AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION STATEMENT 333-46541
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
----------------
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW JERSEY 2750 22-3561164
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
629 GROVE STREET
JERSEY CITY, NEW JERSEY 07310
(201) 217-1990
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
MR. MICHAEL R. CUNNINGHAM
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
629 GROVE STREET
JERSEY CITY, NEW JERSEY 07310
(201) 217-1990
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------
Copies of Communications to:
JEFFREY A. BAUMEL, ESQ. JEFFREY S. LOWENTHAL, ESQ.
LAWRENCE A. GOLDMAN, ESQ. STROOCK & STROOCK & LAVAN LLP
GIBBONS, DEL DEO, DOLAN, 180 MAIDEN LANE
GRIFFINGER & VECCHIONE, P.C. NEW YORK, NEW YORK 10038
ONE RIVERFRONT PLAZA (212) 806-5400
NEWARK, NEW JERSEY 07102
(973) 596-4500
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [ ]
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>
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
PROSPECTUS
2,100,000 SHARES
[LOGO] CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
COMMON STOCK
Cunningham Graphics International, Inc. (the "Company" or "CGII") is hereby
offering (the "Offering") 2,100,000 shares of the Company's common stock, no par
value per share (the "Common Stock"). Prior to the Offering, there has been no
public market for the Common Stock. It is anticipated that the initial public
offering price will be between $11.00 and $13.00 per share. Approximately $4.6
million, or 20%, of the estimated net proceeds of the Offering will be received
by the existing stockholders of the Company. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price. It is expected that approximately 300,000 shares will be offered
outside of the United States.
The Company has applied for listing of the Common Stock on the Nasdaq
National Market System under the symbol "CGII." At the request of the Company,
up to 200,000 shares have been reserved for sale in the Offering to certain
individuals, including directors and employees of the Company, members of their
families, and other persons having business relationships with the Company. See
"Underwriting." Following the Offering, affiliates of the Company will continue
to control approximately 57.3% of the outstanding Common Stock, which will
enable them to control all matters requiring a stockholder vote, including the
election of directors.
---------------
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
Per Share ......... $ $ $
Total(3) .......... $ $ $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $800,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 315,000 additional shares of Common Stock at the price to the public
less underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
---------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if accepted by it and subject to
certain prior conditions including the right of the Underwriters to reject
orders in whole or in part. It is expected that delivery of such shares will be
made in New York, New York, on or about , 1998.
SCHRODER & CO. INC. PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
Inside Front Cover
- -------------------
At the top of the page is the Company's logo, name and the following text:
"Cunningham Graphics International, Inc. (CGII) provides a wide range of graphic
communications services to financial institutions and corporations, focusing on
producing and distributing time-sensitive analytical research and marketing
materials and on providing on-demand printing services."
"The Company, which commenced operations in 1989, currently operates in select
international markets through its facilities in the United States and through
alliances with Roda Limited, its strategic partner in the United Kingdom, and
with its strategic partner in Hong Kong. The Company is a major producer of
financial research reports, having produced over two billion pages during 1997.
The Company provides services, on a non-exclusive basis, to 13 of the top 20
investment banking firms as ranked by Institutional Investor in October 1997."
Below the text are the following graphics:
1. The Company's logo appearing as the hub of a wheel with spokes
identifying the Company's services, clockwise as follows: Time-Sensitive
Printing, International Printing, Complete Bindery Services, Document
Management, Database Management, Electronic Warehousing, Digital Communications
Links, Fulfillment Services, Outsourcing Services and Digital Printing;
2. Globe;
3. Image of the Company's World Wide Web home page;
4. Picture of a clock.
Inside Front Cover folds open and reveals the following text:
"CGII produces and distributes printed and digital documents -- research
reports, corporate marketing materials, catalogues, and directories."
"To facilitate the rapid distribution of documents globally, the Company
has designed and implemented the World Research LinkTM, an array of electronic
data communications networks linking each of the Company's facilities with its
strategic operating partners and major customers."
The text is accompanied by graphics identified by and appearing as follows:
1. Client: photo image of downtown Manhattan and individual on a telephone
looking at a computer screen of a research report;
2. Communications Links: graphics depicting modes of delivery of data from
the client to the Company;
3. Electronic Document and Database Management: graphic of various items of
computer equipment;
4. Flexible Output Configuration: graphics of printing equipment ("Offset
Printing"), photocopying machine ("Digital Printing"), personal computer
("HTML/WEB") and CD-ROM.
Adjacent to the foregoing graphics are images of a clock, Clock Tower in
London, research reports printed by the Company, one of the Company's trucks
used for fulfillment and distribution, a photo of Hong Kong harbor and a globe
in the upper right corner of the page showing London, New York and Hong Kong
with the Company's logo and World Research LinkTM caption.
Inside Back Cover
- -----------------
The inside back cover has the Company's logos and photographs of individuals
performing services in the course of the Company's production process.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Prospective investors
should consider carefully the information set forth under "Risk Factors."
Immediately prior to the Offering, Cunningham Graphics, Inc. (the "Predecessor")
will be reorganized (the "Reorganization") such that the stockholders of the
Predecessor will contribute all of the outstanding shares of common stock of the
Predecessor to CGII in exchange for shares of Common Stock and promissory notes
(the "Exchange Notes") in the aggregate principal amount of $2.4 million
(assuming an initial public offering price of $12.00 per share). Concurrently
with the Reorganization, CGII will assume the Predecessor's obligations with
respect to undistributed subchapter S corporation taxable income through the
date of the Reorganization, estimated at $2.2 million, and will issue promissory
notes in such amount to evidence such obligations (the "Distribution Notes" and,
together with the Exchange Notes, the "Reorganization Notes"). See "The Company
- -- The Reorganization." In addition, the Company will acquire (the
"Acquisition"), in exchange for consideration consisting of cash and shares of
Common Stock, all of the issued share capital of Roda Limited ("Roda"), an
English corporation. Unless otherwise indicated or the context otherwise
requires, all references herein to the "Company" mean the Predecessor with
respect to periods prior to the Offering or CGII and its subsidiaries (including
Roda) with respect to periods after the Offering. In addition, unless otherwise
indicated, (i) all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option and (ii) the exchange rate used for
conversion from Pounds Sterling to United States Dollars is $1.68 (the exchange
rate in effect on March 27, 1998).
THE COMPANY
Cunningham Graphics International, Inc. provides a wide range of graphic
communications services to financial institutions and corporations, focusing on
producing and distributing time-sensitive analytical research and marketing
materials and on providing on-demand printing services. The Company, which
commenced operations in 1989, currently operates in select international markets
through its facilities in the United States and through alliances with Roda
Limited, its strategic partner in the United Kingdom, and with its strategic
partner in Hong Kong. The Company is a major producer of financial research
reports, having produced over 2 billion pages during 1997. The Company provides
services, on a non-exclusive basis, to 13 of the top 20 investment banking firms
in the United States as ranked by Institutional Investor in October 1997.
The Company estimates that in 1997 the commercial printing and document
production market accounted for more than $80 billion in revenue in the United
States and over $10 billion in revenue in the United Kingdom, based upon
information from certain trade associations and other industry sources. The
printing and document management business in the United States is highly
fragmented, with approximately 40,000 companies presently in operation, only
approximately 5% of which are estimated to have annual net sales in excess of $5
million. The Company believes that the commercial printing and document
production business is similarly fragmented in the United Kingdom and in certain
other markets. The printing and document management industry has evolved
significantly over the last several years, driven in large part by rapid
advances in publishing and electronic information technology. The Company
believes that the growth of the printing and document production industry has
been due to various factors, including (i) the increasing volume, complexity and
variety of documents and printed materials produced by businesses worldwide,
(ii) the increasing demand by businesses for the international dissemination of
time-sensitive information, and (iii) the growing trend of businesses to
outsource their in-house printing operations (e.g., print shops, copy centers
and document management facilities) to document professionals equipped to
provide these services more efficiently and cost-effectively.
Graphic communications services provided by the Company include digital
communications, document management, offset printing, digital printing, data
output, bindery, fulfillment services, mailing services and outsource services.
The Company prints brochures, booklets, confirmations of trade, client
statements and adhesive books to meet the daily, weekly and monthly needs of its
customers. To facilitate the rapid distribution of documents globally, the
Company has designed and implemented the World Research LinkTM, an array of
electronic data communication networks linking each of the Company's facilities
with its strategic operating partners and major customers. To date, the Company
has established extensive non-exclusive client relationships
3
<PAGE>
with leading companies in the financial services, insurance and publishing
industries, providing certain of the printing and graphic communications needs
of Credit Suisse First Boston Corporation, Deutsche Morgan Grenfell, Goldman,
Sachs & Co., Lehman Brothers Inc., Merrill Lynch & Co., Inc., The Prudential
Insurance Company of America, Empire Blue Cross/Blue Shield, New York Life
Insurance Company, and The McGraw-Hill Company, among others.
The Company has experienced significant growth, with net sales growing from
$17.3 million for the year ended December 31, 1995 to $35.7 million ($42.7
million pro forma for the Acquisition) for the year ended December 31, 1997 and
income from operations growing over the same period from $528,000 to $2.4
million ($3.2 million pro forma for the Acquisition), representing compounded
annual growth rates of 43.6% and 113.2%, respectively. A significant portion of
this growth is attributable to the assimilation of certain in-house printing
operations of Goldman, Sachs & Co. and Empire Blue Cross/Blue Shield. The
Company intends to continue its growth strategy by (i) pursuing acquisitions and
establishing strategic alliances to expand and strengthen the Company's business
reach in target markets worldwide, (ii) pursuing outsourcing opportunities
through the assimilation of in-house printing operations of third-party
businesses, (iii) expanding the scope and volume of services offered, (iv)
actively cross-selling existing or newly-added products or services to its
customers worldwide, and (v) improving the operating efficiency of its existing
operations. Pursuant to its growth strategy, concurrently with the closing of
the Offering, the Company will acquire its London-based strategic partner Roda.
Roda provides printing and document output and management services to financial
services companies, primarily in the United Kingdom and European markets.
The Company's senior officers have extensive experience in the graphic
communications services industry, having been employed by the Company for an
average of approximately 6 years and having an average of approximately 19 years
of industry experience. The Company's Chairman, President and Chief Executive
Officer, Michael R. Cunningham, founded the Company and has been actively
involved in the industry for over 15 years. The Company believes that, based on
the proven track record of its experienced management team and the wide range of
services it provides, it is well-positioned to capitalize on the increasing
outsourcing trend as well as on consolidation opportunities in the industry.
THE OFFERING
Common Stock offered....... 2,100,000 shares
Common Stock to be outstanding
after the Offering........ 4,865,000 shares(1)(2)
Use of proceeds............ Of the total net proceeds from the Offering,
approximately $6.1 million will be used to fund the
cash portion of the purchase price for Roda, $1.4
million will be used to repay certain indebtedness
of Roda to its stockholders (the "Roda Seller
Debt"), $4.6 million (assuming an initial public
offering price of $12.00 per share) will be used to
repay the Reorganization Notes, representing a
portion of the total consideration in the
Reorganization to stockholders of the Predecessor
and undistributed S corporation taxable income upon
which such stockholders have already paid taxes,
and up to $2.4 million will be used to repay bank
indebtedness. The remaining net proceeds will be
used for working capital and for general corporate
purposes, which may include capital expenditures,
marketing activities and future strategic
acquisitions.
Proposed Nasdaq symbol..... CGII
- ----------
(1) Includes shares of Common Stock to be issued in connection with the
Reorganization and the Acquisition.
(2) Does not include 600,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans, under which options to
purchase 305,700 shares have been granted at an exercise price equal to the
initial public offering price, subject to consummation of the Offering. See
"Management -- Stock Option Plans."
4
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data is qualified in its entirety by the
more detailed information in the financial statements of the Predecessor and the
related notes thereto, the consolidated financial statements of Roda and the
related notes thereto and the pro forma financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1994 1995 1996 1997
---------- ---------- ---------- -----------------------------------------
ACTUAL PRO FORMA(1)
-------------------- --------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ........................................ $15,927 $17,327 $23,193 $ 35,744 $ 42,705
Operating expenses:
Costs of production ............................. 12,085 12,860 17,616 26,894 31,187
Selling, general and administrative ............. 3,151 3,441 4,270 5,794 7,212
Depreciation and amortization ................... 448 498 563 694 1,114
------- ------- ------- ------------ ------------
15,684 16,799 22,449 33,382 39,513
------- ------- ------- ------------ ------------
Income from operations ........................... 243 528 744 2,362 3,192
Interest expense ................................ (173) (257) (234) (250) (595)
Other income .................................... -- 2 48 35 121
------- ------- ------- ------------ ------------
Income before income taxes ....................... 70 273 558 2,147 2,718
Provision for income taxes ...................... 7 6 56 129 394
------- ------- ------- ------------ ------------
Net income ....................................... $ 63 $ 267 $ 502 $ 2,018 $ 2,324
======= ======= ======= ============ ============
PRO FORMA DATA (UNAUDITED):
Income before income taxes ....................... $ 2,147 $ 2,718
Pro forma provision for income taxes ............ 880 (2) 1,142 (3)
------------ ------------
Pro forma net income ............................. $ 1,267 $ 1,576
============ ============
Pro forma earnings per share ..................... $ 0.43 $ 0.43
============ ============
Pro forma shares outstanding ..................... 2,978,594 (4) 3,657,552 (5)
============ ============
Pro forma as adjusted net income ................. $ 1,674 (6)
============
Pro forma as adjusted earnings per share ......... $ 0.40
============
Pro forma as adjusted shares outstanding ......... 4,189,469 (7)
============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED(8)
--------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............................................... $ 67 $ 8,447
Working capital ......................................................... 728 8,703
Total assets ............................................................ 10,938 33,367
Long-term debt and capitalized lease obligations, net of current portion 1,517 2,179
Stockholders' equity .................................................... 3,151 21,765
</TABLE>
(See footnotes on following page)
5
<PAGE>
(footnotes from previous page)
(1) Gives effect to the Reorganization and the Acquisition as if they each had
occurred on January 1, 1997. See the Unaudited Pro Forma Combined Financial
Statements.
(2) Reflects an increase of $751,000 for income taxes computed utilizing an
overall effective tax rate of 41% as if the Company had been a C corporation
since January 1, 1997.
(3) Reflects a pro forma provision for income taxes for the Company and Roda on
a combined basis computed utilizing effective tax rates of 41% for United
States income taxes and 31% for United Kingdom income taxes.
(4) Reflects (i) the initial CGII founding share, (ii) 2,595,260 shares to be
issued in the Reorganization, and (iii) 383,333 shares, representing the
number of shares having a value (based upon an assumed initial public
offering price of $12.00 per share) corresponding to the principal amount of
the Reorganization Notes.
(5) Reflects (i) the shares described in footnote (4) above, (ii) 169,739 shares
issuable in connection with the Acquisition, and (iii) 509,219 shares,
representing the number of shares having a value (based upon an assumed
initial public offering price of $12.00 per share) corresponding to the $6.1
million liability for cash payable to the Roda stockholders in connection
with the Acquisition.
(6) Reflects the elimination of interest expense of $142,000 ($98,000 net of
taxes) on the Roda Seller Debt of approximately $1.4 million (Pounds850,000)
to be repaid through the application of a portion of the net proceeds from
the Offering as if such repayment had occurred on January 1, 1997. See "The
Company -- The Roda Acquisition" and "Use of Proceeds."
(7) Reflects (i) the shares described in footnote (5) above and (ii) 531,917 of
the additional shares to be sold in the Offering, representing the portion
of the shares being sold in the Offering in order to generate sufficient
proceeds necessary to (a) repay the $1.4 million (Pounds850,000) Roda Seller
Debt, (b) repay $2.4 million of bank indebtedness of the Company and (c) pay
underwriting discounts and expenses of the entire Offering. See "The Company
-- The Reorganization" and "Use of Proceeds."
(8) Gives effect to the following transactions as if they had occurred on
December 31, 1997: (i) the Reorganization; (ii) the Acquisition; and (iii)
the sale of 2,100,000 shares of Common Stock offered hereby and the use of
the net proceeds therefrom, including: (a) the repayment of the
Reorganization Notes, (b) the satisfaction of the liability for the cash
payable to the Roda stockholders of $6.1 million (assuming an initial public
offering price of $12.00 per share), (c) the repayment of the Roda Seller
Debt, and (d) the repayment of $2.4 million of bank indebtedness. See the
Unaudited Pro Forma Combined Financial Statements and "Use of Proceeds."
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered by this
Prospectus involves a high degree of risk. In addition, this Prospectus contains
forward-looking statements which involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business --
Industry Background," "Business -- Business Strategy," Business -- Graphic
Communications Services," "Business -- Printing Operations," "Business --
International Network," "Business -- Sales and Marketing," and "Business --
Competition," as well as in this Prospectus generally. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. Accordingly,
prospective investors should consider carefully the following risk factors, in
addition to the other information concerning the Company and its business
contained in this Prospectus, before purchasing the shares of Common Stock
offered hereby.
RELIANCE ON LIMITED NUMBER OF CUSTOMERS
The Company's five largest customers accounted for approximately 65% of its
net sales for the year ended December 31, 1997. The Company's largest customer,
Goldman, Sachs & Co., has contracted with the Company for the Company to provide
certain print-related products and services through December 30, 1999. Goldman,
Sachs & Co. accounted for approximately 24% of the Company's net sales during
1997. Although the Company has had long-term relationships with Goldman, Sachs &
Co. and its other significant customers, the Company's customers generally may
terminate their relationships with the Company upon minimal, if any, advance
notice and there can be no assurance that these relationships will continue. The
termination of the relationships with any one or more significant customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there has been a trend toward
consolidation in the financial services industry and a merger or acquisition
involving any of the Company's principal customers resulting in the termination
of such a relationship could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Sales and Marketing."
DEPENDENCE ON FINANCIAL SERVICES INDUSTRY
To date, the Company has focused the marketing of its services primarily on
companies within the financial services industry and the Company expects to
continue this focus. As a result, the Company's results of operations will be
particularly sensitive to fluctuations in the economy or financial markets
affecting this industry. Any event adversely affecting the financial services
industry could adversely affect the Company. The Company's success in increasing
its revenues will also depend, in part, on its ability to attract new business
from customers outside the financial services industry. No assurance can be
given that the Company will be successful in attracting new customers in
different industries.
INTEGRATION OF RODA
Following the Acquisition, the success of the Company will depend, in part,
on the Company's ability to centralize accounting and administrative systems and
eliminate unnecessary duplication of functions. Although Roda's business is
similar to a portion of the businesses conducted by the Company's Predecessor,
Roda operates in a foreign market that is distinct from the Predecessor's
market. There are differences in technologies, cultural and business customs,
applicable laws, operating and labor matters and currencies that will place
substantial strains upon the Company's ability to integrate the business of Roda
into its existing business. In addition, management of the Company has no
experience in operating facilities that are outside the United States or
geographically separated. No assurance can be given that the Company's senior
management group will be able to integrate and manage effectively the newly
acquired operations of Roda. Roda's printing operations in London have, to date,
been
7
<PAGE>
conducted independently of the Company, as a separate business. Consequently,
there can be no assurance that operating results of the Company will match or
exceed the combined individual operating results achieved by the Predecessor and
Roda prior to the Acquisition.
RISKS RELATED TO THE COMPANY'S EXPANSION STRATEGY
The Company intends to seek to expand its operations through the
acquisition of additional businesses which provide commercial, digital and
time-sensitive printing services and through the expansion of its outsourcing
business by assimilating additional customers' document management operations.
There can be no assurance that the Company will be able to identify,
successfully integrate or profitably manage any such businesses or operations.
The proposed expansion may involve a number of special risks, including possible
adverse effects on the Company's operating results, diversion of management's
attention, inability to retain key personnel, risks associated with
unanticipated events and the financial statement effect of potential impairment
of acquired intangible assets, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, if competition for acquisition candidates or assumed operations were
to increase, the cost of acquiring businesses or assuming customers' operations
could increase materially. The inability of the Company to implement and manage
its expansion strategy successfully may have a material adverse effect on the
business and future prospects of the Company. See "Business -- Business
Strategy."
MANAGEMENT OF GROWTH
The Company is continuing to experience significant growth, which has
placed, and could continue to place, a strain on the Company's managerial and
other resources. From December 1995 through January 1998, the number of the
Company's employees increased from 186 to 370 and further increases are
anticipated during 1998. The Company's future performance and profitability will
depend, in large part, on its ability to manage its growth, particularly with
respect to a workforce that is geographically dispersed, while continuing to
integrate the operations of additional companies and to expand its current
business. In order to manage growth successfully, the Company will be required
to continue to improve its operational, financial and other internal systems and
the training, motivation and management of its employees. If the Company is
unable to manage growth effectively, the Company's business, financial condition
and results of operations could be materially adversely affected.
NEED FOR ADDITIONAL FINANCING
The Company will need additional funds to implement its acquisition and
internal growth strategies. If the Company does not have sufficient cash
resources, its growth could be limited unless it is able to obtain additional
capital through additional debt or equity financings. Moreover, the Company may
seek to use its Common Stock for all or a portion of the consideration to be
paid in future acquisitions, the issuance of which may result in dilution to
investors in the Offering. The extent to which the Company will be able or
willing to use its Common Stock for this purpose will depend on its market value
from time to time and the willingness of potential acquisition candidates to
accept Common Stock as part of the consideration for the sale of their
businesses. If the Company is unable to use its Common Stock to make future
acquisitions, the Company may be required to use more of its cash resources, if
available, to initiate and maintain its acquisition program. There can be no
assurance that the Company will be able to obtain additional financing as
needed. As a result, the Company might be unable to implement its acquisition
strategy, which would have a material adverse effect on the future prospects of
the Company. See "Business -- Business Strategy."
The Company has a $2.0 million revolving line of credit from Summit Bank
under which $400,000 was outstanding as of March 24, 1998. The Company plans to
draw an additional $1.4 million under this line of credit prior to April 15,
1998 in order to make a distribution to stockholders of the Predecessor to
enable them to pay taxes on undistributed S corporation income for 1997. The
Company intends to use the line of credit for working capital, equipment
purchases and other general corporate purposes. The Company's line of credit
expires on May 30, 1998. Although the Company intends to seek to renew
8
<PAGE>
and, if possible, increase the line, no assurance can be given that the line of
credit will be renewed or increased or that it will be renewed or increased on
terms that are acceptable to the Company. In addition, there can be no assurance
that this or any future line of credit will be sufficient for the Company's
needs or that the Company will be able to obtain other financing on terms that
are acceptable to the Company. See "Business -- Business Strategy."
RISK OF INTERNATIONAL OPERATIONS
On a pro forma basis after giving effect to the Acquisition, sales to
customers outside the United States would have accounted for 16% of the
Company's net sales in the year ended December 31, 1997, and the Company
anticipates that foreign sales will account for a significant portion of net
sales in the foreseeable future. Risks inherent in the Company's international
business activities include the fluctuation of currency exchange rates, various
and changing regulatory requirements, increased sales and marketing expenses,
political and economic instability, difficulty in staffing and managing foreign
operations, potentially adverse taxes, complex foreign laws and treaties and the
possibility of difficulty in accounts receivable collections. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON TECHNOLOGY; RISK OF TECHNOLOGICAL OBSOLESCENCE
The success of the Company will be highly dependent on its ability to
acquire and utilize competitive computer output and document production
technologies that are not readily available on a cost-effective basis to the
Company's existing and potential customers, thereby creating the incentive for
such customers to outsource various services to the Company. Increasing use of
the Internet and other electronic means of delivering information which has
traditionally been delivered in paper form could substantially erode the
Company's core business of printing financial research reports. There can be no
assurance that one or more non-paper-based technologies (whether now existing or
developed in the future) will not reduce or supplant the physical delivery of
documents as a preferred medium for the Company's customers, which could in turn
adversely affect the Company's business. The emergence of services by
competitors of the Company incorporating new technologies could render some or
all of the Company's services unmarketable or obsolete. There can be no
assurance that the Company will be able to obtain the rights to use any such new
technologies, that it will be able to implement effectively such new
technologies on a cost-effective basis or that new technologies will not render
noncompetitive or obsolete the Company's role as a provider of computer output
and document management services. In addition, in order to maintain
state-of-the-art technologies, the Company will have to make significant capital
expenditures, which will require the Company to obtain additional financing.
There can be no assurance that the Company will be able to obtain such
additional financing. See "Business -- Graphic Communications Services."
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly operating results have been and will continue to be
subject to variation, depending upon factors such as the mix of business among
the Company's services, the cost of materials, labor and technology,
particularly in connection with the delivery of business services, the costs
associated with initiating new outsourcing contracts, the economic condition of
the Company's target markets, seasonal concerns and the costs of acquiring and
integrating new businesses. Although most of the Company's long-term contracts
for the provision of business services provide for pricing adjustments to
reflect the actual costs of materials incurred by the Company, these adjustments
typically occur on a quarterly and annual basis and therefore may add to
fluctuations in quarterly and annual operating results of the Company.
RISK OF BUSINESS INTERRUPTIONS AND DEPENDENCE ON SINGLE FACILITIES FOR CERTAIN
SERVICES
The Company's business is particularly sensitive to meeting deadlines and
performing services for numerous clients on an overnight basis. Certain of the
Company's existing operations are performed exclusively at either its Jersey
City or Manhattan locations and such operations are dependent on the
9
<PAGE>
availability of continuous computer, electrical and telephone service. All of
Roda's operations are performed at its single London location. As a result, any
disruption of day-to-day operations could have a material adverse effect upon
the Company. While the Company has, and intends to develop additional,
reciprocal relationships with major printing and document production companies
in locations elsewhere in the United States and near London for back-up
facilities in the event of emergencies, there can be no assurance that the loss
or disruption of any services affecting one or more of the Company's facilities
would not disable the Company, at least temporarily. Any interruption in its
ability to provide services, however brief, could result in the Company being
unable to satisfy the needs of clients and could adversely affect the Company's
business and its reputation within the industry. See "Business -- Graphic
Communications Services," "-- Printing Operations" and "-- Facilities."
BENEFITS TO INSIDERS
The Company will use $4.6 million of the net proceeds of the Offering
(assuming an initial public offering price of $12.00 per share) to repay the
Reorganization Notes, which represent a portion of the total consideration in
the Reorganization to the stockholders of the Predecessor, Michael R.
Cunningham, Gordon Mays, Timothy Mays and trusts for the benefit of their
respective children, and undistributed S corporation taxable income upon which
such stockholders have already paid taxes. All three individuals are executive
officers of the Company. Mr. Cunningham and Gordon Mays are also directors of
the Company. The representations and warranties made by the stockholders of the
Predecessor to the Company in connection with the Reorganization are limited
generally to their ownership of the equity interests being conveyed and do not
cover undisclosed liabilities or other matters relating to the Predecessor's
business. Accordingly, the Company will have only limited recourse against the
stockholders of the Predecessor. Despite the limited scope of these
representations, those stockholders of the Predecessor who have signed the
Registration Statement of which this Prospectus is a part will have certain
responsibilities to purchasers of the Common Stock in accordance with the United
States securities laws. See "The Company -- The Reorganization," "Use of
Proceeds" and "Certain Transactions -- The Reorganization."
COMPETITION
The graphic communications services industry is highly competitive. In each
of the lines of business in which the Company provides services, it competes
with a variety of companies, many of which have greater financial and other
resources than the Company, or are subsidiaries or divisions of larger
organizations. In particular, the industry is characterized by a small number of
large, dominant organizations. No assurances can be given that the Company will
be able to compete effectively against the larger companies in this industry.
During recent periods of economic downturn, excess production capacity in the
Company's business sectors has resulted in more competitive pricing, reducing
the earnings of the Company. In addition, a significant source of competition is
the in-house capability of the Company's target customer base. There can be no
assurance that these businesses will outsource more of their printing and
document management needs or that such businesses will continue to seek such
outsourcing services. See "Business -- Competition."
FLUCTUATIONS IN THE PRICE AND AVAILABILITY OF SUPPLIES
Prices for paper and other raw materials used by the Company may increase
from time to time in the future. Any significant increases in the prices of
these materials that cannot be passed on to customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, increases in the prices of supplies and other materials
might cause some of the Company's customers to utilize alternative technologies
in their respective businesses that do not involve the use of paper or the mail,
such as the Internet. Although the Company purchases raw materials from a varied
group of suppliers, it is dependent upon a stable availability of paper and
other supplies to continue its operations. Should shortages develop either for
any of the Company's suppliers or generally within the industry, the Company
would be unable to produce printed materials on a consistent basis and its
business would be materially adversely affected.
10
<PAGE>
RELIANCE ON SENIOR MANAGEMENT
The Company's operations will continue to be dependent on the continued
services of its executive officers, including the senior management of Roda and
additional senior management personnel which the Company intends to employ.
Furthermore, the Company will likely be dependent on the senior management of
any companies that may be acquired in the future. The Company has employment
agreements with each of its senior executive officers. However, if any of these
individuals elect not to continue in their roles with the Company, or if the
Company is unable to attract and retain senior management, the Company's
business could be adversely affected. The Company maintains key executive life
insurance for Michael R. Cunningham, its President and Chief Executive Officer,
in the amount of $3.0 million. See "Management."
NEED TO ATTRACT AND RETAIN KEY PERSONNEL IN HIGHLY COMPETITIVE MARKETPLACE;
LABOR DELAYS
The Company's performance will depend, to a large extent, on the continued
service of key technical employees and its ability to attract, retain and
motivate such personnel. Competition for such personnel is intense, particularly
for highly skilled and experienced technical personnel who perform the Company's
information technology services. Such technical personnel are in great demand
and are likely to remain a limited resource for the foreseeable future. There
can be no assurance that the Company will be able to attract, retain and
motivate such personnel in the future, and the inability to do so could have a
material adverse effect upon the Company's business, financial condition and
results of operations. In addition, a strike or other labor-related delay or
stoppage could have a material adverse effect upon the Company's business,
operations and financial condition.
ENVIRONMENTAL RISKS; GOVERNMENTAL REGULATIONS
The Company's business is subject to a variety of federal, state and local
laws, rules and regulations. Its production facilities in the United States are
governed by laws and regulations relating to workplace safety and worker health,
primarily the Occupational Safety and Health Act ("OSHA") and the regulations
promulgated thereunder. Comparable laws and regulations exist in the United
Kingdom, in particular, the Health and Safety at Work etc. Act 1974 and the
numerous regulations issued under it. The Company believes that it is in
substantial compliance with OSHA and its United Kingdom counterparts.
The Company is also subject to environmental laws and regulations of the
United States, the United Kingdom and the various States in which it operates
concerning emissions into the air, discharges into waterways and the generation,
handling and disposal of waste materials. The printing business generates
substantial quantities of inks, solvents and other waste products requiring
disposal. The Company typically recycles waste paper, and contracts for the
removal of waste ink and other waste products. The Company believes it is in
substantial compliance with all applicable air quality, waste disposal and other
environmental-related laws and regulations. However, there can be no assurance
that future changes in such laws and regulations will not have a material
adverse effect on the Company's operations.
CONTROL BY CERTAIN STOCKHOLDERS
Following the completion of the Offering, the directors and other executive
officers of the Company, and entities affiliated with them, will beneficially
own approximately 57.3% of the then outstanding shares of Common Stock (53.9% if
the Underwriters' over-allotment option is exercised in full). Accordingly,
present management of the Company is likely to continue to exercise substantial
control over the Company's affairs. These stockholders, acting together, would
be able to elect a sufficient number of directors to control the Company's Board
of Directors and would be able to approve or disapprove any matter submitted to
a vote of stockholders. In addition, because the Company has adopted a staggered
Board of Directors, stockholders will be less able to alter the composition of
the Board of Directors. See "Principal Stockholders" and "Description of Capital
Stock -- Staggered Board of Directors."
11
<PAGE>
ABSENCE OF PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price for the Common Stock offered
hereby will be determined by negotiations between the Company and the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after completion of the Offering. See "Underwriting" for factors to
be considered in determining such offering price.
POTENTIAL EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Upon the consummation of the Reorganization, the Acquisition and the
Offering, 4,865,000 shares of Common Stock will be outstanding. The 2,100,000
shares of Common Stock being sold in the Offering will be freely tradable unless
acquired by affiliates of the Company. The remaining shares outstanding may be
sold publicly only following their effective registration under the Securities
Act, or pursuant to an available exemption (such as provided by Rule 144
following a holding period for previously unregistered shares) from the
registration requirements of the Securities Act. Upon the consummation of the
Offering, the Company will have outstanding under its stock option plans options
to purchase an aggregate of 305,700 shares of Common Stock at the initial public
offering price. The Company intends to register the shares issuable upon
exercise of options granted under the stock option plans, and, upon such
registration, such shares will be eligible for resale in the public market. See
"Management -- Stock Option Plans." The Company, the stockholders of the
Predecessor and the officers and directors of the Company have agreed for a
period of 180 days from the consummation of the Offering not to offer, sell or
otherwise dispose of any shares of Common Stock (or any securities convertible
into or exercisable or exchangeable for Common Stock) or grant any options or
warrants to purchase any shares of Common Stock without the prior written
consent of Schroder & Co. Inc. on behalf of the Underwriters, except that the
Company may grant options pursuant to its stock option plans and may issue
privately placed shares of Common Stock in connection with acquisitions and
pursuant to the Company's stock option plans. See "Shares Eligible For Future
Sale." Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock.
DILUTION
Investors purchasing shares of the Common Stock in the Offering will
experience immediate and substantial dilution of $9.76 per share (assuming an
initial public offering price of $12.00 per share) in the net tangible book
value of their shares. See "Dilution."
EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors of the Company is empowered to issue common stock
and preferred stock without stockholder action. The existence of this
"blank-check" common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise and may adversely affect the
prevailing market price of the Common Stock. The Company currently has no plans
to issue any such securities, other than the Common Stock being issued in
connection with the Reorganization, the Offering and the Acquisition. See "The
Company -- The Reorganization" and "- The Roda Acquisition" and "Description of
Capital Stock." In addition, the New Jersey Shareholders Protection Act
prohibits certain persons from engaging in business combinations with the
Company. See "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for the securities offered hereby, variations in the
Company's operating results, new statutes or government regulations. In
addition, the stock market in recent years has experienced broad price and
volume
12
<PAGE>
fluctuations that often have been unrelated to the operating performance of
particular companies. Such market fluctuations also may adversely affect the
market price of the Common Stock. Accordingly, there can be no assurance that
the market price of the Common Stock will not decline below the initial public
offering price.
DIVIDEND POLICY
The Company expects to retain any earnings to finance the operations and
expansion of the Company's business. The Company's existing Loan and Security
Agreement with Summit Bank may, under certain circumstances, restrict the
Company's ability to pay dividends. Moreover, any additional debt financing that
the Company arranges in the future is likely to restrict the payment of
dividends. Therefore, the payment of any cash dividends on the Common Stock is
unlikely in the foreseeable future. See "Dividend Policy."
13
<PAGE>
THE COMPANY
GENERAL
The Predecessor commenced operations in 1989. The Company was incorporated
in New Jersey in January 1998 in contemplation of the Offering and to effect the
Reorganization. The Company's executive offices are located at 629 Grove Street,
Jersey City, New Jersey 07310 and its telephone number is (201) 217-1990.
THE REORGANIZATION
Immediately prior to the Offering, the Predecessor will be reorganized such
that the stockholders of the Predecessor will contribute all of the outstanding
shares of common stock of the Predecessor to CGII in exchange for a total of
2,595,260 shares of Common Stock and the Exchange Notes. Upon completion of the
Reorganization, CGII will have 2,595,261 shares of Common Stock outstanding. The
principal amount of the Exchange Notes will be $2.4 million, assuming an initial
public offering price of $12.00 per share and will be subject to adjustment for
any change in the initial public offering price. Concurrently with the
Reorganization, CGII will assume the Predecessor's obligations with respect to
undistributed S corporation taxable income through the date of the
Reorganization, estimated to total $2.2 million, and will issue Distribution
Notes in such amount to evidence such obligations. The principal amount of the
Exchange Notes was determined by the Company in connection with the
Reorganization based on a number of factors, including the value of the
enterprise contributed to the Company. The principal amount of the Distribution
Notes was determined by the Company based upon the actual amount of
undistributed S corporation taxable income as of December 31, 1997 and the
anticipated additional undistributed S corporation taxable income during the
period January 1, 1998 through the expected date of the Reorganization. The
Company intends to repay the Reorganization Notes from the net proceeds of the
Offering. The representations and warranties made by the stockholders of the
Predecessor to the Company in connection with the Reorganization are limited
generally to their ownership of the equity interests being conveyed and do not
cover undisclosed liabilities or other matters relating to the Predecessor's
business. Accordingly, the Company will have only limited recourse against the
stockholders of the Predecessor. See "Risk Factors -- Benefits to Insiders,"
"Use of Proceeds" and "Certain Transactions -- The Reorganization."
