<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-49861
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
MASTER GRAPHICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 2752 62-1694322
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE)
INCORPORATION OR
ORGANIZATION)
6075 POPLAR AVENUE, SUITE 401
MEMPHIS, TENNESSEE 38119
(901) 685-2020
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
JOHN P. MILLER
CHIEF EXECUTIVE OFFICER
6075 POPLAR AVENUE, SUITE 401
MEMPHIS, TENNESSEE 38119
(901) 685-2020
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
JOHN A. GOOD, ESQ. JOHN J. KELLEY III, ESQ.
BAKER, DONELSON, BEARMAN & CALDWELL KING & SPALDING
165 MADISON AVENUE, SUITE 2000 191 PEACHTREE STREET
MEMPHIS, TENNESSEE 38103 ATLANTA, GEORGIA 30303-1763
(901) 577-2148 TELEPHONE (404) 572-4600 TELEPHONE
(901) 577-2303 FACSIMILE (404) 572-5100 FACSIMILE
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
MASTER GRAPHICS, INC.
CROSS REFERENCE SHEET
CROSS-REFERENCE SHEET SHOWING
LOCATION IN THE PROSPECTUS OF INFORMATION REQUIRED
BY PART I OF FORM S-1
<TABLE>
<CAPTION>
FORM S-
1 REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------------ ----------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front Cover Page of Prospectus;
Outside Back Cover Page of Prospectus;
Additional Information
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Prospectus Summary; Risk Factors
4. Use of Proceeds............... Use of Proceeds
5. Determination of Offering
Price........................ Underwriting
6. Dilution...................... Dilution
7. Selling Security Holders...... Principal and Selling Shareholders
8. Plan of Distribution.......... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Dividend Policy; Capitalization;
be Registered................ Description of Capital Stock; Shares
Eligible for Future Sale
10. Interests of Named Experts and
Counsel...................... Not Applicable
11. Information With Respect to Outside Front Cover Page of Prospectus;
the Registrant............... Prospectus Summary; Risk Factors; Dividend
Policy; Capitalization; Selected
Historical, Combined and Pro Forma
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal and Selling Shareholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
PROSPECTUS
LOGO
OF
MASTER GRAPHICS, INC.
APPEARS HERE
3,600,000 SHARES
MASTER GRAPHICS, INC.
COMMON STOCK
-----------
Of the 3,600,000 shares of Common Stock offered hereby, 3,400,000 shares are
being offered by Master Graphics, Inc. (the "Company") and 200,000 shares are
being offered by a shareholder of the Company (the "Selling Shareholder"). See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Shareholder.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It is currently anticipated that the initial public offering
price will be between $11.00 and $13.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price of the Common Stock. The Common Stock has been approved
for quotation on The Nasdaq Stock Market's National Market ("The Nasdaq
National Market") under the symbol "MAGR." After the Offering, the officers and
directors of the Company will beneficially own approximately 54.1% of the
outstanding shares of Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2)(3) SHAREHOLDER(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
- --------------------------------------------------------------------------------
Total....................... $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
540,000 additional shares of Common Stock on the same terms and conditions
as set forth above. If all such shares are purchased by the Underwriters,
the total Price to Public will be $ , the total Underwriting Discount
will be $ , and the total Proceeds to Company will be $ . See
"Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as, and if issued to and accepted by them,
and subject to the Underwriters' right to withdraw, cancel, or modify such
offer and reject any order in whole or in part. It is expected that delivery of
the shares of Common Stock will be made on or about , 1998.
-----------
MORGAN KEEGAN & COMPANY, INC.
SUNTRUST EQUITABLE SECURITIES
, 1998.
<PAGE>
[THE LOGOS OF THE MASTER GRAPHICS DIVISIONS ARRANGED IN A CIRCULAR PATTERN
AROUND THE MASTER GRAPHICS' LOGO APPEAR HERE. THE GRAPHICS ARE ABOVE THE NAMES
OF THE MASTER GRAPHICS DIVISIONS, CITIES IN WHICH THEY ARE LOCATED, AND THE
YEARS IN WHICH THEY WERE ESTABLISHED.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. This summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the related notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, the information in this Prospectus (i)
assumes a 40,000 for 1 stock split effected in May 1998; (ii) assumes
conversion of the Company's 5% Series A Cumulative Convertible Redeemable
Preferred Stock (the "Series A Preferred Stock") into 177,776 shares of Common
Stock; (iii) assumes the exercise of a warrant (the "Lender Warrant") to
purchase 183,333 shares of Common Stock (assuming an initial public offering
price of $12.00 per share, the mid-point of the range set forth on the cover
page of this Prospectus (the "Mid-Point")); (iv) assumes no exercise of any
other outstanding warrants or options to purchase Common Stock; and (v) assumes
no exercise of the Underwriters' over-allotment option. Unless the context
otherwise requires, as used herein the term "Company" means and refers to
Master Graphics, Inc., a Tennessee corporation, its wholly-owned operating
subsidiaries, including Premier Graphics, Inc., a Delaware corporation
("Premier Graphics") as well as Master Printing, Inc. ("Master Printing") and
B&M Printing, Inc. ("B&M Printing"), the predecessors of Master Graphics, Inc.
and Premier Graphics, respectively. On March 26, 1998, Master Graphics, Inc., a
Delaware corporation formed in June 1997, merged with and into Master Graphics,
Inc., a Tennessee corporation, in a reincorporation transaction. References to
fiscal year financial information of the Company refer to the fiscal year ended
June 30 of the relevant year. References to fiscal year financial information
of the companies acquired by the Company prior to the date hereof refer to the
respective fiscal year ends of such companies. Effective January 1, 1998, the
Company changed its fiscal year to a calendar year.
THE COMPANY
The Company is a rapidly growing provider of general commercial printing
services to customers throughout the United States. Since June 1997, the
Company has acquired 10 high quality, general commercial printing companies
which the Company believes are market leaders in their respective geographic
areas in terms of customer service, responsiveness and quality (which, together
with B&M Printing, are hereinafter collectively called the "Acquired
Companies"). Each of the Acquired Companies operates as a separate division of
the Company and provides a full range of general commercial printing services.
The Acquired Companies have an average operating history of over 50 years,
established customer relationships and strong reputations for customer service,
responsiveness and quality. The Company's acquisition and operating strategies
are focused on continued selective acquisitions and internal growth. The
Company expects that this strategy will enable each division to offer broader
services to existing customers and attract new customers for existing services.
The Company's pro forma consolidated revenue and operating income for the
twelve months ended December 31, 1997 were $154.0 million and $8.5 million,
respectively. The Company's pro forma consolidated revenue and operating income
for the three months ended March 31, 1998 were $ 38.5 million and $ 2.4
million, respectively.
The Company provides service in all areas of general commercial printing,
including prepress, printing and postpress services. The Company's products
include annual reports, direct mail pieces, sales literature, point of purchase
materials, market letters, newsletters, training manuals, product brochures,
catalogs and university recruiting materials for customers such as Federal
Express, IBM, Provident Life, W. W. Grainger, Turner Broadcasting and
G. D. Searle. The Company's operating philosophy emphasizes responding rapidly
to customer requirements and producing high quality printed materials.
Responsiveness is essential because of the typically short lead time on most
general commercial printing jobs.
The printing industry is one of the largest and most fragmented industries in
the United States, with total estimated 1996 sales of $132 billion among an
estimated 50,000 printing companies, according to the Printing Industries of
America, Inc. (the "PIA"). The printing industry includes general commercial
printing, financial printing, printing and publishing of books, newspapers and
periodicals, quick printing and production of business forms and greeting
cards. The Company focuses on providing general commercial printing and related
services. According to the PIA, this segment had approximately $43 billion in
revenue in 1996 compared to $40 billion in
3
<PAGE>
1995. There are approximately 25,000 general commercial printing companies in
the United States according to the PIA.
The general commercial printing industry is characterized by unpredictable
shifts in demand and fast turnaround times. To remain competitive and meet
their customers' demands, general commercial printers must make substantial
investments in plant capacity. Independent general commercial printers often
experience lower than optimal capacity utilization because of wide fluctuations
in demand, which can adversely affect profitability. The Company seeks to
smooth its capacity utilization through its proprietary "Master Central"
equipment utilization and marketing process. Master Central serves as a
clearinghouse to allocate projects to those divisions with available capacity
or those that possess the specialized equipment and expertise required for a
particular project. See "Business--Master Central."
The Company has developed an integrated operating and acquisition strategy
designed to maximize internal and external growth and maintain and expand its
position as a leading provider of general commercial printing services. The
Company's operating strategy is to combine the service and responsiveness of a
locally-oriented, independent general commercial printing company with the
resources and economies of scale of a large company. The key elements of the
Company's operating strategy are as follows:
. Provide Premium, High Quality Service. The Company targets the premium
segment of the general commercial printing market. The Company's
customers generally choose printers primarily based on service, quality
and responsiveness, and not based solely on price.
. Cross-Sell Production Capabilities. In order to maximize "same store"
revenue growth and profitability, the Company has developed its
proprietary Master Central equipment utilization and marketing process.
Master Central is designed to maximize the utilization of the Company's
existing printing capacity and capabilities by (i) allocating, on a real
time basis, certain printing projects to a particular division based on
equipment capabilities and availability; and (ii) training the Company's
sales force to market the production capacity and capabilities of all of
the Company's divisions. See "Business--Master Central."
. Achieve Economies of Scale. As a result of centralized purchasing, the
Company expects to receive volume discounts and rebates from
manufacturers of paper, film, printing plates and ink that would be
unavailable to the Company's divisions on a stand-alone basis. Paper is
generally the largest cost item for general commercial printing
companies, including the Company. The Company's paper costs were
approximately 27% of revenue for the six months ended December 31, 1997.
