UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM
__________ TO __________.
COMMISSION FILE NUMBER 000-24021
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CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-3561164
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
100 BURMA ROAD 07305
JERSEY CITY, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(201) 217-1990
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 22, 2000
COMMON STOCK, NO PAR VALUE - $56,321,621
The number of shares outstanding of the issuer's
common stock as of March 22, 2000:
COMMON STOCK, NO PAR VALUE - 5,754,549
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Shareholders
Meeting to be held on or about June 15, 2000 to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended, are incorporated by reference into Part III of this Report.
Such Proxy Statement, except for the parts therein which have been specifically
incorporated by reference, shall not be deemed "filed" for the purposes of this
report on Form 10-K.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1. Business 3
2. Properties 15
3. Legal Proceedings 15
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters 16
6. Selected Consolidated Financial Data 17
7. Management's Discussion and Analysis of Financial Condition 18
7A Quantitative and Qualitative Disclosures about Market Risk 22
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on Accounting 24
PART III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 24
13. Certain Relationships and Related Transactions 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24
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PART I
ITEM 1. BUSINESS
GENERAL
Cunningham Graphics International, Inc., a New Jersey corporation, (the
"Company") provides a wide range of graphic communications services to financial
services companies, insurance companies, healthcare companies, telecommunication
companies and publishing houses, including the production and distribution of
time-sensitive analytical research and marketing materials, general commercial
and on-demand printing services. The Company operates in select international
markets through its facilities in the United States, the United Kingdom, Canada,
Hong Kong and Singapore.
The Company's executive offices are located at 100 Burma Road, Jersey City,
New Jersey 07305 and its telephone number is (201) 217-1990.
Graphic communications services provided by the Company include digital
communications, document management, offset printing, data output, bindery,
fulfillment services, mailing services and outsource services. The Company
prints brochures, booklets, confirmations of trade, client statements and
perfect bound books. 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 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, PaineWebber
Services, Inc., and The McGraw-Hill Companies, Inc., among others.
INDUSTRY BACKGROUND
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 professionals equipped to provide these
services more efficiently and cost-effectively.
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BUSINESS SOLUTION
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's services provides the following
advantages to customers:
o Advanced Technology. The Company employs state-of-the-art technology
in desktop and pre-press operations. Advanced technology enables the
Company to reduce turnaround time and eliminate or reduce the use of
film in the printing operations ultimately enabling the Company to
provide competitive prices to customers.
o World Research Link. The World Research Link(TM) electronically links
the Company's facilities in the United States, London, Toronto, Hong
Kong and Singapore and allows international customers the ability
rapidly and cost-effectively to disseminate information both
domestically and internationally.
o Sophisticated Order Entry System. The Company has developed a
proprietary program that allows major customers to electronically
submit orders, which reduces error and expedites the production of
time-sensitive material.
o Superior Customer Service. The customer service workforce of 150
employees worldwide is dedicated to establishing and maintaining
customer relationships and facilitating the production of
time-sensitive material.
o Experienced Management. Most senior executive officers have spent
their entire professional careers in the printing and graphic
communications industry. As part of the Company's acquisition
strategy, they are committed to retaining management at each newly
acquired company who is familiar with their particular customers and
market.
o Purchasing Economies. The Company's purchasing volume allows it to
negotiate more favorable pricing arrangements with significant
suppliers. These arrangements enable the Company to offer competitive
prices to its customers.
BUSINESS STRATEGY
The Company intends to continue its growth strategy by (i) pursuing
outsourcing opportunities through the assimilation of in-house printing
operations of third-party businesses, (ii) expanding the scope and volume of
services offered, (iii) actively cross-selling existing or newly-added products
or services to its customers worldwide, (iv) improving the operating efficiency
of its existing operations and (v) pursuing acquisitions and establishing
strategic alliances to expand and strengthen the Company's business reach in
target markets worldwide.
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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 shops of
Merrill Lynch & Co, Inc., PaineWebber Services, Inc., Empire Blue Cross/Blue
Shield, The McGraw-Hill Companies, Inc., and Schroder & Co. Inc. The Company
believes that it is a cost 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.
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 actively to cross-sell existing and newly-added
products or services to its customers worldwide. By taking advantage of the wide
range of products and services offered through its facilities in international
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
international operations 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 operations provides it with a distinct competitive advantage.
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 taking advantage of 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.
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 intends to target acquisition candidates with (i)
annual net sales ranging from $3.0 to $25.0 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) a solid reputation with established customer relationships; and
(vi) an experienced
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management team. The Company will 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's ability to continue to pursue such
acquisitions is dependent on its ability to secure additional financing.
The Company will also seek to establish new 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
partner's respective customer bases. During 1999, the Company entered into a
strategic alliance with two different companies in Japan and Australia. The
Company believes that such alliances also provide for future acquisition
opportunities. Pursuant to this strategy, the Company initially established
alliances with Roda Limited ("Roda") in London and a Workable Company Limited
("Workable") in Hong Kong, both of which were subsequently purchased, thereby
solidifying the Company's presence in the United Kingdom, European and Asian
printing markets.
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 fund 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. In addition, the Company's
World Research Link(TM) network enables the Company to print and distribute
these documents, in conjunction with its international operations,
contemporaneously in several international locations.
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.
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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 shops of Merrill Lynch & Co., Inc.
PaineWebber Services, Inc., Empire Blue Cross/Blue Shield, The McGraw-Hill
Companies, Inc. and Schroder & Co., Inc. 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 provides a variety of data output services, including the
production of trade confirmations and brokerage and investment account
statements for major financial institutions. 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,
telecommunications, pharmaceutical companies and other major corporations 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.
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.
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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
desktop computers, thereby permitting customers to create an order while
submitting digital files.
Prepress Operations
At the majority 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.
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 web, sheet-fed and digital presses with varying
capabilities in different locations. The 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.
Through investments in sophisticated technology, the Company is able to
provide digital printing services as a complement to conventional offset
printing. Digital printing integrates 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. 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. Some of the digital presses also have in-line binding attachments
that produce finished booklets. These presses are linked directly to
computerized networks and are currently being used to produce research reports,
personalized health care documents, trade confirmations, client statements and
general print products.
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Binding and Fulfillment Services
The Company provides bindery and fulfillment services with varying
capabilities in different locations. Finishing services include cutting and
folding, saddle stitching, punching, collation and inserting, and perfect
binding and shrink-wrapping.
Many of the documents prepared for customers need to be stored for future
distribution, both electronically and physically. Through the Company's
fulfillment services, materials are stored and orders are assembled for
distribution upon a customer's request. Printed materials are assembled into
kits and are packed individually, or in bulk, for delivery. Upon completion of
the order, the fulfillment system generates an activity report for inventory
control. For customers who require mail distribution, the Company operates
mailing departments at each facility. Using inkjet and cheshirre labeling
machines, electronic mailing lists are addressed on envelopes. Documents are
then 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 then strategic partners in
London and Hong Kong, 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. Presently, through the use of high-speed
electronic links among the Company's facilities in the United States, Canada,
London, Hong Kong and Singapore and the Company's strategic partners in Japan
and Australia, the Company is able to print research reports concurrently
throughout these principal international financial markets.
The Company intends to continue to expand its World Research Link(TM)
through the establishment of new strategic alliances in Europe, South America
and Asia. The Company's international relationships have offered cross-selling
opportunities and the Company intends to develop new joint marketing alliances
as a means for the Company and its strategic partners to each 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 50 individuals. The Company's sales representatives
are generally organized among customer industry groups, such as financial
services, healthcare, insurance and telecommunications 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.
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A major component of the Company's plan of integrating newly-acquired
companies, is the expansion of joint marketing efforts among various
international operating divisions to cross-sell products and services to
customers of one geographic location who maintain business operations within the
Company's other geographic regions.
The Company believes that the 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. Major customers are encouraged to enter into service
contracts specifying certain types of business for a defined period, which
enables the Company to improve order flow and provide a more predictable volume
of business. The Company intends to add sales representatives and customer
support staff to further increase its customer base in new markets and to
augment the volume of non-financial commercial printing.
CUSTOMERS
The Company currently has approximately 960 customers in the United States,
190 customers in London, 50 customers in Hong Kong and Singapore and 25
customers in Canada, including financial institutions, healthcare companies,
trade organizations and retail and manufacturing firms. The Company's three
largest customers, Goldman, Sachs & Co., Credit Suisse First Boston Corporation,
and Merrill Lynch & Co, Inc. accounted for approximately 12%, 12%, and 12%,
respectively, of the Company's net sales for the year ended December 31, 1999.
See Note 16 to the Company's Consolidated Financial Statements for financial
information about domestic and foreign sales and income from operations.
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 and Boston markets, the Company competes with Bowne & Co., R.R.
Donnelly, Xerox Business Services, Big Flower Press Holdings, Inc. and Merrill
Corporation, and numerous smaller operations, in the printing of time-sensitive
documents. A major competitor in the London market is Williams Lea Ltd. (a
strategic partner of Bowne & Co.). In the Hong Kong market, the Company competes
with M. Graphics, Speedflex, XPRESS Printing and CIS.
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.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,189 employees (818
in the United States, 219 in the United Kingdom, 117 in Asia and 35 in Cananda).
As of such date, 350 United States-based employees were members of the Paper
Allied Industrial Chemical and Energy Workers International Union, with which
the Company has a contract which expires on June 30, 2000 and 35 employees were
members of the Local One Amalgamated Lithographers of America, which the Company
has a contract which expires on June 30, 2001. As of December 31, 1999, 50
United Kingdom-based employees were members of the National Graphical
Association labor union. The Company believes that it is in compliance with its
labor agreements and that its labor relations are good.
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GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company is subject to the environmental laws and regulations of the
United States, the foreign jurisdictions in which the Company maintains
facilities, and the applicable state and local laws and regulations concerning
air emissions, discharges into waterways and the generation, handling and
disposal of wastes. The printing business generates substantial quantities of
inks, solvents and other waste materials requiring disposal. The Company
typically recycles waste paper and contracts for the removal of other waste
materials. The Company believes that it is in material compliance with all
applicable environmental laws and regulations, as well as other applicable
employee health and safety laws and regulations. The Company does not anticipate
the need for significant capital expenditures for environmental control
facilities during the current fiscal year or in the next fiscal year.
RISK FACTORS
Reliance on Limited Number of Customers
The Company's three largest customers accounted for approximately 36% of
net sales for the year ended December 31, 1999. If one of the Company's major
customers discontinues or significantly reduces the use of services, the
business, results of operations and financial condition could materially suffer.
In addition, the non-payment of amounts due from a major client could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Dependence on Financial Services Industry
The Company performs a significant amount of services for 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.
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.
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Management of Growth
The Company continues 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 December 1999, the number of the Company's
employees increased from 186 to 1,286, and further increases are anticipated
during 2000. 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 has $7.1 million available under its line of credit for
acquisitions purposes. The Company will need additional financing to continue
its growth strategy, if the Company is unable to obtain additional financing
it's growth could be limited. Moreover, the Company may seek to use its common
stock or equity securities senior to 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 existing investors. The extent to which the Company will
be able or willing to use its common stock for this purpose will depend on the
commons stock's 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. As a result, the Company might be unable to
continue its acquisition strategy, which would have a material adverse effect on
the future prospects of the Company.
Risk of International Operations
Sales to customers outside the United States accounted for 31% of the
Company's net sales in the year ended December 31, 1999. 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
12
<PAGE>
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.
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. The Company's
operations at each of its locations are dependent on the availability of
continuous computer, electrical and telephone service. 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 and Hong Kong 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's operations at such facilities, 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.
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.
13
<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 its
foreign subsidiaries 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 at
each operating subsidiary. 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.
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.
Control by Certain Stockholders
The directors and other executive officers of the Company, and entities
affiliated with them, beneficially own approximately 53% of the outstanding
shares of Common Stock. 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.
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.
Dividend Policy
The terms of the Company's existing credit facility prohibits the Company
from paying dividends. Moreover, the Company expects to retain any earnings to
finance the operations and expansion of the Company's business. Therefore, the
payment of any cash dividends on the Common Stock is unlikely in the foreseeable
future.
14
<PAGE>
ITEM 2. PROPERTIES
As of March 20, 2000, the Company's principal facilities consisted
primarily of printing facilities that contain production, storage and office
space. With the exception of the Company's headquarters in Jersey City, New
Jersey which is owned by the Company and the facilities in Hong Kong, all of the
Company's other facilities are leased from unaffiliated third parties. The
Jersey City building is subject to a mortgage in favor of Summit Bank. The
facilities in Hong Kong are leased from the selling shareholders of Workable,
the Company's Hong Kong subsidiary, who continue to manage its day-to-day
operations.
APPROXIMATE SQUARE
LOCATION FOOTAGE
- --------------------------------------------------------------------------------
Jersey City, New Jersey (100 Burma Road) 167,000
- --------------------------------------------------------------------------------
New York, New York (175 Varick Street) 36,000
- --------------------------------------------------------------------------------
New York, New York (250 54th Street) 10,000
- --------------------------------------------------------------------------------
London, England (Unit 9 Chadwich Road) 4,500
- --------------------------------------------------------------------------------
London, England (29-33 Choumert Grove) 7,500
- --------------------------------------------------------------------------------
London, England (2 Mill Harbour) 22,000
- --------------------------------------------------------------------------------
London, England (7/9 Parkgate Road) 1,000
- --------------------------------------------------------------------------------
Croydon, England (87 Beddington Lane) 500
- --------------------------------------------------------------------------------
Chai Wan, Hong Kong (No. 27 Lee Chung Street) 28,000
- --------------------------------------------------------------------------------
Singapore (9 Harrison Road) 1,000
- --------------------------------------------------------------------------------
Toronto, Canada (461 King Street West) 26,000
- --------------------------------------------------------------------------------
Boston, Massachusetts (215 A Street) 22,000
- --------------------------------------------------------------------------------
San Francisco, California (1900-1930 Carrol Ave.) 20,000
- --------------------------------------------------------------------------------
Hawthorne, New Jersey (44 Utter Avenue) 36,000
- --------------------------------------------------------------------------------
Santa Fe Springs, California (11929 Baker Place) 13,817
- --------------------------------------------------------------------------------
Santa Fe Springs, California (9830 Alburtis Avenue) 8,800
- --------------------------------------------------------------------------------
Grand Praire, Texas (1310 Post and Paddock Road) 3,150
- --------------------------------------------------------------------------------
Orlando, Florida (9500 Satellite Boulevard) 6,685
- --------------------------------------------------------------------------------
Erlanger, Kentucky (1145 Airport Exchange Boulevard) 11,200
- --------------------------------------------------------------------------------
Inglewood, California (450 N. Dale Street) 5,920
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to legal proceedings arising in
the normal course of its business. The Company maintains insurance coverage
against potential claims in an amount which it believes to be adequate.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to security holders for a voted during the quarter
ending December 31, 1999.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) The Common Stock is traded on the Nasdaq Stock Market National Market
System ("Nasdaq NMS") (symbol: CGII). The following table sets forth, for the
periods indicated, the range of the high and low sales prices for the Common
Stock as reported by Nasdaq NMS:
High Low
------ ------
1999
Quarter ended March 31, 1999 $18.00 $10.00
Quarter ended June 30, 1999 $18.13 $12.06
Quarter ended September 30, 1999 $17.50 $11.88
Quarter ended December 31, 1999 $15.50 $ 9.88
1998
April 22, 1998 - June 30, 1998 $21.75 $16.625
Quarter ended September 30, 1998 $20.50 $ 9.125
Quarter ended December 31, 1998 $17.75 $10.875
(b) As of March 21, 2000 there were approximately 41 holders of record of
the Common Stock and the Company estimates that there are approximately 670
beneficial holders of the Common Stock.
(c) The terms of the Company's existing credit facility prohibits the
payment of dividends. Moreover, the Company currently intends to retain all
future earnings to finance the continuing development of its business and does
not anticipate paying cash dividends on the Common Stock in the foreseeable
future. Any future payment of dividends will be at the discretion of the Board
of Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other relevant
factors.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The summary of historical financial data presented below is derived from
the historical audited financial statements of the Company and the Predecessor.
Acquisitions have been included in the historical income statement data of the
Company from the date of acquisition. The data presented below should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations, the historical financial statements and the related
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
Statement of Income Data: (in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 17,327 $ 23,193 $ 35,744 $ 53,146 $ 110,671
Operating expenses:
Costs of production 12,860 17,616 26,894 37,694 74,707
Selling, general and administrative 3,441 4,270 5,794 7,783 17,921
Non-recurring moving costs 0 0 0 0 1,017
Depreciation and amortization 498 563 694 1,252 4,873
--------- --------- --------- --------- ---------
16,799 22,449 33,382 46,729 98,518
--------- --------- --------- --------- ---------
Income from operations 528 744 2,362 6,417 12,153
Interest (expense) income (257) (234) (250) 75 (2,052)
Other income 2 48 35 5 195
--------- --------- --------- --------- ---------
Income before income taxes 273 558 2,147 6,497 10,296
Provision for income taxes 6 56 129 2,489 3,747
--------- --------- --------- --------- ---------
Net income $ 267 $ 502 $ 2,018 $ 4,008 $ 6,549
========= ========= ========= ========= =========
Earnings per share:
Basic $ 1.15
=========
Diluted $ 1.15
=========
Weighted average shares outstanding:
Basic 5,692,456
=========
Diluted 5,718,371
=========
Pro Forma Data (unaudited):
Income before income taxes $ 6,497
Pro forma provision for income taxes 2,809
---------
Pro forma net income $ 3,688
=========
Pro forma earnings per share:
Basic $ 0.80
=========
Diluted $ 0.80
=========
Pro forma weighted average shares outstanding:
Basic 4,587,941
=========
Diluted 4,637,024
=========
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
At December 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents $ 1 $ 543 $ 67 $ 2,179 $ 5,131
Working capital 32 (867) 728 5,420 6,042
Total assets 5,568 9,471 10,938 43,589 132,372
Long-term debt and capitalized lease
obligations, net of current portion 1,151 1,300 1,517 1,985 51,952
Stockholders' equity 830 1,344 3,151 32,510 46,135
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions and statements made elsewhere herein contain
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally are
accompanied by words such as "intend", "anticipate", "believe", "estimated",
"expect", "should" or similar expressions. Readers are cautioned that such
information involves risks and uncertainties, including those created by general
market conditions, competition and the possibility that events may occur which
limit the ability of the Company to maintain or improve its operating results or
execute its primary growth strategy of acquiring additional printing businesses.
Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and there can therefore be no assurance that the forward-looking
statements included herein will prove to be accurate. The inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Important factors that could cause actual result to differ from estimates or
projections contained in forward-looking statements include those described in
"Risk Factors".
GENERAL
The Company, headquartered in Jersey City, New Jersey, provides a wide
range of graphic communications services to financial institutions and
corporations, focusing on printing and distributing time-sensitive analytical
research and marketing materials, commercial printing, digital printing and
outsourcing services to large companies in the financial services, insurance and
publishing industries, and on providing on-demand printing services. The Company
operates in select international markets through its facilities in the United
States, the United Kingdom, Canada, Hong Kong and Singapore. The Company is a
major producer of financial research reports and provides services, on a
non-exclusive basis, to a variety of major international investment banking
firms.
Sales are derived from graphic communications services, including digital
communications, document management, offset printing, data output, bindery,
fulfillment services, mailing services and outsourcing 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
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, Goldman, Sachs &
Co., PaineWebber Services Inc., 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 Companies, Inc. among others.
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 outsourcing opportunities through the assimilation of
in-house printing operations of third-party businesses, (ii) expanding the scope
and volume of services offered, (iii) actively cross-selling existing or
newly-added products or services to its customers worldwide, and (iv) improving
the operating efficiency of its existing operations and (vi) pursuing
acquisitions and establishing strategic alliances to expand and strengthen the
Company's business reach in target markets worldwide.
18
<PAGE>
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 earned by sales persons and professional fees.
Results of Operations
The following tables set forth certain items from the Company's Statements
of Income as a percentage of net sales for the periods indicated:
1997 1998 1999
----- ----- -----
Net Sales 100.0% 100.0% 100.0%
Costs of production 75.3 70.9 67.5
Selling, general and administrative 16.2 14.6 16.2
Non-recurring moving costs 0 0 .9
Depreciation and amortization 1.9 2.4 4.4
----- ----- -----
Income from operations 6.6 12.1 11.0
Interest income (expense) (0.7) 0.1 (1.9)
Other income (expense) 0.1 0.0 0.2
----- ----- -----
Income before income taxes 6.0 12.2 9.3
Provision for income taxes 0.4 4.7 3.4
----- ----- -----
Net income 5.6% 7.5% 5.9%
===== ===== =====
Acquisitions in 1998 and 1999 are the primary causes of the increases in
revenues and expenses since April of 1998. Each of the Company's acquisitions in
fiscal 1998 and 1999 have been accounted for under the purchase method of
accounting; accordingly, the Company's consolidated income statements reflect
revenues and expenses of acquired businesses only for post-acquisition periods.
The following table sets forth the Company's 1998 and 1999 acquisitions
(collectively the "1998/99 Acquired Businesses") and indicates the month in
which each business was acquired.
1998 Acquisitions:
Roda Limited April 1998
1999 Acquisitions:
Workable Company Limited and Affiliates January 1999
Boston Towne Press, Inc February 1999
Griffin House Graphics Limited and Affiliates March 1999
Goldhawk Reprographics Limited and Affiliates April 1999
Bengal Graphics, Inc. and Affiliate June 1999
Venus Holdings Limited and Affiliates June 1999
MVP Graphics, Inc. and Affiliate July 1999
D&L Graphics, Inc. September 1999
Golden Crane, Incorporated September 1999
Mirror Graphics and Affiliates October 1999
19
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Net sales. The Company reported net sales of $110.7 million for the year
ended December 31, 1999 compared to $53.1 million for 1998, an increase of $57.6
million or 108.5%. The increase is due to the addition of the 1998/1999 Acquired
Businesses and 31% internal growth from the Company's existing customer base.
The internal growth resulted primarily from increased sales to existing
customers and the assimilation of certain in-house printing operations of
third-party businesses.
Costs of production. Costs of production were $74.7 million for the year
ended December 31, 1999, as compared to $37.7 million for 1998, an increase of
$37.0 million or 98.1%. Costs of production were approximately 67.5% of net
sales for the year ended December 31, 1999, compared to 70.9% for the same
period in 1998. The reduction of costs of production as a percentage of net
sales was attributable to the inclusion of lower percentage costs of production
for the 1998/1999 Acquired Businesses and certain improvements and benefits
resulting from the fixed nature of certain costs in the Company's existing
operations. The lower costs of production as a percentage of sales at the
1998/1999 Acquired Businesses is due to the acquired businesses higher selling
prices in their markets.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $17.9 million for the year ended December 31, 1999,
as compared to $7.8 million for 1998, an increase of $10.1 million or 129.5%.
Selling, general and administrative expenses were 16.2% of net sales for the
year ended December 31, 1999 compared to 14.6% for the same period in 1998. This
increase is due to the addition of the 1998/1999 Acquired Businesses and an
increase in the corporate infrastructure to manage the Company's accelerated
acquisition program and internal growth.
Non-recurring moving expenses. The Company relocated it's New Jersey and
certain Manhattan operations to a new 150,000 square foot facility in Jersey
City, NJ, in 1999. The Company incurred $1.0 million ($597 after taxes) for
non-recurring moving related costs.
Depreciation and amortization. Depreciation and amortization expenses were
$4.9 million for the year ended December 31, 1999, as compared to $1.3 million
for the same period in 1998, an increase of $3.6 million, or 276.9%. This
increase is due to the addition of the depreciation expense of the 1998/1999
Acquired Businesses and the increase in goodwill amortization.
Interest expense and interest income. Interest expense was $2.1 million for
the year ended December 31,1999, as compared to $400,000 for the same period
in1998, an increase of $1.7 million or 425%. Such increase was largely
attributable to higher levels of borrowings during 1999, the proceeds of which
were used for the purchase of the 1999 acquired businesses and the assumption of
certain debt related to those acquisitions. Interest income was $21,000 for
1999, as compared to $475,000 for 1998. Interest income in 1998 reflects
interest on the unused portion of the cash proceeds from the Company's initial
public offering.
Provision for income taxes. The provision for income taxes was $3.7 million
for the year ending December 31, 1999, as compared to the pro forma provision
for income taxes of $2.8 million for the same period in 1998. As a percentage of
income before income taxes the tax rate was 36.4% for the year ended December
31, 1999 and 43.2% for the same period in 1998. The decrease is primarily
attributable to the inclusion of the foreign 1998/99 Business Acquisitions,
which generally have lower tax rates coupled with a special one-time income tax
charge of $94,000 for the year ended December 31, 1998 attributable to the
termination of the Company's status as an S Corporation incidental to its
initial public offering offset by nondeductible goodwill.
20
<PAGE>
Net income. Net income was $6.6 million or $1.15 per share on a diluted
basis with 5,718,371 weighted average common shares outstanding for the year
ended December 31, 1999 compared to pro forma net income of $3.7 million for
1998. Before non-recurring moving related costs, net income for the year would
have increased 94% to $7.1 million, or $1.25 per diluted shares, compared to pro
forma net income of $3.7 million, or $0.80 per diluted share, for the year ended
December 31, 1998.
Year ended December 31, 1998 compared to year ended December 31, 1997
Net sales. The Company reported net sales of $53.1 million for the year
ended December 31, 1998 compared to $35.7 million for 1997, an increase of $17.4
million or 48.7%. The increase was attributable to the inclusion of $7.1 million
of Roda's net sales in 1998, together with an increase of $10.3 million in net
sales from domestic operations. The domestic growth resulted primarily from the
increase in net sales with existing customers and the assimilation of certain
in-house printing operations of third-party businesses, including the print shop
and data output centers of The McGraw-Hill Companies, Inc. and Schroder & Co.
Inc.
Costs of production. Costs of production were $37.7 million for the year
ended December 31, 1998, as compared to $26.9 million for 1997, an increase of
$10.8 million or 40.1%. Costs of production were approximately 71.0% of net
sales for the year ended December 31, 1998, compared to 75.3% for the same
period in 1997. The reduction of costs of production as a percentage of net
sales was attributable to the inclusion of Roda's lower percentage costs of
production in 1998 and certain improvements and benefits resulting from the
fixed nature of certain costs in the domestic operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $7.8 million for the year ended December 31, 1998,
as compared to $5.8 million for 1997, an increase of $2.0 million or 34.5%. This
increase was a result of the inclusion of Roda's operations and an investment in
new marketing and management personnel in London and domestically. Selling,
general and administrative expenses were 14.6 % of net sales for the year ended
December 31, 1998 compared to 16.2% for 1997. The decrease in selling, general
and administrative expenses as a percentage of net sales reflects the benefits
resulting from the fixed nature of certain costs associated with the increase in
net sales domestically and from the acquisition of Roda.
Depreciation and amortization. Depreciation and amortization expenses were
$1.3 million for the year ended December 31, 1998, as compared to $694,000 for
the same period in 1997, an increase of $558,000, or 80.4%. The increase was the
result of the inclusion of Roda's depreciation expenses after its acquisition,
goodwill amortization associated with the acquisition of Roda and the purchase
of new equipment.
