common Stock) under certain agreements with Mr. Weincek, MBG and Mr. Kopitke.
These shareholders exercised the outstanding options in April 1996 and purchased
the underlying shares of Common Stock. In connection with this exercise, Mr.
Wiencek issued a note to the Company in the principal amount of $75,000, which
becomes due and payable in April 2001. Both MBG and Mr. Kopitke issued notes to
the Company for the exercise price of their options in the principal amount of
$25,000 each. These notes have the same terms as the note issued by Mr. Wiencek.
These notes, which are with recourse, bear interest at a per annum rate of 6%
and repayment of the notes is secured by a pledge of the share of Common Stock
issued upon the exercise of the options. In the future, no loans will be made to
officers, directors, promoters, shareholders or their affiliates who own
28
<PAGE>
more than 5% of the outstanding shares of Common Stock except for bona fide
business purposes.
In connection with the organization of the Company and the funding of the
Company's acquisition of Newspaper Enterprises, Inc. in February 1994, MBG and
Holly Investment, L.P. contributed $500,000 and $250,000, respectively, to the
Company and received an aggregate of 58% and 29%, respectively (after giving
effect to the conversion of outstanding shares of preferred stock and dividends
accrued thereon), of the capital stock of the Company.
In February 1994, the Company also entered into a management agreement with
MBG, of which Barry B. Conrad, the Chairman of the Board of the Company, and
Floyd W. Collins, a director of the Company, are principals. Under the terms of
the agreement, MBG provided supervisory management services to the Company,
including the negotiation, financing and consummation of all of the acquisitions
made by the Company. MBG has earned as fees $100,000, $100,000 and $150,000
during fiscal years 1995 and 1996 and 1997, respectively. Pursuant to the
management agreement, the Company granted MBG an option to purchase 83,250
shares of common stock at an exercise price of $.30 per share. As of April 1996,
all the options became fully vested and were exercised.
In February 1994, the Company entered into a sales consulting agreement with
Robert D. Kopitke under which Mr. Kopitke earned as fees $30,000, $30,000 and
$60,000 during fiscal years 1995, 1996 and 1997, respectively. Pursuant to such
agreement, the Company granted Mr. Kopitke an option to purchase 83,250 shares
of Common Stock at an exercise price of $.30 per share. As of April 1996, all
the options became full vested and were exercised. The agreement was terminated,
effective April 30, 1997, although Mr. Kopitke will be paid on a project basis
for any further sales consulting performed for the Company.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Reference is made to the Exhibit Index on page E-1 for a list of all exhibits
filed as part of this report.
(b) Current Reports on form 8-K:
The Company was not required to file any reports on Form 8-K during the
fiscal quarter ended March 31, 1997.
29
<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.
NEI WEBWORLD, INC.
By: /s/ RICHARD J. WIENCEK
------------------------------
Richard J. Wiencek
Chief Executive Officer
Dated: June 30, 1997
30
<PAGE>
In accordance with the Exchange Act, this report has been signed below by the
following persons of the registrant and in the capacities indicated on June 30,
1997
Name Title
---- -----
/s/ RICHARD J. WIENCEK
- ---------------------------
Richard J. Wiencek President and Chief Executive Officer and Director
/s/ BRUCE E. FREDRIKS
- ---------------------------
Bruce E. Fredriks Vice President-Finance and Administration and
Chief Financial Officer (Principal Financial
Officer)
/s/ BARRY B. CONRAD
- ---------------------------
Barry B. Conrad Director and Chairman of the Board
/s/ FLOYD W. COLLINS
- ---------------------------
Floyd W. Collins Director
/s/ BRIAN A. HARPSTER
- ---------------------------
Brian A. Harpster Director
/s/ ROBERT D. KOPITKE
- ---------------------------
Robert D. Kopitke Director
31
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Articles of Incorporation of NEI WebWorld, Inc., as amended. (1)