THE RODA ACQUISITION
The Company will acquire 100% of the share capital of Roda in two stages.
Concurrently with the consummation of the Offering, the Company will acquire all
of the issued ordinary share capital of Roda pursuant to an agreement dated
January 16, 1998, as amended (the "Roda Purchase Agreement") for an aggregate
consideration of approximately $6.1 million. The $6.1 million consideration will
be satisfied by (i) the delivery of 169,739 shares of Common Stock, which will
be valued at the initial public offering price, and (ii) a cash payment for the
balance of the consideration ($4.3 million, assuming an initial public offering
price of $12.00 per share). In addition, upon consummation of the Offering, the
Company will deliver into escrow $1.8 million, representing the total redemption
price of all of the issued preference share capital of Roda. The Company has the
right to redeem, and intends to redeem, such preference shares on June 30, 1998.
The Company may be required by the holders of the preference shares to redeem
such shares prior to June 30, 1998. The amount in escrow will be used to pay the
redemption price upon such redemption.
In addition to the consideration for the ordinary and preference share
capital, Roda's outstanding indebtedness will be reflected on the Company's
consolidated balance sheet from and after the consummation of the Acquisition.
As of December 31, 1997, Roda had approximately $4.3 million of indebtedness
outstanding, including the Roda Seller Debt. Under the terms of the Roda
Purchase Agreement, the Company has committed to cause Roda to repay the entire
$1.4 million (Pounds850,000) of the Roda Seller Debt within 28 days following
the closing. The Company intends to repay the Roda Seller Debt from the proceeds
of the Offering. In order to secure the performance by the selling
14
<PAGE>
stockholders of Roda of certain warranties and covenants, $462,000
(Pounds275,000) of the cash portion of the consideration will be held in escrow
until one year following the closing. The obligations of the parties under the
Roda Purchase Agreement are contingent upon the closing of the Offering.
Roda provides printing and document output and management services to
financial services companies primarily in the United Kingdom and European
markets, and has been a strategic partner in the World Research Link(TM). Upon
completion of the Offering and the Acquisition, Roda will become a wholly-owned
subsidiary of the Company and its day-to-day operations in London will continue
to be supervised by its current management team. Peter L. Furlonge, who has been
a senior executive officer of Roda since 1989, and its chief executive officer
since 1995, is continuing in such capacity pursuant to an employment agreement.
Two other key employees of Roda will also enter into employment agreements with
Roda incidental to the Acquisition. See "Business -- Graphic Communications
Services" and "-- International Network."
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $22.6 million ($26.2 million if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$12.00 per share. Of this amount, approximately $6.1 million (assuming an
initial public offering price of $12.00 per share) will be used to fund the cash
portion of the consideration for the acquisition of Roda, and approximately $1.4
million (Pounds850,000) will be used to repay the Roda Seller Debt. See "The
Company -- The Roda Acquisition." The Roda Seller Debt, which has no specified
maturity date, bears interest at the rate of 10% per annum, payable
semi-annually. Pursuant to the Roda Purchase Agreement, the Company has agreed
to cause Roda to repay the Roda Seller Debt within 28 days following the closing
of the Acquisition. In addition, the Company expects to use $4.6 million
(assuming an initial public offering price of $12.00 per share) to repay the
Reorganization Notes, representing a portion of the consideration in the
Reorganization to the stockholders of the Predecessor and undistributed S
corporation taxable income upon which they have already paid taxes. See "The
Company -- The Reorganization." The Reorganization Notes bear no interest and
have no specified maturity date. The Company also intends to repay up to $1.0
million of indebtedness to Summit Bank under its term loan and approximately
$1.4 of indebtedness to Summit Bank under its revolving line of credit,
representing the expected outstanding balance under the line of credit as of the
consummation of the Offering. The Predecessor intends to draw down such $1.4
million under the line of credit prior to April 15, 1998 in order to make a
distribution to stockholders of the Predecessor to enable them to pay taxes due
on April 15, 1998 on undistributed S corporation income for 1997. The term loan
bears interest at a rate of 8.5% per annum and matures on December 1, 2001. The
revolving line of credit bears interest at a floating rate equal to the prime
rate and matures on May 30, 1998. The remaining net proceeds of the Offering,
estimated to be approximately $8.1 million, will be used for working capital and
general corporate purposes, which may include capital expenditures, marketing
activities and strategic acquisitions. The Company currently has no agreement or
understanding with respect to any future acquisitions. Pending the use of the
net proceeds, the Company will invest the net proceeds in short-term, United
States government securities.
DIVIDEND POLICY
Following the Offering, it will be the policy of the Company's Board of
Directors to retain all future earnings to finance the operation and expansion
of the Company's business. Accordingly, the Company does not anticipate
declaring or paying cash dividends on the Common Stock in the foreseeable
future. The payment of cash dividends in the future will be at the sole
discretion of the Company's Board of Directors and will depend on, among other
things, the Company's earnings, operations, capital requirements, financial
condition, restrictions in then existing financing agreements, and other factors
deemed relevant by the Board of Directors. In addition, the Company's existing
Loan and Security Agreement with Summit Bank may, under certain circumstances,
restrict the Company's ability to pay dividends.
15
<PAGE>
Prior to the Reorganization, the Predecessor has been an S corporation
within the meaning of (section)1361 of the Internal Revenue Code of 1986, as
amended (the "Code"), making distributions to its stockholders in respect of
income which was taxable to such stockholders under the applicable provisions of
the Code. In connection with the Reorganization, the Company will pay to the
stockholders of the Predecessor the amounts of their respective undistributed S
corporation taxable income through the anticipated date of the Reorganization by
delivery of the Distribution Notes. See "The Company -- The Reorganization." A
portion of the net proceeds of the Offering will be used to repay the
Distribution Notes. See "Use of Proceeds."
16
<PAGE>
CAPITALIZATION
The following table sets forth at December 31, 1997, (i) the actual short
term debt and consolidated capitalization of the Predecessor and (ii) the pro
forma short-term debt and consolidated capitalization of the Company as adjusted
to give effect to the Reorganization, the Acquisition, and the sale of the
Common Stock offered hereby and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds." The capitalization table should
be read in connection with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Unaudited Pro Forma Combined Financial Statements, the Company's financial
statements and related notes thereto and Roda's consolidated financial
statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------
COMPANY
PRO FORMA
PREDECESSOR AS ADJUSTED
------------- ------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Short-term debt, including current portion of long-term debt and
capitalized lease obligations ................................. $ 885 $ 1,870
====== =======
Long-term debt and capitalized lease obligations, net of current
portion ....................................................... $1,517 $ 2,179
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized;
none issued and outstanding ................................. -- --
Common stock, no par value, 30,000,000 shares authorized;
and 4,865,000 shares issued and outstanding, pro forma as
adjusted(1) ................................................. 6 21,765
Additional paid-in capital ..................................... 734 --
Retained earnings .............................................. 2,411 --
------ -------
Total stockholders' equity ..................................... 3,151 21,765
------ -------
Total capitalization ........................................... $4,668 $23,944
====== =======
</TABLE>
- ----------
(1) Does not include 600,000 shares of Common Stock reserved for issuance
pursuant to the Company's stock option plans, under which options to
purchase 305,700 shares have been granted at the initial public offering
price subject to consummation of the Offering. See "Management -- Stock
Option Plans" and "Underwriting."
17
<PAGE>
DILUTION
The difference between the initial public offering price per share and net
tangible book value per share of Common Stock after this Offering constitutes
the dilution to investors in this Offering. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of then outstanding shares
of Common Stock. At December 31, 1997, the Predecessor's net tangible book value
was $3.2 million, or $1.06 per share of Common Stock. After giving effect to (i)
the Reorganization, (ii) the Acquisition, and (iii) the sale of the 2,100,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $12.00 per share and the receipt and application of the estimated net
proceeds therefrom (less underwriting discounts and commissions and estimated
offering expenses), the adjusted pro forma net tangible book value of the
Company as of December 31, 1997 would have been $10.9 million or $2.24 per
share, representing an immediate increase in pro forma net tangible book value
of $1.22 per share to existing stockholders and an immediate dilution of $9.76
per share to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................ $ 12.00
--------
Predecessor net tangible book value ............................. $ 1.06
Decrease attributable to the Reorganization ..................... (2.03)
Decrease attributable to the Acquisition ........................ (2.24)
Increase attributable to investors in this offering ............. 5.45
-------
Pro forma as adjusted net tangible book value of the Company after
the Offering .................................................... 2.24
--------
Dilution to new investors ........................................ $ 9.76
========
</TABLE>
The following table summarizes the number of shares of Common Stock issued
by the Company, the total consideration paid to the Company, and the average
price per share paid by the existing stockholders, the Roda stockholders and the
new investors. For purposes of the total consideration and average price per
share paid by the existing stockholders, the Company has based such valuation on
the aggregate amount of such stockholders' cash equity contributions to the
Predecessor without deducting distributions paid to such stockholders.
<TABLE>
<CAPTION>
SHARE PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 2,595,261 53.3% $ 740,000 2.6% $ 0.29
Roda stockholders ............. 169,739 3.5 2,037,000 7.3 $ 12.00
New investors ................. 2,100,000 43.2 25,200,000 90.1 $ 12.00
--------- ----- ----------- -----
Total ......................... 4,865,000 100.0% $27,977,000 100.0%
========= ===== =========== =====
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Underwriting."
18
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are based
on the historical financial statements of the Predecessor and Roda. The
unaudited pro forma combined balance sheet, to the extent indicated, gives
effect to: (i) the Reorganization, (ii) the Acquisition and (iii) the Offering,
as if each occurred as of December 31, 1997. The unaudited pro forma combined
statement of income gives effect to the Acquisition as if it occurred on January
1, 1997. With the exeception of share and per share amounts, the Reorganization
and the Offering have no effect on the unaudited pro forma combined statement of
income.
The unaudited pro forma combined financial statements give effect to the
Acquisition under the purchase method of accounting. The Roda financial
statements have been adjusted to conform to United States Generally Accepted
Accounting Principles and have been converted into Dollars using the average
exchange rate of $1.66 to Pounds1.00 for the statement of income for the year
ended December 31, 1997 and the year end exchange rate of $1.67 to Pounds1.00
for the balance sheet as of December 31, 1997.
The unaudited pro forma combined statement of income is not necessarily
indicative of operating results which would have been achieved had the
Acquisition been completed on January 1, 1997 and should not be construed as
representative of future operating results. These unaudited pro forma combined
financial statements should be read in conjunction with the historical financial
statements of the Company and Roda Limited including the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
19
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
REORGANIZATION
PREDECESSOR ADJUSTMENTS(1)(2)
------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................... $ 67 $ --
Accounts receivable ................................................ 5,673 --
Inventories ........................................................ 940 --
Prepaid expenses and other current assets .......................... 78 --
Notes and advances receivable -- stockholder/officers .............. 136 --
Deferred income taxes .............................................. 47 295(1)
------- -----------
TOTAL CURRENT ASSETS ................................................ 6,941 295
Property and equipment, net ....................................... 3,579 --
Goodwill and other assets ......................................... 418 --
TOTAL ASSETS ........................................................ $10,938 $ 295
======= ===========
CURRENT LIABILITIES
Current portion of long-term debt -- third parties ................. $ 407 $ --
Revolving line of credit ........................................... 300 1,400 (2)
Current portion of obligations under capital lease ................. 178 --
Accounts payable ................................................... 3,854 --
Accrued expenses ................................................... 1,474 --
Reorganization notes ............................................... -- 4,600 (2)
Cash payable to Roda stockholders .................................. -- --
------- -----------
TOTAL CURRENT LIABILITIES ........................................... 6,213 6,000
Long-term debt third parties -- net of current portion ............ 1,185 --
Obligations under capital lease -- net of current portion ......... 332 --
Notes payable -- related parties .................................. -- --
Deferred income taxes ............................................. 57 354 (1)
Other liabilities ................................................. -- --
------- -----------
TOTAL LIABILITIES ................................................... 7,787 6,354
STOCKHOLDERS' EQUITY
Common stock ....................................................... 6 (2,914) (2)
Additional Paid-in capital ......................................... 734 (734) (2)
Retained Earnings .................................................. 2,411 (59) (1)
(2,352) (2)
-----------
TOTAL STOCKHOLDERS' EQUITY .......................................... 3,151 (6,059)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $10,938 $ 295
======= ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
RODA
THE (HISTORICAL ACQUISITION COMPANY
COMPANY CONVERTED)(3) ADJUSTMENTS(4) PRO FORMA
----------- --------------- ---------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash ............................................................... $ 67 $ 2 $ -- $ 69
Accounts receivable ................................................ 5,673 1,381 -- 7,054
Inventories ........................................................ 940 246 -- 1,186
Prepaid expenses and other current assets .......................... 78 169 -- 247
Notes and advances receivable -- stockholder/officers .............. 136 -- -- 136
Deferred income taxes .............................................. 342 -- -- 342
-------- ------ --------- -------
TOTAL CURRENT ASSETS ................................................ 7,236 1,798 -- 9,034
Property and equipment, net ....................................... 3,579 1,442 -- 5,021
Goodwill and other assets ......................................... 418 3,513 (100) 11,206
(3,513)
10,888
---------
TOTAL ASSETS ........................................................ $ 11,233 $6,753 $ 7,275 $25,261
======== ====== ========= =======
CURRENT LIABILITIES
Current portion of long-term debt -- third parties ................. $ 407 $ 780 $ -- $ 1,187
Revolving line of credit ........................................... 1,700 -- -- 1,700
Current portion of obligations under capital lease ................. 178 205 -- 383
Accounts payable ................................................... 3,854 932 -- 4,786
Accrued expenses ................................................... 1,474 579 -- 2,053
Reorganization notes ............................................... 4,600 -- -- 4,600
Cash payable to Roda stockholders .................................. -- -- 6,111 6,111
-------- ------ --------- -------
TOTAL CURRENT LIABILITIES ........................................... 12,213 2,496 6,111 20,820
Long-term debt third parties -- net of current portion ............ 1,185 1,195 -- 2,380
Obligations under capital lease -- net of current portion ......... 332 467 -- 799
Notes payable -- related parties .................................. -- 1,419 -- 1,419
Deferred income taxes ............................................. 411 165 -- 576
Other liabilities ................................................. -- 138 -- 138
-------- ------ --------- -------
TOTAL LIABILITIES ................................................... 14,141 5,880 6,111 26,132
STOCKHOLDERS' EQUITY
Common stock ....................................................... (2,908) 334 (334) (871)
2,037
Additional Paid-in capital ......................................... -- 334 (334) --
Retained Earnings .................................................. -- 205 (205)
TOTAL STOCKHOLDERS' EQUITY .......................................... (2,908) 873 1,164 (871)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 11,233 $6,753 $ 7,275 $25,261
======== ====== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMPANY
OFFERING PRO FORMA
ADJUSTMENTS(5) AS ADJUSTED
---------------- ------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................... $ 22,636 $ 8,447
272
(6,111)
(1,419)
(4,600)
(1,000)
(1,400)
Accounts receivable ................................................ 7,054
Inventories ........................................................ -- 1,186
Prepaid expenses and other current assets .......................... -- 247
Notes and advances receivable -- stockholder/officers .............. -- 136
Deferred income taxes .............................................. -- 342
---------- -------
TOTAL CURRENT ASSETS ................................................ 8,378 17,412
Property and equipment, net ....................................... -- 5,021
Goodwill and other assets ......................................... (272) 10,934
TOTAL ASSETS ........................................................ $ 8,106 $33,367
========== =======
CURRENT LIABILITIES
Current portion of long-term debt -- third parties ................. $ -- $ 1,187
Revolving line of credit ........................................... (1,400) 300
Current portion of obligations under capital lease ................. -- 383
Accounts payable ................................................... -- 4,786
Accrued expenses ................................................... -- 2,053
Reorganization notes ............................................... (4,600) --
Cash payable to Roda stockholders .................................. (6,111) --
---------- -------
TOTAL CURRENT LIABILITIES ........................................... (12,111) 8,709
Long-term debt third parties -- net of current portion ............ (1,000) 1,380
Obligations under capital lease -- net of current portion ......... -- 799
Notes payable -- related parties .................................. (1,419) --
Deferred income taxes ............................................. -- 576
Other liabilities ................................................. -- 138
---------- -------
TOTAL LIABILITIES ................................................... (14,530) 11,602
STOCKHOLDERS' EQUITY
Common stock ....................................................... 22,636 21,765
Additional Paid-in capital ......................................... --
Retained Earnings ..................................................
TOTAL STOCKHOLDERS' EQUITY .......................................... 22,636 21,765
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 8,106 $33,367
========== =======
</TABLE>
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(1) As a result of the conversion from a S corporation to a C corporation the
Company will record: (i) a deferred tax asset of $295,000, (ii) a deferred
tax liability of $354,000, and (iii) the resulting net decrease in retained
earnings of $59,000.
(2) Reflects the issuance of the Reorganization Notes, consisting of: (i) the
$2.2 million Distribution Notes, the amount of which approximates the
undistributed S corporation taxable income to the Predecessor stockholders
estimated through the anticipated date of the Reorganization, and (ii) the
$2.4 million Exchange Notes to be issued as part of the consideration for
the equity of the Predecessor (assuming an initial public offering price of
$12.00 per share). Also reflects additional anticipated borrowings of $1.4
million under the Predeccesor's existing revolving line of credit for
distributions to be made prior to April 15, 1998 to shareholders of the
Predecesor for taxes due on such date attributable to undistributed S
corporation income for 1997.
(3) Historical balances for Roda at December 31, 1997 have been adjusted to
conform to United States Generally Accepted Accounting Principles, including
(i) the recognition of goodwill of $3.5 million related to a 1996 management
buyout of Roda, (ii) the recording of a deferred tax liability of $165,000
and (iii) the resulting net increase to stockholders' equity of $3.3
million.
(4) The aggregate consideration of $8.1 million payable to the Roda stockholders
will consist of (i) 169,739 shares of Common Stock and (ii) a cash payment
for the balance of the consideration. For presentation purposes, the shares
issuable as part of the consideration have been valued at $2.0 million
(assuming an initial public offering price of $12.00 per share), resulting
in an assumed cash payment of $6.1 million which has been presented as "Cash
Payable to Roda Stockholders." This liability will be satisfied with a
portion of the net proceeds of the Offering.
The purchase of Roda has been accounted for based upon available information
regarding the estimated fair value of the assets and liabilities acquired as
follows:
Purchase price .................. $ 8,148,000
Acquisition costs ............... 100,000
Net liabilities assumed ......... 2,640,000
-----------
Goodwill ........................ $10,888,000
===========
Roda's stockholders' equity of $873,000 and prior goodwill of $3.5 million
have been eliminated in consolidation with the Company.
(5) The Offering adjustments assume an initial public offering price of $12.00
per share and give effect to (i) the receipt of the assumed net proceeds of
$22.6 million (after deducting underwriting discounts and commissions of
$1.8 million and estimated offering expenses of $800,000), (ii) the
recognition of a $272,000 portion of the offering expenses previously paid
and deferred by the Predecessor at December 31, 1997, (iii) the repayment of
the Reorganization Notes, (iv) satisfaction of the liability for cash
payable to the Roda stockholders of $6.1 million, (v) the repayment of the
$1.4 million (Pounds850,000) Roda Seller Debt and (vi) the repayment of $2.4
million of bank indebtedness of the Company.
21
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
RODA
PREDECESSOR/ (HISTORICAL ACQUISITION COMPANY
COMPANY CONVERTED)(1) ADJUSTMENTS PRO FORMA
-------------------- --------------- ----------------- --------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales ............................................ $ 35,744 $ 6,961 $ -- $ 42,705
Operating expenses:
Costs of production ................................. 26,894 4,293 -- 31,187
Selling, general and administrative ................. 5,794 1,418 -- 7,212
Depreciation and amortization ....................... 694 148 -- 842
Amortization of goodwill ............................ -- 90 (90)(2) 272
272 (2)
------------- -------- --------- -------------
33,382 5,949 (182) 39,513
------------- -------- --------- -------------
Income from operations ............................... 2,362 1,012 (182) 3,192
Interest expense .................................... (250) (345) -- (595)
Other income ........................................ 35 86 -- 121
------------- -------- --------- -------------
Income before income taxes and minority interest. 2,147 753 (182) 2,718
Provision for income taxes .......................... 129 265 -- 394
------------- -------- --------- -------------
Income before minority interest ...................... 2,018 488 (182) 2,324
Minority interest ................................... -- 106 (106) (3) --
------------- -------- --------- -------------
Net income ........................................... $ 2,018 $ 382 $ (76) $ 2,324
============= ======== ========= =============
PRO FORMA DATA (UNAUDITED):
Income before income taxes ........................... $ 2,147 $ 2,718
Pro forma provision for income taxes ................ 880 (4) 1,142 (5)
------------- -------------
Pro forma net income ................................. $ 1,267 $ 1,576
============= =============
Pro forma earnings per share ......................... $ 0.43 $ 0.43
============= =============
Pro forma shares outstanding ......................... 2,978,594 (6) 3,657,552 (7)
============= =============
Pro forma as adjusted net income ..................... $ 1,674 (8)
=============
Pro forma as adjusted earnings per share ............. $ 0.40
=============
Pro forma as adjusted shares outstanding ............. 4,189,469 (9)
=============
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(1) Historical balances for Roda at December 31, 1997 have been adjusted to
conform to United States Generally Accepted Accounting Principles, including
the amortization of goodwill of $90,000 related to a 1996 management buyout
of Roda and the recording of deferred taxes of $75,000.
(2) Reflects (i) the elimination of Roda's amortization of goodwill of $90,000
related to the 1996 management buyout of Roda and (ii) the Company's
recognition of amortization of goodwill of $272,000 resulting from the
Acquisition.
(3) Reflects the elimination of $106,000 of minority interest in the earnings of
Roda.
(4) Reflects an increase of $751,000 for income taxes computed utilizing an
overall effective tax rate of 41% as if the Company had been a C corporation
since January 1, 1997.
(5) Reflects a pro forma provision for income taxes for the Company and Roda on
a combined basis and computed utilizing effective tax rates of 41% for
United States income taxes and 31% for United Kingdom income taxes.
(6) Reflects (i) the initial CGII founding share, (ii) 2,595,260 shares to be
issued in the Reorganization, and (iii) 383,333 shares, representing the
number of shares having a value (based upon an assumed initial public
offering price of $12.00 per share) corresponding to the principal amount of
the Reorganization Notes.
(7) Reflects (i) the shares described in footnote (6) above, (ii) 169,739 shares
issuable in connection with the Acquisition, and (iii) 509,219 shares,
representing the number of shares having a value (based upon an assumed
initial public offering price of $12.00 per share) corresponding to the $6.1
million liability for cash payable to the Roda stockholders in connection
with the Acquisition.
(8) Reflects the elimination of interest expense of $142,000 ($98,000 net of
taxes) on the Roda Seller Debt of approximately $1.4 million (Pounds850,000)
to be repaid through the application of a portion of the net proceeds from
the Offering as if such repayment had occurred on January 1, 1997. See "The
Company -- The Roda Acquisition" and "Use of Proceeds."
(9) Reflects (i) the shares described in footnote (7) above and (ii) 531,917 of
the additional shares to be sold in the Offering, representing the portion
of the shares being sold in the Offering in order to generate sufficient
proceeds necessary to (a) repay the $1.4 million (Pounds850,000) Roda Seller
Debt, (b) repay $2.4 million of bank indebtedness of the Company and (c) pay
underwriting discounts and expenses of the entire Offering. See "The Company
-- The Reorganization" and "Use of Proceeds."
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for the
Predecessor and selected unaudited pro forma combined financial data for the
Company. The selected historical financial data presented below as of and for
the three years ended December 31, 1995, 1996 and 1997 are derived from the
Predecessor's audited financial statements appearing elsewhere in this
Prospectus and should be read in conjunction with those financial statements and
the related notes appearing elsewhere in this Prospectus. The selected
historical financial data presented below as of and for the years ended December
31, 1993 and 1994 are derived from the unaudited financial statements of the
Predecessor for the year ended December 31, 1993 and audited financial
statements of the Predecessor for the year ended December 31, 1994. The pro
forma data are unaudited. The unaudited financial statements include all
adjustments, consisting of only normal recurring accruals, which management
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. The selected financial data below
should be read in conjunction with the Predecessor financial statements and the
related notes thereto, the Unaudited Pro Forma Combined Financial Statements and
the related notes thereto and the information in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- ----------- ----------- ----------- -----------------------------------------
ACTUAL PRO FORMA(1)
(UNUADITED) -------------------- --------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales ......................... $ 13,959 $ 15,927 $ 17,327 $ 23,193 $ 35,744 $ 42,705
Operating expenses:
Costs of production .............. 9,637 12,085 12,860 17,616 26,894 31,187
Selling, general and
administrative .................. 3,053 3,151 3,441 4,270 5,794 7,212
Depreciation and amortization..... 281 448 498 563 694 1,114
-------- -------- -------- -------- ------------ ------------
12,971 15,684 16,799 22,449 33,382 39,513
-------- -------- -------- -------- ------------ ------------
Income from operations ............ 988 243 528 744 2,362 3,192
Interest expense ................. (99) (173) (257) (234) (250) (595)
Other income ..................... 3 -- 2 48 35 121
-------- -------- -------- -------- ------------ ------------
Income before income taxes ........ 892 70 273 558 2,147 2,718
Provision for income taxes ....... 119 7 6 56 129 394
-------- -------- -------- -------- ------------ ------------
Net income ........................ $ 773 $ 63 $ 267 $ 502 $ 2,018 $ 2,324
======== ======== ======== ======== ============ ============
PRO FORMA DATA (UNAUDITED):
Income before income taxes ........ $ 2,147 $ 2,718
Pro forma provision for income
taxes ........................... 880 (2) 1,142 (3)
------------ ------------
Pro forma net income .............. $ 1,267 $ 1,576
============ ============
Pro forma earnings per share ...... $ 0.43 $ 0.43
============ ============
Pro forma shares outstanding ...... 2,978,594 (4) 3,657,552 (5)
============ ============
Pro forma as adjusted net income. $ 1,674 (6)
============
Pro forma as adjusted earnings
per share ........................ $ 0.40
============
Pro forma as adjusted shares
outstanding ...................... 4,189,469 (7)
============
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
------------- -------- -------- -------- -------------------------
PRO FORMA
ACTUAL AS ADJUSTED(8)
(UNAUDITED) --------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....................... $ 71 $ 144 $ 1 $ 543 $ 67 $ 8,447
Working capital ................................. 553 338 32 (867) 728 8,703
Total assets .................................... 3,787 5,680 5,568 9,471 10,938 33,367
Long-term debt and capitalized lease obligations,
net of current portion ......................... 623 1,414 1,151 1,300 1,517 2,179
Stockholders' equity ............................ 1,742 1,084 830 1,344 3,151 21,765
</TABLE>
(See footnotes on following page)
24
<PAGE>
(footnotes from previous page)
(1) Gives effect to the Reorganization and the Acquisition as if they each had
occurred on January 1, 1997. See the Unaudited Pro Forma Combined Financial
Statements.
(2) Reflects an increase of $751,000 for income taxes computed utilizing an
overall effective tax rate of 41% as if the Company had been a C corporation
since January 1, 1997.
(3) Reflects a pro forma provision for income taxes for the Company and Roda on
a combined basis computed utilizing effective tax rates of 41% for United
States income taxes and 31% for United Kingdom income taxes.
(4) Reflects (i) the initial CGII founding share, (ii) 2,595,260 shares to be
issued in the Reorganization, and (iii) 383,333 shares, representing the
number of shares having a value (based upon an assumed initial public
offering price of $12.00 per share) corresponding to the principal amount of
the Reorganization Notes.
(5) Reflects (i) the shares described in footnote (4) above, (ii) 169,739 shares
issuable in connection with the Acquisition, and (iii) 509,219 shares,
representing the number of shares having a value (based upon an assumed
initial public offering price of $12.00 per share) corresponding to the $6.1
million liability for cash payable to the Roda stockholders in connection
with the Acquisition.
(6) Reflects the elimination of interest expense of $142,000 ($98,000 net of
taxes) on the Roda Seller Debt of approximately $1.4 million (Pounds850,000)
to be repaid through the application of a portion of the net proceeds from
the Offering as if such repayment had occurred on January 1, 1997. See "The
Company -- The Roda Acquisition" and "Use of Proceeds."
(7) Reflects (i) the shares described in footnote (5) above and (ii) 531,917 of
the additional shares to be sold in the Offering, representing the portion
of the shares being sold in the Offering in order to generate sufficient
proceeds necessary to (a) repay the $1.4 million (Pounds850,000) Roda Seller
Debt, (b) repay $2.4 million of bank indebtedness of the Company and (c) pay
underwriting discounts and expenses of the entire Offering. See "The Company
-- The Reorganization" and "Use of Proceeds."
(8) Gives effect to the following transactions as if they had occurred on
December 31, 1997: (i) the Reorganization; (ii) the Acquisition; and (iii)
the sale of 2,100,000 shares of Common Stock offered hereby and the use of
the net proceeds therefrom, including: (a) the repayment of the
Reorganization Notes, (b) the satisfaction of the liability for the cash
payable to the Roda stockholders of $6.1 million (assuming an initial public
offering price of $12.00 per share), (c) the repayment of the Roda Seller
Debt, and (d) the repayment of $2.4 million of bank indebtedness. See the
Unaudited Pro Forma Combined Financial Statements and "Use of Proceeds."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides a wide range of graphic communications services to
financial institutions and corporations, focusing on producing and distributing
time-sensitive analytical research and marketing materials and on providing
on-demand printing services. The Company commenced its operations in 1989 when
it opened a printing facility in New Jersey to provide overnight printing and
delivery of time-sensitive analytical research and marketing reports for its
financial institution customers in the New York City metropolitan area.
Currently, the Company operates two facilities in the New York City area and has
agreed to acquire London-based Roda, giving the Company its first facility
outside the United States. To date, the Company has experienced significant
growth primarily through the (i) expansion of its existing customer base, (ii)
addition of products and services, (iii) assimilation of in-house printing
operations, (iv) acquisition of selected assets and (v) establishment of
strategic alliances.
Immediately prior to the Offering, the Predecessor will be reorganized such
that the stockholders of the Predecessor will contribute all of the outstanding
shares of common stock of the Predecessor to CGII in exchange for a total of
2,595,260 shares of Common Stock and Exchange Notes in the aggregate principal
amount of $2.4 million (assuming an initial public offering price of $12.00 per
share). Concurrently with the Reorganization, CGII will assume the Predecessor's
obligations with respect to undistributed S corporation taxable income through
the date of the Reorganization, estimated to total $2.2 million, and will issue
Distribution Notes in such amount to evidence such obligations.
The Company will acquire 100% of the share capital of Roda in two stages.
Concurrently with the consummation of the Offering, the Company will acquire all
of the issued ordinary share capital of Roda pursuant to an agreement dated
January 16, 1998, as amended (the "Roda Purchase Agreement") for an aggregate
consideration of approximately $6.3 million. The $6.3 million consideration will
be satisfied by (i) the delivery of 169,739 shares of Common Stock, which will
be valued at the initial public offering price, and (ii) a cash payment for the
balance of the consideration ($4.3 million, assuming an initial public offering
price of $12.00 per share). In addition, upon consummation of the Offering, the
Company will deliver into escrow $1.8 million, representing the total redemption
price of all of the issued preference share capital of Roda. The Company has the
right to redeem, and intends to redeem, such preference shares on June 30, 1998.
The Company may be required by the holders of the preference shares to redeem
such shares prior to June 30, 1998. The amount in escrow will be used to pay the
redemption price upon such redemption.
In addition to the consideration for the ordinary and preference share
capital, Roda's outstanding indebtedness will be reflected on the Company's
consolidated balance sheet from and after the consummation of the Acquisition.
As of December 31, 1997, Roda had $4.3 million of indebtedness outstanding,
including the Roda Seller Debt. Under the terms of the Roda Purchase Agreement,
the Company has committed to cause Roda to repay the entire $1.4 million
(Pounds850,000) of the Roda Seller Debt within 28 days following the closing.
The Company intends to repay the Roda Seller Debt from the proceeds of the
Offering. In order to secure the performance by the selling stockholders of Roda
of certain warranties and covenants, $462,000 (Pounds275,000) of the cash
portion of the consideration will be held in escrow until one year following the
closing. The obligations of the parties under the Roda Purchase Agreement are
contingent upon the closing of the Offering. Roda provides printing and document
output and management services to financial services companies in the United
Kingdom and European markets, and has been a strategic partner in the World
Research Link(TM). Following the Offering and the completion of the Acquisition,
Roda will become a wholly-owned subsidiary of the Company and its day-to-day
operations in London will continue to be supervised by its current management
team.
To date, the Predecessor has been taxed as an S corporation. In connection
with the Offering, the Company will become subject to federal and additional
state income taxes upon the termination of the S corporation status.
Concurrently with becoming subject to federal and additional state income taxes,
the Company will record additional deferred tax assets of $295,000 and
additional deferred tax liabilities of $354,000 and a corresponding net tax
expense of $59,000 in its statement of income. These tax items will be reflected
as a special charge in the Company's income statement for the quarter in which
the Reorganization occurs.
26
<PAGE>
The Company's five largest customers, all of which are financial
institutions, accounted for approximately 65% of its net sales for the year
ended December 31, 1997. After giving effect to the Acquisition, net sales to
customers outside the United States would have accounted for 16% of the
Company's pro forma net sales in the year ended December 31, 1997, and the
Company anticipates that foreign sales will account for a significant portion of
net sales in the foreseeable future. As a result, the Company's operations may
be subject to the fluctuation of currency exchange rates, various and changing
regulatory requirements, increased sales and marketing expenses, political and
economic instability, difficulty in staffing and managing foreign operations,
potentially adverse taxes, complex foreign laws and treaties and the possibility
of difficulty in accounts receivable collections.
The Company's largest customer, Goldman, Sachs & Co., accounted for
approximately 24% of the Company's net sales during 1997. Although the Company
has had long-term relationships with its significant customers, the Company's
customers may terminate their relationship upon minimal, if any, advance notice
and there can be no assurance that these relationships will continue. In
addition, given the concentration of customers in the financial services
industry, the Company's results of operations will be particularly sensitive to
fluctuations in the economy or financial markets affecting this industry.
The Company's net sales are derived primarily from providing printing and
distribution services for customers in the financial services, insurance and
publishing industries, a substantial component of which is the printing and
distribution of financial and analytical research and marketing materials for
the financial services industry. The Company also derives part of its net sales
from providing fulfillment services, including labeling, mailing, inserting, kit
assembly and inventory management for its customers. Finally, the Company
provides computer and data output services and other document related services
for customers.
The Company's operating expenses consist of the following: (i) costs of
production, (ii) selling, general and administrative expenses and (iii)
depreciation and amortization. Costs of production consist primarily of the cost
of paper and other production materials, labor, outside services, insurance and
other production expenses including repairs and maintenance and rent. Selling,
general and administrative expenses consist primarily of management,
administrative and marketing expenses, salaries for officers, salaries and
commissions paid to sales persons and professional fees.
The Company's quarterly operating results have been and will continue to be
subject to variation, depending upon factors such as the mix of business among
the Company's services, the cost of materials, labor and technology,
particularly in connection with the delivery of business services, the costs
associated with initiating new outsourcing contracts or opening new offices, the
economic condition of the Company's target markets, seasonal concerns and the
costs of acquiring and integrating new businesses.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's Statement
of Income as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................................. 100.0% 100.0% 100.0%
Costs of production .................................. 74.2 76.0 75.3
Selling, general and administrative expenses ......... 19.9 18.4 16.2
Depreciation and amortization ........................ 2.9 2.4 1.9
----- ----- -----
Income from operations ................................ 3.0 3.2 6.6
Interest expense ..................................... (1.5) (1.0) (0.7)
Other income ......................................... 0.0 0.2 0.1
----- ----- -----
Income before income taxes ............................ 1.5 2.4 6.0
Provision for income tax ............................. 0.0 0.2 0.4
----- ----- -----
Net income ............................................ 1.5% 2.2% 5.6%
===== ===== =====
</TABLE>
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Year ended December 31, 1997 compared to year ended December 31, 1996.
