<PAGE> 1
As filed with the Securities and Exchange Commission on August 13, 1998
Registration No. 333-46115
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
AMENDMENT NO. 5
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
PERFORMANCE PRINTING CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 2799 75-2418082
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification Number)
Classification Code
Number)
3012 Fairmount
Dallas, Texas 75201
(214) 665-1000
(Address, including zip code and telephone number,
including area code, of registrant's principal
executive offices and principal place of business)
John T. White
President
PERFORMANCE PRINTING CORPORATION
3012 Fairmount
Dallas, Texas 75201
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------
Copies To:
Garza & Staples, P.C. Crouch & Hallett, L.L.P.
1230 Lincoln Center Two 717 North Harwood, Suite 1400
Dallas, Texas 75240 Dallas, Texas 75201
Attn: Joe B. Garza Attn: Susan Henderson
(800) 442-7040 (214) 953-0053
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Proposed
maximum maximum
Amount to be offering price aggregate Amount of
Title of each class of securities to be Registered per share(1) offering registration fee
registered (1) price(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units (2) 1,380,000 $ 5.125 $ 7,072,500 $ 2,144
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value (3) 1,380,000 (3) (3) (3)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants (3)(9) 1,380,000 (3) (3) (3)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, issuable under Common Stock
Purchase Warrants(4)(9) 1,380,000 $ 7.50 $ 10,350,000 $ 3,137
- ------------------------------------------------------------------------------------------------------------------------
Representatives' Warrants (5)(9) 120,000 $ .0009 $ 100 $ .04
- ------------------------------------------------------------------------------------------------------------------------
Units underlying Representatives' Warrants 120,000 $ 6.15 $ 738,000 $ 224
- ------------------------------------------------------------------------------------------------------------------------
Common Stock included in Representatives'
Units (6) 120,000 (6) (6) (6)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants included in
Representatives' Warrants (7) 120,000 (7) (7) (7)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock issuable upon exercise of Common
Stock Purchase Warrants Underlying the
Representatives' Units (8) 120,000 $ 7.50 $ 900,000 $ 272
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,777
========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 180,000 Shares of Common Stock and 180,000 Warrants issuable
pursuant to the Representatives' over-allotment option.
(3) Included in the Units. No additional registration fee is required.
(4) Represents shares of Common Stock issuable upon exercise of the Warrants
registered hereby together with such additional indeterminate number of
shares as may be issued upon exercise of such Warrants by reason of the
anti-dilution provisions contained therein.
(5) Representatives' Warrants to purchase up to 120,000 Units consisting of an
aggregate of 120,000 shares of Common Stock and 120,000 Warrants.
(6) Represents shares of common stock issuable upon exercise of the
Representatives' Warrant, together with such additional indeterminate
number of shares of Common Stock as may be issued upon exercise of such
Representatives' Warrant by reason of the anti-dilution provisions
contained therein.
(7) Representatives' Warrants to purchase up to 120,000 Common Stock Purchase
Warrants.
(8) Issuable upon exercise of Common Stock Purchase Warrants underlying the
Representatives' Units.
(9) Pursuant to Rule 416 of the Securities Act of 1933, no separate
registration fee is required because the Common Stock underlying the Common
Stock Purchase Warrants is being registered in the same registration
statement.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 3
===============================================================================
PROSPECTUS
SUBJECT TO COMPLETION, DATED AUGUST 13, 1998
PERFORMANCE PRINTING CORPORATION
1,200,000 UNITS
Each Unit Consisting of One Share of Common Stock and
One Redeemable Common Stock Purchase Warrant
Performance Printing Corporation (the "Company" or "Performance Printing")
is offering 1,200,000 units (the "Units"), each Unit consisting of one share
(the "Shares") of Common Stock, $.01 par value per share (the "Common Stock"),
and one Redeemable Common Stock Purchase Warrant (the "Warrants"). The Units,
the Shares and the Warrants offered hereby are referred to collectively as the
"Securities." The Shares and Warrants included in the Units may be not be traded
separately until ________, 1999 (180 days from the date of this Prospectus)
unless earlier separated upon three days notice from First London Securities
Corporation and Nutmeg Securities, Ltd. (the "Representatives") to the Company.
The Warrants may not be exercised until they are separated from the Units. Prior
to this Offering, there has been no public market for the Common Stock and the
Warrants. It is estimated that the initial public offering price will be $5.125
per Unit.
Each Warrant entitles the holder to purchase one share of Common Stock at a
price of $7.50 per share. The Warrants may be exercised at any time after
separation from the Units until the close of business five years from the date
hereof. The Warrants are redeemable by the Company for $.15 per Warrant on not
less than 30 nor more than 60 days written notice if the closing price for the
Common Stock for seven trading days during any 10 consecutive trading day period
ending not more than 15 days prior to the date that the notice of redemption is
mailed equals or exceeds $10.00 per share, subject to adjustment under certain
circumstances and provided there is then a current effective registration
statement under the Securities Act of 1933, as amended (the "Act"), with respect
to the issuance and sale of the Common Stock upon the exercise of the Warrants.
Any redemption of the Warrants during the one-year period commencing on the date
of this Prospectus shall require the written consent of the Representatives. See
"Description of Securities."
Prior to this Offering, there has been no public market for the Units,
Common Stock or the Warrants. The initial public offering price of the Units and
the exercise price and other terms of the Warrants have been determined through
negotiations between the Company and the Representatives and are not related to
the Company's assets, book value, financial condition or other recognized
criteria of value. Although the Company has applied for the listing of the
Units, Common Stock and the Warrants on the Boston Stock Exchange under the
symbols "PPC/U," "PPC" and "PPC&W," respectively, and inclusion on the Nasdaq
SmallCap Market under the symbols "INKSU," "INKS" and "INKSW," respectively,
there can be no assurance that an active trading market in the Company's
securities will develop or be sustained.
------------------
THESE ARE SPECULATIVE SECURITIES. AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE
"RISK FACTORS" ON PAGES 11 THROUGH 16 AND "DILUTION."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)(3)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit .............................. $ $ $
- ----------------------------------------------------------------------------------------------------------------------------
Total(3)................................ $ $ $
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEE FOOTNOTES ON FOLLOWING PAGE
The Securities are offered by the Underwriters on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject orders in whole or in part.
It is expected that delivery of the certificates for the shares of Common Stock
will be made on or about , 1998.
FIRST LONDON SECURITIES CORPORATION NUTMEG SECURITIES, LTD.
The date of this Prospectus is , 1998
<PAGE> 4
{Description of pictures and text on gatefold inside of the front cover of the
prospectus}
Page 1 of the gatefold:
Picture #1: Machinery and operator of the machinery.
Picture #2: Machinery and operator of the machinery.
Picture #3: Machinery and operator of the machinery.
Picture #4: Drawing of a toy top.
Text:
A Top
Performer
in P-O-P
Performance is a single-source supplier of P-O-P and promotional marketing
materials. We offer experience, knowledge and special capabilities in the
areas of offset and screen printing, display packaging and P-O-P displays.
Pages 2 & 3 of the gatefold:
Picture #1: Machinery.
Picture #2: Building.
Picture #3: Machinery and operator of the machinery.
Picture #4: Products manufactured by the Company.
Picture #5: Products manufactured by the Company.
Picture #6: Products manufactured by the Company.
Picture #7: Products manufactured by the Company.
Picture #8: Products manufactured by the Company.
Picture #9: Products manufactured by the Company.
Text:
There are many quality printers in America and we, at Performance Printing
Corporation, have separated ourselves from the crowd by offering our
customers a wide range of capabilities and services.
Our special capabilities are in the areas of screen printing,
point-of-purchase displays and display packaging. Performance's services
include design and electronic prepress, both UV and conventional sheetfed
offset printing, large-format screen printing, off-line specialty coating,
plastic forming, a wide range of finishing services, kitting and
fulfillment.
We at Performance have the people and the expertise to take jobs from start
to finish. We give customers more than promises. We give them Performance.
Performance Printing Corporation, is a single-source supplier of
point-of-purchase and other promotional materials on both paper and
plastics.
P-O-P Displays
Display Header signs
Shelf Strips
Self Wobblers
Floor Graphics
Static Cling Decals
Pressure-sensitive Decals
Translites
Trading Cards
Product Trays
Pole Toppers
Posters
Counter cards
Table Tents
Box Labels
Display Packaging
Mouse Pads
Counter Mats
Proportion Wheels
Book Marks
<PAGE> 5
1) Does not include additional underwriting compensation to be received by the
Representatives in the form of (i) a non-accountable expense allowance
equal to 2% of the gross proceeds of this Offering, of which $50,000 has
been paid to date, and (ii) a warrant issued to the Representatives for
nominal consideration (the "Representatives' Warrant") to purchase up to
120,000 Shares and up to 120,000 Warrants exercisable for a four-year
period commencing one year from the date hereof at an exercise price equal
to $6.00 per Share and $0.15 per Warrant, subject to adjustment. In
addition, the Company has granted to the Representatives certain
registration rights with respect to registration of the Common Stock, the
Warrants and the shares of Common Stock issuable upon exercise of the
Warrants. The Company has agreed to pay the Representatives upon the
exercise or redemption of the Warrants a fee equal to 5% of the gross
proceeds received by the Company from the exercise of the Warrants and 5%
of the aggregate redemption price for the Warrants redeemed. The
Representatives or their designees must be designated by the Warrant holder
as having solicited the Warrant in order to receive the fee. The Company
has agreed to indemnify the Underwriters against certain liabilities
arising under the Act.
(2) Before deducting expenses payable by the Company estimated at $500,000
including the Representatives' non-accountable expense allowance.
(3) The Company has granted the Representatives an option (the
"Representatives' Over-allotment Option"), exercisable within 30 days from
the date of this Prospectus, to purchase on the same terms as the
Securities offered hereby up to 180,000 additional Units solely to cover
over-allotments, if any. If the Representatives' Over-allotment Option is
exercised in full, the total Price to Public, Underwriting Commissions, and
Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement"), pursuant to the Act with respect to the securities offered by this
Prospectus. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto. THE STATEMENTS CONTAINED IN
THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT OR OTHER DOCUMENT IDENTIFIED
AS EXHIBITS IN THIS PROSPECTUS ARE NOT NECESSARILY COMPLETE, AND IN EACH
INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH CONTRACT OR DOCUMENT FILED AS AN
EXHIBIT TO THE REGISTRATION STATEMENT, EACH STATEMENT BEING QUALIFIED IN ANY AND
ALL RESPECTS BY SUCH REFERENCE. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and exhibits which may be inspected without charge at the Commission's
principal office at Judiciary Plaza, 450 Fifth Street, NW, Washington, DC 20549.
Upon consummation of this Offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its
New York Regional Office, Room 1300, 7 World Trade Center, New York, New York
10048; and at its Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at prescribed rates. The Company's Registration Statement on Form
SB-2 as well as any reports to be filed under the Exchange Act can also be
obtained electronically after the Company has filed such documents with the
Commission through a variety of databases, including among others, the
Commission Electronic Data Gathering, Analysis And Retrieval ("EDGAR") program,
Knight-Ridder Information, Inc., Federal Filings/Dow Jones and Lexis/Nexis.
Additionally, the Commission maintains a Website (at http://www.sec.gov) that
contains such information regarding the Company. In addition, such material may
also be inspected and copied at the offices of the Boston Stock Exchange, Inc.,
One Boston Place, Boston, Massachusetts.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and such other reports as the Company
deems appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
5
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all information in this Prospectus assumes no exercise
of the Warrants, the Representatives' Over-allotment Option and the
Representatives' Warrant; (ii) all information in this Prospectus assumes a
public offering price of $5.125 per Unit ($5.00 per share of Common Stock and
$.125 per Warrant); and (iii) all share and per share data have been adjusted to
give effect to a 1 for 1.1 reverse stock split in August, 1998.
THE COMPANY
Performance Printing is a specialty printing and display manufacturing
company that is a single-source supplier of point-of-purchase and promotional
marketing materials operating two plants in Dallas, Texas. The Company also
offers unique capabilities in the areas of offset and screen printing,
point-of-purchase displays and display packaging.
The Company's business has been built around a core specialty of
printing with inks and coatings which are cured with ultra violet light ("UV").
This UV printing technology enables the Company to print on Substrates other
than paper, such as vinyl, styrene and polyethelene terephtalate-glycol
("PETG"). Services provided by the Company include design and electronic
pre-press services, both UV and Conventional Sheetfed Offset Printing,
Large-Format Screen Printing, Large-Format Digital Printing, Off-Line Specialty
Coating, Plastic Forming, a wide range of finishing services and direct
shipments of finished point-of-purchase advertising kits to retail stores. The
foregoing capitalized terms, commonly used in the printing industry, are defined
in the Glossary on Page 44 below.
From 1987 to 1995, the Company sustained revenue growth of 24% per
annum. For the fiscal year ended December 31, 1997, the Company recorded
revenues of $20,114,549 and net income of $551,465 compared to the fiscal year
ended December 31, 1996 revenues of $15,715,395 and net income of $213,360, a
28% increase in revenues and a 158% increase in net income. A customer of the
Company filed for bankruptcy protection in July 1998. This customer accounted
for 12.5% and 4% of Company sales in 1997 and the first six months of 1998,
respectively. The Company believes that the bankruptcy of the customer will not
have a material adverse effect on the financial condition or the business
strategy of the Company. See "Selected Financial Data," "Risk Factors -
Ownership of Performance Packaging," "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and "Business - Affiliated
Companies."
The Company has the capabilities to develop concepts and design
prototypes of point-of-purchase displays and also to create graphic design for
commercial printing and display packaging customers. These concept-to-completion
services are instrumental in attracting and retaining the graphic arts customer.
Historically, the Company has grown and profited by increasing its capacity and
adding services complimentary to its existing specialties, such as
point-of-purchase display services.
The Company has a two-point growth strategy that is based upon
internal expansion and acquisitions. Internal expansion focuses on building the
Company's existing business and adding new specialties and related services when
appropriate. The acquisition strategy is to acquire small commercial printers
and screen printers in several key markets around the United States and convert
these plants to shops similar to its Dallas operations. The sales force at each
plant would be trained to sell point-of-purchase advertising and related
materials. Jobs requiring the use of the multi-million dollar presses such as
the Company's equipment in Dallas would be transferred to Dallas for production.
The regional plants would facilitate the development of close relationships with
major users of point-of-purchase advertising and related materials, with primary
emphasis on sales, pre-press and short run work in the regional plants.
The Company was founded in 1981 and incorporated in 1992 as a Texas
corporation. The Company will convert from "S" Corporation status to "C"
Corporation status prior to the consummation of the Offering. It currently has
over 160 employees. The Company's offices are located at 3012 Fairmount, Dallas,
Texas 75201, and its telephone number is (214) 665-1000.
6
<PAGE> 7
THE OFFERING
Securities Offered................... 1,200,000 Units, each Unit consisting of
one share of Common Stock and one
Warrant, each Warrant entitling the
holder to purchase one share of Common
Stock at $7.50 per share until , 2003 (5
years from the date of this Prospectus).
See "Description of Securities."
Description of the
Warrants............................. The Warrants are not immediately
exercisable and are not transferable
separately from the Shares until , 1999
(180 days from the date of this
Prospectus) unless earlier separated on
three days notice from the
Representatives to the Company. See
"Description of Securities."
Common Stock Outstanding:
Before the Offering......... 4,000,000 Shares
After the Offering.......... 5,200,000 Shares (1)(2)
Warrants Outstanding:
Before the Offering......... None
After the Offering.......... 1,200,000 (3)
Estimated Net Proceeds............... $5.0 million (4)
Use of Proceeds...................... Repay outstanding indebtedness and
provide additional working capital. See
"Use of Proceeds."
Risk Factors......................... The Securities offered hereby are
speculative and involve a high degree of
risk. Investors should carefully consider
the risk factors enumerated hereafter
before investing in the Securities. See
"Risk Factors" and "Dilution."
Proposed Trading Symbols (5):
Boston Stock Exchange:
Units........................... PPC/U
Common Stock................ PPC
Warrant..................... PPC&W
Nasdaq SmallCap Market:
Units....................... INKSU
Common Stock................ INKS
Warrants.................... INKSW
- ---------------------------
(1) Does not include 300,000 shares of Common Stock reserved for issuance under
the Company's stock option plan (the "Stock Option Plan"). No shares have
been granted under the Stock Option Plan as of the date of this Prospectus.
See "Management-Stock Option Plan."
(2) Does not include (i) up to 180,000 shares issuable pursuant to the
Representatives' Over-allotment Option, (ii) 1,200,000 shares of Common
Stock issuable upon the exercise of the Warrants offered hereby and (iii)
240,000 shares of Common Stock issuable upon the exercise of the
Representatives' Warrant and the Warrants included therein.
7
<PAGE> 8
(3) Does not include (i) up to 180,000 Warrants issuable pursuant to the
Representatives' Over-allotment Option and (ii) the Representatives'
Warrant and the 120,000 Warrants included therein.
(4) After deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, including a 2% non-accountable
expense allowance payable to the Representatives.
(5) Boston Stock Exchange and the Nasdaq SmallCap Market symbols do not imply
that an established public trading market will develop for any of these
securities, or if developed, that any such market will be sustained. See
"Risk Factors-Possible Applicability of Rules Relating to Low-Priced Stock;
Possible Failure to Qualify for Boston Stock Exchange or Nasdaq SmallCap
Market Listing."
8
<PAGE> 9
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction
with the financial statements and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The data for the years ended December 31, 1997 and
1996 are derived from the audited financial statements included elsewhere in
this Prospectus. The data for the six months ended June 30, 1998 and 1997 are
derived from unaudited financial statements that are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
STATEMENTS OF OPERATIONS DATA: JUNE 30, 1998 JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue $ 9,790,796 $ 8,968,422 $ 20,114,549 $ 15,715,395
Costs of goods sold 8,089,881 6,901,897 15,466,484 12,101,986
Gross profit 1,700,915 2,066,525 4,648,065 3,613,409
Selling, general and administrative expenses 1,512,000 1,515,892 3,269,575 2,872,913
Income from operations 72,915 408,133 984,375 518,174
Other expense, net (134,829) (260,826) (432,910) (346,564)
Pre-tax income (loss) (61,914) 147,307 551,465 213,360
Income tax benefit (provision) (1) 18,912 (53,343) (189,638) (81,354)
Net income (loss) (1) $ (43,002) $ 93,964 $ 361,827 $ 132,006
PRO FORMA EARNINGS PER SHARE (1):
Basic and diluted $ (0.01) $ 0.02 $ 0.09 $ 0.03
Weighted average outstanding shares 4,000,000 4,000,000 4,000,000 4,000,000
OTHER DATA:
EBITDA (2) $ 664,511 $ 807,925 $ 1,884,060 $ 1,629,012
Net cash provided by (used in) operating activities (12,360) (244,018) 568,543 485,755
============= ============= ============= =============
Net cash provided by (used in) investing activities (56,752) 261,269 656,081 236,506
============= ============= ============= =============
Net cash provided by (used in) financing activities (453,823) (814,771) (1,270,200) 85,816
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
Actual As Adjusted (3)
====== ===============
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $ (670,741) $ 3,890,054
=============== ===============
Total assets 10,555,843 12,619,264
=============== ===============
Long-term debt and capitalized lease obligations, 3,546,132 3,309,971
=============== ===============
less current portion
Shareholders' equity 924,394 5,721,350
=============== ===============
</TABLE>
- ---------------
(1) Adjusted to reflect the conversion from "S" Corporation status to "C"
Corporation status prior to the Offering.
(2) EBITDA represents operating income excluding interest, taxes, depreciation,
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 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 revolving
9
<PAGE> 10
credit agreement. Items 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.
(3) The as adjusted summary balance sheet data has been prepared as if the
Offering had occurred as of June 30, 1998 and reflects the issuance of the
Securities offered by the Company hereby and the application by the Company
of the net proceeds therefrom. See "Use of Proceeds."
10
<PAGE> 11
RISK FACTORS
Prospective investors should carefully review the following risk
factors together with the other information in this Prospectus in evaluating the
Company and its business prior to purchasing the Securities offered by this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. Actual results could differ from those discussed in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in the Prospectus.
PRINTING BUSINESS DEPENDENT ON INDIVIDUAL ORDERS AND NOT ON LONG-TERM CONTRACTS
The Company's business 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 needs and
its satisfaction with the services provided. The Company has equipped its plants
to meet expected increases in demand over the next few years. The profitability
of the Company is dependent in part on the continued growth in revenues, and the
Company has no binding commitments from its customers to assure that the
revenues of the Company will be sufficient to cover its fixed costs in the
future.
Since many of the services rendered by the Company relate to large
projects for customers, sales to particular customers may vary significantly
from year to year depending on the number and the size of projects required.
During 1997, five customers together represented more than 34% of the Company's
sales. Although one customer (Pinnacle) accounted for 12.5% of sales in 1997,
Pinnacle accounted for less than 2% of sales in 1996 and is expected to account
for less than 2% of sales in 1998. The partial loss of Pinnacle as a customer
because it is experiencing financial difficulties will not have a material
adverse effect on the Company. See "Business - Affiliated Companies."
The Company had 306 customers in 1997 with an average of approximately
$65,700 of sales per customer. The Company has no printing contracts with any of
its customers, and though it believes that its relations with its customers are
good, the loss of business from a significant customer could have a material
adverse effect on the results of operations, financial condition and cash flows
of the Company.
FLUCTUATIONS IN REVENUES
Because the Company has no long-term contracts with its customers, the
Company 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 the financial results in that quarter. 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.
HISTORY OF WORKING CAPITAL SHORTAGES
In each of 1992 and 1996, the Company was unable to fund its working
capital needs through cash flow from operations and third party financing
sources. As a result, the Company borrowed an aggregate of $410,000 and $350,000
from its shareholders in 1992 and 1996, respectively, to meet its working
capital needs. There can be no assurance in the future that the Company will be
able to fund its working capital requirements through cash flow from operations,
from third party financing sources or from loans from its shareholders. See "Use
of Proceeds" and "Certain Transactions."
OWNERSHIP OF PERFORMANCE PACKAGING
The Company owns 51% of Performance Packaging, L.C. ("Performance
Packaging"). Pinnacle owns the remaining 49% and as the principal customer of
Performance Packaging, accounted for 96.4% of Performance Packaging's sales in
the fiscal year ended December 31, 1997. Under the terms of the First Renewal of
the Packaging Services Agreement dated April 1, 1997 (the "Packaging
Agreement"), Pinnacle has first call on 100% of the packaging capacity of
Performance Packaging in exchange for certain fixed cost payments. Pinnacle has
legal control of Performance Packaging, although the Company currently manages
its
11
<PAGE> 12
operations. Pinnacle and its affiliates filed for Chapter 11 protection in U.S.
Bankruptcy Court on July 23rd 1998. Performance Packaging will cease operations
if a contract with another customer is not reached by October 31, 1998.
Performance Packaging contributed a loss of $46,873 in 1997 and income of
$171,059 in the first six months of 1998, but the Company does not believe that
this event will have a material adverse effect on 1998 and future sales and
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation,." and "Business - Affiliated Companies."
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
John T. White, the Company's Chief Executive Officer and W. Chris Pumpelly, its
Chairman. The loss of the services of either of these key employees could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not maintain key-man insurance on the
lives of Messrs. White and Pumpelly, but carries life insurance on such persons
as required by the terms of a loan guaranteed by the Small Business
Administration on a building owned by the Company. There are no employment
agreements between the Company and any of the executive officers. 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. See "Management."
USE OF PROCEEDS
Upon consummation of the Offering, the Company will use 49.1% of the
net proceeds from the Offering to repay indebtedness. Management will have broad
discretion as to the application of the remaining 50.9% of the net proceeds,
which will be allocated for working capital. A portion of such proceeds may be
used for acquisitions.
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 North Texas. The
Company and its profitability may be susceptible to the effects of unfavorable
or adverse local economic factors and conditions affecting this geographic
region.
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. The Company invests in
technology improvements after such improvements have been proven to be
cost-effective. 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 digital or
electronic formats rather than disseminated in a paper format and this trend
could continue in the future.
CONTROL BY PRINCIPAL SHAREHOLDERS
Upon completion of this Offering, the directors and executive officers
will own approximately 70.71% 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. See "Principal Shareholders."
12
<PAGE> 13
DILUTION
Purchasers of shares of the Common Stock will suffer an immediate,
substantial dilution of approximately $3.96 per share or approximately 79% in
the net tangible book value of their shares of Common Stock since $5.00 of the
Unit purchase price attributable to the Common Stock substantially exceeds the
current tangible book value per share of Common Stock. See "Dilution."
COMPETITION
The commercial printing industry is extremely competitive and
fragmented. The Company has no patented or proprietary products. The Company
competes with numerous large and small printing companies, some of which have
greater financial resources, and the number of printing companies providing UV
Curing of Inks and Coatings is greater at this time than it has been in prior
years. 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. See "Business-Competition."