3.2 Bylaws, as amended and restated, of NEI WebWorld, Inc. (1)
4.1 Form of Warrant Agreement. (1)
10.1 Amended and Restated Employment Agreement of Richard M. Wiencek.
(1)
10.2 Consulting Agreement of Robert D. Kopitke. (1)
10.3 Management Agreement of Conrad/Collins Merchant Banking Group,
Ltd. (1)
10.4 NEI WebWorld, Inc. Stock Option Plan. (1)
10.5 Contract with The Dallas Morning News. (1)
10.6 Loan and Security Agreement by and among the Company and
Congress Financial Corporation (Southwest), dated December 31,
1996. (1)
10.7 Promissory Note issued by NEI WebWorld, Inc. to Webworks, Inc.
as of September 13, 1996 as amended by the Modification of
Promissory Note dated December 30, 1996. (1)
10.8 Subordinated Note dated February 28, 1994 in the amount of
$500,000 executed by NEI WebWorld, Inc. (formerly known as NEI
Acquisition Corporation) to Robert L. Jensen. (1)
10.9 Form of note dated April 2, 1996 issued by certain shareholders
of NEI WebWorld, Inc. in connection with stock option exercises.
(1)
10.10 Form of Indemnification and Hold Harmless Agreement. (1)
27.1 Financial Data Schedule. (2)
- ---------------
(1) Previously filed as an Exhibit to Form SB-2 (File No. 333-23023) and
incorporated herein by reference.
(2) Filed herewith.
32
<PAGE>
NEI WEBWORLD, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT.................................. F-2
FINANCIAL STATEMENTS AND NOTES:
Balance Sheets as of March 31, 1996 and 1997.................. F-3
Statements of Operations for the Years
Ended March 31, 1995, 1996 and 1997.......................... F-4
Statements of Shareholders' Equity for
the Years Ended March 31, 1995, 1996
and 1997..................................................... F-5
Statements of Cash Flows for the Years
Ended March 31, 1995, 1996 and 1997.......................... F-6
Notes to Financial Statements................................. F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
NEI WebWorld, Inc.:
We have audited the accompanying balance sheets of NEI WebWorld, Inc. as of
March 31, 1996 and 1997, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of NEI WebWorld, Inc. as of March 31, 1996 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
Deloitte & Touche LLP
Dallas, Texas
June 19, 1997
F-2
<PAGE>
NEI WEBWORLD, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................. $ 500 $ 43,460
Accounts receivable--net (Notes 3 and
7)................................... 1,718,046 2,374,985
Inventories (Note 7).................. 607,538 731,609
Prepaid expenses and other............ 20,145 16,403
Deferred income tax benefits (Note 9). 13,292 --
Deferred costs on insurance claims in
process (Note 6)..................... 290,172 --
---------- ----------
Total current assets............... 2,649,693 3,166,457
PROPERTY, PLANT AND EQUIPMENT--Net
(Notes 4 and 7)........................ 2,870,215 4,580,355
INTANGIBLES AND OTHER ASSETS--Net (Note
5)..................................... 657,951 716,520
DEFERRED INCOME TAX BENEFITS (Note 9)... 42,024 --
---------- ----------
TOTAL.............................. $6,219,883 $8,463,332
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable (Notes 7 and 14)......... $ 950,000 $1,836,547
Current portion of long-term debt
(Notes 7 and 14)..................... 689,904 664,286
Accounts payable...................... 706,156 1,576,858
Accrued expenses and other liabilities 129,613 378,579
Accrued management and consulting
fees (Note 13)....................... 32,500 63,833
Accrued equipment installation costs
(Note 2)............................. -- 580,000
---------- ----------
Total current liabilities.......... 2,508,173 5,100,103
LONG-TERM DEBT--Less current portion
(Notes 7 and 14)....................... 3,020,027 3,218,333
COMMITMENTS (Note 8)
SHAREHOLDERS' EQUITY (Notes 10, 11 and
14):
Common stock put warrants for 90,000
shares, at estimated redemption
value............................... 50,000 --
Common stock: 20,000,000 shares of
$.01 par value authorized; 2,203,628
shares and 2,719,778 shares issued
and outstanding, respectively...... 22,036 27,198
Additional paid-in capital............ 853,849 1,033,687
Accumulated deficit................... (234,202) (790,989)
Notes receivable--shareholders........ -- (125,000)
---------- ----------
Total shareholders' equity......... 691,683 144,896
---------- ----------
TOTAL.............................. $6,219,883 $8,463,332
========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NEI WEBWORLD, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
NET SALES (Note 3)...................... $12,005,532 $14,285,858 $17,150,360
COST OF SALES........................... 9,775,507 12,239,998 14,587,980
----------- ----------- -----------
GROSS PROFIT............................ 2,230,025 2,045,860 2,562,380
OPERATING EXPENSES:
Selling, general and administrative
(Note 12)............................ 912,390 1,164,963 1,791,057
Depreciation--property................ 378,151 410,702 525,273
Amortization--intangibles............. 232,624 232,485 228,051
Management and consulting fees (Note
13).................................. 140,250 157,408 136,333
----------- ----------- -----------
Total.............................. 1,663,415 1,965,558 2,680,714
----------- ----------- -----------
OPERATING INCOME (LOSS)................. 566,610 80,302 (118,334)
OTHER INCOME (EXPENSE):
Interest expense (Note 7)............. (420,856) (445,154) (531,040)
Other................................. 3,943 25,776 35,172
Gain on fire insurance settlement
(Note 6)............................. -- -- 271,265
----------- ----------- -----------
Total.............................. (416,913) (419,378) (224,603)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE AND EXTRAORDINARY ITEM......... 149,697 (339,076) (342,937)
INCOME TAX (BENEFIT) EXPENSE (Note 9)... 47,823 (29,019) 45,305
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM................................... 101,874 (310,057) (388,242)
EXTRAORDINARY ITEM--Loss on debt
retirement (Note 7).................... -- -- (108,545)
----------- ----------- -----------
NET INCOME (LOSS).......................