The Company has pricing arrangements with five paper suppliers which
provide discounts and rebates based on volume and is currently
discussing with certain manufacturers purchase terms for film, printing
plates and ink and other printing supplies. In addition, the Company
intends to centralize administrative items such as insurance and
employee benefits to further reduce costs.
. Operate on a Decentralized Basis. The Company intends to retain the key
managers of the businesses it acquires and allow them to maintain
substantial responsibility for the day-to-day operations, profitability
and growth of those businesses as separate divisions. The Company
believes that the operating autonomy provided by this decentralized
structure, together with the implementation of reporting systems and
financial controls at the corporate level, will enable it to combine the
service and responsiveness of a locally-oriented, independent general
commercial printing company with the resources and economies of scale of
a large company. Moreover, the Company intends to motivate its employees
and align their interests with those of the Company's shareholders by
using Common Stock as a currency in its acquisition program and by
granting stock options as a part of employee compensation.
The Company's acquisition strategy is to become a leading provider of general
commercial printing services in the United States through the acquisition of
independent general commercial printing companies that are well managed and
market leaders in customer service, responsiveness and quality. The Company
believes that its profile within the industry and its philosophy of
decentralized operations and centralized administration enable
4
<PAGE>
it to identify and acquire high quality, market leading independent general
commercial printing companies. The key elements of the Company's acquisition
strategy are as follows:
. Acquire High Quality, Well Managed Companies. The Company evaluates
potential acquisition candidates based on a variety of factors,
including reputation for quality, service, strength of management,
competitive market position, historical financial performance, growth
potential, customer base, equipment capabilities and available capacity.
The Company seeks to acquire only those companies which maintain high
levels of quality and service consistent with the Company's existing
divisions. The Company believes this strategy is essential to enabling
each division of the Company to cross-sell the capacity and capabilities
of the other divisions without concerns about quality and service.
. Retain Existing Management of Companies Acquired. The Company seeks to
acquire successful companies whose key managers will become employees of
the Company and continue to operate acquired businesses as divisions of
the Company. To preserve local market knowledge and customer
relationships, the Company has entered into employment contracts and
agreements not to compete with the key managers at each Acquired Company
and intends to continue to do so in the future.
The Company is a Tennessee corporation with its principal executive offices
located at 6075 Poplar Avenue, Suite 401, Memphis, Tennessee 38119, and its
telephone number is (901) 685-2020.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............... 3,400,000
Common Stock offered by the Selling Shareholder... 200,000
Common Stock to be outstanding after the Offer-
ing(1)........................................... 8,027,773
Use of proceeds................................... Repayment of indebtedness
and certain other fees. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............ MAGR
</TABLE>
- --------
(1) Includes (i) 177,776 shares of Common Stock issuable for nominal
consideration upon the conversion of the Series A Preferred Stock and (ii)
183,333 shares of Common Stock (assuming an initial public offering price
equal to the Mid-Point) issuable for nominal consideration upon the
exercise of the Lender Warrant. Does not include (i) 1,524,037 shares of
Common Stock (assuming an initial public offering price equal to the Mid-
Point) issuable at the initial public offering price per share upon the
exercise of warrants (the "Seller Warrants") issued in connection with the
Company's acquisition of the Acquired Companies; (ii) 603,636 shares of
Common Stock (assuming an initial public offering price equal to the Mid-
Point) issuable at the initial public offering price per share upon the
exercise of outstanding stock options held by directors and employees of
the Company; (iii) 108,333 shares of Common Stock (assuming an initial
public offering price equal to the Mid-Point) issuable at the initial
public offering price per share upon the exercise of rights granted to
former B&M Printing shareholders; and (iv) 83,333 shares of Common Stock
(assuming an initial public offering price equal to the Mid-Point) issuable
at the initial public offering price per share pursuant to the Company's
deferred compensation plan.
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk, including, among others, risks related to lack of operating
history, integration of assets and personnel and acquisition and operating
strategies. See "Risk Factors."
5
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
--------------------------------------------
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED MARCH 31, ENDED MARCH 31,
1997 1997 1998
------------ --------------- ---------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue......................... $153,971 $35,126 $38,462
Gross profit.................... 38,790 8,907 9,343
Operating income................ 8,545 2,292 2,415
Net earnings.................... 893 156 370
Net earnings applicable to
common shares.................. 663 98 312
Net earnings per common share
Basic......................... $ 0.09 $ 0.01 $ 0.04
Diluted....................... $ 0.09 $ 0.01 $ 0.04
OTHER DATA:
EBITDA(2)....................... $ 13,991 $ 3,405 $ 3,975
<CAPTION>
PRO FORMA
AS ADJUSTED
AS OF
MARCH 31,
1998
------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 24,807
Property, plant and equipment,
net............................ 52,251
Total assets.................... 138,680
Long-term debt, including
current installments........... 82,265
Redeemable preferred stock...... 1,350
Shareholders' equity............ 37,164
</TABLE>
- --------
(1) The summary pro forma financial data presents certain information for the
Company, as adjusted for (i) the effects of the acquisitions of the
Acquired Companies, (ii) the effects of certain pro forma adjustments which
are directly related to such acquisitions, (iii) the exercise of a warrant
by the Selling Shareholder to purchase 266,664 shares of Common Stock for
nominal value, (iv) the issuance of the Series A Preferred Stock, and (v)
the consummation of the Offering and the application of the net proceeds
therefrom, as if the foregoing had occurred on January 1, 1997, with
respect to income statement data, and March 31, 1998, with respect to
balance sheet data. See the Unaudited Pro Forma Condensed Consolidated
Financial Statements and notes thereto contained elsewhere in this
Prospectus. The conversion of the Series A Preferred Stock into 177,776
shares of Common Stock and the exercise of the Lender Warrant have not been
assumed in the pro forma balance sheet data; however their assumed
conversion and exercise, respectively, have been considered in computing
pro forma diluted net earnings per share. The pro forma adjustments
reflect, among other things, a reduction in interest expense and interest
rates on the Company's credit facilities as a result of the application of
the net proceeds of the Offering. The summary pro forma financial data do
not purport to represent what the Company's results of operations or
financial position actually would have been had the foregoing events, in
fact, occurred on the date or at the beginning of the period indicated, nor
is it intended to project the Company's results of operations or financial
position for any future date or period.
6
<PAGE>
(2) Represents earnings before interest, taxes, depreciation and amortization
("EBITDA"). Based on its experience in the general commercial printing
industry, the Company believes that EBITDA is an important tool for
measuring the performance of companies in the industry (including potential
acquisition targets) in several areas such as liquidity, operating
performance and leverage. In addition, lenders use EBITDA as a criterion in
evaluating companies in the industry, and the Company's financing
arrangements contain covenants in which EBITDA is used as a measure of
financial performance. The EBITDA measure for the Company may not be
consistent with similarly titled measures for other companies. EBITDA
should not be considered as an alternative to operating or net income (as
determined in accordance with generally accepted accounting principles
("GAAP")) as an indicator of the Company's performance or to cash flow from
operations (as determined in accordance with GAAP) as a measure of
liquidity. See the comparative historical statements of cash flows included
herein and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "--Liquidity and Capital Resources" for a
discussion of other measures of performance determined in accordance with
GAAP and the Company's sources and applications of cash flow.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION FOR THE COMPANY AND INDIVIDUAL ACQUIRED COMPANIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Master Graphics, Inc.(1)
Revenue......................................... $ 11,426 $ 13,244 $ 13,433
Gross profit.................................... 2,498 3,289 2,121
Operating income (loss)......................... (72) 597 (900)
Blackwell Lithographers, Inc.(2)
Revenue......................................... $ 3,715 $ 4,004 $ 4,164
Gross profit.................................... 1,582 1,544 1,526
Operating income................................ 188 745 609
Lithograph Printing Company of Memphis(2)
Revenue......................................... $ 16,659 $ 18,954 $ 20,118
Gross profit.................................... 3,457 4,203 4,574
Operating income................................ 78 694 1,606
Sutherland Printing Company, Inc.(2)
Revenue......................................... $ 7,451 $ 6,704 $ 7,892
Gross profit.................................... 2,048 2,642 1,836
Operating income (loss)......................... (1,366) 295 580
The Argus Press, Inc.(2)
Revenue......................................... $ 18,655 $ 24,663 $ 23,277
Gross profit.................................... 3,755 5,671 4,765
Operating income................................ 831 1,895 1,147
Phoenix Communications, Inc.(2)(3)
Revenue......................................... $ 22,320 $ 20,093 $ 25,859
Gross profit.................................... 6,075 4,805 6,336
Operating income (loss)......................... 767 (403) 248
Jones Printing Company, Inc.(2)
Revenue......................................... $ 6,984 $ 7,952 $ 6,343
Gross profit.................................... 2,174 2,088 1,318
Operating income................................ 702 606 311
Hederman Brothers, Inc.
Revenue......................................... $ 8,556 $ 9,360 $ 10,459
Gross profit.................................... 2,064 2,509 2,355
Operating income................................ 204 478 322
Phillips Litho Co., Inc.
Revenue......................................... $ 12,162 $ 11,661 $ 12,727
Gross profit.................................... 3,386 2,648 4,087
Operating income (loss)......................... 788 (124) 1,216
Harperprints, Inc.