Net sales. The Company reported net sales of $35.7 million for the year
ended December 31, 1997 compared to $23.2 million for the year ended December
31, 1996, an increase of $12.5 million or 54%. The majority of this increase was
attributable to an increase in business with existing customers, with the
balance attributable to the addition of new customers. In 1997, the Company had
four customers each of whom represented in excess of 10% of net sales, and
together represented an aggregate of 57% of net sales. In 1996, the Company had
three customers each of whom represented in excess of 10% of net sales, and
together represented an aggregate of 42% of net sales.
Costs of production. Costs of production were $26.9 million for 1997, as
compared to $17.6 million for 1996, an increase of $9.3 million or 53%. Costs of
production were approximately 75% of net sales for 1997, as compared to
approximately 76% of net sales for 1996. The decrease in costs of production as
a percentage of net sales was primarily a result of economies of scale resulting
from improved utilization of the Company's existing facilities.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $5.8 million for 1997 from
approximately $4.3 million for 1996, an increase of $1.5 million. The increase
was attributable to costs associated with the addition of personnel to support
future growth. As a percentage of net sales, selling, general and administrative
expenses decreased from approximately 18% for 1996 to approximately 16% for
1997, primarily reflecting greater economies of scale as the Company improved
the utilization of its existing facilities.
Depreciation and amortization. Depreciation and amortization expense was
$694,000 for 1997 as compared to $563,000 for 1996, an increase of $131,000 or
23%. The increase in depreciation and amortization expense was attributable to
the addition of equipment by the Company during 1997. In connection with the
Acquisition, the Company will record goodwill of approximately $10.9 million
which will result in additional amortization expense in the future of
approximately $272,000 per year.
Interest expense. Interest expense was $250,000 for 1997, as compared to
$234,000 for 1996, an increase of $16,000 or 7%. Such increase was largely
attributable to higher levels of borrowings during 1997. Interest expense
reflects interest on notes payable, capital lease obligations and on
utilizations of the line of credit with Summit Bank.
Other income. Other income included $35,000 for 1997, as compared to
$48,000 for 1996, a decrease of $13,000. Other income primarily reflected gains
on the sale of certain depreciated equipment.
Provision for income taxes. Provision for income taxes was $129,000 for
1997, as compared to $56,000 for 1996. The increase is attributable to higher
income generated during the period. As discussed above, upon termination of the
Company's S corporation status, the Company will become subject to federal and
additional state income taxes.
Net income. As a result of the aforementioned, net income increased to $2.0
million for 1997 from $502,000 for 1996, an increase of $1.5 million. As a
percentage of net sales, net income increased to 6% in 1997 from 2% in 1996.
Year ended December 31, 1996 compared to year ended December 31, 1995.
Net sales. The Company had net sales of $23.2 million for the year ended
December 31, 1996 compared to $17.3 million for the year ended December 31,
1995, an increase of $5.9 million or 34%. The majority of this increase was
attributable to an increase in business with existing customers, with the
balance attributable to the addition of new customers. In 1996, the Company had
three customers each of whom represented in excess of 10% of net sales, and
together represented an aggregate of 42% of net sales. In 1995, the Company had
two customers each of whom represented in excess of 10% of net sales, and
together represented an aggregate of 37% of net sales.
Costs of production. Costs of production were $17.6 million for 1996, as
compared to $12.9 million for 1995, an increase of $4.7 million or 37%. Costs of
production were approximately 76% of net sales for 1996, as compared to
approximately 74% of net sales for 1995. The decrease in costs of production as
a percentage of net sales was primarily a result of economies of scale resulting
from improved utilization of the Company's existing facilities.
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<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $4.3 million for 1996 from
approximately $3.4 million for 1995, an increase of $900,000 or 26%. The
increase was attributable to costs associated with the addition of personnel to
support future growth. As a percentage of net sales, selling, general and
administrative expenses decreased to approximately 18% for 1996 from
approximately 20% for 1995, reflecting economies of scale as the Company
increased facilities utilization.
Depreciation and amortization. Depreciation and amortization expense was
$563,000 for 1996 as compared to $498,000 for 1995, an increase of $65,000 or
13%. The increase in depreciation and amortization expense primarily reflects
the addition of equipment by the Company during 1996.
Interest expense. Interest expense was $234,000 for 1996 compared to
$257,000 for 1995, a decrease of $23,000 or 9%.
Other income. Other income included $48,000 for 1996 as compared to $2,000
for 1995. Other income primarily reflected gains on the sale of depreciated
equipment.
Provision for income taxes. Provision for income taxes was $56,000 for 1996
as compared to $6,000 for 1995. The increase is attributable to higher income
generated during the period.
Net income. As a result of the aforementioned, net income increased to
$502,000 for 1996 from $267,000 for 1995, an increase of $235,000 or 88%.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations, including working capital
and equipment acquisitions, using bank borrowings, vendor financing, financing
lease transactions, as well as from cash flow generated from operating
activities, and stockholder debt and equity contributions. As of December 31,
1997, the Company had net working capital of $728,000, as compared to a net
working capital deficit at December 31, 1996 of $867,000. Net cash provided by
operating activities was $1.5 million, $1.7 million and $594,000 for each of the
years ended December 31, 1997, 1996 and 1995, respectively. Net cash used in
investing activities was $797,000, $1.6 million and $254,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Net cash used in investing
activities was primarily attributable to the acquisition of property and
equipment, offset in part by the cash generated from the sale and leaseback of
certain equipment for $1.3 million in 1997. Net cash used in financing
activities totaled $1.1 million in 1997, as compared to net cash generated from
financing activities of $511,000 in 1996. In 1995, net cash used in financing
activities totaled $483,000. In 1997, cash was used in financing activities
primarily to repay indebtedness to related parties and to fund a dividend to the
Company's stockholders. In 1996, cash was provided by financing activities
primarily from the net incurrence of additional third-party indebtedness to
finance the acquisition of equipment and certain other assets. In 1995, cash was
used in financing activities primarily to pay a dividend to the Company's
stockholders, as well as to repay certain indebtedness.
On December 15, 1997, the Company entered into a new Loan and Security
Agreement with Summit Bank (the "Loan and Security Agreement"). The Loan and
Security Agreement provides for a $2.0 million revolving line of credit and a
$1.0 million three-year term loan facility. The revolving line of credit expires
on May 30, 1998. Borrowings under the line of credit and the term loan bear
interest at the bank's prime rate or, at the Company's option, LIBOR plus 2.25%
(8.5% at December 31, 1997). The debt is collateralized by substantially all of
the Company's assets. Among other things, the Loan and Security Agreement
restricts the Company's ability to incur additional indebtedness and requires
the Company to maintain certain financial ratios. As of December 31, 1997,
$300,000 was outstanding under the revolving line of credit and $1.0 million was
outstanding under the term loan facility. The Company intends to repay the term
loan facility with the proceeds of the Offering. As of December 31, 1997, the
Company had no commitments for capital expenditures.
As a result of the Acquisition, the Company will have additional debt
outstanding, including borrowings under Roda's existing credit facility with the
Bank of Scotland (the "Roda Facility") consisting of a $2.0 million (Pounds1.2
million) term loan and a $418,000 (Pounds250,000) revolving line of credit. The
line of credit is reviewed by the bank annually for renewal, but is payable on
demand. Borrowings under both
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<PAGE>
the term loan and the line of credit bear interest at the bank's base rate plus
2.50% (7.25% as of December 31, 1997). The debt is collateralized by
substantially all of Roda's assets. As of December 31, 1997, approximately
$357,000 (Pounds214,000) was outstanding on the credit facility and $1.6 million
(Pounds968,000) was outstanding under the term loan. The term loan is payable in
equal monthly installments through October 20, 2001.
The Company intends to seek to expand its operations through the
acquisition of additional businesses which provide commercial, digital and
time-sensitive printing services and through the expansion of its outsourcing
business. Such acquisitions could involve the issuance of additional securities
of the Company, the payment of cash, including proceeds from the Offering, or
the incurrence of debt. No assurances can be made that the Company will have
access to necessary financing to pursue its growth strategy. The Company
believes that the combination of the proceeds raised from the Offering, together
with internally generated funds, will provide sufficient cash to meet the
Company's capital and other cash requirements for the next twelve months.
YEAR 2000 ISSUES
In the year 2000, the Company's computer programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
The Company will be required to modify its purchased software program so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company has been informed that the vendor for the
purchased software is expected to release an upgrade to address the Year 2000
issue no later than December 31, 1998, which is prior to any anticipated impact
on the Company's operating systems. The cost of the upgrade to the Company is
included in its maintenance contract with its vendor and will not have a
material impact on the Company's future financial results.
The Company has had communications with all of its significant, large
customers and suppliers to determine the extent to which the Company's interface
systems are vulnerable to any failure by third parties to upgrade their own
software. The Company believes that its large customers and suppliers are
addressing the issues and will timely adjust their systems. However, if such
modifications are not made by the Company or its vendors or customers, or are
not completed in a timely manner, the Company's operations could be adversely
affected.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at December 31, 1997, include the following
Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will be
effective for the Company for the year ending December 31, 1998, is currently
anticipated to only impact the Company's financial statements related to the
reporting of translation gains and losses for the proposed acquisition of Roda.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
will require the Company to report financial information on the basis that is
used internally for evaluating segment performance and deciding how to allocate
resources to segments, which may result in more detailed information in the
notes to the Company's financial statements than is currently required and
provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
30
<PAGE>
BUSINESS
OVERVIEW
The Company provides a wide range of graphic communications services to
financial institutions and corporations, focusing on producing and distributing
time-sensitive analytical research and marketing materials and on providing
on-demand printing services. The Company, which commenced operations in 1989,
operates in select international markets through its facilities in the United
States and through alliances with Roda, its strategic partner in the United
Kingdom, and with its strategic partner in Hong Kong. The Company is a major
producer of financial research reports, having produced over 2 billion pages
during 1997. The Company provides services, on a non-exclusive basis, to 13 of
the top 20 investment banking firms in the United States as ranked by
Institutional Investor in October 1997.
Graphic communications services provided by the Company include digital
communications, document management, offset printing, digital printing, data
output, bindery, fulfillment services, mailing services and outsource services.
The Company prints brochures, booklets, confirmations of trade, client
statements and adhesive books to meet the daily, weekly and monthly needs of its
customers. To facilitate the rapid distribution of documents globally, the
Company has designed and implemented the World Research Link(TM), an array of
electronic data communication networks linking each of the Company's facilities
with its strategic operating partners and major customers. To date, the Company
has established extensive non-exclusive client relationships with leading
companies in the financial services, insurance and publishing industries,
providing certain of the printing and graphic communication needs of Credit
Suisse First Boston Corporation, Deutsche Morgan Grenfell, Goldman, Sachs & Co.,
Lehman Brothers Inc., Merrill Lynch & Co., Inc., The Prudential Insurance
Company of America, Empire Blue Cross/Blue Shield, New York Life Insurance
Company, and The McGraw-Hill Company, among others.
The Company has experienced significant growth, with net sales growing from
$17.3 million for the year ended December 31, 1995 to $35.7 million ($42.7
million pro forma for the Acquisition) for the year ended December 31, 1997 and
income from operations growing over the same period from $528,000 to $2.4
million ($3.2 million pro forma for the Acquisition), representing compounded
annual growth rates of 43.6% and 113.2%, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation." A
significant portion of this growth is attributable to the assimilation of
certain in-house printing operations of Goldman, Sachs & Co. and Empire Blue
Cross/Blue Shield. See "Graphic Communications Services -- Outsourcing
Services." The Company intends to continue to pursue its growth strategy by (i)
pursuing acquisitions and establishing strategic alliances to expand and
strengthen the Company's business reach in target markets worldwide, (ii)
pursuing outsourcing opportunities through the assimilation of in-house printing
operations of third-party businesses, (iii) expanding the scope and volume of
services offered, (iv) actively cross-selling existing or newly-added products
or services to its customers worldwide, and (v) improving the operating
efficiency of its existing operations. As part of its growth strategy,
concurrently with the closing of the Offering, the Company will acquire its
London-based strategic partner Roda. Roda provides printing and document output
and management services to financial services companies, primarily in the United
Kingdom and European markets.
The Company's senior officers have extensive experience in the graphic
communications services industry, having been employed by the Company for an
average of approximately 6 years and having an average of approximately 19 years
of industry experience. The Company's Chairman, President and Chief Executive
Officer, Michael R. Cunningham, founded the Company and has been actively
involved in the industry for over 15 years. Furthermore, based on the proven
track record of its experienced management team and the wide range of services
it provides, the Company is well-positioned to capitalize on the increasing
outsourcing trend as well as on consolidation opportunities in the industry.
INDUSTRY BACKGROUND
The Company estimates that the commercial printing and document production
market accounted for more than $80 billion in revenue in the United States and
over $10 billion in revenue in the United Kingdom in 1997, based upon
information from certain trade associations and other industry sources.
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The printing and document management business in the United States is highly
fragmented, with approximately 40,000 companies presently in operation, only
approximately 5% of which are estimated to have annual net sales in excess of $5
million. The Company believes that the commercial printing and document
production business is similarly fragmented in the United Kingdom and in certain
other markets.
The printing and document management industry has evolved significantly
over the last several years driven in large part by rapid advances in publishing
and electronic information technology. The Company believes that the growth of
the printing and document production industry has been due to various factors,
including (i) the increasing volume, complexity and variety of documents and
printed materials produced by businesses worldwide, (ii) the increasing demand
by businesses for the international dissemination of time-sensitive information,
and (iii) the growing trend of businesses to outsource their in-house printing
operations (e.g., print shops, copy centers and document management facilities)
to document professionals equipped to provide these services more efficiently
and cost-effectively.
BUSINESS STRATEGY
The Company believes that the fragmented nature of the graphic
communications industry and the limited capital resources available to many
small, private operators provide the Company with significant opportunities to
expand its base of operations. The Company intends to continue its growth
strategy by (i) pursuing acquisitions and establishing strategic alliances to
expand and strengthen the Company's business reach in target markets worldwide,
(ii) pursuing outsourcing opportunities through the assimilation of in-house
printing operations of third-party businesses, (iii) expanding the scope and
volume of services offered, (iv) actively cross-selling existing or newly-added
products or services to its customers worldwide, and (v) improving the operating
efficiency of its existing operations.
Pursue Acquisitions and Establish Strategic Alliances
The Company will seek to acquire complementary operations throughout the
United States, United Kingdom and other international markets which, the Company
believes, possess attractive characteristics, including concentrations of
prospective customers with significant printing needs, such as financial
institutions. The Company will typically target acquisition candidates with (i)
annual net sales ranging from $3.0 to $15.0 million; (ii) attractive growth
prospects within their respective markets; (iii) complementary technological
capabilities; (iv) opportunities for economies of scale and synergies with the
Company; (v) solid reputation with established customer relationships; and (vi)
an experienced management team. The Company may also seek to make "tuck-in"
acquisitions as a means to expand its existing operations, add product lines and
services as well as expand its customer base.
The Company will also seek to establish additional alliances with strategic
partners in targeted geographic markets. This incremental approach to growth
enables the Company to expand the scope of its operations without the need for
substantial capital investments while mitigating the risks associated with
start-up facilities in new markets. In addition, the Company believes that such
relationships foster significant cross-selling opportunities across each
partners' respective customer bases. The Company believes that such alliances
also provide for future acquisition opportunities. Pursuant to this strategy,
the Company initially established an alliance with Roda, a United Kingdom-based
printing company. As part of its growth strategy, the Company recently entered
into an agreement to acquire Roda, thereby solidifying the Company's presence in
the United Kingdom and European printing markets. See "The Company -- The Roda
Acquisition," "Graphic Communications Services -- Time Sensitive Printing," and
"International Network."
Expand Provision of Outsourcing Services
To date, the Company has grown, in part, through the assimilation of
certain in-house printing operations of third-party businesses, including the
print shop and data output center of Goldman, Sachs & Co. and the print shop of
Empire Blue Cross/Blue Shield. The Company believes that it is a cost
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<PAGE>
effective and an efficient provider of a wide range of in-house printing
services. The Company typically provides outsourcing services by assuming all or
part of the document output and distribution responsibilities previously
performed by a customer's in-house operations. In some instances, the Company
may take over the management of a customer's in-house operations. See "Graphic
Communications Services -- Outsourcing Services."
Expand the Scope and Volume of Services Offered
The Company intends to continue to expand the scope and volume of services
provided to its customers through the addition of complementary products and
services. The Company also continually evaluates opportunities to add new
equipment to its existing facilities or enhance its current technology in order
to satisfy the evolving needs of its customer base. In addition, the Company
regularly evaluates opportunities to add capacity to its existing operations to
meet any anticipated increase in demand of its larger customers.
Capitalize on Cross-Selling Opportunities
The Company also intends to actively cross-sell existing and newly-added
products or services to its customers worldwide. By leveraging on the wide range
of products and services offered through both its own facilities and those of
its strategic partners in complementary geographic markets, the Company believes
that it can better serve the needs of international customers by offering a
"one-stop shopping" approach to satisfying international printing needs. In
addition, the Company also believes that it can cultivate new customer
relationships as a result of introductions made by its strategic partners whose
respective customers may require printing output in the United States or other
markets served by the Company. The Company believes that its ability to
cross-sell the products and services of its international alliance provides it
with a distinct competitive advantage. See "Graphic Communications Services --
Time Sensitive Printing" and "International Network."
Improve Efficiency of its Existing Operations
Central to the Company's business strategy is to improve the profitability
of its operations by maximizing the efficiency of its existing facilities while
actively managing its operating and administrative costs. The Company believes
that significant economies of scale may be achieved by leveraging its
underutilized daytime production capacity through the increase of
non-time-sensitive business. A significant portion of the Company's
time-sensitive business is currently processed overnight, resulting in available
daytime capacity. The Company also expects to achieve significant economies of
scale in conjunction with its acquisition strategy. In this regard, the Company
expects to (i) consolidate duplicative functions or facilities of newly-acquired
businesses; (ii) leverage its purchasing power with its suppliers and employee
benefit providers; and (iii) use its communication network to improve the
coordination of production, maximize equipment utilization and enhance delivery.
GRAPHIC COMMUNICATIONS SERVICES
Time-Sensitive Services
The Company's primary business focuses on the production of time-sensitive
documents for major financial institutions and corporations. The Company offers
a wide range of time-sensitive services including the printing, assembly and
dissemination of folders, booklets and adhesive books on a daily, weekly and
monthly basis. The Company also prints prospectuses, annual and semi-annual
reports for mutual funds customers.
Typically, the Company converts electronic data received from its customers
on a daily basis into tailored analytical research reports which are printed and
delivered to the Company's customers prior to the start of the next business
day. The Company's production processes include digital communications, offset
and digital printing, multiple binding procedures, branch fulfillment, list
maintenance and prompt distribution. The Company's technological capabilities
enable it to produce colorful, attractive products.
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<PAGE>
In addition, the Company's World Research Link(TM) network enables the Company
to print and distribute these documents, in conjunction with its strategic
partners, contemporaneously throughout several international locations. See
"International Network."
The demand for printed research and other time-sensitive reports has
continued to grow despite continuing developments in electronic data
transmission, such as the Internet, which provide customers with alternative
methods of transmitting time-sensitive information. The Company expects that the
demand for time-sensitive printed documents will continue to grow due to (i) the
increasing globalization of its customers, particularly financial institutions,
(ii) the growth and expansion of international capital markets and (iii) the
increasing volume, complexity and variety of document and printed materials. The
Company believes that printed research reports not only serve as information
tools, but serve as marketing tools as well. As such, the Company believes that
customers will continue to demand high quality and colorful research reports as
they seek to distinguish themselves in their own competition for clients.
Outsourcing Services
The Company typically provides outsourcing services by assuming all or part
of the document output and distribution responsibilities previously performed by
a third party's in-house operations. This service often enables such third party
to focus on its core business and to close all or portions of its in-house print
shop and/or document management and copy centers and permits the Company to
operate and perform all services on a remote basis. Such third party can also
achieve significant cost savings on the cost of technology, material and
services such as paper and shipping by taking advantage of the bulk purchase
arrangements which the Company has with its suppliers. Thereafter, the third
party may transmit computer-generated data to one of the Company's production
and printing facilities, which then processes, produces and distributes all of
the reports, statements and other computer-output documents on an as needed
basis. The Company believes that it can operate print shop, document management
and copy center functions more efficiently and cost effectively than can a
non-graphic communications company.
The Company has an established track record of assimilating into its
existing operations the assets and workforce of third-party in-house print
operations, including its assimilation of the print shop and data output center
of Goldman, Sachs & Co. and the print shop of Empire Blue Cross/Blue Shield. In
each of the foregoing transactions, the Company acquired selected equipment and
inventory on favorable terms and retained a majority of the employees.
Data Output Services
The Company also provides a variety of data output services, including the
production of trade confirmations and brokerage and investment account
statements for a major financial institution. In addition, the Company provides
certain database management services to its customers, including the ability to
output data files of addresses directly onto envelopes or other printed
material, insert flyers and other materials into mailings as well as to offer
presorting of first class mail with bulk postal drop services.
Commercial Printing
The Company produces a broad range of commercial printing products that
include catalogs, directories, brochures, booklets, folders, newsletters,
flyers, sales and marketing kits and manuals. The type of printing varies from
simple one color documents to complex multi-color documents on a wide range of
paper stocks. The Company's customers for commercial printing products include
its financial institution clients, insurance companies, healthcare and
pharmaceutical companies and trade associations. The Company also provides
"overflow" printing for a number of in-house print operations of investment
banking firms. Given the non-time-sensitive nature of many of these projects,
the Company typically produces these products during non-critical daytime hours.
The Company expects to continue to increase the volume of daytime commercial
printing to take advantage of its available non-time-sensitive production
capacity. See "Sales and Marketing."
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PRINTING OPERATIONS
The Company provides a broad range of graphic communications services for a
wide variety of commercial purposes. These services commence with the intake of
data, and continue through the prepress and press processes, binding, and
conclude with fulfillment and distribution. The Company continuously reviews its
printing equipment needs and evaluates advances in computer hardware, software
and peripheral equipment, computer networking and telecommunications systems as
they relate to the Company's operations.
Telecommunications and Order Entry
The Company's capital investment in state-of-the-art telecommunications and
customer on-line ordering systems allows the Company to offer its services
internationally and throughout its customers' organizational network. In lieu of
manual delivery of customer data files or artwork, the Company's
telecommunications capabilities allow it to receive direct transmission of
files, saving both time and expense while increasing quality of the work
produced.
Customers have many alternatives for sending electronic files to the
Company. Using a modem, customers can contact the Company's private and secure
electronic bulletin board, log-in and transmit or access data files. For
customers with advanced telecommunications requirements, the Company offers ISDN
line communication capability. For some of the Company's most significant
customers, specialized equipment, such as fractional T1 lines have been
installed. Customers having Internet access may use available File Transfer
Protocol ("FTP") and World Wide Web applications to send and receive data in a
secure manner. Secure router-based connections through proxy servers allow the
Company to control traffic and direct files containing the text and graphics of
research reports, marketing materials, mailing lists, order entry, job tickets
and work orders, internationally through the World Research Link(TM). In
addition, the Company has developed a customized order entry system. This system
links the customer with the Company and can be accessed by customers through
desk-top computers, thereby permitting customers to create an order while
submitting digital files.
Prepress Operations
At each of its facilities, the Company operates a prepress department that
prepares customer-supplied text, data, artwork and images for document
production. Using computerized prepress equipment, the Company processes digital
files, scanned images and graphics into "composed electronic files." These
electronic files are used with a variety of output options, including digital
printing, conventional offset printing or for electronic publishing, such as on
the Internet. In addition, the Company can distribute composed electronic files
that include text and graphics in various formats through the World Research
Link(TM) to other facilities for document production. See "International
Network."
The Company believes that enhanced digital printing technology will further
facilitate multi-purpose uses by its customers of the same electronic files.
Digital printing technology will augment the Company's ability to return to the
customer a printed document plus a reformatted document which can then be used
on multiple media platforms including the Internet, the customer's intranet,
multiple on-line information services and broadcast faxing.
Press Operations
The Company operates 12 presses in its Jersey City facility, seven of which
are web presses and five of which are sheet-fed presses. The Company also
operates five presses in its Manhattan facility, two of which are web presses
and three of which are sheet-fed presses. In London, Roda operates 10 presses,
all of which are sheet-fed presses. The Company's presses vary in size and speed
and can produce printed materials that range in page size, type of paper, number
of pages and the amount of color required.
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<PAGE>
The Company currently has four digital presses, one located in Jersey City
and three in New York City, and intends to add digital press capability in
London. Two of the Company's digital presses have in-line binding attachments
which allow for the production of finished booklets. These presses are linked
directly to the Company's computerized network and are currently being utilized
for the production of research reports, personalized health care documents,
confirmations of trade, client statements and general print products. The
Company has developed the ability to provide digital printing services as a
complement to offset printing. For smaller runs, digital printing is more
efficient and reliable than printing on traditional presses and often results in
a product of higher quality and better resolution. Digital printing involves the
integration of a variety of systems that compile data, scan images, and compose
data and images. Through high-speed computers, data may be received directly
from customers and put directly on the press, eliminating the costly
intermediate steps involved in the traditional printing process.
Binding Services
At each facility, the Company operates a bindery department which provide
various finishing services. The Company's finishing services include cutting and
folding, saddle stitching, punching, collation and inserting, and at the Jersey
City facility, perfect binding and shrink-wrapping. By offering a variety of
finishing services, the Company can offer its clients expeditious service as
well as a wide range of finishing service options.
Fulfillment Services
At each facility, the Company also operates a fulfillment department. Many
of the documents prepared for customers need to be stored for future
distribution, both electronically and physically. The Company's fulfillment
department stores materials and assembles orders for distribution upon customer
request. Printed components are assembled into kits and are packed individually,
or in bulk, for delivery. Upon completion of the order, the fulfillment system
relieves the distribution from the customer's inventory and generates an
activity report for inventory control. For those customers who require mail
distribution, the Company operates a mailing department in each location. Using
inkjet and cheshirre labeling machines, electronic mailing lists are addressed
on envelopes. Documents are inserted into envelopes, sealed and sorted for mail.
Management Information System
The Company's personnel utilize a comprehensive and integrated management
information system which gathers data from all departments and provides
management with job status and historical information. The system is divided
into several fully integrated modules consisting of estimating, production,
purchasing, inventory and accounting modules. This system gives management the
ability to monitor all work orders and department costs against budgets and
profit goals. Using this system, management can also track the status of a
particular work order as it moves through the production process. The system
permits the Company to (i) determine the most efficient and cost-effective means
of completing particular work orders, (ii) give customers pricing estimates
quickly, (iii) measure pressroom efficiency and waste, (iv) analyze buying
patterns, pricing and usage for inventory control purposes and (v) produce
customized financial statements, reports and analyses.
INTERNATIONAL NETWORK
In 1994, the Company, in conjunction with its strategic partners, developed
an international network known as the World Research Link(TM) designed to
facilitate the expeditious distribution of time-sensitive financial research
reports throughout select international financial markets, 24 hours a day.
Through the use of high speed electronic links among the Company's facilities in
the United States and its strategic partners in the United Kingdom and Hong
Kong, the Company is able to print research reports concurrently throughout
these three principal international financial markets.
The Company's strategic partner in the United Kingdom is Roda, a leading
research report printer established in 1976. Roda's principal customers include
the London branches of numerous major international financial institutions,
including Credit Suisse First Boston Corporation and Lehman
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<PAGE>
Brothers Inc., as well as other major international institutions, such as J.
Henry Schroder & Co. Limited, Indosuez W.I. Carr Securities Ltd. and ABN-AMRO
Hoare Govett. Concurrently with the Offering, the Company will acquire Roda and
will subsequently seek to integrate its operations within the Company.
The Company's strategic partner in Hong Kong is Workable Co. Ltd.
("Workable"), a leading research report printer established in 1988. Workable's
principal customers include the Hong Kong branches of numerous major
international financial institutions, including Credit Suisse First Boston
Corporation, Merrill Lynch & Co., Inc. and Indosuez W.I. Carr Securities Ltd.
Workable maintains around-the-clock operations and provides overnight shipments
to other principal financial centers throughout Asia. Workable has invested in
state-of-the art printing and data communications technology to facilitate the
receipt and distribution of electronic data files and Japanese data
transmissions. The Company and Workable have implemented a joint marketing plan
which provides the Company with potential cross-selling opportunities to
Workable's customers who maintain operations in New York and London.
The Company intends to continue to expand its World Research Link(TM)
through the establishment of additional strategic alliances throughout Europe,
South America and Asia. The Company regards its international relationships as
cross-selling opportunities and intends to develop additional joint marketing
alliances whereby the Company and its strategic partners each expect to derive
business from their respective customers' operations in various international
markets.
SALES AND MARKETING
The Company's marketing activities are handled primarily through its own
sales force consisting of nine individuals, a few of whom hold management
positions. Following the Acquisition, the Company will have two salesmen in
London. The Company's sales representatives are generally organized among
customer industry groups, such as financial services, healthcare and insurance
and by specific printing and document output services, such as research reports
and on-demand mutual fund reports and commercial printing. In addition, the
Company employs customer service representatives to provide on-going support to
existing customers and to oversee the implementation of new customer projects.
The Company currently has approximately 350 customers in the United States,
including financial institutions, healthcare companies, trade organizations and
retail and manufacturing firms. The Company's four largest customers, Goldman,
Sachs & Co., The Prudential Insurance Company of America, Credit Suisse First
Boston Corporation and Merrill Lynch & Co., Inc. accounted for approximately
24%, 13%, 10% and 10% respectively, of the Company's net sales for the year
ended December 31, 1997. After giving effect to the Acquisition, the Company's
four largest customers, Goldman, Sach & Co., Credit Suisse First Boston
Corporation, Lehman Brothers Inc., and The Prudential Insurance Company of
America, accounted for approximately 20%, 12%, 11% and 11%, respectively, of the
Company's net sales on a pro forma basis for the year ended December 31, 1997.
In 1997, Roda's largest customers were Lehman Brothers Inc. and Credit
Suisse First Boston Corporation, which accounted for approximately 25% and 22%,
respectively, of its sales. Roda's next three largest customers in London were
J. Henry Schroder & Co. Limited, Indosuez W.I. Carr Securities Ltd. and ABN-AMRO
Hoare Govett. Combined, these five customers accounted for approximately 86% of
Roda's sales during 1997.
The Company believes that its quality of its work product, timeliness of
performance, on-going customer support and its ability to customize services to
serve specific client needs have contributed to its record of successful
customer retention. The Company encourages its major customers to enter into
service contracts specifying certain types of business for a defined period. The
Company believes that such contracts enable it to improve its order flow and
provides it with a more predictable volume of business. The Company intends to
add sales representatives and customer support staff to further increase its
customer base in additional markets and to augment its volume of non-financial
commercial printing.
COMPETITION
The commercial printing and document production industry is highly
competitive. The Company competes with a variety of companies, many of which
possess significantly greater financial and other resources than the Company. In
the New York market, the Company competes with Bowne & Co., R.R.
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<PAGE>
Donnelly, Xerox Business Services, Big Flower Press Holdings, Inc. and Merrill
Corporation, and numerous smaller operations, in the printing of time-sensitive
documents. Roda's major competitor in the London market is Williams Lea Ltd. (a
strategic partner of Bowne & Co.).
The Company believes that the principal competitive factors in providing
printing and document output services include technological expertise, quality
and accuracy, turnaround time, fulfillment, price, reliability, security of
service, reputation, client industry expertise, capacity and personalized
customer support and service. No assurances can be given that the Company will
be able to compete effectively against the larger companies in the printing
industry.
GOVERNMENTAL REGULATION
Under various environmental laws, ordinances and regulations in effect in
the United States, a current or previous owner or operator of real property may
be held liable for the cost of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose clean-up responsibility and liability whether or not the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances, and liability under such laws has been interpreted to be joint and
several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. Existing laws of a similar nature in the United
Kingdom will be replaced and strengthened when new laws for the remediation of
contaminated land become effective. These laws will impose clean-up
responsibility on a proportionate basis. Primary clean-up responsibility will be
imposed on those who caused or knowingly permitted the presence of the hazardous
or toxic substances. If no such persons can be found, then the current owner or
occupier may have clean-up responsibility. The costs of any required remediation
or removal of hazardous or toxic substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations in the United States, an owner,
operator or an entity that arranges for the disposal of hazardous or toxic
substances, such as asbestos-containing materials, at a disposal site may also
be liable for the costs of any required remediation or removal of the hazardous
or toxic substances at the disposal site. In the United Kingdom, laws and
regulations require the owner or operator disposing of such substances to ensure
disposal at a properly licensed disposal site. Failure to do so is a violation
of law. In connection with the ownership or operation of its properties, the
Company could be liable for these costs, as well as certain other costs,
including governmental fines and injuries to persons or properties. As a result,
the presence, with or without the Company's knowledge, of hazardous or toxic
substances at any property held or operated by the Company, or acquired or
operated by the Company in the future, could have an adverse effect on the
Company's business, financial condition and results of operations. No assurance
can be given that existing environmental audits with respect to any of the
Company's properties reveal all environmental liabilities. In addition, the
Company's activities are also governed by laws and regulations affecting the
health and safety of its employees, including the United States Occupational
Safety and Health Act ("OSHA") and the United Kingdom Health and Safety at Work
etc. Act 1974 and the numerous regulations issued under it. Among other things,
these laws and regulations require the Company to obtain and maintain licenses
and permits and carry out risk assessments in connection with its operations.
This extensive regulatory framework imposes significant compliance burdens and
risks on the Company. Failure to comply with applicable laws, rules or
regulations or permitting requirements could subject the Company to civil
remedies, including fines and injunctions, as well as possible criminal
sanctions, which would have a material adverse effect on the Company.
LITIGATION
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. Management believes that none of the legal
proceedings currently outstanding will have a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE>
FACILITIES
The Company leases approximately 110,000 square feet of office and
production space at its principal location in Jersey City, New Jersey under a
lease which expires on February 29, 2000. The Company also subleases
approximately 25,000 square feet of production space in Manhattan from Goldman,
Sachs & Co. under an agreement which expires December 30, 1999. In the Southwark
area of London, Roda leases approximately 8,000 square feet of office and
production space under an agreement which expires on the date five years
subsequent to the closing of the Acquisition and leases nearby warehouse space
under a lease which expires September 28, 2000.
EMPLOYEES
As of December 31, 1997, the Company had approximately 370 employees in the
United States, all of which were employed on a full-time basis. As of such date,
255 United States-based employees were members of the United Paperworkers
International Union, with which the Company has a memorandum of agreement which
expires on June 30, 2000. As of December 31, 1997, Roda had approximately 50
full-time employees, of which approximately 30 were members of the National
Graphical Association, a labor union in the United Kingdom. The Company believes
that it is in compliance with its labor agreements and that its labor relations
are good.
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<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each of the
Company's directors, executive officers, designees to the Board of Directors who
will become directors following the consummation of the Offering and a key
employee of Roda:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ----------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Directors and Executive Officers
Michael R. Cunningham ............. 38 Chairman of the Board, President and Chief
Executive Officer
Gordon Mays ....................... 41 Director and Executive Vice President
Timothy Mays ...................... 39 Executive Vice President of Sales; Secretary
Robert Needle ..................... 39 Chief Operating Officer
Robert M. Okin* ................... 52 Senior Vice President and Chief Financial Officer
Ioannis Lykogiannis ............... 46 Senior Vice President, Operations
Peter L. Furlonge ................. 45 Managing Director of Roda
James J. Cunningham ............... 40 Director
Designees to the Board of Directors
Arnold Spinner** .................. 63 Director Designee
Norman R. Malo** .................. 47 Director Designee
Laurence Gerber** ................. 41 Director Designee
Stanley J. Moss** ................. 68 Director Designee
</TABLE>
- ----------
* Mr. Okin will join the Company on April 6, 1998 as Senior Vice President and
Chief Financial Officer.
** Upon consummation of the Offering, it is anticipated that Messrs. Spinner,
Malo, Gerber and Moss will become directors.
Directors and Officers
Michael R. Cunningham, the principal founder of the Company, has been the
President and Chief Executive Officer of the Company since its inception. He has
spent his entire professional career in the printing and document production
industry. He also teaches Quality Control at the Center for Graphic
Communications Management and Technology of New York University. Mr. Cunningham
has a Masters Degree in Graphic Communications, Management and Technology from
New York University.