INTEGRATION OF ACQUISITIONS
A material element of the Company's growth strategy is to expand its
business by purchasing commercial printers in other geographical markets and
converting them into satellite operations of the Company. The Company has no
experience in purchasing printing companies. 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 the Company does not have sufficient cash resources for any acquisition, its
growth could be limited. There can be no assurance that the Company will be able
to obtain adequate financing for any acquisition, or that, if available, such
financing will be on terms acceptable to the Company. The consent of the
Company's primary lender will be required to be obtained in order to consummate
such acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and
"Business-Business Strategy."
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward looking statements" within the
meaning of Section 27A of the Act, and Section 21E of the Exchange Act. The
actual results of the Company may differ significantly from the results
discussed in such forward-looking statements. Certain factors that might cause
such differences include, but are not limited to, the factors discussed in this
"Risk Factors" section. The safe harbors contained in Section 27A of the Act and
Section 21E of the Act, which apply to certain forward-looking statements, are
not applicable to this Offering.
NO DIVIDENDS EXCEPT TAX DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock since its inception except for Subchapter S distributions to the
shareholders proportional to their Subchapter S tax liabilities. 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.
See "Dividend Policy" and "Note 1 of Notes to Financial Statements."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company 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,
13
<PAGE> 14
there can be no assurance that future changes in such laws and regulations will
not have a material effect on the Company's operations. See "Business-Government
Regulation and Environmental Matters."
SHARES OF COMMON STOCK RESERVED UNDER STOCK OPTION PLAN
The Company has reserved 300,000 shares of Common Stock for issuance to
key employees, officers, directors and consultants pursuant to the Company's
Stock Option Plan. The existence of these options and any other options or
warrants may prove to be a hindrance to future equity financing by the Company.
Further, the holders of such options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
5,200,000 shares of Common Stock (5,380,000 shares if the Representatives'
Over-allotment Option is exercised in full). The existing shareholders have
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities exercisable for or convertible into Common
Stock for a period of one year after the date of this Prospectus without the
prior written consent of the Representatives.
No predictions can be made as to the effect, if any, that market sales
of such shares will have on the market price of shares of Common Stock
prevailing from time to time. However, sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale following
the Offering could adversely affect the market price for the Common Stock. See
"Shares Eligible for Future Sale," "Description of Securities" and "Principal
Shareholders."
ARBITRARY OFFERING PRICE AND EXERCISE OF WARRANTS
The public offering price of the Units and the exercise price of the
Warrants, as well as the exercise price of the Warrants underlying the
Representatives' Warrant, have been determined solely by negotiations between
the Company and the Representatives. Among the factors considered in determining
these prices were the Company's current financial condition and prospects,
market prices of similar securities of comparable publicly traded companies, and
the general condition of the securities market. However, the public offering
price of the Units as well as the amount of the offering price attributable to
the Common Stock and the Warrants and the exercise price of the Warrants and the
underlying Warrants do not necessarily bear any relationship to the Company's
assets, book value, earnings or any other established criterion of value. See
"Underwriting."
Holders of the Warrants have the right to exercise the Warrants only if
there is then a current effective registration statement under the Act and if
the underlying shares of Common Stock are qualified, registered or exempt from
registration under applicable securities laws of the states in which the various
holders of the Warrants reside. The Company cannot issue shares of Common Stock
to holders of the Warrants in states where such shares are not qualified,
registered or exempt. It is possible that the Warrants could be held by persons
residing in states where the Company is unable to qualify the Common Stock
underlying the Warrants for sale. The Company has undertaken, however, to
qualify the Warrants for listing on the Boston Stock Exchange which provides for
blue-sky registration in 11 states. The Warrants may expire, unexercised, which
would result in the holders losing all the value of the Warrants. See
"Description of Securities-Warrants."
14
<PAGE> 15
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
The Warrants are subject to redemption by the Company in certain
circumstances. The Company's exercise of this right would force a holder of the
Warrants to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the then
current market price when the holder might otherwise wish to hold the Warrants
for possible additional appreciation, or to accept the redemption price, which
is likely to be substantially less than the market value of the Warrants in the
event of a call for redemption. Holders who do not exercise their Warrants prior
to redemption by the Company will forfeit their right to purchase the shares of
Common Stock underlying the Warrants. The foregoing notwithstanding, the Company
may not redeem the Warrants at any time that a current registration statement
under the Act is not then in effect. The Company may be expected to redeem the
Warrants at a time when the market price of the Common Stock exceeds $10.00 per
share for more than 10 days. See "Description of Securities-Warrants."
EXERCISE OF REPRESENTATIVES' PURCHASE WARRANTS
In connection with this Offering, the Company will sell to the
Representatives, for nominal consideration, a Representatives' Warrant to
purchase up to 120,000 Shares and up to 120,000 Warrants from the Company. The
Representatives' Warrant will be exercisable for a four-year period commencing
one year from the effective date of the Offering at an exercise price of $6.00
per Share and $0.15 per Warrant, subject to adjustment. The Representatives'
Warrant may have certain dilutive effects because the holders thereof will be
given the opportunity to profit from a rise in the market price of the
underlying shares with a resulting dilution in the interest of the Company's
other shareholders. The terms on which the Company could obtain additional
capital during the life of the Representatives' Warrant may be adversely
affected because the holders of the Representatives' Warrant might be expected
to exercise them at a time when the Company would otherwise be able to obtain
comparable additional capital in a new offering of securities at a price per
share greater than the exercise price of the Representatives' Warrant.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES
Prior to this Offering, there has been no public market for the Units,
the Common Stock or the Warrants. Although the Company has applied to list the
Units, the Common Stock and the Warrants on the Boston Stock Exchange and the
Nasdaq SmallCap Market, there can be no assurance that a regular trading market
will develop (or be sustained, if developed) for the Units, the Common Stock or
the Warrants upon completion of this Offering, or that purchasers will be able
to resell their Units, Common Stock or Warrants or otherwise liquidate their
investment without considerable delay, if at all. Recent history relating to the
market prices of newly public companies indicates that, from time to time, there
may be significant volatility in their market price. There can be no assurance
that the market price of the Units, the Common Stock or the Warrants will not be
volatile as a result of a number of factors, including the Company's financial
results or various matters affecting the stock market generally.
PREFERRED STOCK AUTHORIZED
The Company's Articles of Incorporation authorize the issuance of
3,000,000 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. See
"Description of Securities- Preferred Stock."
REPRESENTATIVES' POTENTIAL INFLUENCE ON THE MARKET
It is anticipated that a significant amount of the Units will be sold
to customers of the Representatives. Although the Representatives have advised
the Company that they intend to make a market in the Securities, they will have
no legal obligation to do so. The prices and the liquidity of the Securities may
be significantly affected by the degree, if any, of the Representatives'
participation in the market. No assurance can be given that any
15
<PAGE> 16
market making activities of the Representatives, if commenced, will be
continued. The Common Stock and the Warrants may not be traded separately until
, 1999, (180 days from the date of this Prospectus) unless earlier
separated upon three days notice in the sole discretion of the Representatives
and without the consent of the Unit holders. The Warrants are not exercisable
until separated from the Units. Factors that the Representatives will consider
in determining whether to separate the Units before , 1999 are the
trading price and volume for the Units and the volatility of the trading price
for the Units. See "Underwriting."
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCKS; POSSIBLE FAILURE
TO QUALIFY FOR BOSTON STOCK EXCHANGE OR NASDAQ SMALLCAP MARKET LISTING
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share, subject to certain exceptions. While the price at which
the Units offered to the public pursuant to this Offering will be equal to
$5.125, there can be no assurance that the Company will be able to satisfy the
listing criteria of the Boston Stock Exchange or that the Units, the Common
Stock or the Warrants will trade for $5.00 or more after the Offering.
Consequently, the "penny stock" rules may restrict the ability of broker/dealers
to sell the Company's Securities and may affect the ability of purchasers in
this Offering to sell the Company's Securities in a secondary market.
Although the Company has applied for listing of the Units, the Common
Stock and the Warrants on the Boston Stock Exchange and the Nasdaq SmallCap
Market, there can be no assurance that such application will be approved or that
a trading market for the Units, the Common Stock and the Warrants will develop
or, if developed, will be sustained. Furthermore, there can be no assurance that
the Securities purchased by the public hereunder may be resold at their original
offering price or at any other price.
In order to qualify for initial listing on the Boston Stock Exchange, a
company must, among other things, have at least $3,000,000 in total assets,
$2,000,000 of net tangible assets, $100,000 of net income in two of the past
three years or $2,000,000 net tangible assets, a 750,000 share "public float,"
with a $1,500,000 market value, 600 beneficial holders, a minimum $2.00 bid
price and $1,000,000 stockholders equity. For continued listing on the Boston
Stock Exchange, a company must maintain $1,000,000 of total assets, a 150,000
share public float with a $500,000 market value, 250 beneficial owners and a
minimum $500,000 of stockholders equity. The failure to meet these maintenance
criteria in the future may result in the discontinuance of the listing of the
Securities on the Boston Stock Exchange.
In order to qualify for initial listing on the Nasdaq SmallCap Market,
a company must, among other things, have at least $4,000,000 in net tangible
assets, $5.0 million "public float," and a minimum bid price for its securities
of $4.00 per share. For continued listing on the Nasdaq SmallCap Market, a
company must maintain $2,000,000 in net tangible assets and a $1,000,000 market
value of the public float. In addition, continued inclusion requires two
market-makers and a minimum bid of $1.00 per share. The failure to meet these
maintenance criteria in the future may result in the discontinuance of the
listing of the Common Stock and Warrants on the Nasdaq SmallCap Market.
If the Company is or becomes unable to meet the listing criteria
(either initially or on a continued basis) of the Boston Stock Exchange or the
Nasdaq SmallCap Market and is never traded or becomes delisted therefrom,
trading, if any, in the Common Stock and the Warrants would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or, if
then available, "Electronic Bulletin Board" administered by the National
Association of Securities Dealers, Inc. (the "NASD"). In such an event, the
market price of the Common Stock and the Warrants may be adversely impacted. As
a result, an investor may find it difficult to dispose of or to obtain accurate
quotations as to the market value of the Common Stock and the Warrants.
16
<PAGE> 17
DILUTION
The net tangible book value of the Common Stock at June 30, 1998 was
$924,394 or $0.23 per share. "Net tangible book value per share" represents the
amount of total tangible assets less total liabilities, divided by the number of
total shares of Common Stock outstanding. After giving effect to the sale of the
1,200,000 Units (1,200,000 shares of Common Stock and 1,200,000 Warrants) at an
assumed initial public offering price per Unit of $5.125 or $5.00 per Share and
$.125 per Warrant, and the initial application of the estimated net proceeds
therefrom, pro forma net tangible book value of the Company at June 30, 1998,
would have been $5,721,350 or $1.10 per share ($1.21 per share if the
Over-allotment Option is exercised), representing an immediate increase in net
tangible book value of $0.87 per share to existing shareholders and an immediate
dilution of $3.90 per share (or approximately 78.0% dilution) to purchasers of
shares of Common Stock in this Offering as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $5.00
Net tangible book value per share before Offering................... $0.23
Increase in value per share attributable to new investors........... $0.87
-----
Pro forma net tangible book value per share after Offering............... $1.10
-----
Dilution per share to new investors...................................... $3.90
=====
Percentage dilution...................................................... 78.0%
</TABLE>
The following table sets forth as of June 30, 1998, (i) the number of
shares of Common Stock purchased from the Company by the existing shareholders,
the total consideration paid and the average price per share paid for such
shares by the existing shareholders and (ii) the number of shares of Common
Stock to be sold by the Company in this Offering, the total consideration to be
paid and the average price per share.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration Per Share
---------------- ------------------- ---------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing shareholders 4,000,000 77% $ 685,824 10% $0.17
New investors 1,200,000 23% 6,000,000 90% $5.00
--------- ----- ----------- ----
Total 5,200,000 100.0% $ 6,685,824 100%
========= ====== =========== ====
</TABLE>
17
<PAGE> 18
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,200,000 Units offered hereby are estimated to be approximately $5,035,000
($5,846,800 if the Representatives' Over-allotment Option is exercised in full)
assuming an initial public offering price of $5.125 per Unit and after deducting
the estimated underwriting discounts and offering expenses and a non-accountable
expense allowance payable to the Representatives equal to 2% of the gross
proceeds.
The following table reflects the application of the estimated net
proceeds by the Company:
<TABLE>
<CAPTION>
DOLLAR PERCENT OF
AMOUNT NET PROCEEDS
------ ------------
<S> <C> <C>
Reduce outstanding balance on revolving credit line with senior lender $ 2,402,763 47.7%
Repay 1996 debentures 241,326 4.8%
Repay 1997 debentures 180,633 3.6%
Repurchase outstanding warrants 139,074 2.8%
Working capital 2,071,203 41.1%
------------ ------------
Total $ 5,035,000 100.0%
============ ============
</TABLE>
At June 30, 1998, the Company's outstanding balance under the revolving
credit note issued to its senior lender was $2,402,763. The advances under this
note have been used by the Company to provide working capital. The outstanding
indebtedness under this note bears interest at a rate equal to the prime rate
plus 1.0% and is repayable on December 31, 1998.
In July 1996, the Company borrowed $350,000 from certain of its
shareholders and other individuals and issued debentures to the lenders. The
proceeds were used to meet working capital needs of the Company. The 1996
debentures are payable in equal installments of principal and interest, based on
a 60 month amortization schedule with interest at 14% per annum, and with a
balloon payment of the outstanding principal in July, 1999. The balance owed on
the 1996 debentures at the time of the Offering will be approximately $241,326.
The balance at June 30, 1998 was $246,632. .
In December 1997, the Company borrowed an additional $200,000 from
certain of its officers, directors and their family members, and issued
debentures for said loans. The proceeds were used to fund $200,000 of the
remaining amount due to John T. White, President of the Company, under a 1992
debenture, with the balance of the repayment coming from internally generated
cash flow. The 1997 debentures are payable in equal installments of principal
and interest, based on a 60 month amortization schedule with interest at 14% per
annum, and with a balloon payment of the outstanding principal in December,
2000. The balance which will be owed on the 1997 debentures at the time of the
Offering will be approximately $180,633. The balance at June 30, 1998 was
$183,110.
The Company issued warrants to each of the lenders of the 1996 and 1997
debentures, and has the right to redeem the warrants for $139,074. The
redemption prices were established at the time the debentures were issued in
1996 and 1997.
The balance of the net proceeds will be used for general working
capital, including a reduction of accounts payable to take advantage of
available discounts and possible acquisitions of additional printing operations.
The Company does not have any present agreements or understandings regarding any
such acquisitions.
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<PAGE> 19
Pending application of the net proceeds of this Offering, the Company
may invest such net proceeds in interest-bearing accounts, United States
government obligations, certificates of deposit or short-term interest bearing
securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock since its inception except for Subchapter S distributions to the
shareholders proportional to their Subchapter S tax liabilities. 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,
except for the Subchapter S tax liabilities on taxable earnings for fiscal 1998
occurring prior to June 1, 1998, the date of the termination of Subchapter S
status. The Company's current revolving credit line prohibits the payment of
dividends under certain conditions.
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of June 30, 1998, and (ii) as adjusted to reflect the sale by the Company of
1,200,000 Units offered hereby at an assumed initial public offering price of
$5.125 per Unit (after deduction of the underwriting discount and estimated
offering expenses) and the application of the net proceeds therefrom as
described under "Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1998
-------------
Actual As Adjusted
------ -----------
<S> <C> <C>
Current portion of long-term debt $ 611,166 $ 516,555
Long-term debt, less current portion 3,546,132 3,309,971
Shareholders' equity
Preferred stock: 3,000,000 share of $1.00 par value authorized, no 0 0
shares issued and outstanding
Common stock: 20,000,000 share of $.01 par value authorized, 40,000 52,000
4,000,000 shares issued and outstanding; 5,200,000 shares issued
and outstanding, as adjusted (1)
Common stock purchase warrants 0 150,000
Additional paid-in capital 645,824 5,379,750
Accumulated earnings 238,570 139,600
------------- -------------
Total shareholders' equity 924,394 5,721,350
------------- -------------
Total capitalization 5,299,967 9,766,151
============= =============
</TABLE>
- -------------
(1) Excludes the issuance of (i) 1,200,000 shares of Common Stock upon exercise
of the Warrants; (ii) up to 360,000 shares of Common Stock issuable
pursuant to the Representatives' Over-allotment Option and shares
underlying the Warrants included therein; (iii) 240,000 shares of Common
Stock issuable upon exercise of the Representatives' Warrant and the
Underlying Warrants included therein; and (iv) 300,000 shares of Common
Stock reserved for issuance under the Company's Stock Option Plan, of which
no shares of Common Stock are currently subject to outstanding options. See
"Underwriting", "Management-Stock Option Plan" and "Description of
Securities."
19
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the financial statements and the notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The data for the years ended December 31, 1997 and
1996 are derived from the audited financial statements included elsewhere in
this Prospectus. The data for the six months ended June 30, 1998 and 1997 are
derived from unaudited financial statements that are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
STATEMENTS OF OPERATIONS DATA: JUNE 30, 1998 JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 9,790,796 $ 8,968,422 $ 20,114,549 $ 15,715,395
Costs of goods sold 8,089,881 6,901,897 15,466,484 12,101,986
Gross profit 1,700,915 2,066,525 4,648,065 3,613,409
Selling, general and administrative expenses 1,512,000 1,515,892 3,269,575 2,872,913
Income from operations 72,915 408,133 984,375 518,174
Other expense, net (134,829) (260,826) (432,910) (346,564)
Pre-tax income (loss) (61,914) 147,307 551,465 213,360
Income tax benefit (provision) (1) 18,912 (53,343) (189,638) (81,354)
Net income (loss) (1) $ (43,002) $ 93,964 $ 361,827 $ 132,006
PRO FORMA EARNINGS PER SHARE (1):
Basic and diluted $ (0.01) $ 0.02 $ 0.09 $ 0.03
Weighted average outstanding shares 4,000,000 4,000,000 4,000,000 4,000,000
OTHER DATA:
EBITDA (2) $ 664,511 $ 807,925 $ 1,884,060 $ 1,629,012
Net cash provided by (used in) operating activities (12,360) (244,018) 568,543 485,755
============= ============= ============= =============
Net cash provided by (used in) investing activities (56,752) 261,269 656,081 236,506
============= ============= ============= =============
Net cash provided by (used in) financing activities (453,823) (814,771) (1,270,200) 85,816
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
Actual As Adjusted (3)
====== ===============
<S> <C> <C>
BALANCE SHEET DATA:
Working capital $ (670,741) $ 3,890,054
=============== ===============
Total assets 10,555,843 12,619,264
=============== ===============
Long-term debt and capitalized lease obligations, 3,546,132 3,309,971
=============== ===============
less current portion
Shareholders' equity 924,394 5,721,350
=============== ===============
</TABLE>
- ---------------
(1) Adjusted to reflect the conversion from "S" Corporation status to "C"
Corporation status prior to the Offering.
(2) EBITDA represents operating income excluding interest, taxes, depreciation,
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 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.
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<PAGE> 21
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 revolving credit agreement. Items 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.
(3) The as adjusted summary balance sheet data has been prepared as if the
Offering had occurred as of June 30, 1998 and reflects the issuance of the
Securities offered by the Company hereby and the application by the Company
of the net proceeds therefrom. See "Use of Proceeds."
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Prospectus.
RESULTS OF OPERATIONS
The following is a summary of the revenues and expenses of the Company
for the periods indicated, with the expenses and profits as a percentage of
revenue and with the percentage increase or decrease from June, 1997 to June,
1998.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED % INCREASE
YEAR ENDED % OF YEAR ENDED % OF JUNE 30, % OF JUNE 30, % OF (DECREASE)
DECEMBER 31, SALES DECEMBER 31, SALES 1998 SALES 1997 SALES 1998 FROM
1997 1996 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $20,114,549 100% $15,715,395 100% $9,790,796 100% $8,968,422 100% 9.2%
Costs of goods sold 15,466,484 76.9% 12,101,986 77.0% 8,089,881 82.6% 6,901,897 77.0% 15.2%
Gross profit 4,648,065 23.1% 3,613,409 23.0% 1,700,915 17.4% 2,066,525 23.0% (17.7%)
Selling, general and
administrative expenses 3,269,575 16.3% 2,872,913 18.3% 1,512,000 15.4% 1,515,892 16.9% (0.3%)
Income from operations 984,375 4.9% 518,174 3.3% 72,915 0.7% 408,133 4.6% (82.1%)
Other expense, net (432,910) (2.2%) (346,564) (2.2%) (134,829) (1.4%) (260,826) (2.9%) (48.3%)
Pre-tax income (loss) 551,465 2.7% 213,360 1.4% (61,914) (0.6)% 147,307 1.6% (142.0%)
-------- ---- -------- ---- -------- ------ ------- ---- --------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998, increased 9.2% to $9.8
million compared to $8.9 million for the six months ended June 30, 1997,
reflecting continuing strong sales to existing customers during the first six
months which have been typically weak for the Company for several years.
The costs of goods sold include materials, outside services, labor and
other factory costs. The costs of materials and outside services increased to
$3.8 million in the first six months of 1998 from $3.3 million in the first six
months of 1997, with a slight increase in the percentage of revenue spent on
materials and outside services. The labor and other direct factory costs of the
Company also increased to $4.2 million in the first six months of 1998 from $3.6
million in the first six months of 1997. These costs, as a percentage of sales,
increased to 43.4% from 39.8%. The increase in the cost of labor resulted from
more labor intensive sales for the jobs sold in the first six months of 1998 in
comparison to jobs sold in the first six months of 1997 and the wind down of
labor costs associated with closing the Pinnacle account during the second
quarter of 1998.
Selling, general and administrative expenses remained level, but
decreased 1.5% as a percentage of revenue.
Other expense, net includes interest expense and other gains and
losses. Interest expense was approximately the same in the first six months of
1998 and 1997 as a percentage of revenue. Other gains and losses
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<PAGE> 23
moved favorably to a gain of $171,059 in the first six months of 1998 from a
gain of $18,881 in the first six months of 1997. This change was the result of
profits at Performance Packaging which completed the move of its packaging plant
to its current facility in the summer of 1997. In the first six months of 1998,
89.4% of total revenues at Performance Packaging were from Pinnacle.
Pinnacle and its affiliates filed for Chapter 11 protection in U.S.
Bankruptcy Court on July 23rd 1998. Sales to Pinnacle in 1996, 1997 and the
first six months of 1998 were 5.1%, 12.5% and 4% of total sales respectively. In
July 1998 the Company wrote off receivables to the allowance account of $32,700
from Pinnacle, and wrote its investment in Performance Packaging down from
$7,300 to zero. The Company does not guarantee any of the debts of Packaging.
The Company does not rely on sales from any one customer. The loss of sales from
Pinnacle will not have a significant financial impact on the future operation of
the Company as it continually adds new customers.
Pinnacle has verbally indicated that it will not continue the Packaging
Services Agreement with Performance Packaging. Performance Packaging will cease
operations if a contract with another customer is not reached by October 31,
1998. Performance Packaging contributed to the Company a loss of $46,873 in 1997
and income of $171,059 in the first six months of 1998. The Company's growth
strategies do not contemplate any growth or contribution from Performance
Packaging.
As a result of the foregoing, pre-tax net income dropped to a loss of
$61,914 in the first six months of 1998 from income of $147,307 in the first six
months of 1997. The Company made no provisions for income tax since it was an S
corporation for federal income tax purposes, though it converted to a C
corporation for federal income tax purposes June 1, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997, increased 28% to $20.1
million compared to $15.7 million for the year ended December 31, 1996. The
increase was primarily attributable to increases in sales to existing customers,
as improvements in plant operations begun in 1996 and continued in the first
three quarters of 1997 increased customer confidence. Large format offset
printing, a service added in 1996, began to add customers in 1997, and business
developed by new sales persons added in 1996 increased both the
point-of-purchase advertising materials and commercial printing sold by the
Company in 1997. Revenues for the fourth quarter of 1997 increased by 37% over
the revenues for the fourth quarter of 1996, as strengthening sales throughout
the year showed greatest improvement in the fourth quarter.
The costs of materials and outside services increased to $7.6 million
in 1997 from $5.7 million in 1996, with an increase of 1.7% in the percentage of
revenue spent on materials and outside services. These expenses can vary
substantially as a percentage of revenue from year to year, depending on the
amount of materials furnished by customers on large jobs and the extent to which
services are performed by sub-contractors of the Company. The costs of materials
and outside services in 1997 were in line with those in 1996.
While additional labor was required in 1997 to perform the work
necessary to increase the revenues in 1997 over those in 1996, with the cost of
labor increasing to $4.1 million in 1997 from $3.5 million in 1996, the cost of
labor as a percentage of sales decreased to 20.3% from 22.0%. Labor can be a
variable expense reflecting the amount of work performed by the Company, but a
substantial portion of factory labor is a fixed expense, reflecting the
necessity that the Company has available capacity for new business. With the
increases in revenues in 1997 the labor force of the Company was better utilized
than in 1996.