Revenue......................................... $ 10,721 $ 10,428 $ 10,904
Gross profit.................................... 3,529 2,915 2,607
Operating income................................ 1,625 968 575
McQuiddy Printing Company(3)
Revenue......................................... $ 15,681 $ 15,574 $ 16,583
Gross profit.................................... 3,505 3,015 3,438
Operating income................................ 915 410 696
Total
Revenue......................................... $134,330 $142,637 $151,759
Gross profit.................................... 34,073 35,329 34,963
Operating income................................ 4,660 6,161 6,410
</TABLE>
- --------
(1) Consists primarily of results of operations of B&M Printing, which was the
sole operating entity of the Company prior to the inception of the
Company's acquisition transactions in June 1997. The Company had a fiscal
year end of June 30 until January 1, 1998.
(2) Since these companies were purchased at different times during 1997, these
amounts reflect combined pre- and post-acquisition activity during the
year.
(3) Phoenix Communications, Inc. ("Phoenix") (January 31) and McQuiddy Printing
Company ("McQuiddy") (June 30) had fiscal year ends that differed from
December 31, which is the year end the Company will use effective January
1, 1998.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. The Company believes
that the following risk factors constitute all of the material risks
associated with an investment in the Common Stock. This discussion also
identifies important cautionary factors that could cause the Company's actual
results to differ materially from those projected in forward looking
statements of the Company made by, or on behalf of, the Company.
LIMITED COMBINED OPERATING HISTORY
The Company has acquired 10 general commercial printing companies since June
1997. Moreover, the Company's management team has been assembled only
recently, and several of its members have not worked in the printing industry
prior to joining the Company. There can be no assurance that the management
team will be able to manage effectively the combined operations of a multiple-
division general commercial printing company or that the Company will be able
to integrate the operations of the Acquired Companies successfully and achieve
expected operating efficiencies and economies of scale. The pro forma and
combined historical financial results of the Acquired Companies cover periods
during which the Acquired Companies were not under common control or
management and may not be indicative of the Company's future financial or
operating results. The inability of the Company to integrate and manage
effectively the Acquired Companies and additional acquired businesses as a
cohesive, efficient enterprise or to eliminate unnecessary duplication or
achieve other operating efficiencies and economies of scale may have a
material adverse effect on the business, financial condition and results of
operations of the Company.
INABILITY TO INTEGRATE OPERATIONS OR IMPLEMENT OPERATING SYSTEMS AND POLICIES
As a rapidly growing provider of general commercial printing services, the
Company is faced with the development, implementation and integration of
Company-wide policies and systems related to its operations. Prior to their
acquisition by the Company, the Acquired Companies operated as separate
independent businesses. For the foreseeable future, the Company will rely on
the separate accounting, information and operating systems of the Acquired
Companies. The Company eventually plans to implement and integrate certain
centralized information and operating systems, policies and procedures for the
Acquired Companies and companies to be acquired in the future including, but
not limited to, accounting systems, employment and human resources policies,
purchasing programs and the Company's Master Central equipment utilization and
marketing process. Each of the Acquired Companies and companies to be acquired
in the future may need to modify certain systems and policies they have
utilized historically to conform with the Company's systems and policies. As a
result of the Company's decentralized operating philosophy, there can be no
assurance that the Company's operating systems and policies will be
implemented successfully across each of its divisions or that the Company will
be successful in monitoring the performance of the divisions. The Company may
experience delays, complications and expenses in implementing, integrating and
operating such systems and policies, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Operating Strategy" and "--Master Central."
The Company expects that Master Central will enable it to utilize more
effectively its printing capacity and effectively allocate print jobs across
the range of the Company's available production equipment. However, there can
be no assurance that the Company will be able to implement successfully Master
Central or that, once implemented, it will enable the Company to utilize its
printing capacity more efficiently.
AVAILABILITY OF DEBT FINANCING; SUBSTANTIAL LEVERAGE
At March 31, 1998, on a pro forma basis as adjusted for the Offering and
application of the net proceeds therefrom, the Company's indebtedness was
approximately $82.3 million, net of $3.0 million of unamortized discount. The
Company currently has an $85 million secured credit facility (the "Senior
Credit Facility") with its senior lender and has received a commitment from
such lender to increase the facility to $90 million upon closing of the
Offering. Currently, the Company has no additional borrowing capacity
available under the Senior
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Credit Facility but, upon closing of the Offering, the application of the net
proceeds therefrom, and the increase of the available credit under the Senior
Credit Facility, the Company will have approximately $30.0 million of
additional borrowing capacity under the Senior Credit Facility. Moreover, the
Company has a $7.5 million credit facility (the "Revolving Credit Facility")
through a commercial bank and is negotiating with the bank to increase the
maximum credit amount under the Revolving Credit Facility to $15 million upon
closing of the Offering. Currently, the Company has approximately $6.5 million
of additional borrowing capacity available under the Revolving Credit Facility
and, upon closing of the Offering, the application of the net proceeds
therefrom and the increase of the available credit under the Revolving Credit
Facility, the Company will have approximately $14.0 million of additional
borrowing capacity under the Revolving Credit Facility. The Senior Credit
Facility and the Revolving Credit Facility are referred to herein as the
"Credit Facilities." The increases in both the Revolving Credit Facility and
Senior Credit Facility are subject to the execution of definitive loan
documents and other conditions, some or all of which may not be met. There can
be no assurance that the Company and its lenders will agree on such definitive
loan documents, all such conditions will be met or the increases in available
credit under the Credit Facilities will be obtained.
The Company expects to fully utilize available credit under the Credit
Facilities, and could incur additional indebtedness, which amounts could be
significant, in connection with future acquisitions. The level of the
Company's indebtedness could have important consequences to shareholders,
including: (i) a substantial portion of the Company's cash flow from
operations could be dedicated to debt service and will not be available for
other purposes; (ii) the Company's ability to obtain additional equity or debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the printing industry
and economic conditions generally. Moreover, Master Graphics, Inc. is
dependent upon the cash flow of and the transfer of funds from its subsidiary,
Premier Graphics, which, under the Credit Facilities, is subject to
restrictions on its ability to pay dividends to Master Graphics, Inc. Certain
of the Company's competitors currently operate on a less leveraged basis and
have significantly greater operating and financing flexibility than the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
A key element of the Company's acquisition strategy is to consummate
numerous acquisitions of independent general commercial printing companies
throughout the United States. The Company's acquisition strategy presents
risks that, singly or in any combination, could have a material adverse effect
on the Company's business, financial condition and results of operations.
These risks include inattention by management to existing operations of the
Company because of increased management attention and resources to
acquisitions, the possible loss of customers of acquired businesses as a
result of the acquisition by the Company, the loss of key personnel of
acquired businesses, possible adverse effects on earnings resulting from
amortization of goodwill created in purchase transactions and the contingent
and latent risks associated with the past operations and other unanticipated
problems arising in the acquired businesses.
The success of the Company's acquisition strategy will be dependent upon a
number of factors, including (i) the Company's ability to locate and
successfully negotiate the acquisitions of existing general commercial
printing companies and to integrate successfully the operations of printing
companies acquired in the future into the Company's operations and (ii) the
availability of adequate financing to develop or acquire additional general
commercial printing companies. There can be no assurance that the Company's
acquisition strategy will be successful, that modifications to the Company's
acquisition strategy will not be required, that the Company will be able to
manage effectively and enhance the profitability of the Acquired Companies or
companies to be acquired in the future or that the Company will be able to
obtain adequate financing on reasonable terms to acquire additional general
commercial printing companies. The failure of the Company to implement its
acquisition strategy would have a material adverse effect on the stock price
of the Company. Moreover, there can be no assurance that future acquisitions,
if any, will contribute to the Company's profitability or otherwise facilitate
the successful implementation of the Company's overall strategy. See
"Business--Acquisition Strategy" and "--Operating Strategy."
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DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
The Company's acquisition strategy will require substantial capital, and the
Company anticipates that it will, in the future, seek to raise additional
funds through equity or debt financing. There can be no assurance that
sufficient funds will be available on terms acceptable to the Company, if at
all. If additional equity securities are issued, dilution to the Company's
shareholders may result, and if additional funds are raised through the
incurrence of debt, the Company may become subject to restrictions on its
operations and finances. Such restrictions may have an adverse effect on,
among other things, the Company's ability to pursue its acquisition strategy.
Although the Company has received a commitment from its senior lender and
expects to receive a commitment from its Revolving Credit Facility lender to
increase the maximum credit available under the Credit Facilities to the
aggregate amount of $105 million at the time the Offering is closed, there can
be no assurance that this increase will be obtained. Moreover, the Company
currently intends to finance future acquisitions in part by using shares of
its Common Stock as consideration. If the Common Stock does not maintain a
sufficient market value, or if potential acquisition candidates are unwilling
to accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, to initiate and maintain its acquisition program. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS RELATED TO NATURE OF GENERAL COMMERCIAL PRINTING BUSINESS; FLUCTUATION
IN QUARTERLY OPERATING RESULTS; PRIOR OPERATING LOSSES
The Company competes primarily in the general commercial printing sector,
which is characterized by individual orders from customers for specific
printing projects rather than long-term contracts. Future engagement by
existing customers is dependent upon the customers' satisfaction with the
services provided by the Company. Therefore, the Company is unable to predict
in advance the number, size and profitability of printing jobs in a given
period. Irregular customer purchasing patterns could result in significant
fluctuations in operating results from quarter to quarter. Such fluctuations
may be caused by underutilization of plant capacity, lost business due to lack
of plant capacity, or higher direct costs. Although the Company's Master
Central equipment utilization and marketing process is designed to smooth
capacity utilization and expand production capabilities, there can be no
assurance that Master Central will have this desired effect. In addition,
direct costs and timing of acquisitions could cause results of operations to
fluctuate from quarter to quarter.
The Company, Sutherland Printing Company, Inc. ("Sutherland"), Phoenix and
Phillips Litho Co., Inc. ("Phillips") have each experienced operating losses
in certain of the last several years. See "Prospectus Summary--Summary
Financial Information for the Company and Individual Acquired Companies."