Gordon Mays has served as a director and Executive Vice President of the
Company since 1991. He is presently responsible for marketing and business
development and is also responsible for overseeing the Company's management
information services departments, including overseeing cost control measures and
governmental compliance. He has spent his entire professional career in the
printing and document production industry. From 1977 to 1991, Mr. G. Mays was
employed by Latham Process Corporation where he was responsible for production
and sales.
Timothy Mays has served as Executive Vice President of Sales and Secretary
of the Company since 1991. He presently oversees sales to major corporate
clients. He has spent his entire professional career in the printing and
document production industry. From 1979 to 1991, Mr. T. Mays was employed by
Latham Process Corporation where he was engaged in sales. Messrs T. Mays and G.
Mays are first-cousins.
Robert Needle joined the Company in 1995 and has served as Chief Operating
Officer of the Company since February 1998. Mr. Needle has served in various
capacities for the Company since 1995, including Co-Chief Operating Officer from
January 1997 to February 1998. He is responsible for all operations of the
Company. He has spent his entire professional career in the printing and
document production industry. From 1988 to 1995, Mr. Needle was employed by
Goldman Sachs & Co., first as Art Director of the Graphics Department and then
as Manager of Print Operations.
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<PAGE>
Robert M. Okin will join the Company in April 1998 as Senior Vice President
and Chief Financial Officer. Mr. Okin has held senior executive positions in the
printing industry for 24 years. Since June 1997, he has been Vice President and
Chief Financial Officer of Applied Printing Technologies, L.P. In 1995, he was
employed by The Corporate Printing Company, an international financial printing
company, as Executive Vice President and Chief Financial Officer, and remained
with its successor, Merrill Corporation, until 1997. From 1993 to 1994, he was
Senior Vice President and Chief Financial Officer of The Berkline Corporation.
Prior thereto, he held senior financial officer positions with Webcraft
Technologies, Inc. and Polychrome Corporation. Mr. Okin is licensed as a
certified public accountant in the State of New York.
Ioannis Lykogiannis has served as Senior Vice President, Operations of the
Company since 1995. Mr. Lykogiannis has served in various capacities for the
Company since 1991, including Plant Manager from 1991 to 1995. He is responsible
for all internal production operations of the Company. From approximately 1984
to 1991, Mr. Lykogiannis was employed by Latham Process Corporation, most
recently as a Plant Production Manager.
Peter L. Furlonge has been an executive officer of Roda since 1989 and its
Managing Director since 1995. Prior to his employment by Roda, he was a
financial officer for various construction companies, including Foster Wheeler
in South Africa, where he was a manager of financial accounting. Mr. Furlonge is
a Qualified Chartered Secretary in England.
James J. Cunningham has been a Director of the Company since 1989. He has
been engaged in the private practice of law in San Diego, California since 1987,
and specializes in workers compensation and labor and employment law. Mr.
Cunningham is the brother of Michael R. Cunningham, the Chairman of the Board,
President and Chief Executive Officer of the Company.
Designees to the Board of Directors
It is expected that upon the consummation of the Offering, each of the
following individuals will become directors of the Company:
Arnold Spinner, Ph.D, has been the Director of the Center for Graphic
Communications Management and Technology of New York University since 1984. He
has held various teaching and administrative positions at New York University
since 1965.
Norman R. Malo has been President and Chief Operating Officer of National
Financial Services Corporation, a subsidiary of Fidelity Investments since
November 1997. From 1993 to November 1997, he was a Managing Director in the
Trading Services Division of Lehman Brothers Inc. From 1991 to 1993, he was a
Director of Corporate Services/Human Resources with Shearson Lehman Brothers.
Laurence Gerber is Chairman and Chief Executive Officer of Epoch Senior
Living, Inc., which he co-founded in late 1997. Prior thereto, since 1991, he
was President and Chief Executive Officer of Berkshire Group. From 1991 to 1997
he was also President and Chief Executive Officer of Berkshire Realty Co., Inc.
(NYSE). From June 1996 to October 1997 he was a director and member of the
executive committee of Harborside Healthcare Corporation (NYSE).
Stanley J. Moss is a lawyer engaged in the solo practice of law since 1992.
From 1992 to 1994 he acted as corporate counsel to Brenner Securities
Corporation. Prior thereto he was of counsel to the law firm Katten, Muchin &
Zavis. From 1987 to 1990 he was employed as a Senior Vice President, Secretary
and Corporate Counsel by Drexel Burnham Lambert Inc. From 1993 to 1997 he was a
trustee of Mid-Atlantic Realty Trust (NYSE) and from 1992 to 1995 he was a
director of Ground Round Restaurants, Inc. (NASDAQ NMS).
Key Employees
Robert M. Zanisnik has served as Senior Vice President of the Company since
he joined the Company in 1995. He is responsible for all production and customer
service activities of the Company. From 1970 to 1995, Mr. Zanisnik was employed
by The Prudential Insurance Company of America, most recently as a Manager of
Print Operations.
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<PAGE>
Kenneth G. Hay has served as Vice President of Finance of the Company since
February 1998. Mr. Hay has served as a principal financial officer of the
Company since he joined the Company in 1997. Prior to joining the Company,
during the period 1992 through 1996, he was Vice President Finance and Chief
Financial Officer of Dana Perfumes Corporation. He is licensed as a certified
public accountant in the State of New Jersey.
George Leos has served as Vice President, Production of the Company since
1995. Mr. Leos has served in various capacities for the Company since 1992,
including Production Supervisor from 1992 to 1995. He is responsible for all
scheduling and production planning of the Company. From approximately 1971 to
1992, Mr. Leos was employed by Latham Process Corporation, most recently as a
Production printing Superintendent.
Richard Monica has served as the controller of the Company since 1991.
Prior thereto, and since 1987, Mr. Monica served as controller of Kenny Press,
Inc., a commercial printer. From 1976 through 1988, he served as an assistant
accounting manager at Automatic Switch, a division of Emerson Electric, Inc.
Classified Board
Effective upon the closing of the Offering, the Company will implement a
staggered Board of Directors consisting of three classes, with each class
containing, as nearly as practicable, an equal number of directors. Messrs.
Spinner, Gerber and Moss will be Class A Directors, for a term expiring at the
1999 Annual Meeting of Stockholders, Messrs. Malo and James J. Cunningham will
be Class B Directors, for a term expiring at the 2000 Annual Meeting of
Stockholders, and Messrs. Gordon Mays and Michael R. Cunningham will be Class C
Directors, for a term expiring at the 2001 Annual Meeting of Stockholders.
Commencing with the 1999 Annual Meeting of Stockholders, directors of one class
will be elected for a three year term. See "Description of Securities --
Staggered Board of Directors."
Executive officers serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has created two committees, the Audit
Committee and the Compensation Committee. The members of the committees will be
designated following the consummation of the Offering. It is anticipated that
Messrs. Spinner, Malo and Moss will comprise the Audit Committee and that
Messrs. Malo, Spinner and Gerber will comprise the Compensation Committee. The
Audit Committee periodically reviews the Company's auditing practices and
procedures and makes recommendations to management or to the Board of Directors
as to any changes to such practices and procedures deemed necessary from time to
time to comply with applicable auditing rules, regulations and practices, and
recommends independent auditors for the Company to be elected by the
stockholders. A majority of the members of the Audit Committee will be outside
directors. The Compensation Committee meets periodically to make recommendations
to the Board of Directors concerning the compensation and benefits payable to
the Company's executive officers and other senior executives and administers the
Company's stock option plan for employees. See "Stock Option Plans."
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid or accrued by the
Company for services rendered in all capacities for the Chief Executive Officer
and the four most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers") during the fiscal year ended
December 31, 1997.
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<PAGE>
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
- ------------------------------------ ------ ----------- ---------- ----------------------
<S> <C> <C> <C> <C>
Michael R. Cunningham,
President and Chief
Executive Officer 1997 $347,798 -- --
1996 $324,314 -- --
1995 $305,476 -- --
Gordon Mays,
Executive Vice President 1997 $170,664 $40,775 --
1996 $153,448 -- --
1995 $134,632 -- --
Timothy Mays,
Executive Vice President of Sales 1997 $230,150 $36,638 --
1996 $221,137 -- --
1995 $266,650 -- --
Robert Needle,
Chief Operating Officer 1997 $159,116 $25,000 --
1996 $133,251 $15,000 --
1995 $ 95,231 -- --
Ioannis Lykogiannis,
Senior Vice President 1997 $111,690 $14,234 --
1996 $101,336 $ 1,500 --
1995 $ 88,933 -- --
</TABLE>
Pursuant to their employment agreements, each of Messrs. Cunningham, G.
Mays, T. Mays, Needle and Lykogiannis will receive base salaries of $250,000,
$175,000, $150,000, $155,000 and $119,000, respectively following the completion
of the Offering. See "Employment Agreements."
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company receives an annual retainer of $6,000 and an additional fee of
$1,000 for each day's attendance at a Board of Directors meeting and/or
committee meeting or $500 for participation in a telephone conference meeting.
Under the Company's Directors' Stock Option Plan, each non-employee Director has
been granted an option to acquire 15,000 shares of Common Stock at the initial
public offering price and will automatically receive options to acquire 4,000
shares of Common Stock each year, commencing in 1999. See "Stock Option Plans --
The Directors' Stock Option Plan." Directors of the Company are reimbursed for
out-of-pocket expenses incurred in their capacity as directors of the Company.
OPTION GRANTS IN LAST FISCAL YEAR
During the year ended December 31, 1997, there were no stock options
granted to the Named Executive Officers.
EMPLOYMENT AGREEMENTS
Michael R. Cunningham, Gordon Mays, Timothy Mays, Robert M. Zanisnik,
Robert Needle, Robert M. Okin and Ioannis Lykogiannis have entered into
employment agreements with the Company which are effective upon the consummation
of the Offering. Mr. Furlonge will enter into a new employment agreement with
the Company which will become effective upon the closing of the Acquisition.
The agreement with Mr. Cunningham is for a term of three years. He is
employed as President and Chief Executive Officer of the Company with general
supervisory authority of the business of the Company and its subsidiaries and is
charged with the responsibility of preparing and implementing a strategic plan
and seeking out and consummating acquisitions, in accordance with policies set
by the Board of Directors. Pursuant to his employment agreement, Mr. Cunningham
is paid an annual salary
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<PAGE>
of $250,000, which may be increased from time to time at the discretion of the
Board of Directors. He is also entitled to an annual bonus in an amount
determined by the Compensation Committee based upon the realization of the
Company's goals during such year.
The agreement with Mr. G. Mays is for a term of three years. He is employed
as Executive Vice President of the Company with responsibility for marketing,
business development and information systems. Pursuant to his employment
agreement, Mr. G. Mays is paid an annual salary of $175,000, which may be
increased from time to time at the discretion of the Board of Directors. He is
also entitled to an annual bonus in an amount determined by the Compensation
Committee based upon the realization of the Company's goals during such year.
The agreement with Mr. T. Mays is for a term of three years. He is employed
as Executive Vice President of Sales of the Company with responsibility for
overseeing major corporate accounts and identifying new customers. Pursuant to
his employment agreement, Mr. T. Mays is paid an annual salary of $150,000,
which may be increased from time to time at the discretion of the Board of
Directors. He is also entitled to an annual bonus in an amount determined by the
Compensation Committee based upon the realization of the Company's goals during
such year and to commissions on net sales to certain customers of the Company.
The agreement with Mr. Needle is for a term of three years. He is employed
as Chief Operating Officer of the Company with responsibility for all
manufacturing and customer service operations. Pursuant to his employment
agreement, Mr. Needle is paid an annual salary of $155,000, which may be
increased from time to time at the discretion of the Board of Directors. He is
also entitled to an annual bonus in an amount determined by the Compensation
Committee based upon the realization of the Company's goals during such year and
to commissions on net sales to certain customers of the Company.
The agreement with Mr. Okin has a term of one year, beginning April 6,
1998. He will be employed as Senior Vice President and Chief Financial Officer
of the Company with supervisory authority over the finance, human resources and
management information services departments of the Company. Pursuant to his
employment agreement, Mr. Okin is paid an annual salary of $145,000, which may
be increased from time to time at the discretion of the Board of Directors. He
is also entitled to an annual bonus in an amount determined by the Compensation
Committee based upon the realization of the Company's goals during such year.
The agreement with Mr. Lykogiannis is for a term of three years. He is
employed as a Senior Vice President, Operations of the Company with
responsibility for all internal production operations. Pursuant to his
employment agreement, Mr. Lykogiannis is paid an annual salary of $119,000 which
may be increased from time to time at the discretion of the Board of Directors.
The agreement with Mr. Zanisnik is for a term of three years. He is
employed as a Senior Vice President of the Company with responsibility for all
production and customer service activities. Pursuant to his employment
agreement, Mr. Zanisnik is paid an annual salary of $88,000, which may be
increased from time to time at the discretion of the Board of Directors. He is
also entitled to an annual bonus in an amount determined by the Compensation
Committee based upon the realization of the Company's goals during such year and
to commissions on net sales to certain customers of the Company.
The agreements with each of Messrs. Cunningham, G. Mays, T. Mays, Zanisnik,
Needle and Lykogiannis are automatically extended for additional periods of one
year effective on the second anniversary of the commencement date and on each
anniversary thereafter (the "Renewal Date") unless the Company gives notice to
the contrary at least six months prior to the Renewal Date. The agreement with
Mr. Okin is automatically extended for additional periods of one year unless the
Company gives notice to the contrary at least three months in advance of the
scheduled termination date. Each of the executive officers is entitled to a lump
sum payment in the amount of one-half times his then annual salary in the event
of a termination without cause, and, except in the case of Mr. Okin, a lump sum
payment in the amount of two times his then annual salary in the event a
termination without cause within one year after a "Change of Control." In Mr.
Okin's case, the payment under such circumstances
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<PAGE>
increases from one-half of his then annual salary to two times his then annual
salary over a period of two years. Except in the case of Mr. Okin, each of the
foregoing individuals is entitled to a lump sum payment in the amount of two
times his then annual salary in the event of a termination of employment by the
employee for "Good Reason" as defined under each of the respective employment
agreements. Each of the foregoing individuals is also entitled to a
comprehensive medical indemnity policy for himself and his family, long-term
disability insurance and such other benefits as the Board of Directors shall
adopt and approve. Messrs. Cunningham, G. Mays, T. Mays, Okin and Needle also
receive a car allowance.
The agreement between Roda and Mr. Furlonge is for a term of at least 18
months, and continues until terminated by either party upon at least six months'
prior notice. Mr. Furlonge is employed as a senior executive of Roda with the
job title Managing Director. He is paid an annual salary of $163,000
(Pounds100,000), which is subject to increase each year by an amount at least
equal to the percentage increase in a consumer price index over the prior year.
He is also entitled to an annual bonus in an amount determined by the
Compensation Committee based upon the realization of the Company's goals during
such year. He is entitled to a lump sum payment in the amount of two times his
then annual salary following a "Change in Control" of Roda or the Company,
provided that he continues to work for at least six months following the Change
of Control (or, if longer, for such period of time following the Change of
Control to ensure that he has completed at least 18 months of service under the
agreement). If his employment is terminated, except for cause, following a
Change in Control, the lump sum payment would be payable immediately. Mr.
Furlonge is also entitled to medical insurance for himself and his family,
continued participation in Roda's pension plan, life insurance in the amount of
four times his annual salary and a car allowance.
STOCK OPTION PLANS
1998 Stock Option Plan
In February 1998, the Board of Directors and the sole stockholder of the
Company adopted the 1998 Stock Option Plan ("1998 Plan") and reserved 450,000
shares of Common Stock for issuance thereunder. The Plan provides for the
granting to employees (including employee directors and officers) of options
intended to qualify as incentive stock options within the meaning of
(section)422 of the Code and for the granting of nonstatutory stock options to
employees and consultants. The 1998 Plan is currently administered by the
Company's Compensation Committee.
The 1998 Plan provides for the granting of both Incentive Stock Options
("ISOs") and nonstatutory stock options (a "NSO") and in connection with such
options the granting of stock appreciation rights (an "SAR") or additional stock
options, known as progressive stock options, in the event the grantee exercises
such stock options by surrendering shares of Common Stock of the Company (a
"PSO"). NSOs and SARs may be issued to any key employee or officer of the
Company or its subsidiaries, or any other person who is an independent
contractor, agent or consultant of the Company or its subsidiaries but not any
director of the Company who is not an employee of the Company. ISOs may be
issued to key employees and officers of the Company and its subsidiaries, but
not to any independent contractor, agent or consultant. The Compensation
Committee also determines the times at which options will vest and will become
exercisable, their transferability and the dates, not more than ten years after
the date of grant, on which options will expire. In the event of a tender offer
for more than 25% of the Company's outstanding stock, or a "change in control"
(as defined in the 1998 Plan) of the Company, all outstanding options become
immediately exercisable. The fair market value of the stock with respect to
which ISOs under the 1998 Plan or any other plan of the Company first become
exercisable may not exceed $100,000 in any year. The option price of an ISO is
to be at least 100% of the fair market value on the date of grant (110% in the
case of optionees holding more than ten percent of the combined voting power of
all classes of stock of the Company). The 1998 Plan, however, permits the
Compensation Committee to grant NSOs at any exercise price consistent with the
purposes of the 1998 Plan, whether or not such exercise price is equal to the
fair market value of the stock on the date of grant of the NSO. NSOs with an
exercise price of less than fair market value on the date of grant would not
qualify as performance-based compensation under (section)162(m) of the Code and,
therefore, any
45
<PAGE>
compensation expense generated by the exercise of such an option would not be
deductible by the Company when the Company is considered to be subject to such
Section, if the optionee is a "covered employee" who is paid compensation from
the Company in an amount in excess of $1,000,000 in the year of exercise.
Options may be exercised by the payment of the exercise price in cash,
Common Stock or a combination thereof. Subject to compliance with the provisions
of applicable governmental regulations, the Compensation Committee may make a
loan for the purpose of exercising any option granted under the 1998 Plan to an
optionee in an amount not to exceed 100% of the purchase price of the shares
acquired upon exercise of the options. The loan must be secured by a pledge of
shares of the Company having an aggregate purchase price equal to or greater
than the amount of the loan.
The 1998 Plan permits the Compensation Committee to grant SARs in
connection with any option granted under the 1998 Plan. SARs enable an optionee
to surrender an option and to receive a payment in cash or Common Stock, as
determined by the Compensation Committee, equal to the difference between the
fair market value of the Common Stock on the date of surrender of the related
option and the option price.
The 1998 Plan also permits the Compensation Committee to grant PSOs in
connection with any option granted under the 1998 Plan. PSOs enable an optionee
to receive additional stock options in the event the grantee exercises a stock
option, in whole or in part, by surrendering shares of Common Stock of the
Company. Any PSO granted will be for a number of shares equal to the number of
surrendered shares of Common Stock, shall not be exercisable for a minimum of
six months from the grant date of the option, shall have an option price per
share equal to 100% of the fair market value of a share of stock on the grant
date and shall be subject to such other terms and conditions as the Compensation
Committee may determine.
At the time of the Offering, options covering an aggregate of 230,700
shares of Common Stock will be outstanding under the 1998 Plan including options
to purchase 50,000 shares of Common Stock granted to each of Messrs. Needle and
Lykogiannis and options to purchase 45,000 shares granted to Mr. Okin. All of
such options will expire ten years after the date of grant, and have an exercise
price per share, subject to adjustment, equal to the initial public offering
price. Of the above 230,700 options, 175,000 will be fully vested upon the
consummation of the Offering and the remaining 55,700 will vest over a period of
three years.
The Directors' Stock Option Plan
In February 1998, the Board of Directors and the sole stockholder of the
Company adopted the Directors' Stock Option Plan (the "Directors' Plan") and
reserved 150,000 shares of Common Stock for insurance thereunder. The
individuals eligible to participate in the Directors' Plan are each Director of
the Company who is not an employee of the Company or any of its subsidiaries (an
"Outside Director").
Under the terms of the Directors' Plan, upon the closing of the Offering,
each Outside Director automatically receives an NSO to acquire 15,000 shares of
Common Stock at the initial public offering price. Accordingly, at the time of
the Offering, options covering an aggregate of 75,000 shares of Common Stock
will be outstanding under the Directors' Plan. In addition, beginning in 1999,
on the first business day of the month following the month in which the annual
meeting of stockholders occurs, each Outside Director shall automatically
receive an NSO for the purchase of 4,000 shares of Common Stock at the fair
market value of the Common Stock on the date of grant. New Outside Directors
shall receive an NSO for the purchase of 15,000 shares of Common Stock upon
their initial election as directors. All options granted under the Directors'
Plan will be fully vested six months after the date of grant.
Options under the Directors' Plan will have a term of ten years and shall
not be exercisable until six months following the date of grant. Payment upon
exercise may be made only in cash or by check. In the case of a person who
ceases to be an Outside Director for reasons other than death, the options shall
not be exercisable after the third anniversary of the date such person ceased to
be an Outside Director. In the case of death, options that have not expired may
not be exercised by executors, administrators, heirs or distributees, after the
first anniversary of the date of death.
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<PAGE>
The Board of Directors has the authority to amend, suspend or discontinue
the Directors' Plan but the Board of Directors may not, without the approval of
stockholders, make any amendment which (i) makes a change in the persons
eligible to receive options under the Directors' Plan, (ii) increases the number
of shares of the Common Stock which may be issued under the Directors' Plan,
(iii) increases the maximum option price, (iv) decreases the option price or (v)
changes the number of shares subject to the automatic option.
401(K) PLAN
The Predecessor maintains a salary deferral and savings plan for its
employees (the "401(k) Plan") which is qualified under Section 401(k) of the
Code. Subject to limits set forth in the Code, employees who meet certain age
and service requirements may participate in the 401(k) Plan by contributing
through payroll deductions. The Company, at its discretion, may elect to
contribute to the 401(k) Plan in amounts and at times determined by the Board of
Directors.
RODA PENSION PLAN
Roda maintains a defined contribution pension plan, approved by the United
Kingdom's Inland Revenue, in which employees who meet certain age and service
requirements may participate. The plan is based upon contributions from both the
employer and employees, with Roda's contribution on behalf of each participating
employee being set at 5% of basic salary.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock, after giving effect to the Reorganization and the
Acquisition, both before and after the Offering, by (i) each person known to the
Company to be the beneficial owner of 5% or more thereof, (ii) each director and
designee who will become a director upon consummation of the Offering, (iii)
each of the Named Executive Officers and (iv) all directors and officers as a
group.
Under the rules of the Securities and Exchange Commission (the
"Commission"), a person is deemed to be a "beneficial owner" of a security if he
or she has or shares the power to vote or direct the voting of such security or
the power to dispose of or direct the disposition of such security. Accordingly,
more than one person may be deemed to be a beneficial owner of the same
security. Shares of Common Stock subject to options held by the directors and
officers that are not exercisable within 60 days of the date hereof are not, in
accordance with beneficial ownership rules promulgated by the Commission, deemed
outstanding for the purpose of computing such director's or officer's beneficial
ownership.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
BENEFICIALLY OWNED
----------------------
AMOUNT AND NATURE
OF BENEFICIAL BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNERSHIP OFFERING OFFERING
- ------------------------------------------------------- -------------------- ---------- ---------
<S> <C> <C> <C>
Michael R. Cunningham ................................. 2,050,728 (2) 79.0% 42.2%
Gordon Mays ........................................... 228,198 (3) 8.8% 4.7%
Timothy Mays .......................................... 165,803 (4) 6.4% 3.4%
Robert Needle ......................................... 50,000 (5) * 1.0%
Robert M. Okin ........................................ 45,000 (5) * *
Ioannis Lykogiannis ................................... 50,000 (5) * 1.0%
Peter L. Furlonge ..................................... 128,323 (6) * 2.6%
Arnold Spinner ........................................ - * *
James J. Cunningham ................................... 130,898 (7) 5.0% 2.7%
Norman R. Malo ........................................ - * *
Laurence Gerber ....................................... - * *
Stanley J. Moss ....................................... - * *
All directors and officers as a group (12 persons)..... 2,869,457 (8) 99.2% 57.3%
</TABLE>
- ----------
* Less than 1%.
(1) Unless otherwise indicated, the address of each such person is c/o
Cunningham Graphics International, Inc., 629 Grove St., Jersey City, New
Jersey 07310. All persons listed have sole voting and investment power with
respect to their shares unless otherwise indicated.
(2) Excludes 130,898 shares held by a trust for the benefit of Michael R.
Cunningham's children. The trustee of such trust, James J. Cunningham, the
brother of Mr. M. Cunningham, has the sole right to vote and dispose of such
shares.
(3) Excludes 9,817 shares held by a trust for the benefit of Gordon Mays'
children. The trustee of such trust, William J. Mays, the brother of Mr. G.
Mays, has the sole right to vote and dispose of such shares.
(4) Excludes 9,817 shares held by a trust for the benefit of Timothy Mays'
children. The trustee of such trust, William Edward Shannon, the
brother-in-law of Mr. T. Mays, has the sole right to vote and dispose of
such shares.
(5) Represents shares underlying options which have been granted to the
designated person, all of which are exercisable within 60 days of the date
of this Prospectus.
(6) Gives effect to 128,323 shares to be issued to Mr. Furlonge in the
Acquisition.
(7) Includes the 130,898 shares referred to in footnote (2).
(8) Includes 145,000 shares subject to options which have been granted to
officers and which are exercisable within 60 days of the date of this
Prospectus, and excludes the shares referred to in footnotes (3) and (4).
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<PAGE>
CERTAIN TRANSACTIONS
CAPITALIZATION PRIOR TO THE REORGANIZATION
The Predecessor was initially capitalized in September 1983 through the
sale of 100 shares of common stock of the Predecessor, to Michael R. Cunningham,
the Company's founder. Mr. Cunningham subsequently made gifts of six shares to a
trust created for the benefit of his children.
On June 11, 1991, the Predecessor entered into a stock purchase agreement
(the "Stock Purchase Agreement") with Timothy Mays and Gordon Mays
(collectively, the "Buyers") which entitled the Buyers to purchase from the
Predecessor up to 53.85 shares of common stock, of which up to 11.11 shares of
common stock of the Predecessor could be purchased by the Buyers on June 12,
1991, and the remaining 42.74 shares of common stock of the Predecessor could be
purchased by the Buyers, at certain times after June 12, 1991 but in no event
later than December 1, 1996 ("Purchase Option Termination Date"). On June 12,
1991, pursuant to the terms of the Stock Purchase Agreement, Timothy Mays
purchased 3.67 shares of common stock of the Predecessor, and Gordon Mays
purchased 7.44 shares of common stock of the Predecessor, in consideration for
(i) the return by the Buyers to the Company of a promissory note dated April 12,
1991 evidencing indebtedness of the Company to the Buyers in the principal
amount of $100,000 and (ii) $200,000 paid by the Buyers to the Company. Pursuant
to the terms of the Stock Purchase Agreement, from time to time between June 12,
1991 and the Purchase Option Termination Date, Timothy Mays purchased an
additional 4.38 shares of common stock of the Predecessor, and Gordon Mays
purchased an additional 3.47 shares of common stock of the Predecessor, in
consideration for the retention by the Company of (i) all dividends declared by
the Company and payable to the Buyers and (ii) certain "Additional Compensation"
due to the Buyers under employment agreements with the Company.
Messrs. G. Mays and T. Mays subsequently made gifts of .45 shares of common
stock of the Predecessor each to a trust created for the benefit of their
respective children.
Messrs. Cunningham, G. Mays and T. Mays entered into a shareholders
agreement in 1991 providing for certain restrictions upon the disposition of
shares and upon the voting of stock, which agreement will be terminated
effective upon the consummation of the Reorganization.
LOANS FROM INSIDERS
From time to time, the Company borrowed funds from Michael R. Cunningham
and the trust for the benefit of his children, which are stockholders of the
Company. A total of $227,000 of such loans was outstanding as of December 31,
1996, all of which was repaid in 1997.
THE REORGANIZATION
In connection with the Reorganization, the Company will issue to the
stockholders of the Predecessor an aggregate of 2,595,260 shares of Common
Stock, Exchange Notes in the aggregate principal amount of $2.4 million
(assuming an initial public offering price of $12.00 per share) and Distribution
Notes in the aggregate principal amount of $2.2 million. The Exchange Notes and
the Distribution Notes will be paid from the proceeds of the Offering. See "The
Company -- The Reorganization." The number of shares of Common Stock, the
principal amounts of the Exchange Notes and the principal amounts of the
Distribution Notes, to be received by each stockholder of the Predecessor in the
Reorganization, are as follows:
<TABLE>
<CAPTION>
SHARES OF COMMON PRINCIPAL OF PRINCIPAL OF
STOCKHOLDER STOCK EXCHANGE NOTES DISTRIBUTION NOTES
- ------------------------------------- ------------------ ---------------- -------------------
<S> <C> <C> <C>
Michael R. Cunningham ............... 2,050,727 $1,896,432 $1,738,400
Gordon Mays ......................... 228,198 211,030 193,443
Timothy Mays ........................ 165,803 153,330 140,551
James J. Cunningham, Trustee ........ 130,898 121,050 110,962
William J. Mays, Trustee ............ 9,817 9,079 8,322
William Edward Shannon, Trustee ..... 9,817 9,079 8,322
--------- ---------- ----------
Totals: ............................. 2,595,260 $2,400,000 $2,200,000
</TABLE>
POLICY OF THE BOARD OF DIRECTORS
All ongoing and any future transactions with affiliates of the Company, if
any, will be on terms believed by the Company to be no less favorable than are
available from unaffiliated third parties and will be approved by a majority of
disinterested directors.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The summary of the terms of the capital stock of the Company set forth
below does not purport to be complete and is subject to and qualified in its
entirety by reference to the Certificate of Incorporation (the "Certificate of
Incorporation") and By-Laws of the Company, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
GENERAL
The Company's Certificate of Incorporation authorizes 30,000,000 shares of
Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. After giving effect to (i) the Reorganization, (ii) the closing of the
Acquisition and (iii) the completion of the Offering, the Company will have
outstanding 4,865,000 shares of Common Stock and no shares of Preferred Stock.
In addition, the Company will have 450,000 shares of Common Stock reserved for
issuance under the Company's 1998 Stock Option Plan and 150,000 shares of Common
Stock reserved for issuance under the Company's Directors' Stock Option Plan.
See "Management -- Stock Option Plans."
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all action to be taken by stockholders. Cumulative voting of shares
is prohibited. Accordingly, the holders of a majority of the voting power of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The Common Stock bears no preemptive rights, and is not
subject to redemption, sinking fund or conversion provisions. The shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
non-assessable.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Company's Board of Directors out of funds legally available
therefor, subject to the dividend and liquidation rights of any Preferred Stock
that may be issued (and subject to any dividend restriction contained in any
credit facility which the Company may enter into in the future) and distributed
pro rata in accordance with the number of shares of Common Stock held by each
stockholder. See "Risk Factors -- Dividend Policy."
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time by the Board of
Directors of the Company, without stockholder approval, in such series and with
such preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or other provisions, as may be fixed
by the Board of Directors when designating any such series.
The Preferred Stock and the variety of characteristics available for it
offers the Company flexibility in financing and acquisition transactions. An
issuance of Preferred Stock could dilute the book value or adversely affect the
relative voting power of the Common Stock. The issuance of such shares could be
used to enable the holder to block an acquisition of the Company. Although the
Board of Directors is required when issuing such stock to act based on its
judgment as to the best interests of the stockholders of the Company, the Board
could act in a manner which would discourage or prevent a transaction some
stockholders might believe is in the Company's best interests or in which
stockholders could or would receive a premium for their shares of Common Stock
over the market price.
STATUTORY BUSINESS COMBINATION PROVISIONS
The New Jersey Business Corporation Act provides that in determining
whether a proposal or offer to acquire a corporation is in the best interest of
the Corporation, the Board may, in addition to considering the effects of any
action on stockholders, consider any of the following: (a) the effects of the
proposed action on the corporation's employees, suppliers, creditors and
customers, (b) the effects on the community in which the corporation operates
and (c) the long-term as well as short-term interests
50
<PAGE>
of the corporation and its stockholders, including the possibility that these
interests may best be served by the continued independence of the corporation.
The statute further provides that if, based on these factors, the Board
determines that any such offer is not in the best interest of the corporation,
it may reject the offer. These provisions may make it more difficult for a
stockholder to challenge the Board's rejection of, and may facilitate the
Board's rejection of, an offer to acquire the Company. The Company will be
subject to the New Jersey Shareholders Protection Act (the "Protection Act"),
which prohibits certain New Jersey corporations from engaging in business
combinations (including mergers, consolidations, significant asset dispositions
and certain stock issuances) with any interested stockholder (defined to
include, among others, any person that becomes a beneficial owner of 10% or more
of the affected corporation's voting power) for five years after such person
becomes an interested stockholder, unless the business combination is approved
by the Board of Directors prior to the date the stockholder became an interested
stockholder. In addition, the Protection Act prohibits any business combination
at any time with an interested stockholder other than a transaction that (i) is
approved by the Board of Directors prior to the date the interested stockholder
became an interested stockholder, or (ii) is approved by the affirmative vote of
the holders of two-thirds of the voting stock not beneficially owned by the
interested stockholder, or (iii) satisfies certain "fair price" and related
criteria.
STAGGERED BOARD OF DIRECTORS
The Company's Certificate of Incorporation provides for a Board of
Directors of not less than three members, with the actual number to be set by
resolution of the Board from time to time. In addition, the Certificate of
Incorporation provides for the implementation of a staggered Board of Directors
effective at the closing of the Offering. Under this provision the Board of
Directors will be divided into three classes, Class A, Class B and Class C, with
each class containing as nearly as practicable, an even number of Directors.
Initially, the Class A Directors will have a term expiring at the 1999 Annual
Meeting of Stockholders, the Class B Directors will have a term expiring at the
2000 Annual Meeting of Stockholders and the Class C Directors will have a term
expiring at the 2001 Annual Meeting of Stockholders. Commencing with the 1999
Annual Meeting of Stockholders, as each class comes up for election, it will be
for a three-year term.
An effect of the staggered Board of Directors is to make it more difficult
or to discourage an attempt to obtain control of the Company by means of a
tender offer, proxy contest, merger or otherwise, and thereby to protect the
continuity of the Company's management.
LIMITATION OF DIRECTORS' LIABILITIES
Pursuant to provisions of the Company's Certificate of Incorporation,
directors of the Company are not personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or any transaction in which a director has derived an improper
personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that market sales of Common
Stock or the availability of such shares for sale will have on the market price
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
Upon consummation of the Offering, the Company will have outstanding
4,865,000 shares of Common Stock, of which the 2,100,000 Shares offered hereby
will be freely tradable without restriction or further registration under the
Securities Act, except for shares purchased by an "affiliate of the Company" (in
general, a person who has a controlling position with regard to the Company),
which will be subject to the resale limitations of Rule 144 promulgated under
the Securities Act.
The remaining 2,765,000 shares of Common Stock to be outstanding after the
Offering are deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, and may only be sold pursuant to
an effective registration under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Such restricted shares of Common Stock will become eligible for
sale, under Rule 144, subject to certain volume limitations prescribed by Rule
144. The holders of all of the restricted shares have agreed not to sell any of
their securities of the Company for a period of 180 days following the date of
this Prospectus, under any circumstances.
In general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated with an affiliate) who has owned restricted shares of
Common Stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of the issuer's Common Stock or the average weekly
trading volume during the four calendar weeks preceding such sale, provided that
certain public information about the issuer as required by Rule 144 is then
available and the seller complies with certain other requirements. A person who
is not an affiliate, has not been an affiliate within three months prior to
sale, and has beneficially owned the restricted shares for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
The Company, the stockholders of the Predecessor and the directors and
officers of the Company (who in the aggregate will beneficially own 2,869,457
shares of Common Stock) have agreed with the Underwriters that, for a period of
180 days following the Offering, they will not offer to sell, contract to sell,
grant an option to purchase or otherwise dispose (or announce any offer, sale,
grant of any option or other distribution) of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock without the prior written consent of Schroder & Co. Inc. on behalf of the
Underwriters (except that the Company may grant options to purchase or award
shares of Common Stock under the 1998 Plan and the Directors' Plan and issue
privately placed shares in connection with acquisitions). See "Management --
Stock Option Plans" and "Principal Stockholders."
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock issuable pursuant to the 1998 Plan and the
Directors' Plan. See "Management -- Stock Option Plans." Shares of Common Stock
issued pursuant to the 1998 Plan and the Directors' Plan after the effective
date of such registration statement will be available for sale in the open
market, subject to the lock-up agreement described above, if applicable.