The other factory costs of the Company also increased, to $2.4 million
in 1997 from $1.8 million in 1996, with scheduled increases in equipment leases
as negotiated at the time of equipment installations and increases to repair
costs as press warranties expired. The increase in revenues kept the fixed
factory costs, as a percentage of revenue relatively flat, at 19.0% in 1997
compared to 18.7% in 1996. As a result of these efficiencies in the use of labor
and the maintenance of other factory costs as a percentage of revenue, the gross
profit of the Company increased to $4.6 million in 1997 from $3.6 million in
1996.
Selling, general and administrative expenses increased by $.4 million
in 1997 to $3.3 million from $2.9 million in 1996. However, as a percentage of
revenue the costs decreased to 16% in 1997 from 18% in 1996. The Company decided
to spend more money on its selling efforts in 1997 than in 1996, and it took a
larger reserve for
23
<PAGE> 24
doubtful accounts, increasing the administrative costs for 1997, but these
increases were more than offset by the increases in revenues for 1997, resulting
in lower costs as a percentage of revenue.
Interest expense decreased to $587,548 in 1997 from $610,310 in 1996,
primarily as a result of the Company's move to a new lender with a lower
interest rate for its revolving working capital loan in 1997. Other gains and
losses moved unfavorably to a gain of $154,638 in 1997 from a gain of $263,746
in 1996. This change was primarily the result of losses suffered at Performance
Packaging which suffered operating losses in connection with the move of the
packaging plant to its current facility in the summer of 1997. In 1997, 96.4% of
total revenues at Performance Packaging were from Pinnacle. Gains from cash
sales of property and equipment increased to $191,423 in 1997 from $90,727 in
1996.
As a result of the foregoing, pre-tax net income rose to $551,465 in
1997 from $213,360 in 1996. The Company makes no provisions for income tax since
it is an S corporation for federal income tax purposes, though it will convert
to a C corporation for federal income tax purposes prior to the Offering.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its cash flow requirements from
funds generated from operations and credit facilities provided by financial
institutions, other lenders and shareholders. Cash flow provided by operations
was ($27,016) and $508,065 for the six months ended June 30, 1998 and 1997
respectively, and $568,543 and $485,755 for the years ended 1997 and 1996
respectively. The Company intends to apply approximately $2.8 million of the net
proceeds of the Offering to the repayment of certain indebtedness and reduction
of certain indebtedness, including the Company's line of credit and certain term
indebtedness. See "Use of Proceeds."
Trade accounts receivable outstanding December 31, 1997 increased by
42% over amounts outstanding December 31, 1996, primarily as a result of
increases in fourth quarter sales in 1997 over 1996. Substantially all of the
amounts receivable at the end of 1997 have been collected except for one invoice
on which approximately $625,000 is owed. The Company delivered the goods on
which that invoice was based, and the buyer successfully resold the goods as
part of a successful advertising campaign. The customer has disputed the quality
and quantity of product shipped, claiming that only 80% of the quantity of
printed sheets invoiced was good product. The Company believes that it met its
obligations to the customer and that the customer is making the claims in an
effort to increase its profits on the project. The Company has accrued 24% of
the amount due as a reserve against this account, and based on its history of
collecting from this customer in a previously disputed claim by the same
customer for which 100% of the balance invoiced was collected, the Company
believes it has adequately reserved for the contingency of non-payment from this
customer. However, the amount due from the customer is not secured by any
collateral. The Company is pursuing collection of the invoice through
litigation. See "Note 1 to Financial Statements."
The Company has a revolving credit facility with a senior lender which
permits borrowings of up to $3.5 million, subject to borrowing base
requirements. This credit facility, which bears interest at the prime rate plus
1% (for a total of 9.5% as of December 20, 1997), is secured by a lien on
substantially all of the Company's assets. In addition, John T. White, an
executive officer and director of the Company, has personally guaranteed the
Company obligations under this credit facility. The Company pays a 0.25% unused
facility fee on the unused portion of this credit facility which matures on
December 19, 1998. At June 30, 1998, the Company had borrowings of approximately
$2,402,763 outstanding under this credit facility. The Company intends to reduce
the outstanding balance of this credit facility with the net proceeds from this
Offering. See "Use of Proceeds."
Heller Financial, Inc. ("Heller") provided bridge financing for the
purchase of the printing division building in the original principal amount of
$1,260,000 on April 5, 1995. In 1997 this loan was replaced with three long term
loans held by Heller, having outstanding balances as of June 30, 1998, of
$680,000, $563,000 and $52,000 and annual payments of $83,868, $54,960 and
$16,764 respectively.
In December 1997, the Company issued unsecured notes in the aggregate
principal amount of $200,000 to certain of its officers, directors, and their
family members. These notes are due in December 2000 and bear interest at 14%.
The Company will repay these notes with the net proceeds from this Offering. See
"Use of Proceeds" and "Certain Transactions."
24
<PAGE> 25
In July, 1996, the Company issued promissory notes secured by the
Company's interest in Performance Packaging promissory notes in the aggregate
principal amount of $350,000 to certain officers, directors and their family
members. These notes are due in July 1999 and bear interest at 14%. The Company
will repay these notes with the net proceeds from this Offering. See "Use of
Proceeds" and "Certain Transactions."
The Company has financed its purchases of equipment through term
financing and equipment leases from several equipment lenders. Interest rates
average approximately 9.5% per annum, with payment terms ranging from 48 months
to 96 months. The total outstanding obligations under these financings on June
30, 1998 was $2,485,969.
The Company has previously leased printing equipment from certain
related companies. Effective March 31, 1998, most of the equipment owned by the
lessors was sold back to the equipment manufacturer, and the manufacturer agreed
to lease the equipment directly to the Company on terms more favorable than the
original lease. The balance of the equipment was transferred to the Company from
one of the lessors in exchange for the assumption by the Company of the debt
owed by the lessors to the equipment manufacturer. As a result of the
transaction, the Company's lease payments will be approximately $65,000 per year
greater in 1998 than in 1997, but the new lease will eliminate a large balloon
payment, reduce the escalation of lease payments over the next five years and
grant the Company options to purchase the equipment at fair market value after
four years. See "Certain Transactions".
The Company has no significant commitments at this time which would
require that it expend capital and believes its current facilities and capital
equipment are adequate for the Company as currently structured.
25
<PAGE> 26
BUSINESS
Performance Printing is a printing and display manufacturing company
primarily engaged in the business of serving the point-of-purchase advertising
industry. In addition to its Display and Printing divisions which are operated
from separate plants, the Company owns a majority interest in Performance
Packaging, which packages trading cards and related products. All three plants
are in close proximity to one another in Dallas, Texas. The sales and
administrative offices are located in a corporate office separate from any of
the plants.
The Company's business has been built around a core specialty of
printing with inks and coatings which are cured with ultra violet light ("UV").
This UV printing technology enables the Company to print on Substrates other
than paper, such as vinyl, styrene and PETG. Over the past few years, the
Company has added UV screen printing to compliment the UV offset printing,
allowing it to print on more diverse materials such as metal and very thick
materials and to use special inks and coatings.
BUSINESS STRATEGY
Historically, the Company has grown and profited by increasing its
capacity and adding services complimentary to its existing specialties. The
Company has a two-point growth strategy for the future:
o Internal Growth The Company will continue to build its existing business in
Dallas, Texas, adding new specialties and related services when
appropriate. Much of its existing equipment has more than twice the
capacity utilized in 1997. By utilizing its strong local sales force, local
market share can be increased. By using the national marketing and sales
effort which have been developed over the past five years, the Company
expects to continue to realize a substantial portion of its revenues from
customers located outside of the North Texas area. The Company believes
that it can achieve substantial growth from its existing business.
o Acquisitions The Company plans to acquire small commercial printers and
screen printers in several key markets around the United States and convert
these plants to shops similar to its Dallas operations. Small UV offset and
screen presses and large format digital presses would be installed in these
regional plants which would be operated under the Performance trade name.
The sales force at each would be increased and trained to sell
point-of-purchase advertising and related materials. Jobs requiring the use
of the multi-million dollar presses such as the Company's equipment in
Dallas would be transferred to Dallas for production. The regional plants
would facilitate the development of close relationships with major users of
point-of-purchase advertising and related materials, with primary emphasis
on sales, pre-press and short run work in the regional plants. The Company
believes that it can develop three to five such regional centers over the
next three years, achieving substantial additional growth and profits from
these new regional centers.
The Company expects, over the four fiscal years ending December 31, 2002,
that its growth will be divided approximately equally between internal growth
and acquisitions. The Company believes that it will continue its internal
historic growth over the next four years. The recent bankruptcy of Pinnacle will
not affect this strategy. In the event the Company is not successfull in
locating suitable acquisition candidates at the rate of two per year, it will
depend primarily on its internal growth rate to increase its revenues. The
Company will seek to acquire other printing companies with annual revenues in
the $5 to $10 million range. If the Company acquires one or more printing
companies with revenues greater than its targeted range, the increase in sales
could be weighted more toward acquistion than internal growth.
INDUSTRY BACKGROUND
Although the Company is built around specialty printing, it is
considered a commercial printer by industry classification. The commercial
printing industry is one of the largest and most fragmented manufacturing
industries in the United States. According to the Printing Industries of
America, Inc. ("PIA"), the main national trade organization for the industry,
there were approximately 52,000 printing firms with total annual revenues of
$132 billion in 1996. Of the 27,600 commercial, screen and specialty printers,
only 621 had more than 100 employees in 1996, but these firms sold 42% of the
$72.8 billion in revenues sold by the commercial, screen and specialty printers.
The printing industry is experiencing considerable consolidation at this time.
Several printing companies are in the business of acquiring other printing
companies.
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<PAGE> 27
The point-of-purchase advertising industry was a $12 billion industry
in 1995 according to the Point-of-Purchase Advertising Institute, an industry
trade organization. The Institute reported a growth of 8% for the industry from
1994 to 1995.
COMPANY OPERATIONS
The Company has used its core specialties involving offset and screen
printing of UV cured materials to attract customers, and, once relationships are
established, the Company often sells commercial printing services to them as
well. Moreover, the Company has added many other complimentary services to go
with its UV printing and its commercial printing, such as complete pre-press
services, large format printing which is used for large point-of-purchase
displays, folding and gluing of decorative cartons for in-store use, die cutting
of printing and display materials, thermoforming of plastics for displays, large
format digital printing for short run banners and posters, and kitting and
fulfillment of advertising materials for in-store use.
The equipment used for these specialties is expensive in comparison to
much of the equipment used in commercial printing. Not only is it necessary to
have large presses with multiple colors and finishing equipment to match the
presses, but the curing equipment is also expensive. In addition, customers
require very fast turn time as advertising campaigns are commonly late in the
creative and approval phase, shortening the available time for manufacturing.
Thus the Company is required to have a great deal of ready capacity to meet
these requirements. However, hourly rates and material markups are also
relatively high for this type of work.
The Company fills in the idle time for its specialty capacity by
selling commercial printing services and trading card printing. While the prices
for these types of work are not as high as for the specialty services, revenues
from these activities help cover the cost of the necessary capacity.
EQUIPMENT
The Company owns or leases seven sheetfed offset presses ranging from
two colors to eight colors and from 20" to 63" in print width. In addition the
Company has five large format flat bed and cylinder screen presses and an off
line UV coater. The Company's finishing equipment includes a variety of
guillotine cutters, die cutters, folders, gluing machines and wrappers. The
Display Division has three thermoforming machines for plastic molding and large
format digital printers. Almost all of the Company's pre-press services are
performed on its extensive high-end pre-press systems, including scanners and
film output devices.
COMPANY SERVICES
The Company builds relationships with its customers by offering turnkey
services for point-of-purchase advertising materials and related products. Some
of the manufacturing capacity not absorbed with those activities is sold in the
commercial printing market. Products and services offered by the Company include
the following:
o Plastic In-store Materials. Typical products of this core specialty include
static clings, plastic shelf strips, danglers, wobblers, counter mats,
mouse pads, floor graphics and translights, all of which are common to
point-of-purchase advertising.
o Special Inks and Coatings. Using UV curing technology for both offset and
screen printing, inks and coatings with special properties are offered,
including materials with are light fast for outdoor usage and which have
other unusual properties such as sealed scents, glow-in-the-dark
capabilities and temperature sensitive inks which change colors as
temperatures change.
o Large Format Printing. Offset printing up to 63" by 44", digital printing
up to 54" by 36', and screen printing up to 84" by 48". Typical products
include decorative labels for corrugated boxes, posters, banners and
temporary in-store displays.
o Promotional Advertising Materials. Trading cards and other giveaway items
for advertising campaigns by food and beverage companies are manufactured
using UV printing, UV coating and other specialty inks and coatings.
o Kitting and Fulfillment. The Company compiles materials manufactured by it
and other vendors on behalf of its customers and ships the packages
directly to stores for in-store display.
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<PAGE> 28
o Commercial Printing. Using conventional printing, UV printing and a variety
of types of finishing, the Company manufactures brochures, small catalogs,
trading cards, calendars, manuals and other typical commercial printing
products.
o Folding Cartons. Decorative cartons used for in-store sales and direct
marketing sales are printed, coated, die-cut, folded and glued in-house by
the Company.
o Plastic Displays. The Company builds molds, heat forms and finishes a
variety of plastics for in-store displays and for packaging components.
o Design and Advertising. Under the trade name "Performance Marketing", the
Company provides creative and design services for advertising and for
in-store displays. These services include media purchasing, prototype
development, public relations and printing design.
MARKETING AND SALES
The Company has three primary means of marketing and selling its
services. It has a sales staff of 16 sales persons who sell mainly to customers
located in the North Texas area, although seven of these salespersons also have
accounts in other parts of the United States. In addition, the Company
advertises in national trade magazines for the point-of-purchase and printing
industries, with a marketing staff of four persons responsible for designing and
placement of advertising, public relations and handling inquiries from
customers. The Company also uses telephone marketing through its national sales
department to contact and sell to customers located outside of the North Texas
area. With a staff of four, this department contacts potential buyers by phone,
sends samples and advertising materials to interested prospects and sells to
customers by telephone.
A team of customer service representatives supports the local and
national sales departments. Eight representatives are located in the offset and
display plants to handle order entry, proofing, communications with customers
and production management once sales are made by the salespersons. This lets the
salespersons concentrate on generating new sales while maintaining a close
working relationship with the customers.
CUSTOMERS
Since many of the services rendered by the Company relate to large
projects for customers, sales to particular customers may very significantly
from year to year depending on the number and size of projects required. During
1997, five customers together represented more than 34% of the Company's sales.
For 1997 and the first six months of 1998, Pinnacle accounted for 12.5% and 4%
of sales, respectively. I July 1998, Pinnacle filed for bankruptcy protection,
and the Company believes that the loss of Pinnacle as a customer will not have a
material negative effect on the Company's future business. See " - Affiliated
Companies." The Company had 306 total customers in 1997 with an average of
approximately $65,700 per customer. The average order sizes in 1997 was
approximately $6,200.
PURCHASING RAW MATERIALS
The Company purchases plastics, paper, ink, plates, film, pressroom
supplies and other materials from a number of suppliers. Large orders for paper
and plastics are often placed directly with mills, and routine purchases are
made from product distributors. For large trading card projects and production
of large giveaway premiums, the customers normally furnish the required paper or
plastic. Paper and plastic represent the majority of the materials purchased by
the Company. Though the Company has not found that price increases and decreases
for paper and plastic directly decrease or increase the orders it receives for
printing services, these prices can be volatile in some years. Substantial
increases in the costs of material could reduce the feasibility of some
projects. The Company has not experienced any significant difficulty in
obtaining raw materials necessary to produce orders for its customers.
28
<PAGE> 29
FACILITIES AND CAPABILITIES
The Company operates three manufacturing plants. All three plants are
within 10 minutes of driving time from one another, and none are more than 15
minutes from the corporate office.
The Performance Display division is in a leased facility of
approximately 44,000 square feet. The primary lease term expires December 31,
2000. Performance Packaging is in a leased facility of approximately 76,000
square feet. The primary lease term expires April 30, 2002. The Company does not
expect any difficulty in negotiating a lease renewal for either facility if it
desires to do so. The offices and manufacturing areas of both are
air-conditioned and have adequate power.
The Printing division is in a 50,000 square foot facility owned by the
Company. It is located on Interstate Highway 35 near downtown Dallas, which is
an excellent location due to its visibility and accessibility to the highway.
One senior lender has mortgages on the building securing indebtedness in the
aggregate amount of $1,305,593. The equipment lenders and other financing
sources have liens on substantially all of the Company's equipment and
machinery.
The sales, estimating, marketing, advertising agency and administrative
functions of the Company are conducted from the corporate office of the Company
located near downtown Dallas in a 9,200 single tenant office building. The
building is on a month-to-month rental basis from a partnership between John T.
White and Richard D. Cox. Messrs. White and Cox are directors of the Company,
and Mr. White is the Company's Chief Executive Officer.
The Company has substantial capacity available for growth of its
business. With proper staffing of pressmen and assistant pressmen, each printing
press has a potential of four 40-hour shifts per week. With six sheetfed offset
presses currently running only nine shifts at the printing plant, and with the
five screen presses, two digital and one off-line UV coater currently running
only eight shifts, there are a potentially fifteen and twenty-four shifts
available at the printing and display plants, respectively. Currently a portion
of these shifts is filled through overtime work by existing shifts, but the
majority of these available shifts represent additional capacity for the
Company. The existing finishing and pre-press equipment has adequate capacity to
compliment the available capacity on the printing presses. While the employment
market in Dallas, Texas, is tighter now than in recent years, the Company has
not incurred any substantial difficulty in attracting, training and retaining
qualified personnel.
INTELLECTUAL PROPERTY
The Company markets its services in the United States under the names,
"Performance Printing," "Performance Display," "Performance Marketing," and
"Performance Packaging." "Performance Printing," together with its logo, is a
federally registered service mark in the name of the Company.
EMPLOYEES
As of June 30, 1998, the Company had a total of 165 regular employees,
11 of whom were administrative personnel, 39 of whom were salaried or
commissioned employees and 115 of whom were hourly employees. In addition, the
Company employs up to 50 temporary employees as work requires, with almost all
of such temporary employees providing hand labor services. The Company does not
have any employees engaged in research and development. None of its employees
are represented by a collective bargaining agreement. The Company believes its
relations with its employees are good.
GOVERNMENT REGULATIONS 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,
29
<PAGE> 30
the Texas Natural Resource Conservation Commission and regulatory agencies at
the county and local level. The printing and display business generate
substantial quantities or 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 and
plastic, returns salvageable waste ink to its supplier and contracts 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.
AFFILIATED COMPANIES
Although the Company has no subsidiaries, it owns 51% of Performance
Packaging. The remaining 49% is owned by Pinnacle, which is the primary customer
of Performance Packaging under the terms of the Packaging Agreement, which
terminates on March 31, 2002. The Packaging Agreement provides, in part, that
Pinnacle will have first call on 100% of the packaging capacity of Performance
Packaging in exchange for certain fixed cost payments. For the fiscal year ended
December 31, 1997, Pinnacle accounted for 96.4% of Performance Packaging sales.
Through its 49% stock ownership of Performance Packaging and three of five
members of the management committee (board of directors), Pinnacle has legal
control of Performance Packaging. However, pursuant to an Organizational
Agreement, the Company is responsible for the management of Performance
Packaging and John T. White, President of the Company, is President of
Performance Packaging.
Pinnacle and its affiliates filed for Chapter 11 protection in U.S.
Bankruptcy Court on July 23rd 1998. Sales to Pinnacle in 1996, 1997 and the
first six months of 1998 were 5.1%, 12.5% and 4% of total sales respectively. In
July 1998 the Company wrote off receivables to the allowance account of $32,700
from Pinnacle, and wrote its investment in Performance Packaging down from
$7,300 to zero. The Company does not guarantee any of the debts of Packaging.
The Company does not rely on sales from any one customer. The loss of sales from
Pinnacle will not have a significant financial impact on the Company as it
continually adds new customers.
Pinnacle has verbally indicated that it will not continue the Packaging
Services Agreement with Performance Packaging. Performance Packaging will cease
operations if a contract with another customer is not reached by October 31,
1998. Performance Packaging contributed to the Company a loss of $46,873 in 1997
and income of $171,059 in the first six months of 1998. The Company's growth
strategies do not contemplate any growth or contribution from Performance
Packaging.
The Company also has three sister companies, Performance Label
Corporation, Tejas Label Corporation and Southwest UV Corporation (the
"Equipment Companies"), which are owned by shareholders with identical ownership
to that of the Company. All three of these companies were formed and have
existed for the sole purpose of owning printing equipment purchased from and
financed by a printing press manufacturer. Except for a limited guarantee for
approximately $158,000 of payments due between January and June of 1998, none of
the obligations of the Equipment Companies are guaranteed by or the
responsibility of the Company, though all of the presses owned by the Equipment
Companies are leased to the Company.
Effective March 31, 1998, most of the equipment owned by the Equipment
Companies was sold back to the equipment manufacturer, and the manufacturer
agreed to lease the equipment directly to the Company. The balance of the the
equipment was transferred to the Company from one of the Equipment Companies in
exchange for the assumption by the Company of the debt owed by the Equipment
Company to the equipment manufacturer. Prior to the date of the Offering, the
Equipment Companies will be dissolved.
30
<PAGE> 31
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 which 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. Performance Printing believes it competes effectively
on all of these bases. The Company intends to participate in the consolidation
taking place in the printing industry by acquiring printing companies in several
markets throughout the United States. See "-Business Strategy" and "-Industry
Background."
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. There are
no pending suits or threatened suits against the Company at this time, though
the Company is the plaintiff in four suits for collection of past due accounts.
The Company is not aware of any pending litigation that is likely to have a
significant negative impact on the business, income, assets or operation of the
Company.
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.
31
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
W. Chris Pumpelly 60 Chairman of the Board; Vice President - Business Development;
and Director.
John T. White 46 Chief Executive Officer; President; and Director
Gary H. Homsey 52 Vice President - Marketing
Michael Short 36 Vice President - Operations
Russell V. Oesch 35 Chief Financial Officer; Vice President - Finance; and
Secretary
Greg White 30 Vice President - Sales
Stephen M. Lilly 39 Director
C. Thomas Daulton 43 Director
Richard D. Cox 47 Director
Joseph E. Pate 55 Director
</TABLE>
John T. White has served as President and Chief Executive Officer of the Company
since 1991.
W. Chris Pumpelly has served as Chairman of the Company since 1991. Mr. Pumpelly
founded Performance Printing in 1981, and served as president for the next ten
years. He has 25 years experience in both production and sales and has extensive
knowledge of all types of printing, including UV, specialty and packaging.
Michael Short has served as Vice-President-Operations since April, 1996. Mr.
Short previously was the general manager of Performance Display for four years.
Russell V. Oesch has served as the Vice President-Finance of the Company since
August, 1995. From February to August 1995, he was a consultant for Business
Records Corporation. From November, 1990 to February, 1995, he was the Vice
President of Finance and Accounting for Great American Clubs, Inc., a
hospitality company, and an accounting manager for the international public
accounting firm of KPMG Peat Marwick from August, 1985 to December, 1990. He is
a certified public accountant with 12 years of accounting and finance experience
and two years of printing experience.
Gary H. Homsey has served as Vice President-Marketing for the Company's three
divisions since January, 1993. Mr. Homsey also manages national phone sales and
operates Performance Marketing, an in-house advertising and public relations
agency. From 1977 through 1992, he served as president and creative director of
Homsey Advertising & Public Relations, Inc.
Greg White has served as Vice President-Sales for the Company since August,
1997. Mr. White joined the Company in 1991 and has been the top sales producer
at the Company for the past three years. Mr. White is the brother of John T.
White.
Richard D. Cox has served as a director since 1991. Mr. Cox has been an attorney
and partner with Brown McCarroll & Oaks Hartline in Dallas since 1989.
C. Tom Daulton has been a director since 1991. Mr. Daulton is self-employed in
venture capital. From 1989 through 1995, he served as chief financial officer of
the Company.
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<PAGE> 33
Steven M. Lilly has served as a director of the Company since 1996. Since
August, 1991, Mr. Lilly has been the President and Chief Executive Officer of
Promotional Services International, Inc., a promotional advertising agency, in
Atlanta, Georgia. He has ten years of printing industry experience.
Joseph E. Pate has been a director of the Company since 1991. Mr. Pate was the
operations manager at VidPro International, Inc, a point-of-purchase display
company from August 30, 1996 until April 3, 1998 when he rejoined the Company as
a sales representative. Mr. Pate was a founding partner and vice president of
the Company from 1981 to 1996.
BOARD OF DIRECTORS
The Board of Directors of the Company consists of six members. Each
director will hold office until the annual meeting of the shareholders of the
Company next following his election or until his successor is elected and
qualified.