$ 101,874 $ (310,057) $ (496,787)
=========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Loss before extraordinary item........ $(0.11) $(0.14)
=========== ===========
Net loss.............................. $(0.11) $(0.18)
=========== ===========
COMMON SHARES OUTSTANDING............... 2,719,778 2,719,778
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NEI WEBWORLD, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON STOCK ADDITIONAL NOTES TOTAL
STOCK PUT -------------------- PAID-IN ACCUMULATED RECEIVABLE - SHAREHOLDERS'
WARRANTS SHARES AMOUNT CAPITAL DEFICIT SHAREHOLDERS EQUITY
--------- --------- ------- ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT APRIL 1,
1994....................... $ 50,000 2,003,828 $20,038 $ 823,462 $ 6,366 $ -- $ 899,866
Accretion on preferred
stock previously
outstanding (Note 10)... -- 99,900 999 101,027 (102,026) -- --
Accretion for estimated
redemption value of
common stock put
warrants for 90,000
shares.................. 159,124 -- -- -- (159,124) -- --
Net income................ -- -- -- -- 101,874 -- 101,874
--------- --------- ------- ---------- --------- --------- ----------
BALANCES AT MARCH 31,
1995....................... 209,124 2,103,728 21,037 924,489 (152,910) -- 1,001,740
Accretion on preferred
stock previously
outstanding (Note 10)... -- 99,900 999 (70,640) 69,641 -- --
Accretion (decrease) for
estimated redemption
value of the common
stock put warrants...... (159,124) -- -- -- 159,124 -- --
Net loss.................. -- -- -- -- (310,057) -- (310,057)
--------- --------- ------- ---------- --------- --------- ----------
BALANCES AT MARCH 31,
1996....................... 50,000 2,203,628 22,036 853,849 (234,202) -- 691,683
Accretion on preferred
stock previously
outstanding (Note 10)... -- 99,900 999 59,001 (60,000) -- --
Issuance of common stock
warrants for 80,000
shares.................. 23,500 -- -- -- (23,500) -- --
Redemption of common
stock warrants for
170,000 shares.......... (73,500) -- -- -- 23,500 -- (50,000)
Exercise of stock
options................. -- 416,250 4,163 120,837 -- (125,000) --
Net income................ -- -- -- -- (496,787) -- (496,787)
--------- --------- ------- ---------- --------- --------- ----------
BALANCES AT MARCH 31,
1997....................... $ -- 2,719,778 $27,198 $1,033,687 $(790,989) $(125,000) $ 144,896
========= ========= ======= ========== ========= ========= ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NEI WEBWORLD, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------
1995 1996 1997
---------- ----------- ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)..................... $ 101,874 $(310,057) $ (496,787)
Extraordinary loss on debt retirement. -- -- 108,545
Gain on fire insurance settlement
(Note 6)............................. -- -- (271,265)
Noncash items in net income (loss):
Depreciation and amortization...... 610,775 643,187 753,324
Amortization of debt discount...... 8,956 9,510 8,098
Amortization of debt issuance costs -- -- 11,409
Interest expense portion of
long-term debt increase........... -- -- 128,312
Gain on retirement of asset........ -- (17,032) --
Deferred income taxes.............. (37,083) (18,233) 55,316
Cash provided by (used for) operating
working capital:
Accounts receivable................ (442,699) (272,919) (161,075)
Inventories........................ (523,761) 333,659 428,867
Prepaid expenses and other......... 2,850 17,928 3,742
Costs related to insurance claims
settlements (Note 6)............. -- (127,741) (83,227)
Accounts payable and accrued
liabilities....................... 158,235 (179,315) 367,199
Income taxes payable............... 47,542 (47,542) --
--------- --------- -----------
Net cash provided by (used for)
operating activities........... (73,311) 31,445 852,458
--------- --------- -----------
INVESTING ACTIVITIES:
Acquisition of assets (Note 2)........ -- -- (217,063)
Additions to property, plant and
equipment............................ (193,079) (266,420) (627,651)
Proceeds from insurance settlements
(Note 6)............................. 61,853 21,824 578,965
Increase in intangibles and other
assets............................... (20,201) -- --