52
<PAGE>
UNDERWRITING
The Underwriters named below have agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company, and the
Company has agreed to sell to the Underwriters, the number of shares of Common
Stock set forth opposite their respective names:
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------- -----------------
Schroder & Co. Inc. ......................... 1,050,000
Prudential Securities Incorporated .......... 1,050,000
---------
Total .................................... 2,100,000
=========
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby, if any such shares
are purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public, initially at the offering price
set forth on the cover page of this Prospectus; that the Underwriters propose
initially to allow a concession not in excess of $ per share to certain dealers;
and that the Underwriters may initially allow a concession not in excess of $
per share to other dealers. After the initial offering of the shares of Common
Stock, the public offering price and such concessions may be changed by the
Underwriters.
The Company has granted an option to the Underwriters, exercisable for 30
days from the date of this Prospectus, to purchase up to 315,000 additional
shares of Common Stock, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise such option only to cover over-allotments in connection with the sale
of the Common Stock offered hereby.
The Underwriting Agreement provides that the Company and Michael R.
Cunningham will indemnify the Underwriters against certain liabilities,
including liabilities under the federal securities laws, or will contribute to
payments that the Underwriters may be required to make in respect thereof.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act. Overallotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiation between the Company and the Underwriters. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, are the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies, and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is being sold by the Underwriters.
The Company, the stockholders of the Predecessor and the directors and
officers of the Company (who in the aggregate will beneficially own 2,869,457
shares of Common Stock) have agreed with the Underwriters that, for a period of
180 days following the Offering, they will not offer to sell, sell, contract to
sell, grant an option to purchase or otherwise dispose (or announce any offer,
sale, grant of any option or
53
<PAGE>
other distribution) of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for shares of Common Stock without the prior
written consent of Schroder & Co. Inc. on behalf of the Underwriters (except
that the Company may grant options to purchase or award shares of Common Stock
under the 1998 Plan and the Directors' Plan and issue privately placed shares in
connection with acquisitions). See "Management -- Stock Option Plans" and
"Principal Stockholders."
At the request of the Company, up to 200,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families and/or
friends, and other persons having business relationships with the Company. The
price of such shares to such persons will be the initial public offering price
set forth on the cover of this Prospectus. The number of shares available for
sale to the general public will be reduced to the extent these persons purchase
such reserved shares. Any reserved shares not purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Company has agreed with the Underwriters that it will exercise its
right to redeem all of the preference share capital of Roda on June 30, 1998 if
it is not sooner required to redeem such shares by the holders thereof. A
portion of the proceeds of the Offering will be deposited into escrow to provide
for the payment of the redemption price of the preference shares.
54
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Gibbons, Del Deo, Dolan,
Griffinger & Vecchione, a Professional Corporation, Newark, New Jersey. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
EXPERTS
The predecessor financial statements of Cunningham Graphics International,
Inc. for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
the authority of such firm as experts in accounting and auditing.
The financial statements of Roda Limited for the year ended December 31,
1997 and for the four months ended December 31, 1996, and of Roda Print Concepts
Limited for the ten month period ended October 31, 1996, appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young,
Chartered Accountants, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the securities offered hereby, reference is hereby
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of any
agreement or any other document referred to are not necessarily complete, and in
each instance, if such agreement or document is filed as an exhibit, reference
is made to the copy of such agreement or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. The Registration Statement, including exhibits
and schedules thereto, may be inspected and copied at the principal office of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's Regional Offices at 7 World Trade Center, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, the Company is required
to file electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
55
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
CONTENTS
Report of Independent Auditors ...................................... F-2
Predecessor Balance Sheets as of December 31, 1996 and 1997 ......... F-3
Predecessor Statements of Income for the years ended
December 31, 1995, 1996 and 1997 ................................... F-4
Predecessor Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 ................................... F-5
Predecessor Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 ................................... F-6
Notes to Predecessor Financial Statements ........................... F-7
RODA LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, AND 1997
CONTENTS
Report of Independent Auditors ....................................... F-16
Consolidated Profit and Loss Account for the year ended 31 December
1997 and the period from incorporation (29 August 1996) to 31
December 1996 and the Profit and Loss Account of Roda Print Concepts
Limited for the ten-month period ended 31 October 1996..... ......... F-17
Consolidated Balance Sheets as of December 31, 1996 and 1997.......... F-18
Consolidated Statement of Cash Flows for the year ended 31 December
1997 and the period from incorporation (29 August 1996) to 31
December 1996 and the Statement of Cash Flows of Roda Print Concepts
Limited for the ten-month period ended 31 October 1996............... F-19
Notes to Financial Statements ......................................... F-20
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cunningham Graphics International, Inc.
We have audited the accompanying predecessor balance sheets of Cunningham
Graphics International, Inc. as of December 31, 1996 and 1997, and the related
predecessor statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the predecessor financial statements referred to above
present fairly, in all material respects, the financial position of Cunningham
Graphics International, Inc. at December 31, 1996 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
January 16, 1998
F-2
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
PREDECESSOR BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
1996 1997 1997
-------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash .............................................................. $ 543 $ 67
Accounts receivable (net of allowance for doubtful accounts of
$28 in 1996 and $50 in 1997) .................................... 4,607 5,673
Inventories ....................................................... 541 940
Prepaid expenses and other current assets ......................... 70 78
Notes and advances receivable -- stockholder/officers ............. 158 136
Deferred income taxes ............................................. -- 47
------ -------
Total current assets ............................................... 5,919 6,941
Property and equipment -- net ...................................... 3,458 3,579
Other assets ....................................................... 94 418
------ -------
$9,471 $10,938
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, third-party .................... $ 414 $ 407
Revolving line of credit .......................................... 1,350 300
Current portion of notes payable -- related parties ............... 73 --
Current portion of obligations under capital leases ............... 183 178
Accounts payable .................................................. 3,661 3,854
Accrued expenses .................................................. 1,105 1,474
------ -------
Total current liabilities .......................................... 6,786 6,213
Long-term debt, third-party -- net of current portion .............. 631 1,185
Notes payable -- related parties -- net of current portion ......... 154 --
Obligations under capital leases -- net of current portion ......... 515 332
Deferred income taxes .............................................. 41 57
------ -------
Total liabilities .................................................. 8,127 7,787
Commitments and contingencies
Stockholders' equity:
Common stock, no par value; 2,507 shares authorized, 119 shares
in 1996 and 1997 issued and outstanding, stated at $50 per share. 6 6 $ --
Additional paid-in capital ........................................ 734 734 (2,908)
Retained earnings ................................................. 604 2,411 --
------ ------- --------
Total stockholders' equity ......................................... 1,344 3,151 $ (2,908)
------ ------- ========
$9,471 $10,938
====== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
PREDECESSOR STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1995 1996 1997
---------- ---------- ----------
Net sales .............................. $17,327 $23,193 $35,744
Operating expenses:
Costs of production ................... 12,860 17,616 26,894
Selling, general and administrative ... 3,441 4,270 5,794
Depreciation and amortization ......... 498 563 694
------- ------- -------
16,799 22,449 33,382
Income from operations ................. 528 744 2,362
Interest expense ...................... (257) (234) (250)
Other income .......................... 2 48 35
------- ------- -------
Income before income taxes ............. 273 558 2,147
Provision for income taxes ............ 6 56 129
------- ------- -------
Net income ............................. $ 267 $ 502 $ 2,018
======= ======= =======
PRO FORMA DATA (UNAUDITED):
Income before income taxes .................... $ 2,147
Pro forma provision for income taxes ......... 880
---------
Pro forma net income .......................... $ 1,267
=========
Pro forma earnings per share .................. $ 0.43
=========
Pro forma shares outstanding .................. 2,978,594
=========
See accompanying notes.
F-4
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
PREDECESSOR STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ........... 118 $ 6 $722 $ 356 $1,084
Net income .......................... -- -- -- 267 267
Distributions ....................... -- -- -- (521) (521)
--- --- ---- ------ ------
Balance at December 31, 1995 ......... 118 6 722 102 830
Net income .......................... -- -- -- 502 502
Sale of common stock ................ 1 -- 12 -- 12
--- --- ---- ------ ------
Balance at December 31, 1996 ......... 119 6 734 604 1,344
Net income .......................... -- -- -- 2,018 2,018
Distributions ....................... -- -- -- (211) (211)
--- --- ---- ------ ------
Balance at December 31, 1997 ......... 119 $ 6 $734 $2,411 $3,151
=== === ==== ====== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
PREDECESSOR STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 267 $ 502 $ 2,018
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................. 498 563 694
Gain on sale of equipment ................................. -- (48) (18)
Deferred income taxes ..................................... (1) 32 (31)
Changes in operating assets and liabilities:
Increase in accounts receivable ......................... (34) (2,161) (1,066)
(Increase) decrease in inventories ...................... (436) 509 (399)
Increase in prepaid expenses and other current assets (29) (86) (8)
Increase in other assets ................................ (9) (45) (324)
Increase (decrease) in advance to officers .............. 257 (94) 22
Increase in accounts payable ............................ 219 1,835 193
(Decrease) increase in accrued expenses ................. (138) 664 369
------- -------- ---------
Net cash provided by operating activities .................. 594 1,671 1,450
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the disposition of equipment ................ -- 71 1,349
Acquisition of property and equipment ..................... (254) (1,711) (2,146)
------- -------- ---------
Net cash used in investing activities ...................... (254) (1,640) (797)
CASH FLOWS FROM FINANCING ACTIVITIES
Net principal proceeds (payments) on revolving line of
credit .................................................. 306 444 (1,050)
Proceeds from long-term borrowings, third-party ........... -- 614 1,023
Principal payments on long-term borrowings, third-party . (200) (302) (476)
Principal payments on obligations under capital lease ..... (138) (139) (188)
Proceeds from issuance of notes payable -- related
parties ................................................. 70 24 --
Principal payments on notes payable -- related parties..... -- (142) (227)
Shareholder distribution .................................. (521) -- (211)
Proceeds from sale of common stock ........................ -- 12 --
------- -------- ---------
Net cash (used in) provided by financing activities ........ (483) 511 (1,129)
------- -------- ---------
Net (decrease) increase in cash ............................ (143) (542) (476)
Cash, beginning of year .................................... 144 1 543
------- -------- ---------
Cash, end of year .......................................... $ 1 $ 543 $ 67
------- -------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Income taxes paid .......................................... $ 10 $ 40 $ 169
======= ======== =========
Interest paid .............................................. $ 254 $ 235 $ 251
======= ======== =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment under capital lease ............... $ 23 $ 422 $ --
======= ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying predecessor financial statements include the operations of
Cunningham Graphics, Inc. (the "Company" or the "Predecessor Entity"). As
further discussed in Note 14, a reorganization of the Predecessor is planned for
1998.
DESCRIPTION OF COMPANY
The Company provides a wide range of graphic communication services to
financial institutions and corporations in the eastern United States, focusing
on producing and distributing time-sensitive analytical research and marketing
materials and on providing on-demand printing.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less when acquired. The carrying
amount reported for cash equivalents approximates fair value.
CONCENTRATION OF CREDIT RISK
The Company performs periodic credit evaluations of its customers and
generally does not require collateral.
INVENTORIES
Inventories are stated at the lower of cost or market by the specific
identification method. Inventory consists of raw materials and work in process.
Finished goods are shipped upon completion.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization of
assets, including those under capital lease, are computed using the
straight-line method over the lesser of the estimated useful lives of the
related assets or the lease term. Useful lives range from 3 to 10 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. No such event has
occurred since adoption at January 1, 1995.
INCOME TAXES
The Company and its stockholders have elected to be taxed as an S
Corporation pursuant to the Internal Revenue Code and certain state and local
tax regulations. Therefore, no provision has been made in the accompanying
financial statements for federal and certain state and local income taxes, since
such taxes are the liability of the stockholders. The provision for income taxes
principally reflects taxes levied by certain state and local governments. (See
Notes 11 and 14).
Deferred taxes are computed based on the tax effects in future years of the
differences between financial and tax reporting bases of assets and liabilities.
Deferred tax assets and liabilities are classified as current and noncurrent
based on the classification of the related asset or liability for financial
reporting purposes, or based on the expected reversal date for deferred taxes
that are not related to an asset or liability.
F-7
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
REVENUE RECOGNITION
Revenue is recognized upon shipment of products to customers.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
similar to the previously required fully diluted earnings per share.
2. INVENTORIES
Inventories consist of the following:
1996 1997
------ -------
Raw materials (net of valuation allowance of $200 at
December 31, 1996 and $194 at December 31, 1997)....... $477 $805
Work-in-process ........................................ 64 135
---- ----
$541 $940
==== ====
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Machinery and equipment ............................ $ 4,711 $ 4,813
Furniture, fixtures and office equipment ........... 653 974
Leasehold improvements ............................. 261 471
Autos and transportation equipment ................. 214 280
-------- --------
5,839 6,538
Accumulated depreciation and amortization .......... (2,381) (2,959)
-------- --------
$ 3,458 $ 3,579
======== ========
</TABLE>
The gross amount of the leased property included in property and equipment
is $1,062 and $1,069, and accumulated amortization is $341 and $386 at December
31, 1996 and 1997, respectively.
F-8
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
4. OTHER ASSETS
Included in other assets is approximately $342 of costs related to the
anticipated initial public offering and the acquisition of Roda Limited (Note
14).
5. ACCRUED EXPENSES
Other accrued liabilities consists of the following:
1996 1997
--------- ---------
Employee compensation .......... $ 761 $ 689
Other .......................... 344 785
------ ------
$1,105 $1,474
====== ======
6. REVOLVING LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASE
On December 15, 1997, the Company entered into a new Loan and Security
Agreement with a bank (the "Loan and Security Agreement"). The Loan and Security
Agreement provides for a $2,000 revolving line of credit and a $1,000 3-year
term loan (the "Term Loan"). The revolving line of credit expires on May 30,
1998. Borrowings under both the line of credit and the Term Loan bear interest
at the bank's prime rate or at the Company's option LIBOR plus 2.25% (8.5% at
December 31, 1997). The debt is collateralized by substantially all of the
Company's assets. Among other things, the Loan and Security Agreement restricts
the Company's ability to incur additional indebtedness and requires the Company
to maintain certain financial ratios.
At December 31, 1996, the revolving line of credit represents the amount
outstanding under a previous $2,000 revolving line of credit with a bank.
Borrowings under this agreement carried interest at the bank's prime rate plus
.5% (8.75% at December 31, 1996) and were secured by substantially all of the
Company's assets and guaranteed by the principal stockholder of the Company.
The Company leases property and equipment under capital leases expiring in
various years through 2001. Amortization ($74, $105 and $119 in 1995, 1996 and
1997, respectively) of assets under capital leases is included in depreciation
expense.
Long-term debt consists of the following (excluding notes payable to
related parties, see Note 7):
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Term loan, payable with interest only through December 1998 with principal
payments beginning January 1999 through December 2001 .......................... $ -- $1,000
Notes payable to finance companies, payable in monthly installments with
interest at rates ranging from 7.48% to 11.75%, through various dates
from December 1998 to October 1999 (secured by certain equipment with a
carrying value of approximately $358).......................................... 518 262
Non-interest bearing note payable in monthly installments through December
1999 (discounted based on imputed interest rate of 8%) ......................... 449 308
Various capital lease obligations ............................................... 698 510
Other (secured by equipment with a carrying value of $135)....................... 78 22
------ ------
1,743 2,102
Less current maturities ......................................................... 597 585
------ ------
$1,146 $1,517
====== ======
</TABLE>
The aggregate fair value of the instruments representing the Company's
revolving line of credit, long-term debt and obligations under capital lease
approximate their carrying value at December 31, 1996 and 1997. Such fair values
are estimated based on discounting the estimated future cash flows using the
Company's incremental borrowing rate for similar debt instruments.
F-9
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
6. REVOLVING LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASE
--(CONTINUED)
Maturities of long-term debt and obligations under capital lease (principal
and interest) for each of the next five years are as follows:
OBLIGATIONS
UNDER
LONG-TERM CAPITAL
DEBT LEASE
----------- ------------
1998 .......................................... $407 $236
1999 .......................................... 516 185
2000 .......................................... 333 119
2001 .......................................... 336 84
----
Total minimum lease payments .................. 624
Less amount representing interest ............. 114
----
Present value of net minimum lease payments ... $510
====
7. RELATED PARTY TRANSACTIONS
Included in notes and advances receivable -- stockholder/officers are notes
receivable aggregating $22 at December 31, 1996 and advances of $136 at December
31, 1996 and 1997. The notes bear interest at an annual rate of 8% and were
repaid in 1997. Advances receivable represent cash advances with no specific
repayment terms. The stockholder intends to repay the advances as a part of the
Offering. Notes payable to related parties consists of the following:
1996 1997
------ -----
Note payable to stockholder/officer, payable in
monthly installments with interest at the prime rate
(8.5% at December 31, 1996) ........................... $112 $--
Note payable to Cunningham Children Trust, payable
in monthly installments with interest at the prime rate
(8.5% at December 31, 1996) ........................... 115 --
---- ---
227 --
Less current portion .................................... 73 --
---- ---
$154 $--
==== ===
In December 1997, the Company repaid the outstanding balances under these
notes payable.
F-10
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office facilities, equipment and automobiles under
noncancelable operating leases expiring in various years through 2000. One of
the facility leases requires the Company to pay additional rents based on its
proportionate share of certain costs of the facility.
In March 1997, the Company entered into a sale-leaseback arrangement. Under
the arrangement, the Company sold equipment and leased it back for a period of
six years. The leaseback has been accounted for as an operating lease. No gain
or loss was recorded on the transaction. Upon expiration of the lease, the
Company has agreed to acquire the equipment at terms more fully described in the
lease agreement.
Future minimum rental payments for each of the next five years and in the
aggregate under the above lease agreements are as follows:
1998 ........................ $1,094
1999 ........................ 1,085
2000 ........................ 360
2001 ........................ 286
2002 ........................ 237
Thereafter .................. 39
------
$3,101
======
Rent expense under all operating leases was $282, $463 and $631 for the
years ended December 31, 1995, 1996 and 1997, respectively.
9. CONCENTRATIONS
Sales to customers representing 10% or more of the Company's total net
sales (two customers in 1995, 24% and 14% each respectively; three customers in
1996, 15%, 15% and 13% each respectively; and four in 1997, 24%, 13%, 10% and
10% each respectively) represented total net sales of $6,445, $9,812 and
$20,375, respectively. Included in trade accounts receivable are amounts due
from these customers of $1,648 and $2,989 as of December 31, 1996 and 1997,
respectively.
The Company has 370 employees, approximately 255 of whom are members of a
union which are covered under a memorandum of agreement which expires on June
30, 2000.
10. STOCKHOLDERS' EQUITY
On June 11, 1991, the Company entered into an agreement with two
stockholders which entitled the two stockholders to purchase from the Company up
to 53.85 shares of its common stock through December 1, 1996. Through the
expiration of the agreement and pursuant to the terms of the agreement, the
stockholders purchased 18.96 shares (including one share in 1995 for an
aggregate consideration of $12).
F-11
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
11. INCOME TAXES
The provision for state income taxes consists of the following:
1995 1996 1997
--------- ------ -------
Current .............................. $ 8 $24 $ 160
Deferred ............................. (2) 32 (31)
------ --- -----
Total provision for income taxes ..... $ 6 $56 $ 129
===== === =====
The significant components of the Company's deferred tax liabilities and
assets include depreciation, accounts receivable and inventory reserves and
accrued expenses. (See Note 14 regarding conversion from S Corporation to C
Corporation for tax purposes.)
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution pension plan pursuant to Section
401(k) of the Internal Revenue Code covering substantially all employees. The
Company, at its discretion, may elect to contribute to the plan at amounts and
dates determined by the Board of Directors. For the years ended December 31,
1995, 1996 and 1997 the Company made contributions of $24, $-0- and $52,
respectively, to the plan.
13. SUBSEQUENT EVENTS
Acquisition of Roda
On January 16, 1998, the Company and Roda entered into an agreement (the
"Roda Purchase Agreement") such that concurrently with the consummation of the
Offering, the Company will close the acquisition of all the outstanding capital
stock of Roda under the Roda Purchase Agreement for an aggregate purchase price
of $8,148. The purchase price will be satisfied by the delivery of 169,739
shares of common stock, which will be valued at the initial public offering
price, and a cash payment equal to the balance of the purchase price. Under the
terms of the Roda Purchase Agreement, the Company has committed to cause the
repayment of Pounds850 (approximately $1,400) of indebtedness to the present
Roda stockholders within 28 days following the closing. The Company intends to
use a portion of the proceeds of the Offering to repay this indebtedness. In
order to secure the performance by the selling stockholders of Roda of certain
warranties and covenants, Pounds275 (approximately $459) will be held in escrow
until one year following the closing. The acquisition of Roda will be accounted
for under the purchase method of accounting.
F-12
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
14. FORMATION OF CUNNINGHAM GRAPHICS INTERNATIONAL, INC., PLANNED INITIAL
PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS (UNAUDITED)
Reorganization and Planned Public Offering
The Company intends to proceed with a reorganization and a concurrent
initial public offering of the common stock of the reorganized entity.
Immediately prior to the initial public offering of shares of common stock of
Cunningham Graphics International, Inc. (CGII) (the "Offering"), the Company
will be reorganized (the "Reorganization") such that all of the stockholders of
the Predecessor will contribute all of the outstanding shares of common stock of
the Predecessor to CGII, in exchange for a total of 2,595,260 shares of common
stock and promissory notes (the "Exchange Notes") in the aggregate principal
amount of $2,400 (assuming an initial offering price of $12.00 per share).
Concurrently with the Reorganization, CGII will assume the Predecessor's
obligations with respect to undistributed S corporation taxable income through
the date of the Reorganization estimated to total $2,200, and will issue
promissory notes in such amount to evidence such obligations (the "Distribution
Notes" and, together with the Exchange Notes, the "Reorganization Notes"). The
principal amount of the Reorganization Notes was determined by the Company in
connection with the Reorganization based on a number of factors, including the
value of the enterprise contributed to the Company. The principal amount of the
Distribution Notes was determined by the Company based upon the actual amount of
undistributed S corporation taxable income as of December 31, 1997 and the
anticipated additional undistributed S corporation taxable income during the
period January 1, 1998 through the expected date of the Reorganization. The
Company intends to pay the Reorganization Notes from the net proceeds of the
Offering.
1998 Stock Option Plan
In February 1998, the Board of Directors and the sole stockholder of the
Company adopted the 1998 Stock Option Plan ("1998 Plan") and reserved 450,000
shares of Common Stock for issuance thereunder. The Plan provides for the
granting to employees (including employee directors and officers) of options
intended to qualify as incentive stock options within the meaning of
(section)422 of the Code and for the granting of nonstatutory stock options to
employees and consultants. The Board of Directors has granted options to
purchase 230,700 shares of Common Stock under the 1998 Plan subject to
consummation of the Offering.
The Directors' Stock Option Plan
In February 1998, the Board of Directors and the sole stockholder of the
Company adopted the Directors' Stock Option Plan (the "Directors' Plan") and
reserved 150,000 shares of Common Stock for insurance thereunder. The
individuals eligible to participate in the Directors' Plan are each Director of
the Company who is not an employee of the Company or any of its subsidiaries (an
"Outside Director"). The Board of Directors has granted options to purchase
75,000 shares of Common Stock under the Directors' Plan subject to consummation
of the Offering.
F-13
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
14. FORMATION OF CUNNINGHAM GRAPHICS INTERNATIONAL, INC., PLANNED INITIAL
PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS (UNAUDITED) --(CONTINUED)
Pro Forma Adjustments (Unaudited)
The following table sets forth the capitalization of the Company at
December 31, 1997, and the pro forma capitalization of the Company as of such
date after giving effect to the issuance of the Reorganization Notes, to the
stockholders and the recording of a net deferred tax liability of approximately
$59 in connection with the Company becoming subject to federal and additional
state and local income taxes.
ACTUAL PRO FORMA
-------- ------------
Common stock ........................ $ 6 $ --
Additional paid-in capital .......... 734 (2,908)
Retained earnings ................... 2,411 --
------ --------
Total stockholders' equity .......... $3,151 $ (2,908)
====== ========
As discussed in Note 1, the Company has elected to be taxed as an S
corporation pursuant to the Internal Revenue Code and certain state and local
tax regulations. In connection with the Offering made hereby, the Company will
become subject to federal and additional state income taxes. Accordingly, in the
quarter in which the Offering is completed, the Company will record additional
deferred tax assets of $295 and additional deferred tax liabilities of $354 and
a corresponding net tax expense of $59 in the statement of income in accordance
with the provisions of SFAS No. 109.
The pro forma provision for income taxes represents the income tax
provisions that would have been reported had the Company been subject to federal
and additional state income taxes during the year ended December 31, 1997. The
unaudited pro forma net income for the year ended December 31, 1997 reflects an
increase of $751 for the year ended December 31, 1997 for income taxes based
upon income before income taxes as if the Company had become subject to federal
and additional state income taxes on that date.
Pro forma deferred income taxes will reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
pro forma financial reporting and the amounts used for income tax purposes.
Significant components of the Company's pro forma net deferred tax liability as
of December 31, 1997 is as follows:
1997
----------
Tax over book depreciation ..................... $ (411)
Allowance for doubtful accounts ................ 20
Inventory capitalization and reserves .......... 100
Other book accruals ............................ 232
------
$ (59)
======
The pro forma income tax provision consists of the following:
1997
---------
Current:
Federal ............................. $ 820
State and local ..................... 300
------
1,120
Deferred income tax benefit ......... (240)
------
$ 880
======
F-14
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO PREDECESSOR FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -(CONTINUED )
14. FORMATION OF CUNNINGHAM GRAPHICS INTERNATIONAL, INC., PLANNED INITIAL
PUBLIC OFFERING AND PRO FORMA ADJUSTMENTS (UNAUDITED) --(CONTINUED)
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and the U.S. federal statutory tax rate is as
follows:
1997
----------
Federal statutory rate ................................... 34.0%
State and local taxes, net of federal tax benefits ....... 7.0
----
Effective tax rate ....................................... 41.0
====
Pro Forma Earnings Per Share (Unaudited)
The Pro Forma shares outstanding of 2,978,594 represent the total equity
value for the Common Stock of the Predecessor contributed to the Company in the
Reorganization and includes (i) the initial CGII founding share, (ii) 2,595,260
shares to be issued in the Reorganization and (iii) 383,333 shares, representing
the value of the $4,600 principal amount of the Reorganization Notes (based upon
the assumed initial public offering price of $12.00 per share).
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Roda Limited
We have audited the accompanying consolidated balance sheet of Roda Limited
as of 31 December 1997 and 1996 and the related consolidated profit and loss
account and statement of cash flows for the year ended 31 December 1997 and the
period from incorporation (29 August 1996) to 31 December 1996 and the profit
and loss account and statement of cash flows of Roda Print Concepts Limited
(Predecessor) for the ten-month period ended 31 October 1996. 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 audit.
We conducted our audit in accordance with United Kingdom auditing standards
which do not differ in any significant respect from United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurances 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 the management, as well as evaluating the overall financial
statements presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Roda Limited at
31 December 1997 and 1996 and the consolidated results of its operations and its
cash flows for the year ended 31 December 1997 and the period from incorporation
(29 August 1996) to 31 December 1996 and the results of operations and cash
flows of Roda Print Concepts Limited for the ten-month period ended 31 October
1996, in conformity with accounting principles generally accepted in the United
Kingdom which differ in certain respects from those followed in the United
States (see Note 25 of Notes to the Financial Statements).
/s/ Ernst & Young Chartered Accountants
Ernst & Young
Chartered Accountants
London, England
11 February 1998
F-16
<PAGE>
RODA LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
COMPANY
PREDECESSOR PERIOD FROM
TEN MONTHS INCORPORATION COMPANY YEAR
ENDED 31 (29 AUGUST 1996) ENDED 31
OCTOBER TO 31 DECEMBER DECEMBER
1996 1996 1997
NOTES Pounds Pounds Pounds
------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
TURNOVER ............................................ 3 3,058,221 625,525 4,198,219
Cost of sales ....................................... (2,035,263) (399,674) (2,589,186)
---------- -------- ----------
GROSS PROFIT ........................................ 1,022,958 225,851 1,609,033
Administrative expenses ............................. (1,067,421) (149,319) (943,590)
---------- -------- ----------
OPERATING (LOSS)/PROFIT ............................. 4 (44,463) 76,532 665,443
Profit on disposal of tangible fixed assets ......... -- -- 52,076
Interest receivable ................................. 30 13 344
Interest payable .................................... 7 (29,995) (37,699) (208,456)
---------- -------- ----------
(LOSS)/PROFIT ON ORDINARY
ACTIVITIES BEFORE TAXATION ......................... (74,428) 38,846 509,407
Taxation ............................................ 8 9,070 (11,355) (169,000)
---------- -------- ----------
(LOSS)/PROFIT ON ORDINARY
ACTIVITIES AFTER TAXATION .......................... (65,358) 27,491 340,407
Minority interest ................................... -- (18,130) (64,101)
---------- -------- ----------
(LOSS)/PROFIT FOR THE PERIOD ........................ (65,358) 9,361 276,306
DIVIDENDS
Preference dividend on non-equity shares
of Roda Print Concepts Limited ..................... (45,970) -- --
Ordinary dividend on equity shares of Roda Print
Concepts Ltd ....................................... (28,000) -- --
---------- -------- ----------
RETAINED (LOSS)/PROFIT
FOR THE PERIOD ..................................... 17 (139,328) 9,361 276,306
========== ======== ==========
</TABLE>
There were no recognized gains or losses other than those recorded above.
A summary of the significant adjustments to the profit/(loss) for the
period that would be required if United States generally accepted accounting
principles were to be applied instead of those generally accepted in the United
Kingdom is set forth in Note 25.
The notes to the financial statements are
an integral part of the financial statements.
F-17
<PAGE>
RODA LIMITED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
31 DECEMBER 31 DECEMBER
1996 1997
NOTES Pounds Pounds
------- --------------- ---------------
<S> <C> <C> <C>
FIXED ASSETS
Tangible assets ........................................ 9 399,465 863,739
CURRENT ASSETS
Stocks ................................................. 11 96,220 148,026
Debtors ................................................ 12 799,336 928,254
Cash at bank and in hand ............................... 89,610 522
------- -------
985,166 1,076,802
CREDITORS: amounts falling due within one year ......... 13 (1,995,006) (1,493,999)
---------- ----------
NET CURRENT LIABILITIES ................................ (1,009,840) (417,197)
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES .................. (610,375) 446,542
CREDITORS: amounts falling due after more than
one year .............................................. 14 (1,147,710) (1,928,321)
MINORITY INTEREST ...................................... 21 (100) (100)
---------- ----------
21 (1,758,185) (1,481,879)
========== ==========
CAPITAL AND RESERVES
Called up share capital ................................ 16 200,000 200,000
Share premium .......................................... 17 199,998 199,998
Profit and loss account ................................ 17 (2,158,183) (1,881,877)
---------- ----------
(1,758,185) (1,481,879)
========== ==========
</TABLE>
A summary of the significant adjustments to capital and reserves that would
be required if United States generally accepted accounting principles were to be
applied instead of those generally accepted in the United Kingdom is set forth
in Note 25.
The notes to the financial statements are
an integral part of the financial statements.
F-18
<PAGE>
RODA LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION
TEN MONTHS (29 AUGUST 1996) COMPANY YEAR
ENDED 31 TO 31 DECEMBER ENDED 31
OCTOBER 1996 1996 DECEMBER 1997
NOTES Pounds Pounds Pounds
------- -------------- ------------------ --------------
<S> <C> <C> <C> <C>
RECONCILIATION OF OPERATING
(LOSS)/PROFIT TO NET CASH FLOW
FROM OPERATING ACTIVITIES
Operating (loss)/profit ............................. (44,463) 76,532 665,443
Depreciation charges ................................ 58,889 9,506 88,714
(Increase)/decrease in stocks ....................... (7,170) 8,532 (51,806)
(Increase)/decrease in debtors ...................... (75,115) 203,657 (123,515)
Increase/(decrease) in creditors .................... 297,438 (173,652) (56,337)
------- -------- --------
Net cash inflow from operating activities ........... 229,579 124,575 522,499
------- -------- --------
CASH FLOW STATEMENT
Net cash inflow from operating activities ........... 229,579 124,575 522,499
Returns on investment and servicing of finance....... 22 (75,935) (55,816) (272,213)
Taxation ............................................ (46,647) -- (97,865)
Capital expenditure ................................. 22 (29,960) (2,436) (36,382)
Acquisitions ........................................ 10 -- (1,627,222) --
Equity dividends paid ............................... (28,000) -- --
------- ---------- --------
49,037 (1,560,899) 116,039
Management of liquid resources ...................... 22 25,685 -- --
FINANCING ........................................... 22 (183,432) 1,641,546 (410,245)
------- --------
(Decrease)/increase in cash ......................... (108,710) 80,647 (294,206)
======== ========== ========
RECONCILIATION OF NET CASH FLOW TO
MOVEMENT IN NET DEBT
(Decrease)/increase in cash ......................... (108,710) 80,647 (294,206)
Cash flow from decrease/(increase) in debt and
lease financing .................................... 81,924 (1,241,548) 410,245
Loans and finance leases acquired with
subsidiary ......................................... (54,351) (239,912) --
Loan stock issued ................................... (25,685) (50,000) --
New loan ............................................ -- (816,000) --
New finance leases .................................. -- -- (464,530)
-------- ---------- --------
Change in net debt .................................. (106,822) (2,266,813) (348,491)
Net debt at beginning of period ..................... (328,442) -- (2,266,813)
-------- ---------- ----------
Net debt at end of period ........................... 23 (435,264) (2,266,813) (2,615,304)
========== ==========
</TABLE>
The significant differences between the statement of cash flows presented
above and that required under United States generally accepted accounting
principles are described in Note 25.
The notes to the financial statements are
an integral part of the financial statements.
F-19
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
These financial statements comprise the consolidated financial statements
of Roda Limited ("the Company") and its subsidiary Roda Print Concepts Limited
("the Predecessor") (together, "the Group") for the period from incorporation,
29 August 1996 to 31 December 1996 and for the year ended 31 December 1997,
together with the financial statements of the Predecessor for the 10 months
ended 31 October 1996. The Company acquired Roda Print Concepts Limited on 21
October 1996 (the trading results from 21 October 1996 to 31 October 1996 are
not considered material). Prior to its acquisition of Roda Print Concepts
Limited, Roda Limited did not trade. The acquisition was a management buy-out
and the current shareholders of Roda Ltd are not the same as the original
shareholders of Roda Print Concepts Limited.
2. ACCOUNTING POLICIES
Accounting convention
The financial statements are prepared under the historical cost convention
and in accordance with United Kingdom applicable accounting standards.
Goodwill
Goodwill on acquisition has been set off directly against reserves. If the
subsidiary is subsequently sold or closed, any goodwill arising on acquisition
which was written off to reserves will be taken into account in determining the
profit or loss on sale or closure.
Depreciation
Depreciation is provided on all tangible fixed assets at rates calculated
to write off the cost less estimated residual value of each asset evenly over
its expected useful life, as follows:
Leasehold improvements -- over the lease term
Plant and machinery -- 10% per annum
Fixtures, fittings and equipment -- 10% per annum
Motor vehicles -- 20% per annum
Stocks
Stocks are stated at the lower of cost and net realizable value. Cost
includes all expenses incurred in bringing the products to their present
location and condition. Net realisable value is based on estimated selling
prices less any further costs to be incurred on disposal.
Deferred taxation
Deferred taxation is provided on the liability method for all timing
differences which are expected to reverse in the future, calculated at the rate
at which it is estimated that tax will be payable.
Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the
date of the transaction or at the contracted rate if the transaction is covered
by a forward exchange contract. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the rate of exchange ruling at the
balance sheet date or, if appropriate, at the forward contract rate.
Pensions
The Group contributes to two defined contribution schemes for its directors
and employees. The assets of the schemes are held separately from those of the
Company in independently administered funds. The pension cost charge represents
contributions paid by the Company to the schemes.
F-20
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
2. ACCOUNTING POLICIES - (CONTINUED)
Leasing commitments
Assets held under finance leases, which are leases where substantially all
the risks and rewards of the ownership of the asset have passed to the Company,
are capitalized in the balance sheet and are depreciated over their useful
lives. The capital elements of future obligations under the leases are included
as liabilities in the balance sheet.
The interest elements of the rental obligations are charged in the profit
and loss account over the periods of the leases and represent a constant
proportion of the balance of capital repayments outstanding.
Rentals payable under operating leases are charged in the profit and loss
account on a straight line basis over the lease term.