There can be no assurance that such operating losses will not continue.
Moreover, Sutherland was a debtor-in-possession under the protection of a
proceeding filed under Chapter 11 of the United States Bankruptcy Code at the
time of its acquisition by the Company.
RAW MATERIALS--PAPER
The cost of paper is a principal factor in the Company's pricing to certain
customers. The Company is generally able to pass increases in the cost of
paper to its customers, while decreases in paper costs generally result in
lower prices to customers. In the last three years, paper prices for the
industry have experienced dramatic fluctuations. To the extent that there are
future paper cost increases and the Company is not able to pass such increases
to its customers or its customers reduce the size or number of their orders,
the Company's results of operations could be materially adversely affected.
In recent years, increases or decreases in demand for paper have led to
corresponding pricing changes and, in periods of high demand, to limitations
on the availability of certain paper grades, including grades utilized by the
Company. Any loss of the sources for paper supply or any disruption in such
sources' businesses or failure by them to meet the Company's product needs on
a timely basis could cause, at a minimum, temporary shortages in needed
materials which could have a material adverse effect on the Company's results
of operations. Although the Company actively manages its paper supply, it does
not maintain large inventories of paper, and there can be no assurance that
the Company's sources of supply for its paper will be adequate or, in the
event that such sources are not adequate, that alternative sources can be
developed in a timely manner.
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AVAILABILITY OF TECHNICIANS AND SALESPEOPLE
The Company's ability to provide high-quality finished printed products in a
timely fashion is dependent on the Company's maintaining an adequate staff of
skilled technicians, including prepress personnel, pressmen, bindery operators
and fulfillment personnel. Accordingly, the Company's ability to increase its
productivity and profitability will be limited by its ability to employ, train
and retain the skilled technicians necessary to meet the Company's
commitments. From time-to-time, the printing industry experiences shortages of
qualified technicians, and there can be no assurance that the Company will be
able to maintain an adequate skilled labor force necessary to operate
efficiently, that the Company's labor expenses will not increase from time to
time as a result of shortages of skilled technicians or that the Company will
not have to curtail its planned internal growth as a result of labor
shortages. Moreover, the general commercial printing industry is characterized
by personal relationships between individual members of a company's sales
force and customers who order printing services. The inability of the Company
to retain salespeople with large customer bases could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Marketing and Sales."
RAPID TECHNOLOGICAL CHANGE
The technology used by the Company primarily in its prepress operations is
rapidly evolving. The Company could experience delays or difficulties in
adjusting its prepress systems on a timely basis to accommodate changing
technology, to address the increasingly sophisticated needs of its customers
and to keep pace with emerging industry standards. The financial investment
required to respond to and integrate changing technologies may be greater than
anticipated by the Company. If the Company does not respond adequately to the
need to integrate changing technologies in a timely manner or the investment
required to so respond is greater than anticipated, the Company's business,
financial condition and results of operations may be materially adversely
affected.
FACTORS AFFECTING INTERNAL GROWTH
The Company's ability to increase the revenue of the Acquired Companies and
any subsequently acquired company will be affected by various factors,
including the demand for general commercial printing services and other
factors discussed in this Prospectus. Many of these factors are beyond the
control of the Company, and there can be no assurance that the Company's
operating and internal growth strategies will be successful or that it will be
able to generate cash flow adequate for its operation and to support internal
growth. Furthermore, there can be no assurance that management will be able to
integrate successfully acquired businesses and reduce operating expenses. See
"--Inability to Integrate Operations or Implement Operating Systems and
Policies," "--Limited Combined Operating History," "--Risks Associated with
Acquisition Strategy," "Business--Operating Strategy" and "--Master Central."
VALUATION OF ACQUISITIONS
The Company has negotiated acquisitions on an individual, company-by-company
basis, using valuations based on prior and anticipated operating results of
the Acquired Companies. There can be no assurance that the consideration paid
by the Company for the Acquired Companies accurately reflects the value of
these companies and subsequent acquisitions will accurately reflect the values
of companies acquired in the future. If the fair market values of the Acquired
Companies, or companies to be acquired in the future at the time of
acquisition by the Company are materially different from the amounts paid by
the Company, the Company may have overpaid for such companies, which could
result in a material and adverse effect on the financial performance of the
Company and the value of the Common Stock. The Company has recorded $39
million of goodwill in connection with its acquisition of the Acquired
Companies, and the Company expects to record additional goodwill in connection
with future acquisitions. The Company intends to evaluate periodically the
amount of goodwill on its balance sheet. In the event the Company determines
that the value of goodwill has been impaired, it may be required to charge
earnings for the amount of such impairment. Any such charge could have a
material adverse effect on the Company's financial condition and results of
operations.
COMPETITION
The general commercial printing industry is extremely competitive and
fragmented. In spite of the fragmentation of the industry, recent
technological developments in prepress and design and over-capacity in the
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printing industry have increased industry consolidation and competitive
pressures. The Company competes with numerous large and small printing
companies, some of which have greater financial resources than the Company.
The Company competes on the basis of ongoing customer service, quality of
finished products and price. Moreover, the Company competes for potential
acquisition candidates with other printing industry consolidators, some of
which have greater financial resources than the Company. There can be no
assurance that the Company will be able to compete successfully with such
competitors. See "Business--Competition."
DEPENDENCE UPON KEY PERSONNEL
The Company's operation and implementation of its acquisition and operating
strategies are dependent on the continued efforts of its executive officers,
including John P. Miller, Chairman of the Board, Chief Executive Officer and
President, Lance T. Fair, Senior Vice President-- Acquisitions and Chief
Financial Officer, Robert J. Diehl, Chief Operating Officer, P. Melvin Henson,
Jr., Senior Vice President--Finance and Administration and Chief Accounting
Officer, and James B. Duncan, Senior Vice President--Sales and Marketing. The
Company has no key man life insurance on the lives of any of its executive
officers or key managers. Furthermore, the Company will be dependent on the
key managers of companies that may be acquired in the future. The Company
currently has employment contracts with its five executive officers and
certain key managers of the divisions. Because of the difficulty in finding
adequate replacements for such personnel, the loss of the services of any of
them or the Company's inability in the future to attract and retain management
and other key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management--
Executive Compensation."
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's manufacturing operations are subject to numerous federal,
state and local laws and regulations relating to human health and safety and
the environment. These laws and regulations address and regulate, among other
matters, wastewater discharge, air quality and the generation, handling,
storage, treatment, disposal and transportation of solid and hazardous wastes
and releases of hazardous substances into the environment. In addition, third
parties and governmental agencies in some cases have the power under such laws
and regulations to require remediation of environmental conditions and, in the
case of governmental agencies, to impose fines and penalties. The Company
makes capital expenditures from time to time to stay in compliance with
applicable laws and regulations.
The Company has obtained all permits and approvals and filed all
registrations required for the conduct of its business, except where the
failure to obtain any permit or approval or file any registration would not
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is in compliance in all material
respects with the numerous federal, state and local laws and regulations and
permits, approvals and registrations relating to human health and safety and
the environment except where noncompliance would not have a material adverse
effect on the Company's business, financial condition and results of
operations.
In connection with the acquisition of the Acquired Companies, each of the
Company's properties has been subjected to a Phase I environmental site
assessment ("ESA") (which does not involve invasive procedures, such as soil
sampling or ground water analysis) by independent environmental consultants.
The ESAs have not revealed any material environmental liability that would
have a material adverse effect on the Company. The Company has not been
notified by any governmental authority of any continuing noncompliance,
liability or other claim in connection with any of its properties or business
operations, nor is the Company aware of any other material environmental
condition with respect to any of its properties or arising out of its business
operations at any other location. However, in connection with the ownership
and operation of its properties (including locations to which the Company may
have sent waste in the past) and the conduct of its business, the Company
potentially may be liable for damages or cleanup, investigation or remediation
costs.
No assurance can be given that all potential environmental liabilities have
been identified or properly quantified or that any prior owner, operator, or
tenant has not created an environmental condition unknown to the Company.
Moreover, no assurance can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the properties will not be
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affected by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to the Company. Federal, state and local environmental
regulatory requirements change often. It is possible that compliance with a
new regulatory requirement could impose significant compliance costs on the
Company. Such costs could have a material adverse effect on the Company's
business, financial condition and results of operations.
NO PRIOR MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on The Nasdaq
National Market, there can be no assurance that an active public market for
the Common Stock will develop or continue after the Offering. The initial
public offering price for the Common Stock will be determined by negotiations
among the Company and the representatives of the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. See
"Underwriting" for factors considered in determining the initial public
offering price. The market price of the Common Stock after the Offering may be
subject to significant fluctuations from time to time in response to numerous
factors, including the depth and liquidity of the market for the Common Stock,
variations in the reported financial results of the Company, investor
perception of the Company, changes in conditions in the economy in general and
the printing industry in particular. The equity markets have from time to time
experienced significant price and volume fluctuations that have affected the
market prices for many companies' securities and that have often been
unrelated to the operating performance of these companies. Any such
fluctuations that occur following completion of the Offering may adversely
affect the market price of the Common Stock.
IMMEDIATE, SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the pro forma net tangible book value of
their shares of Common Stock in the amount of $12.19 per share. See
"Dilution." In the event the Company issues additional shares of Common Stock
in the future, including shares that may be issued in connection with future
acquisitions, purchasers of the Common Stock in the Offering may experience
further dilution in the net tangible book value per share of the Common Stock.
Moreover, the issuance of additional shares of Common Stock (the aggregate
number of which is 1,715,703, assuming an initial public offering price equal
to the Mid-Point) upon the exercise of Seller Warrants, rights granted to
former B&M Printing shareholders or pursuant to the Company's deferred
compensation plan could have a substantial dilutive impact on the Company's
earnings per share.