Interest expense and interest income. Interest expense was $400,000 for
1998, as compared to $250,000 for 1997, an increase of $150,000 or 60%. Such
increase was largely attributable to higher levels of borrowings during 1998,
principally capital lease obligations. Interest expense reflects interest on
notes payable, capital lease obligations and on utilization of line of credits.
Interest income was $475,000 for 1998, as compared to $0 for 1997. Interest
income reflects interest on the unused portion of the cash proceeds from the
initial public offering.
21
<PAGE>
Provision for income taxes. On April 22, 1998 the Company converted from an
S corporation to a C corporation for tax purposes (the "Conversion") in
conjunction with its initial public offering. For comparative purposes pro forma
provision for income taxes was calculated as if the Conversion had occurred on
January 1, 1997. The pro forma provision for income taxes was $2.8 million for
the year ended December 31, 1998, as compared to the pro forma provision for
income taxes of $880,000 for the same period in 1997. As a percentage of profits
before taxes the tax rates on a pro forma basis were 43.2% for the year ended
December 31, 1998 and 41.0% for the same period in 1997. The increase is the
result of the recording of $94,000 of deferred taxes as a result of the
conversion from an S corporation to a C corporation.
Net income. Net income was $4.0 million or $0.80 per share on a diluted
basis with 4,637,024 weighted average common shares outstanding for the year
ended December 31, 1998 compared to pro forma net income of $1.3 million for
1997.
Liquidity and Capital Resources
The Company's primary uses of cash are for business acquisitions,
acquisitions of property, plant and equipment and payments on long-term debt
assumed in connection with certain acquisitions or incurred to finance certain
equipment purchases. Cash utilized to complete acquisitions, net of cash
acquired, totaled $41.0 million for year ended December 31, 1999. Cash utilized
for the acquisition of property, plant and equipment, was $17.9 million for the
year ended December 31, 1999. Payments on long-term debt, including capital
lease obligations, totaled $3.0 for the year ended December 31, 1999. In
connection with the business acquisitions, the Company assumed $10.3 million of
debt.
Net cash provided by operating activities was $7.9 million for the year
December 31, 1999.
On February 3, 1999, the Company purchased a 150,000 square foot building
located in Jersey City, New Jersey for approximately $5.5 million. The Company
obtained a mortgage loan for $7.4 million to finance the purchase of the land
and building and to make necessary improvements. As of December 31, 1999, the
entire $7.4 million has been utilized.
On August 3, 1999, the Company refinanced its domestic debt other than the
mortgage indebtedness and entered into a $60 million credit facility (the
"Credit Facility") with a group of banks. The Company may borrow up to $24
million until July 2001 for acquisitions (the "Acquisition Line"), and $26
million until July 31, 2004 for working capital, general business purposes and
letters of credit (the "Working Capital Line"), on a revolving basis. The
Company also borrowed $10 million, payable in quarterly installments beginning
on September 30, 2000 to repay existing indebtedness. At the Company's option,
the Credit Facility bears interest at either: (i) the bank's base rate plus a
number of basis points depending upon the Company's maximum leverage ratio, as
defined in the agreement or (ii) the Eurodollar rate plus a number of basis
points depending upon the Company's maximum leverage ratio, as defined. At
December 31, 1999, the weighted average interest rate on the Credit Facility was
8.4%. Among other things, the loan agreement restricts the Company's ability to
incur indebtedness, pay dividends, make capital expenditures, dispose of assets,
lend money to foreign subsidiaries and make acquisitions. The Credit Facility
also requires the Company to maintain certain financial covenants, including
minimum net worth, maximum leverage and debt coverage ratios. The facility is
collateralized by substantially all of the assets of the Company's domestic
subsidiaries and a controlling interest of the stock of the Company's foreign
subsidiaries.
As of December 31, 1999 $7.6 million remained available for borrowing for
acquisitions and $9.1 million remained available for working capital and general
business purposes under the Credit Facility. Letters of credit totaling $4.1
million were outstanding as of December 31, 1999.
22
<PAGE>
The Company believes that the cash flow provided from operations and the
existing revolving line of credit facility is sufficient to fund the ongoing
operations. In addition, while the revolving line of credit facility is
sufficient for to pursue the Company's acquisition strategy in the short-term,
the long-term growth prospects will require additional debt or equity financing.
The Company cannot be assured that additional financing on acceptable terms will
be able to be obtained.
Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company's
expenses associated with the Year 2000 remediation were immaterial. The Company
is not aware of any material problems resulting from Year 2000 issues, either
with its machinery and equipment, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to insure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates and foreign currency
exchange primarily in its cash, debt and foreign currency transactions.
A discussion of the Company's accounting policies for financial instruments
is included in the Summary of Significant Accounting Policies in the Notes to
the Consolidated Financial Statements. Additional information relating to
financial instruments and debt is included in Note 9 - Revolving Line of Credit,
Long-Term Debt and Obligations Under Capital Leases.
International operations, excluding U.S. export sales which are principally
denominated in U.S. dollars, constitute 31% of the revenues and 39% of the
identifiable assets of the Company as of December 31, 1999, which were
denominated in British Pounds, Hong Kong Dollars and Canadian Dollars. The
Company has loans to foreign affiliates which are denominated in foreign
currencies. Foreign currency changes against the U.S. dollar affect the foreign
currency translation adjustment of the Company's net investment in these
affiliates and the foreign currency transaction adjustments on long-term
advances to affiliates, which impact consolidated equity of the Company.
International operations result in a large volume of foreign currency commitment
and transaction exposures and significant foreign currency net asset exposures.
With the acquisition of Workable and Griffin House during 1999, the Company
prints in a number of locations around the world and has a cost base that is
diversified over a number of different currencies, as well as the U.S. dollar,
which serves to counterbalance partially its foreign currency transaction risk.
The Company does not hedge its exposure to translation gains and losses relating
to foreign currency net asset exposures; however, currently in the United
Kingdom, it borrows in British Pounds to reduce such exposure. Currently, the
Hong Kong dollar is "pegged" to the United States dollar, so there is minimal
foreign currency translation adjustment with respect to the Hong Kong
operations.
The Company's cash position includes amounts denominated in foreign
currencies. The Company manages its worldwide cash requirements considering
available funds among its subsidiaries and the cost effectiveness with which
these funds can be accessed. The repatriation of cash balances from certain of
the Company's affiliates could have adverse tax consequences. However, those
balances are generally available without legal restrictions to fund ordinary
business operations.
The Company regularly invests excess operating cash in overnight repurchase
agreements that are subject to changes in short-term interest rates.
Accordingly, the Company believes that the market risk arising from its holding
of these financial instruments is minimal.
The Company's interest expense is most sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S. interest rates
affect the interest paid on its debt. To mitigate the impact of fluctuations in
U.S. interest rates, the Company generally maintains a portion of its debt as
fixed rate in nature.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
report thereon of Ernst & Young LLP dated February 1, 2000, including the
information required by Item 302 of Regulation S-K, are set forth on pages F-1
through F-23 hereof. The schedule required under Regulation S-X is included
herein on page S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
The information called for by "Item 10. Directors and Executive Officers of
the Registrant", "Item 11. Executive Compensation", "Item 12. Security Ownership
of Certain Beneficial Owners and Management", and "Item 13. Certain
Relationships and Related Transactions", is hereby incorporated by reference to
the Company's Proxy Statement for its Annual Meeting of Shareholders (scheduled
to be held on June 15, 2000) to be filed with the SEC pursuant to Regulation 14A
under the Securities Exchange Act of 1934 as amended.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
See Index to the Consolidated Financial Statements and Financial
Statement Schedule on page F-1 hereof.
(a) (2) Financial Statement Schedules:
See Index to the Consolidated Financial Statements and Financial
Statement Schedule on page F-1 hereof.
(a) (3) Exhibits
The following documents are filed as Exhibits to this report on Form
10-K or incorporated by reference herein. Any document incorporated by
reference is identified by a parenthetical referencing the filing with
the Commission which included such document.
Exhibit No. Description
- ----------- -----------
2.1 Reorganization Agreement among Stockholders of Cunningham Graphics,
Inc. and the Company (Exhibit 2.1 to Amendment No. 2 to Registration
Statement on Form S-1 No. 333-46541)
2.2 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 Cunningham Graphics, Inc. (Exhibit 1.2 to Registration
Statement on Form S-1 No. 333-46541)
2.3 Supplemental Agreement dated March 24, 1998 between P.L. Furlonge and
others and Cunningham Graphics, Inc. (Exhibit 1.2(a) to Amendment No.
2 to Registration Statement on Form S-1 No. 333-46541)
3.1 Certificate of Incorporation (Exhibit 3.1 to Registration Statement on
Form S-1 No. 333-46541)
3.2 By-Laws (Exhibit 3.2 to Registration Statement on Form S-1 No.
333-46541)
24
<PAGE>
10.1 1998 Stock Option Plan (Exhibit 10.1 to Amendment No. 1 to
Registration Statement on Form S-1 No. 333-46541)
10.2 Amended and Restated Directors' Stock Option Plan
10.3 Employment Agreement between the Company and M.R. Cunningham (Exhibit
10.3 to Amendment No. 2 to Registration Statement on Form S-1 No.
333-465411)
10.4 Employment Agreement between the Company and G. Mays (Exhibit 10.4 to
Amendment No. 2 to Registration Statement on Form S-1 No. 333-465411)
10.5 Employment Agreement between the Company and T. Mays (Exhibit 10.5 to
Amendment No. 2 to Registration Statement on Form S-1 No. 333-465411)
10.6 Employment Agreement between the Company and R. Needle (Exhibit 10.6
to Amendment No. 2 to Registration Statement on Form S-1 No.
333-465411)
10.7 Service Agreement between Roda Limited and P.L. Furlonge (Exhibit 10.7
to Registration Statement on Form S-1 No. 333-46541)
10.13 Roda Lease (Exhibit 10.13 to Amendment No. 1 to Registration Statement
on Form S-1 No. 333-46541)
10.15 Employment Agreement between the Company and I. Lykogiannis (Exhibit
10.15 to Amendment No. 2 to Registration Statement on Form S-1 No.
333-46541)
10.16 Employment Agreement between the Company and R. Zanisnik (Exhibit
10.16 to Amendment No. 2 to Registration Statement on Form S-1 No.
333-46541)
10.18 Agreement for the sale and purchase of the entire issued share capital
of Workable Company Limited and 60% of the issued share capital of
Plainduty Limited dated as of January 13, 1999 by and among Lam Hok
Ling, Tung Hok Ki, Hacienda Resources Limited, the Company and
Cunningham Graphics International, S.A. (Exhibit 10.18 to Current
Report on Form 8-K for the event occurring on January 13, 1999)
10.19 Service Agreement dated as of January 13, 1999 between Workable
Company Limited and Evan Lam (Exhibit 10.19 to Current Report on Form
8-K for the event occurring on January 13, 1999)
10.20 Service Agreement dated as of January 13, 1999 between Workable
Company Limited and Timothy Tung (Exhibit 10.20 to Current Report on
Form 8-K for the event occurring on January 13, 1999)
10.21 Tenancy Agreement dated as of January 13, 1999 between Workable
Company Limited and Many Best Development Limited (Exhibit 10.21 to
Current Report on Form 8-K for the event occurring on January 13,
1999)
10.22 Tenancy Agreement dated as of January 13, 1999 between Workable
Company Limited and Splendour Chief Development Limited (Exhibit 10.22
to Current Report on Form 8-K for the event occurring on January 13,
1999)
10.23 Loan Agreement dated February 3, 1999 among Summit Bank, the Company
and Cunningham Graphics Realty, L.L.C. (Exhibit 10.23 to Current
Report on Form 8-K for the event occurring on February 3, 1999)
10.24 Agreement of Sale dated October 28, 1998 between Willco Associates-1,
L.L.C. and the Company (Exhibit 10.24 to Current Report on Form 8-K
for the event occurring on February 3, 1999)
10.25 Amendment to Agreement of Sale between Willco Associates-1, L.L.C. and
the Company dated February 3, 1999 (Exhibit 10.25 to Current Report on
Form 8-K for the event occurring on February 3, 1999)
10.26 Agreement of Sale dated October 28, 1998 between Willco Associates-2,
L.L.C. and the Company (Exhibit 10.26 to Current Report on Form 8-K
for the event occurring on February 3, 1999)
10.27 Amendment to Agreement of Sale between Willco Associates-2, L.L.C. and
the Company dated February 3, 1999 (Exhibit 10.27 to Current Report on
Form 8-K for the event occurring on February 3, 1999)
10.28 Assignment of Agreement of Sale (Exhibit 10.28 to Current Report on
Form 8-K for the event occurring on February 3, 1999)
10.29 Asset purchase agreement dated February 17, 1999 for the sale and
purchase of certain assets and the assumption of certain liabilities
of Boston Towne Press, Inc. by and among Boston Towne Press, Inc.,
John R. Henesey, Jr., Cunningham Graphics International, Inc. and BTP
Acquisition
25
<PAGE>
Corp. (Exhibit 10.29 to Current Report on Form 8-K for the event
occurring on February 17, 1999)
10.30 10.30 Employment Agreement dated as of February 17, 1999 between BTP
Acquisition Corp. and John R. Henesey Jr. (Exhibit 10.30 to Current
Report on Form 8-K for the event occurring on February 17, 1999)
10.31 Employee Stock Purchase Plan (Exhibit 4.1 to Registration Statement on
Form S-8, No. 333- 86345, filed September 1, 1999.
10.32 Loan and Security Agreement dated August 3, 1999 among the Company,
Cunningham Graphics, Inc., Cunningham Graphics Realty, L.L.C., Boston
Towne Press, Inc., Cunningham Graphics Delaware, Inc., CGII California
Holdings, Inc., MVP Graphics, Inc., Super Pack, Inc., Bengal Graphics,
Inc., Summit Bank, as Agent, The Bank of New York, Chase Manhattan
Bank and National Bank of Canada (Exhibit 10.32 to Quarterly Report on
Form 10-Q for the quarter ending June 30, 1999).
10.34 Agreement for the sale and purchase of the entire issued share capital
of Venus Holdings Limited dated June 21, 1999 by and among Venus
Holdings Limited, Brian Coles, Wendy Kathleen Coles, and Brian Coles
and Wendy Coles as the trustees of the Brian and Wendy Coles
Retirement Relief Trust (Exhibit 10.34 to Current Report on Form 8-K/A
for the event occurring on June 21, 1999).
10.35 Underlease dated 3 November 1986 between Wimgrove Investments Limited
(lessor) and East London Telecommunications Limited (lessee) for
premises at Unit C3 Enterprise Business Park
10.36 First Amendment dated December 31, 1999 to Loan and Security Agreement
among the Company, Cunningham Graphics, Inc., Cunningham Graphics
Realty, L.L.C., Cunningham Graphics Delaware, Inc., MVP Graphics,
Inc., Bengal Graphics, Inc., D & L Graphics, Inc., Colorfast Printing,
Inc., GCG/Seville, Inc., Mirror Graphics, Inc., Cunningham Graphics
Digital, Inc., Boston Towne Press, Inc., Summit Bank, as Agent, The
Bank of New York, Chase Manhattan Bank and National Bank of Canada.
10.37 Employment Agreement dated as of November 15, 1999 among Gerald (L.J.)
Baillargeon, the Company and Cunningham Graphics, Inc.
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
24 Power of attorney
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the quarter ended December
31, 1999.
26
<PAGE>
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNDER DULY AUTHORIZED.
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
By: /s/ Michael R. Cunningham
-------------------------------------
Michael R. Cunningham
President, Chief Executive Officer
And
Chairman of the Board of Directors
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Date Signature Title
---- --------- -----
<S> <C> <C>
March 29, 2000 /s/ Michael R. Cunningham President, Chief Executive Officer
----------------------------- And
Michael R. Cunningham Chairman of the Board of Directors
March 29, 2000 * Executive Vice President
----------------------------- And Director
Gordon J. Mays
March 29, 2000 /s/ Gerald (L. J.) Baillargeon Acting Chief Financial Officer
------------------------------ (Principal Financial and Accounting Officer)
Gerald (L.J.) Baillargeon
March 29, 2000 * Director
------------------------------
Arnold Spinner
March 29, 2000 * Director
------------------------------
James J. Cunningham
March 29, 2000 * Director
------------------------------
Laurence Gerber
March 29, 2000 * Director
------------------------------
Stanley J. Moss
/s/ Michael R. Cunningham
- --------------------------------------------------------
* Michael R. Cunningham, as Attorney-In-Fact
</TABLE>
27
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
Contents
<TABLE>
<S> <C>
Report of Independent Auditors .................................................................. F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................................... F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1998 and 1999 .......... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 ............................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 ...... F-6
Notes to Consolidated Financial Statements ...................................................... F-7
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Cunningham Graphics International, Inc.
We have audited the accompanying consolidated balance sheets of Cunningham
Graphics International, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999 Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cunningham Graphics
International, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Metro Park, New Jersey
February 1, 2000
F-2
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETSDECEMBER 31, 1998 AND 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,179 $ 5,131
Accounts receivable (net of allowance for
doubtful accounts of $146 and $224, respectively) 9,199 24,906
Inventories 1,301 3,357
Prepaid expenses and other current assets 383 2,523
Deferred income taxes 520 1,234
-------- --------
Total current assets 13,582 37,151
Cash held for acquisitions, land and building addition 9,700 975
Property, plant and equipment - net 8,652 40,833
Other assets 860 4,051
Goodwill, net of accumulated amortization of $176 in 1998
and $1,006 in 1999 10,795 49,362
-------- --------
$ 43,589 $132,372
======== ========
Liabilities and stockholders' equity Current liabilities:
Revolving line of credit $ 419 $ 1,622
Current portion of long-term debt 580 939
Current portion of obligations under capital leases 493 2,563
Accounts payable 3,102 15,526
Accrued expenses 3,069 9,852
Income taxes payable 499 607
-------- --------
Total current liabilities 8,162 31,109
Long-term debt, net of current portion 769 7,844
Obligations under capital leases- net of current portion 1,216 5,689
Revolving line of credit - net of current portion 38,419
Deferred income taxes 932 3,176
Commitments
Stockholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized, none
issued and outstanding for 1998 and 1999 -- --
Common stock, no par value; 30,000,000 shares
authorized, 5,305,000 and 5,731,399 shares issued and outstanding in
1998 and 1999, respectively 29,395 36,003
Accumulated other comprehensive income 1 469
Retained earnings 3,114 9,663
-------- --------
Total stockholders' equity 32,510 46,135
-------- --------
$ 43,589 $132,372
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 35,744 $ 53,146 $ 110,671
Operating expenses:
Costs of production 26,894 37,694 74,707
Selling, general and administrative 5,794 7,783 17,921
Non-recurring moving costs -- -- 1,017
Depreciation and amortization 694 1,252 4,873
----------- ----------- -----------
33,382 46,729 98,518
----------- ----------- -----------
Income from operations 2,362 6,417 12,153
Interest expense (250) (400) (2,073)
Interest income -- 475 21
Other income 35 5 195
----------- ----------- -----------
Income before income taxes 2,147 6,497 10,296
Provision for income taxes 129 2,489 3,747
----------- ----------- -----------
Net income $ 2,018 $ 4,008 $ 6,549
=========== =========== ===========
Earnings per share
Basic $ 1.15
===========
Diluted $ 1.15
===========
Weighted average number of common shares
Basic 5,692,456
===========
Diluted 5,718,371
===========
Pro Forma Data (unaudited):
Income before income taxes $ 2,147 $ 6,497
Pro forma provision for income taxes 880 2,809
----------- -----------
Pro forma net income 1,267 $ 3,688
=========== ===========
Pro forma earnings per common share:
Basic $ 0.43 $ 0.80
=========== ===========
Diluted $ 0.43 $ 0.80
=========== ===========
Pro forma weighted average number of common shares:
Basic 2,964,492 4,587,941
=========== ===========
Diluted 2,964,492 4,637,024
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands, except share amounts)
<TABLE>
<CAPTION>
------------------------
Common Stock
------------------------
Accumulated
Additional Other
Paid-in Comprehensive Retained
Shares Amount Capital Income Earnings Total
--------- --------- ----------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 119 $6 $734 -- $604 $1,344
Distributions (211) (211)
Net income 2,018 2,018
--------- --------- --------- ---------- --------- --------
Balance at December 31, 1997 119 6 734 -- 2,411 3,151
Elimination of Predecessor's
common stock in the
Reorganization (119) (6) (6)
Reorganization of the
Predecessor 2,595,261 (2,191) (734) (1,846) (4,771)
Issuance of common stock:
Initial public offering 2,530,000 29,249 29,249
Acquisition 169,739 2,207 2,207
Exercise of stock options 10,000 130 130
Distributions (1,459) (1,459)
Net Income 4,008 4,008
Currency translation
Adjustment 1 1
--------
Comprehensive income 4,009
--------- --------- --------- ---------- --------- --------
Balance at December 31, 1998 5,305,000 29,395 -- 1 3,114 32,510
Issuance of common stock
for an acquisition 398,216 6,181 6,181
Exercise of stock options 28,183 366 366
Issuance of common stock
options 61 61
Net income 6,549 6,549
Currency translation
adjustment 468 468
--------
Comprehensive income 7,017
--------- --------- --------- ---------- --------- --------
Balance at December 31, 1999 5,731,399 $ 36,003 $ -- $ 469 $ 9,663 $ 46,135
========= ========= ========= ========== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 2,018 $ 4,008 $ 6,549
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 694 1,252 4,873
Gain on sale of equipment (18) -- --
Deferred income taxes (31) 292 593
Changes in operating assets and liabilities, net
of effects of acquired business:
Accounts receivable (1,066) (1,880) (5,159)
Inventories (399) (165) (1,073)
Prepaid expenses and other current assets (8) (235) (939)
Other assets (324) 313 (3,119)
Notes and advances receivable - stockholder/officers 22 136 --
Accounts payable 193 (1,580) 5,710
Accrued expenses 369 1,134 452
Other liabilities -- (60) (18)
-------- -------- --------
Net cash provided by operating activities 1,450 3,215 7,869
Cash flows from investing activities
Proceeds from the disposition of equipment 1,349 182 699
Acquisition of property and equipment (2,146) (4,614) (17,917)
Acquisition of businesses, net of cash acquired -- (6,149) (40,955)
-------- -------- --------
Net cash used in investing activities (797) (10,581) (58,173)
Cash flows from financing activities
Net principal (payments) proceeds on revolving line of credit (1,050) (352) 39,381
Proceeds from long-term borrowings 1,023 -- 7,400
Principal payments on long-term borrowings (476) (3,127) (906)
Principal payments on obligations under capital lease (188) (468) (2,123)
Principal payments on notes payable - related parties (227) -- --
Shareholder distributions (211) (6,236) --
Net proceeds from sale of common stock -- 29,249 --
Proceeds from the exercise of stock options -- 130 366
-------- -------- --------
Net cash provided by (used in) financing activities (1,129) 19,196 44,118
Effect of exchange rate changes on cash and cash equivalents (18) 413
-------- -------- --------
Net (decrease) increase in cash (476) 11,812 (5,773)
Cash and cash equivalents, beginning of year 543 67 11,879
-------- -------- --------
Cash and cash equivalents, end of year $ 67 $ 11,879 $ 6,106
======== ======== ========
Supplemental disclosure of cash flow data
Income taxes paid $ 169 $ 1,963 $ 2,581
Interest paid $ 251 $ 400 $ 1,582
Supplemental disclosure of noncash investing and
financing activities
Acquisition of equipment under capital lease $ -- $ 967 $ --
Stock issued for acquisition $ -- $ 2,207 $ 6,181
Debt assumed in business acquisitions $ -- $ -- $ 10,343
</TABLE>
See accompanying notes.
F-6
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
On April 22, 1998 Cunningham Graphics, Inc. (the "Predecessor") reorganized (the
"Reorganization") such that all the stockholders of the Predecessor contributed
all of the outstanding shares of common stock of the Predecessor to Cunningham
Graphics International, Inc. (the "Company"), in exchange for a total of
2,595,261 shares of common stock, no par value (the "Common Stock") and
promissory notes (the "Exchange Notes") in the aggregate principal amount of
$2,600. In the Reorganization, the Company also assumed the Predecessor's
obligations under promissory notes in the aggregate principal amount of $2,200,
representing undistributed S corporation taxable income (the "Distribution
Notes"). Collectively, the Exchange Notes and Distribution Notes are known as
the "Reorganization Notes." Concurrently with the Reorganization, the Company
sold 2,530,000 shares of Common Stock in an initial public offering (the
"Offering"). The Company used a portion of the proceeds to repay the
Reorganization Notes.
The Company provides a wide range of graphic communication services to financial
institutions and corporations throughout North America, the United Kingdom and
Asia focusing on producing and distributing time-sensitive analytical research
and marketing materials and on providing on-demand printing services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Reorganization has been accounted for in a manner similar to a pooling of
interests and, accordingly, the historical carrying values of the assets and
liabilities of the Predecessor were not affected by the Reorganization. The
Company conducted no business prior to the Reorganization and, accordingly, it
was not included in the results of operations of the Predecessor. The
accompanying financial statements for the year ended December 31, 1997 include
the accounts and results of operations of the Predecessor. The accompanying
consolidated financial statements as of and for the year ended December 31, 1998
include the accounts and results of operations of the Predecessor for the period
from January 1, 1998 through April 22, 1998 and the results of the Company from
April 23, 1998 through December 31, 1998, including the results of operations of
Roda Limited, an English Corporation, ("Roda") from April 27, 1998 (date of
acquisition) through December 31, 1998. The accompanying consolidated financial
statements as of and for the year ended December 31, 1999 include the accounts
and results of operations of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date
based on their estimated respective fair values and, under certain
circumstances, are subject to revision for a period not to exceed one year from
the date of acquisition. In certain cases, the purchase price is subject to
adjustment based upon the verification of financial position and results of
operations of the acquired business as of a specified date. The results of
operations of the acquired enterprises are included in the Company's
consolidated financial statements for the period subsequent to the acquisitions.
All goodwill generated from the business combinations is being amortized over 40
years.
F-7
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
Selected unaudited statement of income data for the year ended December 31, 1998
are as follows:
Year ended
January 1 to April 23, 1998 to December 31,
April 22, 1998 December 31, 1998 1998
-------------- ----------------- ------------
Net sales $13,390 $39,756 $53,146
======= ======= =======
Income from operations $ 1,044 $ 5,373 $ 6,417
======= ======= =======
Income before income taxes $ 973 $ 5,524 $ 6,497
Provision for income taxes 79 2,410 2,489
------- ------- -------
Net income $ 894 $ 3,114 $ 4,008
======= ======= =======
PRO FORMA ADJUSTMENTS
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 and the
period January 1, 1998 through April 22, 1998. The unaudited pro forma net
income for the year ended December 31, 1997 and 1998 reflects a decrease of $751
and $320 for the year ended December 31, 1997 and the period January 1, 1998
through April 22, 1998, respectively for income taxes based upon income before
income taxes as if the Company had been subject to federal and additional state
income taxes.
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.
CONCENTRATION OF CREDIT RISK
The Company performs periodic credit evaluations of its customers and generally
does not require collateral.