--------- --------- -----------
Net cash used for investing
activities..................... (151,427) (244,596) (265,749)
--------- --------- -----------
FINANCING ACTIVITIES:
Borrowings on notes payable and
long-term debt....................... 400,000 550,000 4,958,208
Payments/retirement of notes payable
and long-term debt................... (553,808) (636,849) (5,120,593)
Payments for debt issuance costs...... -- -- (90,079)
Borrowings under capital lease
arrangements......................... -- 300,000 --
Redemption of warrants................ -- -- (50,000)
Deferred IPO costs.................... -- -- (241,285)
--------- --------- -----------
Net cash provided by (used for)
financing activities........... (153,808) 213,151 (543,749)
--------- --------- -----------
INCREASE (DECREASE) IN CASH............. (378,546) -- 42,960
CASH:
Beginning of period................... 379,046 500 500
--------- --------- -----------
End of period.................... $ 500 $ 500 $ 43,460
========= ========= ===========
SUPPLEMENTAL INFORMATION:
Interest paid......................... $ 436,075 $ 445,806 $ 389,462
========= ========= ===========
Income taxes paid (received).......... $ 40,000 $ 47,000 $ (9,842)
========= ========= ===========
Noncash investing and financing
activities:
Acquisition of assets for
long-term debt
(Note 2).......................... $ 1,010,000
===========
Exercise of stock options for
notes receivable
(Note 11)......................... $ 125,000
===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business--NEI WebWorld, Inc. (the ``Company'') is in the business of printing
television programming schedules, advertising circulars, school catalogs and
other similar supplements for newspapers and periodicals. The Company commenced
operations in February 1994 following an acquisition accounted for under the
purchase method.
Preparation of Financial Statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses for the period. Differences from those
estimates are recognized in the period they become known.
Revenues are recognized as sales primarily when print jobs are shipped. Also,
in accordance with trade practice, revenues are accrued for jobs in process at
year-end on the basis of production activity at pro rata billing value of work
completed.
Inventories, which consist primarily of paper, are stated at the lower of cost
(first-in, first-out method) or market.
Property, Plant and Equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are provided using the straight-
line method over the estimated useful lives of the assets as follows: building
and improvements--7 to 40 years, printing equipment and other property--3 to 11
years.
Intangibles and Other Assets are amortized on a straight-line basis over two
to five years.
Financial Instruments consist of cash, receivables, payables and debt, the
carrying values of which are a reasonable estimate of their fair values due to
their short maturities or current interest rates.
Deferred Income Taxes are provided under the asset and liability method for
temporary differences in the recognition of income and expense for tax and
financial reporting purposes.
Stock-Based Compensation arising from stock option grants is accounted for by
the intrinsic value method under APB Opinion No. 25. Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," is effective for the Company beginning April 1, 1996, although
no options have been granted since that date. This statement requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. As permitted by SFAS No. 123, the
Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share.
Earnings per Share are computed based on the weighted average number of common
shares outstanding in fiscal 1996 and 1997, restated for the common stock split
and the preferred stock conversion that occurred on the effective date of the
Company's initial public offering ("IPO") in May 1997, as discussed in Notes 10,
11 and 14.
F-7
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. ASSET ACQUISITION
Effective September 13, 1996, the Company acquired certain printing equipment
and other assets and assumed certain liabilities from Webworks, Inc.