3. TURNOVER
Turnover, which is stated net of value added tax and represents amounts
invoiced to third parties, and pre-tax profits are wholly attributable to the
Group's one continuing activity of general printing.
An analysis of turnover by geographical market is given below:
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
United Kingdom ......................... 2,393,100 336,000 2,972,334
Rest of the European Community ......... 236,969 108,918 531,138
Rest of the world ...................... 428,152 180,607 694,747
--------- ------- ---------
3,058,221 625,525 4,198,219
========= ======= =========
</TABLE>
4. OPERATING (LOSS)/PROFIT
This is stated after charging:
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
Auditors' remuneration--audit fees .................. 6,250 1,250 --
Depreciation of owned fixed assets .................. 46,374 7,005 38,751
Depreciation of assets held under finance
leases and hire purchase contracts .................. 12,515 2,501 49,963
Operating lease rentals--land and buildings ......... 30,000 6,000 36,000
====== ===== ======
</TABLE>
F-21
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
5. DIRECTORS' EMOLUMENTS
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
Emoluments .................... 225,435 23,131 157,063
Pension contributions ......... 224,389 2,666 14,149
------- ------ -------
449,824 25,797 171,212
======= ====== =======
Directors' emoluments, excluding pension contributions, were paid by the
subsidiary undertakings and fell within the following ranges:
NO. NO. NO.
----- ----- ----
Poundsnil -- Pounds5,000 ............. 3 3 --
Pounds15,000 -- Pounds19,999 ........... -- 1 --
Pounds20,000 -- Pounds24,999 ........... -- -- 2
Pounds75,000 -- Pounds79,999 ........... 1 -- --
Pounds105,000 -- Pounds109,999 .......... -- -- 1
Pounds120,000 -- Pounds127,999 .......... 1 -- --
The emoluments of the highest paid director, were Pounds107,627 (1996 --
Pounds120,354, for the pre-acquisition period and Pounds19,131 for the
consolidated period) (these were not the same directors).
The chairman received no emoluments.
6. STAFF COSTS
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
Wages and salaries ............ 926,724 190,969 1,300,333
Social security costs ......... 88,627 20,677 126,950
Other pension costs ........... 15,886 1,215 13,495
------- ------- ---------
1,031,237 212,861 1,440,778
========= ======= =========
The average weekly number of employees during the period, including the
directors, was as follows:
NO. NO. NO.
----- ----- ----
Factory ................. 19 19 37
Administration .......... 12 12 9
Directors ............... 2 2 1
-- -- --
33 33 47
== == ==
F-22
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
7. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
Interest payable on bank overdraft ................. 23,513 4,055 4,759
Finance leases and hire purchase contracts ......... 5,808 1,001 27,469
Other interest payable ............................. 674 32,643 176,228
------ ------ -------
29,995 37,699 208,456
====== ====== =======
</TABLE>
8. TAXATION
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
Based on the (loss)/profit for the period: .........
UK corporation tax at 31.5% (1996 -- 33%) .......... 12,505 (11,355) (115,000)
Corporation tax underprovided in previous years (3,435) -- (54,000)
------ ------- --------
9,070 (11,355) (169,000)
====== ======= ========
</TABLE>
9. TANGIBLE FIXED ASSETS
Company -- year to 31 December 1997
<TABLE>
<CAPTION>
IMPROVEMENT PLANT FIXTURES,
TO AND FITTINGS AND MOTOR
LEASEHOLD MACHINERY EQUIPMENT VEHICLES TOTAL
Pounds Pounds Pounds Pounds Pounds
------------- ----------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
COST:
At 1 January 1997 ................ 19,438 469,659 152,290 51,690 693,077
Additions ........................ 4,602 535,881 54,079 2,350 596,912
Disposals ........................ -- (90,597) -- -- (90,597)
------ ------- ------- ------ -------
At 31 December 1997 .............. 24,040 914,943 206,369 54,040 1,199,392
------ ------- ------- ------ ---------
DEPRECIATION:
At 1 January 1997 ................ 5,102 212,736 67,550 8,224 293,612
Provided during the year ......... 2,754 58,203 17,302 10,455 88,714
Disposals ........................ -- (46,673) -- -- (46,673)
------ ------- ------- ------ ---------
At 31 December 1997 .............. 7,856 224,266 84,852 18,679 335,653
------ ------- ------- ------ ---------
Net book value at
31 December 1997 ................ 16,184 690,677 121,517 35,361 863,739
====== ======= ======= ====== =========
Net book value at
31 December 1996 ................ 14,336 256,923 84,740 43,466 399,465
====== ======= ======= ====== =========
</TABLE>
The net book value of tangible fixed assets includes Pounds617,529 in
respect of assets held under finance leases.
F-23
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
9. TANGIBLE FIXED ASSETS - (CONTINUED)
Company -- period from incorporation (29 August 1996) to 31 December 1996
<TABLE>
<CAPTION>
IMPROVEMENT PLANT FIXTURES,
TO AND FITTINGS AND MOTOR
LEASEHOLD MACHINERY EQUIPMENT VEHICLES TOTAL
Pounds Pounds Pounds Pounds Pounds
------------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COST:
On incorporation ........................ -- -- -- -- --
Arising on acquisition of ...............
subsidiary undertakings ................. 14,543 263,440 84,785 43,767 406,535
Additions ............................... -- -- 2,436 -- 2,436
------ ------- ------ ------ -------
At 31 December 1996 ..................... 14,543 263,440 87,221 43,767 408,971
------ ------- ------ ------ -------
DEPRECIATION:
On incorporation ........................ -- -- -- -- --
Provided during the period .............. 207 6,517 2,481 301 9,506
------ ------- ------ ------ -------
At 31 December 1996 ..................... 207 6,517 2,481 301 9,506
------ ------- ------ ------ -------
Net book value at
31 December 1996 ....................... 14,336 256,923 84,740 43,466 399,465
====== ======= ====== ====== =======
Net book value on incorporation ......... -- -- -- -- --
====== ======= ====== ====== =======
</TABLE>
The net book value of tangible fixed assets includes Pounds152,999 in
respect of assets held under finance leases. Predecessor -- ten months to 31
October 1996
<TABLE>
<CAPTION>
IMPROVEMENT PLANT FIXTURES,
TO AND FITTINGS AND MOTOR
LEASEHOLD MACHINERY EQUIPMENT VEHICLES TOTAL
Pounds Pounds Pounds Pounds Pounds
------------- ----------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COST:
At 1 January 1996 .................. 19,438 453,159 125,933 7,800 606,330
Additions .......................... -- 16,500 23,921 43,890 84,311
------ ------- ------- ------ -------
At 31 October 1996 ................. 19,438 469,659 149,854 51,690 690,641
------ ------- ------- ------ -------
DEPRECIATION:
At 1 January 1996 .................. 3,857 167,079 53,469 812 225,217
Provided during the period ......... 1,038 39,140 11,600 7,111 58,889
------ ------- ------- ------ -------
At 31 October 1996 ................. 4,895 206,219 65,069 7,923 284,106
------ ------- ------- ------ -------
NET BOOK VALUE:
At 31 October 1996 ................. 14,543 263,440 84,785 43,767 406,535
====== ======= ======= ====== =======
At 31 December 1995 ................ 15,581 286,080 72,464 6,988 381,113
====== ======= ======= ====== =======
</TABLE>
The net book value of tangible fixed assets includes Pounds145,500 in
respect of assets held under finance leases.
F-24
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
10. ANALYSIS OF THE ACQUISITION OF RODA PRINT CONCEPTS LIMITED
NET BOOK
VALUE AND
FAIR VALUE
Pounds
-------------
Fixed assets ................................ 406,535
Stocks ...................................... 104,752
Debtors ..................................... 1,003,004
Cash ........................................ 23,590
Overdraft ................................... (218,940)
Creditors ................................... (948,599)
Loans and finance leases .................... (239,914)
---------
Net assets .................................. 130,428
Less: Minority interest ..................... (100)
Goodwill arising on the acquisition ......... 2,167,544
---------
2,297,872
=========
DISCHARGED BY:
Loan ........................................ 866,000
Cash ........................................ 1,419,872
Retention account ........................... 12,000
---------
2,297,872
=========
On 21 October 1996 the Company acquired, from the family interests of D
Boulton, 100% of the equity issued share capital of Roda Print Concepts Limited,
a company incorporated in Great Britain, for a consideration of Pounds2,297,872.
CASH FLOWS RELATING TO THE ACQUISITION OF RODA PRINT CONCEPTS LIMITED:
<TABLE>
<CAPTION>
Pounds
---------------
<S> <C>
Net overdraft ....................................................... (195,350)
Cost of acquisition of Roda Print Concepts Limited -- cash .......... (1,419,872)
Cost of acquisition of Roda Print Concepts Limited -- cash placed
in escrow account .................................................. (12,000)
----------
(1,627,222)
==========
</TABLE>
11. STOCKS
1996 1997
Pounds Pounds
-------- ----------
Raw materials ............ 96,220 133,934
Work in progress ......... -- 14,092
------ -------
96,220 148,026
====== =======
12. DEBTORS
1996 1997
Pounds Pounds
--------- ----------
Trade debtors .......................... 766,365 827,353
Other debtors .......................... 16,623 69,399
Prepayments and accrued income ......... 16,348 31,502
------- -------
799,336 928,254
======= =======
F-25
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
13. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
1996 1997
Pounds Pounds
------------ ------------
Bank loans and overdrafts .................. 261,594 466,712
Obligations under finance leases ........... 33,618 122,798
Trade creditors ............................ 631,304 558,372
Corporation tax ............................ 63,067 134,202
Advance corporation tax .................... -- 5,403
Other taxes and social security costs ...... 62,316 41,765
Other creditors ............................ 913,502 133,124
Accruals ................................... 29,605 31,623
------- -------
1,995,006 1,493,999
========= =========
14. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
1996 1997
Pounds Pounds
------------ ------------
Loans wholly repayable within five years:
Bank loans ................................ 947,369 715,785
Other creditors ........................... 117,975 82,336
Obligations under finance leases .......... 32,366 280,200
Loan notes ................................ 50,000 850,000
------- -------
1,147,710 1,928,321
========= =========
The bank loans and overdraft are secured on the assets of the Group. Other
creditors (notes 13 and 14) include a loan from the directors' pension fund of
Pounds130,336 (1996 -- Pounds165,480) which is unsecured and repayable by
monthly instalments until 30 June 2004. The loan notes are part of the
management buy-out consideration, secured on the assets of the Group. These are
convertible to ordinary shares after a period of 5 years, if unredeemed, at the
option of the stockholder.
The finance lease liabilities mature as follows:
<TABLE>
<CAPTION>
1996 1997
Pounds Pounds
----------- ------------
<S> <C> <C>
Within one to two years ................................... 40,011 163,536
Within two to five years .................................. 33,717 321,497
------ -------
73,728 485,033
Less: finance charges allocated to future periods ......... (7,744) (82,035)
------ -------
65,984 402,998
====== =======
</TABLE>
15. PROVISION FOR LIABILITIES AND CHARGES
Deferred taxation not provided is as follows:
<TABLE>
<CAPTION>
NOT PROVIDED
---------------------------
1996 1997
Pounds Pounds
------------ ------------
<S> <C> <C>
Capital allowances in advance of depreciation ......... (54,190) (99,000)
======= =======
</TABLE>
F-26
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
16. SHARE CAPITAL
<TABLE>
<CAPTION>
ALLOTTED,
CALLED UP
AUTHORIZED AND FULLY PAID
------------------------- ------------------
1996 1997 1996 1997
Pounds Pounds Pounds Pounds
------------ ------------ --------- --------
<S> <C> <C> <C> <C>
`A' ordinary shares of 50p each .. 100,000 100,000 100,000 100,000
`B' ordinary shares of 50p each .. 900,000 900,000 100,000 100,000
------- ------- ------- -------
1,000,000 1,000,000 200,000 200,000
========= ========= ======= =======
</TABLE>
On incorporation, 2 ordinary shares of Pounds1 each were issued to the
subscribers to the Memorandum and Articles of Association for cash consideration
of Pounds2. On 21 October 1996 the Pounds1 shares were each converted to two 50p
ordinary `A' shares, and the authorised share capital was then increased to
Pounds1,000,000 (made up of 200,000 ordinary `A' shares and 1,800,000 ordinary
`B' shares). Pounds200,000 ordinary `B' shares and an additional Pounds199,996
ordinary `A' shares were then issued for Pounds1 each (i.e. at a premium of 50p
per share) for cash as part of the Management Buy-Out Agreement.
All shares have equal rights except on sale.
17. RECONCILIATION OF SHAREHOLDER'S FUNDS AND MOVEMENTS IN RESERVES
TOTAL
SHARE PROFIT AND SHAREHOLDERS'
CAPITAL LOSS ACCOUNT FUNDS
Pounds Pounds Pounds
--------- -------------- --------------
PREDECESSOR
At 1 January 1996 ........... 200 269,556 269,756
Loss for the period ......... -- (139,328) (139,328)
--- -------- --------
At 31 October 1996 .......... 200 130,228 130,428
=== ======== ========
<TABLE>
<CAPTION>
PROFIT TOTAL
SHARE SHARE AND LOSS SHAREHOLDERS'
CAPITAL PREMIUM ACCOUNT FUNDS
Pounds Pounds Pounds Pounds
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
COMPANY
On incorporation ............................ 2 2
Issue of share capital: on acquisition of
Roda Print Concepts Limited ................ 199,998 199,998 -- 399,996
Goodwill write off .......................... (2,167,544) (2,167,544)
Profit for the period ....................... 9,361 9,361
---------- ----------
At 31 December 1996 ......................... 200,000 199,998 (2,158,183) (1,758,185)
Profit for the year ......................... -- -- 276,306 276,306
------- ------- ---------- ----------
At 31 December 1997 ......................... 200,000 199,998 (1,881,877) (1,481,879)
======= ======= ========== ==========
</TABLE>
18. FINANCIAL COMMITMENTS
The Group had annual commitments under non-cancellable operating leases as
follows:
LAND AND
OTHER BUILDINGS
1996 1997 1996 1997
Pounds Pounds Pounds Pounds
------- ------- --------- ----------
Operating leases which expire:
within one year .................. 3,000 4,281 -- --
within two to five years ......... -- -- 36,000 36,000
----- ----- ------ ------
3,000 4,281 36,000 36,000
===== ===== ====== ======
F-27
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
19. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
The Group has authorised but not contracted for capital expenditure of
Poundsnil (1996 -- Pounds120,000).
20. ULTIMATE CONTROLLING ENTITY
In the opinion of the directors there is no ultimate controlling entity.
21. MINORITY INTERESTS
The non-equity minority interests represents a 100% holding of the
preference shares of Roda Print Concepts Limited by a third party. The holders
of these shares have no rights against other group companies.
22. NOTES TO THE STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996 TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
Interest received .................................... 30 -- 344
Dividends paid on non-equity shares .................. (45,970) -- --
Subsidiary dividend paid ............................. -- (18,130) (64,101)
Interest paid ........................................ (24,187) (36,685) (180,987)
Interest element of finance lease rental payments (5,808) (1,001) (27,469)
------- ------- --------
Net cash outflow from returns on investments
and servicing of finance ........................... (75,935) (55,816) (272,213)
======= ======= ========
CAPITAL EXPENDITURE:
Payments to acquire tangible fixed assets ............ (29,960) (2,436) (132,382)
Receipts from sales of tangible fixed assets ......... -- -- 96,000
------- ------- --------
(29,960) (2,436) (36,382)
======= ======= ========
MANAGEMENT OF LIQUID RESOURCES:
Sale of short term investment ........................ 25,685 -- --
------- ------- --------
Net cash inflow ...................................... 25,685 -- --
------- ------- --------
FINANCING:
Capital element of finance lease rental payments (37,736) (8,114) (127,517)
Capital repayment of pension fund loan ............... (5,866) (333) (35,149)
Capital repayment of bank loan ....................... (38,322) -- (231,579)
Loan to Roda Limited ................................. (101,508) -- --
Repayment of loan .................................... -- -- (16,000)
New secured loan ..................................... -- 1,200,000 --
New unsecured loan ................................... -- 49,995 --
Share capital issued ................................. -- 399,998 --
-------- --------- --------
Net cash (outflow)/inflow from financing ............. (183,432) 1,641,546 (410,245)
======== ========= ========
</TABLE>
F-28
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
23. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
AT AS
1 JANUARY OTHER 31 OCTOBER
1996 CASH FLOWS CHANGES 1996
Pounds Pounds Pounds Pounds
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
PREDECESSOR
Cash at bank and in hand ......... 26,092 (2,502) 23,590
Bank overdraft ................... (112,732) (106,208) (218,940)
-------- -------- --------
(86,640) (108,710) (195,350)
Finance leases ................... (57,486) 37,736 (54,351) (74,101)
Loans ............................ (210,001) 145,696 (101,508) (165,813)
--------
Short term investment ............ 25,685 (25,685)
-------- --------
(328,442) (49,037) (155,859) (435,264)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT AS
1 NOVEMBER OTHER 31 DECEMBER
1996 CASH FLOWS ACQUISITION CHANGES 1996
Pounds Pounds Pounds Pounds Pounds
------------ --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
COMPANY
Cash at bank and in hand ......... -- 89,610 89,610
Bank overdraft ................... -- (8,963) (8,963)
-- ------ ------
-- 80,647 80,647
Finance leases ................... -- 8,114 (74,099) (65,985)
Loans ............................ -- (1,249,662) (165,480) (866,333) (2,281,475)
- -------- -------- ----------
-- (1,160,901) (239,579) (866,333) (2,266,813)
== ========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
AT AS
1 JANUARY OTHER 31 OCTOBER
1997 CASH FLOWS CHANGES 1997
Pounds Pounds Pounds Pounds
--------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
COMPANY
Cash at bank and in hand ......... 89,610 (89,088) 522
Bank overdraft ................... (8,963) (205,118) (214,081)
------ -------- --------
80,647 (294,206) (213,559)
Finance leases ................... (65,985) 127,517 (464,530) (402,998)
Loans ............................ (2,281,475) 282,728 (1,998,747)
---------- -------- ----------
(2,266,813) 116,039 (464,530) (2,615,304)
========== ======== ======== ==========
</TABLE>
F-29
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED )
24. COMPANIES ACT 1985
These financial statements do not comprise statutory accounts within the
meaning of section 240 of the Companies Act 1985 of Great Britain. Statutory
accounts for the year ended 31 December 1996 of Roda Print Concepts Ltd, have
been delivered to the Registrar of Companies for England and Wales. Statutory
accounts for the period from incorporation to 31 December 1997 for Roda Limited
and the year ended 31 December 1997 for Roda Print Concepts Ltd. will be
delivered to the Registrar. The auditors' reports on these accounts were
unqualified.
25. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
KINGDOM AND UNITED STATES
The Group's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United Kingdom ("UK GAAP")
which differ in certain respects from United States generally accepted
accounting principles ("US GAAP"). The significant differences as they apply to
the Group are summarized below.
Goodwill
Under UK GAAP the goodwill arising on the acquisition of Roda Print
Concepts Limited has been charged to reserves. Under US GAAP such goodwill would
be capitalised and amortised over its estimated useful life of 40 years. The
goodwill arising under UK GAAP differs from that arising under US GAAP because,
under US GAAP, the net assets acquired would be net of a deferred tax liability.
Corporation tax
Under UK GAAP an additional provision is required for a prior year, which
is booked in 1997. Under US GAAP such an item would be taken back to the prior
year.
Deferred taxation
Under UK GAAP the Group provides for deferred tax using the liability
method on all timing differences which are expected to reverse in the future
without being replaced, calculated at the rate at which it is anticipated the
timing differences will reverse. Under US GAAP deferred taxation is provided
using the liability method on all temporary differences. Deferred tax
liabilities and assets would be classified as current or non current based on
the classification between the book and tax bases of assets and liabilities.
F-30
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
25. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
KINGDOM AND UNITED STATES - (CONTINUED)
The following is a summary of the significant adjustments to profit/(loss)
for the period and capital and reserves, which would be required if US GAAP were
to be applied instead of UK GAAP together with a statement of shareholders'
equity:
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
INCOME
(Loss)/profit for the period as reported in consolidated
statement of income ........................................ (65,358) 9,361 276,306
Amortisation of goodwill ..................................... -- (18,614) (55,843)
Prior period tax adjustment .................................. -- (54,000) 54,000
Deferred taxation: Methodology ............................... (66,172) 11,982 (44,810)
------- ------- -------
Net (loss)/income as adjusted to accord with US GAAP ......... (131,530) (51,271) 229,653
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
31 DECEMBER 31 DECEMBER
1996 1997
--------------- ---------------
<S> <C> <C>
CAPITAL AND RESERVES
Capital and reserves as reported in the consolidated balance
sheet ......................................................... (1,758,185) (1,481,879)
Goodwill ........................................................ 2,215,102 2,159,259
Deferred taxation: Methodology .................................. (54,190) (99,000)
---------- ----------
Current liabilities-corporation tax ............................. (54,000) --
Shareholders' equity as adjusted to accord with US GAAP ......... 348,727 578,380
========== ==========
</TABLE>
Statement of movements in shareholders' equity as adjusted to US GAAP:
Pounds
------------
Balance at 29 August 1996 .................. --
Share capital issued ....................... 399,998
Net loss as adjusted to US GAAP ............ (51,271)
-------
Balance at 31 December 1996 ................ 348,727
Net income as adjusted to US GAAP .......... 229,653
-------
Balance at 31 December 1997 ................ 578,380
=======
F-31
<PAGE>
RODA LIMITED
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
25. DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
KINGDOM AND UNITED STATES - (CONTINUED)
Cash flows
The consolidated statement of cash flows presents substantially the same
information as that required under US GAAP. These statements differ, however,
with regard to classification of items within the statements and as regards the
definition of cash and cash equivalents.
Under US GAAP, cash and cash equivalents would not include bank overdrafts
and borrowings with initial maturities of less than three months. Under UK GAAP,
cash flows are presented separately for operating activities, servicing of
finance and returns on investments, taxation, capital expenditure and financial
investment, equity dividends paid, management of liquid resources and financing.
US GAAP, however, require only three categories of cash flow activity to be
reported: operating, investing and financing. Cash flows from taxation and
servicing of finance and return on investments shown under UK GAAP would, with
the exception of dividends paid, be included as operating activities under US
GAAP. The payment of dividends would be included as a financing activity under
US GAAP. Under US GAAP, capitalised interest is treated as part of the cost of
the asset to which it relates and thus included as part of investing cash flows;
under UK GAAP all interest is treated as part of servicing of finance and
returns on investments.
The categories of cash flow activities under US GAAP can be summarised as
follows:
<TABLE>
<CAPTION>
COMPANY
PERIOD FROM
PREDECESSOR INCORPORATION COMPANY
TEN MONTHS (29 AUGUST YEAR
ENDED 1996) TO ENDED
31 OCTOBER 31 DECEMBER 31 DECEMBER
1996 1996 1997
Pounds Pounds Pounds
------------- --------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities .............. 106,997 68,759 152,421
Cash outflows on investing activities ............. (29,960) (1,629,658) (36,382)
Cash flows from financing activities .............. (79,539) 1,650,509 (205,127)
------- ---------- --------
Increase/(decrease) in cash and cash equivalents . (2,502) 89,610 (89,088)
Cash and cash equivalents at beginning of period . 26,092 -- 89,610
------- ---------- --------
Cash and cash equivalent at end of period ......... 23,590 89,610 522
======= ========== ========
</TABLE>
F-32
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION AND 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 ANY SECURITIES
BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON ASKING 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
PAGE
------------
Prospectus Summary ....................... 3
Risk Factors ............................. 7
The Company .............................. 14
Use of Proceeds .......................... 15
Dividend Policy .......................... 15
Capitalization ........................... 17
Dilution ................................. 18
Unaudited Pro Forma Combined
Financial Statements .................. 19
Selected Financial Data .................. 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................ 26
Business ................................. 31
Management ............................... 40
Principal Stockholders ................... 48
Certain Transactions ..................... 49
Description of Capital Stock ............. 50
Shares Eligible for Future Sale .......... 52
Underwriting ............................. 53
Legal Matters ............................ 55
Experts .................................. 55
Additional Information ................... 55
Index to Financial Statements ............ F-1
------------------------------------
UNTIL 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS 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.
================================================================================
================================================================================
2,100,000 SHARES
[LOGO]
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
COMMON STOCK
------------------------------------------------
PROSPECTUS
------------------------------------------------
SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock
offered hereby.
Securities and Exchange Commission Registration Fee ..... $ 9,262
NASD Filing Fee ......................................... $ 3,640
NASDAQ Listing Fee -- National Market Fee ............... $44,500
Blue Sky Fees and Expenses .............................. $ *
-------
Legal Fees and Expenses ................................. $ *
Accounting Fees ......................................... $ *
Printing and Engraving Costs ............................ $ *
Transfer Agent Fees ..................................... $ *
Miscellaneous Expenses .................................. $ *
=======
Total ................................................... $800,000
========
- ----------
* To be included by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation contains a provision
eliminating or limiting director liability to the Registrant and its
stockholders for monetary damages arising from acts or omissions in the
director's capacity as director. The provision does not, however, eliminate or
limit the personal liability of a director (i) for any breach of such director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, (iii) under the New Jersey statutory provision making
directors personally liable, under a negligence standard, for unlawful dividends
or unlawful stock purchases or redemptions or (iv) for any transaction from
which the director derived an improper personal benefit. This provision offers
persons who serve on the Board of Directors of the Registrant protection against
awards of monetary damages resulting from breaches of their duty of care (except
as indicated above). As a result of this provision, the ability of the
Registrant or a stockholder thereof to successfully prosecute an action against
a director for breach of his duty of care is limited. However, the provision
does not affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission has taken the position that the provision will have no
effect on claims arising under the federal securities laws.
In addition, the Registrant's Certificate of Incorporation and Bylaws
provide for mandatory indemnification rights, subject to limited exceptions, to
any director or officer of the Registrant who by reason of the fact that he or
she is a director or officer of the Registrant, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director, officer, employee or agent in advance of the
final deposition of such proceeding in accordance with the applicable provisions
of the New Jersey Business Corporation Act.
Each of the officers and directors of the Company is insured against
certain liabilities which he or she might incur in his or her capacity as an
officer or director pursuant to a Directors and Officers Liability Policy issued
by Federal Insurance Company of Warren, New Jersey. The general effect of this
policy is that if during the policy period any claim or claims are made against
the officers and directors of the Company or any of them individually for a
Wrongful Act (as defined in the policy) while acting in their individual or
collective capacities as directors or officers, and the Company has indemnified
them, the insurer will pay for 100% of any Loss (as defined in the policy). In
those instances where the officers and directors are not indemnified by the
Company, the insurer will pay on behalf of the officers and directors
II-1
<PAGE>
of the Company or any of them, their executors, administrators, or assigns, 100%
of the Loss. The insurer's combined limit of liability is $1,000,000 during any
policy year and $1,000,000 for any single Loss. "Wrongful Act" is defined as any
error, misstatement, misleading statement, act, omission, neglect or breach of
duty actually or allegedly committed or attempted by the officers or directors
of the Company while acting in their individual or collective capacities or in
any matter, not excluded by the terms and conditions of the policy, claimed
against them by reason of their being directors or officers of the Company. The
term "Loss" is defined as any amount which the Company shall be required or
permitted by law to pay to such person as indemnity for a claim or claims made
against them for "Wrongful Acts," and includes damages, judgments, settlements,
costs, charges, and expenses incurred in the defense of actions, suits or
proceedings and appeals therefrom, except that the term "Loss" does not include
fines or penalties imposed by law or matters which may be deemed uninsurable
under the law pursuant to which the policy shall be construed.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon formation of the Company, one share of Common Stock was issued to
Michael R. Cunningham.
Immediately prior to the Offering, the Company is closing the private
placement of 2,595,260 shares of Common Stock to the existing stockholders of
the Predecessor in connection with the Reorganization.
The recipients of these securities are the following:
NAME NUMBER OF SHARES
- ------------------------------------------------- -----------------
Michael R. Cunningham .................... 2,050,727
Gordon Mays .............................. 228,198
Timothy Mays ............................. 165,803
James J. Cunningham, Trustee ............. 130,898
William J. Mays, Trustee ................. 9,817
William Edward Shannon, Trustee .......... 9,817
Contemporaneously with the completion of the Offering, the Company is
closing the private placement of 169,739 shares of Common Stock to the selling
stockholders of Roda as part of the purchase price for the shares of capital
stock of Roda. For purposes of the transaction, a share of Common Stock is being
valued at the initial public offering price.
The recipients of these securities are the following:
NAME NUMBER OF SHARES
- -------------------------------------------------- -----------------
Peter L. Furlonge ......................... 128,323
Ralph J. Elman ............................ 624
Stelby Holdings Limited ................... 3,999
Central Investments Limited ............... 17,901
The Naggar Family Pension Scheme .......... 3,999
M. L. Tagliaferri ......................... 508
M. D. Moriarty ............................ 51
Mrs. J. Moriarty .......................... 76
George Harvey ............................. 14,258
The Company relies on Section 4(2) of the Securities Act in making the
foregoing private placements. No offer was made to any person other than the
existing stockholders of the Predecessor and the selling stockholders of Roda
Limited.
No underwriters are involved nor will any commissions be paid in connection
with the foregoing transactions.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------
1.1* Form of Underwriting Agreement among the Company, Schroder & Co. Inc.
and Prudential Securities Incorporated
1.2- Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Roda Limited dated January 16, 1998 between P.L. Furlonge
and others and the Predecessor
1.2 (a) Supplemental Agreement dated March 24, 1998 between P.L. Furlonge
and others and the Predecessor
2.1* Reorganization Agreement among Stockholders of the Predecessor and
CGII
3.1- Certificate of Incorporation
3.2- By-Laws
4.2* Specimen Common Stock Certificate
5.1* Opinion of Gibbons, Del Deo, Dolan, Griffinger & Vecchione
10.1 1998 Stock Option Plan
10.2- Directors' Stock Option Plan
10.3* Employment Agreement between the Company and M.R. Cunningham
10.4* Employment Agreement between the Company and G. Mays
10.5* Employment Agreement between the Company and T. Mays
10.6* Employment Agreement between the Company and R. Needle
10.7* Form of Service Agreement between Roda Limited and P.L. Furlonge
10.8* Employment Agreement between the Company and Robert M. Okin
10.9 - Loan and Security Agreement dated December 15, 1997 between the
Company and Summit Bank, as amended 10.10-+ Printing Services
Agreement dated July 12, 1996 between the Company and Goldman, Sachs &
Co., as amended
10.11- Agreement of Lease dated April 18, 1989 between the Company and
Lackawanna Warehouse Corp. of New Jersey, as amended
10.12- Agreement of Sublease dated July 15, 1996 between the Company and
Goldman, Sachs & Co.
10.13 Form of Roda Lease
10.14 Joint Marketing Agreement among Cunningham Graphics, Inc., Roda Print
Concepts Ltd. and Workable Ltd.
14(a)- Financial Statement Schedule
Report of Independent Auditors on Financial Statement Schedule
Schedule II -- Valuation of Qualifying Accounts
21.1 - List of all subsidiaries of the Company
23.1* Consent of Gibbons, Del Deo, Dolan, Griffinger & Vecchione (included
in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young Chartered Accountants
24.1 Power of Attorney (Page II -- 5)
27- Financial Data Schedule
99.1- Consent of Arnold Spinner
99.2- Consent of Norman R. Malo
99.3 Consent of Laurence Gerber
99.4 Consent of Stanley J. Moss
- ----------
- - Previously filed
* To be included by amendment
+ Portions of this Exhibit have been omitted and have been filed separately
with the Secretary of the Commission pursuant to Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Securities Act.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to Item 14 hereof, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities 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, 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities 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 Securities
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 the time shall be
deemed to be bona fide offering thereof.
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.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Jersey City, State
of New Jersey, on March 31, 1998.
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
By: /s/ Michael R. Cunningham
------------------------------------------
Michael R. Cunningham
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose signature appears below hereby constitutes
and appoints Michael R. Cunningham and Gordon Mays, or either of them, as such
person's true and lawful attorney-in-fact and agent with full power of
substitution for such person and in such person's name, place and stead, in any
and all capacities, to sign and to file with the Commission, any and all
amendments and post-effective amendments to this Registration Statement, with
exhibits thereto and other documents in connection therewith, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any substitute therefor, may lawfully do or cause to be done by virtue
thereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ Michael R. Cunningham
----------------------------- Chairman of the Board, March 31, 1998
Michael R. Cunningham President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ Kenneth G. Hay
----------------------------- Principal Financial and March 31, 1998
Kenneth G. Hay Accounting Officer
/s/ James J. Cunningham
----------------------------- Director March 31, 1998
James J. Cunningham
/s/ Gordon Mays
----------------------------- Director March 31, 1998
Gordon Mays
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cunningham Graphics International, Inc.
We have audited the predecessor financial statements of Cunningham Graphics
International, Inc. as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997, and have issued our report thereon
dated January 16, 1998 (included elsewhere in this Registration Statement). Our
audits also included the Financial Statement Schedule listed in Item 14(a) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the Financial Statement Schedule referred to above, when
considered in relation to the basic Financial Statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Princeton, New Jersey
January 16, 1998
S-1
<PAGE>
ITEM 14(A) FINANCIAL STATEMENT SCHEDULE
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS -- PREDECESSOR COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COST AND ENDING
DESCRIPTION BALANCE EXPENSE WRITE-OFFS BALANCE
- --------------------------------------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowances for accounts receivable ......... $28 $31 $ 9 $50
Year ended December 31, 1996:
Allowances for accounts receivable ......... 30 -- 2 28
Year ended December 31, 1995:
Allowances for accounts receivable ......... 30 -- -- 30
</TABLE>
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COST AND ENDING
DESCRIPTION BALANCE EXPENSE WRITE-OFFS BALANCE
- ------------------------------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowances for inventories ......... $200 $86 $92 $194
Year ended December 31, 1996:
Allowances for inventories ......... 200 82 82 200
Year ended December 31, 1995:
Allowances for inventories ......... 200 200
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
1.1* Form of Underwriting Agreement among the Company, Schroder & Co. Inc.
and Prudential Securities Incorporated
1.2- Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Roda Limited dated January 16, 1998 between P.L. Furlonge
and others and the Predecessor
1.2 (a) Supplemental Agreement dated March 24, 1998 between P.L. Furlonge
and others and the Predecessor
2.1* Reorganization Agreement among Stockholders of the Predecessor and
CGII
3.1- Certificate of Incorporation
3.2- By-Laws
4.2* Specimen Common Stock Certificate
5.1* Opinion of Gibbons, Del Deo, Dolan, Griffinger & Vecchione
10.1 1998 Stock Option Plan
10.2- Directors' Stock Option Plan
10.3* Employment Agreement between the Company and M.R. Cunningham
10.4* Employment Agreement between the Company and G. Mays
10.5* Employment Agreement between the Company and T. Mays
10.6* Employment Agreement between the Company and R. Needle
10.7* Form of Service Agreement between Roda Limited and P.L. Furlonge
10.8* Employment Agreement between the Company and Robert M. Okin
10.9- Loan and Security Agreement dated December 15, 1997 between the
Company and Summit Bank, as amended 10.10-+ Printing Services
Agreement dated July 12, 1996 between the Company and Goldman, Sachs &
Co., as amended
10.11- Agreement of Lease dated April 18, 1989 between the Company and
Lackawanna Warehouse Corp. of New Jersey, as amended
10.12- Agreement of Sublease dated July 15, 1996 between the Company and
Goldman, Sachs & Co.
10.13 Form of Roda Lease
10.14 Joint Marketing Agreement among Cunningham Graphics, Inc., Roda Print
Concepts Ltd. and Workable Ltd.
14(a)- Financial Statement Schedule
Report of Independent Auditors on Financial Statement Schedule
Schedule II -- Valuation of Qualifying Accounts
21.1- List of all subsidiaries of the Company
23.1* Consent of Gibbons, Del Deo, Dolan, Griffinger & Vecchione (included
in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young Chartered Accountants
24.1 Power of Attorney (Page II -- 5)
27- Financial Data Schedule
99.1- Consent of Arnold Spinner
99.2- Consent of Norman R. Malo
99.3 Consent of Laurence Gerber
99.4 Consent of Stanley J. Moss
- ----------
- - Previously filed
* To be included by amendment
+ Portions of this Exhibit have been omitted and have been filed separately
with the Secretary of the Commission pursuant to Registrant's Application
Requesting Confidential Treatment under Rule 406 of the Securities Act.