F-8
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, PLANT AND EQUIPMENT
Property, plant 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 39 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets, including goodwill
resulting from business acquisitions, 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.
GOODWILL
Goodwill represents the excess of cost over the estimated fair value of
identifiable assets of businesses acquired and is being amortized on a
straight-line basis over 40 years. Amortization expense was $176 and $830 for
the years ended December 31, 1998 and 1999, respectively
INCOME TAXES
The Company uses the liability method to account for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Through April 22, 1998, the Predecessor and its shareholders elected to be
treated as an S corporation for federal income tax purposes. As a result, any
income or loss generated through such date was passed through directly to the
stockholders. Effective April 23, 1998, the Company's S corporation election
terminated.
F-9
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
2. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which will be required to be adopted by the Company as of January 1, 2001,
established standards for derivative instruments including those embedded in
other contracts and for hedging activities. The new standard requires the
Company to recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. Management believes that the adoption of SFAS
No. 133 will not have a material impact on the Company's financial statements.
SOP 98-1, Accounting for Costs of Computer Software Developed or Obtained for
Internal Use, was required to be adopted by the Company on January 1, 1999.
Also, SOP 98-5, Reporting on the Costs of Start-Up Activities, was adopted by
the Company as of January 1, 1999. The adoption of SOP 98-1 and SOP 98-5 did not
have a material impact on the Company's financial statements.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB Statement No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using the average exchange rate for the year. The gains and losses resulting
from the changes in exchange rates from year to year have been reported in other
comprehensive income.
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income (all changes in equity during a period
except those resulting from investments by owners and distributions to owners)
and its components in the financial statements.
F-10
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
SEGMENTS
The Company presents segment information in accordance with Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. The Company
operates in a single segment. Statement 131 also requires disclosures about
geographic areas and major customers. The Company has four geographic segments,
which are made up of the operations of the United States, Canada, United Kingdom
and Hong Kong and Singapore. The accounting policies of the reportable segments
are the same as those of the Company. Amortization of goodwill is allocated from
the United States segment to the foreign subsidiaries; however, the goodwill is
maintained on the United States books.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of their short-term nature. The
carrying amounts of the revolving line of credit and long-term debt approximate
fair value because their interest rates are reflective of rates that the Company
would be able to obtain on debt with similar terms and conditions.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123 Accounting for Stock-Based Compensation (SFAS No.
123), the Company has elected to follow Accounting Principal Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options plans. Under APB
25, no compensation expense is recognized at the time of option grant when the
exercise price of the employee stock option equals or exceeds the fair market
value of the underlying common stock on the date of grant.
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
Stock options granted to non-employees are valued at fair value in accordance
with SFAS No. 123 with related expenses recorded.
EARNINGS PER SHARE
Basic and diluted earnings per share is calculated in accordance with FASB
Statement No. 128, Earnings per Share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
requirements of Statement 128.
F-11
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
3. ACQUISITIONS
During 1999, the Company purchased all of the outstanding shares or
substantially all of the assets and assumed certain liabilities of the following
commercial printing companies for the indicated consideration
Company Consideration
--------------------------------------------- -------------
Workable Company Limited and Affiliates $ 13,255
Boston Towne Press, Inc. 6,063
Griffin House Graphics Limited and Affiliates 6,740
Venus Holdings Limited and Affiliates 9,039
MVP Graphics, Inc. and Affiliate 4,957
D&L Graphics, Inc. 4,178
Golden Crane, Incorporated 3,629
Mirror Graphics, Inc. and Affiliates 8,401
Bengal Graphics, Inc. and Affiliates 3,013
Goldhawk Reprographics Limited and Affiliates 2,330
All of the consideration paid for the acquisitions was in cash, with the
exception of Workable Company Ltd. where a portion of the consideration was paid
through the issuance of 398,216 shares valued at $15.52 per share of the
Company's Common Stock. At December 31, 1999, under the terms of the purchase
agreements, the Company may be required to pay the sellers up to an additional
$8,100 depending upon the earnings of the acquired companies through 2002. The
aggregate cost of the acquisitions exceed the fair value of the acquired net
assets by $38,721 and has been recorded as goodwill.
On April 27, 1998, the Company acquired all of the outstanding ordinary share
capital of Roda Limited, an English corporation ("Roda") for consideration
consisting of cash in the amount of $4,100 and 169,739 shares of Common Stock,
valued at the Offering price of $13.00 per share. In addition, the Company
purchased the outstanding preference share capital of Roda on June 4, 1998 for
cash in the amount of $1,800. Additional acquisition costs aggregated $200. The
acquisition was accounted for using the purchase method. Under this method, the
purchase price is allocated to the assets and liabilities of the acquired
enterprise as of the acquisition date based on their estimated respective fair
values and are subject to revision for a period not to exceed one year from the
date of acquisition. The excess of the purchase price over the net assets
acquired totaled approximately $11,000 and was recorded as goodwill.
The pro forma unaudited results of operations for the year ended December 31,
1998 and 1999, assuming the Reorganization, the consummation of the acquisitions
and issuance of the common stock as of January 1, 1998, are as follows:
For the years ended December 31,
-----------------------------------
1998 1999
---------- ----------
Net sales $ 126,024 $ 137,339
Net income 7,631 7,406
Per share data:
Basic earnings 1.66 1.30
Diluted earnings 1.65 1.30
F-12
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
3. ACQUISITIONS (CONTINUED)
The preceding unaudited pro forma results are based on assumptions and are not
necessarily indicative of the actual results which would have occurred had these
acquisitions occurred on January 1, 1998, or of the future results of operations
of the combined Company.
4. CASH HELD FOR ACQUISITIONS AND BUILDING ADDITION
The cash held for acquisitions and building addition represents cash used
subsequent to December 31, 1998 for business acquisitions and the purchase of a
building.
At December 31, 1999, the Company also has contracted for the acquisition of an
unimproved parcel of land, for a purchase price of $975. The closing of such
transaction is contingent upon the completion of certain environmental
remediation to the satisfaction of the New Jersey Department of Environmental
Protection.
5. INVENTORIES
Inventories consist of the following at December 31:
1998 1999
------- -------
Raw materials (net of valuation allowance of $143
and $149, respectively) $ 1,214 $ 2,452
Work-in-process 87 905
------- -------
$ 1,301 $ 3,357
======= =======
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
1998 1999
------- -------
Land, building and building improvements $ -- $13,045
Machinery and equipment 10,364 28,240
Furniture, fixtures and office equipment 1,669 5,061
Leasehold improvements 685 1,555
Autos and transportation equipment 326 1,367
------- -------
13,044 49,268
Accumulated depreciation and amortization 4,392 8,435
------- -------
$ 8,652 $40,833
======= =======
F-13
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
6. PROPERTY AND EQUIPMENT (CONTINUED)
The gross amount of the leased property included in property and equipment is
$2,380 and $8,694 and accumulated amortization is $184 and $647 at December 31,
1998 and 1999, respectively. Amortization ($119, $113 and $354 in 1997, 1998 and
1999, respectively) of assets under capital leases is included in depreciation
expense. During 1999, the Company capitalized approximately $250 of interest
incurred during the construction period of the Jersey City facility. In
connection with certain acquisitions the Company has machinery and equipment
with a fair value of $500 which was held for sale at December 31, 1999 and is
included in property and equipment.
7. OTHER ASSETS
Included in other assets at December 31, 1998 is a deposit for $755 on a
building, which was subsequently purchased in 1999. Included in other assets at
December 31, 1999 is a deposit of $1,875 on printing equipment to be delivered
in 2000.
8. ACCRUED EXPENSES
Other accrued liabilities consists of the following at December 31:
1998 1999
------ ------
Employee compensation $1,529 $3,721
Due to sellers -- 2,000
Accrued interest 470
Accrued professional fees 420
Other 1,540 3,241
------ ------
$3,069 $9,852
====== ======
9. REVOLVING LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASE
On August 3, 1999, the Company refinanced its debt and entered into a $60,000
credit facility (the "Credit Facility") with a group of banks. The Company may
borrow up to $30,000 until July 2001 for acquisitions (the "Acquisition Line"),
and $20,000 until July 31, 2004 for working capital, general business purposes
and letters of credit (the "Working Capital Line"), on a revolving basis. The
Company also borrowed $10,000 to repay its then existing indebtedness, payable
in quarterly installments beginning on September 30, 2000. At the Company's
option, the Credit Facility bears interest at either: (i) the bank's base rate
plus a number of basis points depending upon the Company's maximum leverage
ratio, as defined in the agreement or (ii) the Eurodollar rate plus a number of
basis points depending upon the Company's maximum leverage ratio, as defined. At
December 31, 1999, the weighted average interest rate on the Credit Facility was
8.4%. Among other things, the loan agreement restricts the Company's ability to
incur indebtedness, pay dividends, make capital expenditures, dispose of assets,
lend money to foreign subsidiaries and make acquisitions. The Credit Facility
also requires the Company to maintain certain financial covenants, including
minimum net worth, maximum leverage and debt coverage ratios. The facility is
collateralized by substantially all of the assets of the Company's domestic
subsidiaries and a controlling interest of the stock of the Company's foreign
subsidiaries.
F-14
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
9. REVOLVING LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES (CONTINUED)
Effective December 31, 1999, the Company amended the Credit Facility and
transferred $6,000 from the Acquisition Line to the Working Capital Line. After
giving effect to the amendment, as of December 31, 1999 $7,600 remained
available for borrowing for acquisitions and $9,100 remained available for
working capital and general business purposes. Letters of credit totaling $4,100
were outstanding as of December 31, 1999.
Roda has a credit facility with a bank (the "Roda Facility") consisting of a
$2,000 ((pound)1.2 million) term loan (the "Roda Term Loan") and a $750
((pound)450) revolving line of credit. The line of credit is reviewed by the
bank annually for renewal, and is payable on demand. The term loan is payable in
equal monthly installments through October 2001. The debt bears interest at 1%
above the banks base rate, as defined, and is collateralized by substantially
all of Roda's assets. As of December 31, 1998 and 1999, approximately $419
((pound)252) and $872 ((pound)542) was outstanding on the credit facility and
$1,183 ((pound)716) and $748 ((pound)465) was outstanding under the term loan.
The Company issued a standby letter of credit to the bank to guarantee the Roda
Facility.
In 1998 the Company had a $30,000 revolving line of credit facility with a bank
(the "Revolver"). At the Company's option, the facility incurred interest at
either: (i) the bank's base rate less a number of basis points depending upon
the Company's maximum leverage ratio, as defined in the agreement or (ii) the
Eurodollar rate plus a number of basis points depending upon the Company's
maximum leverage ratio, as defined. The Revolver was repaid on August 3, 1999 in
connection with the refinancing described above.
The Company leases property and equipment under capital leases expiring in
various years through 2005. Interest rates inherent in the leases range from 7%
to 12%.
Long-term debt and obligations under capital leases consists of the following at
December 31:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Revolving line of credit $ 419 $40,041
Notes payable to bank, payable in monthly installments of $61
including interest at 7.5%, with a final payment of $5,038 due
in March 2009 (secured by certain real estate with a carrying
value of approximately $13,000) -- 7,313
Roda Term Loan 1,189 748
Various capital lease obligations 1,709 8,252
Other notes payable 160 722
------- -------
3,477 57,076
Less current maturities 1,492 5,124
------- -------
$ 1,985 $51,952
======= =======
</TABLE>
The weighted average interest rate on short-term borrowings 7.25% and 8.5% at
December 31, 1998 and 1999, respectively.
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, 1998 and 1999. 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-15
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
9. REVOLVING LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES (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
Long-Term Under Capital
Debt Lease
--------- -------------
2000 $ 2,561 $ 3,126
2001 889 2,459
2002 209 1,826
2003 223 1,234
2004 38,656 684
Thereafter 6,286 574
-------
Total long-term debt $48,824
======= -------
Total minimum lease payments 9,903
Less amount representing interest 1,651
-------
Present value of net minimum lease payments $ 8,252
=======
10. INCOME TAXES
The provision for income taxes consists of the following:
1997 1998 1999
------- ------- -------
Current:
Federal $ -- $ 1,351 $ 1,478
State 160 764 524
Foreign -- 136 1,152
------- ------- -------
160 2,251 3,154
Deferred:
Federal -- 17 415
State (31) (4) 17
Foreign -- 225 161
------- ------- -------
(31) 238 593
------- ------- -------
Total $ 129 $ 2,489 $ 3,747
======= ======= =======
F-16
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts) -(continued)
10. INCOME TAXES (CONTINUED)
The differences between the provisions for income taxes and the amounts that
would result from applying the statutory federal tax rate to income before
income taxes for the year ended December 31, 1999 is summarized as follows:
Statutory federal income tax rate 34.0%
Non-deductible amortization of goodwill 2.8
State income tax, net of federal benefit 3.5
Benefit of lower foreign tax rates (3.9)
----
Effective income tax rate 36.4%
====
The significant components of the Company's deferred tax assets and liabilities
were as follows at December 31:
1998 1999
------- -------
Current deferred tax assets:
Accrued liabilities $ 128 $ 500
Allowance for doubtful accounts 83 324
Employee compensation 219 217
Inventory 90 193
------- -------
Total current deferred tax assets 520 1,234
Non-current deferred tax assets
Net operating loss carryforwards -- 270
------- -------
Total non-current deferred tax assets -- 270
Non-current deferred tax liabilities
Fixed assets 932 3,278
Other 168
------- -------
Total non-current deferred tax liabilities 932 3,446
------- -------
Net deferred tax liabilities $ (412) $(1,942)
======= =======
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $752 from acquired companies that will begin to expire in 2005.
The Company has unremitted foreign earnings of approximately $4,800 at December
31, 1999. It is the Company's intention to permanently reinvest those earnings
in its foreign operations. Accordingly, no federal deferred taxes have been
provided on those earnings. If such earnings were to be remitted, it is possible
there would be withholding taxes (although not readily determinable) on such
remittances.
F-17
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts) -(continued)
11. STOCK OPTION PLANS
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 incentive stock options
and nonstatutory stock options to employees and consultants.
Additionally, 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 issuance thereunder. Directors
of the Company who are not employees of the Company or any of its subsidiaries
are eligible to participate in the plan.
Options issued under both the 1998 Plan and the Directors' Plan expire ten years
from the date of grant. The vesting period for options granted under the 1998
Plan varies among employees and ranges from immediately to three years. The
vesting period for options granted under the Directors' Plan is six months
following the date of grant. Options granted under the plans have exercise
prices equal to but not less than the fair market value of the common stock on
the grant date.
The following summarizes the activity in the options outstanding for the
combined plans during 1998:
Weighted
Number of Average
Options Exercise Price
--------- --------------
Outstanding at January 1, 1998 -- $ --
Granted 303,700 13.00
Canceled (3,950) 13.00
Exercised (10,000) 13.00
-------
Outstanding at December 31, 1998 289,750 13.00
Granted 189,000 14.81
Canceled (7,950) 13.00
Exercised (28,183) 13.00
-------
Outstanding at December 31, 1999 442,617 13.78
=======
Exercisable at December 31, 1999 305,472 13.24
At December 31, 1999, the weighted average remaining contractual life of the
options outstanding is 8.4 years.
F-18
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
12. STOCK OPTION PLANS (CONTINUED)
At December 31, 1999, an aggregate of 561,817 shares of common stock are
reserved for issuance under the plans.
Had the Company used the fair value-based method of accounting for the stock
option plans prescribed by SFAS No. 123, Accounting for Stock-Based
Compensation, and charged compensation expense against income over the vesting
period based on the fair value of options at the date of grant, net income and
diluted earnings per share would have been reduced to the following pro forma
amounts:
---------------------------
1998 1999
--------- ---------
Net income $ 2,529 $ 5,860
Diluted earnings per share $ 0.55 $ 1.02
The pro forma compensation expense may not be representative of future amounts
because options vest over several years and additional options may be granted in
future years.
The weighted-average grant date fair value of options granted during 1998 and
1999 were $4.83 and $5.50, respectively. The weighted-average grant date fair
value of options was determined by utilizing the Black-Scholes option-pricing
model with the following key assumptions for 1998 and 1999:
Dividend yield 0%
Expected volatility 30%
Risk-free interest rate 5.75%
Expected life 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
During 1999, the Company issued 10,000 options to a consultant related to an
acquisition. The options were valued at $61 using the Black-Scholes model and
are included in the purchase price. The options have an exercise price of $16.50
and vest over three years. None of the options were exercisable at December 31,
1999.
F-19
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
13. EMPLOYEE BENEFIT PLAN
The Company has defined contribution employee benefit plans in the United States
and in the United Kingdom covering substantially all employees. The Company may
elect to contribute to the plan in amounts and dates determined by the
management in its discretion. For the years ended December 31, 1997, 1998 and
1999 the Company made aggregate contributions of $52, $118 and $165
respectively, to the plans.
14. COMMITMENTS
The Company leases office and manufacturing facilities, equipment and trucks
under noncancelable operating leases expiring in various years through 2007.
Certain of these leases contain renewal options for specified periods.
Future minimum rental payments for each of the next five years and in the
aggregate under the above lease agreements are as follows:
2000 $4,765
2001 4,205
2002 3,392
2003 2,628
2004 1,832
Thereafter 3,813
---------
$ 20,635
=========
Rent expense under all operating leases was $631, $887 and $4,251 for the years
ended December 31, 1997, 1998 and 1999, respectively.
15. CONCENTRATIONS
Sales to customers representing 10% or more of the Company's total net sales
(four customers in 1997, 24%, 13%, 10% and 10% each respectively; three
customers in 1998, 24%, 15% and 10% each respectively; three customers in 1999,
12% each) represented total net sales of $20,375, $25,752 and $40,160,
respectively. Included in trade accounts receivable are amounts due from these
customers of $3,127 and $5,856 as of December 31, 1998 and 1999, respectively.
If one of these major customers were to discontinue or significantly reduce the
use of the Company's services, the business, results of operations and financial
condition could materially suffer.
The Company has 1,189 employees of which 385 are members of a union in the
United States and 50 are members of a union in the United Kingdom.
F-20
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's single business segment is the production and distribution of
time-sensitive analytical research marketing materials, commercial printing,
digital printing, outsourcing services and on providing on-demand printing
services.
All of the Company's financial results prior to April 27, 1998, the date of the
acquisition, of Roda, were from U.S. operations only. The following table
presents financial information based on the Company's geographic segments for
the year ended December 31, 1998 and 1999 (dollars in thousands):
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Income from Income Before Identifiable
Net Sales Operations Taxes Assets
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
United States $ 46,005 $ 5,151 $ 5,512 $29,527
United Kingdom 7,141 1,266 985 14,062
-------- ------- ------- --------
Total $ 53,146 $ 6,417 $ 6,497 $ 43,589
======== ======= ======= ========
</TABLE>
For the Year Ended December 31 1999
<TABLE>
<CAPTION>
Income from Income Before Identifiable
Net Sales Operations Taxes Assets
--------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
United States $ 76,128 $ 7,283 $ 5,990 $ 80,177
United Kingdom 21,824 1,658 1,162 32,659
Hong Kong and Singapore 9,143 2,023 2,064 14,067
Canada 3,576 1,189 1,080 5,469
-------- ------- ------- --------
Total $110,671 $12,153 $10,296 $132,372
======== ======= ======= ========
</TABLE>
F-21
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1998 1999
------------ ------------ ------------
(Pro forma) (Pro forma)
<S> <C> <C> <C>
Numerator:
Net income for basic and diluted earnings per share $ 1,267 $ 3,688 $ 6,549
=========== ========== ==========
Denominator
Denominator for basic earnings per share - weighted average
common shares 2,946,492 4,587,941 5,692,456
Effect of dilutive securities - employee stock options -- 49,083 25,915
----------- ---------- ----------
Denominator for diluted earnings per share- adjusted
weighted average common shares and assumed conversion 2,964,492 4,637,024 5,718,371
=========== ========== ==========
Basic earnings per common share $ 0.43 $ 0.80 $ 1.15
=========== ========== ==========
Diluted earnings per common share $ 0.43 $ 0.80 $ 1.15
=========== ========== ==========
</TABLE>
F-22
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(dollars in thousands, except per share amounts)
18. QUARTERLY DATA
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $18,301 $22,562 $31,335 $38,472
Gross profit 6,051 7,630 10,319 11,964
Net income 1,395 1,090 1,824 2,240
Earnings per share:
Basic 0.25 0.19 0.32 0.39
Diluted 0.25 0.19 0.32 0.39
<CAPTION>
1998
----------------------------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $10,850 $13,080 $14,191 $15,025
Gross profit 2,726 3,731 4,052 4,943
Net income 1,030 1,298
Pro forma net income 525 835
Earnings per share:
Basic 0.19 0.25
Diluted 0.19 0.24
Pro forma earnings per common share:
Basic 0.18 0.17
Diluted 0.18 0.17
</TABLE>
F-23
<PAGE>
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(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, 1999
Allowances for accounts receivable $146 $ 78 $-- $224
Year ended December 31, 1998
Allowances for accounts receivable 50 96 -- 146
Year ended December 31, 1997
Allowances for accounts receivable 28 31 9 50
<CAPTION>
Charged to
Beginning Cost and Ending
Description Balance Expense Write-offs Balance
----------- ------- ------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowances for unsaleable inventories $143 $ 6 $-- $149
Year ended December 31, 1998
Allowances for unsaleable inventories 194 84 135 143
Year ended December 31, 1997
Allowances for unsaleable inventories 200 86 92 194
</TABLE>
S-1
Exhibit 10.2
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
AMENDED AND RESTATED DIRECTORS' STOCK OPTION PLAN
1. PURPOSE
The purpose of the Cunningham Graphics International, Inc. Amended and
Restated Directors' Stock Option Plan (the "Plan") is to promote the success of
Cunningham Graphics International, Inc. (the "Company") by providing a method
whereby members of the Board of Directors of the Company who are not Employees
of the Company or its Subsidiaries may be encouraged to invest in the Common
Stock of the Company in order to promote long term shareholder value, and
increase their personal interest in the continued success and progress of the
Company.
2. DEFINITIONS
Except where the context otherwise requires, as used herein:
2.1 "Board of Directors" shall mean the Board of Directors of the Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
any Treasury regulations promulgated thereunder.
2.3 "Common Stock" shall mean the common stock, no par value, of the
Company.
2.4 "Director" shall mean a member of the Board of Directors.
2.5 "Employee" shall mean an individual who is on the active salaried
payroll of the Company or any of its Subsidiaries at the time a Nonstatutory
Stock Option is granted under the Plan.
2.6 "Fair Market Value" of the Common Stock means, for all purposes of the
Plan unless otherwise provided (i) the mean between the high and low sales
prices of the Common 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 Common Stock as reported by the National Quotation Bureau Incorporated
or such other source as the Board of Directors shall determine, or (iii) if the
Common 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 Common Stock on the principal securities
exchange on which the Common Stock is listed. In the event that the method for
determining the Fair Market Value of the Common Stock provided for above shall
either be not applicable or not be practical, in the opinion of the Board of
Directors, then the Fair Market Value shall be determined by such other
reasonable method as the Board of Directors shall, in its discretion, select and
apply.
2.7 "Nonstatutory Stock Option" shall mean an option to purchase Common
Stock granted under Section 5(b) of the Plan that by its terms does not qualify
as an "incentive stock option" under Section 422 of the Code.
2.8 "Optionee" shall mean a person to whom a Nonstatutory Stock Option has
been granted under the Plan.
<PAGE>
2.9 "Outside Director" shall mean each Director who is not an Employee.
2.10 "Subsidiary" shall mean any subsidiary corporation as defined in
Section 424(f) of the Code.
3. ADMINISTRATION
(a) The Board of Directors of the Company shall administer the Plan. The
Board of Directors shall have full power and authority to grant Nonstatutory
Stock Options pursuant to the provisions of the Plan, to interpret the
provisions of the Plan and any agreements reflecting Nonstatutory Stock Options
issued under the Plan, and to supervise the administration of the Plan,
including the adoption of the rules and regulations for the administration of
the Plan. The Board of Directors may act only by a majority of its members in
office, except that the members thereof may authorize any one or more of their
number or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Board of Directors.
(b) All decisions of the Board of Directors pursuant to the provisions of
the Plan shall be final, conclusive and binding on all persons, including the
Company, shareholders, employees and Optionees.
(c) No member of the Board of Directors shall be liable for anything done
or omitted to be done by him or any other member of the Board of Directors in
connection with the Plan, except for his own willful misconduct or as expressly
provided by statute.
4. SHARES SUBJECT TO THE PLAN
(a) The shares of Common Stock to be delivered upon exercise of
Nonstatutory Stock Options granted under the Plan may be made available from the
authorized but unissued shares of the Company or treasury shares or from shares
reacquired by the Company, including shares purchased in the open market.
(b) Subject to adjustments made pursuant to the provisions of Section 4(c),
the aggregate number of shares to be delivered upon the exercise of all
Nonstatutory Stock Options which may be granted under the Plan shall not exceed
150,000 shares of Common Stock.
(c) In the event of any change in the outstanding Common Stock of the
Company by reason of any stock split, stock dividend, split-up, split-off,
spin-off, recapitalization, merger, consolidation, rights offering,
reorganization, combination or exchange of shares, a sale by the Company of all
or part of its assets, any distribution to shareholders other than a normal cash
dividend, or other extraordinary or unusual event, the number or kind of shares
that may be issued under the Plan pursuant to Section 4(b) above, the number or
kind of shares subject to, and the Nonstatutory Stock Option price per share
under, all outstanding Nonstatutory Stock Options shall be automatically
adjusted so that the proportionate interest of the Optionee shall be maintained
as before the occurrence of such event; such adjustment in outstanding
Nonstatutory Stock Options shall be made without change in the total
Nonstatutory Stock Option exercise price applicable to the unexercised portion
of such Nonstatutory Stock Options and with a corresponding adjustment in the
Nonstatutory Stock Option exercise price per share, and such adjustment shall be
conclusive and binding for all purposes of the Plan.
-2-
<PAGE>
(d) If a Nonstatutory Stock Option granted under the Plan shall expire or
terminate for any reason, the shares subject to, but not delivered under, such
Nonstatutory Stock Option shall be available for other Nonstatutory Stock
Options to the same member or other members of the Board of Directors.
5. ELIGIBILITY AND EXTENT OF PARTICIPATION
(a) Only Outside Directors shall be eligible to receive Nonstatutory Stock
Options under the Plan.
(b) Each individual who is an Outside Director at the time of the closing
of the Company's initial public offering of Common Stock and, thereafter, each
individual who becomes an Outside Director shall receive a Nonstatutory Stock
Option for 15,000 shares of Common Stock. In addition, each year on the first
business day of the month following the month in which the annual meeting of
shareholders occurs, commencing in 1999, each Outside Director shall
automatically receive a Nonstatutory Stock Option for 4,000 shares of Common
Stock.
(c) The Nonstatutory Stock Option shall not be transferable by the Optionee
otherwise than by will or the laws of descent and distribution, or pursuant to a
"qualified domestic relations order" as defined by the Code and shall be
exercisable during his lifetime only by him.