Directors of the Company do not receive compensation for serving as
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. See "Stock Option Plan."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established two committees: a Compensation
Committee and an Audit Committee. The Compensation Committee, currently
comprised of Messrs. Daulton, Lilly and Cox, is responsible for reviewing and
making recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Company's
Stock Option Plan. The Audit Committee, currently comprised of Messrs. Cox,
Daulton and Pate, is responsible for reviewing the Company's financial
statements, audit reports, internal controls and the services performed by the
Company's independent public accountants, and for making recommendations with
respect to those matters to the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid by the Company to executive officers who earned over $100,000 for
services during each of the fiscal years ended December 31, 1997 and 1996, and
1995:
<TABLE>
<CAPTION>
Annual Compensation
Fiscal All Other
Name and Principal Position Year Salary Bonus Compensation (1)
--------------------------- ---- ------ ----- ----------------
<S> <C> <C> <C> <C>
John T. White 1997 $228,000 $0 $950
President and CEO 1996 227,932 0 0
1995 185,092 0 0
W. Chris Pumpelly 1997 $142,800 $0 $950
Vice President - Business Development 1996 148,957 0 0
and Chairman of the Board 1995 157,373 0 0
Gary Homsey 1997 $131,461 $0 $950
Vice President - Marketing 1996 132,336 0 0
1995 128,654 0 0
Greg White 1997 $199,999 $0 $950
Vice President - Sales 1996 126,890 0 0
1995 114,838 0 0
</TABLE>
- ---------------
(1) Amount consists of matching 401 (k) contributions of $950.
33
<PAGE> 34
STOCK OPTION PLAN
The Board of Directors adopted the Stock Option Plan which provides for
the grant of options to eligible officers, directors, employees and advisors for
the purchase of Common Stock of the Company. The Option Plan covers, in the
aggregate, a maximum of 300,000 shares of Common Stock. The Stock Option Plan
provides for the granting of both incentive stock options (as defined in Section
422 of the Internal Revenue Code of 1986) (the "Incentive Options") and
nonqualified stock options (options which do not meet the requirements of
Section 422) (the "Nonqualified Options").
The Compensation Committee of the Board of Directors (the "Committee")
administers and interprets the Option Plan and is authorized to grant options
thereunder to all eligible employees of the Company, including officers. The
Committee designates the optionees, the number of shares subject to the options
and the terms and conditions of each option. Certain changes in control of the
Company will cause the options to vest immediately. Each option granted under
the Option Plan must be exercised, if at all, during a period established in the
grant which may not exceed 10 years from the date of grant. An optionee may not
transfer or assign any option granted and may not exercise any options after a
specified period subsequent to the termination of the optionee's employment with
the Company.
The Stock Option Plan provides for the grant of Incentive Options to
employees of the Company or a subsidiary who, in the judgment of the Committee
are responsible for, or contribute to, the management or success of the Company
or a subsidiary. Nonqualified Options may be granted to officers, directors,
employees and advisors of the Company or a subsidiary who, in the judgment of
the Committee are responsible for or contribute to the management or success of
the Company or subsidiary. The exercise price of Incentive Options shall not be
less than 100% of the market price of the Company's stock on the date of grant.
The exercise of Nonqualified Options shall be not less than 85% of the market
price of the Company's stock on the date of grant.
None of the named Executive Officers were granted options during the
year ended December 31, 1997. The Company has no outstanding options to purchase
shares of its capital stock.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation and Bylaws limit the liability
of the directors, officers, employees and agents of the Company to the Company
or its shareholders to the fullest extent permitted by Texas Business
Corporation Act.
The Texas Business Corporation Act permits indemnification of
directors, officers, employees and agents acting in such capacity, so long as
such person acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Company. Such indemnification
may be made only upon a determination by the Board of Directors that such
indemnification is proper in the circumstances because the person to be
indemnified has met the applicable standard of conduct to permit indemnification
under the law. The Company is also required to advance to such persons payment
for their expenses incurred in defending a proceeding to which indemnification
might apply, provided the recipient provides an undertaking agreeing to repay
all such advanced amounts if it is ultimately determined that he is not entitled
to be indemnified.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
As of this date hereof, there is no pending litigation or proceeding
involving a director, officer, employee or agent of the Company where
indemnification will be required or permitted, and the Company is not aware of
any threatened litigation or proceeding which may result in a claim for such
indemnification.
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<PAGE> 35
CERTAIN TRANSACTIONS
In 1997, Messrs. White and Pumpelly, executive officers and directors
of the Company, guaranteed two printing press equipment lease agreements for the
Company. The leases provide for level rental payments for 84 months with an
option to purchase the equipment at the end of the lease terms for the fair
market value of the equipment. While the Company has an option to purchase the
presses for their fair market value at the end of the 84 month lease terms, the
guaranty agreements provide that Messrs. White and Pumpelly are obligated to
buy, and an equipment manufacturer is obligated to sell, the presses for 25% of
the initial cost of the presses. It is anticipated that prior to the Offering,
the Company will convert the press leases to outright purchases under option
agreements currently in place, in which event the obligations of Messrs. White
and Pumpelly and an equipment manufacturer relating to the mandatory press
purchases after 84 months will lapse. In the event the Company does not elect to
convert the leases to purchases, the Company and Messrs. White and Pumpelly
expect that the Company will purchase the presses at the same price from either
an equipment manufacturer or Messrs. White and Pumpelly at the end of the 84
month lease term.
The Equipment Companies, which are owned by shareholders with identical
ownership to that of the Company, have existed for the sole purpose of owning
printing equipment purchased from and financed by a printing press manufacturer.
Except for a limited guarantee for approximately $158,000 of payments due
between January and June of 1998, none of the obligations of the Equipment
Companies are guaranteed by, or the responsibility of, the Company though all of
the presses owned by the Equipment Companies are leased to the Company.
Effective March 31, 1998, most of the equipment owned by the Equipment
Companies was sold back to the equipment manufacturer, and the manufacturer
agreed to lease the equipment directly to the Company. The balance of the the
equipment was transferred to the Company from one of the Equipment Companies in
exchange for the assumption by the Company of the debt owed by the Equipment
Company, to the equipment manufacturer. Prior to the date of the Offering, the
Equipment Companies will be dissolved.
Messrs. White and Pumpelly have guaranteed substantially all of the
Company's debt and equipment lease obligations.
The Company rents its corporate office from a partnership between
Messrs. White and Cox. The 9,200 square foot single tenant office building has
been rented under a verbal tenancy at will. Rental payments to the partnership
by the Company were $85,487 in 1995, $82,536 in 1996 and $83,392 in 1997.
On December 1, 1997, the Company issued an aggregate of $200,000
principal amount of unsecured notes (the "1997 Notes") which are due December 1,
2000 and bear interest at 14%. The 1997 Notes were used to retire $200,000 of
indebtedness of the Company to John T. White which was incurred in 1992 to
provide working capital to the Company. The following persons purchased the 1997
Notes for the amounts indicated: John T. White $78,196; Mrs. Diana Peterson, a
shareholder, $30,075; C. Thomas Daulton, director, $19,549; Mrs. Lucy Cox,
mother of Richard D. Cox, $22,180; and Richard D. Cox, a director, $50,000.
In connection with the issuance of the 1997 Notes, the Company entered
into a Warrant for Stock Purchase (the "1997 Note Warrants") with each purchaser
of the 1997 Notes which entitles the note purchasers to purchase a specified
percentage of the Company's outstanding stock, unless the Company pays a
cancellation fee to the note purchaser. The Company will use a portion of the
net proceeds from this Offering to retire the 1997 Notes and to cancel the 1997
Note Warrants. The Company will pay to the following persons the amounts
indicated to redeem the 1997 Warrants: John T. White, $15,115, Mrs. Peterson,
$5,813, Mr. Daulton, $3,779, and Mr. Cox, $13,952. See "Use of Proceeds."
In July, 1996, the Company issued promissory notes (the "1996 Notes")
in the aggregate principal amount of $350,000 secured by the Company's 51%
interest in Performance Packaging. The 1996 Notes are due June, 1999 and the
outstanding principal amount of the 1996 Notes bears interest at 14%. The 1996
Notes were used to provide working capital to the Company. The following persons
purchased the 1996 Notes for the amounts indicated: White, Cox, Larson, P.C.,
Retirement Trust (on behalf of John T. White, Chief Executive
35
<PAGE> 36
Officer and a director) $100,000; Richard D. Cox $50,000; Mrs. Lucy Cox, mother
of Richard D. Cox, $50,000; Thomas P. White, Jr., father of John T. White,
$100,000; and Russell V. Oesch, Chief Financial Officer, $50,000.
In connection with the issuance of the 1996 Notes, the Company entered
into a Warrant for Stock Purchase (the "1996 Note Warrants") which entitled the
note purchasers to purchase a specified percentage of the Company's outstanding
stock, unless the Company pays a cancellation fee to the note purchaser. The
Company will use a portion of the net proceeds from this Offering to retire the
1996 Notes and to cancel the 1996 Note Warrants. The Company will pay the
following persons the amounts indicated to redeem the 1996 Warrants: John T.
White, $28,690; Richard D. Cox, $14,345; Mrs. Cox, $14,345; Mr. Thomas P. White
$28,690; and Russell V. Oesch $14,345. See "Use of Proceeds."
During the periods ended June 30, 1998 and 1997 and the fiscal years
1997 and 1996, the Company sold goods and services to Promotional Services
International, Inc., ("PSI"), in the amounts of $1,065,952, $219,258, $444,235,
and $6,484, respectively. The Company continues to provide services to PSI.
Stephen M. Lilly, a director of the Company, is a principal shareholder of PSI.
The Company believes that all of the transactions set forth above were
made on terms no less favorable to the Company that could have been obtained
from unaffiliated parties. All future transactions, including loans and
compensation between the Company and its officers, directors, principal
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.
36
<PAGE> 37
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of June 30, 1998 and as
adjusted to reflect the sale of Common Stock being offered by the Company
hereby, for (i) each person known by the Company to own beneficially 5% or more
of the Common Stock, (ii) each director and executive officer of the Company,
and (iii) 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 his or her shares.
<TABLE>
<CAPTION>
Percentage Owned
Number of Before After
Name Shares Offering Offering
--------------- -------------- -----------
<S> <C> <C> <C>
John T. White (1) 1,040,000 26.00% 20.00%
Richard D. Cox (2) 960,000 24.00% 18.46%
W. Chris Pumpelly (1) 770,000 19.25% 14.81%
Joseph E. Pate (3) 570,000 14.25% 10.96%
Diana Peterson (4) 400,000 10.00% 7.69%
C. Thomas Daulton (5) 260,000 6.50% 5.00%
Gary H. Homsey (1) -- -- --
Michael Short (1) -- -- --
Russell V. Oesch (1) -- -- --
Greg White (1) -- -- --
Stephen M. Lilly (6) -- -- --
All directors, and executive
officers as a group (ten
persons) 3,600,000 90.00% 69.23%
</TABLE>
- ----------------------------
(1) The address of Messrs. John T. White, Pumpelly, Homsey, Short, Oesch and
Greg White is 3012 Fairmount, Dallas, Texas 75201.
(2) The address of Mr. Cox is 300 Crescent Court, Suite 1400, Dallas, Texas
75201.
(3) The address of Mr. Pate is 1409 San Rafael Dallas, Texas 75218.
(4) The address of Mrs. Peterson is 111 E. Broadway, #1080, Salt Lake City,
Utah 84111.
(5) The address of Mr. Daulton is 1901 N. Akard, Dallas, Texas 75201. (6) The
address of Mr. Lilly is 1000 Holcomb Woods Parkway, Suite 4408, Roswell,
Georgia 30076.
37
<PAGE> 38
DESCRIPTION OF SECURITIES
CAPITAL STOCK OF THE COMPANY
Performance Printing's authorized capital stock consists of 20,000,000
shares of Common Stock, $.01 par value, and 3,000,000 shares of preferred stock,
$1.00 par value per share ("Preferred Stock").
UNITS
Each Unit consists of one share of Common Stock and one Warrant. The
Shares and Warrants included in the Units may be not be traded separately until
, 1999 (180 days from the date of this Prospectus) unless earlier separated upon
three days notice from the Representatives to the Company. The Warrants may not
be exercised until they are separated from the Units.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of shareholders, including the election of
directors. The Common Stock does not have cumulative voting rights, which means
that the holders of a plurality of the shares voting for election of directors
can elect all members of the Board of Directors. Dividends may be paid ratably
to holders of Common Stock when and if declared by the Board of Directors out of
funds legally available therefor. Upon liquidation or dissolution of the
Company, the holders of Common Stock will be entitled to share ratably in the
assets of the Company legally available for distribution to shareholders after
payment of all liabilities and the liquidation preferences of any outstanding
Preferred Stock. The provisions of the Articles of Incorporation relating to
share structure, preferences, privileges, restrictions and rights may be amended
only upon the affirmative vote of 66 2/3 percent of the outstanding voting stock
of the Company.
The holders of Common Stock have no preemptive or conversion rights or
other subscription rights and are not subject to redemption or sinking fund
provisions or to calls or assessments by the Company. The shares of Common Stock
offered hereby will be, when issued and paid for, fully paid and not liable for
call or assessment.
At June 30, 1998, the Company had six shareholders.
PREFERRED STOCK
The Company may issue Preferred Stock in one or more series and the
Board of Directors may designate the dividend rate, voting rights and other
rights, preferences and restrictions of each series. It is not possible to state
the actual effect of the issuance of any shares of Preferred Stock upon the
rights of holders of the Common Stock until the Board of Directors determines
the specific rights of the holders of such Preferred Stock. However, the effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, impairing the liquidation rights
of the Common Stock and delaying or preventing a change in control of the
Company without further action by the shareholders. The Company presently has no
plans to issue any shares of Preferred Stock.
WARRANTS
The Warrants will be issued in registered form pursuant to an agreement
dated the date of this Prospectus (the "Warrant Agreement"), between the Company
and Securities Transfer Corporation, Dallas, Texas, as Warrant Agent (the
"Warrant Agent"). The following discussion of certain terms and provisions of
the Warrants is qualified in its entirety by reference to the Warrant Agreement.
A form of the certificate representing the Warrants which forms a part of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
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<PAGE> 39
Each Warrant entitles the registered holder to purchase one share of
Common Stock. The Warrants are exercisable at a price of $7.50, which exercise
price has been arbitrarily determined by the Company and the Representatives,
subject to certain adjustments. The Warrants are entitled to the benefit of
adjustments in their exercise prices and in the number of shares of Common Stock
or other securities deliverable upon the exercise thereof in the event of a
stock dividend, stock split, reclassification, reorganization, consolidation or
merger.
The Warrants may be exercised at any time after separation from the
Units until the close of business five years from the date hereof, unless such
period is extended by the Company. After the expiration date, Warrant holders
shall have no further rights. Warrants may be exercised by surrendering the
certificate evidencing such Warrant, with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Warrant Agent.
If less than all of the Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time beginning six
months from the date hereof to redeem the Warrants, at a price of $.05 per
Warrant, by written notice to the registered holders thereof, mailed not less
than 30 nor more than 60 days prior to the Redemption Date. The Company may
exercise this right only if the closing bid price for the Common Stock for seven
trading days during a 10 consecutive trading day period ending no more than 15
days prior to the date that the notice of redemption is given, equals or exceeds
$10, subject to adjustment. If the Company exercises its right to call the
Warrants for redemption, such Warrants may still be exercised until the close of
business on the day immediately preceding the Redemption Date. If any Warrant
called for redemption is not exercised by such time, it will cease to be
exercisable, and the holder thereof will be entitled only to the repurchase
price. Notice of redemption will be mailed to all holders of Warrants of record
at least 30 days, but not more than 60 days, before the Redemption Date. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Act is not then in effect. Any
redemption of the Warrants during the one-year period commencing on the date of
this Prospectus shall require the written consent of the Representatives.
The Warrant Agreement permits the Company and the Warrant Agent without
the consent of Warrant holders to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that the Company and the Warrant
Agent deem necessary or desirable and that do not adversely affect the interest
of any Warrant holder. The Company and the Warrant Agent may also supplement or
amend the Warrant Agreement in any other respect with the written consent of
holders of not less than a majority in the number of the Warrants then
outstanding; however, no such supplement or amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed, or (ii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Warrants, and the
issuance of such shares to the holder must be registered, qualified or exempt
under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Warrants prior to the exercise of such Warrants
and will deliver a prospectus with respect to such securities to all holders
thereof as required by Section 10(a)(3) of the Act. See "Risk Factors -
Arbitrary Offering Price and Exercise of Warrants."
TRANSFER AGENT AND REGISTRAR; WARRANT AGENT
The Transfer Agent and Registrar and Warrant Agent for the Company's
Units, Common Stock and Warrants is Securities Transfer Corporation, Dallas,
Texas.
39
<PAGE> 40
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,200,000
shares of Common Stock outstanding. Of these shares, the 1,200,000 shares sold
to the public hereby will be freely tradable without restrictions or
registration under the Act (1,380,000 if the Representatives' Over-allotment
Option is exercised in full), except that any shares purchased by "affiliates"
of the Company, as that term is defined in Rule 144 ("Rule 144") under the Act
("Affiliates") may generally be sold only within the limitations of Rule 144
described below. An aggregate of 1,200,000 shares will be issued upon the
exercise of the Warrants. The Company has agreed to register these shares under
the Act in order to permit the resale of such shares in the open market from
time to time and has agreed to maintain the effectiveness of such registration.
Following the sale of such shares pursuant to an effective registration
statement filed in connection with such registration, these shares shall be
freely tradable. The Company, the Company's executive officers and directors,
and shareholders of the Company prior to the Offering have agreed not to offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or any
securities exercisable for or convertible into Common Stock for a period of one
year after the date of this Prospectus without the prior written consent of the
Representatives, except that the Representatives have agreed to permit the sale
of 18,000 shares prior to such one year period by the donee of a charitable gift
of a director of the Company.
A total of 4,000,000 shares owned by the Company's shareholders prior
to this Offering (the "Restricted Shares") will be "restricted shares" within
the meaning of the Act and may be publicly sold only if registered under the Act
or sold in accordance with an applicable exemption from registration, such as
those provided by Rule 144 under the Act. In general, under Rule 144, as
currently in effect, a person (or persons whose shares are aggregated) is
entitled to sell restricted shares if at least one year has passed since the
later of the date such shares were acquired from the Company or any affiliate of
the Company. Rule 144 provides that within any three-month period such person
may sell only up to the greater of one percent (1%) of the then outstanding
shares of the Company's Common Stock (approximately 56,000 shares following
completion of this Offering) or the average weekly trading volume in the
Company's Common Stock during the four calendar weeks immediately preceding the
date on which the notice of the sale is filed with the Commission. Sales
pursuant to Rule 144 are subject to certain other requirements relating to
manner of sale, notice of sale and availability of current public information.
Any person who has not been an affiliate of the Company for a period of three
months preceding a sale of restricted shares is entitled to sell such shares
under Rule 144 without regard to such limitations if at least two years have
passed since the later of the date such shares were acquired from the Company or
any affiliate of the Company. Shares held by persons who are deemed to be
affiliates of the Company are subject to such volume limitations regardless of
how long they have been owned or how they were acquired. The foregoing is a
brief summary of certain provisions of Rule 144 and is not intended to be a
complete description thereof. The "restricted shares" held by the current
shareholders of the Company have been held longer than two years and are
qualified for sale pursuant to Rule 144 beginning 90 days after the date of this
Prospectus.
The Company intends to file a registration statement under the Act to
register all shares of Common Stock issuable pursuant to the Company's Stock
Option Plan. See "Management - Stock Option Plan." Subject to the completion of
the one-year period described above, shares of Common Stock issued after the
effective date of such registration statement upon the exercise of awards issued
under such plan generally will be eligible for sale in the public market.
The Company cannot predict the effect, if any, that sales of restricted
securities or the availability of such securities for sale could have on the
market price, if any, prevailing from time to time. Nevertheless, sales of
substantial amounts of the Company's securities, including the securities
offered hereby, could adversely affect prevailing market prices of the Company's
securities and the Company's ability to raise additional capital by occurring at
a time when it would be beneficial for the Company to sell securities.
40
<PAGE> 41
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom First London Securities Corporation and
Nutmeg Securities, Ltd. are acting as Representatives, have severally agreed to
purchase from the Company an aggregate of 1,200,000 Units. The number of Units
which each Underwriter has agreed to purchase is set forth opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS
---- ---------
<S> <C>
First London Securities Corporation...........................
Nutmeg Securities, Ltd........................................
------------
TOTAL 1,200,000
============
</TABLE>
The Units are offered by the Underwriters subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all Units offered by this Prospectus, if
any are purchased.
The Company has been advised by the Representatives that the
Underwriters propose initially to offer the Units offered hereby to the public
at the offering price set forth on the cover page of this Prospectus. The
Representatives have advised the Company that the Underwriters propose to offer
the Units through members of the NASD, and may allow a concession, in their
discretion, to certain dealers who are members of the NASD and who agree to sell
the Units in conformity with the NASD Conduct Rules. Such concessions shall not
exceed the amount of the underwriting discount that the Underwriters are to
receive. The public offering price, concession and reallowance to dealers will
not be reduced by the Representatives until after the Offering is complete. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Representatives an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to an additional
180,000 Units at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Representatives may exercise the
Over-allotment Option solely to cover over-allotments in the sale of the Units
being offered by this Prospectus.
Officers and directors of the Company may introduce the Representatives
to persons to consider the Offering and purchase Units either through the
Representatives, other Underwriters, or through participating dealers. The
Underwriters have not reserved any Units for sale to persons introduced to the
Underwriters by officers and directors. In this connection, officers and
directors will not receive any commissions or any other compensation.
The Company has agreed to pay the Representatives a commission of 10%
of the gross proceeds of the offering (the "Underwriting Discount"), including
the gross proceeds from the sale of the Over-allotment Option, if exercised. In
addition, the Company has agreed to pay to the Representatives a non-accountable
expense allowance of two percent (2%) of the gross proceeds of this Offering,
including proceeds from any Units purchased pursuant to the Over-allotment
Option. The Representatives' expenses in excess of the non-accountable expense
allowance will be paid by the Representatives. To the extent that the expenses
of the Representatives are less than the amount of the non-accountable expense
allowance received, such excess shall be deemed to be additional compensation to
the Representatives. The Company has also agreed to pay the Representatives a
fee of equal to 5% of the gross proceeds received by the Company from the
exercise of the Warrants and 5% of the aggregate redemption price for Warrants
redeemed. Such fee will be paid to the Representatives no earlier than 12 months
after the effective date of this Offering. Additionally, the Representatives or
their designees must be
41
<PAGE> 42
designated in writing by the Warrant holders as having solicited the Warrant in
order to receive the fee and such fee shall not be paid with respect to Warrants
held in a discretionary account without prior specific written approval of such
exercise by the discretionary account holder. The Representatives have informed
the Company that they do not expect sales to discretionary accounts to exceed 5%
of the total number of securities offered by the Company hereby.
The Representatives shall have the right to nominate an Advisory
Director to the Company's Board of Directors. The Advisory Director will have
the same privileges as a normal Director, including equal compensation, but will
not have the right to vote on Board issues.
Prior to the Offering, there has been no public market for the Units,
the Shares or Warrants of the Company. Consequently, the initial public offering
price for the Units, and the terms of the Warrants (including the exercise price
of the Warrants), have been determined by negotiation between the Company and
the Representatives. Among the factors considered in determining the public
offering price were the history of, and the prospect for, the Company's
business, an assessment of the Company's management, its past and present
operations, the Company's development and the general condition of the
securities market at the time of the Offering. The initial public offering price
does not necessarily bear any relationship to the Company's assets, book value,
earnings or other established criteria of value. Such price is subject to change
as a result of market conditions and other factors, and no assurance can be
given that a public market for the Units, the Shares or Warrants will develop
after the close of the Offering, or if a public market in fact develops, that
such public market will be sustained, or that the Securities can be resold at
any time at the offering or any other price. See "Risk Factors."
At the closing of this Offering, the Company will issue to the
Representatives or persons related to the Representatives, for nominal
consideration, a Representatives' Warrant to purchase up to 120,000 Shares and
up to 120,000 Warrants (the "Underlying Warrants"). The Representatives' Warrant
will be exercisable for a four-year period commencing one year from the date of
this Prospectus at an exercise price of $6.00 per Share and $0.15 per Warrant,
subject to adjustment. Each Underlying Warrant will be exercisable for a four
year period commencing one year from the date of this Prospectus at an exercise
price of $7.50 per share of Common Stock. The number of Shares and Warrants
subject to the Representatives' Warrant will not exceed 10% of the Shares and
Warrants underlying the Units offered hereby to the public, excluding the
securities subject to the Representatives' Warrant. The Representatives'
Warrants will not be transferable for one year from the date of this Prospectus,
except (i) to officers of the Representatives or to officers and partners of the
other Underwriters or selected dealers participating in this Offering; (ii) by
will; or (iii) by operation of law.
The Representatives' Warrant contains provisions providing for
appropriate adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Representatives' Warrant contains net issuance provisions
permitting the holders thereof to elect to exercise the Representatives' Warrant
in whole or in part and instruct the Company to withhold from the securities
issuable upon exercise a number of securities, valued at the current fair market
value on the date of exercise, to pay the exercise price. Such net exercise
provision has the effect of requiring the Company to issue shares of Common
Stock without a corresponding increase in capital. A net exercise of the
Representatives' Warrant will have the same dilutive effect on the interests of
the Company's shareholders as will a cash exercise. The Representatives' Warrant
does not entitle the holders thereof to any rights as a shareholder of the
Company until such Representatives' Warrant is exercised and shares of Common
Stock are purchased thereunder.