RESTRICTIONS ON DIVIDENDS
The Company has never paid or declared a cash dividend on the Common Stock.
The Company currently intends to retain all future earnings, with the
exception of earnings paid as dividends on the Series A Preferred Stock, to
finance the continuing development of its business and does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future. The
Company's ability to pay dividends on the Common Stock is currently restricted
by the terms of the Credit Facilities, the terms of the Series A Preferred
Stock, and in the future will be restricted by the terms of the Credit
Facilities and could be restricted by the terms of subsequent financings and
series of preferred stock that may be issued in the future. See "Description
of Capital Stock--Common Stock" and "--Series A Preferred Stock."
Additionally, the ability of Premier Graphics to pay dividends to Master
Graphics, Inc. is limited by the terms of the Credit Facilities.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, 8,027,773 shares of Common Stock will be
outstanding, including 177,776 shares issuable upon conversion of the
outstanding Series A Preferred Stock and 183,333 shares (assuming an initial
public offering price equal to the Mid-Point) issuable upon exercise of the
Lender Warrant. The 3,600,000 shares of Common Stock sold in the Offering
(other than shares that may be purchased by "affiliates" of the Company, as
that term is defined under the Securities Act) will be freely tradeable. The
remaining shares of Common Stock outstanding may be resold only pursuant to an
effective registration under the Securities Act or pursuant to an available
exemption (such as provided by Rule 144 following a holding period for
previously unregistered shares) from the registration requirements of the
Securities Act. As of the date of this Prospectus,
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the 4,000,000 shares of Common Stock owned by Mr. Miller are eligible for
resale pursuant to Rule 144. The remaining 427,773 shares of Common Stock are
"restricted" within the meaning of Rule 144 and are not currently eligible for
resale under Rule 144. The earliest point in time when any such restricted
shares of Common Stock are eligible for resale pursuant to Rule 144, subject
to the volume, manner of sale and other limitations thereof, is March 1999.
Upon the closing of the Offering, the Company also will have granted to
employees and directors options to purchase up to a total of 603,636 shares of
Common Stock (assuming an initial public offering price equal to the Mid-
Point) at the initial public offering price per share, of which 221,721 shares
may be acquired immediately after the closing of the Offering. The remaining
options are excercisable beginning one year after the date of grant. See
"Shares Eligible for Future Sale -- Options." The Company intends to register
the shares subject to these options under the Securities Act for public
resale. See "Shares Eligible for Future Sale --Options."
In connection with the acquisition of the Acquired Companies, the Company
issued the Seller Warrants to purchase 1,524,037 shares of Common Stock
(assuming an initial public offering price equal to the Mid-Point) at an
exercise price per share equal to the initial public offering price. All
Seller Warrants may be exercised immediately after the closing of the
Offering. The Seller Warrants were issued in individually negotiated
transactions with the Acquired Companies. As a result of such negotiations,
the holders of Seller Warrants to purchase an aggregate of 491,666 shares of
Common Sock have piggyback registration rights.
In connection with a financing transaction, the Company issued to its senior
lender the Lender Warrant to purchase 183,333 shares of Common Stock (assuming
an initial public offering price equal to the Mid-Point) for nominal
consideration, which is exercisable immediately after the closing of the
Offering. Moreover, in connection with the refinancing of debt incurred as a
result of the acquisition of B&M Printing, the Company granted rights to
purchase 108,333 shares of Common Stock (assuming an initial public offering
price equal to the Mid-Point) at a price per share equal to the initial public
offering price to certain former shareholders of B&M Printing, which rights
are exercisable immediately after the closing of the Offering. Pursuant to the
Company's deferred compensation plan, the Company issued rights to purchase
83,333 shares of Common Stock (assuming an initial public offering price equal
to the Mid-Point) at a price per share equal to the initial public offering
price, which are exercisable immediately after the closing of the Offering.
See "Shares Eligible for Future Sale -- Warrants and Rights."
The Company, the Selling Shareholder, the Company's senior lender and the
Company's executive officers and directors have agreed that they will not
offer, sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission (the "Commission") a registration statement under the
Securities Act relating to any additional shares of Common Stock or securities
convertible or exchangeable or exercisable for shares of Common Stock, without
the prior written consent of Morgan Keegan & Company, Inc. and SunTrust
Equitable Securities Corporation for a period of 180 days after the date of
this Prospectus (the "lock-up period"), except for (i) subsequent sales of
Common Stock offered in the Offering, (ii) issuances by the Company of
unregistered Common Stock in connection with the acquisition of printing
companies, (iii) issuances by the Company of Common Stock pursuant to the
exercise of stock purchase warrants or stock options outstanding on the date
of this Prospectus, or (iv) issuance or registration of stock options or other
rights granted under the Company's 1998 Equity Compensation Plan or 1998 Non-
Employee Director Option Plan. After the Offering, the officers and directors
of the Company will beneficially own approximately 54.1% of the outstanding
shares of Common Stock.
The effect, if any, of the availability for sale, or sale, of shares of
Common Stock eligible for future sale on the market price of the Common Stock
prevailing from time-to-time is unpredictable, and no assurance can be given
that the effect will not be adverse.
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of the Offering, the existing shareholders of the Company
will beneficially own in the aggregate approximately 55.2% of the outstanding
Common Stock (or approximately 51.7% if the Underwriters' over-allotment
option is exercised in full). Accordingly, such persons will have substantial
influence on the Company, which influence might not be consistent with the
interests of other shareholders, and on the outcome
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of any matters submitted to the Company's shareholders for approval. In
addition, although there is no current agreement, understanding or arrangement
for these shareholders to act together on any matter, these shareholders may
have economic and business reasons to act together, and would be in a position
to exert significant influence over the affairs of the Company if they were to
act together in the future. If these persons were to act in concert, they
might, as a practical matter, be able to exercise control over the Company's
affairs, including the election of the Company's Board of Directors and other
matters requiring shareholder approval. The concerted efforts of existing
shareholders could effect transactions such as mergers and combinations
without the approval of minority shareholders. See "Principal and Selling
Shareholders."
POTENTIAL ANTI-TAKEOVER EFFECTS
The Company's charter (the "Charter") and bylaws (the "Bylaws") provide for
a classified Board of Directors, restrict the ability of shareholders to call
special meetings and contain advance notice requirements for shareholder
proposals and nominations and special voting requirements for the amendment of
the Charter and Bylaws. These provisions could delay or hinder the removal of
incumbent directors and could discourage or make more difficult a proposed
merger, tender offer or proxy contest involving the Company or may otherwise
have an adverse effect on the market price of the Common Stock. There are
certain Tennessee statutes which provide anti-takeover protection for
Tennessee corporations. See "Description of Capital Stock--Certain Provisions
of the Charter, Bylaws and Tennessee Law." The Charter authorizes 10,000,000
shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any further action by shareholders and which could be used by the
Company to deter unwanted merger or acquisition proposals. See "Description of
Capital Stock--Preferred Stock."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, at an assumed initial public offering price of $12.00 per
share (the Mid-Point) are estimated to be approximately $37.0 million ($43.1
million if the Underwriters' over-allotment option is exercised in full) after
deduction of the underwriting discount and estimated offering expenses payable
by the Company. The Company will not receive any proceeds from the sale of
shares of the Common Stock by the Selling Shareholder. The Company expects to
use $3 million of such net proceeds to pay acquisition advisory fees, payment
of which was deferred until the completion of the Offering, approximately $4.3
million to repay indebtedness owed to the Selling Shareholder which matures in
May 2002 and bears interest at 13.25% per annum, and the balance
(approximately $29.7 million or, if the Underwriters' over-allotment option is
exercised in full, approximately $35.8 million) to repay indebtedness owed to
General Electric Capital Corporation which matures on March 2003 and bears
interest at 12% per annum. The proceeds of each of the loans were used for
acquisitions and working capital. The Company expects that the combination of
these proceeds and proceeds available under the Credit Facilities after the
Offering and application of the net proceeds therefrom will enable the Company
to obtain financing for its new acquisitions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never paid or declared a cash dividend on its Common Stock.
The Company currently intends to retain all future earnings, with the
exception of earnings paid as dividends on the Series A Preferred Stock, to
finance the continuing development of its business and does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. Any
payment of cash dividends on the Common Stock in the future will be at the
Board of Directors' discretion and will depend on the Company's earnings,
financial condition, capital needs and other factors deemed pertinent by the
Company's Board of Directors, including the limitations, if any, on the
payment of dividends under state law, any then-existing credit agreement and
any subsequently issued Preferred Stock. Moreover, the Company is dependent
upon the cash flow of and transfer of funds from Premier Graphics, which under
the Credit Facilities is subject to restrictions on its ability to pay
dividends to the Company. See "Risk Factors -- Restriction on Dividends."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an historical basis including the 40,000 for 1 stock split
effected in May 1998; (ii) on a pro forma basis to reflect the acquisition of
McQuiddy and the financing thereof; and (iii) on a pro forma as adjusted basis
to reflect the exercise of a warrant to purchase 266,664 shares of Common
Stock on April 8, 1998, and the application of the net proceeds from the
Offering, which are estimated to be approximately $37 million (after deducting
underwriting discounts and estimated offering expenses payable by the
Company). For a description of the adjustments, see Notes to Unaudited Pro
Forma Condensed Consolidated Financial Statements included elsewhere herein.