(d) The Nonstatutory Stock Option shall not be exercisable:
(i) before the expiration of six months from the date it is granted
and after the expiration of ten years from the date it is granted, and may
be exercised at any time during such period;
(ii) unless payment in full is made in United States dollars by cash
or check;
(iii) in the case of a person who ceases to be an Outside Director for
any reason while holding a Nonstatutory Stock Option that has not expired
and has not been fully exercised, after the third anniversary of the date
he ceased to be an Outside Director (but in no event after the Nonstatutory
Stock Option has expired under the provisions of Section 5(d)(i) above);
and
(iv) in the case of the executors, administrators, heirs or
distributees, as the case may be, of a person who dies holding a
Nonstatutory Stock Option that has not expired and has not been fully
exercised, after the later of (A) the first anniversary of the date of
death or (B) the expiration date that would be applicable under Section
5(d)(iii) (but in no event after the Nonstatutory Stock Option has expired
under the provisions of Section 5(d)(i) above).
(e) It shall be a condition to the obligation of the Company to issue
shares of Common Stock upon exercise of a Nonstatutory Stock Option, that the
holder (or any beneficiary or person entitled to exercise such Nonstatutory
Stock Option pursuant to the Plan) pay to the Company, upon its demand, such
amount as may be requested by the Company for the purpose of satisfying any
liability to withhold federal, state, or local income or other taxes. If the
amount requested is not paid, the Company may refuse to issue shares of Common
Stock.
-3-
<PAGE>
6. OPTION AGREEMENTS
Each Nonstatutory Stock Option under the Plan shall be evidenced by an
option agreement which shall be executed by the Optionee and, on behalf of the
Company, by an officer of the Company and shall contain such provisions
consistent with the Plan as may be approved by the Board of Directors and may be
supplemented and amended from time to time as approved by the Board of
Directors.
7. OPTION PRICE
The price at which shares of Common Stock may be purchased upon exercise of
a particular Nonstatutory Stock Option shall be 100 percent of the Fair Market
Value of such shares at the time such Nonstatutory Stock Option is granted, but
in no event less than the par value thereof (if any). In the case of the options
granted to persons who are or who become Outside Directors at the time of the
initial public offering of the Common Stock, the exercise price shall be the
initial public offering price.
8. TRANSFERABILITY OF NONSTATUTORY STOCK OPTIONS
A Nonstatutory Stock Option granted under the Plan may not be transferred
except by will or the laws of descent and distribution. During the lifetime of
an Optionee, a Nonstatutory Stock Option may be exercised only by the Optionee,
or by a duly appointed legal guardian in the event of the legal disability of
the Optionee. Except as specifically provided in the Plan, no person shall have
any right to assign, transfer, alienate, pledge, encumber or subject to lien the
benefits to which such person is entitled thereunder, and benefits under the
Plan shall not be subject to adverse legal process of any kind. No prohibited
assignment, transfer, alienation, pledge or encumbrance of benefits or
subjection of benefits to lien or adverse legal process of any kind will be
recognized by the Board of Directors and in such case the Board of Directors may
terminate the right of such person to such benefits and direct that they be held
or applied for the benefit of such person, his spouse, children or other
dependents in such manner and in such proportion as the Board of Directors deems
advisable. If a person to whom benefits are due shall be or become incompetent,
either physically or mentally, in the judgment of the Board of Directors, the
Board of Directors shall have the right to determine to whom such benefits shall
be paid for the benefit of such person.
9. DELIVERY OF SHARES
No shares shall be delivered pursuant to any exercise of a Nonstatutory
Stock Option until the requirements of such laws and regulations as may be
deemed by the Board of Directors to be applicable thereto are satisfied.
-4-
<PAGE>
10. AMENDMENTS, SUSPENSION OR DISCONTINUANCE
The Board of Directors may amend, suspend, or discontinue the Plan, but
except as permitted by Section 4(c), may not, without the prior approval of the
shareholders of the Company, make any amendment which operates (a) to make any
material change in the persons eligible to receive Nonstatutory Stock Options
under the Plan, (b) to increase the total number of shares which may be
delivered under the Plan except as provided in Section 4(c), (c) to extend the
maximum option period or the period during which Nonstatutory Stock Options may
be granted under the Plan, (d) to decrease the option price, or (e) increase the
number of shares subject to an option granted to a director each year hereunder.
Except with the consent of an Optionee, no amendment, suspension or termination
of the Plan shall impair the right of any recipient of any Nonstatutory Stock
Options granted under the Plan.
11. TERM OF THE PLAN
(a) This Plan shall be effective as of the date of its approval by both the
Board of Directors and shareholders of the Company.
(b) No Nonstatutory Stock Option shall be granted under the Plan after
December 31, 2007. Unless otherwise expressly provided in the Plan or in an
applicable option agreement, any Nonstatutory Stock Option granted hereunder
may, and the authority of the Board of Directors to amend, alter, adjust,
suspend, discontinue, or terminate any such Nonstatutory Stock Option shall,
continue after December 31, 2007.
12. MISCELLANEOUS
(a) All expenses and costs in connection with the operation of the Plan
shall be borne by the Company.
(b) Proceeds from the sale of shares pursuant to Nonstatutory Stock Options
granted under this Plan shall constitute general funds of the Company.
(c) Upon any distribution of shares of Common Stock pursuant to any
provision of the Plan, the distributee may be required to represent in writing
that he is acquiring such shares for his own account for investment and not with
a view to, or for sale in connection with, the distribution of any part thereof.
The certificates for shares delivered under the Plan may include any legend
which the Board of Directors or counsel for the Company deems appropriate to
reflect any restrictions on transfers.
(d) Except as expressly provided for in the Plan, no member of the Board of
Directors or other person shall have any claim or right to be granted a
Nonstatutory Stock Option under the Plan. Neither the Plan nor any action taken
hereunder shall be construed as giving any member of the Board of Directors any
right to be retained in the service of the Company.
-5-
PARTICULARS
1. DATE OF THIS UNDERLEASE 3rd November 1986
2. LESSOR WIMGROVE INVESTMENTS LIMITED of 31,
Hammersmith Grove, London W6 7EN
3. LESSEE EAST LONDON TELECOMMUNICATIONS LIMITED
of 46/47 Bloomsbury Square, London WC1A
2RU (Co. Registration No. 1870928)
4. DEMISED PREMISES All those premises shown edged red on the
Plan annexed hereto together with the
buildings from time to time thereon fronting
Millharbour in the London Borough of Tower
Hamlets intended to be known as Unit C3 on the
Lessor's Estate as hereinafter defined
5. DATE OF COMMENCEMENT 6th October 1986
OF TERM
6. LENGTH OF TERM Twenty Five years
7. INITIAL RENT (pounds) 95,500 p.a.
------------------------------------
D. J. FREEMAN
Solicitors
1 Fetter Lane, London EC4A 1BR
------------------------------------
Date: 23/10/97 Ref:MKA
Certified a true copy of the original*
/s/ D.J. Freeman
------------------------------------
* but without lease plan
-1-
<PAGE>
THIS UNDERLEASE is made on the date stated in the Particulars B E T W E E N the
Lessor stated in the Particulars (hereinafter called "the Lessor") of the one
part and the Lessee stated in the Particulars (hereinafter called the Lessee")
of the other part
WITNESSETH as follows:-
1. IN these presents unless there be something in the subject or context
inconsistent therewith:-
(a) (i) words importing the masculine gender only shall include the
feminine and vice versa and words importing persons shall
include companies and corporations and vice versa
(ii) words importing the singular number only shall include the
plural and vice versa and where there are two or more
persons included in the expression "the Lessee" then
covenants herein expressed to be made by the Lessee shall
be covenants by such persons jointly and severally
(b) the following expressions shall have the meanings
attributed to them hereunder:-
(i) "the Demised Premises" shall mean the land and premises so
designated and described in the Particulars and each and
every part thereof together with the appurtenances thereto
and any building now or hereafter erected thereon or on any
part thereof together with all additions alterations and
improvements thereto and shall also include all landlord's
fixtures and fittings and landlord's plant machinery and
equipment now or hereafter in or about the same
(ii) "the insured risks" shall mean fire explosion lightning
aircraft articles dropped from aircraft storm tempest flood
impact riot malicious damage civil commotion subsidence
landslip and heave earthquake (fire and shock) and bursting
-2-
<PAGE>
and overflowing of water tanks apparatus and pipes together
with three years (or such longer period as the Lessee may
require) loss of rent and Service Charge costs of
demolition and site clearance Architects' Surveyor's and
other appropriate professional fees and such other risks as
the Lessor may from time to time require to insure against
(iii) "the Particulars" shall mean the details and descriptions
appearing in the page headed "Particulars" and which shall
comprise part of this Underlease
(iv) "the Plan" shall mean the Plan annexed hereto
(v) "the Lessor" shall include the person for the time being
entitled to the reversion immediately expectant on the
determination of the term hereby granted and "the Lessee"
shall include its successors in title and assigns
(vi) (a) "the Lessor's Surveyor" shall mean the person firm or
company appointed by the Lessor from time to time to act as
its Surveyor or Managing Agent (such Surveyor or Managing
Agent being a Member of the Royal Institution of Chartered
Surveyors or some other recognised professional body
regulating the activities of surveyors or if not a Member
of such a professional body being experienced in the
professional management of commercial properties)
(b)"the Superior Lessor's Surveyor" shall mean the estates
manager or Surveyor (or one of the Surveyors) for the time
being from time to time of the Superior Lessor being a
member of the Royal Institution of Chartered Surveyors or
some other recognised professional body regulating the
activities of Surveyors
(vii) "the Superior Lessor" shall mean the London Docklands
Development Corporation or other the person for the time
-3-
<PAGE>
being entitled to the reversion to the Head Lease
(viii) "the Head Lease" shall mean the lease dated the Eighth day
of October 1985 and made between London Docklands
Development Corporation (1) and the Lessor (2)
(ix) "the Lessor's Estate" shall mean the premises comprised in
the Head Lease registered under Title Number EGL165861
known as The Enterprise Business Park Poplar London E 14
and edged green on the Plan
(x) "Stated Interest" shall mean interest at the rate of four
per cent per annum above the Base Rate from time to time of
Lloyds Bank Plc. or if such Base Rate shall cease to
exist or be published then interest at such rate as shall
reasonably equate with the same and as the Lessor may from
time to time in writing specify
(xi) "the Term" shall mean the term of years hereby granted
which where applicable shall include the period of any
holding over or any extension or continuance thereof by
statute or at common law
(xii) "the Termination Date" shall mean the date of expiration or
sooner determination of the Term
2. IN consideration of the Yearly Rent and the covenants on the part of the
Lessee hereinafter reserved and contained the Lessor HEREBY DEMISES unto
the Lessee the Demised Premises TOGETHER with the rights and easements
set out in the First Schedule hereto and EXCEPT AND RESERVED the rights
and easements set out in the Second Schedule hereto TO HOLD the same unto
the Lessee for a term from and including the Date of Commencement of Term
for the Length of Term PAYING therefor:-
(a) During the first five years of the Term the Yearly Rent of NINETY
- FIVE THOUSAND FIVE HUNDRED POUNDS ((pound)95,500) and during the
remainder of the term such Yearly Rent as shall be agreed or
-4-
<PAGE>
determined in accordance with the provisions for review of the
Yearly Rent hereinafter contained
(b) By way of further or additional rent 47.10 per centum of the
Service Charge as defined in the Fourth Schedule hereto in the
manner provided therefor in the said Schedule
such Yearly Rent and further or additional rent to be paid by equal
quarterly payments in advance on the usual quarter days the first of such
payments to be made on the Seventeenth day of November 1986 in respect
of the period on and from the 17th day of November 1986 to the quarter day
next following
3. THE Lessee HEREBY COVENANTS with the Lessor as follows:-
(1) To pay the rents hereinbefore reserved on the days and in
the manner hereinbefore appointed for payment thereof
(2) (i) To pay bear and discharge all existing and future rates
taxes duties charges assessments impositions and outgoings
whatsoever (whether Parliamentary or parochial or
otherwise and whether or not of a capital or
non-recurring nature) which now are or may at any time
hereafter during the Term be charged levied assessed or
imposed upon the Demised Premises or upon the owner or
occupier in respect thereof (other than taxes upon the
income or gains or deemed income or gains of the Lessor or
any person holding an interest in the Demised Premises
superior to that of the Lessee or arising from or in
connection with the reversion immediately expectant upon
the expiration of the Term or arising from any such
superior interest)
(ii) To pay (or to reimburse the Lessor as appropriate) for all
water supplied to the Demised Premises as recorded by the
check meter from time to time installed therein at the rate
charged from time to time by the Water Authority and at all
-5-
<PAGE>
times to keep the meter installed within the Demised
Premises in full working order and repair and to ensure
that at all times throughout the term apparatus for the
purpose of recording the quantity of water supplied to the
Demised Premises of a type approved by the Water Authority
and the Lessor is maintained therein and further to permit
the Lessor to enter into and upon the Demised Premises at
any time for the express purpose of checking that the said
apparatus is installed and maintained in accordance with
this covenant and to take readings in order to prepare any
necessary accounts
(3) From time to time and at all times during the Term to
repair and to keep the whole of the Demised Premises
including (without prejudice to the generality of that
expression) the external walls roof drains and the sanitary
and water apparatus therein in good and substantial repair
and condition and to renew or replace the Demised Premises
or any part or parts thereof if the same may be or become
beyond repair or which may require renewal or replacement
by reason of any defect therein whether latent inherent or
otherwise and to yield up the same on the Termination Date
in good and substantial repair and condition in accordance
with the covenants by the Lessee herein contained To repair
cleanse and maintain and to keep repaired cleansed and
maintained and free from obstruction all gutters sewers
drains and water and waste-pipes and ducts belonging
solely to or forming part of the Demised Premises
(4) (a) As often as may be reasonably necessary during the Term and
also in the last six months thereof whether determined by
effluxion of time or otherwise to paint or otherwise treat
as the case may be all the exterior and interior wood metal
-6-
<PAGE>
plastic stucco and cement work of the Demised Premises
previously so painted or treated in a workmanlike manner
(b) As often as may be reasonably necessary and in any event
during the last six months of the Term whether determined
by effluxion of time or otherwise and so far as is
practicable to clean the external stone and brickwork and
other external surfaces of the Demised Premises and if
necessary to repoint the brickwork
(5) To permit the Lessor and the Superior Lessor and its or
their agents or surveyors with or without workmen and
others and appliances at all reasonable times on reasonable
prior written notice during the Term (save in case of
emergency when no notice shall be required) to enter the
Demised Premises or any part thereof:-
(a) To view the state and condition of the same and to give or
leave on the Demised Premises notice in writing to the
Lessee of all defects wants of reparation and breaches of
covenants then and there found for which the Lessee is
liable hereunder and within three months after every such
notice (or sooner if requisite) the Lessee shall commence
to repair and complete and make good the same according to
such notice and the covenants in that behalf herein
contained to the reasonable satisfaction of the Lessor's
Surveyor and the Superior Lessor's Surveyor AND if the
Lessee shall fail to comply with such notice or if the
Lessee shall at any time make default in the performance of
any of the covenants herein contained for or relating to
the repair decoration or maintenance of the Demised
Premises it shall be lawful (but without prejudice to the
right of re-entry and forfeiture hereinafter contained)
for the Lessor its agents servants and workmen to
-7-
<PAGE>
enter upon the Demised Premises and to carry out or cause
to be carried out all or any of the works referred to in
such notice and the cost of so doing and all expenses
incurred thereby together with Stated Interest thereon from
the date when written notice of the amount of any such
expenditure by the Lessor shall be served on the Lessee to
the date of payment shall be paid by the Lessee to the
Lessor within seven days of such written notice and shall
be recoverable as rent in arrear
(b) During the period of six months prior to the Termination
Date to take schedules or inventories of the fixtures and
fittings plant and machinery belonging to the Lessor or to
be yielded up on the Termination Date and
(c) To execute any repairs decorations or other work upon or to
any adjoining or neighbouring premises or to carry out any
repairs decorations or other work which the Lessor must or
may carry out under the provisions of this Underlease upon
or to the Demised Premises or to cleanse or empty or renew
the sewers drains and gutters belonging to the same or to
construct any building or erection on any land adjoining or
neighbouring the Demised Premises the Lessor or any other
person exercising such right of entry doing as little
damage as reasonably possible and forthwith making good all
damage occasioned thereby to the Demised Premises or their
contents as soon as reasonably possible
(6)(a) That no additional or new building or structure of any kind
shall at any time hereafter be erected upon the Demised
Premises or any part thereof without the prior consents in
writing of the Lessor and the Superior Lessor (such
consents not to be unreasonably withheld nor in the case of
the Lessor
-8-
<PAGE>
unreasonably delayed)
(b) Not at any time during the Term to make or permit or suffer
to be made any structural alterations or additions
whatsoever in or to the Demised Premises or any part
thereof either internally or externally nor to cut maim or
remove or permit or suffer to be cut maimed or removed any
of the walls beams columns or other structural parts of the
Demised Premises without in any of the foregoing cases the
prior written consents of the Lessor and the Superior
Lessor (such consents not to be unreasonably withheld nor
in the case of the Lessor unreasonably delayed)
(7)(a) Not to do or permit or suffer to be done or remain upon the
Demised Premises or any part thereof anything which may be
or become a nuisance annoyance or disturbance inconvenience
injury or damage to the Lessor the Superior Lessor or its
or their tenants or the owners or occupiers of any property
in the neighborhood
(b) Not to use or permit or suffer the Demised Premises or any
part thereof to be used for any noxious noisy or offensive
trade or business nor for any illegal or immoral act or
purpose
(c) Not to discharge or permit or suffer to be discharged into
any pipe or drain serving the Demised Premises or any other
property any oil grease or other deleterious matter or any
substance which might be or become a source of danger or
injury to the drainage system of the Demised Premises or
any such other property or any part thereof
(d) Not to overload or permit or suffer to be overloaded the
floor roof or structure of the Demised Premises or permit
or suffer the same to be used in any manner which will
cause
-9-
<PAGE>
undue strain or interfere therewith and not to install or
permit or suffer to be installed any machinery on the
Demised Premises which shall be unduly noisy or cause
dangerous vibrations nor to use or permit or suffer to be
used the Demised Premises or any part thereof in such
manner as to subject the same to any strain beyond that
which it is designed to bear
(8) At all times during the said term to use the Demised
Premises for purposes within Classes III or X of the Town
and Country Planning (Use Classes) Order 1972 and not to
use or permit or suffer the same to be used for any other
purpose it being agreed and declared between the parties
that the use of the Demised Premises for the purposes of a
centre for the provision of cable television and related
television services and other services related to
telecommunications or other communications shall be deemed
to be within the said purposes
(9) That no signboard advertisement placard or sign whatsoever
shall be attached to or exhibited in on or to the Demised
Premises without the previous written consents of the
Lessor and the Superior Lessor which shall not be
unreasonably withheld nor in the case of the Lessor
unreasonably delayed in the case of notices relating to the
Lessee's business or any associated business which are
normally and reasonably displayed
(10) That no road forecourt entrance or other area leading to or
giving access to the Demised Premises or over which the
Lessee is hereby granted rights of access or use shall be
damaged or obstructed or used in such manner as to cause
any nuisance damage or annoyance
-10-
<PAGE>
(11) To comply with the regulations contained in the Fifth
Schedule hereto and with all reasonable regulations made by
the Lessor and/or the Superior Lessor or by any public
local or other authority from time to time for the
management of the Lessor's Estate and any land water area
or premises used or to be used in common or jointly with
any other person
(12) As soon as is reasonably possible after the happening of
any event or thing against which insurance has been
effected by the Lessor under the provisions hereinafter
contained to give notice thereof to the Lessor
(13)(a) At all times during the Term at the Lessee's own expense to
observe and comply in all respects with the provisions and
requirements of any and every enactment (which expression
in this covenant includes as well any and every Act of
Parliament already or hereafter to be passed as any and
every notice direction order regulation bye-law rule and
condition already or hereafter to be made under or in
pursuance of or deriving effect from any such Act) or
prescribed or required by any public local or other
authority so far as they relate to or affect the Demised
Premises or the Lessee thereof or any additions or
improvements thereto or the user thereof for any purposes
or the employment therein of any person or persons or any
fixtures machinery plant or chattels 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 enactment 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
enactment are or may be directed
-11-
<PAGE>
or required to be executed provided or maintained at any
time during the Term upon or in respect of the Demised
Premises or any additions or improvements thereto or in
respect of any user thereof or employment therein or any
person or persons or fixtures machinery plant or chattels
and whether by the Landlord or tenant thereof
(c) To indemnify the Lessor at all times 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 and not
at any time during the term to do or omit or suffer to be
done or omitted in or about the Demised Premises any act or
thing (other than any which shall be permitted under any
other provision of this Underlease) by reason of which the
Lessor or the Superior Lessor may under any enactment incur
or have imposed upon it or become liable to pay any penalty
damages compensation costs charges or expenses
(d) To pay to the Lessor and the Superior Lessor upon demand a
due proportion (to be conclusively determined by the
Lessor's and the Superior Lessor's Surveyors) of all costs
charges and expenses (including Surveyors' Architects' and
other professional advisers' fees) incurred by the Lessor
and the Superior Lessor of or incidental to (i) complying
with all provisions and requirements of any kind and every
enactment prescribed or required by any public local or
other authority and (ii) executing all works and providing
all arrangements which may be directed or required as
aforesaid sofar as the same relate to any premises used or
enjoyed by the Lessee in common or jointly with any other
person or persons or the user thereof
-12-
<PAGE>
(14) Within seven days of the receipt of notice of the same to
give full particulars to the Lessor and the Superior Lessor
of any direction permission notice or order or proposal for
any such relevant to the Demised Premises or to the use or
condition thereof or otherwise concerning the Lessee made
given or issued to the Lessee or the occupier of the
Demised Premises by any Government Department Local or
Public Authority or other competent authority
(15) Not to do or omit to be done anything whereby the policy or
policies of insurance effected by the Lessor may become
void or voidable at the instance of the Insurers or whereby
the rate of premium thereon may be increased and if the
said rate of premium shall be increased as the result of
any act or default on the part of the Lessee to repay to
the Lessor on demand the amount of any such increase
(16)(a) (i) Not to assign or share the possession of any part or parts
(as distinct from the whole) of the Demised Premises
PROVIDED ALWAYS THAT the Lessee may nevertheless share
possession of part of the Demised Premises with a company
which is a member of the same group as the Lessee within
the meaning contained in Section 42 of the Landlord and
Tenant Act 1954
(ii) Not without the previous written consent of the Lessor
(which shall not be unreasonably withheld or delayed) to
underlet any part (as distinct from the whole) of the
Demised Premises save that the Lessee may (with such
consent as aforesaid) underlet either the northern or
southern sections of the Demised Premises upon and subject
to the following conditIons:-
(a) any such underletting shall be for a term not exceeding
ten years to expire earlier than the Termination Date
-13-
<PAGE>
(b) prior to granting any proposed underlease the intended
parties thereto shall obtain an Order from the appropriate
Court excluding the provisions of sections 24 to 28
inclusive of the Landlord and Tenant Act 1954 (as amended
by the Law of Property Act 1969) from the proposed tenancy
(c) the purpose for which the proposed underlessee intends
to use the part of the Demised Premises intended to be
sub-demised shall be first approved by the Lessor (which
approval shall not be unreasonably withheld or delayed)
(d) the provisions of paragraph (c)(i)(ii) and (iii) of
this Clause 3(16) shall apply to any underletting of part
of the Demised Premises
(b) Not to assign the whole or underlet or part with possession
of the whole of the Demised Premises (except to a company
which is a member of the same group as the Lessee within
the meaning contained in Section 42 of the Landlord and
Tenant Act 1954) without the previous written consent of
the Lessor which shall not be unreasonably withheld in the
case of a respectable and responsible assignee or
under-tenant and upon any assignment to obtain if the
Lessor shall reasonably so require (but not otherwise) an
acceptable guarantor for any private limited company and a
direct covenant by the assignee with the Lessor to observe
and perform the covenants and conditions of this Underlease
(c) Any sub-underlease of the whole or any part of the Demised
Premises shall be at the best rent reasonably obtainable if
the Demised Premises (or the part thereof) were let on the
open market with vacant possession by a willing Landlord to
a willing tenant without payment of a fine or premium and
shall contain (inter alia):-
-14-
<PAGE>
(i) An unqualified covenant on the part of the sub-under-
lessee that the sub-underlessee will not assign underlet
or share possession (other than with a company which is a
member of the same group within the said meaning) of part
only of the premises thereby demised and
(ii) a covenant on the part of the sub-underlessee that
the sub-underlessee will not assign underlet or part with
the possession of the whole of the premises thereby demised
without obtaining the previous written consent of the
Lessor under this present Underlease (which consent shall
not be unreasonably withheld or delayed) and providing in
such sub-underlease that any sub-underlease granted out
of such sub-underlease whether immediate or mediate shall
contain a similar provision and
(iii) provisions for the review of the rent thereby
reserved on the same dates and substantially in the same
form as those contained herein
(d) Within one month after the execution of any assignment
transfer or underlease or the assignment of an underlease
or the grant of any sub-underlease out of an underlease or
any transmission by reason of a death or otherwise
affecting the Demised Premises or any part thereof to
produce to and leave with the Lessor and the Superior
Lessor or its or their Managing Agents for the time being a
copy of the deed instrument or other document evidencing or
effecting such dealing or transmission and on each occasion
to pay to the Lessor and the Superior Lessor or such agents
a reasonable registration fee and that every sub-tenancy
or sub-lease of the Demised Premises shall contain a
similar covenant by the sub-tenant or sub-lessee and
expressed to be for the benefit
-15-
<PAGE>
of the Lessee and the Lessor
(17) To pay to the Lessor all costs charges and expenses
(including Solicitors' Counsels' and Surveyors' and other
professional costs and fees) reasonably incurred by the Lessor:-
(a) In or in contemplation of any proceedings relating to the
Demised Premises under Section 146 or 147 of the Law of Property
Act 1925 or the preparation and service of Notice thereunder
(whether or not any right of re-entry or forfeiture has been
waived by the Lessor or a Notice served under the said Section
146 is complied with by the Lessee or the Lessee 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 keep the Lessor fully and
effectively indemnified against all costs expenses claims and
demands whatsoever in respect of the said proceedings
(b) In the preparation and service of a Schedule of Dilapidations at
any time during or after the Term
(c) In respect of any application for consent required by this Lease
whether or not such consent be granted PROVIDED ALWAYS THAT
nothing contained in this sub-clause 3(17) shall be intended to
oust the jurisdiction of the Court to determine the question of
costs in relation to any application by the Lessee to the Court
for a declaration that (where appropriate) the Lessor or the
Superior Lessor has in any respect unreasonably refused or
delayed its consent to any such application or otherwise to oust
the jurisdiction of the Court in relation to any of the other
matters referred to in this sub-clause
(18) In relation to the Planning Acts" which in this Lease means
-16-
<PAGE>
Local Government Planning and Land Act 1980 the Town and Country
Planning Acts 1962-1974 and any future legislation of a similar
nature and any statutory modification or re-enactment thereof
for the time being in force and any order instrument plan
regulation permission and directive made or issued or to be made
or issued thereunder or deriving validity therefrom:
(a) At all times during the Term to comply in all respects with the
provisions and requirements of the Planning Acts and all
licenses consents permissions and conditions (if any) hereafter
to be granted or imposed thereunder or under any enactment
repealed thereby so far as the same respectively relate to or
affect the Demised Premises or any parts thereof or any
operations works acts or things hereafter to be carried out
executed done or omitted thereon or the use thereof for any
purpose
(b) During the Term so often as occasion shall require at the
expense in all respects of the Lessee to obtain from the Local
Authority the Local Planning Authority and/or the Secretary of
State for the Environment (or other appropriate Minister) all
such licences consents and permissions (if any) as may be
required for the carrying out by the Lessee or anyone deriving
title under the Lessee (in this sub-clause (18) referred to as
"a sub-tenant") of any operations on the Demised Premises or
the institution or continuance by the Lessee or a sub-tenant
thereon of any use thereof which may constitute development
within the meaning of the Planning Acts
(c) To pay and satisfy any charge that may hereafter be imposed
under the Planning Acts in respect of the carrying out or
-17-
<PAGE>
maintenance by the Lessee or a sub-tenant of any such operation
or the institution or continuance by the Lessee or a sub-tenant
of any such use as aforesaid
(d) If and when called upon so to do to produce to the Lessor the
Superior Lessor and their Surveyors and as they may direct all
such plans documents and other evidence as the Lessor and the
Superior Lessor may reasonably require to satisfy themselves
that the provisions of this covenant have been complied with in
all respects
(19) 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 Law or by the Local or
other competent authority and not to obstruct or permit or
suffer to be obstructed the access to or means of working such
appliances or the means of escape from the Demised Premises in
the case of fire
(20) During the six months immediately preceding the Termination Date
to permit the Lessor or its agents to affix upon any part of the
Demised Premises as may be reasonable and shall not obstruct the
windows or doors of the same a notice of a reasonable size as to
the proposed re-letting or other disposal thereof and to permit
intending tenants or purchasers at reasonable times of the day
on reasonable prior notice to view the Demised Premises
(21) Not knowingly to permit any new window light opening doorway
path drain or encroachment or easement to be made into against
or upon the Demised Premises and to give notice to the Lessor
and the Superior Lessor of any such which shall be made or
attempted and come to the Lessee's notice and at the request and
cost of the Superior Lessor to adopt such means
-l8-
<PAGE>
and take such steps as may be reasonably required by the
Superior Lessor to prevent the same
4. THE Lessor HEREBY COVENANTS with the Lessee as follows:-
(1) That the Lessee paying the rents hereinbefore reserved on the
days and in the manner hereinbefore appointed for payment
thereof and performing the covenants and conditions hereinbefore
contained on the Lessee's part to be observed and performed
shall and may peaceably and quietly hold and enjoy the Demised
Premises hereby granted without any lawful interruption by the
Lessor or any person rightfully claiming through under or in
trust for it
(2) At all times throughout the said term to insure the Demised
Premises against loss or damage by the Insured Risks subject to
such limitations or exclusions as may be normal for such
insurance and are imposed or required by the Insurers with
Insurers of good repute in the full reinstatement value thereof
and to effect and maintain adequate third party insurance with
Insurers of good repute And duly to make all payments necessary
for the above purposes and to produce to the Lessee on demand a
copy of the policy or policies of such insurance together with
all endorsements thereon and the receipt or other sufficient
evidence of every such payment
(3) In the event of the Demised Premises or any part thereof or any
part of the access thereto or the essential services thereto