("Webworks"), a subsidiary of Morris Newspaper Corporation, for $50,000 cash,
a $1,010,000 note payable to the seller (Note 7) and $167,063 of acquisition
costs ($70,000 for brokerage and related acquisition services--see Note 13;
$58,000 for legal services; and $39,063 for consulting and related services)
primarily paid in cash. This total purchase price of $1,227,063 was allocated to
the assets acquired and liabilities assumed in proportion to their fair values
as shown below:
<TABLE>
<CAPTION>
<S> <C>
Current assets acquired--primarily
receivables and inventories....... $1,048,802
Current liabilities assumed........ (828,802)
Accrued equipment installation
costs............................. (580,000)
----------
Net current liabilities............ (360,000)
Web presses and other printing
equipment acquired................ 1,587,063
----------
$1,227,063
==========
</TABLE>
The acquired printing equipment is located in a facility leased under a short-
term operating lease. The estimated costs for the Company to relocate and
install the equipment in its facilities have been accrued based on the
installation plan initiated at acquisition. The installation commenced in March
1997 and is expected to be completed in September 1997.
3. ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Trade:
Billed.......................... $1,616,545 $2,268,442
Accrued revenues on jobs in
process........................ 43,209 189,693
Other accounts receivable.......... 60,644 23,336
---------- ----------
1,720,398 2,481,471
Less allowance for doubtful
accounts.......................... 2,352 106,486
---------- ----------
Accounts receivable--net........... $1,718,046 $2,374,985
========== ==========
</TABLE>
Revenues and accounts receivable from significant customers represent the
following percentages of the Company's net sales and accounts receivable:
<TABLE>
<CAPTION>
NET SALES ACCOUNTS RECEIVABLE
------------------ -------------------
1995 1996 1997 1996 1997
---- ---- ---- ------ -------
<S> <C> <C> <C> <C> <C>
Customer A.. 56% 55% 35% 36% 19%
Customer B.. 16 6 2 1 2
Customer C.. -- 6 8 14 5
</TABLE>
F-8
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Land................................. $ 186,264 $ 186,264
Building and improvements............ 863,830 1,215,406
Printing equipment and other property 2,611,376 4,457,952
Furniture and fixtures............... 27,909 29,709
Automotive and office equipment...... 8,000 43,461
---------- ----------
3,697,379 5,932,792
Less accumulated depreciation and 827,164 1,352,437
amortization........................ ---------- ----------
Property, plant and equipment--net... $2,870,215 $4,580,355
========== ==========
</TABLE>
5. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Noncompete agreement (with prior
owner of the Company; five-
year term from February
1994--see Notes 1 and 7)........ $750,000 $750,000
Goodwill............................. 305,533 305,533
Debt issuance costs.................. 80,322 90,079
Organizational costs................. 25,235 25,235
Less accumulated amortization........ 503,139 695,612
-------- --------
Total 657,951 475,235
Deferred IPO costs................... -- 241,285
-------- --------
Intangibles and other assets--net.... $657,951 $716,520
======== ========
</TABLE>
6. FIRE INSURANCE CLAIMS
On March 6, 1996, a fire damaged a portion of the Company's facilities.
Related to this fire, the Company deferred costs totaling $290,172, consisting
primarily of $162,431 for the net book value of property identified as damaged
by the fire, $62,042 for cleanup costs and $65,699 for restoration and
enhancement costs incurred through March 31, 1996. The Company continued to
incur cleanup and restoration costs after March 31, 1996, and was in the process
of finalizing its claim with an insurance company at that date.
During fiscal 1997, the Company incurred additional cleanup costs of $83,227,
received insurance proceeds of $578,965 and recorded a gain of $271,265. Also,
total restoration and enhancement costs of $395,903 were recorded as additions
to buildings and improvements and to equipment.