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
----------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- ------------
<S> <C> <C> <C>
Current portion of long-term debt............ $ 4,127 $ 4,127 $ 4,127
Long-term debt, net of current portion and
unamortized discount........................ 99,732 109,092 78,138
Redeemable common stock warrant.............. 2,026 2,026 --
5% Series A Cumulative Convertible Redeemable
Preferred Stock, $.001 par value per share,
177,776 shares issued and outstanding ...... 1,350 1,350 1,350
Shareholders' equity:
Preferred stock, $.001 par value per share,
9,822,224 shares authorized, no shares
issued and outstanding..................... -- -- --
Common Stock, $.001 par value per share;
100,000,000 shares authorized; 4,000,000
shares issued and outstanding (historical)
4,266,664 shares issued and outstanding
(pro forma); and 7,666,664 shares issued
and outstanding (pro forma as adjusted)
(1)........................................ 4 4 8
Additional paid-in capital.................. 6,744 6,796 45,818
Retained earnings (deficit) ................ (5,006) (5,006) (8,662)
-------- -------- --------
Total shareholders' equity................... 1,742 1,794 37,164
-------- -------- --------
Total capitalization......................... $108,977 $118,389 $120,779
======== ======== ========
</TABLE>
- --------
(1) Does not include (i) 177,776 shares of Common Stock issuable for nominal
consideration upon the conversion of the Series A Preferred Stock; (ii)
183,333 shares of Common Stock (assuming an initial public offering price
equal to the Mid-Point) issuable for nominal consideration upon the
exercise of the Lender Warrant; (iii) 1,524,037 shares of Common Stock
(assuming an initial public offering price equal to the Mid-Point)
issuable at the initial public offering price per share upon the exercise
of the Seller Warrants; (iv) 603,636 shares of Common Stock (assuming an
initial public offering price equal to the Mid-Point) issuable at the
initial public offering price per share upon the exercise of outstanding
stock options held by directors and employees of the Company; (v) 108,333
shares of Common Stock (assuming an initial public offering price equal to
the Mid-Point) issuable at the initial public offering price per share
upon the exercise of rights granted to former B&M Printing shareholders;
and (vi) 83,333 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable at the initial public
offering price per share pursuant to the Company's deferred compensation
plan.
DILUTION
The pro forma net tangible book value of the Company at March 31, 1998,
after giving effect to the acquisition of the Acquired Companies, the exercise
of a warrant to purchase 266,664 shares of Common Stock, the conversion of the
Series A Preferred Stock into 177,776 shares of Common Stock, and the issuance
of 183,333 shares of Common Stock (assuming an initial public offering price
equal to the Mid-Point) upon exercise
17
<PAGE>
of the Lender Warrant as if each had occurred as of that date, but before
giving effect to the Offering, was $(33.7) million or $(7.28) per share. "Pro
forma net tangible book value per share" before the Offering represents the
amount of pro forma total tangible assets of the Company less pro forma total
liabilities divided by the number of shares of Common Stock outstanding. Pro
forma dilution per share to new investors represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
Offering and the pro forma as adjusted net tangible book value per share
immediately after completion of the Offering. After giving effect to the sale
by the Company of the 3,400,000 shares of Common Stock offered hereby
(assuming an initial public offering price equal to the Mid-Point and after
deducting the underwriting discounts and estimated offering expenses payable
by the Company) and the application of the net proceeds therefrom as discussed
under "Use of Proceeds," the pro forma as adjusted net tangible book value of
the Company as of March 31, 1998 was approximately $(1.5 million) or $(0.19)
per share. This represents an immediate increase in pro forma net tangible
book value of approximately $7.38 per share to the existing shareholders and
an immediate dilution in pro forma net tangible book value of approximately
$12.19 per share to purchasers of Common Stock in this Offering. The following
table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... 12.00
Pro forma net tangible book value (deficit) per share before
the Offering............................................... (7.28)
Increase per share attributable to the Offering............. 7.09
-----
Pro forma as adjusted net tangible book value deficit after
the Offering................................................. (0.19)
-----
Pro forma dilution per share to new investors................. 12.19
=====
</TABLE>
The following table shows, after giving effect to the Offering, the
difference between existing shareholders and new investors with respect to the
number of shares purchased from the Company and the total consideration and
average price per share paid to the Company, before deducting the underwriting
discounts and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 4,427,773 55.2% $ 2,200,000 5.1% $ .48
New investors........... 3,600,000 44.8% 40,800,000 94.9% $12.00
--------- ------ ----------- ------ ------
Total................. 8,027,773 100.0% $43,000,000 100.0%
========= ====== =========== ======
</TABLE>
The foregoing table assumes the conversion of the Series A Preferred Stock
into 177,776 shares of Common Stock and the issuance of 183,333 shares of
Common Stock (assuming an initial public offering price equal to the Mid-
Point) upon exercise of the Lender Warrant, in each case for nominal
consideration. In addition to the foregoing, upon closing of the Offering,
there will be (i) 1,524,037 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable at the initial public offering
price per share upon the exercise of the Seller Warrants; (ii) 603,636 shares
of Common Stock (assuming an initial public offering price equal to the Mid-
Point) issuable at the initial public offering price per share upon the
exercise of outstanding stock options held by directors and employees of the
Company; (iii) 108,333 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable at the initial public offering
price per share upon the exercise of rights granted to former B&M Printing
shareholders; and (iv) 83,333 shares of Common Stock (assuming an initial
public offering price equal to the Mid-Point) issuable at the initial public
offering price per share pursuant to the Company's deferred compensation plan.
18
<PAGE>
SELECTED HISTORICAL, PRO FORMA AND COMBINED FINANCIAL DATA
The following historical financial data and balance sheet data of the
Company and combined historical income statement data of the Company and the
Acquired Companies have been derived from the historical consolidated
financial statements of the Company, and the separate historical financial
statements of the Company and the Acquired Companies, respectively. The
consolidated financial statements of the Company and certain of the separate
financial statements of the Acquired Companies have been audited by
independent auditors to the extent and for the periods indicated in the
respective reports of KPMG Peat Marwick LLP (with respect to the financial
statements of Master Graphics, Inc., Lithograph Printing Company of Memphis
("Lithograph"), Blackwell Lithographers, Inc. ("Blackwell"), The Argus Press,
Inc. ("Argus"), Jones Printing Company, Inc. ("Jones"), Phoenix, and Hederman
Brothers, Inc. ("Hederman")), Arthur Andersen LLP (with respect to the
financial statements of Phoenix), Marlin and Edmondson, P.C. (with respect to
the financial statements of McQuiddy), Joseph Decosimo and Company, LLP (with
respect to Jones), Thompson Dunavant PLC (with respect to Master Printing),
Becker & Company, P.C. (with respect to Harperprints), and S. F. Fiser &
Company, P.A. (with respect to Phillips), all of which reports are included
elsewhere herein.
The combined historical income statement data for the Company and the
Acquired Companies are merely additions of such data for each of the
individual companies and do not purport to represent what the Company's
results of operations would have been if the operations of such businesses had
actually been combined during the periods indicated or to project the
Company's results of operations for any period. Such presentation is not
intended to be, and is not, in accordance with GAAP, since the Acquired
Companies were not owned or controlled by the Company prior to their
respective acquisitions. Additionally, the Acquired Companies operated with
varying fiscal years, and such data combines information from those varying
fiscal years into single periods and as of single dates. See Note 1 below.
The pro forma financial data are derived from the unaudited pro forma
condensed consolidated financial statements of the Company as of March 31,
1998 and for the year ended December 31, 1997 and the three month periods
ended March 31, 1997 and March 31, 1998, respectively, which statements are
included elsewhere in this Prospectus. Such pro forma financial statements
give effect to acquisitions consummated in 1997 and 1998, and the financing
thereof, as if those transactions had occurred as of January 1, 1997 in the
case of the pro forma income statement data, and as if those transactions had
occurred as of March 31, 1998 in the case of the pro forma balance sheet data.
The pro forma financial data do not purport to represent what the Company's
results of operations or financial position would actually have been if such
transactions in fact had occurred on such dates, or to project the Company's
results of operations or financial position for any period or date. Pro forma
adjustments are based on the purchase method of accounting.
Pro forma as adjusted income statement and balance sheet data give effect to
the transactions described in the previous paragraph and, in addition, give
effect to the use of proceeds from the Offering, primarily reducing debt and
the related interest expense.
The financial information should be read in conjunction with the historical
financial statements of the Company and certain of the Acquired Companies, and
the pro forma condensed consolidated financial statements of the Company,
including the related notes thereto, included elsewhere herein.