within the Lessor's Estate being destroyed or damaged by any of
the insured risks with all reasonable speed after obtaining as
soon as shall be practicable all necessary statutory approvals
consents and licences to apply all moneys received by virtue of
such insurance and to apply such further moneys as may be
necessary for that purpose in
-19-
<PAGE>
rebuilding or reinstating or making good as the case may be to
the satisfaction of the Lessor and the Superior Lessor and the
reasonable satisfaction of the Lessee the Demised Premises or
such part thereof as the case may be PROVIDED that the Lessor's
obligation under this covenant shall cease if such insurance
shall be rendered void or vitiated by any act or omission of the
Lessee
(4) If rebuilding or reinstatement of the Demised Premises or any
part thereof proves impossible or impracticable or is frustrated
the insurance moneys shall be divided between the Lessor the
Superior Lessor and the Lessee and the other persons (if any) in
whose interest the said insurance shall have been maintained in
the proportions which the values of their respective interests
in the Demised Premises or that part thereof bears to one
another immediately before the occurrence of the event giving
rise to its payment and such proportion shall be determined
under the provisions of the Arbitration Acts 1950 to 1979 (or
any statutory modifications or re-enactment thereof for the
time being in force) by a single arbitrator to be appointed by
agreement between the Lessor the Superior Lessor and the Lessee
or in default of agreement by the President for the time being
of the Royal Institution of Chartered Surveyors (or its
successor body) making the appointment at the request of any of
such persons
(5) To the extent that such obligations are not imposed on the
Lessee hereunder to observe and perform the covenants on the
part of the Lessor as Lessee contained in the Head Lease and to
use its best endeavours to procure performance of the covenants
on the part of the Superior Lessor therein
-20-
<PAGE>
contained
(6) Throughout the Term unless prevented by circumstances beyond its
control and subject to the payment by the Lessee of the further
and additional rent hereby reserved to provide the services
referred to in the Fourth Schedule hereto and such other or
alternative services as may from time to time be provided by the
Lessor for the reasonable benefit of the Lessee and the other
tenants and occupiers of the Lessor's Estate
(7) If at any time during the Term it shall become a statutory or
local authority requirement or the reasonable requirement of any
relevant insurer or the reasonable requirement of the Lessee or
of any other tenant of any other Unit on the Lessor's Estate
that either the Demised Premises or any other Unit on the
Lessor's Estate shall have a sprinkler system then the Lessor
shall if so required (but not otherwise) at its own expense and
without cost to the Lessee construct and install within the
Lessor's Estate the requisite pumphouse storage tank and such
other plant and equipment as shall be necessary to provide to
the Demised Premises the mains supply for such sprinkler system
(which such pumphouse storage tank and other plant and equipment
are hereinafter together called "the Sprinkler Main") and from
the date on which the Sprinkler Main shall have been installed
and shall be fully operational and available in all respects for
connection to the Demised Premises then the provisions of
paragraph 3(i) of Part I of the Fourth Schedule hereto shall
become applicable (the provisions of paragraph 3(ii) thereof
only becoming applicable on the date on which the Lessee shall
make its own connection to the Sprinkler Main
-21-
<PAGE>
5. PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows:-
(i) Notwithstanding and without prejudice to any other remedies and
powers herein contained or otherwise available to the Lessor if
the rents hereby reserved or any part thereof shall at any time
be unpaid for 21 days after becoming payable (whether formally
demanded or not) or if any covenant on the Lessee's part or
condition herein contained shall not be performed or observed or
if the Lessee shall go into liquidation (except for the
purpose of amalgamation or reconstruction) or being an
individual shall become bankrupt or make an assignment for the
benefit of creditors or enter into an agreement or make an
arrangement with creditors for liquidation of the debts of the
Lessee by composition or otherwise or suffer any distress or
process of execution to be levied on the goods of the Lessee
upon the Demised Premises then and in any such case it shall be
lawful for the Lessor at any time thereafter to re-enter upon
the Demised Premises or any part thereof in the name of the
whole and thereupon this demise shall absolutely determine but
without prejudice to any right of action or remedy of the Lessor
in respect of any breach non-observance or non-performance of
any of the Lessee's covenants or any conditions herein contained
(ii) Any demand or notice requiring to be made given to or served on
the Lessee or any Surety from time to time hereunder shall be
duly and validly made given or served if left or sent by the
Lessor or its agents through the first-class post by pre-paid
letter addressed to the Lessee (and if there shall be more than
one of them then any one of them) at its registered office Any
notice required to be given to the Lessor shall be well and
sufficiently given if left or sent through the
-22-
<PAGE>
first-class post by pre-paid letter addressed to Lessor at its
registered office Any demand or notice sent by post shall be
conclusively treated as having been made given or served
forty-eight hours after posting PROVIDED ALWAYS THAT (a) any
Review Notice served upon the Lessee by the Lessor pursuant to
paragraphs 2 or 3(a) of the Third Schedule hereto shall only be
deemed to have been validly served if it shall be left at or
sent to the registered office of the Lessee by registered or
recorded delivery post (b) the Lessee shall forthwith notify the
Lessor in writing of any change in the address of its registered
office
(iii) Nothing herein contained shall render the Lessor or the Lessee
liable to the other in respect of any of the covenants
conditions or provisions hereinbefore contained if and so far
only as the performance and observance of such covenants
conditions and provisions or any one or more of them shall
hereafter become impossible or illegal under or by virtue of the
provisions of the Planning Acts but subject as aforesaid the
Term shall not determine by reason only of any change
modification or restriction of use of the Demised Premises or
obligations or requirements hereafter to be made or imposed
under or by virtue of the Planning Acts
(iv) Notwithstanding anything herein contained the Lessor and all
persons authorised by it shall have power without obtaining any
consent from or making any compensation to the Lessee to deal as
it or they may think fit with any of the lands buildings or
parts of buildings and hereditaments adjacent adjoining or near
to the Demised Premises or any part thereof and to erect or
suffer to be erected thereon or on any part thereof any
buildings whatsoever and to make any alterations
-23-
<PAGE>
erections or additions and carry out any demolition building or
rebuilding whatsoever which it or they may think fit or desire
to do to such land or buildings or any part or parts thereof in
such manner as the Lessor thinks fit whether such buildings
alterations or additions shall or shall not affect or diminish
the light or air which may now or at any time during the Term be
enjoyed by the Lessee or the tenants or occupiers of the Demised
Premises and so that any light or air or other easements rights
or amenities (other than those expressly granted hereby) at any
time enjoyed in respect of the Demised Premises or any part
thereof which might otherwise interfere with the rights of the
Lessor or of any neighbouring owner or occupier under this
provision shall be deemed to have been and to be enjoyed by
consent and the Lessee shall not (subject to the proviso to this
sub-clause) at any time during the Term or thereafter raise or
make any complaint or institute or take any proceedings
whatsoever whether by way of injunction or for damages or
otherwise against the Lessor by reason or in consequence of any
noise disturbance annoyance or inconvenience occasioned by any
such erection rebuilding or alteration as aforesaid but the
Lessor shall make good any damage caused to the Demised
Premises or their contents as a result of any of the matters set
out in this sub-clause PROVIDED THAT:-
(a) nothing herein shall prevent the Lessee from using the
Demised Premises for its normal business including unimpeded
access to and egress and services to and from the Demised
Premises and
(b) Notwithstanding the foregoing provisions of this
sub-clause nor the provisions of paragraph (3) of the Second
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<PAGE>
Schedule hereto the Lessor shall in doing or permitting any of
the matters referred to in this sub-clause take all such steps
as shall be practicable to minimise any diminution of light or
air or any other adverse effect on the Demised Premises by way
of noise obstruction of access or other inconvenience
(v) If the Demised Premises or any part thereof or any part of the
access or essential services thereto within the Lessor's Estate
shall at any time during the Term 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 of insurance
effected by the Lessor shall not have been vitiated or payment
of the policy monies refused in whole or in part by or in
consequence of the act or default of the Lessee or the Lessee's
servants workpeople or agents then the rent and further or
additional rent from time to time hereby reserved or a fair
proportion thereof respectively according to the nature and
extent of the damage sustained shall be suspended until the
Demised Premise shall again be rendered fit for occupation and
use or until the expiration of three years (or such longer
period for which loss of rent insurance shall be applicable)
from the date when such damage or destruction occurred whichever
shall be the earlier and any dispute or difference arising under
the provisions of this sub-clause shall be referred to
arbitration in accordance with sub-clause 5 (vi) hereof
(vi) That in case any dispute or controversy shall at any time or
times during the Term arise between the Lessor and the Lessee in
relation to the provisions of the Fourth Schedule hereto or in
relation to the provisions of the preceding
-25-
<PAGE>
sub-clause 5(v) the same shall be referred to the decision of a
single arbitrator appointed (in default of agreement between the
parties) by the President of the Royal Institution of Chartered
Surveyors at the request of either party whose decision shall be
final and binding on both parties and such reference shall be
deemed to be a submission to arbitration within the meaning of
the Arbitration Acts 1950 and 1979
(vii) That in case any dispute or controversy shall at any time or
times during the Term arise between the Lessee and any other
tenants or occupiers of the Lessor's Estate relating to the
conducting media or the easements or privileges affecting or
relating to the Demised Premises or the Lessor's Estate the same
shall be settled and determined by the Lessor's Surveyor to
whose determination the Lessee shall submit if such
determination shall be free from any manifest error and shall be
based on normal and proper professional principles
(viii) Nothing in this Underlease shall be or be deemed to be a
warranty or representation on the part of the Lessor that
the permitted use of the Demised Premises under the Planning
Acts is as referred to in Clause 3(8) hereof
IN WITNESS whereof the parties hereto have executed this Underlease and the
Counterpart thereof the day and year first above written
THE FIRST SCHEDULE
(1) The right for the Lessee its tenants servants agents licensees
and visitors in common with the Lessor the Superior Lessor and
those authorised by it or them and all others
-26-
<PAGE>
having the same right to pass and repass with or without
vehicles over the roads shown coloured blue on Plan B annexed to
the Head Lease and all other roads and bridges (if any) within
the Superior Lessor's title which give access to or from the
public highway until the said roads shall be adopted by the
highway authority and shall become maintainable at the public
expense for the purpose of access to and egress from the Demised
Premises and car parking spaces provided that the Superior
Lessor shall be entitled from time to time to stop up or
re-locate the situation of such roads on condition that there
shall remain or the Superior Lessor shall provide alternative
means of access to the Demised Premises not materially less
convenient than the existing roads
(2) The right of free and uninterrupted passage and running of water
surface water drainage soil gas electricity and other services
to and from the Demised Premises from and to the Lessor's Estate
and other land of the Lessor in and through the wires cables
pipes sewers drains ducts and other media now or at any time
during the Term in or under such land to the extent that the
same are laid or formed to serve and are capable of serving
the Demised Premises and the right to make and maintain
connections with such wires cables pipes sewers drains ducts and
other media or any of them to the extent aforesaid for the
purpose of exercising the said rights of passage and running of
water soil gas electricity and other services SUBJECT to (a)
the Lessee causing as little damage and inconvenience as
possible in the exercise of such rights and as soon as
practicable making good any damage to such land thereby caused
and (b) there being no use or attempt to use the said conducting
media to an extent which is in excess
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<PAGE>
of the capacity which the same or any part of the same is
designed to bear
The right for the Lessee its tenants servants agents licensees
and visitors in common with the Lessor and its tenants of the
remainder of the Lessor's Estate to go pass and repass on foot
only over the footpaths laid out within the Lessor's Estate and
indicated on the Plan
(4) The right for the Lessee its tenants servants agents licensees
and visitors to go pass and repass on foot or with private motor
cars motor cycles or light commercial vehicles only over that
part of the Lessor's Estate edged yellow on the Plan
(5) The right for the Lessee its tenants servants licensees and
visitors to park private motor cars motor cycles or light
commercial vehicles only in the car parking spaces hatched
yellow on the Plan
(6) The right for the Lessee its tenants servants agents licensees
and visitors to go pass and repass on foot or with vehicles of
any description over that part of the Lessor's Estate edged
brown on the Plan and to park such vehicles adjacent to the
Demised Premises within the area hitched brown on the plan for
the sole purpose of loading and unloading goods for delivery to
and from the same causing as little inconvenience as possible to
the Lessor's tenants and occupiers of the remainder of the
Lessor's Estate in the exercise of such right
(7) The right for the Lessee on giving not less than one month's
notice in writing to the Lessor of its intention so to do to
install a sprinkler system in the Demised Premises and to make
connections to any Sprinkler Main which may hereafter be
-28-
<PAGE>
laid by the Lessor within the Lessor's Estate for the purpose of
providing a mains supply to any sprinkler system within the
Demised Premises PROVIDED ALWAYS that:-
(i) Prior to commencing such installation and connection the Lessee
shall submit fully detailed drawings and specification to and
obtain the Lessor's approval thereof (which approval shall not
be unreasonably withheld or delayed) and
(ii) In carrying out such installation and connection it shall permit
the Lessor's Surveyor and other duly authorised by the Lessor
for that purpose to have access to the Demised Premises at
reasonable times for the purposes of ensuring that such
installation and connection is carried out in a proper and
workmanlike manner and to the reasonable satisfaction of the
Lessor's Surveyor and (if considered necessary) the Lessor's
Insurers
(8) The right for the Lessee its contractors and servants to enter
on those parts of the Lessor's Estate adjacent to the Demised
Premises with all necessary plant and equipment so as to enable
the Lessee to comply, with its repairing covenants herein
contained causing as little damage and inconvenience as possible
in the exercise of such right and forthwith making good to the
satisfaction of the Lessor's Surveyor all damage occasioned
thereby
(9) The right for the Lessee to install and use cabling ducting and
other services across the Lessor's Estate to and from the
Demised Premises:
(a) to connect with any services lying under Marsh Wall
Millharbour or any other immediately adjoining property outside
and not forming part of the Lessor's Estate
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<PAGE>
(b) to connect with any building structure plant or equipment
which the Lessor shall permit to be erected on any other part of
the Lessor's Estate outside the Demised Premises for use in
connection with the Demised Premises to act as a connection
between the separate parts of the Demised Premises as shown on
the plan Together with rights of access for the repair and
maintenance of the same subject to the Lessee causing as little
damage and inconvenience as possible in the exercise of such
rights and forthwith making good to the satisfaction of the
Lessor's Surveyor any damage occasioned thereby
Provided always that:-
(i) prior to making any such connection as aforesaid the Lessee
shall first submit to the Lessor for its approval (such approval
not to be unreasonably withheld or delayed) full details of its
proposed works and
(ii) in carrying out the works the Lessee shall accept such
degree of supervision as the Lessor's Surveyor may reasonably
require
(10) The right (subject to the Lessor's prior approval which approval
shall not be unreasonably withheld or delayed and subject to the
Lessee obtaining any relevant statutory or local authority
consents) to lop or prune any trees on the Lessors Estate which
shall interfere with the receipt or transmission of any
satellite television radio or other telecommunications signal
to or from the Demised Premises
THE SECOND SCHEDULE
(Rights and Easements excepted)
The following rights and easements are excepted and reserved out of the
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<PAGE>
Demised Premises unto the Lessor the Superior Lessor and their tenants and the
occupiers of any adjoining or neighbouring land and/or premises and all other
persons authorised by the Lessor or the Superior Lessor or having the like
rights and easements:-
(1) The free and uninterrupted passage of water and soil through the
pipes drains and watercourses and of electricity and gas through
the cables wires and pipes which are now or may at any time
during the Term be in or under or passing through or over the
Demised Premises (other than those exclusively serving the same)
with the right to construct and maintain new services for the
benefit of any adjacent or nearby premises the right to repair
maintain and renew such existing and new services and the right
at any time but (except in emergency) after giving reasonable
prior written notice to enter (or in an emergency or after the
giving of reasonable notice in the Lessee's absence to break and
enter) the Demised Premises in the exercise of such rights the
person exercising such right causing as little damage as is
reasonable and making good as soon as reasonably possible any
damage caused to the Demised Premises or their contents
(2) The right at any time but (except in an emergency) after giving
reasonable prior written notice to enter (or in an emergency or
after the giving of reasonable prior notice during the Lessee'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 any adjacent premises and (c) to carry out any
repairs or other work which the Lessor must or may carry out
under the provisions of this Lease or to do any other thing
which under the said provisions the Lessor may do in all such
cases the person
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<PAGE>
exercising such rights causing as little damage as is reasonable
and making good as soon as reasonably possible any damage caused
to the Demised Premises or their contents
(3) The right to deal in any manner whatsoever with any of the land
belonging to the Lessor adjoining opposite or near to the
Demised Premises and to erect maintain rebuild or alter or
suffer to be erected maintained rebuilt or altered on such
adjoining opposite or neighbouring lands any buildings or
structures whatsoever whether such buildings shall or shall not
affect or diminish the light or air which may now or at any time
hereafter be enjoyed for or in respect of the Demised Premises
or any building for the time being thereon
TEE THIRD SCHEDULE
(Provisions as to Rent Review)
1. "Review Date" means the expiration of the 5th, 10th, 15th and 20th years
and the 364th day of the 25th year of the Term
2. The Lessor may require a review of the Yearly Rent at each of the Review
Dates by notice in writing (hereinafter called "a Review Notice") served
upon the Lessee in which event the Yearly Rent payable as from the
relevant Review. Date shall be whichever is the greater of (i) the
Yearly Rent immediately before such review or (ii) the rack rental value
(as hereinafter defined) of the Demised Premises at the relevant Review
Date
3. The following provisions shall apply to each and every Review Notice
served by the Lessor under the Provision of Clause 2 of this Schedule:-
(a) The Review Notice shall set out the sum which the Lessor
considers to be the Rack Rental Value of the Demised Premises
at the relevant Review Date
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<PAGE>
(b) The Lessee shall within three months of the date of service of the
Review Notice on the Lessee serve a counter-notice on the Lessor
stating whether or not the Lessee agrees with the figure stated by the
Lessor to be the Rack Rental Value of the Demised Premises at the
relevant Review Date
(c) If the Lessee shall fail to serve such a counter-notice within the
period of three months then the figure stated in the Lessor's notice to
be the Rack Rental Value of the Demised Premises at the relevant Review
Date shall be the Yearly Rent payable on and from the relevant Review
Date
(d) If the Lessee shall serve a counter-notice objecting to the
Lessor's opinion of the Rack Rental Value of the Demised Premises then
the provisions of Clause 6 of this Schedule shall take effect
4. If during any period whilst Rent Restriction Legislation is in force the
Lessor shall be precluded by such Legislation from requiring the Lessee
to pay the full amount of the Yearly Rent payable immediately before the
commencement of such a period or of the Yearly Rent payable as from any
Review Date occurring during that period or if no review of the Yearly
Rent shall for any reason whatsoever be required or carried out in
respect of a Review Date falling within that period the Lessor may on
each occasion during such period when such legislation makes it lawful
for the Lessor to require the Lessee to pay an increased amount of
Yearly Rent and also on the occasion when such period comes to an end
require a supplementary review of the Yearly Rent by a Review Notice
given to the Lessee before or not later than six months after the
relevant occasion in which event the Yearly Rent payable as from the
relevant occasion shall be the higher of (i) the Yearly Rent payable
immediately before such occasion and (ii) the Rack Rental Value of the
Demised Premises at such occasion And for the purpose of the remaining
provisions of this Schedule each such occasion shall be
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<PAGE>
deemed a Review Date PROVIDED ALWAYS THAT notwithstanding the provisions
of this paragraph 4:-
(a) There shall not be more than five reviews of the yearly rent payable
hereunder during the Term (including the review on the 364th day of the
25th year of the Term)
(b) Following a review effected pursuant to the provisions of this
paragraph 4 the next review thereafter shall take place on the next
Review Date (as defined in paragraph 1 above)
5. "Rack Rental Value of the Demised Premises" means such rent as may be
agreed or determined as hereinafter provided to be the best Yearly Rent
at which the Demised Premises could reasonably be expected to let with
vacant possession in the open market by a willing landlord to a willing
tenant for a term equal to the residue of the Term remaining unexpired
at the relevant Review Date or a term of ten years whichever shall be
the longer by means of a lease containing the same provisions (other
than as to Yearly Rent but including the same provisions as to Rent
Review) as are herein contained on the following assumptions:-
(a) that the Demised Premises are in such condition as they would have
been in had the Lessee's covenants and the Lessor's covenants herein
contained been fully complied with at that date
(b) that there is disregarded any effect on rent of:-
(i) the Lessee being in occupation of the Demised Premises
(ii) any goodwill attaching to the Demised Premises
solely by virtue of any business carried on thereat by
the Lessee and
(iii) any improvement carried out to the
Demised Premises in conformity with the covenants herein
contained by the Lessee or any person deriving title
from the Lessee at its own expense otherwise than
in pursuance of any obligation to the Lessor
6. If the Lessor and the Lessee fail to agree upon the Rack Rental Value of
the Demised Premises the same shall be determined by an independent
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<PAGE>
Surveyor acting as an expert experienced in the letting of similar
properties (who shall receive and consider such evidence and represent
-ations (whether written or oral) as the parties may reasonably wish to
make) agreed upon by the parties or failing agreement appointed on the
application of either party by the President for the time being of the
Royal Institution of chartered Surveyors and the cost of such Surveyor
shall be paid as he shall direct and any delay in making such
application shall not prejudice the Lessor's right to require the Rack
Rental Value of the Demised Premises to be determined as aforesaid
7. If the Yearly Rent payable as from any Review Date shall not have been
agreed or determined by that Review Date the Lessee shall continue to
pay at the rate payable immediately before that Review Date but
immediately upon the Yearly Rent payable as from that Review Date being
agreed or determined the Lessee shall pay to the Lessor on demand the
balance (if any) due from the Lessee in respect of the period from that
Review Date to the Quarter Day next after the date on which the Yearly
Rent shall have been agreed or determined together with interest on the
said balance at 2% under Lloyds Bank plc base rate (or its equivalent)
from time to time for the period from the Review Date to the date of
payment of the said balance
8. Within twenty eight days of agreement or determination of the Yearly
Rent payable at a Review Date a memorandum thereof in such form as the
Lessor's Solicitors shall reasonably require shall be executed in
duplicate by the Lessor and the Lessee and annexed to this Underlease
and the Counterpart thereof
THE FOURTH SCHEDULE
PART I
(Services Provided by the Lessor)
1. INSURANCE in accordance with the Lessor's covenant contained in Clause
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<PAGE>
4 (b) of this Underlease
2. CLEANING LIGHTING REPAIRING AND MAINTAINING all parts of the Lessor's
Estate not demised to the Lessee or demised or intended to be demised to
other tenants of parts thereof including (without prejudice to the
generality hereof) the cost of electricity and all necessary plant
machinery and materials for the purpose of keeping in good and
substantial repair maintenance and condition the drives forecourts
parking areas paths lawns gardens and landscaped areas and keeping the
same free from weeds and litter and properly planted tended and
cultivated
3. (i) SPRINKLER MAIN including the repair and maintenance rates and
other outgoings payable in respect of the pumphouse and storage
tank and repairing maintaining and replacing as necessary the
sprinkler main and all pumps and other plant and equipment required
to provide an adequate supply of water at all times to any
sprinkler system installed within the Demised Premises in
accordance with the terms of this Underlease and other premises
within the Lessor's Estate from time to time
(ii) From the time at which the Lessee shall exercise its right to
connect to the Sprinkler Main pursuant to the provisions of Clause
(7) of the First Schedule hereto the regular testing at a frequency
recommended by the manufacturers and/or the Lessor's insurers of
the Sprinkler Main in accordance with the code of practice Laid
down by the Fire Insurance Offices
4. SIGNAGE including the maintenance renewal decoration lighting and
cleaning of such signboard or signboards and barriers as the Lessor may
from time to time reasonably provide
5. GENERALLY the provision of such other services and facilities and the
making of any other payments which may reasonably be required by the
Lessor for the proper and efficient running and maintenance of the
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<PAGE>
Lessor's Estate as a whole (excluding any payment for the collection of
rents) including the provision of such staff accommodation and and
equipment and the obtaining of such professional advice and professional
services as shall in each case in the reasonable opinion of the Lessor
be necessary or desirable for the general benefit of the Lessor's Estate
and of the occupiers thereof PROVIDED ALWAYS THAT prior to the
appointment of any such staff as aforesaid or the provision of any other
services or facilities which the Lessor may o consider necessary or
desirable for the general benefit of the Lessor's Estate as aforesaid
and which shall have significant cost implications for the Lessee the
Lessor shall first consult with the Lessee and obtain its views as to
whether the Lessee considers any such appointment service or facility to
be necessary or desirable
PART II
Provision for the payment of Service Charge by the Lessee
1. In this Underlease "Service Charge" shall mean the aggregate of the cost
to the Lessor of providing the services set out in Part I of this
Schedule together (hereinafter called "the Services") with any amount
placed to a reserve fund as hereinafter referred to (credit being given
for any drawings from such reserve fund and, any interest earned on that
fund net of any applicable tax)
2. In this part of this Schedule
(a) "year means the period from the First day of January in one year to
the Thirty-first day of December in each year or such other period as
the Lessor may from time to time decide
(b) "Managing Agents" means such Surveyors Accountants or other
suitably professionally qualified persons as may from time to time be
appointed by the Lessor for the calculation of the Service Charge and
the management of the Lessor's Estate or (if none be appointed) the
Lessor
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<PAGE>
3. The Managing Agents will notify the Lessee before or as soon as
practicable after the start of each year of the estimated amount of the
Service charge payable by the Lessee during that year including the
amount to be placed in a reserve fund in that year in respect of costs
likely to be incurred in respect of such services in future years and
the Lessee shall pay the estimated amount of the Service Charge to the
Lessor by four quarterly installments in advance on the usual quarter
days or (in the case of the estimated amounts payable In respect of the
years during which this tenancy commences and terminates) by such other
installmentws as the Managing Agents may stipulate
4. As soon as practicable after the end of each year the Managing Agents
will supply the Lessee with a certificate showing:-
(a) the cost to the Lessor of providing the Services during that year
due allowance being made for any reimbursement received by the
Lessor from any insurer tenant or other person not being a payment
of Service Charge or estimated Service Charge
(b) the amount placed to a reserve fund in that year (and the interest
earned on that fund net of any applicable tax) in respect of costs
likely to be incurred in respect of such Services in future years
and in order to seek to avoid fluctuations in the Service charge
occasioned by periodical repairs or renewals
(c) The amount of the costs referred to in sub-paragraph (a) above
which have been met out of any such reserve fund and
(d) The proportion of amounts referred to in sub-paragraphs (a) and (b)
above after deducting the amount referred to in sub-paragraph (c)
above which is payable by the Lessee
5. If the amount shown payable by the Lessee in such Certificate exceeds
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<PAGE>
the amounts of the Estimated Service Charge paid by the Lessee for the
relevant year the Lessee shall pay the amount of the excess to the
Lessor within 21 days of the issue of the said Certificate if the amount
so shown is less than the amount of the Estimated Service Charge so paid
the difference shall be allowed to the Lessee or at the end of the Term
be repaid to the Lessee within 21 days
6. Any Certificate supplied by the Managing Agents shall (save in the event
of manifest error notified to the Managing Agents in writing within 21
days of the issue thereof) be conclusive as to the matters stated
therein and binding on the parties
7. Any such reserve fund shall be placed in an appropriate interest-
bearing account and the said fund together with all such interest shall
(after the deduction of or the making of provision for any relevant tax
on the same) be held by the Lessor upon trust for the benefit of all the
lessees for the time being of the Lessor's Estate in the same
proportions as the proportion of the Service Charge which individual
lessees covenant to pay under their respective underleases
THE FIFTH SCHEDULE
(Regulations)
1. No storage of materials shall be permitted outside the Demised Premises
2. No rubbish or waste materials paper wood or other combustible matter
shall be burnt on the Demised Premises except within boilers or
incinerators specifically designed for the purpose
3. No smoke or fumes or noxious smells shall be emitted from the Demised
Premises so as to cause in the reasonable opinion of the Lessor or its
Surveyors annoyance or interference with the proper enjoyment of
adjoining premises of the Lessor or its tenants
4. The Lessee must not use industrial machinery engines and equipment so
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<PAGE>
as to cause excessive noise vibration or dust Any such use which in the
reasonable opinion of the Lessor's Surveyor is causing annoyance to
adjoining tenants of the Lessor or to the occupiers in the vicinity
shall be abated immediately upon notice
5. No mechanically operated vehicles cycles hand trucks or trailers shall
be parked or left unattended outside areas properly reserved for such
parking or in such manner as to obstruct roadways within the Lessor's
Estate
6. The Lessee must not save in the case of an emergency off-load vehicles
except within the curtilage of the Demised Premises
7. The Lessee must not store inflammable materials explosive substances or
liquids except in proper containers or receptacles in accordance with
regulations enforced by a competent authority and in any event not
abutting any boundary fences or other adjoining Property of the Lessor
8. Any external lighting within the curtilage of the Demised Premises is to
be maintained in good condition and fully operational
9. Not to repair test or wash vehicles save within purpose built areas
provided for that purpose within the Demised Premises
10. Not to deposit litter on the footpaths gardens or landscaped areas
within the Lessor's Estate or to allow its servants agents or visitors
to cause a nuisance or annoyance to the Lessor or other tenants of the
Lessor's Estate
THE COMMON SEAL of EAST L0NDON )
TELECOMUNICATI0NS LIMITED was )
hereunto affixed in the )
presence of :- )
Director
[SEAL APPEARS HERE]
Secretary
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<PAGE>
DATED 3rd November 1986
WIMGROVE INVESTMENTS LIMITED
and
EAST LONDON TELECOMMUNICATIONS LIMITED
Counterpart/
UNDERLEASE
of
UNIT C.3 THE ENTERPRISE BUSINESS PARK,
POPLAR LONDON E 14
Term commences 6th day of October 1986
For years 25
---
Term expires 5th day of October 2011
----
Initial Rent (pound) 95,500 p.a.x.