DATED 1998
(1) P. FURLONGE AND OTHERS
(2) CUNNINGHAM GRAPHICS, INC.
SUPPLEMENTAL AGREEMENT
MUNDAYS
CROWN HOUSE
CHURCH ROAD
CLAYGATE, ESHER
SURREY KT10 0LP
TELEPHONE: 01372 809000
REF: RAP/RAF/R13553
<PAGE>
SUPPLEMENTAL AGREEMENT
----------------------
THIS SUPPLEMENTAL AGREEMENT is made the day of March 1998
BETWEEN
(1) The several persons who respective names and addresses are set out in
column 1 of the Schedule hereto other than the Trustees ("the Vendors");
and
(2) CUNNINGHAM GRAPHICS, INC. a corporation organised under the laws of the
State of New Jersey, USA ("the Purchaser").
And is supplemental to an agreement dated 16th January 1998 and made between the
Vendors (other than the trustees as hereinafter defined) and the Purchaser
("the Main Agreement").
WHEREAS
(A) Under the Main Agreement the Vendors (other than the Trustees) agreed
to sell to the Purchaser, subject to the fulfilment of certain
conditions, the entire issued share capital of Roda Limited ("the
Company").
(B) Subsequent to the Main Agreement and contemporaneously with the signing
of this Agreement, the share capital of the Company has been
reorganised pursuant to resolutions in the agreed terms and P.
Furlonge, one of the Vendors, has transferred certain shares of the
Company to the Trustees No 1.
(C) The parties to the Main Agreement and the Trustees have agreed to vary
the Main Agreement as set out in this Supplemental Agreement.
(D) The Main Agreement remains conditional at the date hereof.
1
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
1998 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purpose of the Cunningham Graphics International, Inc. Stock Option
Plan (the "Plan") is to provide an additional incentive to key employees,
independent contractors, agents and consultants of Cunningham Graphics
International, Inc. (the "Company") and its subsidiaries, to aid in attracting
and retaining employees, independent contractors, agents and consultants of
outstanding ability, and to align their interests with those of shareholders.
SECTION 2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in this Plan, shall have the meanings set forth in this Section 2.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CHANGE IN CONTROL". A change in control of the Company shall be deemed
to have occurred if, over the initial opposition of the then-incumbent Board
(whether or not such Board ultimately acquiesces therein), (i) any person or
group of persons shall acquire, directly or indirectly, stock of the Company
having at least 25% of the combined voting power of the Company's
then-outstanding securities, or (ii) any shareholder or group of shareholders
shall elect a majority of the members of the Board in each case after the
closing of the initial public offering of the Stock.
(c) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and
regulations thereunder, as it or they may be amended from time to time.
(d) "COMMITTEE" shall mean the full Board, Compensation Committee of the
Board or such other committee as may be designated by the Board. If less than
the full Board, the Committee shall consist of two or more members of the Board
who are not eligible to participate in the Plan, and who otherwise are
"non-employee directors" under Rule 16b-3.
(e) "DATE OF EXERCISE" shall mean the earlier of the date on which written
notice of exercise, together with payment in full, is received at the office of
the Secretary of the Company or the date on which such notice and payment are
mailed to the Secretary of the Company at its principal office by certified or
registered mail.
(f) "EMPLOYEE" shall mean any employee or any officer of the Company or any
of its Subsidiaries, or any other person, who is an independent contractor,
agent or consultant of the Company or any of its Subsidiaries, and excluding any
director of the Company who is not otherwise an employee of the Company. For the
purposes of any provision of this Plan relating to Incentive Stock Options, the
term "Employee" shall be limited to mean any employee (as that term is defined
under Code Section 3401(c)) or officer of the Company or any of its
Subsidiaries, but not any person who is merely an independent contractor, agent
or consultant of the Company or any of its subsidiaries.
<PAGE>
(g) "FAIR MARKET VALUE" of the Stock means, for all purposes of the Plan
unless otherwise provided (i) the mean between the high and low sales prices of
the Stock as reported on the National Market System or Small Cap Market of the
National Association of Securities Dealers, Inc., Automated Quotation System, or
any similar system of automated dissemination of quotations of securities prices
then in common use, if so quoted, or (ii) if not quoted as described in clause
(i), the mean between the high bid and low asked quotations for the Stock as
reported by a the National Quotation Bureau Incorporated or such other source as
the Committee shall determine, or (iii) if the Stock is listed or admitted for
trading on any national securities exchange, the mean between the high and low
sales price, or the closing bid price if no sale occurred, of the Stock on the
principal securities exchange on which the Stock is listed. In the event that
the method for determining the Fair Market Value of the Stock provided for above
shall either be not applicable or not be practical, in the opinion of the
Committee, then the Fair Market Value shall be determined by such other
reasonable method as the Committee, in its discretion, shall select and apply.
(h) "GRANTEE" shall mean an Employee granted a Stock Option.
(i) "GRANTING DATE" shall mean the date on which the Committee authorizes
the issuance of a Stock Option for a specified number of shares of Stock to a
specified Employee.
(j) "INCENTIVE STOCK OPTION" shall mean a Stock Option granted under the
Plan which is properly qualified under the provisions of Section 422 of the
Code.
(k) "NONSTATUTORY STOCK OPTION" shall mean a Stock Option granted within
the Plan which is not an Incentive Stock Option or otherwise qualified under
similar tax provisions.
(l) "PROGRESSIVE STOCK OPTIONS" shall mean either Incentive Stock Options
or Nonstatutory Stock Options granted pursuant to Section 5(j) of this Plan.
(m) "RULE 16B-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
or any rule in replacement thereof.
(n) "STOCK" shall mean the Common Stock, no par value, of the Company.
(o) "STOCK APPRECIATION RIGHT" shall mean a right granted pursuant to the
Plan to receive Stock, cash, or a combination thereof, upon the surrender of the
right to purchase all or part of the shares of Stock covered by a Stock Option.
(p) "STOCK OPTION" shall mean an Incentive Stock Option or Nonstatutory
Stock Option granted pursuant to the Plan to purchase shares of Stock.
(q) "SUBSIDIARY" shall mean any subsidiary corporation as defined in
Section 424(f) of the Code.
SECTION 3. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to adjustment pursuant to Section 9, 450,000 shares of Stock shall
be reserved for issuance upon the exercise of Stock Options granted pursuant to
this Plan. Shares delivered under the Plan may be authorized and unissued shares
or issued shares held by the Company in its treasury. If any
2
<PAGE>
Stock Options expire or terminate without having been exercised, the shares of
Stock covered by such Stock Option shall become available again for the grant of
Stock Options hereunder. Similarly, if any Stock Options are surrendered for
cash pursuant to the provisions of Section 7, the shares of Stock covered by
such Stock Options shall also become available again for the grant of Stock
Options hereunder. Shares of Stock covered by Stock Options surrendered for
Stock pursuant to Section 7, however, shall not become available again for the
grant of Stock Options hereunder.
SECTION 4. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have authority to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to it, to
determine the terms and provisions of Stock Option grants, and to make all other
determinations necessary or advisable for the administration of the Plan.
(b) It is intended that the Plan and any transaction hereunder meet all of
the requirements of Rule 16b-3 promulgated by the Securities and Exchange
Commission, as such rule is currently in effect or as hereafter modified or
amended, and all other applicable laws. If any provision of the Plan or any
transaction would disqualify the Plan or such transaction under, or would not
comply with, Rule 16b-3 or other applicable laws, such provision or transaction
shall be construed or deemed amended to conform to Rule 16b-3 or such other
applicable laws or otherwise shall be deemed to be null and void, in each case
to the extent permitted by law and deemed advisable by the Committee.
(c) Any controversy or claim arising out of or related to this Plan shall
be determined unilaterally by and at the sole discretion of the Committee.
SECTION 5. GRANTING OF STOCK OPTIONS
(a) Only key Employees shall be eligible to receive Stock Options under the
Plan. Directors of the Company who are not also employees shall not be eligible
for Stock Options.
(b) The option price of each share of Stock subject to an Incentive Stock
Option shall be at least 100% of the Fair Market Value of a share of the Stock
on the Granting Date.
(c) The option price of each share of Stock subject to a Nonstatutory Stock
Option shall be 100% of the Fair Market Value of a share of the Stock on the
Granting Date, or such other price either greater than or less than the Fair
Market Value (but in no event less than the par value of the Stock) as the
Committee shall determine appropriate to the purposes of the Plan and to the
Company's total compensation program.
(d) The Committee shall determine and designate from time to time those key
Employees who are to be granted Stock Options and whether the particular Stock
Options are to be Incentive Stock Options or Nonstatutory Stock Options, and
shall also specify the number of shares covered by and the option price per
share of each Stock Option. Each Stock Option granted under the Plan shall be
clearly identified as to its status as a Nonstatutory Stock Option or an
Incentive Stock Option.
(e) The aggregate Fair Market Value (determined at the time the Stock
Option is granted) of the Stock with respect to which Incentive Stock Options
are exercisable for the first time by any individual during any calendar year
(under all plans of the individual's employer corporation and its parent and
subsidiary corporations) shall not exceed $100,000.
3
<PAGE>
(f) A Stock Option shall be exercisable during such period or periods and
in such installments as shall be fixed by the Committee at the time the Stock
Option is granted or in any amendment thereto; but each Stock Option shall
expire not later than ten years from the Granting Date.
(g) The Committee shall have the authority to grant both transferable Stock
Options and nontransferable Stock Options, and to amend outstanding
nontransferable Stock Options to provide for transferability. Each
nontransferable Stock Option intended to qualify under Rule 16b-3 or otherwise
shall provide by its terms that it is not transferable otherwise than by will or
the laws of descent and distribution or, except in the case of Incentive Stock
Options, pursuant to a "qualified domestic relations order" as defined by the
Code, and is exercisable, during the Grantee's lifetime, only by the Grantee.
Each transferable Stock Option may provide for such limitations on
transferability and exercisability as the Committee may designate at the time a
Stock Option is granted or is otherwise amended to provide for transferability.
(h) Stock Options may be granted to an Employee who has previously received
Stock Options or other options whether such prior Stock Options or other options
are still outstanding, have previously been exercised or surrendered in whole or
in part, or are canceled in connection with the issuance of new Stock Options.
(i) Subject to adjustment pursuant to Section 9, the aggregate number of
shares of Stock subject to Stock Options granted to an Employee under the Plan
during any calendar year, with the exception of 1998, shall not exceed 25,000
shares.
(j) Without in any way limiting the authority of the Committee to make
grants of Stock Options under the Plan, and in order to induce Employees to
retain ownership of Stock, the Committee shall have the authority (but not the
obligation) to include within any agreement reflecting a Stock Option a
provision entitling the Grantee of such a Stock Option to a further Stock Option
(a "Progressive Stock Option") in the event the Grantee exercises such Stock
Option evidenced by such agreement, in whole or in part, by surrendering other
shares of Stock in accordance with this Plan and the terms and conditions of
such agreement. Any such Progressive Stock Option shall be for a number of
shares of Stock equal to the number of surrendered shares, shall become
exerciseable no sooner than six months after the Granting Date of the Stock
Option or such longer period as the Committee may establish, shall have an
option price per share equal to one hundred percent (100%) of the Fair Market
Value of a share of Stock on the Granting Date of the Progressive Stock Option,
and shall be subject to such other terms and conditions as the Committee may
determine.
(k) Notwithstanding the foregoing, the option price of an Incentive Stock
Option in the case of a Grantee who owns more than ten percent of the total
combined voting power of all classes of stock of the Company or any of its
Subsidiaries, will not be less than one-hundred-ten percent (110%) of the Fair
Market Value of the Stock at the Granting date and in the case of such a
Grantee, the Incentive Stock Option may be exercised no more than five years
after the Granting Date.
SECTION 6. EXERCISE OF STOCK OPTIONS
(a) Except as provided in Section 8, no Stock Option may be exercised at
any time unless the Grantee is an Employee on the Date of Exercise and, in the
case of holders of Incentive Stock Options, has been an Employee at all times
during the period beginning on the Granting Date and ending on the day 3 months
before the date of such exercise.
4
<PAGE>
(b) The Grantee shall pay the option price in full on the Date of Exercise
of a Stock Option in cash, by check, or by delivery of full shares of Stock of
the Company, duly endorsed for transfer to the Company with signature
guaranteed, by any combination thereof or by such other mode of payment as the
Committee may approve, including payment through a broker in accordance with
procedures permitted by rules and regulations of the Federal Reserve Board.
Stock will be accepted at its Fair Market Value on the Date of Exercise.
(c) Subject to the approval of the Committee, or of such person to whom the
Committee may delegate such authority ("its designee"), and subject further to
the applicable regulations of any governmental authority, the Company may loan
to the Grantee a sum equal to an amount which is not in excess of 100% of the
purchase price of the shares of Stock acquired upon exercise of a Stock Option,
such loan to be evidenced by the execution and delivery of a promissory note.
Interest shall be paid on the unpaid balance of the promissory note at such
times and at such rate as shall be determined by the Committee or its designee.
Such promissory note shall be secured by the pledge to the Company of shares of
Stock having an aggregate purchase price on the date of purchase equal to or
greater than the amount of such note. A Grantee shall have, as to such pledged
shares of Stock, all rights of ownership including the right to vote such shares
of Stock and to receive dividends paid on such shares of Stock, subject to the
security interest of the Company. Such shares of Stock shall not be released by
the Company from the pledge unless the proportionate amount of the note secured
thereby has been repaid to the Company; provided, however that shares of Stock
subject to a pledge may be used to pay all or part of the purchase price of any
other option granted hereunder or under any other stock incentive plan of the
Company under the terms of which the purchase price of an option may be paid by
the surrender of shares of Stock, subject to the terms and conditions of this
Plan relating to the surrender of shares of Stock in payment of the exercise
price of an option. In such event, that number of the newly purchased shares of
Stock equal to the shares of Stock previously pledged shall be immediately
pledged as substitute security for the pre-existing debt of the Grantee to the
Company, and thereupon shall be subject to the provisions hereof relating to
pledged shares of Stock. All notes executed hereunder shall be payable at such
times and in such amounts and shall contain such other terms as shall be
specified by the Committee or its designee or stated in the option agreement;
provided, however, that such terms shall conform to requirements contained in
any applicable regulations which are issued by any governmental authority.
SECTION 7. STOCK APPRECIATION RIGHTS
(a) The Committee may grant to any Employee, Stock Appreciation Rights in
connection with any Stock Option. Stock Appreciation Rights may be granted at
the time the related Stock Option is granted or at any time thereafter up to six
months prior to the expiration of the related Stock Option.
(b) Stock Appreciation Rights shall be exercisable at such times and to the
extent that the related Stock Option shall be exercisable and only to the extent
the Stock Appreciation Right has a positive value, unless the Committee
specifies a more restrictive period.
(c) Upon the exercise of a Stock Appreciation Right, the Grantee shall
surrender the related Stock Option or a portion thereof and shall be entitled to
receive payment of an amount determined by multiplying the number of shares as
to which the Stock Option rights are surrendered by the difference obtained by
subtracting the exercise price per share of the related Stock Option from the
Fair Market Value of a share of Stock on the Date of Exercise of the Stock
Appreciation Right.
(d) Payment of the amount determined under Section 7(c) shall be made in
Stock, in cash, or partly in cash and partly in Stock as the Committee shall
determine in its sole discretion.
5
<PAGE>
(e) Except as provided in Section 10(b), the exercise of a Stock
Appreciation Right for cash may be made only during the period beginning on the
third business day following the release of quarterly or annual financial data
and ending on the twelfth business day following such date.
SECTION 8. TERMINATION OF EMPLOYMENT
Except as otherwise provided by the Committee at the time the Stock Option
is granted or any amendment thereto, if a Grantee ceases to be an Employee then:
(a) if termination of employment is voluntary or involuntary without cause,
the Grantee may exercise each Stock Option held by the Grantee within three
months after such termination (but not after the expiration date of the Stock
Option) to the extent of the number of shares subject to the Stock Option which
are purchasable pursuant to its terms at the date of termination;
(b) if termination is for cause, all Stock Options held by the Grantee
shall be canceled as of the date of termination;
(c) subject to the provisions of Section 8(d), if termination is (i) by
reason of retirement at a time when the Grantee is entitled to the current
receipt of benefits under any retirement plan maintained by the Company or any
Subsidiary, or (ii) by reason of disability, each Stock Option held by the
Grantee may be exercised by the Grantee at any time (but not after the
expiration date of the Stock Option) (within one year of termination in the case
of Incentive Stock Options) to the extent of the number of shares subject to the
Stock Option which were purchasable pursuant to its terms at the date of
termination;
(d) if termination is by reason of the death of the Grantee, or if the
Grantee dies after retirement or disability as referred to in Section 8(c), each
Stock Option held by the Grantee may be exercised by the Grantee's estate, or by
any person who acquires the right to exercise the Stock Option by reason of the
Grantee's death, at any time within a period of three years after death (but not
after the expiration date of the Stock Option) to the extent of the total number
of shares subject to the Stock Option which were purchasable pursuant to its
terms at the date of termination; or
(e) if the Grantee should die within three months after voluntary
termination of employment or involuntary termination without cause, as
contemplated in Section 8(a), each Stock Option held by the Grantee may be
exercised by the Grantee's estate, or by any person who acquires the right to
exercise by reason of the Grantee's death, at any time within a period of one
year after death (but not after the expiration date of the Stock Option) to the
extent of the number of shares subject to the Stock Option which were
purchasable pursuant to its terms at the date of termination.
SECTION 9. ADJUSTMENTS
In the event of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other change in the corporate
structure or capitalization affecting the Stock, there shall be an appropriate
adjustment made by the Committee in the number and kind of shares that may be
granted in the aggregate and to individual Employees under the Plan, the number
and kind of shares subject to each outstanding Stock Option and Stock
Appreciation Right and the option prices.
6
<PAGE>
SECTION 10. TENDER OFFER; CHANGE IN CONTROL
(a) A Stock Option shall become immediately exercisable to the extent of
the total number of shares subject to the Stock Option in the event of (i) a
tender offer by a person or persons other than the Company for all or any part
of the outstanding Stock if, upon consummation of the purchases contemplated,
the offeror or offerors would own, beneficially or of record, an aggregate of
more than 25% of the outstanding Stock, or (ii) a Change in Control of the
Company.
(b) The Committee may authorize the payment of cash upon the exercise of a
Stock Appreciation Right during a period (i) beginning on the date on which a
tender offer as described in (a), above, is first published or sent or given to
holders of Stock and ending on the date which is seven days after its
termination or expiration, or (ii) beginning on the date on which a Change in
Control of the Company occurs and ending on the twelfth business day following
such date.
SECTION 11. GENERAL PROVISIONS
(a) Each Stock Option shall be evidenced by a written instrument containing
such terms and conditions, not inconsistent with this Plan, as the Committee
shall approve.
(b) The granting of a Stock Option in any year shall not give the Grantee
any right to similar grants in future years or any right to be retained in the
employ of the Company or any Subsidiary or interfere in any way with the right
of the Company or such Subsidiary to terminate an Employee's employment at any
time.
(c) The Company shall have the right to deduct from any payment or
distribution under the Plan any federal, state or local taxes of any kind
required by law to be withheld with respect to such payments or to take such
other action as may be necessary to satisfy all obligations for the payment of
such taxes. In case distributions are made in shares of Stock, the Company shall
have the right to retain the value of sufficient shares of Stock to equal the
amount of tax to be withheld for such distributions or require a recipient to
pay the Company for any such taxes required to be withheld on such terms and
conditions prescribed by the Committee.
(d) No Grantee shall have any of the rights of a shareholder by reason of a
Stock Option until it is exercised.
(e) This Plan shall be construed and enforced in accordance with the laws
of the State of Delaware (without regard to the legislative or judicial conflict
of laws rules of any state), except to the extent superseded by federal law.
SECTION 12. AMENDMENT AND TERMINATION
(a) The Plan shall terminate on December 31, 2007 and no Stock Option shall
be granted hereunder after that date, provided that the Board may terminate the
Plan at any time prior thereto.
(b) The Board may amend the Plan at any time without notice, provided
however, that the Board may not, without prior approval by the shareholders, (i)
increase the maximum number of shares of Stock for which Stock Options may be
granted (except as contemplated by the provisions of Section 9), (ii) materially
increase the benefits accruing to participants under the Plan or (iii)
materially modify the requirements as to eligibility for participation in the
Plan.
7
<PAGE>
(c) No termination or amendment of the Plan may, without the consent of a
Grantee to whom a Stock Option shall theretofore have been granted, adversely
affect the rights of such Grantee under such Stock Option.
SECTION 13. EFFECTIVE DATE
The Plan shall become effective as of the date it is approved by the
Company's stockholders.
8
THIS LEASE is made the day of One thousand nine hundred and
ninety-eight BETWEEN * of * (hereinafter called "the Landlord" which expression
where the context so admits shall include the reversioner for the time being
immediately expectant upon the term hereby granted) of the first part and *
whose registered office is situate at * (hereinafter called "the Tenant" which
expression where the context so admits shall include the person or persons in
whom the term hereby granted may from time to time be vested) of the second part
NOW THIS DEED WITNESSETH as follows:
1. IN consideration of the rents and covenants on the part of the Tenant
hereinafter reserved and contained the Landlord HEREBY DEMISES unto the
Tenant ALL THOSE the premises described in the First Schedule hereto
(hereinafter called "the demised premises") EXCEPT AND RESERVING unto the
Landlord and all others for the time being entitled thereto the rights set
out in the Second Schedule hereto AND SUBJECT to the matters set out in the
Third Schedule hereto TO HOLD the demised premises unto the Tenant for a
term of FIVE YEARS from and including the date hereof (hereinafter called
"the Term" which shall include the period of any holding over or any
extension or continuation whether by statute or at common law) YIELDING AND
PAYING therefor FIRSTLY yearly and proportionately for any fraction of a
year until and including the 31 day of August 2000 the yearly rent of
THIRTY-SIX THOUSAND POUNDS ((pound)36,000) and from and including the 1 dAY
of September 2000 such rent as may become payable pursuant to the Fourth
Schedule hereto in each case by equal quarterly payments to be made in
advance on the usual quarter days in every year without any deduction the
first such payment or a proportionate part thereof in respect of the period
from the date hereof to the quarter day hereafter next following being
payable on the completion hereof SECONDLY by way of additional rent from
time to time such sum or sums as are equal to the amount which the Landlord
may expend in effecting and maintaining the insurance of the demised
premises such last mentioned rent to be paid without deduction forthwith on
demand and THIRDLY by way of additional rent without deduction forthwith on
demand any other monies payable by the Tenant to the Landlord pursuant to
the terms of this Lease
2. THE Tenant HEREBY COVENANTS with the Landlord as follows:
TO PAY RENTS
(1) To pay the rents hereinbefore reserved at the times and in the manner
aforesaid without any deduction whatsoever
TO PAY INTEREST ON OVERDUE MONIES
(2) Without prejudice to any other right remedy or power herein contained or
otherwise available to the Landlord if any of the said rents (whether
formally demanded or not) or any other sum of money payable to the Landlord
by the Tenant under this Lease shall remain unpaid for more than fourteen
(14)days
<PAGE>
after the date upon which the same becomes due to pay interest thereon at
the yearly rate of 4% per annum above the Base Rate for the time being of
National Westminster Bank PLC or in the event of National Westminster Bank
PLC ceasing to publish a Base Rate such other comparable rate of interest
as the Landlord shall from time to time determine (hereinafter in either
case called "the Prescribed Rate")
TO PAY OUTGOINGS
(3) To bear pay and discharge all rates taxes duties charges assessments
impositions and outgoings whatsoever (whether parliamentary parochial local
or of any other description and whether or not of a capital or
non-recurring nature or of a wholly novel character) now or hereafter
assessed charged or imposed upon or payable in respect of the demised
premises or any part thereof or upon the owner or occupier thereof and a
proper proportion attributable to the demised premises of any such rate
taxes duties charges assessments impositions and outgoings now or hereafter
assessed charged or imposed upon or payable in respect of the demised
premises or any part thereof or upon the owners or occupiers thereof
jointly with any adjoining or neighbouring property or the owners or
occupiers thereof excluding any payable by the Landlord occasioned by any
dealing with the reversion of this Lease
TO MAINTAIN AND KEEP IN REPAIR
(4)
(a) To keep the demised premises in as good repair and condition and
decorative order as they now are (as evidenced by the Schedule of
Condition annexed hereto) (damage by the Insured Risks as hereinafter
defined excepted unless payment of the insurance monies is withheld in
whole or in part as a result of the act neglect or default of the
Tenant)
(B) Not to commit any waste whether permissive or voluntary in or upon the
demised premises
(C) Not to allow to pass into the sewers drains or watercourses serving
the demised premises any noxious or deleterious effluent or other
substance which might cause any obstruction in or injury to the said
sewers drains or watercourses and in the event of any such obstruction
or injury forthwith to make good all such damage to the satisfaction
of the Landlord
CLEANING
(5) At least once in each month during the Term properly to clean all the
windows (both inside and outside) and all other glass in the demised
premises
TO YIELD UP
<PAGE>
(6) At the expiration or sooner determination of the Term quietly to yield up
the demised premises to the Landlord in such repair and condition and
decorative order as shall be in accordance with the covenants on the part
of the Tenant herein contained
ENTRY BY LANDLORD AND OTHERS
(7) To permit the Landlord and its agents or surveyors with or without workmen
and others and all persons authorised by the Landlord with all necessary
materials and appliances at all reasonable times during the Term upon
reasonable prior notice (or without notice in case of emergency) to enter
and remain upon the demised premises for any of the following purposes:
(A) to view and examine the state and condition of the demised premises
and to take schedules or inventories of the Landlord's fixtures and
fittings
(B) for any other purpose connected with the interest of the Landlord in
the demised premises including but not limited to valuing or disposing
of any interest of the Landlord
(C) to exercise any of the rights excepted and reserved by this Lease
TO COMPLY WITH NOTICES TO REPAIR
(8) To repair and made good to the satisfaction of the Landlord all defects
wants of repair and breaches of covenant of which notice in writing shall
be given to the Tenant by the Landlord and for which the Tenant is liable
under this Lease within thirty-five (35) days of such notice or sooner if
requisite AND if the Tenant shall fail within fourteen (14) days of such
notice (or immediately in case of emergency) to commence and then
diligently and expeditiously to continue to comply with suc notice in all
respects it shall be lawful (but without prejudice to the right of re-entry
and forfeiture hereinafter contained) for the Landlord and its agents
surveyors and workmen to enter upon the demised premises and to carry out
all or any of the works referred to in such notice and the cost of so doing
and all expenses incurred thereby shall be paid by the Tenant to the
Landlord on demand and in default of payment shall be recoverable as rent
in arrear
DANGEROUS MATERIALS AND USE OF MACHINERY
(9) Not to bring into or keep in the demised premises any article or thing
which is or might become dangerous offensive combustible inflammable
radio-active or explosive or which might increase the risk of fire or
explosion or attack or in any way injure by percolation corrosion or
otherwise the demised premises or contravene any statute
OVERLOADING FLOORS AND SERVICES
(10)
(A) Not to do anything in the demised premises which may throw on the
<PAGE>
demised premises any weight or strain in excess of that which the
demised premises are calculated to bear with due margin for safety and
to observe the weight limits for all lifts and similar equipment in
the demised premises
(B) Not to overload the floors of the demised premises nor to suspend any
excessive weight from the roof ceilings walls or stanchions or the
structure of the demised premises and to pay to the Landlord on demand
all costs reasonably incurred by the Landlord in obtaining the opinion
of a qualified structural engineer as to whether the structure of the
demised premises is being or is about to be overloaded
ALTERATIONS
(11)
(A) Not to make any alterations or additions of whatsoever nature to any
structural part of the demised premises nor to the external design
elevation or appearance of the demised premises
(B) Not without the consent in writing of the Landlord to make any
alteration or addition to the Landlord's fixtures and fittings or
otherwise interfere with the same
(C) Not to make any alterations or additions to the electrical
installation save with the Landlords consent not to be unreasonably
withheld and save in accordance with the requirements from time to
time of the Institute of Electrical Engineers
(D) Not to make any alterations or additions of a non-structural nature to
the demised premises without the consent in writing of the Landlord
(such consent not to be unreasonably withheld or delayed) PROVIDED
that the Landlord may as a condition of giving any such consent as
aforesaid require the Tenant to enter into such covenants with the
Landlord as the Landlord may reasonably require as regards (inter
alia) the execution of any such works and the reinstatement of the
demised premises at the end or sooner determination of the Term
(E) In the event of the Tenant failing to observe this covenant it shall
be lawful for the Landlord and its agents or surveyors with or without
workmen and others and all persons authorised by the Landlord with all
necessary materials and appliances to enter upon the demised premises
and remove any alterations or additions and execute such works as may
be necessary to restore the demised premises to their former state and
the costs and expenses thereof (including surveyors and other
professional fees) shall be paid by the Tenant to the Landlord on
demand and in default of payment shall be recoverable as rent in
arrear
STATUTORY REQUIREMENTS
<PAGE>
(12)
(A) At the Tenant's own expense to observe and comply in all respects with
the provisions and requirements of the Offices, Shops and Railway
Premises Act 1963 the Fire Precautions Act 1971 the Defective Premises
Act 1972 the Health and Safety at Work, etc. Act 1974 and every other
statute already or hereafter in force or prescribed or required by any
public local or other authority so far as they relate to or affect the
demised premises or any additions or alterations thereto or the user
thereof for any purpose or the employment therein of any person or any
fixture machinery plant or chattel for the time being affixed thereto
or being thereupon or used for the purposes thereof
(B) To execute all works and provide and maintain all arrangements which
by or under any statute or by any government department local
authority or other public authority or duly authorised officer or
Court of competent jurisdiction acting under or in pursuance of any
statute are or may be directed or required to be executed provided or
maintained upon or in respect of the demised premises or any additions
or alterations thereto or in respect of any user thereof or the
employment therein of any person or any fixture machinery plant or
chattel and whether by the landlord or tenant thereof
(C) To indemnify and keep indemnified the Landlord against all costs
charges and expenses of or incidental to the execution of any works or
the provision or maintenance of any arrangements so directed or
required as aforesaid
(D) Not to do or omit to be done in or about the demised premises any act
or thing by reason of which the Landlord may under any statute incur
or have imposed upon it or become liable to pay any penalty damages
compensation costs charges or expenses
(E) Not to do anything in the demised premises or cause them to be
occupied in such a way as shall cause any part of the same not to
comply with any statute
PLANNING
(13)
(A) To comply in all respects with the Town and Country Planning Act 1990
the Planning (Listed Buildings and Conservation Areas) Act 1990 the
Planning (Hazardous Substances) Act 1990 the Planning (Consequential
Provisions) Act 1990 the Planning and Compensation Act 1991 and any
subsequent legislation of a similar nature (hereinafter called "the
Planning Acts") and to keep the Landlord indemnified in respect
thereof
(B) As often as may be necessary at the expense in all respects of the
Tenant to obtain all licences consents and permissions which may be
required for
<PAGE>
the carrying out by the Tenant of any operations on the demised
premises or the commencement continuation or renewal by the Tenant of
any use thereof PROVIDED THAT the Tenant shall not make any
application for planning permission or give any notice to any
authority of the commencement or carrying out of any development (or
give any notice of an intention to commence or carry out the same)
without the prior consent in writing of the Landlord
(C) To pay and satisfy any charge that may hereafter be imposed under the
Planning Acts in respect of the carrying out by the Tenant of any of
its operations on the demised premises or the institution or
continuation by the Tenant of any use thereon
(D) Notwithstanding any consent which may be granted by the Landlord under
this Lease not to carry out or make any alteration or addition to the
demised premises or any change of use thereof before a planning
permission therefor has been produced to the Landlord and acknowledged
by it in writing as satisfactory to it PROVIDED THAT the Landlord may
refuse so to express its satisfaction with any such planning
permission on the ground that the period thereof or anything contained
therein or omitted therefrom would in the reasonable opinion of the
Landlord be or be likely to be prejudicial to the Landlord's interest
in the demised premises whether during the Term or following the
expiration thereof
(E) Unless the Landlord shall otherwise direct to carry out before the
expiration or sooner determination of the Term any works stipulated to
be carried out to the demised premises by a date subsequent to such
expiration or sooner determination as a condition of any planning
permission which may have been implemented by the Tenant
(F) If and when called upon so to do to produce to the Landlord all plans
documents and other evidence which the Landlord may reasonably require
in order to satisfy itself that the provisions of this sub-clause have
been compiled with in all respects
(G) In any case where permission for any development granted by the local
planning or other authority has been granted subject to conditions the
Landlord shall be entitled in addition to its other rights contained
in this Lease as a condition of giving consent to the carrying out of
the works or making the change of use to require the Tenant to provide
reasonable security for the compliance with the conditions imposed as
aforesaid and the development shall not be commenced or the change of
use put into effect until such security shall have been provided to
the reasonable satisfaction of the Landlord
<PAGE>
STATUTORY NOTICES
(14) Within seven (7) days (or sooner if requisite having regard to the
requirements of the notice in question or the time limits stated therein)
of the receipt of notice of the same to produce to the Landlord a true copy
and any further particulars required by the Landlord of any permission
notice or order or proposal for a notice or order relevant to the demised
premises or to the use or condition thereof or otherwise concerning the
Tenant made given or issued to the Tenant or occupier by any government
department or local or public authority AND without delay to take all
reasonable or necessary steps to comply therewith AND ALSO at the request
of the Landlord to join with the Landlord in making such objections or
representations against or in respect of any such notice order or proposal
as aforesaid as the Landlord shall deem expedient
FIRE PRECAUTIONS AND EQUIPMENT
(15)
(A) To comply with all requirements and recommendations from time to time
of the appropriate authority the insurers of the demised premises and
the Landlord in relation to fire precautions affecting the demised
premises
(B) To keep the demised premises sufficiently supplied and equipped with
such fire fighting and extinguishing appliances as shall from time to
time be required by any statute or by the fire or other competent
authority or the insurers of the demised premises or as shall be
reasonably required by the Landlord or (at the Landlord's option) to
pay to the Landlord on demand the cost of providing and installing any
of the same and such appliances shall be open to inspection and shall
be maintained to the reasonable satisfaction of the Landlord
(C) Not to obstruct the access to or means of working any fire fighting
and extinguishing appliances or the means of escape from the demised
premises in case of fire
TO INFORM THE LANDLORD OF DEFECTS
(16) Forthwith upon becoming aware of the same to give written notice to the
Landlord of any defect in the demised premises which might give rise to an
obligation on the Landlord to do or refrain from doing any act or thing so
as to comply with any statutory or common law duty of care now or hereafter
imposed on the Landlord and at all times to display and maintain all
notices which the Landlord may from time to time reasonably require to be
displayed in respect thereof at the demised premise
USER
(17)
(A) Not at any time during the term to use or permit the demised premises
to be used for any noisy noisome noxious dangerous or offensive trade
manufacture or business whatsoever nor for the carrying on of anything
which shall be a nuisance damage annoyance or
<PAGE>
inconvenience to the neighbourhood or to the Public Local or any other
Authorities or to the Landlord or to the tenants or owners or
occupiers of adjoining or adjacent premises or which shall in any way
be injurious to the sam nor to allow any sale by auction to be held in
the demised premises
(B) Not to use or permit the demised premises to be used otherwise than
for a use falling within Class B1(c) B2 or B8 of the Town and Country
Planning (Use Classes) Order 1987 with ancillary offices
NOT TO AFFIX SIGNS
(18) Not to affix or exhibit or permit to be affixed or exhibited to or upon any
part of the demised premises or within the same so as to be visible from
the exterior thereof any placard poster signboard or other advertisement
PROVIDED THAT the Tenant may erect at the entrance of the demised premises
a sign stating the name and business of the Tenant the size style position
and materials of such sign to be approved in writing by the Landlord (such
approval not to be unreasonably withheld or delayed) and (if necessary) by
the local authority
NOTICES FOR DISPOSAL
(19) To permit the Landlord to fix and retain in a conspicuous position on the
demised premises a noticeboard for the reletting (in the event of the
termination or likely termination for whatever reason of the Term) and/or
the sale of the same and not to take down or obscure the said noticeboard
and to permit all persons authorised in writing by the Landlord or its
agents to view the demised premises by prior appointment or (if the Tenant
refuses an appointment) after reasonable prior notice