The Company has granted to the holders of the Representatives' Warrant
certain rights with respect to registration of the Shares, the Underlying
Warrants and the Common Stock issuable upon exercise of the Representatives'
Warrant (the "Registrable Securities") under the Act. For a period of four years
commencing one year following the date of this Prospectus, the holders
representing more than 50% of the Registrable Securities have the right at the
Representatives' or holders' expense to require the Company to prepare and file
one registration statement with respect to the Registrable Securities. In
addition, subject to certain limitations, in the event the Company proposes to
register any of its securities under the Act during the seven year period
following the date of this Prospectus, the holders of the Registrable Securities
are entitled to notice of such
42
<PAGE> 43
registration and may elect to include the Registrable Securities held by them in
such registration statement at the sole expense of the Company.
In connection with the Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Units. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulations M, pursuant to which such persons may bid for or
purchase Units for the purpose of stabilizing their respective market prices.
The Underwriters also may create a short position for the account of the
Underwriters by selling more Units in connection with the Offering than they are
committed to purchase from the Company, and in such case may purchase Units in
the open market following completion of the Offering to cover all or a portion
of such short position. The Underwriters may also cover all or a portion of such
short position by exercising the Over-allotment Option. In addition, the
Underwriters may impose "penalty bids" under contractual arrangements with the
Underwriters whereby they may reclaim from an Underwriter (or dealer
participating in the Offering) for the account of other Underwriters, the
selling concession with respect to Units that are distributed in the Offering
but subsequently purchased for the account of the Underwriters in the open
market. Any of the transactions described in this paragraph may result in the
maintenance of the price of the Units at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken they may be discontinued at
any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Available Information."
LEGAL MATTERS
Legal matters in connection with the Common Stock and Warrants being
offered hereby will be passed upon for the Company by Garza & Staples, P.C.,
Dallas, Texas. Certain legal matters will be passed upon for the Underwriters by
Crouch & Hallett, L.L.P.
EXPERTS
The financial statements of the Company as of December 31, 1997 and
1996, and for each of the two years in the periods then ended, included in this
Prospectus have been audited by Travis Wolff & Company, LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
43
<PAGE> 44
GLOSSARY
The following terms used in this Prospectus have the
specialized meanings in the printing industry set forth below:
"Conventional Sheetfed Offset Printing": Offset printing of sheets of
paper using inks and coatings that cure when exposed through oxidation.
"Large-Format Digital Printing": Digital printing of large sheets (in
excess of 28" x 40") of paper, plastics and other Substrates. Digital
printing is printing by plateless imaging systems that are imaged by
digital data from prepress systems.
"Large-Format Screen Printing": Screen printing of large sheets (in
excess of 28" x 40") of paper, plastics and other Substrates. Screen
printing is printing by use of fine-meshed screens through which ink is
squeezed onto the printing substrate.
"Off-line Special Coatings": Applying coatings to printed sheets on a
coating machine after the sheets have been printed on a printed press.
Special coatings are those which are not commonly applied by a printing
press, such as coatings which are: UV (applied to sheets printed using
conventional offset printing), glow-in-the-dark, sealed scent and
"thermochromatic" (change colors when exposed to heat).
"UV Sheetfed Offset Printing": Offset printing of sheets of paper,
plastics and other Substrates using inks and coatings which cure when
exposed to ultraviolet light. Offset printing is printing by use of a
blanket cylinder to transfer an image from the image carrier to the
substrate.
"Offset Printing": Printing by use of a blanket cylinder to transfer an
image from the image carrier to the Substrate.
"PETG": Polyethelene terephtalate-glycol a petroleum based Substrates.
"Plastic Forming": Forming of plastic Substrates (both printed and
unprinted) using heat and vacuums.
"Substrates": The material on which the printing is placed.
"UV Curing of Inks and Coatings": Curing of inks and coatings on sheets
of paper, plastics and other Substrates using inks and coatings which
cure when exposed to ultraviolet light.
"UV sheetfed Offset Printing": Offset printing of sheets of paper,
plastics and other Substrates using inks and coatings which cure when
exposed to ultraviolet light.
44
<PAGE> 45
PERFORMANCE PRINTING CORPORATION
Table of Contents
<TABLE>
<CAPTION>
Page
-----------------
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4 to F-5
Statements of Changes in Stockholders' Equity F-6
Statements of Cash Flows F-7 to F-8
Notes to Financial Statements F-9 to F-16
</TABLE>
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Performance Printing Corporation
We have audited the accompanying balance sheets of Performance Printing
Corporation (the "Company") as of December 31, 1997 and 1996, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Performance Printing
Corporation as of December 31, 1997 and 1996, and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
Travis Wolff & Company, L.L.P.
Dallas, Texas
January 16, 1998, except for Note 12,
as to which the date is April 30 1998
F-2
<PAGE> 47
PERFORMANCE PRINTING CORPORATION
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31, December 31,
1998 1997 1996
(Unaudited)
----------- ---------- ----------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 239,566 $ 762,501 $ 808,077
Accounts receivable, net 4,327,343 4,387,407 3,086,984
Notes receivable 42,733 55,091 189,573
Inventories 687,225 613,598 515,715
Prepaid and other current assets 117,709 71,002 84,310
----------- ---------- ----------
Total current assets 5,414,576 5,889,599 4,684,659
----------- ---------- ----------
Property and equipment, net 4,780,647 3,643,937 3,933,257
----------- ---------- ----------
Other assets:
Deferred offering costs 193,132 75,000 --
Notes receivable-long term 70,221 73,395 240,591
Equity method investment 7,249 18,333 65,206
Deposits and other assets 90,018 122,091 121,734
----------- ---------- ----------
360,620 288,819 427,531
----------- ---------- ----------
Total assets $10,555,843 $9,822,355 $9,045,447
=========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term note payable $ 2,402,763 $2,001,610 $2,419,670
Current portion of long-term debt and
debenture notes 829,441 594,465 622,685
Accounts payable 1,952,510 2,067,438 1,641,260
Accrued liabilities 717,016 729,618 480,996
Deferred income 183,587 201,433 39,096
----------- ---------- ----------
Total current liabilities 6,085,317 5,594,564 5,203,707
----------- ---------- ----------
Long-term liabilities:
Long-term debt 3,309,971 2,597,002 2,738,256
Debenture notes payable (net of discount for the
issuance of stock warrants of $119,022,
$139,074 and $100,415, respectively)
236,161 244,481 176,604
----------- ---------- ----------
Total long-term liabilities 3,546,132 2,841,483 2,914,860
Commitments and contingencies (Notes 5, 6, 9, 10
and 11)
Stockholders' equity (Notes 1 and 12):
Common stock; 20,000,000 shares authorized;
4,000,000 issued and outstanding; par value
of $.01 per share 40,000 40,000 40,000
Preferred stock; 3,000,000 shares authorized;
no shares issued and outstanding; par value
of $1.00 per share -- --
Additional paid-in capital 645,824 645,824 607,165
Retained earnings 238,570 700,484 279,715
----------- ---------- ----------
924,394 1,386,308 926,880
----------- ---------- ----------
Total liabilities and stockholders' equity $10,555,843 $9,822,355 $9,045,447
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 48
PERFORMANCE PRINTING CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Six months Ended Six months Ended
June 30, 1998 June 30, 1997 Year Ended Year Ended
(Unaudited) (Unaudited) December 31, 1997 December 31, 1996
----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
Printing sales, net of returns and
allowances of $59,273 and
$51,838 in 1997 and 1996,
respectively $ 9,790,796 $ 8,968,422 $ 20,114,549 $ 15,715,395
Cost of goods sold:
Materials and outside services 3,838,657 3,330,794 7,639,665 5,701,008
Other costs 4,251,224 3,571,103 7,826,819 6,400,978
----------- ------------ ------------ ------------
8,089,881 6,901,897 15,466,484 12,101,986
----------- ------------ ------------ ------------
Gross profit 1,700,915 2,066,525 4,648,065 3,613,409
Selling, general and administrative
expenses 1,512,000 1,515,892 3,269,575 2,872,913
Provision for doubtful accounts 116,000 142,500 394,115 222,322
----------- ------------ ------------ ------------
Income from operations 72,915 408,133 984,375 518,174
----------- ------------ ------------ ------------
Other income (expense):
Gain (loss) on equity method
investment 171,059 18,881 (46,873) 141,024
Interest expense (362,797) (288,453) (587,548) (610,310)
Interest and other income 22,853 8,746 10,088 31,995
Gain on sale of property and
equipment 34,056 -- 191,423 90,727
----------- ------------ ------------ ------------
(134,829) (260,826) (432,910) (346,564)
----------- ------------ ------------ ------------
Income (loss) before extraordinary gain (61,914) 147,307 551,465 171,610
Extraordinary gain from
extinguishment of debt -- -- -- 41,750
----------- ------------ ------------ ------------
Net income (loss) $ (61,914) $ 147,307 $ 551,465 $ 213,360
=========== ============ ============ ============
</TABLE>
(Continued)
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 49
PERFORMANCE PRINTING CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Six months Six months
Ended Ended
June 30, 1998 June 30, 1997 Year Ended Year Ended
(Unaudited) (Unaudited) December 31, 1997 December 31, 1996
----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Pro forma unaudited income tax information (Note 1):
Income (loss) before extraordinary gain $ (61,914) $ 147,307 $ 551,465 $ 171,610
Pro forma provision for federal
income taxes (18,912) 53,343 189,638 67,159
----------- ---------- ---------- ----------
Pro forma income (loss) before
extraordinary gain (43,002) 93,964 361,827 104,451
Pro forma extraordinary gain
from extinguishment of debt
(net of federal income taxes
of $14,195 for 1996) -- -- -- 27,555
----------- ---------- ---------- ----------
Pro forma net income (loss) $ (43,002) $ 93,964 $ 361,827 $ 132,006
=========== ========== ========== ==========
Pro forma earnings per share information (Note 1):
Basic and diluted earnings per common share:
Income before extraordinary
gain $ (0.01) $ 0.02 $ 0.09 $ 0.02
Extraordinary gain from
extinguishment of debt -- -- -- 0.01
----------- ---------- ---------- ----------
Net income $ (0.01) $ 0.02 $ 0.09 $ 0.03
=========== ========== ========== ==========
Basic and diluted weighted-average
common shares 4,000,000 4,000,000 4,000,000 4,000,000
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 50
PERFORMANCE PRINTING CORPORATION
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Additional Retained
Stock Paid-In Capital Earnings Total
--------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 40,000 $ 506,750 $ 66,355 $ 613,105
Issuance of stock warrants -- 100,415 -- 100,415
Net Income -- -- 213,360 213,360
--------- --------- ----------- -----------
$ 40,000 $ 607,165 $ 279,715 $ 926,880
Balance, December 31, 1996
Issuance of stock warrants -- 38,659 -- 38,659
Net Income -- -- 551,465 551,465
Stockholders' Distributions -- -- (130,696) (130,696)
--------- --------- ----------- -----------
$ 40,000 $ 645,824 $ 700,484 $ 1,386,308
Balance, December 31, 1997
Net Income (Unaudited) -- -- (61,914) (61,914)
Stockholders' distributions
(Unaudited) (400,000) (400,000)
--------- --------- ----------- -----------
Balance, June 30, 1998
(Unaudited) $ 40,000 $ 645,824 $ 238,570 $ 924,394
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 51
PERFORMANCE PRINTING CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months Six months
Ended Ended Year Ended Year Ended
June 30, 1998 June 30, 1997 December 31, December 31,
(Unaudited) (Unaudited) 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (61,914) $ 147,307 $ 551,465 $ 213,360
----------- ----------- ----------- -----------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 363,628 380,665 745,047 805,342
Amortization of discount on debentures 40,104 -- -- --
Provision for doubtful accounts 116,000 142,500 394,115 222,322
Gain on sale of property and equipment (9,546) -- (191,423) (90,727)
(Gain) loss on equity method investment (171,059) (18,880) 46,873 (141,024)
Gain on extinguishment of debt -- -- -- (41,750)
Changes in operating assets and
liabilities:
(Increase) decrease in accounts (55,936) (1,106,186) (1,716,989) (338,081)
receivable
(Increase) decrease in inventories (73,627) (110,042) (97,883) 84,201
(Increase) decrease in prepaid and
other current assets (46,707) (17,560) 14,627 (72,544)
(Increase) decrease in deposits 32,073 (1,778) (14,426) 9,455
Increase (decrease) in accounts payable (114,928) 240,907 426,178 (144,975)
Increase (decrease) in accrued liabilities (12,602) (4,640) 248,622 2,472
Increase (decrease) in deferred income (17,846) 103,689 162,337 (22,296)
----------- ----------- ----------- -----------
49,554 (391,325) 17,078 272,395
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (12,360) (244,018) 568,543 485,755
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 16,000 -- 550,000 150,000
Purchases of property and equipment (270,427) (74,935) (195,597) (78,121)
Collections of notes receivable 185,317 151,032 441,509 303,083
(Increase) decrease in notes receivable 12,358 185,172 (139,831) (138,456)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (56,752) 261,269 656,081 236,506
----------- ----------- ----------- -----------
Cash flows from financing activities:
Increase in deferred offering costs (118,132) -- (75,000) --
Proceeds from (payments on) short-term
note payable 401,153 (642,305) (418,060) 342,924
Proceeds from issuance of long-term debt -- 242,623 242,623 590,323
Principal payments on long-term debt (291,832) (257,928) (1,032,078) (1,131,380)
Payments made on debt issue costs -- -- -- (47,794)
</TABLE>
(Continued)
The accompanying notes are an integral part of the financial statements
F-7
<PAGE> 52
PERFORMANCE PRINTING CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months Six months
Ended Ended Year Ended Year Ended
June 30, 1998 June 30, 1997 December 31, December 31,
(Unaudited) (Unaudited) 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Proceeds on issuance of debenture notes
payable -- -- 200,000 350,000
Principal payments on debenture notes
payable (45,012) (26,465) (56,989) (18,257)
Stockholders' distributions (400,000) (130,696) (130,696) --
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (453,823) (814,771) (1,270,200) 85,816
----------- ----------- ----------- -----------
Increase (decrease) in cash $ (522,935) $ (797,520) $ (45,576) $ 808,077
Cash, beginning of period 762,501 808,077 808,077 --
----------- ----------- ----------- -----------
Cash, end of period $ 239,566 $ 10,557 $ 762,501 $ 808,077
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 374,594 $ 290,309 $ 575,559 $ 633,809
Supplemental schedule of noncash investing
and financing activities:
Equipment purchases financed by notes
payable $ 1,236,365 $ 144,983 $ 605,957 $ 154,625
Notes receivable paid through issuance of
of debenture note $ -- $ -- $ 22,451 $ --
Debt paid off through refinancing $ -- $ 1,787,668 $ 1,787,668 $ 973,147
Building improvements acquired to satisfy
note receivable $ -- $ -- $ -- $ 339,115
Equipment sold on accounts receivable $ -- $ -- $ -- $ 30,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 53
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 1 - Summary of Significant Accounting Policies
Organization
Performance Printing Corporation (the "Company") was incorporated under the laws
of the State of Texas on February 12, 1992. The Company prints state of the art
advertising on various types of paper, plastics and clear films for customers
located throughout the United States.
Cash and cash equivalents
The Company maintains its cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant risk on
cash. Cash in banks, based on the bank balances exceeded the federally insured
limits by $1,250,000 and $1,130,000 at December 31, 1997 and 1996, respectively.
The Company considers all investments with an original maturity of three months
or less on their acquisition date to be cash equivalents.
Allowance for doubtful accounts
The allowance for doubtful accounts is based on historical bad debt experience
and an evaluation of the aging of the accounts receivable. For the years ended
December 31, 1997 and 1996, respectively, the allowance for doubtful accounts
totaled $229,818 and $183,135.
Inventories
Inventories are comprised of raw materials and work-in-process and are valued at
the lower of cost (cost being determined by the first-in, first-out method) or
market.
Property and equipment
Property and equipment are recorded at cost and depreciated over their estimated
useful lives using the straight-line method. Leasehold improvements are
amortized using the straight-line method over their useful lives or their
respective lease term, whichever is shorter. Depreciation expense was $732,297
and $781,800, for the years ended December 31, 1997 and 1996, respectively.
The Company continually reviews property and equipment to determine that the
carrying values have not been impaired. As of December 31, 1997 and 1996, the
Company expects these assets to be fully recoverable.
Deferred offering costs
If the offering is not completed, such costs will be expensed. If the offering
is completed, such costs will be recorded as a reduction of the net proceeds of
the offering.
Deferred income
Deferred income consists primarily of payments received in advance from
customers. The Company recognizes revenue as the goods and services are
provided.
F-9
<PAGE> 54
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 1 - Summary of Significant Accounting Policies (Continued)
Federal income taxes
The shareholders of the Company have elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code, whereby they are to include their
respective shares of the Company's income or loss in their individual income tax
returns. Therefore, no provision for Federal income taxes has been provided in
the financial statements.
Pro forma income taxes and earnings per share
The unaudited pro forma effects of income tax expense are calculated as if the
Company had been a C corporation with an effective tax rate of 34% for the years
ended December 31, 1997 and 1996.
The Company has approved a stock split effective April 30, 1998. All share data
has been retroactively adjusted for the effect of the stock split.
Concentrations of risk
The Company's customers are not concentrated in any geographic location.
However, during 1997, thirty-four percent of the Company's revenue was
attributable to five customers. Of these five, sales to one customer accounted
for 12.5% of total revenue. These customers have balances included in accounts
receivable of approximately $1,865,000. The Company does not require collateral
or other security to support the accounts receivable subject to credit risk.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the financial statements at, and during the reporting periods. Actual
results could differ from these estimates.
Fair value of financial instruments
The carrying value of cash, accounts receivable and payable, notes receivable,
and accrued liabilities approximate fair value due to the short-term maturities
of these assets and liabilities. The fair value of the short-term note payable,
the long-term debt, including the current portion, and the debenture notes
payable approximates carrying value and is estimated based on quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same maturities.
Reclassification
Certain reclassifications have been made to 1996 balances to conform to the 1997
presentation.
F-10
<PAGE> 55
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 1 - Summary of Significant Accounting Policies (Continued)
Interim financial data (Unaudited)
The balance sheet as of June 30, 1998, the accompanying statements of operations
for the six months ended June 30, 1998 and 1997, statements of stockholders'
equity for the six months ended June 30, 1998 and statements of cash flows for
the six months ended June 30, 1998 and 1997, have been prepared by the Company
without an audit. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, considered necessary in order to make the
financial statements not misleading have been made. Results for interim periods
should not be considered as indicative of results for a full year.
Note 2 - Inventories
The principal components of inventories are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Raw materials $ 363,461 $ 392,316
Work-in-process 250,137 123,399
------------------ -----------------
Total inventories $ 613,598 $ 515,715
================== =================
</TABLE>
Note 3 - Property and Equipment
The principal components of property and equipment are as follows at December
31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- -----------------------------------
Estimated Estimated
Service Service
Amounts Lives Amounts Lives
---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Machinery and equipment $ 3,959,512 1-10 years $ 4,528,553 1-10 years
Furniture and fixtures 615,994 1-7 years 603,332 1-7 years
Leasehold improvements 575,928 1-6 years 565,579 1-6 years
Vehicles 204,163 3-4 years 170,889 3-4 years
Building and improvements 1,514,948 31 years 1,414,442 31 years
Land 400,000 400,000
---------------- ----------------
7,270,545 7,682,795
Less accumulated depreciation
and amortization (3,626,608) (3,749,538)
================ =================
$ 3,643,937 $ 3,933,257
================ =================
</TABLE>
F-11
<PAGE> 56
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 4 - Short-term Note Payable
Amounts drawn on a $3,500,000 revolving line of credit totaled $2,001,610 and
$2,419,670 at December 31, 1997 and 1996, respectively, bearing interest at the
bank's prime rate (8.5%) plus 1%. The revolving line of credit is guaranteed by
a stockholder and is collateralized by all of the Company's assets. The credit
arrangement obligates the Company to certain positive and negative covenants
such as the maintenance of financial ratios, defined equity levels and
limitations on capital expenditures and officers' salaries. At December 31, 1997
and 1996, the Company was in compliance with positive and negative covenants.
Note 5 - Long-term Debt
During the year ended December 31, 1997, the Company refinanced its $1,260,000
interim note payable for its building with permanent financing. The permanent
financing consists of three notes issued by the original lender totaling
$1,344,000. The repayment terms are noted below.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Note payable maturing March 2017, payable in monthly installments of principal
and interest of $6,989, bearing interest at 10.25%, collateralized by the deed
of trust for the building. $ 688,135 $ --
Note payable maturing June 2017, payable in monthly installments of principal
and interest of $4,580, bearing interest at 7.267%, collateralized by the deed
of trust for the building. 571,133 --
Note payable maturing April 2002, payable in monthly installments of principal
and interest of $1,397, bearing interest at prime (8.5%) plus 2%, collateralized
by the deed of trust for the building. 57,757 --
Note payable maturing in October 2016, payable in monthly installments of
principal and interest of $12,368, commencing in 1997, bearing interest at prime
(8.5%) plus 2%, collateralized by the deed of trust for the building and
guaranteed by certain stockholders. Note was refinanced during 1997. -- 1,260,000
Note payable maturing in April 2002, payable in monthly installments of
principal and interest of $17,118, bearing interest at 10.25%, collateralized by
machinery and equipment.
719,896 --
Note payable maturing in August 2002, payable in monthly installments of
principal and interest of $4,781, bearing interest at 10%, collateralized by
machinery and equipment. 213,786 --
</TABLE>
F-12
<PAGE> 57
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 5 - Long-term Debt (Continued)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Note payable maturing in July 2002, payable in monthly installments of principal
and interest of $6,325, bearing interest at 9.75%, collateralized by machinery
and equipment. 243,402 --
Note payable maturing in 2001, payable in monthly installments of principal and
interest of $19,728, bearing interest at 9.5%, collateralized by machinery and
equipment. 303,394 844,933
Note payable maturing in 1999, payable in monthly installments of principal and
interest of $11,631, bearing interest at 11%, collateralized by machinery
and equipment. 263,660 394,147
Notes payable maturing at various dates through 2002, payable in monthly
installments of principal and interest of $1,405, bearing interest between 8.5%
and 9.65%, collateralized by vehicles. 39,105 69,552
Notes payable maturing in 1998, payable in monthly installments of principal and
interest of $3,429, bearing interest at 9.75%, collateralized by machinery and
equipment. Notes were refinanced during 1997. -- 51,521
Notes payable maturing various dates through 1998, payable in monthly
installments of principal and interest of $4,176, bearing interest at 11%,
collateralized by machinery and equipment and guaranteed by certain
stockholders. Notes were refinanced during 1997. -- 63,937
Notes payable maturing at various dates through 1999, payable in monthly
installments of principal and interest of $14,950, bearing interest at rates
ranging from 9.25% through 10.875%, collateralized by machinery and equipment.
Notes were refinanced during 1997. -- 417,127
Unsecured subordinated debt to stockholder maturing in 1997, interest only
payments at 10%. Principal and any remaining unpaid interest was paid through
the issuance of a debenture note payable during 1997. -- 205,000
-------------- --------------
3,100,268 3,306,217
Less current maturities of long-term debt 503,266 567,961
-------------- --------------
$ 2,597,002 $ 2,738,256
============== ==============
</TABLE>
F-13
<PAGE> 58
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 5 - Long-term Debt (Continued)
Aggregate principal maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Years ended December 31:
1998 $ 503,266
1999 $ 531,178
2000 $ 439,856
2001 $ 408,860
2002 $ 176,529
</TABLE>
Note 6 - Debenture Notes Payable
In December 1997 and July 1996, respectively, the Company issued debenture notes
payable to certain officers, directors and other related parties totaling
$200,000 and $350,000. The debentures bear interest at 14.0% per annum and
provide for monthly payments of principal and interest of $12,800, commencing in
August 1996 and continuing through December 2000. The Company has pledged as
collateral its 51% ownership interest in Performance Packaging, L.C. (see Note
10) together with all future profits therefrom for the 1996 issued debenture
notes payable. The 1997 issued debenture notes payable are unsecured.
Aggregate principal maturities of debenture notes payable are as follows:
<TABLE>
<S> <C>
Years ended December 31:
1998 $ 91,199
1999 $ 250,439
2000 $ 133,116
</TABLE>
The Company issued stock warrants to the debenture holders as additional
consideration. The warrants issued in relation to the 1996 debentures make
available 3.5% of the then outstanding stock of the Company and become
exercisable in June 1999. The warrants issued in relation to the 1997 debentures
make available 2.0% of the then outstanding stock of the Company and become
exercisable in December 2000. The Company may cancel the debenture holders'
rights to purchase the warrant stock at any time prior to June 1999 and December
2000 for debentures issued in 1996 and 1997, respectively. The cancellation fees
are recorded at the fair value of the warrants and are reflected as a discount
on the debenture notes payable. The discount will be amortized to interest
expense over the life of the debenture notes payable. The cancellation fees
under these agreements would be assessed as follows:
<TABLE>
<S> <C>
May 1998 $ 139,074
May 1999 $ 215,892
May 2000 $ 90,579
</TABLE>
F-14
<PAGE> 59
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 7 - 401(k) Retirement Plan
During 1997, the Company adopted a 401(k) retirement plan (the "Plan"). The Plan
covers all full-time employees with at least one year of service. Employees can
contribute a portion of their salary to the Plan within the limits set in the
Internal Revenue Code. The Company matches employee contributions at ten cents
per dollar contributed. In addition to the matching contribution, the Company
may make a discretionary contribution to the Plan. Employees are fully vested in
their contributions and become fully vested in the employer contributions on a
seven-year vesting schedule.