F. Sweatman
Legal Department
Wimpey Property Holdings Limited
31, Hammersmith Grove
London W6 7EN
Ref: 7:A:4:l
<PAGE>
RENT REVIEW MEMORANDUM
- ----------------------
RE: PREMISES KNOWN AS UNIT C3 THE ENTERPRISE BUSINESS PARK POPLAR LONDON E14
--------------------------------------------------------------------------
Pursuant to the provisions for rent review contained in the Underlease to which
this Memorandum is annexed, details of which are given in the Schedule below, IT
IS HEREBY RECORDED THAT with effect from the 6th day of October 1991 until the
next review date therein mentioned the rent payable thereunder is increased to
(pound) 152,864 per annum.
Dated this 31st day of January 1992
SCHEDULE
DATE DOCUMENT PARTIES
3rd November 1986 Underlease Wimgrove Investments Ltd
(1) East London Telecomm-
unications Ltd.(2)
/s/ Peter
- --------------------
Signed by Director
for and on behalf of
EAST LONDON TELECOMMUNICATIONS LIMITED
Exhibit 10.36
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") dated as
of December 31, 1999, between CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
("Parent"), a New Jersey corporation, CUNNINGHAM GRAPHICS, INC. ("CGI"), a New
Jersey corporation , CUNNINGHAM GRAPHICS REALTY, LLC ("Realty"), a New Jersey
limited liability company, CUNNINGHAM GRAPHICS DELAWARE, INC. ("CGD"), a
Delaware corporation, MVP GRAPHICS, INC. ("MVPII") (MVPII, formerly known as
CGII California Holdings, Inc. ("CGIIC" prior to the merger), is the survivor of
the merger between MVP Graphics, Inc., ("MVPI"), CGIIC and Super Pack, Inc.
("Super Pack")), a California corporation, BENGAL GRAPHICS, INC. ("Bengal"), a
New Jersey corporation, D&L GRAPHICS, INC. ("D&L"), a New Jersey corporation,
COLORFAST PRINTING, INC., ("CGSF"), a California corporation, GCG/SEVILLE, INC.
("GCGS"), a New York corporation, MIRROR GRAPHICS, INC. ("Mirror"), a Delaware
corporation, CUNNINGHAM GRAPHICS DIGITAL, INC. ("Digital"), a Delaware
corporation, and BOSTON TOWNE PRESS, INC., a New Jersey corporation ("BTP", and
together with Parent, CGI, Realty, CGD, MVPII, D&L, CGSF, GCGS, Digital, Mirror
and Bengal, the "Borrowers"), and SUMMIT BANK, as Lender, Agent and Issuing Bank
and the other Lenders under the Loan Agreement.
BACKGROUND
A. Lenders and Parent, CGI, Realty, CGD, MVPI, CGIIC, Super Pack, Bengal
and BTP (collectively the "Original Borrowers") entered into that certain Loan
and Security Agreement dated as of August 3, 1999 (the "Original Loan
Agreement"), pursuant to which Lenders made available to the Original Borrowers
certain credit facilities in the maximum amount of $60,000,000.00, consisting of
the Revolving Credit, the SAMLOC, the Acquisition Loan and the Term Loan. The
Original Loan Agreement as amended from time to time shall be referred to herein
as the "Loan Agreement." All terms capitalized but not defined herein shall have
the meanings given to such terms in the Loan Agreement. Since the execution of
the Original Loan Agreement, MVPI, CGIIC and Super Pack have merged, with MVPII
as the surviving entity, and D&L, CGSF, Golden, GCGS, Mirror and Digital have
all become parties to, and Borrowers under, the Loan Agreement by executing
joinder agreements thereto, all in accordance with the terms of the Original
Loan Agreement.
B. The Borrowers have requested that (i) $6,000,000.00 of credit
availability be transferred from the Acquisition Loan to the Revolving Credit,
(ii) the Lenders agree to amend the definition of "Fixed Charge Coverage Ratio",
(iii) the Lenders consent to the transfer of all of the capital stock of Roda
Limited from Parent to Cunningham Graphics International, S.A. ("CGISA"), a
wholly owned subsidiary of the Parent, (iv) in connection with the transactions
described in clause (iii), the Agent release its lien on the capital stock of
Roda Limited, and (v)
<PAGE>
provisions be added to the Loan Agreement to take into account that certain
Letters of Credit could be issued in foreign currencies.
C. Subject to the terms and conditions set forth herein, Lenders have
agreed to the requests of the Borrowers described in Paragraph B above and
Borrowers and Lenders have agreed to amend and modify the Loan Agreement as set
forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and intending to be legally bound,
the parties hereto agree as follows:
Article I
AMENDMENTS TO LOAN AGREEMENT; RELEASE OF LIEN ON RODA STOCK
SECTION 1.1 Amendments to the Loan Agreement. The parties hereto agree to amend
the Loan Agreement as follows:
(A) The Background section of the Loan Agreement is hereby amended by (i)
deleting "$19,000,000.00" as the amount of the Revolving Credit and inserting
"$25,000,000.00", and (ii) deleting "$30,000,000.00" as the amount of the
Acquisition Loan and inserting "$24,000,000.00".
(B) The following definitions in Section 1.1 of the Loan Agreement are
hereby amended to read as follows:
"Acquisition Loan Limit" means $24,000,000.00, as the same may be reduced
in accordance with the terms of this Agreement.
"Acquisition Loan Notes" means, from August 3, 1999, through but not
including the First Amendment Closing Date, the Borrowers' promissory notes
to each Lender in substantially the form attached hereto as Exhibit 2.13C,
and from and after the First Amendment Closing Date, the Borrowers' amended
and restated promissory notes to each Lender in substantially the form
attached to the First Amendment as Exhibit 2.13C.
"Agreement" means this Loan and Security Agreement as amended by the First
Amendment, and as further amended, supplemented or modified from time to
time.
"Fixed Charge Coverage Ratio" means the ratio of (A) (1) EBITDA plus base
rent payments on operating leases less (2) the amount of all cash Capital
Expenditures of Borrowers and their Subsidiaries on a Consolidated Basis,
excluding Capital Expenditures (i) up to $7,400,000.00 used to acquire the
Premises and up to $4,600,000.00 used to initially rehabilitate the
Premises, (ii) up to $3,000,000.00 incurred prior to December 31, 1999 by
CGII to acquire Equipment and other assets of Merrill Lynch, Pierce, Fenner
& Smith and (iii) up to $1,000,000.00
-2-
<PAGE>
incurred prior to February 29, 2000 by CGII to acquire Equipment and other
assets of McGraw Hill, to (B) Fixed Charges, all as calculated on a rolling
four quarter basis.
"Letter of Credit Liability" means, at any date of determination, the
amount of all unreimbursed draws under any Letters of Credit. For the
purpose of determining the portion of Letter of Credit Liability
representing unreimbursed draws under any Foreign Letter of Credit, the
amount of unreimbursed draws (which shall be in units of a Foreign Currency
because such Letter of Credit is a Foreign Letter of Credit) shall be
deemed converted into the number of U.S. Dollars equal to the product of
(i) the number of units of such Foreign Currency, and (ii) the rate at
which the Agent exchanged units of such Foreign Currency for U.S. Dollars
on the date on which such draw was honored.
"Letter of Credit Obligations" means, at any date of determination, the sum
of the maximum aggregate amount which is or at any time thereafter may
become available for drawing under all Letters of Credit then outstanding
(for the purpose of determining the amounts which may become available for
drawing under any Foreign Letter of Credit, the amount available for
drawing (which shall be in units of a Foreign Currency because such Letter
of Credit is a Foreign Letter of Credit) shall be deemed converted into the
number of U.S. Dollars equal to the product of (i) the number of units of
such Foreign Currency, and (ii) the rate at which the Agent exchanges units
of such Foreign Currency for U.S. Dollars) as of the date of determination,
plus the Letter of Credit Liability. For purposes hereof, a Letter of
Credit on which a draw for the full amount available thereunder (a "Final
Draw") has not been made shall be deemed outstanding (to the extent of the
amount then available for draws thereunder) until the earlier of the date
on which such Letter of Credit is returned to Issuing Bank for cancellation
without a Final Draw having been made, or the expiration date thereof.
"Loan Documents" means this Agreement, the First Amendment, the Notes, the
Security Documents, the Letter of Credit Documents, the SAMLOC Agreements
and all other documents executed and delivered in connection with the
Loans.
"Revolving Credit Limit" means $25,000,000.00, as such sum may be reduced
from time to time in accordance with the terms hereof.
"Revolving Credit Notes" means, from August 3, 1999, through but not
including the First Amendment Closing Date, the Borrowers' promissory notes
to each Lender in substantially the form attached hereto as Exhibit 2.13A,
and from and after the First Amendment Closing Date, the Borrowers' amended
and restated promissory notes to each Lender in substantially the form
attached to the First Amendment as Exhibit 2.13A.
(C) Section 1.1 of the Loan Agreement is hereby amended to incorporate
the following definitions:
-3-
<PAGE>
"CGISA" means Cunningham Graphics International, S.A.
"First Amendment" means the First Amendment to Loan and Security Agreement
dated as of December 31, 1999 among Agent, Lenders, Issuing Bank and
Borrowers.
"First Amendment Closing Date" means December 31, 1999.
"Foreign Currency" means a currency other than the U.S. Dollar.
"Foreign Letter of Credit" means a Letter of Credit issued in a Foreign
Currency.
"U.S. Dollar" means the United States Dollar.
(D) Section 2.1 is hereby amended by removing the term "Letter of
Credit Liabilities" from the proviso in clause (b) and substituting
therefor the term "Letter of Credit Obligations."
(E) Section 2.3(C) is hereby amended to read as follows:
"(C) the Letter of Credit Obligations at any one time shall not exceed
$4,800,000.00."
(F) Section 2.3 is hereby amended by adding the following language to
the end of the second to last sentence of Section 2.3:
"provided, that, as long as the Letter of Credit Obligations do not exceed
$4,800,000.00, Borrowers shall not be required to make any such pledge or
deposit if the Letter of Credit Obligations would not have exceeded the
Letter of Credit Limit if the portion of the Letter of Credit Obligations,
arising from the increase in value of one or more Foreign Currencies (under
one or more Foreign Letters of Credit) against the U.S. Dollar since the
respective issue dates of such Foreign Letters of Credit, had been excluded
from the calculation of Letter of Credit Obligations."
(G) Section 2.23(A)(4) is hereby amended by adding the following
language to the end of Section 2.23(A)(4):
"(or, with respect to Foreign Letters of Credit, the equivalent amount in
the applicable foreign currency as determined on the date of issuance),"
(H) Section 2.23(C) is hereby amended by adding the following language
to the end of Section 2.23(C):
"All payments under this Agreement, including without limitation under this
Section 2.23(C) and including without limitation reimbursements with
respect to Foreign Letters of Credit, shall be made in U.S. Dollars. If a
draw in a Foreign Currency is made, the amount to be reimbursed shall be
determined by
-4-
<PAGE>
multiplying the number of units of Foreign Currency drawn, by the rate at
which the Agent exchanges units of such Foreign Currency for U.S. Dollars
as of the date such draw is honored."
(I) Section 2.23(D)(1) is hereby amended by adding the following
sentence to the end of Section 2.23(D)(1):
"For purposes of calculating the portion of the Letter of Credit Fee
payable with respect to each Foreign Letter of Credit, the face amount of
such Foreign Letter of Credit shall be converted into U.S. Dollars as of
the date such installment of the Letter of Credit Fee is due, using the
average of the rates of exchange used by the Agent and determined on a
basis no less frequently than once per week during the quarterly period
ending on the date such installment is due, for converting units of the
Foreign Currency in which such Foreign Letter of Credit is issued into U.S.
Dollars."
(J) Section 2.24 is hereby amended by deleting the phrase "Letter of
Credit Liability" from the fourth sentence thereof and substituting
therefor the phrase "Letter of Credit Obligations."
(K) Section 5.20 is hereby amended by adding the following sentence to
the end of Section 5.20:
"CGISA does not have any Indebtedness, except for Indebtedness owed solely
to the Borrowers or to CGISA's Subsidiaries."
(L) Section 6.5 is hereby amended by adding the following sentence to
the end of Section 6.5:
"For the purposes of this Section 6.5 only and only for the 1999 and 2000
fiscal years, the determination of Capital Expenditures shall not include
up to $1,000,000.00 incurred prior to February 29, 2000, by CGII to acquire
Equipment and other assets of McGraw Hill."
(M) Section 6.18 is hereby amended by adding the following sentence to
the end of Section 6.18:
"Notwithstanding any exception set forth in the immediately preceding
sentence, except for Indebtedness owed solely to the Borrowers or CGISA's
Subsidiaries, Borrowers will not permit CGISA to incur any Indebtedness
without the written consent of Required Lenders."
(N) A new Section 7.3 is hereby inserted immediately after Section 7.2
and immediately before Article 8 to read as follows:
"Section 7.3 Judgment Currency. If during the period from the
date a judgment against any Borrower or its assets is issued in a
Foreign
-5-
<PAGE>
Currency, in favor of the Agent or any of the Lenders (arising from
this Agreement, any other Loan Document or any transaction arising
from any Loan Document), to the date the judgment is paid, the value
of such Foreign Currency decreases against the value of the U.S.
Dollar so that, at time of payment, the judgment is worth less in U.S.
Dollars then it was at the time the judgment was issued, such judgment
holder shall be entitled to an additional amount equal to the value
lost because of such currency fluctuation."
(O) A new Section 9.17 is hereby inserted immediately after
Section 9.16 to read as follows:
"SECTION 9.17 Calculation of Foreign Exhange Rates. Agent shall
reset or reconfirm, as appropriate, its foreign exchange rates used to
convert Foreign Currencies into U.S. Dollars for purposes of making
calculations of "Letter of Credit Obligations" from time to time under
the terms of this Agreement, no less frequently than once per week."
(P) Exhibits 2.1, 2.13A, 2.13C and 5.11 of the Loan Agreement are
hereby replaced in their entirety with, respectively, Exhibits 2.1,
2.13A, 2.13C and 5.11 attached hereto.
SECTION 1.2 Incorporation of Terms. The terms of this Amendment are hereby
incorporated into the Loan Agreement.
SECTION 1.3 Consent to Transfer of Roda Limited Stock and Release of Lien.
Lenders hereby acknowledge that the Parent, a Pledgor under the Pledge
Agreement, has transferred all the capital stock of Roda Limited to CGISA, which
is not a Pledgor under the Pledge Agreement (the "Roda Transfer"). Agent and
Lenders hereby consent to the Roda Transfer and Agent, Lenders and Borrowers
understand and agree that the capital stock of Roda Limited is no longer
included in the Pledged Collateral under the Pledge Agreement, and Agent hereby
releases its lien on the capital stock of Roda Limited.
ARTICLE II
REPRESENTATIONS
SECTION 2.1 Representations and Warranties. Each Borrower represents and
warrants to Lender that:
(A) The representations and warranties set forth in Article V of the Loan
Agreement and in all other Loan Documents are true and correct as of the date
hereof;
(B) No Default or Event of Default has occurred or is continuing;
-6-
<PAGE>
(C) The Loan Documents continue in full force and effect and none of
Borrowers have any charge, lien, claim or offset against Agent, Issuing Bank or
any Lender, or defenses to enforcement of the Loan Documents by Agent, Issuing
Bank or any Lender; and
(D) The Collateral, and Agent's security interest therein, secures all
Liabilities, including without limitation, liabilities created under this
Amendment or in connection herewith.
ARTICLE III
CONDITIONS PRECEDENT
The obligations of the Agent and the Lenders hereunder, and the consent and
release set forth in Section 1.3 above, are subject to the satisfaction of each
of the following conditions precedent:
SECTION 3.1 Documents. Borrowers shall have delivered or caused to be
delivered the following documents:
(A) with respect to each Borrower, a copy, certified in writing by the
Secretary or an Assistant Secretary of each Borrower, of (1) resolutions of the
Board of Directors of such Borrower evidencing approval of this Amendment and
the matters and documents contemplated hereby, and, with respect to Parent, the
Roda Transfer, (2) each document evidencing other necessary consents, approvals,
actions and approvals, if any, with respect to this Amendment and the documents
contemplated hereby, and (3) such Borrower's articles/certificate of
incorporation and by-laws (or with respect to any Original Borrower, in lieu
thereof, an officer's certificate stating that the articles/certificate of
incorporation and bylaws have not been amended since August 3, 1999);
(B) this Amendment and the amended and restated Acquisition Notes and
Revolving Credit Notes duly executed by each Borrower;
(C) the First Amendment fee letter duly executed by Parent, together with
the payment of the fee required thereby; and
(D) such other documents as Agent may reasonably require.
SECTION 3.2 Payment of Fees and Costs. Borrowers shall have paid all costs
and out-of-pocket expenses (including, without limitation, reasonable attorneys'
fees and costs) of Agent and Lenders in connection with the Loan Agreement
(including without limitation this Amendment), and the transactions contemplated
thereby, which includes among other things, the preparation, review and
negotiation of this Amendment, and all costs and expenses incurred in connection
with the above.
-7-
<PAGE>
ARTICLE IV
MISCELLANEOUS
SECTION 4.1 Modifications. This Amendment contains all of the modifications
to the Loan Agreement. No further modifications shall be deemed effective,
unless in a writing executed by the parties hereto.
SECTION 4.2 No Waivers. Except as expressly set forth herein, the
execution, delivery and effectiveness of this Amendment shall not operate as a
waiver of any right, power or remedy of Agent, Issuing Bank or any Lender under
the Loan Agreement, or constitute a waiver of any Default or Event of Default or
any provision of the Loan Agreement.
SECTION 4.3 Governing Law. This Amendment shall be construed and enforced
in accordance with the laws of the State of New Jersey.
SECTION 4.4 Counterparts. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Amendment by signing
any such counterpart.
SECTION 4.5 Binding Effect. This Amendment shall become effective when it
shall have been executed by Borrowers, Agent and Lenders, and it shall
thereafter be binding upon and inure to the benefit of Borrowers, Agent and
Lenders and their respective successors and assigns, except that Borrowers shall
not have the right to assign any right or obligation hereunder or any interest
herein.
SECTION 4.6 No Novation. The Loan Agreement, as amended hereby, shall
remain in full force and effect. Execution of this Amendment shall not
constitute a novation among Borrowers, Agent and Lenders.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
caused this Amendment to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
CUNNINGHAM GRAPHICS CUNNINGHAM GRAPHICS, INC.
INTERNATIONAL, INC.
By: By:
------------------------------ -----------------------------------
CUNNINGHAM GRAPHICS, BOSTON TOWNE PRESS, INC.
REALTY, LLC
By: Cunningham Graphics By:
International, Inc. -----------------------------------
By:
------------------------------
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<PAGE>
D&L GRAPHICS, INC. MVP GRAPHICS, INC.
By: By:
------------------------------ -----------------------------------
CUNNINGHAM GRAPHICS BENGAL GRAPHICS, INC.
DELAWARE, INC.
By: By:
------------------------------ -----------------------------------
COLORFAST PRINTING, INC. GCG/SEVILLE, INC.
By: By:
------------------------------ -----------------------------------
MIRROR GRAPHICS, INC. CUNNINGHAM GRAPHICS DIGITAL,
INC.