TO NOTIFY LANDLORD OF ENCROACHMENTS
(20) To give immediate notice to the Landlord of any notice or claim affecting
the demised premises or any part thereof and not knowingly to permit or
suffer any encroachment upon the demised premises or the acquisition of any
new right to light passage drainage or other easement on over or under the
demised premises and if any such encroachment or easement shall be made or
acquired or threatened to be made or acquired forthwith to give notice to
the Landlord and at the cost of the Tenant to do all such things as may be
proper for the purpose of preventing the making of such encroachment or the
acquisition of such easement or right PROVIDED ALWAYS that if the Tenant
shall omit or neglect forthwith to do all such things as aforesaid it shall
be lawful for the Landlord and its agents surveyors and workmen to enter
the demised premises and to do the same and any expense so incurred by the
Landlord shall be repaid to the Landlord by the Tenant on demand in that
behalf together with all Solicitors and Surveyors charges and other
expenses which may be incurred by the Landlord in connection therewith and
in default of payment shall be recoverable as rent in arrear
TO INFORM LANDLORD OF NOTICES
<PAGE>
(21) Upon the happening of any occurrence or upon the receipt of any notice
order requisition direction or other thing which may be capable of
adversely affecting the Landlord's interest in the demised premises the
Tenant shall forthwith at his own expense deliver full particulars or a
copy thereof to the Landlord
TAX
(22) Notwithstanding anything contained in this Lease not to do on or in
relation to the demised premises or any part thereof any act matter or
thing (other than the payment of the rents hereby reserved) which shall
render the Landlord liable for any tax levy duty charge or imposition
whatsoever (whether parliamentary local parochial or of any other
description and whether or not of a capital or non-recurring nature or of a
wholly novel character) and not to dispose of or deal with the demise
premises in such a way that the Landlord shall be or become liable for any
such tax levy duty charge or imposition as aforesaid nor to permit any such
disposition or dealing
LANDLORD'S COSTS
(23) To pay on demand to the Landlord all reasonable costs charges and expenses
properly incurred by the Landlord including (without limitation) solicitors
counsels architects and surveyors fees bailiffs commission and other
professional costs and fees:
(A) incidental to or in contemplation of the preparation and service of a
notice under Section 146 of the Law of Property Act 1925 or in or in
contemplation of any proceedings under Sections 146 or 147 of the said
Act (whether or not any right of re-entry or forfeiture has been
waived by the Landlord or a notice served under the said Section 146
is complied with by the Tenant or the Tenant has been relieved under
the provisions of the said Act and notwithstanding forfeiture is
avoided otherwise than by relief granted by the Court) AND to
indemnify the Landlord against all costs charges expenses claims and
demands whatsoever in respect of the said proceedings and the
preparation and service of the said notice
(B) incidental to or in contemplation of the preparation and service of
all notices and schedules relating to wants of repair whether served
during or after the expiration of the Term (but relating in all cases
only to such wants of repair that accrued not later than the
expiration or sooner determination of the Term)
(C) in connection with or in procuring the remedying of the breach of any
covenant by the Tenant contained in this Lease
(D) in relation to any application for consent required by this Lease
(such costs to include reasonable management fees and expenses)
whether or not the same is granted
(E) in the event of default in payment by the Tenant of any of the sums
<PAGE>
referred to in the foregoing provisions hereof the same shall be
recoverable as rent in arrear
(F) in connection with the preparation and grant of this Lease
ALIENATION
(24)
(A) Not to assign underlet charge or otherwise part with the possession of
the whole or any part of the demised premises or permit another to
occupy the whole or any part of the demised premises except as
hereinafter authorised
(B) Not to assign or charge the whole of the demised premises without the
prior written consent of the Landlord such consent not to be
unreasonably withheld or delayed PROVIDED that for the purposes of
S.19 of the Landlord and Tenant Act 1927 as amended the Landlord shall
not be considered to be unreasonably withholding or delaying its
consent to an assignment in the event that the Tenant fails to comply
with the provisions of subclause (c) hereof
(C) Prior to any permitted assignment at its own expense (i) to procure
that the proposed assignee of the Demised Premises enters into a
direct covenant with the Landlord to perform and observe all the
tenant's covenants and all other provisions of this Lease (ii) if the
Landlord shall reasonably so require to obtain either a guarantor or
guarantors who shall covenant with the Landlord in the terms set out
in the Fifth Schedule hereto or such other security as is acceptable
to the Landlord for the proposed assignee (iii) to enter into an
Authorised Guarantee Agreement guaranteeing the performance by the
proposed assignee of the covenants and conditions herein contained
such Authorised Guarantee Agreement to be in such form as is
reasonably required by the Landlord and (iv) to procure that any
guarantor who has covenanted with the Landlord pursuant to subclause
(c) (ii) hereof shall enter into such Authorised Guarantee Agreement
(D) The Tenant shall be entitled to share occupation with any other
company in the same group of companies as the Tenant (as defined by
S.42 of the Landlord and Tenant Act 1954) so long as the relationship
of landlord and tenant is not created between them
(E) Within twenty-one (21) days of any assignment charge underlease or any
transmission or other devolution relating to the demised premises or
any part thereof to produce for registration with the Landlord's
Solicitor such deed or document or a certified copy thereof and to pay
the Landlord's Solicitors reasonable charges for the registration of
every such document such charges not being less than(pound)20.00 plus
Value Added Tax
VALUE ADDED TAX
<PAGE>
(25)
(A) To pay and keep the Landlord indemnified against all Value Added Tax
which may from time to time be charged or chargeable on any sum
payable by the Tenant to the Landlord pursuant to the terms of this
Lease or any document entered into pursuant hereto
(B) Any rent or other sum specified in this Lease or in any document
entered into pursuant hereto is and any sum to be agreed certified
determined or ascertained pursuant to the provisions hereof shall be a
sum net of Value Added Tax
(C) The Tenant hereby irrevocably consents to the Landlord charging Value
Added Tax on any such rent or other sum
INSURANCE
(26)
(A) Not to do or permit to be done anything upon the demised premises
whereby any policy or policies of insurance effected by the Landlord
may become void or voidable or whereby any additional premium may
become payable for the insurance of the demised premises
(B) To comply at all times with all requirements of the insurers in
respect of the policy or policies of insurance effected by the
Landlord
(C) Not to effect any policy of insurance on the demised premises in
respect of any of the Insured Risks (and in default the Landlord shall
be entitled to any insurance money received by or payable to the
Tenant)
(D) (Without limiting the generality of the foregoing) not to bring or
keep in or on the Demised Premises any dangerous explosive corrosive
or offensive material
(E) Forthwith upon becoming aware of the happening of any event or thing
against which insurance has been effected by the Landlord the Tenant
shall give immediate notice thereof to the Landlord
3. LANDLORD'S COVENANTS
The Landlord HEREBY COVENANTS with the Tenant as follows:
(1) That the Tenant shall and may peaceably and quietly hold and enjoy the
demised premises during the said term without any lawful interruption or
disturbance from or by the Landlord or any person or persons lawfully
claiming under or in trust for it
(2) That the Landlord will insure and keep insured with insurers or
underwriters of repute:
<PAGE>
(A) The demised premises subject only to such exclusions excesses and
limitations as may be imposed by the insurers in the full
reinstatement cost of the demised premises against loss or damage by
fire storm tempest and such other risks for which cover is available
as the Landlord may in its absolute discretion from time to time
determine (hereinafter called "the Insured Risks") including
architects surveyors and other professional fees (and Value Added Tax
thereon) and expenses incidental thereto the cost of shoring up
demolition and site clearance and similar expenses
(B) The explosion of any engineering and electrical plant and machinery to
the extent that the same is not covered by paragraph (a) of this
sub-clause
(C) Property owners liability and such other insurances as the Landlord
may from time to time deem necessary to effect
(3) At the request of the Tenant the Landlord shall (but not more than twice in
any period of twelve months) produce to the Tenant a copy of the current
schedule of insurance cover
(4) If the demised premises or any part thereof are destroyed or damaged by any
of the Insured Risks then the Landlord will lay out or procure to be laid
out and utilise the net proceeds of such insurance only in the rebuilding
and reinstatement of the demised premises so destroyed or damaged
4. PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows:
FORFEITURE
(1)
(A) In this clause a "Forfeiting Event" is any of the following:-
(I) any of the rents reserved by this Lease is outstanding for
fourteen days after becoming due whether formally demanded or
not
(II) a breach by the Tenant of any of the provisions of this Lease
(III) the Tenant has any distress or execution levied on its goods
(IV) the Tenant is Insolvent
(B) In this clause " Insolvent" means:
(I) in relation to a company any of the following:
(AA) it is deemed unable to pay its debts as defined in the
Insolvency Act 1986 (referred to in this clause as "the
Act") section 123
(BB) a proposal is made for a voluntary arrangement under Part
<PAGE>
I of the Act
(CC) a petition is presented for an administration order under
Part II of the Act or
(DD) a receiver, administrative receiver or manager is
appointed under (without limitation) Part III of the Act
or the Law of Property Act section 101
(FF) a provisional liquidator is appointed under section 135
of the Act
(GG) a proposal is made for a scheme of arrangement under the
Companies Act 1985 section 425
(II) in relation to an individual any of the following:
(AA) an application is made for an interim order or a proposal
is made for a voluntary arrangement under Part VIII of
the Act
(BB) a bankruptcy petition is presented to the court or his
circumstances are such that a bankruptcy petition could
be presented under Part IX of the Act
(CC) he enters into a deed of arrangement
(DD) a receiver of the income of the demised premises is
appointed under the Law of Property Act section 101
Whenever a Forfeiting Event exists the Landlord may enter the
demised premises (or any part of them) at any time even if a
previous right of re-entry has been waived and then the term
will end but without affecting any rights that either party
may have against the other including (without limitation) the
breach under which the re-entry is made
IMPLIED EASEMENTS
(2) That nothing herein contained shall operate expressly or impliedly to
confer upon or grant to the Tenant any easement right or privilege
whatsoever
RESTRICTIONS ON ADJOINING PROPERTY
(3) That nothing herein contained or implied shall impose or be deemed to
impose any restriction on the use of any land or building or premises not
comprised in these presents or give the Tenant the benefit of or the right
to enforce or to have enforced or to permit the release or modification of
any covenant agreement or condition entered into by any purchaser from or
by any lessee or occupier of the Landlord in respect of property not
comprised in these presents or to prevent or restrict i any way the
development of any land not comprised in these presents
COMPENSATION
(4) Except where any Act of Parliament prohibits or modifies the right of the
Tenant to compensation being excluded or reduced by agreement the Tenant
shall not be
<PAGE>
entitled on quitting the demised premises to claim any compensation from
the Landlord under the Landlord and Tenant Act 1954 or any other Act of
Parliament whether enacted before or after the date hereof
NOTICES
(5)
(A) Any demand or notice required to be made given to or served on the
Tenant shall be duly and validly made given or served if addressed to
the Tenant (and if there shall be more than one of them then any of
them) and left at or sent by pre-paid registered or recorded delivery
mail addressed (in the case of a company) to its registered office or
(whether a company or individual) its last known address or (in the
case of a notice to the Tenant) the demised premises
(B) Any notice required to be given to or served on the Landlord shall be
duly and validly made given or served if sent by pre-paid registered
or recorded delivery mail addressed in the case of a company to the
Landlord at its registered office and in the case of an individual to
the latest address of the Landlord of which the Tenant was given
notice in writing
(C) Any demand or notice sent by mail shall be conclusively treated as
having been made given or served on the second working day after the
day of posting
CESSER OF RENT
(6) In case the demised premises or any part thereof shall be destroyed or
damaged by any of the Insured Risks so as to render the demised premises
unfit for occupation and use and the policy or policies or insurance shall
not have been vitiated or payment of the policy monies refused in whole or
in part in consequence of some act or default of the Tenant or any
undertenant or any person under its or their control then the rent first
hereby reserved or a fair proportion thereof according to the nature and
extent of the damage sustained shall be suspended until the demised
premises shall be again rendered fit for occupation and use or the
expiration of three (3) years from the date of the destruction or damage
(whichever is the earlier) and any dispute regarding the cesser of rent
shall be referred to the award of a single arbitrator to be appointed in
default of agreement upon the application of either party by or on behalf
of the President for the time being of the Royal Institute of Chartered
Surveyors in accordance with the provisions of the Arbitration Act 1996 (as
the same may from time to time be amended)
<PAGE>
EXCLUSION ORDER
(7) Having been authorised so to do by an Order of the * County Court made on
the * day of * 199* under the provisions of S.38(4) of the Landlord and
Tenant Act 1954 as amended by S.5 of the Law of Property Act 1969 the
parties hereto agree that the provisions of S.24 to S.28 inclusive of the
Landlord and Tenant Act 1954 shall be excluded in relation to the Lease
hereby created
INTERPRETATION
(8) In this Lease where the context so admits words importing the neuter gender
only shall include the masculine or feminine gender (as the case may be)
and words importing the masculine gender only shall include the feminine
gender and vice-versa and words importing the singular number only include
the plural number and vice versa and where there are two or more
individuals included in the expression "the Tenant" covenants herein
expressed to be made by the Tenant shall be deemed to be made by such
persons jointly and severally
PARAGRAPH HEADINGS
(9) The paragraph headings hereto shall not affect the construction of these
presents
CERTIFICATION
(10) It is hereby certified that this Lease is not entered into pursuant to an
Agreement for Lease
IN WITNESS whereof this Lease has been duly executed as a Deed the day and year
first before written
THE FIRST SCHEDULE
ALL THAT the land and premises known as 29, 29A, 31 and 33 Choumert Grove
Camberwell London SE13 which said land and premises comprise Title Nos. SGL
281662 and SGL 382413 together with the appurtenances thereto and any building
now or hereafter erected on the said land or any part thereof and all boundary
walls fences and hedges belonging thereto and including all additions
alterations and improvements thereto and all Landlord's fixtures and fittings
and plant machinery and equipment now or hereafter on in or about the same
THE SECOND SCHEDULE
The following rights and easements are excepted and reserved out of the demised
premises to the Landlord and its tenants and the occupiers of any adjoining or
neighbouring land or premises ("the other premises") and all other persons
authorised by the Landlord or having the like rights and easements:
(A) The free passage and running of water soil gas electricity
<PAGE>
telecommunications and other services through all channels pipes
conduits and cables and other media which are now or may at any time
during the Term be in on over or under the demised premises or any
part thereof
(B) Full right and liberty at any time hereafter as need or occasion shall
arise to build re-build or execute any other works upon the other
premises and to use the other premises in any manner and for any
purposes as the Landlord or the person exercising such rights may
think fit notwithstanding that the access of light or air to the
demised premises may thereby suffer interference
(C) The right to lay construct and maintain gas water and other pipes
drains electric telecommunications and other wires and cables and
appliances (with necessary inspection chambers) through in under over
or upon the demised premises or any part thereof for the benefit of
the demised premises or the other premises
(D) The right at any time with or without workmen and equipment but
(except in an emergency) after giving not less than Twenty-four hours
prior written notice to enter (or in an emergency or after the giving
of reasonable prior notice during the Tenant's absence to break and
enter) the demised premises in order to (a) inspect or view the
condition of the demised premises (b) carry out work upon the other
premises and (c) carry out any repairs or other work which the
Landlord must or may carry out under the provisions of this Lease or
to do any other thing which under the said provisions the Landlord may
do
(E) Such rights and easements as were excepted or reserved by any of the
documents set out in the Third Schedule hereto
THE THIRD SCHEDULE
The demise hereinbefore contained is made subject to the covenants restrictions
reservations and other matters (other than financial charges) contained or
referred to in the Property and Charges Registers of Title Nos. SGL 281662 and
SGL 382413
THE FOURTH SCHEDULE
RENT REVIEW
DEFINITIONS
(1) For the purpose of this Schedule:
(A) "Review Date" means 1st September 2000
(B) "Open Market Rent" means the best yearly rent at which the demised
<PAGE>
premises might reasonably be expected to be let in the open market on
the Review Date by a willing landlord to a willing tenant with vacant
possession and without a premium or any other consideration for the
grant thereof for a term of years equal to the residue unexpired of
the Term at the Review Date and after the expiry of a rent free period
of such length as would be negotiated in the open market and otherwis
on the same terms and conditions as are contained in this Lease
(except as to the amount of the rent payable hereunder but including
these provisions for the review of rent) and on the assumption (if not
a fact) that at the Review Date:
(A) the demised premises are suitable and fit for immediate
beneficial occupation and use by the willing tenant
(B) the demised premises are in good and substantial repair and free
from defects (whether or not inherent)
(C) no work has been carried out to the demised premises by the
Tenant or any undertenant during the Term which has diminished
the rental value of the demised premises
(D) if the demised premises have been destroyed or damaged they have
been fully rebuilt and reinstated
(E) all the covenants on the part of the Tenant contained in this
Lease have been fully performed and observed
BUT there shall be disregarded:
(I) any effect on rent of the fact that the Tenant or any permitted
undertenant may have been in occupation of the demised premises
(II) any goodwill attached to the demised premises by reason of any
business carried on therein by the Tenant or any permitted
undertenant
(III)any increase in the rental value of the demised premises
attributable to the existence at the Review Date of any
improvement to the demised premises or any part thereof carried
out by the Tenant or any permitted undertenant after the date
hereof with the consent (where required) of the Landlord
otherwise than in pursuance of an obligation to the Landlord or
pursuant to obligations requiring compliance with statutes or
directions of local or other authorities
(IV) the taxable status of the Tenant for the purposes of Value Added
Tax or any other tax
(V) so far as may be permitted by law all restrictions whatsoever
relating to rent or to security of tenure contained in any
statute or orders rules or regulations thereunder and any
directions thereby given relating to any method of determining
rent
(C) "Surveyor" means the independent professionally qualified surveyor of
not less than Ten (10) years standing being suitably experienced in
rent review valuations in South East England of industrial and
warehouse premises of a similar size and nature to the demised
premises appointed
<PAGE>
from time to time to determine the Open Market Rent pursuant to the
provisions of this Schedule
(D) "the President" means the President for the time being of The Royal
Institution of Chartered Surveyors and shall include the duly
appointed deputy of the President or any person authorised by the
President to make appointments on his behalf
(E) "Rent Restrictions" means any restrictions imposed by statute or any
order rule or regulation thereunder for the control of rent in force
on the Review Date or on the date on which any increased rent is
ascertained in accordance with this Schedule and which operate to
impose any limitation whether in time or amount on the collection of
an increase in the rent first hereby reserved or any part thereof
UPWARDS ONLY RENT REVIEW
(2) The rent first hereby reserved shall be reviewed with effect from the
Review Date in accordance with the provisions of this Schedule and from and
including the Review Date the rent shall be equal to the higher of either
the rent payable immediately before the Review Date or the Open Market Rent
on the Review Date agreed or determined as hereinafter provided
AGREEMENT OR DETERMINATION OF THE REVIEWED RENT
(3) The Open Market Rent at the Review Date may be agreed in writing at any
time between the Landlord and the Tenant but if for any reason the Landlord
and the Tenant are unable to agree to the Open Market Rent then either the
Landlord or the Tenant may (not more than two months before but at any time
after the Review Date) by notice to the other party require the Open Market
Rent to be determined by the Surveyor
APPOINTMENT OF SURVEYOR
(4) In default of agreement between the Landlord and the Tenant on the
appointment jointly of the Surveyor the Surveyor shall be appointed by the
President on the written application of either the Landlord or the Tenant
who shall be at liberty to make such application not more than one (1)
month before but at any time after the Review Date
FUNCTIONS OF THE SURVEYOR
(5) The Surveyor shall:
(A) at the option of the Landlord act either as an arbitrator in
accordance with the Arbitration Act 1996 (as the same may be amended
from time to time) or as an expert
(B) if acting as an expert invite the Landlord and the Tenant to submit to
him
<PAGE>
within such time limits as he shall consider appropriate and as shall
be approved by the Landlord a valuation accompanied if desired by a
statement of reasons and such representations and cross
representations as to the amount of the Open Market Rent with such
supporting evidence as they may respectively wish
(C) within sixty (60) days of his appointment or within such extended
period as the Landlord and the Tenant shall jointly agree in writing
give to each of them written notice of the amount of the Open Market
Rent as determined by him
COSTS OF REFERENCE TO SURVEYOR
(6)
(A) The costs of any reference to the Surveyor (if acting as an expert)
shall be in the award of the Surveyor and failing such award the costs
shall be borne by the parties in equal shares
(B) If either the Landlord or the Tenant shall fail to pay their
respective share of the costs of the Surveyor under the provisions
hereof within twenty-one days of the same being demanded by the
Surveyor then the other shall be entitled to pay the same and the
amount to paid shall be repaid by the party chargeable on demand and
in the case of the Tenant shall be recoverable as rent in arrear
APPOINTMENT OF NEW SURVEYOR
(7) If the Surveyor (acting as an expert) does not give notice of his
determination within the time aforesaid or if he shall die or become
unwilling to act or incapable of acting or if for any other reason he is
unable to act then either the Landlord or the Tenant may request the
President to discharge the Surveyor and appoint another surveyor in his
place which procedure may be repeated as many times as necessary
INTERIM PAYMENTS PENDING DETERMINATION
(8) In the event that by the Review Date the amount of the reviewed rent has
not been agreed or determined as aforesaid (the actual date of agreement or
determination being herein called "the Determination Date") then in respect
of the period of time (herein called "the Interim Period") beginning with
the Review Date and ending on the quarter day following the Determination
Date the Tenant shall pay to the Landlord rent at the yearly rate payable
immediately before the Review Date and within seven (7) days of the
Determination Date the Tenant shall pay to the Landlord on demand as
arrears of rent the amount by which the reviewed rent exceeds the rent
actually paid during the Interim Period (apportioned on a daily basis)
together with interest thereon at the Prescribed
<PAGE>
Rate from the Review Date to the date of actual payment
RENT RESTRICTIONS
(9) On each and every occasion during the Term that Rent Restrictions shall
prevent or prohibit either wholly or partially:
(A) the operation of the above provisions for review of the rent or
(B) the normal collection and retention by the Landlord of any increase in
the rent or any installment or part thereof
THEN and in each such case respectively:
(I) the operation of such provisions for review of the rent shall be
postponed to take effect on the first date or dates thereafter
upon which such operation may occur
(II) the collection of any increase or increases in the rent shall be
postponed to take effect on the first date or dates thereafter
that such increase or increases may be collected and/or retained
in whole or in part and on as many occasions as shall be required
to ensure the collection of the whole increase
AND until the Rent Restrictions shall be relaxed either partially or wholly
the rent first hereby reserved shall be the maximum sum from time to time
permitted by the Rent Restrictions as may be applicable
MEMORANDA OF REVIEWED RENT
(10) As soon as the amount of any reviewed rent has been agreed or determined
memoranda thereof shall be prepared by the Landlord or its Solicitors and
thereupon shall be signed by or on behalf of the Landlord and the Tenant
and annexed to this Lease and the counterpart thereof and the parties shall
bear their own costs in respect thereof
TIME NOT OF THE ESSENCE
(11) For the purpose of this clause time shall not be of the essence
THE FIFTH SCHEDULE
(1) The Assignee or the Surety shall pay the rents and all other sums reserved
and made payable by the Lease in the manner and at the respective times
appointed for payment thereof and shall perform and observe all the
covenants on the part of the Tenant and the conditions and provisions
contained in the Lease AND the Surety hereby indemnifies the Landlord
against all claims demands losses damages costs and expenses whatsoever
sustained by the Landlord by reason of or arising in any way directly or
indirectly out of any default by the Assignee in the payment of the said
rents or other sums in the manner aforesaid or in the performance or
observance of any of the said covenants conditions and provisions
<PAGE>
PROVIDED ALWAYS that any neglect delay or forbearance of the Landlord in
enforcing or giving time to the Assignee for payment of the said rents or
other sums or the performance or observance of any of the said covenants
conditions and provisions or any variation in the terms of th Lease
(including any reviews of the rent) or the transfer of the Landlord's
reversion or the release of any one of the persons acting as the Surety (if
more than one) from liability under the Lease or any other act omission
matter or thing whatsoever whereby (but for this provision) the Surety
would be exonerated either wholly or in part from this covenant and
indemnity (other than a release under seal given by the Landlord) shall not
release or in any way lessen or affect the liability of the Surety
hereunder
(2) If the Lease is forfeited or if the Assignee being a company goes into
liquidation and the liquidator disclaims the Lease or the Assignee is
wound-up or ceases to exist or the Assignee being an individual becomes
bankrupt and the trustees in bankruptcy disclaim the Lease or if the Lease
is disclaimed by or on behalf of the Assignee under any statutory or other
power then if the Landlord so requires the Surety shall accept from and
execute and deliver to the Landlord a counterpart of a ne lease of the
Demised Premises for a term commencing on the date of such forfeiture
disclaimer or other event putting an end to the effect of the Lease as
aforesaid and continuing for the residue then remaining unexpired of the
term granted by the Lease such new lease to be at the cost of the Surety
and to reserve the same rents and other sums as are then reserved and made
payable by the Lease and to be subject to the same covenants conditions and
provisions (including the rent review provisions) as are contained in the
Lease (with the exception of this clause)
(3) If the Landlord shall not require the Surety to take a new lease of the
Demised Premises pursuant to paragraph (2) above the Surety shall
nevertheless upon demand pay to the Landlord a sum equal to the rents and
all other outgoings that would have been payable under this Lease but for
the disclaimer or other event as aforesaid in respect of the period from
and including the date of the disclaimer or other event as aforesaid until
the expiration of six (6) months therefrom or until the Demised Premises
shall have been re-let by the Landlord (whichever shall first occur)
(4) In the event that the Assignee further assigns the Lease the Surety shall
enter into the said Authorised Guarantee Agreement so as to guarantee the
performance by the Assignee of the Assignees covenants contained therein
SIGNED as a DEED by the
said * in the presence of:
Director
<PAGE>
Secretary
<PAGE>
SIGNED as a DEED by the
said *
in the presence of:
Director
Secretary
<PAGE>
INDEX
PARTIES
CLAUSE 1: Demise
Habendum
Reddendum
CLAUSE 2: Tenants Covenants
(1) To pay rents
(2) To pay interest on overdue monies
(3) To pay outgoings
(4) To maintain and keep in repair
(5) Cleaning
(6) To yield up
(7) Entry by Landlord and others
(8) To comply with notices to repair
(9) Dangerous materials and use of machinery
(10) Overloading floors and services
(11) Alterations
(12) Statutory requirements
(13) Planning
(14) Statutory notices
(15) Fire precautions and equipment
(16) To inform the Landlord of defects
(17) User
(18) Not to affix signs
(19) Notices for disposal
<PAGE>
(20) To notify Landlord of encroachments
(21) To inform Landlord of notices
(22) Tax
(23) Landlords Costs
(24) Alienation
(25) Value Added Tax
(26) Insurance
CLAUSE 3: Landlord's Covenants
(1) Quiet Enjoyment
(2) To Insure
(3) To produce copy Schedule
(4) Destruction of Demised Premises
CLAUSE 4: Provisos and Declarations
(1) Forfeiture
(2) Implied easements
(3) Restrictions on adjoining property
(4) Compensation
(5) Notices
(6) Cesser of rent
(7) Exclusion Order
(8) Interpretation
(9) Paragraph headings
(10) Certification
<PAGE>
THE FIRST SCHEDULE: The demised premises
THE SECOND SCHEDULE: Rights reserved
THE THIRD SCHEDULE: Subject matters
THE FOURTH SCHEDULE: Rent Review provisions
THE FIFTH SCHEDULE: Form of Covenant by Future Surety
<PAGE>
DATED 1998
(1) *
(2) *
LEASE OF WHOLE
OF
29-33 CHOUMERT GROVE
CAMBERWELL
LONDON SE13
EXHIBIT 10.14
CUNNINGHAM GRAPHICS, INC.
629 GROVE ST.
JERSEY CITY, N.J. 07310
Mr. Evan Lam
Workable Co., Ltd.
Unit 1, 1/F., Tak King Ind. Building
27 Lee Chung Street
Chai Wan, Hong Kong
Mr. Peter Furlonge
Roda Print Concepts Limited
29-33 Choumert Grove
London, SE15 4RB
England
Gentlemen:
The purpose of this letter is to outline the terms of a proposed Joint
Marketing and Technology License Agreement ("Joint Marketing Agreement") by and
among Cunningham Graphics, Inc. ("Cunningham"), Roda Print Concepts Limited
("Roda") and Workable Co., Ltd. ("Workable", and together with Cunningham and
Roda, each a "Party" and collectively, the "Parties"). Pending the negotiation
and execution of a more formal agreement the Parties intend to conduct their
joint activities within the framework of this letter.
Each of the Parties is engaged in the business of printing time-sensitive
research reports and other materials for international investment banking and
investment research firms and other financial institutions. Each of the Parties
presently performs work for customers which have operations in the markets
served by the other Parties. In some of such cases, the customers are utilizing
the services of firms other than the Parties to this letter agreement. A
principal objective of the Joint Marketing Agreement will be the promotion of
cross-selling arrangements among the Parties.
A second objective of the Joint Marketing Agreement will be to formalize
the Parties' understanding with respect to the "World Research Link" (also known
as "WRL").
More specifically, the interim understanding of the Parties is, and the
Joint Marketing Agreement shall provide, as follows:
<PAGE>
1. Cross-Selling.
(a) The Parties shall designate targeted firms, which are already a
customer of one or more of the Parties, to which another Party's printing and
document management and distribution services shall be marketed.
(b) In the event that a Party derives new business from such marketing
activities, the Party shall pay a commission to the referring firm in such
amount as shall be determined and agreed upon by the Parties based upon
profitability. It is anticipated that such commissions will be in the range of
2% - 5% of net sales, based upon actual receipts of payment. The commissions
will be payable on a monthly basis within ten (10) days following the close of
each month. The commissions will be payable over the term of the Joint Marketing
Agreement.
(c) Each Party shall be entitled to audit the other Parties' accounts
receivable up to two (2) times per calendar year in order to verify the amount
of commissions which are payable.
(d) In their cross-selling activities the Parties agree not to
disclose any pricing grids or formulae or any confidential information of
another Party without such Party's written consent.
(e) Prices quotes to a targeted cross-selling customer shall be good
for one year and not subject to increases, except for increases in the cost of
materials.
(f) All billing must be in accordance with customers' specifications.
2. World Research Link
(a) Each of Roda and Workable acknowledges that Cunningham is the sole
owner of the intellectual property rights in the names "World Research Link" and
"WRL" including, but not limited to trademarks and the goodwill associated
therewith and any logos which may be developed with respect thereto
(collectively, the "Licensed Rights").
(b) As long as this letter agreement (as superseded by the Joint
Marketing Agreement) remains in effect, each of Roda and Workable shall be
entitled to use the Licensed Rights solely in connection with the joint
marketing activities provided for hereunder and the data transmission activities
described in the following paragraph. Neither Roda nor Workable shall use the
Licensed Rights in connection with any other activity' provided, however that
the Licensed Rights may be used in connection with the
2
<PAGE>
independent marketing activities of each of Roda and Workable, subject to the
prior written approval of Cunningham.
(c) Prior to this date, the Parties have developed a process for the
transmission to one another of proprietary data files of their respective
customers for the purpose of facilitating the contemporaneous production and
distribution of time-sensitive financial research reports on an international
basis. The Parties shall market the availability of this service as a part of
their cross-selling activities and their individual marketing plans; provided,
however, use of the Licensed Rights in any marketing materials shall be subject
to the prior written approval of Cunningham.
(d) Communication costs incidental to services associated with the
"World Research Link" shall be borne by the Party receiving copy.
(e) Each of the Parties shall seek to identify new participants in the
"World Research Link" in other international financial markets.
(f) The Parties shall develop an annual budget to market the
activities associated with the Licensed Rights. Such marketing activities shall
be coordinated by Cunningham. Each Party shall pay 1/3 of the budgeted expenses.
3. Confidentiality. Each Party agrees to hold in confidence all
"Confidential Information" which it obtains from the other Parties with respect
to their independent businesses and shall cause their respective management,
sales and marketing employees to execute appropriate confidentiality agreements.
As used herein "Confidential Information" means any and all financial,
operational, technical, commercial and other information which is not in the
"Public Domain" (as defined below) concerning the business and affairs of a
Party that has been or may hereafter be provided by a Party to another Party in
connection with their joint activities provided for herein.
"Public Domain" shall mean information made available to the public by
a Party, including, without limitation, the following:
(i) Information which at the time of disclosure pursuant to this
agreement or the Joint Marketing Agreement had previously been published by,
revealed in trade journals or filed with any governmental agency by a Party;
(ii) Information which while this agreement or the Joint Marketing
Agreement is in effect is published or revealed in trade journals by a Party or
filed with any governmental agency; and
(iii) Information which is obtained by a Party from a third party who
is lawfully in possession of such information and not in violation of any
contractual, legal or fiduciary obligation to the Party to which the information
pertains with respect to the disclosure of such information.
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4. Most-Favored Nation. Each Party agrees not to offer services to promote
or enter into any form of joint venture or marketing alliance with any other
printing company with regard to the production of financial research reports or
other printing or document production and management services without the prior
written consent of the other Parties hereto.
5. On-Going Disclosure. Each Party agrees to disclose to the others any
material adverse changes in its financial condition or operations.
6. Termination Rights. The Parties' joint activities pursuant to this
letter agreement shall terminate on May 1, 1998 if the Joint Marketing Agreement
has not been executed and delivered by that date, unless said deadline is
extended by agreement of all the Parties in writing. Cunningham shall have the
right to terminate this letter agreement in the event of a breach by another
Party of the provisions of paragraphs 2(b) or 2(c).
7. Term. The Joint Marketing Agreement shall have a term of three (3)
years.
8. Representations and Warranties. Each Party represents and warrants to
the other Parties that it has the absolute and unrestricted right, power,
authority and capacity to execute and deliver this letter agreement and to
perform its obligations hereunder. Each Party further represents and warrants to
the other Parties that this letter agreement constitutes its legal, valid and
binding obligation and is enforceable against it in accordance with its terms.
9. Governing Law. This letter agreement and the Joint Marketing Agreement
shall be governed by and construed in accordance with the laws of the State of
New Jersey and applicable laws of the United States of America.
10. Arbitration of Disputes. Any disputes arising in connection with this
letter agreement or the Joint Marketing Agreement shall be finally settled under
the Rules of Conciliation and Arbitration of the International Chamber of
Commerce by three arbitrators appointed in accordance with the said Rules. The
place of arbitration shall be New York, New York, and the language of the
arbitration shall be English. The parties waive any objection to an arbitrator
having the same nationality as one of the parties. Judgment upon the award
rendered by the arbitrators may be entered by any court having jurisdiction.
If you are in agreement with the foregoing terms and conditions of the
interim arrangements among the Parties and the expression of intent regarding
the terms and conditions of the Joint Marketing Agreement, please so acknowledge
where provided below and return a signed copy of this letter to the undersigned.
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The acknowledgment may be signed in counterparts.
Very truly yours,
CUNNINGHAM GRAPHICS, INC.
By:__________________________
Michael Cunningham
President
ACKNOWLEDGED AND AGREED TO:
RODA PRINT CONCEPTS, LIMITED.
By:_________________________
Peter Furlonge
Managing Director
WORKABLE CO., LTD.
By:_________________________
Evan Lam
Principal
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CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated January 16, 1998, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-46541) and related Prospectus of
Cunningham Graphics International, Inc. for the registration of 2,415,000 shares
of its common stock.
Princeton, New Jersey
March 27, 1998
/s/Ernst & Young LLP
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-1) and related Prospectus of Cunningham Graphics
International, Inc. for the registration of 2,415,000 shares of its common stock
and to the inclusion therein of our report dated 11 February 1998 with respect
to the consolidated financial statements of Roda Limited and the financial
statements of Roda Print Concepts Limited (Predecessor).
/s/ ERNST & YOUNG
Chartered Accountants
London, England
25 March 1998
To: Cunningham Graphics International, Inc.
629 Grove Street
Jersey City, New Jersey 07310
The undersigned hereby consents to being identified in the Registration
Statement on Form S-1 to be filed by Cunningham Graphics International, Inc.
("CGII") with the Securities and Exchange Commission as a person designated to
be a director of CGII following the effective date of the Registration
Statement.
/s/ Laurence Gerber
------------------
Laurence Gerber
To: Cunningham Graphics International, Inc.
629 Grove Street
Jersey City, New Jersey 07310
The undersigned hereby consents to being identified in the Registration
Statement on Form S-1 to be filed by Cunningham Graphics International, Inc.
("CGII") with the Securities and Exchange Commission as a person designated to
be a director of CGII following the effective date of the Registration
Statement.
/s/ Stanley J. Moss
------------------------
Stanley J. Moss