Employer matching contributions to the Plan for the year ended December 31, 1997
of $19,500 were charged to expense. No discretionary contribution was made to
the Plan.
Note 8 - Related Party Transaction
Notes receivable includes an $87,150 note from an employee due in monthly
installments of $880. The employee had previously been a customer of the Company
and upon employment, the related account receivable was converted to a note
receivable.
Note 9 - Operating Leases
The Company conducts its display division operations in office and manufacturing
space leased through December 2000 for $10,540 monthly. The Company also leases
its office facility from a stockholder for $6,100 monthly. There is no set lease
term for this facility; the Company anticipates it will occupy the space
indefinitely. The approximate future minimum rental commitments for the
facilities leases for the years ended December 31 are as follows:
<TABLE>
<S> <C>
1998 $ 199,692
1999 199,692
2000 199,692
2001 73,200
2002 73,200
----------------
Total $ 745,476
================
</TABLE>
During 1997, the Company entered into five equipment leases for printing presses
with the manufacturer. The leases are subject to cancellation from time to time
during the term of the lease. The leases provide for monthly payments ranging
from $16,000 to $24,000 and expire from 2000 to 2004. Lease expense for the
years ended December 31, 1997 and 1996, was $765,816 and $433,151, respectively.
Note 9 - Operating Leases (Continued)
Minimum future rentals for years ending December 31 under these equipment leases
are as follows:
<TABLE>
<S> <C>
1998 $ 1,317,071
1999 1,453,627
2000 1,396,210
2001 511,428
2002 511,428
-------------------
Total $ 5,189,764
===================
</TABLE>
F-15
<PAGE> 60
PERFORMANCE PRINTING CORPORATION
Notes to Financial Statements
December 31, 1997 and 1996
Note 10 - Equity Method Investment
The Company and an unrelated investor formed a Texas limited liability company
on December 31, 1993 called Performance Packaging, L.C. ("Packaging"). The
Company contributed 51% of the capital of Packaging and uses the equity method
to account for the investment. Packaging is managed by a committee, on which,
the Company holds two positions and the other stockholder holds three positions.
The Company exercises no effective control over the operations of Packaging;
therefore, the financial information is not consolidated. The investment is
carried at 51% of net equity plus organizational costs contributed by the
Company. At December 31, 1997 and 1996 respectively, notes receivable includes
$13,482 and $188,185 from Packaging.
Condensed financial information at and for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
Unaudited Unaudited
-------------------- -------------------
<S> <C> <C>
Current assets $ 934,283 $ 698,096
Non-current assets 1,916,587 1,235,967
=================== ===================
Total assets $ 2,850,870 $ 1,934,063
=================== ===================
Current liabilities $ 693,193 $ 515,125
Non-current liabilities 2,121,730 1,291,083
-------------------- -------------------
Total liabilities $ 2,814,923 $ 1,806,208
=================== ===================
Total revenues $ 6,306,031 $ 3,700,049
=================== ===================
Net income (loss) $ (91,907) $ 245,572
=================== ===================
</TABLE>
The primary customer of Packaging filed for Chapter 11 protection in U.S.
Bankruptcy Court on July 23rd 1998. In July 1998 the Company wrote its
investment in Packaging down from $7,300 to zero. The Company does not guarantee
any of the debts of Packaging. The customer has verbally indicated that it will
not continue the Packaging Services Agreement with Packaging. Performance
Packaging will cease operations if a contract with another company is not
reached by October 31, 1998.
Note 11 - Litigation and Contingencies
The Company is from time to time subject to routine litigation incidental to its
business. The Company believes that the results of any pending legal proceedings
will not have a materially adverse effect on the Company's financial condition.
Note 12 - Subsequent Event
On April 30, 1998, the Company restated the articles of incorporation to reflect
changes in the capital stock structure. The total authorized number of common
shares increased from 10,000 at $1.00 par value per share to 20,000,000 at $.01
par value per share. Additionally, the Company authorized 3,000,000 shares of
preferred stock at $1.00 par value per share. The financial information in this
report has been adjusted to reflect the impact of these changes.
F-16
<PAGE> 61
{Description of pictures and text on inside of the back cover of the prospectus}
Solo page of inside cover:
Picture #1: Products manufactured by the Company.
Picture #2: Products manufactured by the Company.
Picture #3: Products manufactured by the Company.
Text:
(Logo)
Performance offers a wide range of products and services to companies all
over the country. Our customers include, among others, food and beverage
companies, promotional and media advertising agencies, sports marketing
companies, hi-tech manufacturers and software developers, office-product
retailers, airlines and other printers and display companies.
<PAGE> 62
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information....................... 5
Prospectus Summary.......................... 6
Risk Factors................................ 11
Dilution.................................... 17
Use of Proceeds............................. 18
Dividend Policy............................. 19
Capitalization.............................. 19
Selected Financial Data..................... 20
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................. 22
Business.................................... 26
Management.................................. 32
Certain Transactions........................ 35
Principal Shareholders...................... 37
Description of Securities................... 38
Shares Eligible For Future Sale............. 40
Underwriting................................ 41
Legal Matters............................... 43
Experts..................................... 43
Glossary.................................... 44
Table of Contents to Financial Statements .. F-1
</TABLE>
-------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,2000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF
COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE
WARRANT
PERFORMANCE PRINTING CORPORATION
-------------------------
PROSPECTUS
, 1998
-------------------------
FIRST LONDON SECURITIES
CORPORATION
NUTMEG SECURITIES, LTD.
===============================================================================
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the Texas Business Corporation Act provides generally
and in pertinent part that a Texas corporation may indemnify its directors and
officers against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by them in connection with any suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) if, in connection with the
matters in issue, they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, in connection with any criminal suit or proceeding, if in connection with
the matters in issue, they had no reasonable cause to believe their conduct was
unlawful.
The registrant's Articles of Incorporation provide that a director of
the registrant shall not be liable to the registrant or its shareholders for any
act or omission in such director's capacity as a director to the fullest extent
permitted by Texas statutory or decisional law.
The Company's Bylaws provide that the Company shall indemnify each of
its directors and officers, acting in such capacity, so long as such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company. Such indemnification may be
made only upon a determination that such indemnification is proper in the
circumstances because the person to be indemnified has met the applicable
standard of conduct to permit indemnification under the law. The Company is also
required to advance to such persons payment for their expenses incurred in
defending a proceeding to which indemnification might apply, provided the
recipient provides an undertaking agreeing to repay all such advanced amounts if
it is ultimately determined that he is not entitled to be indemnified.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration and NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 5,777
NASD filing fee................................................... 2,387
Boston Stock Exchange ............................................ 15,000
Nasdaq SmallCap Market listing fee................................ 10,000
Underwriters' non-accountable expense allowance................... 123,000
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 35,000
Printing and engraving expenses................................... 85,000
Transfer agent and registrar fees and expenses.................... 4,000
Blue Sky fees and expenses........................................ 30,000
Miscellaneous expenses........................................... 14,836
---------
Total ....................................................... $ 500,000
</TABLE>
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Registrant during the
last three years involving the sale of securities which were not registered
under the Securities Act:
In July, 1996, the Company issued promissory notes secured by the
Company's interest in Performance Packaging (the "1996 Notes") in the aggregate
principal amount of $350,000. The 1996 Notes are due June, 1999 and the
outstanding principal amount of the 1996 Notes bears interest at 14%. The 1996
Notes were used to
II-1
<PAGE> 64
provide working capital to the Company. The 1996 Notes were issued to six
persons, all of whom were officers or directors of the Company or family
members. In connection with the issuance of the 1996 Notes, the Company entered
into a Warrant for Stock Purchase (the "1996 Note Warrants") which entitled the
note purchasers to purchase a specified percentage of the Company's outstanding
stock, unless the Company pays a cancellation fee to the note purchaser.
The transaction was exempt from registration pursuant to Section 4 (2)
of the Act for transactions not involving a public offering. Each of the
purchasers was a sophisticated investor as that term is recognized under the Act
and had access to corporate information through their positions with the Company
or through their family member who was an officer or director of the Company. No
underwriter was involved in the transaction and no compensation was paid to an
underwriter.
On December 1, 1997, the Company issued an aggregate of $200,000
principal amount of unsecured notes (the "1997 Notes") which are due December 1,
2000 and bear interest at 14%. The 1997 Notes were used to retire $200,000 of
indebtedness of the Company to Mr. John White which was incurred in 1992 to
provide working capital to the Company. The 1997 Notes were issued to five
persons, all of whom were officers or directors of the Company or family
members. In connection with the issuance of the 1997 Notes, the Company entered
into a Warrant for Stock Purchase (the "1997 Note Warrants") with each purchaser
of the 1997 Notes which entitles the note purchasers to purchase a specified
percentage of the Company's outstanding stock, unless the Company pays a
cancellation fee to the note purchaser.
The transaction was exempt from registration pursuant to Section 4 (2)
of the Act for transactions not involving a public offering. Each of the
purchasers was a sophisticated investor and had access to corporate information
through their positions with the Company or through their family member who was
an officer or director of the Company. No underwriter was involved in the
transaction and no compensation was paid to an underwriter.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
1.1 Revised Form of Underwriting Agreement. (1)
3.1 Articles of Incorporation of Performance Printing
Corporation, as amended. (3)
3.2 Bylaws, as amended and restated, of Performance Printing
Corporation (3)
4.1 Revised Warrant Agreement(3)
5.1 Opinion of Garza & Staples, P.C. (3)
10.1 Performance Printing Corporation Stock Option Plan. (3)
10.2 Loan and Security Agreement by and among the Company and
Finova Capital Corporation, dated December 19, 1996. (3)
10.3 Representatives' Warrant Agreement (3)
10.4 Commercial Lease Agreement between The Sigma Joint Venture
and Performance Printing Corporation (3)
10.5 Standard Commercial Lease between Beltline Quaker Limited
Partnership and Performance Printing Corporation (3)
10.6 First Renewal of Packaging Services Agreement dated April 1,
1997 (3)
10.7 Organization Agreement (3)
10.8 Release of Guaranty (3)
23.1 Consent of Travis Wolff, L.L.P. (1)
23.2 Consent of Garza & Staples, P.C. (included in Exhibit 5.1).
(3)
24.1 Power of Attorney (included on page II-4). (1)
27.1 Financial Data Schedule (1)
</TABLE>
- -------------------
(1) Filed herewith
II-2
<PAGE> 65
(2) To be filed by amendment
(3) Previously filed
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Act, the information omitted from the form of
prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The registrant hereby undertakes (1) to file, during any
period in which it offers or sells securities, a
post-effective amendment to this Registration Statement, to
include any prospectus required by section 10(a)(3) of the
Securities Act, to reflect in the prospectus any facts or
events which, individually or together, represent a
fundamental change in the information in the Registration
Statements, and to include any additional or changed material
information on the plan of distribution; (2) that, for the
purpose of determining any liability under the Act of 1933, to
treat each post-effective amendment as a new Registration
Statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and (3) to file a
post-effective amendment to remove from registration any of
the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising from the Act may be permitted
to directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirement of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Dallas,
State of Texas on August 13, 1998.
II-3
<PAGE> 66
PERFORMANCE PRINTING CORPORATION
BY: s/John T. White
-----------------------------------
John T. White, Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Performance Printing
Corporation hereby severally constitute and appoint John T. White and Russell V.
Oesch, and each of them singly, our true and lawful attorneys, with full power
to them and each of them singly, to sign for us in our names in the capacities
indicated below, all pre-effective and post-effective amendments to this
Registration Statement, including any filings pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and generally to do all things in our names
and on our behalf in such capacities to enable Performance Printing Corporation
to comply with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Securities and Exchange Commission.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities on August 13, 1998.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/W. Chris Pumpelly Chairman of the Board and Director
- -------------------------------------
W. Chris Pumpelly
/s/John T. White Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
John T. White
/s/Russell V. Oesch Vice President of Finance and Chief Financial Officer
- ------------------------------------- (Principal Financial Officer)
Russell V. Oesch Officer)Office
/s/C. Thomas Daulton * Director
- -------------------------------------
C. Thomas Daulton
/s/Richard D. Cox * Director
- -------------------------------------
Richard D. Cox
/s/Joseph E. Pate Director
- -------------------------------------
Joseph E. Pate
/s/Stephen M. Lilly * Director
- -------------------------------------
Stephen M. Lilly
* By: John T. White
As Attorney in-Fact
/s/ John T. White
- -----------------
</TABLE>
II-4
<PAGE> 67
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 Revised Form of Underwriting Agreement. (1)
3.1 Articles of Incorporation of Performance Printing Corporation,
as amended. (3)
3.2 Bylaws, as amended and restated, of Performance Printing
Corporation (3)
4.1 Revised Warrant Agreement(3)
5.1 Opinion of Garza & Staples, P.C. (3)
10.1 Performance Printing Corporation Stock Option Plan. (3)
10.2 Loan and Security Agreement by and among the Company and
Finova Capital Corporation, dated December 19, 1996. (3)
10.3 Representatives' Warrant Agreement (3)
10.4 Commercial Lease Agreement between The Sigma Joint Venture and
Performance Printing Corporation (3)
10.5 Standard Commercial Lease between Beltline Quaker Limited
Partnership and Performance Printing Corporation (3)
10.6 First Renewal of Packaging Services Agreement dated April 1,
1997 (3)
10.7 Organization Agreement (3)
10.8 Release of Guaranty (3)
23.1 Consent of Travis Wolff, L.L.P. (1)
23.2 Consent of Garza & Staples, P.C. (included in Exhibit 5.1). (3)
24.1 Power of Attorney (included on page II-4). (1)
27.1 Financial Data Schedule (1)
- -------------------
(1) Filed herewith
<PAGE> 1
EXHIBIT 1.1
1,200,000 UNITS
PERFORMANCE PRINTING CORPORATION
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT
UNDERWRITING AGREEMENT
Dallas, Texas
__________, 1998
First London Securities Corporation
Nutmeg Securities, Ltd.
c/o First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Gentlemen:
Performance Printing Corporation (the "Company"), on the basis of the
representations, warranties, covenants and conditions contained herein, hereby
proposes to issue and sell to such Underwriters as named in Schedule A (the
"Underwriters") to this Underwriting Agreement (the "Agreement"), for whom First
London Securities Corporation and Nutmeg Securities, Ltd. are acting as the
representatives (the "Representatives"), pursuant to the terms of this
Agreement, on a "firm commitment" basis, 1,200,000 Units (the "Units"), each
Unit consisting of one share of Common Stock (the "Shares") and one Redeemable
Common Stock Purchase Warrant (the "Warrants"). The Units, the Shares and the
Warrants are collectively referred to as the "Securities." The Shares and
Warrants may not be traded separately until ______, 1999 [six months from the
date of the Prospectus], unless earlier separated upon three days notice from
the Representatives to the Company. Each Warrant is exercisable to purchase one
(1) share of Common Stock (the "Common Stock") at $7.50, subject to possible
adjustment, at any time during the period between the Effective Date and five
(5) years from the Effective Date. The Warrants may not be exercised unless the
Shares and the Warrants are separated from the Units. The date upon which the
Securities and Exchange Commission ("Commission") shall declare the registration
statement of the Company effective shall be the "Effective Date". The Warrants
are subject to redemption under certain circumstances. In addition, the Company
proposes to grant to the Underwriters (or, at the option of the Representatives,
to the Representatives, individually) the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 180,000 additional Units (the
"Option Securities").
You have advised the Company that you and the other Underwriters desire
to purchase, severally, the Securities, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms the
agreements made by it with respect to the
1
<PAGE> 2
purchase of the Securities by the several Underwriters on whose behalf you are
signing this Agreement, as follows:
1. Representations and Warranties of the Company.
The Company represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined) that:
(a) A registration statement (File No. 333-46115) on Form SB-2 relating to
the public offering of the Securities, including a preliminary form of the
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Commission thereunder, and has been filed with the
Commission under the Act. The Company has prepared in the same manner and
proposes to file, prior to the Effective Date of such registration statement, an
additional amendment or amendments to such registration statement, including a
final form of Prospectus, copies of which shall be delivered to you.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to the Rules
and Regulations under the Act prior to the Effective Date. The registration
statement (including all financial schedules and exhibits) as amended at the
time it becomes effective and the final prospectus included therein are
respectively referred to as the "Registration Statement" and the "Prospectus,"
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from said prospectus as then
amended, the term "Prospectus" shall mean the prospectus first filed pursuant to
Rule 424(b), and (ii) if such registration statement or prospectus is amended or
such prospectus is supplemented, after the effective date of such registration
statement and prior to the Option Closing Date (as hereinafter defined), the
terms "Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall include
the prospectus as so supplemented, or both, as the case may be.
(b) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or
Selected Dealers: (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein, in light of the
circumstances under which they are made, not misleading; provided, however, that
the Company makes no representations, warranties or agreement as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by the Underwriters specifically for use in the preparation thereof. It
is understood that the statements set forth in the Prospectus with respect to
stabilization, under the heading "Underwriting" and regarding the identity of
counsel to the Underwriters under the heading "Legal Matters" constitute the
only information furnished in writing by the Underwriters for inclusion in the
Prospectus.
(c) Each of the Company and each subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with
2
<PAGE> 3
full power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus and is duly qualified to do business
as a foreign corporation and is in good standing in all other jurisdictions in
which the nature of its business or the character or location of its properties
requires such qualification, except where failure to so qualify will not
materially affect the Company's business, properties or financial condition.
(d) The authorized, issued and outstanding securities of the Company as of
the date of the Prospectus is as set forth in the Prospectus under
"Capitalization;" all of the issued and outstanding securities of the Company
have been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respects with applicable
Federal and state securities laws; the holders thereof have no rights of
rescission against the Company with respect thereto, and are not subject to
personal liability by reason of being such holders; none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company; except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any securities of the Company have been granted or
entered into by the Company; and all of the securities of the Company, issued
and to be issued as set forth in the Registration Statement, conform to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Securities are duly authorized, and when issued, delivered and
paid for pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Securities as contemplated in this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any securities of the Company, except as
described in the Registration Statement and Prospectus.
The Warrants have been duly authorized and, when issued, delivered and
paid for pursuant to this Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form filed
as an exhibit to the Registration Statement. The shares of Common Stock issuable
upon exercise of the Warrants have been reserved for issuance and when issued in
accordance with the terms of the Warrants and Warrant Agreement, will be duly
and validly authorized, validly issued, fully paid and non-assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof. The Warrant exercise period and the Warrant exercise price may not be
changed or revised by the Company without the prior written consent of the
Representatives. The Warrant Agreement has been duly authorized and, when
executed and delivered pursuant to this Agreement will constitute the valid and
legally binding obligation of the Company enforceable in accordance with its
terms.
The Representative's Warrants, the Representative's Units, the
Underlying Warrants, the shares of Common Stock issuable upon exercise of the
Common Stock Representative's Warrants, and the shares of Common Stock issuable
upon exercise of the Underlying Warrants (all as defined
3
<PAGE> 4
in the Representative's Warrant Agreement described in Section 12 herein), have
been duly authorized and, when issued, delivered and paid for, will be validly
issued, fully paid, non-assessable, free of preemptive rights and no personal
liability will attach to the ownership thereof, and will constitute valid and
legally binding obligations of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Representative's Warrant
Agreement.
(f) This Agreement, the Warrant Agreement and the Representative's Warrant
Agreement have been duly and validly authorized, executed and delivered by the
Company, and assuming due execution of this Agreement by the other party hereto,
constitute valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as enforceability may be limited
by bankruptcy, insolvency or other laws affecting the rights of creditors
generally. The Company has full power and lawful authority to authorize, issue
and sell the Securities to be sold by it hereunder on the terms and conditions
set forth herein, and no consent, approval, authorization or other order of any
third party or any governmental authority is required in connection with such
authorization, execution and delivery or with the authorization, issuance and
sale of the Securities or the securities to be issued pursuant to the
Representative's Warrant Agreement, except such as may be required under the Act
or state securities laws, or as otherwise have been obtained.
(g) Except as described in the Prospectus, neither the Company nor any
subsidiary is in material violation, breach of or default under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach of, or
constitute a material default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of the
Company or each subsidiary or any of the terms or provisions of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or each subsidiary is a party or by which the Company or each
subsidiary may be bound or to which any of the property or assets of the Company
or each subsidiary is subject, nor will such action result in any material
violation of the provisions of the articles of incorporation or bylaws as
amended of the Company or each subsidiary, or any statute or any order, rule or
regulation applicable to the Company or subsidiary of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or each subsidiary.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each subsidiary have good and marketable title to all properties and assets
described in the Prospectus as owned by each of them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which the Company or each subsidiary is the lessor or
sublessor of properties or assets or under which the Company or each subsidiary
holds properties or assets as lessee or sublessee as described in the Prospectus
are in full force and effect, and, except as described in the Prospectus,
neither the Company nor each subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone, adverse to rights of the
Company or each subsidiary as lessor, sublessor, lessee, or sublessee under any
of the leases or subleases mentioned above, or affecting or questioning the
right of the Company or each subsidiary to continued possession of the leased or
subleased premises
4
<PAGE> 5
or assets under any such lease or sublease except as described or referred to in
the Prospectus; and the Company and each subsidiary owns or leases all such
properties described in the Prospectus as are necessary to its operations as now
conducted and, except as otherwise stated in the Prospectus, as proposed to be
conducted as set forth in the Prospectus.
(i) Travis, Wolff & Company, LLP, who have given their report on certain
financial statements filed and to be filed with the Commission as part of the
Registration Statement, and which are included in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(j) The financial statements and schedules, together with related notes,
set forth in the Prospectus and the Registration Statement present fairly the
financial position and results of operations and changes in financial position
of the Company on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Said
statements and related notes and schedules have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved. The Company's internal accounting controls and
procedures are sufficient to cause the Company and each subsidiary to prepare
financial statements which comply in all material respects with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved. During the preceding five (5) year period, nothing has been
brought to the attention of the Company's management that would result in any
reportable condition relating to the Company's internal accounting procedures,
weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) neither the Company nor any subsidiary has
incurred and will not have incurred any material liabilities or obligations,
direct or contingent, and has not entered into and will not have entered into
any material transactions other than in the ordinary course of business and/or
as contemplated in the Registration Statement and the Prospectus; (ii) neither
the Company nor any subsidiary has and will not have paid or declared any
dividends or have made any other distribution on its capital stock; (iii) there
has not been any change in the capital stock of, or any incurrence of long-term
debt by, the Company or any subsidiary; (iv) neither the Company nor any
subsidiary has issued any options, warrants or other rights to purchase the
capital stock of the Company or any subsidiary; and (v) there has not been and
will not have been any material adverse change in the business, financial
condition or results of operations of the Company or any subsidiary, or in the
book value of the assets of the Company or any subsidiary, arising for any
reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business prospects, net worth, or properties of
the Company or any subsidiary.
5
<PAGE> 6
(m) Except as disclosed in the Prospectus, each of the Company and each
subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any subsidiary that has not been provided for in
the financial statements.
(n) Except as set forth in the Prospectus, each of the Company and each
subsidiary has material licenses, permits and other governmental authorizations
currently required for the conduct of its business or the ownership of its
property as described in the Prospectus and is in all material respects in
compliance therewith and owns or possesses adequate right to use all material
patents, patent applications, trademarks, service marks, trade-names, trademark
registrations, service mark registrations, copyrights, and licenses necessary
for the conduct of such business and has not received any notice of conflict,
with the asserted rights of others in respect thereof. To the best of the
Company's knowledge, none of the activities or business of the Company or any
subsidiary are in violation of, or cause the Company or any subsidiary to
violate, any law, rule, regulation or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company and any
subsidiary.
(o) Neither the Company nor any subsidiary has, directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution, in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law.
(p) On the Closing Dates (herein defined) all transfer or other taxes
(including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction) if any, which are required to be paid in connection
with the sale and transfer of the Securities to the several Underwriters
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been fully complied with.
(q) All contracts and other documents which are required to be described
in or filed as exhibits to the Registration Statement have been so described
and/or filed.
(r) Except as described in the Registration Statement and Prospectus, no
holders of Common Stock or of any other securities of the Company have the right
to include such Common Stock or other securities in the Registration Statement
and Prospectus.
(s) Except as set forth in or contemplated by the Registration Statement
and the Prospectus, neither the Company nor any subsidiary has any material
contingent liabilities.