F-9
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE, CREDIT FACILITIES AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Notes payable to lender under term
loans, due in monthly principal
installments of $38,690, plus
interest at lender's prime rate
(8.5% at March 31, 1997), plus 1.5%,
balance due December 31, 1998,
collateralized by substantially all
Company assets.............................. $ -- $3,172,619
Subordinated note payable to Webworks
interest at 12% payable quarterly,
plua principal installments of $100,000
on September 12, 1997 and 1998, and
$310,000 on September 12, 1999,
collateralized by certain property.......... -- 510,000
Subordinated note payable to prior
owner, due in annual principal
installments of $100,000, plus
interest at 8% payable quarterly,
through February 28, 1999,
collateralized by certain property.......... 300,000 200,000
Note payable to bank under term loan,
due in monthly installments of $9,320,
including interest at 8.64%, balance
due March 31, 1999, collateralized
by substantially all Company assets......... 859,660 --
Subordinated notes payable to lender
(net of $31,434 unamortized discount
assigned to common stock warrant),
interest at 12% payable quarterly, plus
principal installments of $62,500 per
quarter beginning June 30, 1997 through
March 31, 2000, collateralized by
substantially all Company assets............ 718,566 --
Capital lease obligations, due in
monthly installments of $58,660,
including interest at 8.6% to 10.9%
through December 31, 2000, collateralized
by the leased equipment. Future minimum
lease payments total $2,100,431, which
includes interest of $268,726............... 1,831,705 --
---------- ----------
3,709,931 3,882,619
Less current portion......................... 689,904 664,286
---------- ----------
Long-term debt--less current portion......... $3,020,027 $3,218,333
========== ==========
</TABLE>
Notes payable of $1,836,547 at March 31, 1997, are outstanding under a
$3,750,000 revolving loan agreement as of that date which matures December 31,
1998, and is subject to annual renewals thereafter. Borrowings under the
revolving loan are subject to borrowing base requirements which may be adjusted
at the lender's discretion, bear interest payable monthly at lender's prime rate
plus 1.25%, and are collateralized by a lockbox requirement and by substantially
all Company assets. The revolving loan carries a .25% annual commitment fee,
payable quarterly, on the unused portion of the loan.
The loan agreement and notes payable to lender under the revolving loan and
term loans require maintenance of specified levels of adjusted net worth and
limit additional debt, investing activities, payment of dividends, purchases of
Company stock, other changes in ownership and transactions with related parties.
The loan agreement carries a $1,000 monthly servicing fee and early termination
fees of $270,000 prior to December 31, 1997, $180,000 prior to December 31,
1998, and $90,000 prior to the end of any renewal period. At March 31, 1997,
and in a subsequent month, the Company was in violation of certain debt
covenants, but returned to compliance in May 1997 when the Company completed the
IPO and repaid $3,400,000 on the term and revolving loans outstanding at that
time.
F-10
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The loan agreement also provides for capital expenditures loans of up to
$2,000,000, which would bear interest at the lender's prime rate, plus 1.5%,
would be payable monthly over five years or by the termination of the agreement,
and would be collateralized by substantially all Company assets. No capital
expenditures loans are outstanding at March 31, 1997.
In December 1996, a portion of the proceeds under these facilities were used
by the Company to retire the notes payable to the bank under the previous
revolving line of credit, the term loans and the subordinated notes payable
discussed below. In connection with this debt retirement, an extraordinary loss
of $108,545 was recognized, including write-offs of the related debt issuance
costs of $33,000 and unamortized debt discount of $23,000.
Notes payable of $950,000 at March 31, 1996, were outstanding under a
$1,100,000 revolving bank line of credit which matures March 31, 1997 (as
revised on September 13, 1996). Borrowings under the line of credit were subject
to borrowing base requirements, bearing interest payable monthly at the bank's
base rate (8.25% at March 31, 1996) plus 1.5% and collateralized by
substantially all Company assets. The revolving line of credit carried a
commitment fee of .25% on the unused portion of the loan. These notes payable
were retired in December 1996.
On September 13, 1996, the subordinated lender and the Company amended the
subordinated loan agreement. The amended agreement provided for an accelerated
payment on the original loan of $50,000 payable on September 19, 1996, without
prepayment penalty. In addition, this lender received warrants to purchase
80,000 shares of the Company's stock for $1 a share, and granted the Company the
option to repay the loan in full by December 31, 1996, without any prepayment
penalties and repurchase the 1994 and 1996 warrants for $50,000. This note
payable was retired and the warrants were redeemed in December 1996.
Long-term debt under the agreements existing at March 31, 1997, matures as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................................... $ 664,286
1999.................................... 2,908,333
2000.................................... 310,000
----------
$3,882,619
==========
</TABLE>
8. COMMITMENTS
Purchase Commitments--In March 1997, the Company entered into an unconditional
purchase obligation to a printing materials supplier for purchases at market
value through March 2000. Minimum future purchases under this agreement at March
31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................................... $200,000
1999.................................... 200,000
2000.................................... 183,333
--------
$583,333
========
</TABLE>
F-11
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases--During fiscal 1997, the Company entered into long-term
noncancelable operating leases for certain equipment and for an adjacent plant
facility. Minimum future rental commitments for these leases at March 31, 1997,
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................................... $ 186,402
1999.................................... 221,976
2000.................................... 214,620
2001.................................... 213,444
2002.................................... 213,444
Thereafter.............................. 88,935
----------
$1,138,821
==========
</TABLE>
The Company has entered into a contract to purchase the leased plant facility
for $1,700,000 by December 31, 1997. Should the Company fail to close this
transaction, the lease remains in effect and provides a five-year renewal option
at market rates. Rent expense under operating leases for fiscal 1995, 1996 and
1997 was $0, $4,058 and $47,348, respectively.