By: By:
------------------------------ -----------------------------------
SUMMIT BANK, as Agent, Lender THE BANK OF NEW YORK, as Lender
and Issuing Bank
By: By:
------------------------------ -----------------------------------
THE CHASE MANHATTAN BANK, NATIONAL BANK OF CANADA, as Lender
as Lender
By: By:
------------------------------ -----------------------------------
<PAGE>
Cunningham Graphics Allocations
Exhibit 2.1 (Amended and Restated as of December 31, 1999)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ProRata Pro Rata
SAMLOC Share REVOLVER ProRata Share TERM LOAN Share (Term ACQUISITION
Commitment (SAMLOC) Commitment (Revolver) Commitment Loan) Commitment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Summit $1,000,000.00 100% $10,169.491.53 40.677966120% $4,067,796.62 40.677966102% $ 9,762,711.85
- ------------------------------------------------------------------------------------------------------------------------------------
BNY $ 6,355,932.21 25.423728840% $2,542,372.88 25.423728814% $ 6,101,694.91
- ------------------------------------------------------------------------------------------------------------------------------------
NBC $ 4,237,288.13 16.949152520% $1,694,915.25 16.949152542% $ 4,067,796.62
- ------------------------------------------------------------------------------------------------------------------------------------
Chase $ 4,237,288.13 16.949152520% $1,694,915.25 16.949152542% $ 4,067,796.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,000,000.00 100% $25,000,000.00 100% $10,000,000.00 100% $24,000,000.00
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------
Pro Rata Share
(Acquisition) Total Pro Rata Share
Commitment Total
- ---------------------------------------------------------------
<S> <C> <C> <C>
Summit 40.6779660417% $25,000,000.00 41.666666667%
- ---------------------------------------------------------------
BNY 25.4237287917% $15,000,000.00 25.0000000%
- ---------------------------------------------------------------
NBC 16.9491525833% $10,000,000.00 16.66666667%
- ---------------------------------------------------------------
Chase 16.9491525833% $10,000,000.00 16.66666667%
- ---------------------------------------------------------------
Total 100% $60,000,000.00 100%
- ---------------------------------------------------------------
</TABLE>
-1-
<PAGE>
Exhibit 2.13A
AMENDED AND RESTATED REVOLVING CREDIT NOTE
$ .00 Princeton, New Jersey
------------- Dated as of August 3, 1999
Amended and Restated as of December 31, 1999
The undersigned, CUNNINGHAM GRAPHICS INTERNATIONAL, INC. ("Parent"),
CUNNINGHAM GRAPHICS, INC. ("CGI"), CUNNINGHAM GRAPHICS REALTY, LLC ("Realty"),
CUNNINGHAM GRAPHICS DELAWARE, INC. ("CGD"), MVP GRAPHICS, INC. ("MVPII") (MVPII,
formerly known as CGII California Holdings, Inc. ("CGIIC" prior to the merger),
is the survivor of the merger between MVP Graphics, Inc. ("MVPI"), CGIIC and
Super Pack, Inc. ("Super Pack")), BENGAL GRAPHICS, INC. ("Bengal"), D&L
GRAPHICS, INC. ("D&L"), COLORFAST PRINTING, INC. ("Colorfast"), GCG/SEVILLE,
INC. ("GCGS"), MIRROR GRAPHICS, INC. ("Mirror"), CUNNINGHAM GRAPHICS DIGITAL
INC. ("Digital"), and BOSTON TOWNE PRESS, INC. ("BTP") (collectively, "Makers"),
hereby jointly and severally promise to pay to the order of_________ (the
"Payee") as and when due as set forth in the Loan Agreement (as hereinafter
defined) the principal sum of________________ Dollars ($__________.00) or, if
less, the aggregate principal amount (as shown by Payee's records, which shall
constitute prima facie evidence thereof) of all advances (the "Advances") made
by Payee under the Revolving Credit provided for in and made pursuant to Section
2.3 of the Loan and Security Agreement dated as of August 3,1999 between certain
Makers, Payee, Agent, Issuing Bank and the other Lenders (the "Original Loan
Agreement"), as joined in by certain other Makers and as amended by a certain
First Amendment to Loan and Security Agreement dated as of December 31, 1999
between Makers, Payee, Agent, Issuing Bank and the other Lenders (the "First
Amendment"; the Original Loan Agreement as so joined and as amended by the First
Amendment and as further amended from time to time hereafter, the "Loan
Agreement"). Capitalized terms used herein and not otherwise defined shall have
the meanings given such terms in the Loan Agreement.
Makers further jointly and severally promise to pay to the order of Payee
interest on the unpaid principal amounts of the Advances, from the respective
dates on which the Advances are made until such principal amounts have been
repaid in full, payable at the times and rates provided in the Loan Agreement.
Makers hereby waive presentment, demand for payment, notice of dishonor or
acceleration, protest and notice of protest, and any and all other notices or
demands in connection with the delivery, acceptance, performance, default or
enforcement of this Amended and Restated Revolving Credit Note except any notice
expressly required in the Loan Agreement.
Parent, CGI, Realty, CGD, MVPI, CGIIC, Super Pack, Bengal and BTP
(collectively, the "Original Borrowers") executed a certain Revolving Credit
Note in favor of Payee dated as of August 3, 1999, in the face amount
of_____________ Dollars ($_______) (the "Original Note"). Since the execution
and delivery of the Original Note, MVPI, CGIIC and Super Pack have merged, and
D&L, Colorfast, GCGS, Mirror and Digital have become obligated as Makers under
the Original Note. This Amended and Restated Revolving Credit Note replaces,
substitutes for and restates the obligations of Makers under the Original Note.
Execution of this Amended and Restated Revolving Credit Note does not constitute
a novation between Makers and Payee.
-1-
<PAGE>
This is the Revolving Credit Note mentioned in, and is entitled to the
benefits of, the Loan Agreement and the other Loan Documents.
IN WITNESS WHEREOF, Makers hereby execute this Amended and Restated
Revolving Credit Note on the day and year first above written.
CUNNINGHAM GRAPHICS CUNNINGHAM GRAPHICS, INC.
INTERNATIONAL, INC.
By: By:
------------------------ ------------------------
CUNNINGHAM GRAPHICS BOSTON TOWNE PRESS, INC.
REALTY, LLC
By: Cunningham Graphics By:
International, Inc. ------------------------
By:
------------------------
D&L GRAPHICS, INC. MVP GRAPHICS, INC.
By: By:
------------------------ ------------------------
CUNNINGHAM GRAPHICS BENGAL GRAPHICS, INC.
DELAWARE, INC.
By: By:
------------------------ ------------------------
COLORFAST PRINTING, INC. MIRROR GRAPHICS, INC.
INC.
By: By:
------------------------ ------------------------
GCG/SEVILLE, INC. CUNNINGHAM GRAPHICS DIGITAL,
INC.
By: By:
------------------------ ------------------------
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<PAGE>
Exhibit 2.13C
AMENDED AND RESTATED ACQUISITION LOAN NOTE
$ .00 Princeton, New Jersey
------------- Dated as of August 3,1999
Amended and Restated as of December 31, 1999
The undersigned, CUNNINGHAM GRAPHICS INTERNATIONAL, INC. ("Parent"),
CUNNINGHAM GRAPHICS, INC. ("CGI"), CUNNINGHAM GRAPHICS REALTY, LLC ("Realty"),
CUNNINGHAM GRAPHICS DELAWARE, INC. ("CGD"), MVP GRAPHICS, INC. ("MVPII") (MVPII,
formerly known as CGII California Holdings, Inc. ("CGIIC" prior to the merger),
is the survivor of the merger between MVP Graphics, Inc. ("MVPI"), CGIIC and
Super Pack, Inc. ("Super Pack"), BENGAL GRAPHICS, INC. ("Bengal"), D&L GRAPHICS,
INC. ("D&L"), COLORFAST PRINTING, INC. ("Colorfast"), GCG/SEVILLE, INC.
("GCGS"), MIRROR GRAPHICS, INC. ("Mirror"), CUNNINGHAM GRAPHICS DIGITAL, INC.
("Digital"), and BOSTON TOWNE PRESS, INC. ("BTP") (collectively, "Makers"),
hereby jointly and severally promise to pay to the order of____________ (the
"Payee") as and when due as set forth in the Loan Agreement (as hereinafter
defined) the principal sum of________________ Dollars ($_________.00) or, if
less, the aggregate principal amount (as shown by Payee's records, which shall
constitute prima facie evidence thereof) of all advances (the "Advances") made
by Payee under the Acquisition Loan provided for in and made pursuant to Section
2.8 of the Loan and Security Agreement dated as of August 3, 1999 between
certain Makers, Payee, Agent, Issuing Bank and the other Lenders (the "Original
Loan Agreement"), as joined in by certain other Makers and as amended by a
certain First Amendment to Loan and Security Agreement dated as of December 31,
1999 between Makers, Payee, Agent, Issuing Bank and the other Lenders (the
"First Amendment"; the Original Loan Agreement as so joined and as amended by
the First Amendment and as further amended from time to time hereafter, the
"Loan Agreement"). Capitalized terms used herein and not otherwise defined shall
have the meanings given such terms in the Loan Agreement.
Makers further jointly and severally promise to pay to the order of Payee
interest on the unpaid principal amounts of the Advances, from the respective
dates on which the Advances are made until such principal amounts have been
repaid in full, payable at the times and rates provided in the Loan Agreement.
Makers hereby waive presentment, demand for payment, notice of dishonor or
acceleration, protest and notice of protest, and any and all other notices or
demands in connection with the delivery, acceptance, performance default or
enforcement of this Amended and Restated Acquisition Loan Note except any notice
expressly required in the Loan Agreement.
Parent, CGI, Realty, CGD, MVPI CGIIC, Super Pack, Bengal and BTP
(collectively, the "Original Borrowers") executed a certain Acquisition Loan
Note in favor of Payee dated as of August 3, 1999, in the face amount
of______________ Dollars ($________) (the "Original Note"). Since the execution
and delivery of the Original Note, MVPI, CGIIC and Super Pack have merged, and
D&L, Colorfast, GCGS, Mirror and Digital have become obligated as Makers under
the Original Note. This Amended and Restated Acquisition Loan Note replaces,
substitutes for and restates the obligations of Makers under the Original Note.
Execution of this Amended and Restated Acquisition Loan Note does not constitute
a novation between Makers and Payee.
-1-
<PAGE>
This is the Acquisition Loan Note mentioned in, and is entitled to the
benefits of, the Loan Agreement and the other Loan Documents.
IN WITNESS WHEREOF, Makers hereby execute this Amended and Restated
Acquisition Loan Note on the day and year first above written.
CUNNINGHAM GRAPHICS CUNNINGHAM GRAPHICS, INC.
INTERNATIONAL, INC.
By: By:
------------------------ ------------------------
CUNNINGHAM GRAPHICS. BOSTON TOWNE PRESS, INC.
REALTY, LLC
By: Cunningham Graphics By:
International, Inc. ------------------------
By:
------------------------
D&L GRAPHICS, INC. MVP GRAPHICS, INC.
By: By:
------------------------ ------------------------
CUNNINGHAM GRAPHICS BENGAL GRAPHICS, INC.
DELAWARE, INC.
By: By:
------------------------ ------------------------
COLORFAST PRINTING, INC. MIRROR GRAPHICS, INC.
INC.
By: By:
------------------------ ------------------------
GCG/SEVILLE, INC. CUNNINGHAM GRAPHICS DIGITAL,
INC.
By: By:
------------------------ ------------------------
-2-
<PAGE>
Exhibit 5.11
Ownership of Stock; Subsidiaries and Affiliates; Fictitious Name
A. Ownership of Stock
Parent is a publicly-traded company whose shares of common stock are listed on
the Nasdaq National Market. The share ownership of the directors, officers and
holders of more than 5% of Parent's common stock is contained in Parent's Notice
of Annual Meeting and Proxy Statement dated April 7, 1999. Parent holds all of
the issued and outstanding capital stock and other equity ownership interests of
CGI and Realty. Cunningham Graphics Delaware, Inc. holds all of the issued and
outstanding capital stock and other equity interests of Cunningham Graphics
Digital, Inc., Bengal Graphics, Inc., Boston Towne Press, Inc., MVP Graphics,
Inc., Colorfast Printing, Inc., and D&L Graphics, Inc. Bengal Graphics, Inc.
holds all of the issued and outstanding capital stock and other equity interests
of Mirror Graphics, Inc. and GCG/Seville, Inc.
B. Subsidiaries
Parent has the following direct or indirect subsidiaries:
Direct Subsidiaries
Cunningham Graphics Realty, L.L.C.
Cunningham Graphics, Inc.
Cunningham Graphics International, S.A. ("SA")
Griffin House Graphics Limited
Indirect Subsidiaries
Cunningham Graphics International (Europe) Limited ("Europe")
(a direct subsidiary of SA)
Roda Print Services, Ltd. (a direct subsidiary of Europe)
Venus Holdings Limited (a direct subsidiary of Europe)
Apollo UK Limited (a direct subsidiary of Venus Holdings Limited)
Apollo Offset Limited (a direct subsidiary of Apollo UK Limited)
Apollo Translation Limited (a direct subsidiary of Apollo UK Limited)
Artemis Colour Limited (a direct subsidiary of Apollo UK Limited)
Performance Securities Limited (a direct subsidiary of Apollo UK Limited)
Goldhawk Print Services Limited (a direct subsidiary of Europe)
Goldhawk Reprographics Limited (a direct subsidiary of Europe)
Goldhawk Reprographics (London) Limited (a direct subsidiary of Europe)
Workable Company Limited (a direct subsidiary of SA)
Workable Printing (Singapore) PTE, Ltd.
(a direct subsidiary of Workable Company Limited)
Plainduty Limited (60% owned by SA and 40% owned by Workable Company Limited)
Cunningham Graphics Delaware, Inc.
(a direct subsidiary of Cunningham Graphics, Inc.)
Bengal Graphics, Inc.
(a direct subsidiary of Cunningham Graphics Delaware, Inc.)
Cunningham Graphics Digital, Inc.
(a direct subsidiary of Cunningham Graphics Delaware, Inc.)
<PAGE>
Boston Towne Press, Inc.
(a direct subsidiary of Cunningham Graphics Delaware, Inc.)
MVP Graphics, Inc. (a direct subsidiary of Cunningham Graphics Delaware, Inc.)
Colorfast Printing, Inc.
(a direct subsidiary of Cunningham Graphics Delaware, Inc.)
D&L Graphics, Inc. (a direct subsidiary of Cunningham Graphics Delaware, Inc.)
Mirror Graphics, Inc. (a direct subsidiary of Bengal Graphics, Inc.)
GCG/Seville, Inc. (a direct subsidiary of Bengal Graphics, Inc.)
The present intention of Cunningham Graphics Digital, Inc. is to utilize the
alternate or fictitious name "Cunningham Graphics, Inc." in those states in
which Cunningham Graphics Digital, Inc. intends to conduct business.
Prior Names, Acquisitions of Assets and Mergers within the past 5 years
Within the last five (5) years, Parent has acquired all of the outstanding
capital stock of each of the direct subsidiaries.
Pursuant to an 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 CGI, CGI acquired all of the issued and outstanding capital stock of Roda
Limited. Simultaneously with such acquisition, the capital stock of Roda Limited
was assigned to Parent. Roda Limited holds all of the issued and outstanding
capital stock of Roda Print Services, Ltd.
Pursuant to an Agreement for the sale and purchase of the entire issued share
capital of Workable Company Limited and 60% of the issued share capital of
Plainduty Limited (the "Agreement") dated as of January 13, 1999 among Evan Lam
Hok Ling, Timothy Tung Hok Ki, Hacienda Resources Limited (collectively, the
"Sellers"), Parent and Cunningham Graphics International, S.A. ("CGISA"),
Parent, through its wholly-owned subsidiary, CGISA, acquired all of the issued
and outstanding capital stock of Workable Company Limited, a Hong Kong
corporation ("Workable"). In addition, the Company acquired from the Sellers the
60% of the outstanding capital stock of Plainduty Limited, a Hong Kong
corporation, which was not already held by Workable.
Pursuant to an Asset Purchase Agreement dated as of February 17, 1999 (the
"Agreement") among Boston Towne Press, Inc. (the "Seller"), John R. Henesey,
Jr., Parent and BTP Acquisition Corp. (now known as Boston Towne Press, Inc.)
("BTP"), Parent, through BTP, purchased certain of the assets and assumed
certain liabilities of the Seller.
Pursuant to a Share Purchase Agreement dated March 12, 1999 among Cunningham
Graphics International, Inc., 1344747 Ontario Limited, 831541 Ontario Inc.,
Anthony Griffin, Andrew Paul Griffin, John W. Griffin, Griffin House Graphics
Limited and King Lithoplate Limited, Parent, through 1344747 Ontario Limited
acquired all of the issued and outstanding capital stock of Griffin House
Graphics Limited and King Lithoplate Limited. Subsequent to the acquisition,
Griffin House Graphics Limited and King Lithoplate Limited were merged with and
into 1344747 Ontario Limited and the surviving entity was renamed Griffin House
Graphics Limited.
-2-
<PAGE>
Pursuant to an Agreement for the sale and purchase of the entire issued share
capital of Goldhawk Reprographics Limited, Goldhawk Print Services Limited and
Goldhawk Reprographics (London) Limited dated April 1, 1999 among L.J. Berry and
others and Roda Limited, Roda Limited acquired all of the issued capital stock
of Goldhawk Print Services Limited, Goldhawk Reprographics Limited and Goldhawk
Reprographics (London) Limited.
Pursuant to an Asset Purchase Agreement dated as of June 2, 1999 by and among
Parent, CGI Acquisition Corp. (now known as Bengal Graphics, Inc.) ("Bengal"),
the entity formerly known as Bengal Graphics, Inc. and AJ Industries, Inc.,
Parent, through Bengal, acquired substantially all of the assets of the entity
formerly known as Bengal Graphics, Inc. and AJ Industries, Inc.
Pursuant to an Agreement for the sale and purchase of the entire issued share
capital of Venus Holdings Limited dated June 21, 1999 among B. Coles and others
and Roda Limited, Roda Limited acquired all of the issued and outstanding
capital stock of Venus Holdings Limited. Venus Holdings Limited holds all of the
issued and outstanding capital stock of Apollo UK Limited, Apollo Offset
Limited, Apollo Translation Limited, Artemis Colour Limited and Performance
Securities Limited.
Pursuant to a Contribution Agreement dated as of June 30, 1999, Parent
contributed all of the issued and outstanding shares of capital stock of Bengal
and BTP to CGI. Simultaneously therewith, CGI contributed all of the issued and
outstanding shares of capital stock of Bengal and BTP to Cunningham Graphics
Delaware, Inc.
Pursuant to a Stock Purchase Agreement dated as of July 14, 1999 among CGII
California Holdings, Inc., Parent, George Chou, Brown Wen Jemp Tsui, Wayne
Hsieh, Yi-Kao W. Shaw, Jackie Chou, Mon Yin Lee, Li-Chin Hao Hsieh and Fung Yuan
Wu, CGII California Holdings, Inc. acquired all of the issued and outstanding
capital stock of MVP Graphics, Inc. and Super Pack, Inc. Subsequent to the
acquisition, MVP Graphics, Inc. and Super Pack, Inc. were merged with and into
CGII California Holdings, Inc. with CGII California Holdings, Inc. being the
surviving corporation to the merger. CGII California Holdings, Inc. changed its
name to MVP Graphics, Inc.
Pursuant to a Stock Purchase Agreement dated as of September 2, 1999 among CGI
Acquisition Corp. II, Parent, George N. Lisa, Giovanna Pagano-Decker and Richard
Lisa, CGI Acquisition Corp. II acquired all of the issued and outstanding
capital stock of D&L Graphics, Inc. Subsequent to the acquisition, D&L Graphics,
Inc. was merged with and into CGI Acquisition Corp. II with CGI Acquisition
Corp. II being the surviving corporation to the merger. CGI Acquisition Corp. II
changed its name to D&L Graphics, Inc.
Pursuant to a Stock Purchase Agreement dated as of September 10, 1999 among CGII
San Francisco Holdings, Inc., Parent, Chi-Kin Ngai, Jone Lau, Wai Ming Chan and
Hin Shing Lee, CGII San Francisco Holdings, Inc. acquired all of the issued and
outstanding capital stock of Golden Crane, Incorporated, d/b/a Colorfast
Printing Co. Subsequent to the acquisition, Golden Crane, Incorporated was
merged with and into CGII San Francisco Holdings, Inc. with CGII San Francisco
Holdings, Inc. being the surviving corporation to the merger. CGII San Francisco
Holdings, Inc. changed its name to Colorfast Printing, Inc.
-3-
<PAGE>
Pursuant to a Stock Purchase Agreement dated as of October 15, 1999 among Bengal
Graphics, Inc., Parent, Juanita Sweeney, Mary Ann Di Gennaro, Ernest C. Macri,
Stanley Knipl and Lewis Di Gennaro, Bengal Graphics, Inc. acquired all of the
issued and outstanding capital stock of GCG/Seville, Inc.
Pursuant to a Stock Purchase Agreement dated as of October 15, 1999 among Bengal
Graphics, Inc., Parent, John D'Onofrio and Michael D'Onofrio, Bengal Graphics,
Inc. acquired all of the issued and outstanding capital stock of Mirror
Graphics, Inc.
Pursuant to an Asset Purchase Agreement dated as of October 15, 1999 among
Bengal Graphics, Inc., Parent, Seville Graphics Corp., John Coccuzza, John
D'Onofrio, Michael D'Onofrio, Ernest C. Macri, Philip Marchese, Frederick Penza
and G.R. Poma, Bengal Graphics, Inc. acquired substantially all of the assets of
Seville Graphics Corp.
Mundays (586) Limited changed its name on November 20, 1996 to Roda Limited.
Roda Limited changed its name in December 1999 to Cunningham Graphics
International (Europe) Limited.
-4-
Exhibit 10.37
EMPLOYMENT AGREEMENT
AGREEMENT dated as of November 15, 1999 by and among CUNNINGHAM GRAPHICS,
INC., a New Jersey corporation, with its principal offices located at 100 Burma
Road, Jersey City, New Jersey 07305 (the "Company"), CUNNINGHAM GRAPHICS
INTERNATIONAL, INC. ("CGII") and GERALD (L.J.) BAILLARGEON with an address at 1
Mansfield Road, Princeton, New Jersey 08540 ("Employee");
R E C I T A L S:
WHEREAS, Employee, prior to this date, has been employed as the Vice
President of Finance of CGII and the Company;
WHEREAS, effective November 15, 1999, the existing Chief Financial Officer
of CGII has resigned and the Board has elected Employee as Acting Chief
Financial Officer of CGII pending a search for a permanent candidate for such
position; and
WHEREAS, should CGII receive a proposal from, or engage in discussions
with, a third person, whether solicited by CGII or unsolicited, concerning a
possible business combination with or the acquisition of a substantial portion
of the voting securities of CGII, the Board and senior management of CGII has
deemed it imperative that it and CGII be able to rely on Employee to continue to
serve as a senior financial officer of CGII, without concern that Employee might
be distracted by the personal uncertainties and risks that such a proposal or
discussions might otherwise create; and
WHEREAS, CGII desires to reward Employee for his valuable, dedicated
service to CGII and its Subsidiaries should his service be terminated under the
conditions described herein;
NOW, THEREFORE, it is agreed as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
1.1 "Affiliate" shall mean a Person which, directly or indirectly,
controls, is controlled by or is under common control with CGII or the Company,
and for purposes hereof, "control" shall mean the ownership of 20% or more of
the voting interests of the Person in question.
1.2 "Basic Salary" shall have the meaning assigned to that term in Section
5.1 of this Agreement.
<PAGE>
1.3 "Board" shall mean the Board of Directors of CGII as duly constituted
from time to time. Any action of the Board hereunder with respect to this
Agreement shall require the approval of a majority of the whole Board of
Directors of CGII.
1.4 "Business" shall mean the business conducted by CGII or any Subsidiary,
directly or indirectly, including, but not limited to, commercial printing and
services ancillary thereto.
1.5 "Cause" shall mean any of the following:
(a) The conviction of Employee for a felony, or the willful commission by
Employee of a criminal act, that in the reasonable judgment of the Board causes
or will likely cause substantial economic damage to CGII or substantial injury
to the business reputation of CGII;
(b) The willful commission by Employee of an act of fraud in the
performance of such Employee's duties on behalf of CGII or a Subsidiary; or
(c) The continuing willful failure of Employee to perform the substantive
duties of the Employee to CGII (other than any such failure resulting from
Employee's incapacity due to physical or mental illness) after written notice
thereof (specifying the particulars thereof in reasonable detail) and a
reasonable opportunity to be heard and cure such failure are given to Employee
by the Board.
For purposes of this subparagraph, no act, or failure to act, on Employee's
part shall be considered "willful" unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action or omission was
in the best interests of CGII or a Subsidiary.
1.6 "Change of Control" shall mean:
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee
or other fiduciary holding securities under an employee benefit plan of CGII or
a Subsidiary, which becomes the "beneficial owner" (as defined in Rule 13d-3
under the Act), directly or indirectly, of securities of CGII representing 51%
or more of the combined voting power of CGII's then outstanding securities;
(B) a majority of the Board consists of individuals other than the members
of the Board on the date hereof (the "Incumbent Directors"); provided, however,
that any person becoming a director subsequent to the date hereof whose election
or nomination for election was approved by at least two-thirds of the directors
who at the time of such election or nomination comprised the Incumbent Directors
shall for purposes of this definition be considered an Incumbent Director;
(C) the shareholders of CGII approve, or if no shareholder approval is
required or obtained, CGII completes a merger, consolidation or similar
transaction of CGII with or into any other corporation, or a binding share
exchange involving CGII's securities occurs, other than any such transaction
which would result in the voting securities of CGII outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 75% of
the combined voting power of the voting securities of CGII or such surviving
entity outstanding immediately after such transaction; or
(D) the shareholders of CGII approve a plan of complete liquidation of CGII
or an agreement for the sale or disposition by CGII of all or substantially all
of its assets.
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1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules, regulations and interpretations issued thereunder.
1.8 "Commencement Date" shall mean the date hereof.
1.9 "Confidential Information" shall include, without limitation by reason
of specification, any information, including, without limitation, trade secrets,
operational methods, methods of doing business, technical processes, formulae,
designs and design projects, inventions, research projects, strategic plans,
possible acquisition information and other business affairs of CGII or its
Affiliates, which (i) is or are designed to be used in, or are or may be useful
in connection with, the Business of CGII, any Subsidiary or any Affiliate of any
thereof, or which, in the case of any of these entities, results from any of the
research or development activities of any such entity, or (ii) is private or
confidential in that it is not generally known or available to the public,
except as the result of unauthorized disclosure by or information supplied by
Employee, or (iii) gives CGII or a Subsidiary or any Affiliate an opportunity or
the possibility of obtaining an advantage over competitors who may not know or
use such information or who are not lawfully permitted to use the same.
1.10 "Date of Termination" shall mean the Term Date, or such earlier date
upon which this Agreement shall terminate pursuant to Section 7 hereof.
1.11 "Disability" shall mean the inability of Employee to perform
Employee's duties of employment, pursuant to the terms of this Agreement and
by-laws of CGII as hereinafter provided, because of physical or mental
disability, where such disability shall have existed for a period of more than
90 consecutive days or an aggregate of 120 days in any 365 day period. The
existence of a Disability means that Employee's mental and/or physical condition
substantially interferes with Employee's performance of his substantive duties
for the Company and/or its Subsidiaries as specified in this Agreement. The fact
of whether or not a Disability exists hereunder shall be determined by
professionally qualified medical experts selected by the Board and reasonably
acceptable to the Employee or his agent.
1.12 "Duties" shall have the meaning assigned to that term in Section 2.1
of this Agreement.
1.13 "Panel" shall have the meaning given such terms in Section 8.
1.14 "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, entity or
government (whether federal, state, county, city,
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<PAGE>
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
1.15 "Restricted Period" shall mean the Term and the twelve month period
thereafter in the case of a termination of employment of Employee by the Company
(including non-extension) for Cause; and the Term and the six month period
thereafter in all other cases of the termination of Employee's employment
whether voluntarily or by the Company (including non-extension).
1.16 "Subsidiary" shall mean a Person, 50% or more of the outstanding
voting interests of which is owned or controlled, directly or indirectly, by
CGII.
1.17 "Term" shall mean the period of employment of Employee under this
Agreement.
1.18 "Term Date" shall have the meaning assigned to that term in Section 3
of this Agreement.
Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
2. EMPLOYMENT AND DUTIES OF EMPLOYEE
2.1 Employment; Title; Duties. CGII and the Company hereby employ Employee,
and Employee hereby accepts appointment, as Vice President and Acting Chief
Financial Officer of CGII and the Company. The duties of Employee shall be act
as the principal financial officer of CGII and the Company and to supervise the
finance and human resources departments of the Company; to pursue the objectives
of the Business; to perform generally those responsibilities and to render
services as are necessary and desirable to protect and to advance the best
interests of CGII and the Subsidiaries (collectively, the "Duties"), acting, in
all instances, under the supervision of the President, and in accordance with
the policies set by the Board. CGII shall take such actions as are necessary to
include Employee within the coverage of the policy of directors and officers
liability insurance.