(t) The Company has no subsidiary corporations except as disclosed in the
Registration Statement and Prospectus, nor has it any equity interest in any
partnership, joint venture, association or other entity except as disclosed in
the Registration Statement or Prospectus. Except as described
6
<PAGE> 7
in the Registration Statement and Prospectus, the Company owns all of the
outstanding securities of each of its subsidiaries.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) Neither the Company, nor, to the Company's knowledge, any of its
officers, directors, employees or stockholders, have taken or will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any of the securities of the
Company.
(w) Item 26 of Part II of the Registration Statement accurately discloses
all unregistered securities sold by the Company within the three year period
prior to the date as of which information is presented in the Registration
Statement. All of such securities were sold in transactions which were exempt
from the registration provisions of the Act and not in violation of Section 5
thereof.
(x) Other than as set forth in the Prospectus, the Company has not entered
into any agreement pursuant to which any person is entitled, either directly or
indirectly, to compensation from the Company for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Underwriters against any losses, claims, damages or
liabilities, joint or several, which shall include, but not be limited to, all
costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(y) Based upon written representations received by the Company, no
officer, director or five percent (5%) or greater stockholder of the Company or
any subsidiary has any direct or indirect affiliation or association with any
member of the National Association of Securities Dealers, Inc. ("NASD"), except
as disclosed to the Representatives in writing, and no beneficial owner of the
Company's unregistered securities has any direct or indirect affiliation or
association with any NASD member except as disclosed to the Representatives in
writing. The Company will advise the Representatives and the NASD if any five
percent (5%) or greater shareholder of the Company or any subsidiary is or
becomes an affiliate or associated person of an NASD member participating in the
distribution.
(z) The Company and each subsidiary is in compliance in all material
respects with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any subsidiary by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any subsidiary pending before the
National Labor Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending or to the knowledge of the Company, threatened
against or involving the Company or any subsidiary or any predecessor entity.
7
<PAGE> 8
No question concerning representation exists respecting the employees of the
Company or any subsidiary and no collective bargaining agreement or modification
thereof is currently being negotiated by the Company or any subsidiary. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or any subsidiary, if any.
(aa) Neither the Company nor any subsidiary maintains, sponsors nor
contributes to, nor is it required to contribute to, any program or arrangement
that is an "employee pension benefit plan" an "employee welfare benefit plan",
or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(i) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). Neither the Company nor any subsidiary
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA.
(bb) Based upon written representations received from the officers and
directors of the Company and each subsidiary, except as disclosed in the
Prospectus, during the past five years, none of the officers or directors of the
Company or any subsidiary have been:
(1) Subject of a petition under the Federal bankruptcy laws or any
state insolvency law filed by or against them, or by a receiver, fiscal
agent or similar officer appointed by a court for their business or
property, or any partnership in which either or them was a general partner
at or within two years before the time of such filing, or any corporation
or business association of which either of them was an executive officer
at or within two years before the time of such filing;
(2) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) The subject of any order, judgment, or decree not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining either of them from, or otherwise
limiting, any of the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor
broker, leverage transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person, director
or employee of any investment company, bank, savings and loan
association or insurance company, or engaging in or continuing any
conduct or practice in connection with any such activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any
violation of Federal or State securities law or Federal Commodity
laws.
8
<PAGE> 9
(4) The subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated of any Federal or State authority barring,
suspending or otherwise limiting for more than sixty (60) days either of
their right to engage in any activity described in paragraph (3)(1) above,
or be associated with persons engaged in any such activity;
(5) Found by any court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission to have violated any Federal
or State securities law, and the judgment in such civil action or finding
by the Commission has not been subsequently reversed, suspended or
vacated; or
(6) Found by a court of competent jurisdiction in a civil action or
by the Commodity Futures Trading Commission to have violated any Federal
Commodities Law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
(cc) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement and upon the
basis of the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriters an aggregate of
1,200,000 Units at $4.62 per Unit, at the place and time hereinafter specified,
in accordance with the number of Units set forth opposite the names of the
Underwriters in Schedule A attached hereto plus any additional Securities which
such Underwriters may become obligated to purchase pursuant to the provisions of
Section 9 hereof. The price at which the Underwriters shall sell the Units to
the public shall be $5.125 per Unit.
Delivery of the Securities against payment therefor shall take place at
the offices of First London Securities Corporation, 2600 State Street, Dallas,
Texas 75204 (or at such other place as may be designated by the Representatives)
at 10:00 a.m., Eastern Time, on such date after the Effective date as the
Representatives shall designate, but not later than ten (10) business days
(holidays excepted) following the first date that any of the Securities are
released to you, such time and date of payment and delivery for the Securities
being herein called the "Closing Date".
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants the "Option" to the Underwriters (or, at
the option of the Representatives, to the Representatives, individually) to
purchase all or any part of an aggregate of an additional 180,000 Units, each
Unit consisting of one Share and one Warrant at the same price per Unit as the
Underwriters shall pay for the Securities being sold pursuant to the provisions
of subsection (a) of this Section 2 (such additional Securities being referred
to herein as the "Option Securities"). This Option may be exercised within 30
days after the Effective Date upon notice by
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<PAGE> 10
the Underwriters (or the Representatives, individually) to the Company advising
as to the amount of Option Securities as to which the Option is being exercised,
the names and denominations in which the certificates for such Option Securities
are to be registered and the time and date when such certificates are to be
delivered. Such time and date shall be determined by the Underwriters (or the
Representatives, individually) but shall not be later than ten (10) full
business days after the exercise of the Option, nor in any event prior to the
Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Securities against payment therefor shall
take place at the offices of the Representatives. The Option granted hereunder
may be exercised only to cover over allotments in the sale by the Underwriters
of the Securities referred to in subsection (a) above. In the event the Company
declares or pays a dividend or distribution on its Common Stock, whether in the
form of cash, shares of Common Stock or any other consideration, prior to the
Option Closing Date, such dividend or distribution shall also be paid on the
Option Closing Date.
(c) The Company will make the certificates for the Securities to be sold
hereunder available to you for inspection at least two (2) full business days
prior to the Closing Date and the Option closing date at the offices of the
Representatives, and such certificates shall be registered in such names and
denominations as you may request. Time shall be of the essence and delivery at
the time and place specified in this Agreement is a further condition to the
obligations of the Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices by the several Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company or
by wire transfer in New York Clearing House funds.
In addition, in the event the Underwriters (or the Representatives,
individually) exercise the Option to purchase from the Company all or any
portion of the Option Securities pursuant to the provisions of subsection (b)
above, payment for such Securities shall be made payable in New York Clearing
House funds at the offices of the Representatives, or by wire transfer, at the
time and date of delivery of such Securities as required by the provisions of
subsection (b) above, against receipt of the certificates for such Securities by
the Representatives for the respective accounts of the several Underwriters
registered in such names and in such denominations as the Representatives may
request.
It is understood that the Representatives, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representatives at the time of delivery of the Securities to be purchased by
such Underwriter or Underwriters. Any such payment by the Representatives shall
not relieve any such Underwriter or Underwriters of any of its or their
obligations hereunder. It is also understood that the Representatives
individually, rather than all of the Underwriters, may (but shall not be
obligated to) purchase the Option Securities referred to in subsection (b) of
this Section 2, but only to cover over allotments.
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<PAGE> 11
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement is
declared effective by the Commission.
3. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 25 days after the date on which the
Registration Statement shall have become or been declared effective, the Company
will prepare and file with the Commission, promptly upon your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary or advisable in connection with the distribution of the Securities
and as mutually agreed to by the Company and the Representatives.
After the Effective Date and as soon as the Company is advised thereof,
the Company will advise you, and confirm the advice in writing, of the receipt
of any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order
suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus and Definitive Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriters and Selected Dealers to use the Prospectus
in connection with the sale of the Securities for such period as in the opinion
of counsel to the Underwriters the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by the Underwriters or Selected
Dealers, of any event of which the Company has knowledge and which materially
affects the Company or the securities of the Company, or which in the opinion of
counsel for the Company or counsel for the Underwriters, should be set forth in
an amendment to the Registration Statement or a supplement to the Prospectus, in
order to make the statements therein
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<PAGE> 12
not then misleading, in light of the circumstances existing at the time the
Prospectus is required to be delivered to a purchaser of the Securities, or in
case it shall be necessary to amend or supplement the Prospectus to comply with
law or with the Act and the Rules and Regulations, the Company will notify you
promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriters.
The Company will comply with the Act, the Rules and Regulations
thereunder, the Securities Exchange Act of 1934 (the "1934 Act"), and the rules
and regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will qualify to register the Securities for sale under the
securities or "blue sky" laws of such jurisdictions as the Representatives may
designate and will make such applications and furnish such information as may be
required for that purpose and to comply with such laws, provided the Company
shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service of process in any
jurisdiction in any action other than one arising out of the offering or sale of
the Securities. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriters may reasonably request.
(c) If the sale of the Securities provided for herein is not consummated,
the Company shall pay all costs and expenses incident to the performance of the
Company's obligations hereunder, including, but not limited to, all such
expenses itemized in Section 8(a) and 8(c) hereof, and the out-of-pocket
expenses up to $25,000 of the Representatives and expenses up to $25,000 of the
counsel to the Representatives, if the offering for any reason is terminated.
For the purposes of this sub-paragraph, the Representatives shall be deemed to
have assumed such expenses when they are billed or incurred, regardless of
whether such expenses have been paid. The Representatives shall not be
responsible for any expenses of the Company or others, or for any charges or
claims relative to the proposed public offering whether or not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the Effective Date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the Effective
Date of the Registration Statement as the Underwriters may reasonably request.
The Company will deliver to the Underwriters on the Effective Date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of
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<PAGE> 13
the Prospectus, in final form, or as thereafter amended or supplemented as the
several Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either Section
12 or 15 of the 1934 Act, the Company, at its expense, will furnish to the
Representatives during the period ending five (5) years from the Effective Date,
(i) as soon as practicable after the end of each fiscal year, a balance sheet of
the Company and any of its subsidiaries as at the end of such fiscal year,
together with statements of income, surplus and cash flow of the Company and any
subsidiaries for such fiscal year, all in reasonable detail and accompanied by a
copy of the certificate or report thereon of independent accountants; (ii) as
soon as they are available, a copy of all reports (financial or other) mailed to
security holders; (iii) as soon as they are available, a copy of all
non-confidential documents, including annual reports, periodic reports and
financial statements, furnished to or filed with the Commission under the Act
and the 1934 Act; (iv) copies of each press release, news item and article with
respect to the Company's affairs released by the Company; and (v) such other
information as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will make generally available to its stockholders and to
the registered holders of its Warrants and deliver to you as soon as it is
practicable, but in no event later than the first day of the sixteenth full
calendar month following the Effective Date, an earnings statement (which need
not be audited) covering a period of at least twelve consecutive months
beginning with the Effective Date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(h) On the Closing Date, the Company shall have taken the necessary action
to become a reporting company under Section 12 of the 1934 Act, and the Company
will make all filings required to, and will have obtained approval for, the
listing of the Shares and Warrants on The Nasdaq Small Cap Market or a listing
on a national market, and will use its best efforts to maintain such listing for
at least five (5) years from the date of this Agreement.
(i) For such period as the Company's securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of Directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the
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<PAGE> 14
proceeds therefrom as may be required by Sections 12, 13 and/or 15 of the 1934
Act and pursuant to Rule 463 under the Act.
(k) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of counsel to the Underwriters and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date the Company shall execute and deliver to you the
Representative's Warrant Agreement. The Representative's Warrant Agreement and
Warrant Certificates will be substantially in the form of the Representative's
Warrant Agreement and Warrant Certificates filed, as an exhibit to the
Registration Statement.
(m) The Company will reserve and keep available for issuance that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Representative's Warrants outstanding from time to time.
(n) All beneficial owners of the Company's securities (including Warrants,
Options and Common Stock of the Company), as of the Effective Date, shall agree
in writing, in a form satisfactory to the Representatives, not to sell, transfer
or otherwise dispose of any of such securities or underlying securities (except
to a transferee who agrees to be bound by this provision) for a period of twelve
(12) months from the Effective Date (the "lock-up period"), or any longer period
required by any State, without the prior written consent of the Representatives.
Any of such securities which are originally registered in a name of a original
beneficial owner and are subsequently registered under a different name will be
subject to the twelve (12) month lock-up period. Sales of the Company's
securities by officers and/or directors of the Company prior to the expiration
of the lock-up period shall be effected through the Representatives.
(o) The Company shall pay to the Representatives upon the exercise or
redemption of the Warrants a fee equal to 5% of the gross proceeds received by
the Company from the exercise of the Warrants and 5% of the aggregate redemption
price for the Warrants redeemed. Such fee will be paid to the Representatives or
their designee no sooner than 12 months after the Effective Date. Additionally,
the Representatives or their designee must be designated in writing by the
Warrant holder as having solicited the Warrant in order to receive the fee.
(p) Prior to the Closing Date, the Company shall at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and such
other manuals as the Representatives may designate, such listings to contain the
information required by such manuals and the Uniform Securities Act. The Company
hereby agrees to use its best efforts to maintain such listing for a period of
not less than five (5) years unless the Company's securities otherwise qualify
for a secondary market trading exemption. The Company shall take such action as
may be reasonably requested by the Representatives to obtain a secondary market
trading exemption in such states as may be reasonably requested by the
Representatives.
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<PAGE> 15
(q) During the one hundred eighty (180) day period commencing on the
Closing Date, the Company will not, without the prior written consent of the
Representatives, grant options or warrants to purchase the Company's Common
Stock at a price less than the initial per share public offering price.
(r) During the twelve month period commencing on the closing Date, the
Company will not, without the prior written consent of the Representatives,
issue any additional securities of the Company except for securities issued in
connection with an acquisition or merger by the Company or upon the issuance of
Common Stock upon the exercise of Warrants.
(s) Prior to the Closing Date, neither the Company nor any subsidiary will
issue, directly or indirectly, without your prior consent, any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering of the Securities other than routine customary
advertising of the Company's products and services, and except as required by
any applicable law or the directives of any relevant regulatory authority in any
relevant jurisdiction.
(t) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. For a period of five (5) years from the Effective Date, the Company, at
its expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's quarterly report
and the filing of quarterly financial information to stockholders.
(u) The Company shall retain Securities Transfer Corp. as the transfer
agent for the securities of the Company, or such other transfer agent as you may
agree to in writing. In addition, the Company shall direct such transfer agent
to furnish the Representatives with daily transfer sheets as to each of the
Company's securities as prepared by the Company's transfer agent and copies of
lists of stockholders and warrantholders as reasonably requested by the
Underwriter, for a five (5) year period commencing from the Closing Date.
(v) The Company shall cause the Depository Trust Company, or such other
depository of the Company's securities, to deliver a "special security position
report" to the Representatives on a daily and weekly basis at the expense of the
Company, for a five (5) year period from the Effective Date.
(w) Following the Effective Date, the Company shall, at its sole cost and
expense, prepare and file such Blue Sky applications with such jurisdictions as
the Representatives shall designate and the Company may reasonably agree.
(x) On the Effective Date and for a period of three (3) years thereafter,
the Company's Board of Directors shall consist of a minimum of five (5) persons,
two (2) of whom shall be
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<PAGE> 16
independent and not otherwise affiliated with the Company or associated with any
of the Company's affiliates. First London Securities Corporation shall have the
right for a period of three (3) years from the Effective Date to nominate one
Advisory Director to the Board of Directors. The Advisory Director will have all
of the same privileges as a normal Director, including equal compensation, but
will forfeit the right to vote on Board issues.
(y) For such period as any Warrants are outstanding, the Company shall use
its best efforts to cause post-effective amendments to the Registration
Statement or a new Registration Statement to become effective in compliance with
the Act and without any lapse of time between the effectiveness of any such
post-effective amendments and cause a copy of each Prospectus, as then amended,
to be delivered to each holder of record of a Warrant and to furnish to each of
the Underwriters and each dealer as many copies of each such Prospectus as such
Underwriter or such dealer may reasonably request. Such post-effective
amendments or new Registration Statements shall also register the
Representative's Warrants and all the securities underlying the Representative's
Warrants. The Company shall not call for redemption of any of the Warrants
unless a Registration Statement covering the securities underlying the Warrants
or Representative's Warrants has been declared effective by the Commission and
remains current at least until the date fixed for redemption. In addition, the
Warrants or Representative's Warrants shall not be redeemable during the first
year after the Effective Date without the written consent of the
Representatives.
(z) Until such time as the securities of the Company are listed or quoted
on either the New York Stock Exchange, Nasdaq National Market or the American
Stock Exchange, the Company shall engage the Company's legal counsel to deliver
to the Representatives a written opinion detailing those states in which the
Units, Shares and Warrants of the Company may be traded in non-issuer
transactions under the Blue Sky laws of the fifty states ("Secondary Market
Trading Opinion"). The initial Secondary Market Trading opinion shall be
delivered to the Representatives on the Effective Date, and the Company shall
continue to update such opinion and deliver same to the Representatives on a
timely basis, but in any event at the beginning of each fiscal year, for a five
(5) year period, if required.
4. Conditions of Underwriters, Obligations. The obligations of the several
Underwriters to purchase and pay for the Securities which they have agreed to
purchase hereunder from the Company are subject, as of the date hereof and as of
the Closing Date and the Option Closing Date, to the continuing accuracy of, and
compliance with, the representations and warranties of the Company herein, to
the accuracy of statements of officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such later
time or on such later date as you may agree to in writing; (ii) at or prior to
the Closing Date or Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and no proceeding for that purpose shall have been initiated or
pending, or shall be threatened, or to the knowledge of the Company,
contemplated by the Commission; (iii) no stop order suspending the effectiveness
of the qualification or registration of the Securities under the
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<PAGE> 17
securities or "blue sky" laws of any jurisdiction (whether or not a jurisdiction
which you shall have specified) shall be threatened or to the knowledge of the
Company contemplated by the authorities of any such jurisdiction or shall have
been issued and in effect; (iv) any request for additional information on the
part of the Commission or any such authorities shall have been complied with to
the satisfaction of the Commission and any such authorities, and to the
satisfaction of counsel to the Underwriters; and (v) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to the Underwriters
and the Underwriters did not object thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any subsidiary or any material adverse change in
the long-term debt of the Company or any subsidiary except as set forth in or
contemplated by the Registration Statement, (ii) there shall not have been any
material adverse change in the general affairs, business, properties, condition
(financial or otherwise), management, or results of operations of the Company or
any subsidiary, whether or not arising from transactions in the ordinary course
of business, in each case other than as set forth in or contemplated by the
Registration Statement or Prospectus; (iii) neither the Company nor any
subsidiary shall have sustained any material interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and Prospectus; and (iv) the Registration Statement and the Prospectus
and any amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstance under
which they are made, not misleading.
(c) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business prospects, net worth, or properties of
the Company or any subsidiary.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date and
Option Closing Date shall have been duly performed, fulfilled or complied with.
(e) At each Closing Date, you shall have received the opinion, together
with copies of such opinion for each of the other several Underwriters, dated as
of each Closing Date, from Garza & Staples, P.C., counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, to the effect
that:
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<PAGE> 18
(i) the Company and each subsidiary has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, with full corporate power
and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation and is
in good standing in each other jurisdiction in which the ownership
or leasing of its properties or conduct of its business requires
such qualification except for jurisdictions in which the failure to
so qualify would not have a material adverse effect on the Company
and each subsidiary as a whole;
(ii) the authorized capitalization of the Company is as set
forth under "Capitalization" in the Prospectus; all shares of the
Company's outstanding stock and other securities requiring
authorization for issuance by the Company's Board of Directors have
been duly authorized, validly issued, are fully paid and
non-assessable and conform to the description thereof contained in
the Prospectus; the outstanding shares of Common Stock of the
Company and other securities have not been issued in violation of
the preemptive rights of any shareholder and the shareholders of the
Company do not have any preemptive rights or, to such counsel's
knowledge, other rights to subscribe for or to purchase securities
of the Company, nor, to such counsel's knowledge, are there any
restrictions upon the voting or transfer of any of the securities of
the Company, except as disclosed in the Prospectus; the Units,
Common Stock, the Shares, the Warrants, and the securities contained
in the Representative's Warrant Agreement conform to the respective
descriptions thereof contained in the Prospectus; the Units, Common
Stock, the Shares, the Warrants, the shares of Common Stock to be
issued upon exercise of the Warrants and the securities contained in
the Representative's Warrant Agreement, have been duly authorized
and, when issued, delivered and paid for, will be duly authorized,
validly issued, fully paid, non-assessable, free of preemptive
rights and no personal liability will attach to the ownership
thereof; all prior sales by the Company of the Company's securities
have been made in compliance with or under an exemption from
registration under the Act and applicable state securities laws and
no shareholders of the Company have any rescission rights against
the Company with respect to the Company's securities; a sufficient
number of shares of Common Stock has been reserved for issuance upon
exercise of the Warrants and the Representative's Warrants, and to
the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration rights
or other rights, other than those which have been waived or
satisfied or described in the Registration Statement;
(iii) this Agreement, the Representative's Warrant Agreement
and the Warrant Agreement have been duly and validly authorized,
executed and delivered by the Company and, assuming the due
authorization, execution and delivery of this Agreement by the
Representatives, are the valid and legally binding obligations of
the Company, enforceable in accordance with their terms, except (a)
as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws from time to
time in effect
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<PAGE> 19
which effect creditors, rights generally; and (b) no opinion is
expressed as to the enforceability of the indemnity provisions or
the contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities of
the Company, the Units, the Shares, the Common Stock and the
Warrants are in valid and proper legal form;
(v) to the best of such counsel's knowledge, except as set
forth in the Prospectus, there is not pending or, to the knowledge
of the Company, threatened, any material action, suit, proceeding,
inquiry, arbitration or investigation against the Company or any
subsidiary or any of the officers of directors of the Company or any
subsidiary, nor any material action, suit, proceeding, inquiry,
arbitration, or investigation, which might materially and adversely
affect the condition (financial or otherwise), business prospects,
net worth, or properties of the Company or any subsidiary;
(vi) the execution and delivery of this Agreement, the
Representative's Warrant Agreement and the Warrant Agreement, and
the incurrence of the obligations herein and therein set forth and
the consummation of the transactions herein or therein contemplated,
will not result in a violation of, or constitute a default under (a)
the Articles of Incorporation or By-Laws of the Company and each
subsidiary; (b) to the best of such counsel's knowledge, any
material obligations, agreement, covenant or condition contained in
any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, loan agreement, lease, joint
venture or other agreement or instrument to which the Company or any
subsidiary is a party or by which it or any of its properties is
bound; or (c) to the best of such counsel's knowledge, any material
order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or
foreign;
(vii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or
are pending before, or threatened by, the Commission; the
Registration Statement and the Prospectus (except for the financial
statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply
as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations; and
(viii) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Securities by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company
or in connection with the taking of any action contemplated herein,
or the issuance of the Representative's Warrants or the Securities
underlying the Representative's Warrants, other than registrations
or qualifications of the Securities under applicable state or
foreign securities or Blue Sky laws and registration under the Act.
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<PAGE> 20
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriter or counsel for the Underwriter shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact; and may rely as to all matters of law, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such counsel
to the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and the Representatives and that they are justified
in relying thereon.
Such counsel shall also include a statement to the effect that such
counsel has participated in the preparation of the Registration Statement and
the Prospectus and nothing has come to the attention of such counsel to lead
such counsel to believe that the Registration Statement or any amendment thereto
at the time it became effective contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading or that the Prospectus or any supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in order to make
statements therein, in light of the circumstances under which they are made, not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information and
statistical data contained therein, as to which such counsel need express no
opinion).