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
income tax benefit are as follows:
<TABLE>
<CAPTION>
MARCH 31
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Current:
Allowance for accounts
receivable, not currently
deductible.................... $ 1,000 $ 36,000
Vacation and bonus accruals,
not currently deductible....... 7,000 17,000
Other........................... 5,292 (9,000)
Valuation allowance............. -- (44,000)
-------- ---------
Total current assets......... 13,292 --
Long-term:
Accelerated depreciation and
amortization for tax
purposes...................... (68,468) (71,000)
Gain on fire insurance
settlement, not currently
taxable........................ -- (92,000)
Net operating loss carryforward
(expiring 2011
through 2012).................. 120,000 301,000
Alternative minimum tax credit
carryforward................... 68,000 68,000
Valuation allowance............. (77,508) (206,000)
-------- ---------
Total long-term assets....... 42,024 --
-------- ---------
Net deferred tax asset............. $ 55,316 $ --
======== =========
</TABLE>
F-12
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The resulting components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Current........................ $ 84,906 $(10,786) $ (10,011)
Deferred....................... (37,083) (95,741) (117,176)
Change in valuation allowance.. -- 77,508 172,492
-------- -------- ---------
Income tax expense (benefit)... $ 47,823 $(29,019) $ 45,305
======== ======== =========
</TABLE>
Income tax expense (benefit) varies from the amount determined by applying the
statutory federal income tax rate of 34% to income (loss) before income taxes as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------
1995 1996 1997
--------- ----------- ----------
<S> <C> <C> <C>
Income tax expense (benefit) computed
at federal statutory rate............ $50,897 $(115,286) $(139,904)
Change in valuation allowance......... -- 77,508 172,492
Expenses not deductible for tax
purposes............................. -- 9,779 6,437
Other................................. (3,074) (1,020) 6,280
------- --------- ---------
Income tax expense (benefit).......... $47,823 $ (29,019) $ 45,305
======= ========= =========
</TABLE>
10. PREFERRED STOCKS CONVERTED
The Company is authorized to issue 2,000,000 shares of $1 par value preferred
stock. In fiscal 1997 and prior years, the Company had Series A, B and C
preferred stocks issued and outstanding, which had annual cumulative dividends
(payable in Series C preferred stock) and mandatory redemption features
requiring annual accretion. These preferred stocks were converted to common
stock when the registration statement related to the IPO was declared effective
in May 1997 (Note 14). The financial statements are presented as if these stocks
were converted at the beginning of the periods reported.
11. COMMON STOCK
Common Stock--On March 31, 1997, the Company effected a 3.33-to-one stock
split. At the effective date of the IPO in May 1997, the Company converted
Series A, B and C preferred stocks to 2,008,823 shares of common stock. All
share data has been restated for these events.
F-13
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Common Stock Put Warrants--In connection with the subordinated notes payable
to lender, in February 1994, the Company issued warrants for 90,000 shares of
common stock. The warrants were exercisable at any time on or prior to the
expiration date of February 28, 2004, and entitled the holder to purchase common
stock for $1 per share, subject to certain adjustments. An estimated initial
value of $50,000 was assigned to the warrants. The warrant holder could require
the Company to purchase the warrants or common shares issued upon exercise of
the warrants (warrant shares) on or after February 28, 2000, until the
expiration date, subject to certain limitations.
In September 1996, the Company issued to the warrant holder additional
warrants for the purchase of 80,000 shares of common stock for $1 per share,
valued at $23,500, and in December 1996, redeemed the total 170,000 warrants
outstanding for $50,000.