19
<PAGE>
<TABLE>
<CAPTION>
1993
-------
<S> <C>
COMPANY:
INCOME STATEMENT
DATA:
Revenue............ $10,514
Cost of revenue.... 8,339
-------
Gross profit...... 2,175
Selling, general
and administrative
expenses.......... 2,231
Amortization of
goodwill.......... --
-------
Operating income
(loss)........... (56)
Other income
(expense):
Redeemable warrant
valuation
adjustment....... --
Interest income... 102
Interest expense.. (365)
Other, net........ 85
-------
Other income
(expense),
net............ (178)
-------
Income (loss)
before income
taxes............ (234)
Income tax expense
(benefit)......... (43)
-------
Net earnings
(loss)........... $ (191)
=======
Net earnings
(loss) applicable
to common
shares........... N/A
=======
Earnings per share:
Basic............. ($0.05)
=======
Diluted........... ($0.05)
=======
Weighted average
shares
outstanding....... 4,000
OTHER DATA:
EBITDA(3)......... $ 1,610
Depreciation and
amortization..... 1,480
Cash flows
provided by (used
in):
Operating
activities...... 441
Investing
activities...... (2,077)
Financing
activities...... (99)
<CAPTION>
PRO FORMA THREE MONTHS ENDED MARCH 31,
AS ADJUSTED ----------------------------------------
YEARS ENDED JUNE 30,(1) SIX MONTHS EPRO FORMANDEPRO FORMAD YEAR ENDED
----------------------------------- DECEMBER AS ADJUSTED3AS ADJUSTED1, DECEMBER 31,
1994 1995 1996 1997 1997(1) 1997(2) 1997 1998 1997 1998
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMPANY:
INCOME STATEMENT
DATA:
Revenue............ $10,804 $11,426 $13,244 $13,433 $32,394 $153,971 $3,161 $28,020 $ 35,126 $38,462
Cost of revenue.... 8,098 8,928 9,955 11,312 26,528 115,181 2,691 20,654 26,219 29,119
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
Gross profit...... 2,706 2,498 3,288 2,121 5,866 38,790 470 7,366 8,907 9,343
Selling, general
and administrative
expenses.......... 2,587 2,570 2,691 3,021 5,990 29,223 552 4,669 6,360 6,686
Amortization of
goodwill.......... -- -- -- -- 98 1,022 84 196 255 242
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
Operating income
(loss)........... 119 (72) 597 (900) (222) 8,545 (166) 2,501 2,292 2,415
Other income
(expense):
Redeemable warrant
valuation
adjustment....... -- -- -- -- (1,635) -- -- -- -- --
Interest income... 84 67 68 68 48 135 21 85 37 96
Interest expense.. (403) (334) (376) (439) (2,181) (6,987) (157) (2,248) (2,115) (1,982)
Other, net........ 83 44 44 23 191 (126) 42 101 59 120
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
Other income
(expense),
net............ (236) (223) (264) (348) (3,578) (6,978) (94) (2,062) (2,019) (1,766)
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
Income (loss)
before income
taxes............ (117) (295) 334 (1,248) (3,799) 1,567 (260) 439 273 649
Income tax expense
(benefit)......... (25) (86) 161 25 20 674 (11) (4) 117 279
-------- -------- -------- -------- ---------------- ------------ ------- -------- ----------- -----------
Net earnings
(loss)........... $ (92) $ (209) $ 172 $(1,273) $(3,819) $ 893 $ (249) $ 443 $ 156 $ 370
======== ======== ======== ======== ================ ============ ======= ======== =========== ===========
Net earnings
(loss) applicable
to common
shares........... N/A N/A N/A N/A N/A $ 663 N/A N/A 98 $ 312
======== ======== ======== ======== ================ ============ ======= ======== =========== ===========
Earnings per share:
Basic............. ($0.02) ($0.05) 0.04 ($0.32) ($0.95) $ 0.09 ($0.06) $ 0.11 $ 0.01 $ 0.04
======== ======== ======== ======== ================ ============ ======= ======== =========== ===========
Diluted........... ($0.02) ($0.05) 0.04 ($0.32) ($0.95) $ 0.09 ($0.06) $ 0.10 $ 0.01 $ 0.04
======== ======== ======== ======== ================ ============ ======= ======== =========== ===========
Weighted average
shares
outstanding....... 4,000 4,000 4,000 4,000 4,000 7,667 4,000 4,000 7,667 7,667
OTHER DATA:
EBITDA(3)......... $ 1,152 $ 795 $ 1,315 $ (186) $ (205) $ 13,991 $ 48 $ 3,678 $ 3,405 $ 3,975
Depreciation and
amortization..... 867 747 605 623 1,413 5,437 151 1,174 1,344 1,048
Cash flows
provided by (used
in):
Operating
activities...... 795 (52) 628 (80) 2,493 N/A 1,076 (1,613) N/A N/A
Investing
activities...... (248) (47) (364) (17,543) (28,840) N/A (132) (31,379) N/A N/A
Financing
activities...... (397) (211) (563) 18,550 27,023 N/A (733) 36,661 N/A N/A
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------------------------------------- -------------------------
AT JUNE 30, AT AT AT AS ADJUSTED AT
------------------------------- DECEMBER 31, MARCH 31, MARCH 31, MARCH 31,
1993 1994 1995 1996 1997 1997 1998 1998 1998
----- ----- ----- ------ ------ ------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $ 738 $ 866 $ 765 $1,286 $3,056 $6,691 $18,541 $21,807 $24,807
Property, plant and
equipment, net....... 2,458 2,276 1,934 2,007 20,472 29,550 45,117 52,251 52,251
Total assets.......... 8,902 6,330 6,102 6,426 37,215 86,384 127,355 139,290 138,680
Long-term obligations,
including current
installments......... 5,886 3,566 3,382 2,794 30,612 69,317 103,859 113,219 82,265
Redeemable common
stock warrants....... -- -- -- -- 638 3,376 2,026 2,026 --
Redeemable preferred
stock................ -- -- -- -- -- -- 1,350 1,350 1,350
Shareholders' equity
(deficit)............ 1,972 1,880 1,671 1,843 780 (1,596) 1,742 1,794 37,164
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR(4)
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
COMBINED HISTORICAL INCOME
STATEMENT DATA OF THE COMPANY
AND THE ACQUIRED COMPANIES:
Revenue........................ $115,526 $120,834 $134,330 $142,637 $151,759
Gross profit................... 27,751 30,074 34,073 35,329 34,963
Selling, general and
administrative expenses....... 23,596 25,746 29,413 29,168 28,553
Operating income............... 4,155 4,328 4,660 6,161 6,410
</TABLE>
- --------
(1) Effective January 1, 1998, the Company changed its annual accounting
period to a calendar year.
(2) The pro forma financial information presents certain information for the
Company, as adjusted for (i) the effects of the acquisitions of the
Acquired Companies, (ii) the effects of certain pro forma adjustments to
the historical financial statements of the Acquired Companies which are
directly related to these acquisitions, (iii) the exercise of a warrant by
the Selling Shareholder to purchase 266,664 shares of Common Stock for
nominal value, (iv) the issuance of the Series A Preferred Stock, and (v)
the consummation of the Offering and the application of the net proceeds
therefrom, as if the foregoing had occurred on January 1, 1997, with
respect to income statement data, and March 31, 1998, with respect to
balance sheet data. See the Unaudited Pro Forma Condensed Consolidated
Financial Statements and notes thereto contained elsewhere in this
Prospectus. The conversion of the Series A Preferred Stock into 177,776
shares of Common Stock and the exercise of the Lender Warrant have not
been assumed in the pro forma balance sheet data; however their assumed
conversion and exercise, respectively, have been considered in computing
pro forma diluted earnings per share. The pro forma adjustments reflect,
among other things, a reduction in interest expense and interest rates on
the Credit Facilities as a result of the application of the net proceeds
of the Offering. The pro forma financial data do not purport to represent
what the Company's results of operations or financial position actually
would have been had the foregoing events, in fact, occurred on the date or
at the beginning of the period indicated, nor are they intended to project
the Company's results of operations or financial position for any future
date or period.
(3) Based on its experience in the general commercial printing industry, the
Company believes that EBITDA is an important tool for measuring the
performance of companies in the industry (including potential acquisition
targets) in several areas such as liquidity, operating performance and
leverage. In addition, lenders use EBITDA as a criterion in evaluating
companies in the industry, and the Company's financing arrangements
contain covenants in which EBITDA is used as a measure of financial
performance. The EBITDA measure for the Company may not be consistent with
similarly titled measures for other companies. EBITDA should not be
considered as an alternative to operating or net income (as determined in
accordance with GAAP) as an indicator of the Company's performance or to
cash flow from operations (as determined in accordance with GAAP) as a
measure of liquidity. See the comparative historical statements of cash
flows included herein and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "--Liquidity and
Capital Resources" for a discussion of other measures of performance
determined in accordance with GAAP and the Company's sources and
applications of cash flow.
(4) In addition to the Company itself which previously had a June 30 year end,
McQuiddy (June 30) and Phoenix (January 31) had fiscal year ends that
differed from December 31, which is the year end the Company will use
effective January 1, 1998.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
and the pro forma financial statements and related notes of the Company, the
financial statements of the Acquired Companies presented herein and Selected
Historical, Pro Forma and Combined Financial Data included elsewhere in this
Prospectus.
INTRODUCTION
Since June 1997, the Company has acquired 10 high quality, general
commercial printing companies which the Company believes are market leaders in
their respective geographic areas in terms of customer service, responsiveness
and quality. Each of the Acquired Companies was acquired with a combination of
cash, notes and warrants. The Company financed the cash portion of the
purchase price primarily with debt. See Note 2 in "Notes to Unaudited Pro
Forma Condensed Consolidated Financial Statements" for information regarding
the consideration paid for the Acquired Companies. As a result, the Company
has substantial interest expense that will be reduced by application of the
net proceeds from the Offering. Each acquisition was accounted for as a
purchase, and any purchase price in excess of the fair value of the assets
acquired was allocated to goodwill which is amortized over 40 years. A
substantial portion of this non-cash expense will likely be non-deductible for
tax purposes.
The Acquired Companies were all closely-held businesses, and several were S
corporations. In many cases, the tax structure influenced the historical level
of owners' compensation. Many of the owners have agreed to certain reductions
in their compensation and benefits following the acquisition by the Company.
As a result of the acquisitions and the Company's increased size, the
Company expects to receive volume discounts and rebates from manufacturers and
suppliers of paper, film, printing plates and ink. The Company has in place
arrangements with five major paper suppliers which should reduce the Company's
costs. See "Risk Factors--Limited Combined Operating History" and "--Raw
Materials--Paper."
The Company has incurred and will incur various non-cash charges related to
this Offering. In the fourth quarter of 1997, the Company incurred a charge of
$765,000 related to deferred compensation for executives recruited in
connection with the Offering. Also, the Company incurred charges for increases
in the value of redeemable warrants issued to the Company's lenders in the
amounts of approximately $1.6 million during the six months ended. Upon the
closing of the Offering, the Company will incur a one-time charge related to
the write-off of deferred loan costs of approximately $3.7 million.