(f) You and the several Underwriters shall have received on each Closing
Date a certificate dated as of each Closing Date, signed by the Chief Executive
Officer and the Chief Financial Officer of the Company and such other officers
of the Company as the Underwriters may request, certifying that:
(1) No order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities in effect and
no proceedings for such purpose are pending or are, to their knowledge,
threatened by the Commission;
(2) To their knowledge there is no litigation instituted or
threatened against the Company or any subsidiary or any officer or
director of the Company or any subsidiary of a character required to be
disclosed in the Registration Statement which is not disclosed therein; to
their knowledge there are no contracts which are required to be summarized
in the Prospectus which are not so summarized; and to their knowledge
there are no material contracts required to be filed as exhibits to the
Registration Statement which are not so filed;
(3) They have each carefully examined the Registration Statement and
the Prospectus and, to the best of their knowledge, neither the
Registration Statement nor the Prospectus nor any amendment or supplement
to either of the foregoing contains an untrue statement of any material
fact or omits to state any material fact required to be stated therein or
necessary to make the statement therein, in light of the circumstances
under which they are made, not misleading; and since the Effective Date,
to the best of their knowledge, there has occurred no event required to be
set forth in an amended or supplemented Prospectus which has not been so
set forth;
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<PAGE> 21
(4) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition of the Company or any subsidiary,
financial or otherwise, or in the results of its operations, except as
reflected in or contemplated by the Registration Statement and the
Prospectus and except as so reflected or contemplated since such date,
there has not been any material transaction entered into by the Company or
any subsidiary;
(5) The representations and warranties set forth in this Agreement
are true and correct in all material respects and the Company has complied
with all of its agreements herein contained;
(6) Neither the Company nor any subsidiary is delinquent in the
filing of any federal, state and municipal tax return or the payment of
any federal, state or municipal taxes; they know of no proposed
re-determination or reassessment of taxes, adverse to the Company or any
subsidiary, and the Company and each subsidiary has paid or provided by
adequate reserves for all known tax liabilities except such delinquency
that will not have a material adverse affect on the Company;
(7) They know of no material obligation or liability of the Company
or any subsidiary, contingent or otherwise, not disclosed in the
Registration Statement and Prospectus;
(8) This Agreement, the Representative's Warrant Agreement and the
Warrant Agreement, the consummation of the transactions herein of therein
contemplated, and the fulfillment of the terms hereof or thereof, will not
result in a breach by the Company of any terms of, or constitute a default
under, its Articles of Incorporation or By-Laws, any indenture, mortgage,
lease, deed or trust, bank loan or credit agreement or any other material
agreement or undertaking of the Company or any subsidiary including, by
way of specification but not by way of limitation, any agreement or
instrument to which the Company or any subsidiary is now a party or
pursuant to which the Company or any subsidiary has acquired any right
and/or obligations by succession or otherwise;
(9) The financial statements and schedules filed with and as part of
the Registration Statement present fairly the financial position of the
Company as of the dates thereof all in conformity with generally accepted
principles of accounting applied on a consistent basis throughout the
periods involved. Since the respective dates of such financial statements,
there have been no material adverse change in the condition or general
affairs of the Company, financial or otherwise, other than as referred to
in the Prospectus;
(10) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may
otherwise be indicated therein, neither the Company nor any subsidiary
has, prior to the Closing Date, either (i) issued any securities or
incurred any material liability or obligation, direct or contingent, for
borrowed
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<PAGE> 22
money, or (ii) entered into any material transaction other than in
the ordinary course of business. The Company has not declared, paid or
made any dividend or distribution of any kind on its capital stock;
(11) Based upon written representation from the offices and
directors of the Company and each subsidiary they have reviewed the
sections in the Prospectus relating to their biographical data and equity
ownership position in the Company, and all information contained therein
is true and accurate; and
(12) Based upon written representation from the offices and
directors of the Company and each subsidiary except as disclosed in the
Prospectus, during the past five years, they have not been:
(i) Subject of a petition under the Federal bankruptcy laws or
any state insolvency law filed by or against them, or by a receiver,
fiscal agent or similar officer appointed by a court for their
business or property, or any partnership in which either or them was
a general partner at or within two years before the time of such
filing, or any corporation or business association of which either
of them was an executive officer at or within two years before the
time of such filing;
(ii) Convicted in a criminal proceeding or a named subject of
a pending criminal proceeding (excluding traffic violations and
other minor offenses);
(iii) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining either
of them from, or otherwise limiting, any of the following
activities:
(a) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator,
floor broker, leverage transaction merchant, any other person
regulated by the Commodity Futures Trading Commission, or an
associated person of any of the foregoing, or as an investment
adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance
company, or engaging in or continuing any conduct or practice
in connection with any such activity;
(b) engaging in any type of business practice; or
(c) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection
with any violation of Federal or State securities law or
Federal Commodity laws.
(iv) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any Federal or State
authority barring, suspending or otherwise limiting for more than
sixty (60) days either of their right to engage in
22
<PAGE> 23
any activity described in paragraph (3) (i) above, or be associated
with persons engaged in any such activity;
(v) Found by any court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated
any Federal or State securities law, and the judgment in such civil
action or finding by the Commission has not been subsequently
reversed, suspended or vacated; or
(vi) Found by a court of competent jurisdiction in a civil
action or by the Commodity Futures Trading Commission to have
violated any Federal Commodities Law, and the judgment in such civil
action or finding by the Commodity Futures Trading Commission has
not been subsequently reversed, suspended or vacated.
(g) The Underwriters shall have received from Travis, Wolff & Company,
LLP, independent auditors to the Company, certificates or letters, one dated and
delivered on the Effective Date and one dated and delivered on the Closing Date,
in form and substance satisfactory to the Underwriters, stating, that:
(1) they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable Rules and
Regulations;
(2) the financial statements and the schedules included in the
Registration Statement and the Prospectus were examined by them and, in
their opinion, comply as to form in all material respects with the
applicable accounting requirements of the Act, the Rules and Regulations
and instructions of the Commission with respect to Registration Statements
on Form SB-2;
(3) on the basis of inquiries and procedures conducted by them (not
constituting an examination in accordance with generally accepted auditing
standards), including a reading of the latest available unaudited interim
financial statements or other financial information of the Company (with
an indication of the date of the latest available unaudited interim
financial statements), inquiries of officers of the Company who have
responsibility for financial and accounting matters, review of minutes of
all meetings of the shareholders and the Board of Directors of the Company
and other specified inquiries and procedures, nothing has come to their
attention as a result of the foregoing inquiries and procedures that
causes them to believe that:
(i) during the period from (and including) the date of the
financial statements in the Registration Statement and the
Prospectus to a specified date not more than five days prior to the
date of such letters, there has been any change in the Common Stock,
long-term debt or other securities of the Company (except as
specifically contemplated in the Registration Statement and
Prospectus) or any material decreases in net current assets, net
assets, shareholder's equity, working capital or in any other item
appearing in the Company's financial statements as to which the
Underwriters may request advice, in each case as compared with
amounts shown in the balance sheet as of the date of the financial
statement in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred
or will occur;
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<PAGE> 24
(ii) during the period from (and including) the date of the
financial statements in the Registration Statement and the
Prospectus to such specified date there was any material decrease in
revenues or in the total or per share amounts of income or loss
before extraordinary items or net income or loss, or any other
material change in such other items appearing in the Company's
financial statements as to which the Underwriters may request
advice, in each case as compared with the corresponding period in
the preceding year, except in each case for increases, changes or
decreases which the Prospectus discloses have occurred or will
occur;
(4) they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each
case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including
work sheets, of the Company and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries and other appropriate
procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the
letter and found them to be in agreement.
Such letters shall also set forth such other information as may be
requested by counsel for the Underwriters. Any changes, increases or decreases
in the items set forth in such letters which, in the judgment of the several
Underwriters, are materially adverse with respect to the financial position or
results of operations of the Company shall be deemed to constitute a failure of
the Company to comply with the conditions of the obligations to the several
Underwriters hereunder.
(h) Upon exercise of the Option provided for in Section 2(b) hereof, the
obligation of the several Underwriters (or, at its option, the Representatives,
individually) to purchase and pay for the Option Securities referred to therein
will be subject (as of the date hereof and as of the Option Closing Date) to the
following additional conditions:
(1) The Registration Statement shall remain effective at the Option
Closing Date, and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to your knowledge or the knowledge of
the Company, shall be contemplated by the Commission, and any reasonable
request on the part of the Commission for additional information shall
have been complied with to the satisfaction of counsel to the
Underwriters.
(2) At the Option Closing Date, there shall have been delivered to
you the signed opinion from Garza & Staples, P.C., counsel for the
Company, dated as of the Option Closing Date, in form and substance
satisfactory to counsel to the Underwriters, which opinion shall be
substantially the same in scope and substance as the opinion furnished to
you at the Closing Date pursuant to Section 4 (e) hereof, except that such
opinion, where appropriate, shall cover the Option Securities.
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<PAGE> 25
(3) At the Option Closing Date, there shall have been delivered to
you a certificate of the Chief Executive Officer and Chief Financial
Officer of the Company, dated the Option Closing Date, in form and
substance satisfactory to counsel to the Underwriters, substantially the
same in scope and substance as the certificate furnished to you at the
Closing Date pursuant to Section 4(f) hereof.
(4) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from Travis, Wolff
& Company, LLP, independent auditors to the Company, dated the Option
Closing Date and addressed to the several Underwriters confirming the
information in their letter referred to in Section 4(g) hereof and stating
that nothing has come to their attention during the period from the ending
date of their review referred to in said letter to a date not more than
five business days prior to the Option Closing Date, which would require
any change in said letter if it were required to be dated the Option
Closing Date.
(5) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Securities shall be
satisfactory in form and substance to the Underwriters, and the
Underwriters and counsel to the Underwriters shall have been furnished
with all such documents, certificates, and opinions as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of
the Company or its compliance with any of the covenants or conditions
contained herein.
(i) No action shall have been taken by the Commission or the NASD, the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Common Stock and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the several Underwriters
or the Company, shall be contemplated by the Commission or the NASD. The Company
represents that at the date hereof it has no knowledge that any such action is
in fact contemplated by the Commission or the NASD. The Company shall advise the
Representatives of any NASD affiliations of any of its officers, directors, or
stockholders or their affiliates in accordance with paragraph 1(y) of this
Agreement.
(j) At the Effective Date, you shall have received from counsel to the
Company, dated as of the Effective Date, in form and substance satisfactory to
counsel for the Underwriter, a written Secondary Market Trading Opinion
detailing those states in which the Shares and Warrants may be traded in
non-issuer transactions under the Blue Sky laws of the fifty (50) states after
the Effective Date, in accordance with paragraph 3(ab) of this Agreement.
(k) The authorization and issuance of the Securities and delivery thereof,
the Registration Statement, the Prospectus, and all corporate proceedings
incident thereto shall be satisfactory in all respects to counsel for the
several Underwriters, and such counsel shall be furnished with such documents,
certificates and opinions as they may reasonably request to enable them to pass
upon the matters referred to in this sub-paragraph.
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<PAGE> 26
(l) Prior to the Effective Date, the Representatives shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Representatives, as described in the Registration Statement.
(m) If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the several Underwriters under this Agreement may be canceled at, or at any
time prior to, the Closing Date and/or the Option Closing Date by the
Representatives and/or the Underwriters notifying the Company of such
cancellation in writing or by telegram at or prior to the applicable Closing
Date. Any such cancellation shall be without liability of the several
Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Securities is subject to the following
conditions:
(i) The Registration Statement shall have become effective not
later than 5:00 p.m., Eastern Time, on the date of this Agreement,
or on such later time or date as the Company and the Representatives
may agree in writing; and
(ii) At the Closing Date and the Option Closing Date, no stop
orders suspending the effectiveness of the Registration Statement
shall have been issued under the Act or any proceedings therefore
initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the Closing Date but are not fulfilled after the
Closing Date and prior to the Option Closing Date, then only the obligation of
the Company to sell and deliver the Securities on exercise of the Option
provided for in Section 2(b) hereof shall be affected.
6. Indemnification. (a) The Company indemnifies and holds harmless each
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
(i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, (ii) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such cases to the extent, but only to the
extent, that any such losses, claim, damages or liability arises out of or is
based upon an untrue statement or alleged untrue statement
26
<PAGE> 27
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such Preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. Notwithstanding the foregoing, the Company shall have no
liability under this section if such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus and the Prospectus is not
delivered to the person or persons alleging the liability upon which
indemnification is being sought. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter, severally, but not jointly, indemnifies and holds
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statements or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by you or by any Underwriter through you specifically
for use in the preparation thereof. Notwithstanding the foregoing, the
Underwriters shall have no liability under this Section if such untrue statement
or omission made in a Preliminary Prospectus is cured in the Prospectus and the
Prospectus is not delivered to the person or persons alleging the liability upon
which indemnification is being sought through no fault of the Underwriter. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation.
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<PAGE> 28
The indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
an Underwriter or a person who controls such Underwriter within the meaning of
the Act, the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party or (ii) the named parties to any
such action (including any impleaded parties) include both the Underwriter or
such controlling person and the indemnifying party and in the reasonable
judgment of the Representatives, it is advisable for the Representatives or such
Underwriters or controlling persons to be represented by separate counsel (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for all such Underwriters and controlling persons,
which firm shall be designated in writing by you). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
7. Contribution. In order to provide for just and equitable contribution
under the Act in any case in which (i) each Underwriter makes claim for
indemnification pursuant to Section 6 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys, fees) in either
such case (after contribution from others) in such proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Share appearing on the cover page of the Prospectus
bears to the public offering price appearing thereon, and the Company shall be
responsible for the remaining portion, provided, however, that (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company and the Underwriter and controlling persons, in the aggregate, in
connection with the statements or omissions which resulted in such damages and
other relevant equitable considerations shall also be considered. The relative
fault shall be determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information supplied by the
Company, or the Underwriter and the parties, relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if the respective obligations of the Company and the Underwriters to
contribute pursuant to this Section 7 were to be determined by pro rata or per
capita allocation of the aggregate
28
<PAGE> 29
damages (even if the Underwriters and their controlling persons in the aggregate
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the first sentence of this Section; and (b) that the contribution of each
contributing Underwriter shall not be in excess of its proportionate share
(based on the ratio of the number of Securities purchased by such Underwriter to
the number of Securities purchased by all contributing Underwriters) of the
portion of such losses, claims, damages or liabilities for which the
Underwriters are responsible. No person ultimately determined to be guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is nor ultimately
determined to be guilty of such fraudulent misrepresentation. As used in this
paragraph, the term "Underwriter" includes any officer, director, or other
person who controls the Underwriter within the meaning of Section 15 of the Act,
and the word "Company" includes any officer, director, or person who controls
the Company within the meaning of Section 15 of the Act. If the full amount of
the contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company, its officers, directors and controlling persons
to the full extent permitted by law. This foregoing agreement shall in no way
affect the contribution liabilities of any persons having liability under
Section 11 of the Act other than the Company and the Underwriter. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement; provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party.
8. Costs and Expenses. (a) Whether or not this Agreement becomes effective
or the sale of the Securities to the Underwriters is consummated, the Company
will pay all costs and expenses incident to the performance of this Agreement by
the Company including but not limited to the fees and expenses of counsel to the
Company or of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented; the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Securities contemplated hereby; all state
filing fees, expenses and disbursements and legal fees of counsel who serves as
Blue Sky counsel to the Company in connection with the filing of applications to
register the Securities under the state securities or blue sky laws; the cost of
printing and furnishing to the several Underwriters copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the
Selected Dealers Agreement, the Agreement Among Underwriters, Underwriters
Questionnaire, Underwriters Power of Attorney and the Blue Sky Memorandum; the
cost of printing the certificates evidencing the securities comprising the
Securities; the cost of preparing and delivering to the Underwriters and its
counsel bound volumes containing copies of all documents and appropriate
correspondence filed with or received from the Commission and the NASD and all
closing documents; and the fees and disbursements of the transfer agent for the
Company's securities. The Company shall pay any and all taxes (including any
original issue, transfer, franchise, capital stock or other tax imposed by any
jurisdiction) on sales to the Underwriters hereunder. The Company will also pay
all costs and expenses incident to the furnishing of any amended Prospectus or
of any supplement to be attached to the Prospectus. The Company shall also
engage the Company's counsel to provide the Representatives with a written
Secondary Market Trading Opinion in accordance with paragraphs 3(ab) and 4(j) of
this Agreement.
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<PAGE> 30
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Representatives a non-accountable expense allowance
equal to two percent (2%) of the gross proceeds received from the sale of the
Securities, of which an advance of $50,000 has been paid to date. In the event
the over allotment option is exercised, the Company shall pay to the
Representatives at the Option Closing Date an additional amount equal to two
percent (2%) of the gross proceeds received upon exercise of the over allotment
option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Representatives or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Representatives and the other Underwriters against any losses,
claims, damages or liabilities, joint or several which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys, fees, to which the Representatives or such
other Underwriter may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
9. Substitution of Underwriters. If any of the Underwriters shall for any
reason not be permitted hereunder to cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
tender of such Securities in accordance with the terms hereof, then:
(a) if the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of Securities, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Securities which such defaulting Underwriter or Underwriters agreed but
failed to purchase.
(b) If any Underwriter or Underwriters so default and the agreed number of
Securities with respect to which such default or defaults occurs is more than
ten percent (10%) of the total number of Securities, the remaining Underwriters
shall have the right to take up and pay for (in such proportion as may be agreed
upon among them) the Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase, the time for delivery
of the Securities shall be extended to the next business day to allow the
several Underwriters the privilege of substituting within twenty-four hours
(including non-business hours) another Underwriter or Underwriters satisfactory
to the Company. If no such Underwriter or Underwriters shall have been
substituted as aforesaid, within such twenty-four period, the time of delivery
of the Securities may, at the option of the Company, be again extended to the
next following business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including non-business hours) another
Underwriter or Underwriters to purchase the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted
30
<PAGE> 31
Underwriters to take up the Securities of the defaulting Underwriter or
Underwriters as provided in this Section, (i) the Company or the Representatives
shall have the right to postpone the time of delivery for a period of not more
than seven (7) business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary; and (ii) the respective numbers of Securities to
be purchased by the remaining Underwriters or substituted Underwriters shall be
taken at the basis of the underwriting obligation for all purposes of this
Agreement.
If in the event of a default by one or more Underwriters, the remaining
Underwriters shall not take up and pay for all the Securities agreed to be
purchased by the defaulting Underwriters or substitute another Underwriter or
Underwriters as aforesaid, and the Company shall not find or shall not elect to
seek another Underwriter or Underwriters for such Securities as aforesaid, then
this Agreement shall terminate.
If, following the exercise of the Option provided in Section 2(b) hereof,
any Underwriter or Underwriters shall for any reason not permitted hereunder
cancel their obligations to purchase Option Securities at the Option Closing
Date, or shall fail to take up and pay for the number of Option Securities,
which they become obligated to purchase at the Option Closing Date upon tender
of such Option Securities in accordance with the terms hereof, then the
remaining Underwriters or substituted Underwriters may take up and pay for the
Option Securities of the defaulting Underwriters in the manner provided in
Section 9(b) hereof. If the remaining Underwriters or substituted Underwriters
shall not take up and pay for all Option Securities, the Underwriters shall be
entitled to purchase the number of Option Securities for which there is no
default or, at their election, the option shall terminate and the exercise
thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company; provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. Effective Date. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the public offering by the Underwriters of any of the Securities. The
time of the public offering shall mean the time after the effectiveness of the
Registration Statement when the Securities are first generally offered by you to
the other Underwriters and Selected Dealers. This Agreement may be terminated by
you at any time before it becomes effective as provided above, except that
Sections 3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18 shall remain in effect
notwithstanding such termination.
11. Termination. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
13, 14, 15, 16, 17, and 18 hereof, may be terminated at any time prior to the
Closing Date, and the Option referred to in Section 2(b) hereof, if exercised,
may be canceled at any time prior to the Option Closing Date,
31
<PAGE> 32
by you if in your judgment it is impracticable to offer for sale or to enforce
contracts made by the Underwriters for the resale of the Securities agreed to be
purchased hereunder by reason of: (i) the Company having sustained a material
adverse loss, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government
action, order or decree; (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange having been suspended or limited; (iii)
material governmental restrictions having been imposed on trading in securities
generally (not in force and effect on the date hereof); (iv) a banking
moratorium having been declared by Federal or New York or Texas state
authorities; (v) an outbreak of major international hostilities or other
national or international calamity having occurred which is reasonably believed
likely by the Representatives to have a material adverse impact on the business,
financial condition or financial statements of the Company or the market for the
securities offered hereby; (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive;
(vii) any material adverse change in the financial or securities markets beyond
normal market fluctuations having occurred since the date of this Agreement;
(viii) a pending or threatened legal or governmental proceeding or action
relating generally to the Company's business, or a notification having been
received by the Company of the threat of any such proceeding or action, which
could, in the reasonable judgment of the Representatives, materially adversely
affect the Company; (ix) except as contemplated by the Prospectus, the Company
being merged or consolidated into or acquired by another company or group or
there existing a binding legal commitment for the foregoing or any other
material change of ownership or control occurring; or (x) the Company nor having
complied in all material respects with any term, condition or provisions on
their part to be performed, complied with or fulfilled (including but not
limited to those set forth in this Agreement) within the respective times
therein provided.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. Representative's Warrant Agreement. At the Closing Date, the Company
will issue to the Representatives and/or persons related to the Representatives,
for an aggregate purchase price of $100, and upon the terms and conditions set
forth in the form of Representative's Warrant Agreement annexed as an exhibit to
the Registration Statement, Representative's Warrants to purchase up to an
aggregate of Units, in such denominations as the Representatives shall
designate. In the event of conflict in the terms of this Agreement and the
Representative's Warrant Agreement, the language of the form of Representative's
Warrant Agreement shall control.
13. Representations, Warranties and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and the
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriters, the Company or any of its officers or directors or any controlling
person and will survive delivery of and payment for the Securities and the
termination of this Agreement.
32
<PAGE> 33
14. Notice. All communications hereunder will be in writing and, except as
otherwise expressly provided herein, will be mailed, delivered or telegraphed
and confirmed:
If to the Underwriters: Douglas Nichols, President
First London Securities Corporation
2600 State Street
Dallas, Texas 75204
Copy to: Susan Henderson
Crouch & Hallett, L.L.P.
717 North Harwood
Suite 1400
Dallas, Texas 75201
If to the Company: John T. White, CEO
Performance Printing Corporation
3012 Fairmont
Dallas, Texas 75201
Copy to: Joseph Garza
Garza and Staples, P.C.
5420 LBJ Freeway
1230 Lincoln Center II
Dallas, Texas 75240
15. Parties in Interest. This Agreement herein set forth is made solely
for the benefit of the several Underwriters, the Company and, to the extent
expressed, any person controlling the Company or of the Underwriters, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of the Securities, as
such purchaser, from the several Underwriters. All of the obligations of the
Underwriters hereunder are several and not joint.
16. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed entirely within the State of Texas. The parties agree that any
action brought by any party against another party in connection with any rights
or obligations arising out of this Agreement shall be instituted properly in a
federal or state court of competent jurisdiction with venue only in the State
District Court of Dallas, County, Texas or the United States District Court for
the Northern District of Texas. A party to this Agreement named as a Defendant
in any action brought in connection with this Agreement in any court outside of
the above named designated county or district shall have the right to have the
venue of said action changed to the above designated county or district or, if
necessary, have the case dismissed, requiring the other party to re-file such
action in an appropriate court in the above designated county or federal
district.
33
<PAGE> 34
17. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counter-parts shall together constitute but one and the
same instrument.
18. Entire Agreement. This Agreement and the agreements referred to within
this Agreement constitute the entire agreement of the parties, and supersedes
all prior agreement, understanding, negotiations and discussions, whether
written or oral, of the parties hereto.
19. Representatives as Underwriter. In the event the Representatives act
as the sole Underwriter ("Underwriter") in connection with the underwriting of
the securities being offered pursuant to the Registration Statement, all
references to the Representatives in this Agreement shall be replaced by
reference to the "Underwriter," and (i) any consents required to be obtained
from the Representatives shall be required to be obtained solely from the
Underwriter; (ii) all compensation to be received by the Representatives shall
instead be received by the Underwriter; and (iii) the provisions of section nine
(9) of this Agreement shall not apply.
[Signature page to follow]
34
<PAGE> 35
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement between the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
Performance Printing Corporation
By:
---------------------------------------
John T. White, Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
FIRST LONDON SECURITIES CORPORATION
By:
---------------------------------------
Douglas Nichols, President
For itself and as Representative of the
several Underwriters
35
<PAGE> 36
SCHEDULE A
TO THE UNDERWRITING AGREEMENT
UNDERWRITER UNITS
- ----------- -----
First London Securities Corporation............................
Nutmeg Securities, Ltd.........................................
1,200,000
<PAGE> 1
EXHIBIT 23.1
CONSENT OF TRAVIS, WOLFF & COMPANY, L.L.P.
We have issued our report dated January 16, 1998, except for Note 12 which is
dated April 30, 1998, accompanying the financial statements of Performance
Printing Corporation for the year ended December 31, 1997, contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
/s/ Travis, Wolff & Company, L.L.P.
Dallas, Texas
August 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PERFORMANCE PRINTING CORPORATION FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 JUN-30-1998
<CASH> 762,501 239,566
<SECURITIES> 0 0
<RECEIVABLES> 4,617,225 4,685,350
<ALLOWANCES> 229,818 358,007
<INVENTORY> 613,598 687,225
<CURRENT-ASSETS> 5,889,599 5,414,576
<PP&E> 7,270,545 8,628,190
<DEPRECIATION> 3,626,608 3,847,543
<TOTAL-ASSETS> 9,822,355 10,555,843
<CURRENT-LIABILITIES> 5,594,564 6,085,317
<BONDS> 2,841,483 3,546,132
0 0
0 0
<COMMON> 40,000 40,000
<OTHER-SE> 1,346,308 884,394
<TOTAL-LIABILITY-AND-EQUITY> 9,822,355 10,555,843
<SALES> 20,144,549 9,790,796
<TOTAL-REVENUES> 20,144,549 9,790,796
<CGS> 15,466,484 8,089,881
<TOTAL-COSTS> 15,466,484 8,089,881
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 394,115 116,000
<INTEREST-EXPENSE> 587,548 362,797
<INCOME-PRETAX> 551,465 (61,914)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 551,465 (61,914)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 551,465 (61,914)
<EPS-PRIMARY> 0.08 (0.01)
<EPS-DILUTED> 0.08 (0.01)
</TABLE>