Common Stock Options--Under a stock option plan, options for no more than
150,000 shares of common stock were authorized to be granted to certain Company
employees and consultants at prices equal to or greater than the fair market
value of the common stock as determined by the Board of Directors at the dates
of grant. In February 1994, the Company granted a principal officer/shareholder,
a director/shareholder and a preferred shareholder options to purchase a total
of 125,000 shares of common stock at an exercise price of $1 per share. The
options were exercisable subject to the Company's attainment of certain earnings
requirements. At March 31, 1996, 25,000 options were exercisable.
In April 1996, the Company vested all options previously granted and
terminated that plan. These options for 125,000 shares of common stock were
exercised for notes receivable totaling $125,000, which are classified as a
reduction of shareholders' equity. The notes (with recourse) bear interest at 6%
payable annually and mature in April 2001.
On April 4, 1997, the Company adopted the 1997 Stock Option Plan (the
"Plan"), which authorizes the Company to grant to employees and directors
incentive and nonqualified options to purchase up to 350,000 shares of common
stock at a price not less than the fair market value of the common stock on the
date of grant. Options under the Plan expire no more than ten years from the
later of the date of grant or the date first exercisable. Vesting provisions are
at the discretion of the Board of Directors. No options have been granted under
the Plan.
12. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) savings plan which covers substantially all of
its regular employees. The Company's annual contribution to the savings plan is
determined at the discretion of the Board of Directors. The Company recorded
contributions of approximately $31,000, $36,000 and $30,109 for fiscal 1995,
1996 and 1997, respectively.
13. TRANSACTIONS WITH RELATED PARTIES
The Company has an agreement with a shareholder and affiliate of two of its
directors to provide supervisory management services to the Company. Management
fees totaled $100,000 in fiscal 1995 and 1996, with $25,000 included in accrued
management and consulting fees at March 31, 1996. For fiscal 1997, management
fees totaled $150,000, of which $50,000 related to the acquisition of Webworks
assets and refinancing of long-term debt. At March 31, 1997, $50,000 is included
in accrued management and consulting fees.
F-14
<PAGE>
NEI WEBWORLD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company had a consulting agreement with a director and shareholder which
provided for a fixed fee each quarter and a contingent fee based on the
Company's sales growth. Consulting fees totaled $30,000 in fiscal 1995 and 1996,
with $7,500 included in accrued management and consulting fees at March 31,
1996. For fiscal 1997, consulting fees totaled $60,000, of which $30,000
related to the acquisition of Webworks assets. At March 31, 1997, $7,500 is
included in accrued management and consulting fees. Effective April 1997, this
agreement was terminated.
14. SUBSEQUENT IPO
In May 1997, the Company completed an initial public offering ("IPO") of
1,000,000 shares of common stock at $5.50 per share and 1,150,000 common stock
warrants at $.125 per warrant, resulting in net proceeds of $4,500,000, of which
$3,400,000 was used to repay notes payable. The remaining balance will be used
for installation and restoration of equipment acquired from Webworks and for
working capital and capital expenditures.
If the IPO had been completed and the $3,400,000 of notes payable repaid at
April 1, 1996, pro forma earnings per share for fiscal 1997 would be as follows
(assuming a reduction of interest expense of $302,000 and an increase in the
related common shares outstanding of 686,869):
Loss before extraordinary item $(.03)
======
Net loss $(.06)
======
F-15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 0 43
<SECURITIES> 0 0
<RECEIVABLES> 1,720 2,481
<ALLOWANCES> 2 106
<INVENTORY> 607 732
<CURRENT-ASSETS> 2,650 3,166
<PP&E> 3,697 5,933
<DEPRECIATION> 827 1,352
<TOTAL-ASSETS> 6,220 8,463
<CURRENT-LIABILITIES> 2,508 5,100
<BONDS> 3,020 3,218
0 0
0 0
<COMMON> 50 0
<OTHER-SE> 642 145
<TOTAL-LIABILITY-AND-EQUITY> 6,220 8,463
<SALES> 14,285 17,150
<TOTAL-REVENUES> 14,285 17,150
<CGS> 12,239 14,588
<TOTAL-COSTS> 12,239 14,588
<OTHER-EXPENSES> 1,972 2,270
<LOSS-PROVISION> (32) 104
<INTEREST-EXPENSE> 445 531
<INCOME-PRETAX> (339) (343)
<INCOME-TAX> (29) 45
<INCOME-CONTINUING> (310) (388)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (109)
<CHANGES> 0 0
<NET-INCOME> (310) (497)
<EPS-PRIMARY> (.11) (.18)
<EPS-DILUTED> (.11) (.18)
</TABLE>