2.2 Performance of Duties. Employee shall devote substantially all his
working time to perform the Duties as an executive of CGII and for the
performance of such other executive duties as are assigned to him from
time-to-time by the President. During the Term, Employee: (i) shall comply with
all laws, statutes, ordinances, rules and regulations relating to the Business,
and (ii) shall not engage in or become employed, directly or indirectly, in a
business which competes with the Business, without the prior written consent of
the President, nor shall he act as a consultant to or provide any services to,
whether on a remunerative basis or otherwise, the commercial or professional
business of any other Person which competes with the Business of the Company,
without such written consent, which, in both instances, may be given or withheld
by the President in his absolute discretion.
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<PAGE>
2.3 Location of Employment. The principal place of employment of Employee
shall be within a thirty mile radius of Jersey City, New Jersey or such other
location as is consented to by Employee. It is, however, distinctly understood
and agreed that Employee may be required, in connection with the performance of
his duties, to work from time to time at other locations designated by the
President or as required in connection with the Business.
3. TERM OF EMPLOYMENT
The employment of Employee pursuant to this Agreement shall commence as of
the Commencement Date and shall end three years thereafter, unless extended
pursuant to the next sentence or unless sooner terminated pursuant to Section 7
(the later of (i) the third anniversary of the Commencement Date and (ii) the
date to which Employee's period of employment has been extended, is the "Term
Date"). If Employee's employment hereunder has not previously been terminated in
accordance with Section 7 hereof, then on the second anniversary of the
Commencement Date, and on each subsequent anniversary of the Commencement Date,
the Term shall be extended for one additional year, unless the Board shall
provide written notice to Employee three months or more prior to such
anniversary date that this Agreement will not be so extended. The rights of
termination set forth in Section 7 shall be applicable during any such extended
period of employment.
4. COMPENSATION AND BENEFITS
The Company shall pay Employee, as compensation for all of the services to
be rendered by him hereunder during the Term, and in consideration of the
various restrictions imposed upon Employee during the Term and the Restricted
Period, and otherwise under this Agreement, the Basic Salary and other benefits
as provided for and determined pursuant to Sections 5 and 6, inclusive, of this
Agreement; provided, however, that no compensation shall be paid to Employee
under this Agreement for any period subsequent to the termination of employment
of Employee for any reason whatsoever, except as provided in Section 7.
5. BASIC SALARY/BONUS
5.1 Basic Salary. The Company shall pay Employee, as compensation for all
of the services to be rendered by him hereunder, a salary of $125,000 per annum
(as adjusted upward by the Board from time to time) (the "Basic Salary"),
payable in substantially equal monthly payments, less such deductions or amounts
as are required to be deducted or withheld by applicable laws or regulations,
deductions for employee contributions to welfare benefits provided by the
Company to Employee and such other deductions or amounts, if any, as are
authorized by Employee. The Basic Salary shall be prorated for employment of
less than a full calendar year. The Basic Salary may be increased from
time-to-time by the Board and, once increased, shall not thereafter be reduced.
The Basic Salary shall be reviewed at least once in every calendar year by a
committee of the Board responsible for determining compensation of senior
management of the Company, each of the members of which is a
"non-employee-director" as defined in Rule 16b-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the
"Committee"). Any increase in Basic Salary shall not serve to offset or reduce
any other obligation to Employee under this Agreement.
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<PAGE>
5.2 Bonus. Employee will be eligible for a cash bonus (the "Bonus") for
each fiscal year in an amount determined in accordance with the Company's
then-current bonus or incentive compensation policy. The Committee in
consultation with Employee shall establish in advance of each fiscal year of the
Company during the Term goals and levels of the Bonus for such fiscal year which
shall be related to the estimated budget for the Company for such fiscal year.
5.3 Change of Control Bonus. If a Change of Control shall have occurred in
a transaction approved by the Board, Employee shall be entitled to a special
cash bonus in the amount of $150,000 (subject to any applicable payroll or other
taxes required to be withheld), if Employee shall remain in the employ of CGII,
the Company or another Subsidiary for a period of six months after the date of
the Change of Control (the "Bonus Period") or such employment shall terminate
during the Bonus Period other than for Cause or voluntarily by Employee.
6. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES
6.1 Additional Benefits. The Company shall provide the following additional
benefits to Employee during the Term:
(i) provision of a comprehensive medical indemnity policy for Employee
and his family having terms no less favorable than the coverage made
available to other members of senior management;
(ii) such other benefits as the Board shall lawfully adopt and approve
for members of senior management generally;
(iii) three (3) weeks of paid vacation during each calendar year;
provided, however, any vacation must be approved by the President with at
least two weeks' prior notice; and
(iv) long term disability insurance coverage consistent with current
Company policy.
6.2 Reimbursement for Expenses. The Company shall pay or reimburse Employee
for all reasonable expenses actually incurred or paid by him during the Term in
the performance of his services under this Agreement, upon presentation of such
bills, expense statements, vouchers or such other supporting information as the
Board may reasonably require. In the event the Company requires Employee to
travel on business during the Term, Employee shall be reimbursed for any related
travel expenses in accordance with this Section 6.2.
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7. TERMINATION OF EMPLOYMENT
7.1 Death. If Employee dies during the Term, this Agreement shall
terminate, except that the Company shall continue to pay to Employee's spouse,
or in the absence of a surviving spouse, his estate, Employee's Basic Salary for
a period through the third full month following the date of death, pay any other
amounts which were accrued but unpaid, provide welfare benefits to his family
for the balance of the stated Term as if Employee had not died and provide for
the payment of the life insurance benefit provided for in Section 6.1.
7.2 Disability. If, during the Term, Employee has a Disability, the Company
may, at any time after Employee has a Disability, terminate Employee's
employment by written notice to him. In the event that Employee's employment is
terminated, this Agreement shall terminate except that the Company shall
continue to pay Employee's Basic Salary for a period through the third full
month following the date of the termination of his employment, pay any other
amounts which were accrued but unpaid, and provide welfare benefits to his
family until the Term Date, and pay or provide for the payment of the disability
benefit provided for in Section 6.1, until Employee reaches age 65.
7.3 Voluntary Termination. This Agreement may be terminated by Employee at
any time with or without cause upon 30 days prior written notice to the Company.
After such 30 day period, the Company shall have no further liability to make
payments hereunder except those required by law or which were accrued and unpaid
at the end of the Term.
7.4 Termination for Cause. The Company may terminate Employee's employment
hereunder for Cause at any time by written notice given to Employee by the
Board. Upon such termination Employee shall not have any right to receive any
further payments hereunder except for amounts accrued and unpaid hereunder prior
thereto and provide welfare benefits as required by law and except as provided
in Section 7.8.
7.5 Termination Without Cause. Except as provided in the next sentence, if
this Agreement is terminated by the Company without Cause, Employee shall be
entitled to a lump sum payment equal to one half of Employee's then current
Basic Salary, payable upon the Date of Termination and payment of any accrued
but unpaid amounts. If a Change of Control occurs and this Agreement is
terminated by the Company without Cause prior to the Term Date, or within a
period of two years following the Change of Control, whichever is shorter, then
Employee shall be entitled to a lump sum payment equal to two times Employee's
then current Basic Salary and anticipated Bonus based upon the criteria
established by the Committee, payable upon the Date of Termination, and payment
of any accrued but unpaid amounts, including, without limitation, any special
bonus under Section 5.3.
7.6 Notice of Termination. Any purported termination of employment by the
Company by reason of Employee's Disability or for Cause shall be communicated by
written Notice of Termination to Employee. For purposes of this Agreement, a
"Notice of Termination" shall mean a notice given by the Company, which shall
indicate the specific basis for termination of employment and shall set forth in
reasonable detail the basis of determination of the remaining payments due to
Employee under this Agreement.
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7.7 Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date of termination of employment specified in the
Notice of Termination, as such date may be modified pursuant to the following
two sentences. If within thirty (30) days after any Notice of Termination is
given, Employee notifies the Company that a dispute exists as to the reasons
given in the Notice of Termination (a "Dispute" and the giving of such notice, a
"Notice of Dispute"), the Date of Termination shall be the date on which the
Dispute is finally determined, either by mutual written agreement of the
parties, by the Panel, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); provided that the Date of Termination shall be
extended by a Notice of Dispute only if such notice is given in good faith and
Employee pursues the resolution of such Dispute with reasonable diligence and
provided further that pending the resolution of any such Dispute, the Company
shall continue to pay Employee the same Basic Salary and to provide Employee
with the same or substantially comparable welfare benefits and prerequisites,
including participation in the Company's retirement plans, profit sharing plans,
to the extent then so available at the date of such determination, stock option
plans, stock award plans or stock appreciation right plans that Employee was
paid and provided to the extent that such continued participation is possible
under the general terms and provisions of such plans, programs and benefits but
in no event beyond the Term Date. Should a Dispute asserted by Employee
ultimately be determined in favor of the Company, then all sums (net of tax
withholdings by the Company from such sums) paid by the Company to Employee from
the Date of Termination specified in the Notice of Termination until final
resolution of the Dispute pursuant to this paragraph, exclusive of accrued,
unpaid amounts prior to the Date of Termination, shall be repaid promptly by
Employee to the Company, all options, rights and stock awards granted to
Employee during such period shall be canceled or returned to the Company, and no
service as an employee shall be credited to Employee for such period for pension
purposes. Employee shall not be obligated to pay to the Company the cost of
providing Employee with welfare benefits and prerequisites for such period
unless the final judgment, order or decree of a court arbitration panel or other
body resolving the Dispute determines that Employee acted in bad faith in giving
a Notice of Dispute. Should a Dispute ultimately be determined in favor of
Employee, then Employee shall be entitled to retain all sums paid to Employee
under this subparagraph pending resolution of the Dispute and shall be entitled
to receive, in addition, the payments and other benefits provided for in this
Section 7 to the extent not previously paid hereunder and the payment of
Employee's reasonable legal fees incurred as a result of such Dispute upon
submission to the Company of a detailed statement of fees from Employee's
attorneys.
8. ARBITRATION
Except as otherwise provided herein, the parties hereby agree that any
dispute regarding the rights and obligations of any party under this Agreement
or under any law governing the relationship created by this Agreement, including
without limitation Employee's challenge of a purported termination for Cause or
Disability, must be resolved pursuant to this Section 8. Within seven (7) days
of either party's written notice to the other of his or its desire to submit any
arbitrable matter as set forth herein to arbitration, the parties will meet to
attempt to amicably resolve their differences and, failing such resolution,
either or both of the parties may submit the
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matter to mandatory and binding arbitration with the CPR Institute for Dispute
Resolution ("CPR"). The issue(s) in dispute shall be settled by arbitration in
accordance with the Center for Public Resources Rules for Non-Administered
Arbitration of Business Disputes, by a panel of three arbitrators (the "Panel").
The only issue(s) to be determined by the Panel will be those issues
specifically submitted to the Panel. The Panel will not extend, modify or
suspend any of the terms of this Agreement. The arbitration shall be governed by
the United States Arbitration Act, 9 U.S.C. ss.1-16, and judgment upon the award
rendered by the Panel may be entered by any court having jurisdiction thereof. A
determination of the Panel shall be by majority vote.
Promptly following receipt of the request for arbitration, CPR shall
convene the parties in person or by telephone to attempt to select the
arbitrators by agreement of the parties. If agreement is not reached, the
Company shall select one arbitrator and Employee shall select one other
arbitrator. These two arbitrators shall select a third arbitrator. If these two
arbitrators are unable to select the third arbitrator by mutual agreement, CPR
shall submit to the parties a list of not less than eleven (11) candidates. Such
list shall include a brief statement of each candidate's qualifications. Each
party shall number the candidates in order of preference, shall note any
objection they may have to any candidate, and shall deliver the list so marked
back to CPR. Any party failing without good cause to return the candidate list
so marked within ten (10) days after receipt shall be deemed to have assented to
all candidates listed thereon. CPR shall designate the arbitrator willing to
serve for whom the parties collectively have indicated the highest preference
and who does not appear to have a conflict of interest. If a tie should result
between two candidates, CPR may designate either candidate.
This agreement to arbitrate is specifically enforceable. Judgment upon any
award rendered by the Panel may be entered in any court having jurisdiction. The
decision of the Panel within the scope of the submission is final and binding on
all parties, and any right to judicial action on any matter subject to
arbitration hereunder hereby is waived (unless otherwise provided by applicable
law), except suit to enforce this arbitration award or in the event arbitration
is not available for any reason or in the event the Company shall seek equitable
relief to enforce Section 9 of this Agreement. If the rules of the CPR differ
from those of this Section 8, the provisions of this Section 8 will control. The
Company shall pay all the costs of arbitration including the fees of the
arbitrators, and the arbitrators shall award reasonable legal fees to Employee,
unless the arbitrators or a judicial forum shall finally determine that Employee
acted in bad faith.
9. CONFIDENTIAL INFORMATION AND PROPRIETARY INTERESTS
9.1 Acknowledgment of Confidentiality. Employee understands and
acknowledges that he may obtain Confidential Information during the course of
his employment by the Company. Accordingly, Employee agrees that he shall not,
either during the Term or at any time within two years after the Date of
Termination, (i) use or disclose any such Confidential Information outside the
Company, its Subsidiaries and Affiliates; or (ii) except as required in the
proper performance of his services hereunder, remove or aid in the removal of
any Confidential Information or any property or material relating thereto from
the premises of CGII, the Company or any Subsidiary.
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The foregoing confidentiality provisions shall cease to be applicable to
any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Employee of his
obligations under this Section 9).
In the event Employee is required by law or a court order to disclose any
such Confidential Information, he shall promptly notify the Company of such
requirement and provide the Company with a copy of any court order or of any law
which in his opinion requires such disclosure and, if the Company so elects, to
the extent that he is legally able, permit the Company an adequate opportunity,
at its own expense, to contest such law or court order.
9.2 Delivery of Material. Employee shall promptly, and without charge,
deliver to the Company on the termination of his employment hereunder, or at any
other time the Company may so request, all memoranda, notes, records, reports,
manuals, computer disks, videotapes, drawings, blueprints and other documents
(and all copies thereof) relating to the Business of the Company, its
Subsidiaries and its Affiliates, and all property associated therewith, which he
may then possess or have under his control.
10. NON-COMPETITION PROVISIONS
Employee agrees that he will not, during the Restricted Period, compete
directly or indirectly with the Business. The phrase "compete directly or
indirectly with the Business shall be deemed to include, without limiting the
generality thereof, (1) engaging or having a material interest, directly or
indirectly, as owner, employee, officer, director, partner, sales
representative, stockholder, capital investor, lessor, renderer of consultation
services or advise, either alone or in association with other, in the operation
of any aspect of any type of business or enterprise competitive with the
Business; (2) soliciting any of the employees of the Company or any Affiliate to
leave the employ of the Company or any Affiliate; (3) soliciting any of the
employees of the Company or any Affiliate to become employees of any other
Person; or (4) soliciting any customer of the Company or any Affiliate with
respect to the Business. Similarly, Employee shall not raid, entice or induce
any Person who on the Date of Termination is, or within one (1) year immediately
preceding the Date of Termination was, a customer of the Company or any
Affiliate, to become a customer of any other Person for products or services the
same as, or similar to, those products and services as from time to time shall
be provided by the Company or any Affiliate, and Employee shall not approach any
Person for such purpose; nor shall Employee raid, entice or induce any Person
who on the Date of Termination is, or within one year immediately preceding the
Date of Termination was, an employee of the Company or any Affiliate, to become
employed by any other Person; similarly, Employee shall not approach any such
employee for such purpose or authorize or knowingly approve the taking of such
actions by any other Person or assist any such other Person in taking any such
action.
The phrase "compete directly or indirectly with the Business" shall not be
deemed to include an ownership interest as an inactive investor, which, for
purposes of this Agreement, shall mean only the beneficial ownership of less
than five (5%) percent of the outstanding shares of any series or class of
securities of any competitor of CGII, the Company or any Subsidiary, which
securities of such series or class are publicly traded in the securities market.
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11. SURVIVAL
The provisions of Sections 7, 8, 9, 10, and 14 shall survive termination of
this Agreement and remain enforceable according to their terms.
12. SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement shall
in no way affect the validity or enforceability of any other provisions hereof.
13. NOTICES
All notices, demands and requests required or permitted to be given under
the provisions of this Agreement shall be deemed duly given if made in writing
and delivered personally or mailed by postage prepaid certified or registered
mail, return receipt requested, accompanied by a second copy sent by ordinary
mail, which notices shall be addressed as follows:
If to the Company or CGII:
Cunningham Graphics, Inc.
100 Burma Road
Jersey City, New Jersey 07305
Attn: President
If to Employee:
Gerald (L.J.) Baillargeon
1 Mansfield Road
Princeton, New Jersey 08540
By notifying the other parties in writing, given as aforesaid, any party
may from time-to-time change its address or the name of any person to whose
attention notice is to be given, or may add another person to whose attention
notice is to be given, in connection with notice to any party.
14. ASSIGNMENT AND SUCCESSORS
Neither this Agreement nor any of his rights or duties hereunder may be
assigned or delegated by Employee. This Agreement is not assignable by the
Company except to any successor in interest which takes over all or
substantially all of the business of the Company, as it is conducted at the time
of such assignment. Any corporation into or with which the Company is merged or
consolidated or which takes over all or substantially all of the business of the
Company shall be deemed to be a successor of the Company for purposes hereof.
This Agreement shall be binding upon and, except as aforesaid, shall inure to
the benefit of the parties and their respective successors and permitted
assigns.
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15. LIMITATION ON PAYMENTS
In the event that any payment or benefit received or to be received by
Employee in connection with the termination of Employee's employment (whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with CGII, the Company, any person whose actions result in a Change in
Control or any person affiliated with CGII, the Company or such person)
(collectively with the payments and benefits hereunder, "Total Payments") would
not be deductible (in whole or part) as a result of section 280G of the Code by
the Company, an affiliate or other person making such payment or providing such
benefit, the payments and benefits hereunder shall be reduced until no portion
of the Total Payments is not deductible, or the payments and benefits hereunder
are reduced to zero. At Employee's request, such reduction may be effected by
extending the date the payment would otherwise be due by not more than five
years or by decreasing the amount of the payment or benefit otherwise due and
payable. For purposes of this limitation (i) no portion of the Total Payments
the receipt or enjoyment of which Employee shall have effectively waived in
writing prior to the date of payment shall be taken into account, (ii) no
portion of the Total Payments shall be taken into account which, in the opinion
of tax counsel selected by Employee and acceptable to the Company's independent
auditors, is not likely to constitute a "parachute payment" within the meaning
of section 280G(b)(2) of the Code, (iii) the payments and benefits hereunder
shall be reduced only to the extent necessary so that, in the opinion of the tax
counsel referred to in clause (ii), the Total Payments (other than those
referred to in clauses (i) or (ii)) in their entirety are likely to constitute
reasonable compensation for services actually rendered within the meaning of
section 280G(b)(4) of the Code or are otherwise not likely to be subject to
disallowance as deductions; and (iv) the value of any non-cash benefit or any
deferred payment or benefit included in the Total Payments shall be determined
by the Company's independent auditors in accordance with the principles of
sections 280G(d)(3) and (4) of the Code.
16. ENTIRE AGREEMENT, WAIVER AND OTHER
16.1. Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
16.2. No Waiver. No waiver or modification of any of the provisions of this
Agreement shall be valid unless in writing and signed by or on behalf of the
party granting such waiver or modification. No waiver by any party of any breach
or default hereunder shall be deemed a waiver of any repetition of such breach
or default or shall be deemed a waiver of any other breach or default, nor shall
it in any way affect any of the other terms or conditions of this Agreement or
the enforceability thereof. No failure of the Company to exercise any power
given it hereunder or to insist upon strict compliance by Employee with any
obligation hereunder, and no custom or practice at variance with the terms
hereof, shall constitute a waiver of the right of the Company to demand strict
compliance with the terms hereof.
12
<PAGE>
Employee shall not have the right to sign any waiver or modification of any
provisions of this Agreement on behalf of the Company, nor shall any action
taken by Employee reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by instrument in
writing signed by all of the parties hereto after the date hereof. Neither this
Agreement nor any of the rights of any of the parties hereunder may be
terminated except as provided herein.
13
<PAGE>
17. MISCELLANEOUS
17.1 Governing Law. This Agreement shall be governed by and construed, and
the rights and obligations of the parties hereto enforced, in accordance with
the laws of the State of New Jersey.
17.2 Headings. The Section and Subsection headings contained herein are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
17.3 Severability. The invalidity or unenforceability of any provision of
this Agreement shall in no way affect the validity or enforceability of any
other provisions hereof.
17.4 Obligations of Company. The Company's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstances, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against Employee or anyone else. All amounts payable by the
Company hereunder shall be paid without notice or demand. Except as expressly
provided herein, the Company waives all rights which it may now have or may
hereafter have conferred upon it, by statute or otherwise, to terminate, cancel
or rescind this Agreement in whole or in part. Except as provided in Section 7.7
herein, each and every payment made hereunder by the Company shall be final and
the Company will not seek to recover for any reason all or any part of such
payment from Employee or any person entitled thereto. Employee shall not be
required to mitigate the amount of any payment or other benefit provided for in
this Agreement by seeking other employment or otherwise.
17.5 Rights of Beneficiaries of Employee. This Agreement shall inure to the
benefit of, and be enforceable by, Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts would still be payable to
Employee hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's devisee, legatee or other designee or, if there be no
such designee, to Employee's estate.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above, to be effective as of the Commencement Date.
CUNNINGHAM GRAPHICS, INC.
By:
---------------------------------------------
Name: Michael R. Cunningham
Title: President and Chief Executive Officer
CUNNINGHAM GRAPHICS INTERNATIONAL, INC.
By:
---------------------------------------------
Name: Michael R. Cunningham
Title: President and Chief Executive Officer
---------------------------------------------
Gerald (L.J.) Baillargeon
Exhibit 21
Subsidiaries
The following are the direct and indirect subsidiaries of Cunningham Graphics
International, Inc.:
<TABLE>
<CAPTION>
Name: Jurisdiction of Formation:
- ----- --------------------------
<S> <C>
Cunningham Graphics, Inc. New Jersey
Cunningham Graphics International, S.A. British Virgin Islands
Cunningham Graphics International (Europe) Limited United Kingdom
Griffin House Graphics Limited Ontario
Cunningham Graphics Realty, L.L.C. New Jersey
Roda Print Services, Ltd. United Kingdom
Venus Holdings Limited United Kingdom
Apollo UK Limited United Kingdom
Apollo Offset Limited United Kingdom
Apollo Translation Limited United Kingdom
Artemis Colour Limited United Kingdom
Performance Securities Limited United Kingdom
Goldhawk Print Services Limited United Kingdom
Goldhawk Reprographics Limited United Kingdom
Goldhawk Reprographics (London) Limited United Kingdom
Workable Company Limited Hong Kong
Workable Printing (Singapore) PTE, Ltd. Hong Kong
Plainduty Limited Hong Kong
Cunningham Graphics Delaware, Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Bengal Graphics, Inc. New Jersey
Cunningham Graphics Digital, Inc. Delaware
Boston Towne Press, Inc. New Jersey
MVP Graphics, Inc. California
D&L Graphics, Inc. New Jersey
Colorfast Printing, Inc. California
Mirror Graphics, Inc. Delaware
GCG/Seville, Inc. New York
</TABLE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-52723), pertaining to the 1998 Stock Option Plan and the
Directors Stock Option Plan of Cunningham Graphics International, Inc. and the
Registration Statement (Form S-8 No. 333-86345) pertaining to the Cunningham
Graphics International, Inc. Employee Stock Purchase Plan, of our report dated
February 1, 2000 with respect to the consolidated financial statements and
schedule of Cunningham Graphics International, Inc. included in the Annual
Report (Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young, LLP
Metro Park, New Jersey
March 27, 2000
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Michael R.
Cunningham as his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, including amendments, if any, and to deliver and
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, 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 connection with the
foregoing, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Gordon Mays Director March 10, 2000
- ---------------
Gordon Mays
/s/ James J. Cunningham Director March 24, 2000
- -----------------------
James J. Cunningham
/s/ Arnold Spinner Director March 16, 2000
- ------------------
Arnold Spinner
/s/ Laurence Gerber Director March 14, 2000
- -------------------
Laurence Gerber
/s/ Stanley J. Moss Director March 16, 2000
- -------------------
Stanley J. Moss
<PAGE>
STATE OF NEW JERSEY)
) ss.:
COUNTY OF HUDSON )
On the 10 day of March, 2000, before me personally came Gordon Mays, to me
known, and known to me to be the individual described in and who executed the
foregoing instrument, and he acknowledged to me that he executed the same.
/s/ Joan Godette
-----------------------
Notary Public
State of New Jersey
STATE OF CALIFORNIA)
) ss.:
COUNTY OF SAN DIEGO)
On the 14 day of March 2000, before me personally came James J.
Cunningham, to me known, and known to me to be the individual described in and
who executed the foregoing instrument, and he acknowledged to me that he
executed the same.
/s/ Jo-Ellen Platt
---------------------
Notary Public
State of California
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 16 day of March 2000, before me personally came Arnold Spinner, to
me known, and known to me to be the individual described in and who executed the
foregoing instrument, and he acknowledged to me that he executed the same.
/s/ Margaret M. Rodriguez
-------------------------
Notary Public
State of New Jersey
<PAGE>
COMM. OF MASSACHUSETTS)
) ss.:
COUNTY MIDDLESEX )
On the 14 day of March 2000, before me personally came Laurence Gerber, to
me known, and known to me to be the individual described in and who executed the
foregoing instrument, and he acknowledged to me that he executed the same.
/s/ Barbara Vandelinde
-----------------------
Notary Public
Commonwealth of Massachusetts
STATE OF FLORIDA )
) ss.:
COUNTY OF PALM BEACH)
On the 16 day of March 2000, before me personally came Stanley J. Moss, to
me known, and known to me to be the individual described in and who executed the
foregoing instrument, and he acknowledged to me that he executed the same.
/s/ Laurel K. Gille
---------------------
Notary Public
State of Florida
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet at December 31, 1999 and Consolidated
Statement of Income for the year ended December 31, 1999, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,131
<SECURITIES> 0
<RECEIVABLES> 24,906
<ALLOWANCES> 0
<INVENTORY> 3,357
<CURRENT-ASSETS> 37,151
<PP&E> 40,883
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,372
<CURRENT-LIABILITIES> 31,109
<BONDS> 0
0
0
<COMMON> 36,003
<OTHER-SE> 10,132
<TOTAL-LIABILITY-AND-EQUITY> 132,372
<SALES> 110,671
<TOTAL-REVENUES> 110,671
<CGS> 74,707
<TOTAL-COSTS> 98,518
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,073
<INCOME-PRETAX> 10,296
<INCOME-TAX> 3,747
<INCOME-CONTINUING> 6,549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,549
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.15
</TABLE>