PRO FORMA RESULTS OF OPERATIONS FOR THE COMBINED COMPANIES
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
The following table sets forth certain unaudited pro forma financial data
for the periods indicated (dollars in millions) and such results as a
percentage of revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C> <C> <C>
Revenue............................................... $35.1 100.0% $38.5 100.0%
Gross profit.......................................... 8.9 25.3 9.3 24.2
Selling, general and administrative expenses.......... 6.4 18.2 6.7 17.4
Operating income...................................... 2.3 6.5 2.4 6.2
Interest expense...................................... 1.9 5.4 1.8 4.7
</TABLE>
Revenue. Revenue increased 9.7% from $35.1 million for the three months
ended March 31, 1997 to $38.5 million for the three months ended March 31,
1998. The increase in revenue was attributable primarily to increased volume
at nine of the Company's 11 divisions. Included in the revenue for the 1998
period was approximately $600,000 generated through Master Central.
22
<PAGE>
Gross Profit. Gross profit increased 4.5% from $8.9 million for the three
months ended March 31, 1997 to $9.3 million for the three months ended March
31, 1998. The increase in gross profit was primarily attributable to increased
revenue but was partially offset by a decrease in gross margin from 25.3% to
24.2%. The gross margin decrease was primarily attributable to temporary
operating inefficiencies at two divisions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 4.7% from $6.4 million for the three months
ended March 31, 1997 to $6.7 million for the three months ended March 31,
1998. However, as a percentage of revenue, selling, general and administrative
expenses decreased from 18.2% to 17.4% primarily due to increased sales
volume. The overall increase in selling, general and administrative expenses
was partially due to increased selling commissions resulting from increased
sales volume. In addition, general corporate overhead increased substantially
in the 1998 period on account of the development of corporate infrastructure,
including the addition of senior management and information systems to support
the execution of the Company's internal and external growth strategies.
Interest Expense. Interest expense declined 5.3% from $1.9 million for the
three months ended March 31, 1997 to $1.8 million for the three months ended
March 31, 1998. The decrease in interest expense was primarily attributable to
principal payments made from cash flow to reduce overall indebtedness of the
Company.
COMBINED COMPANIES
RESULTS OF OPERATIONS
The following table sets forth certain unaudited combined financial data for
the periods indicated (dollars in millions) and such results as a percentage
of revenue.
<TABLE>
<CAPTION>
FISCAL YEAR(1) PRO FORMA
---------------------------------------- CALENDAR
1995 1996 1997(2) YEAR 1997
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $134.3 100.0% $142.6 100.0% $151.8 100.0% 154.0 100.0%
Gross profit............ 34.1 25.4 35.3 24.8 35.0 23.1 38.8 25.2
Selling, general and
administrative
expenses............... 29.4 21.9 29.2 20.5 28.6 18.8 29.2(3) 19.0
Operating income........ 4.7 3.5 6.2 4.4 6.4 4.2 8.5 5.5
</TABLE>
- --------
(1) The Company and several of the Acquired Companies have fiscal year ends
which differ from December 31, which is the year end the Company will use
effective January 1, 1998. The financial data set forth above reflect the
respective fiscal year ends of the Acquired Companies in the calendar
years indicated.
(2) For Blackwell, Lithograph, Sutherland, Argus, and Jones, these amounts
reflect combined pre- and post-acquisition activity during the year.
(3) Does not include approximately $1.0 million of goodwill amortization.
The combined results of operations of the Company and the Acquired Companies
for the periods presented do not represent combined results of operations
presented in accordance with GAAP, but are only a summation of the revenue,
gross profit, selling, general and administrative expenses and operating
income of the individual companies on an historical basis. The combined
results of operations assume that each of the Acquired Companies were combined
from the beginning of each period presented. The combined results also exclude
the effect of pro forma adjustments and may not be comparable to, and may not
be indicative of, the Company's post-combination results of operations because
(i) the Acquired Companies were not under common control or management during
the periods presented; (ii) the Company will incur incremental costs for its
corporate management and the costs of being a public company; (iii) the
Company will use the purchase method to record the acquisitions of the
Acquired Companies at different points in time, resulting in the recording of
goodwill that will be amortized over 40 years; and (iv) the combined data do
not reflect the potential benefits and cost savings the Company expects to
realize when operating as a combined entity.
23
<PAGE>
Pro Forma Calendar Year 1997 Compared to Combined Fiscal Year 1997
Revenue on a pro forma calendar year basis was $2.2 million (1.5%) greater
than the combined fiscal year basis, as a result of the timing of revenue for
the non-calendar year companies (Master Graphics, Phoenix and McQuiddy). Gross
profit increased for the reason stated above, along with the impact of less
depreciation on a pro forma basis reflecting accelerated methods used by
certain of the Acquired Companies. Selling, general and administrative expense
were relatively unchanged as a percentage of revenue.
Fiscal Year 1997 Compared to Fiscal Year 1996
Revenue. Revenue increased 6.5% from $142.6 million for fiscal year 1996 to
$151.8 million for fiscal year 1997. The increase in revenue was primarily
attributable to the Phoenix acquisition of substantially all the operating
assets and business of the Cunningham Group, Inc. in January 1996. The first
complete fiscal year of operations including the results of the Cunningham was
Phoenix's year ended January 31, 1997, resulting in an increase in revenue of
approximately $5.8 million. Further revenue growth was attributable to volume
increases and a continued strong economy. Of the Acquired Companies, eight
reported increases in revenues from fiscal 1996 to the corresponding period in
1997.
Gross Profit. Gross profit decreased 0.8% from $35.3 million for fiscal 1996
to $35.0 million for fiscal 1997. Gross margin decreased from 24.8% to 23.1%
from fiscal year 1996 to the corresponding period in 1997. The decrease in
gross profit was primarily attributable to the increased labor, depreciation
and lease expense associated with the operation of new presses at B&M
Printing, Argus and McQuiddy which was partially offset by an increase in
revenue during the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 1.7% from $28.9 million for fiscal year 1996
to $28.4 million for fiscal year 1997. The decrease was attributable to a
reduction in compensation and certain other expenses at three of the Acquired
Companies. This decrease was partially offset by the increase in selling costs
which accompany volume increases seen during the same period.
Fiscal Year 1996 Compared to Fiscal Year 1995
Revenue. Revenue increased 6.2% from $134.3 million for fiscal year 1995 to
$142.6 million for fiscal year 1996. The increase in revenue was primarily
volume driven and attributable to a strong economy in the markets of the
Company and the Acquired Companies. The increase in revenue also was
attributable to the acquisition of several large accounts at Argus and
Lithograph, along with increased demand from the existing customer base
throughout the Company.
Gross Profit. Gross profit increased 3.5% from $34.1 million for fiscal 1995
to $35.3 million for fiscal year 1996. The increase in gross profit was
primarily attributable to improved operating leverage from growth in sales
volume. Gross margin decreased from 25.4% to 24.8% from fiscal year 1995 to
fiscal year 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately 1.7% from $29.4 million for
fiscal year 1995 to $28.9 million for fiscal year 1996. The decrease in
expense was attributable to a 1996 corporate restructuring at Sutherland
Printing Company, Inc. which resulted in a decrease of approximately $1.1
million in these expenses during 1997. This decrease was partially offset by
the increase in selling costs which accompany volume increases seen during the
same period.
24
<PAGE>
THE COMPANY
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated (dollars in millions) and such results as a percentage of revenue.
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
FISCAL YEAR(1) ENDED MARCH 31,
---------------------------------------- DECEMBER 31, ---------------------------
1995 1996 1997 1997 1997 1998
------------ ------------ ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $11.4 100.0% $13.2 100.0% $13.4 100.0% $32.4 100.0% $3.2 100.0% $28.0 100.0%
Gross profit............ 2.5 21.9 3.3 25.0 2.1 15.7 5.9 18.2 .5 15.6 7.4 26.4
Selling, general and
administrative
expenses............... 2.6 22.8 2.7 20.5 3.0 22.4 6.0 18.5 .6 18.8 4.7(2) 16.8
Operating income
(loss)................. (.1) (0.9) .6 4.5 (.9) (6.7) (.2) (0.6) (.2) (6.2) 2.5 8.9
Interest expense........ (.3) (2.6) (.4) (3.0) (.4) (3.0) (2.2) (6.8) (.2) (6.2) (2.2) (7.9)
Income tax expense
(benefit).............. (.1) (0.8) .2 1.5 -- -- -- -- -- -- -- --
Net earnings (loss)..... (.2) (1.8) .2 1.5 (1.3) (9.7) (3.8) (11.7) (.2) (6.2) .4 1.4
</TABLE>
- --------
(1) Effective January 1, 1998, the Company changed its annual accounting
period to a calendar year.
(2) Does not include approximately $196,000 of goodwill amortization.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenue. Revenue increased approximately 775% from $3.2 million for the
three months ended March 31, 1997 to $28.0 million for the year ended March
31, 1998. Revenue growth was attributable primarily to the implementation of
the Company's acquisition strategy; six acquisitions took place during the
last three quarters of 1997, two acquisitions occurred on March 1, 1998, and
one acquisition occurred in May 1998.
Gross Profit. Gross profit increased approximately 1380% from $500,000 for
the three months ended March 31, 1997 to $7.4 million for the three months
ended March 31, 1998. The increase in gross profit was attributable primarily
to the implementation of the Company's acquisition strategy described above
and to a lesser degree to a decrease in labor and lease costs related to the
sale by B&M Printing of a web press.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately 683% from $600,000 for the
three months ended March 31, 1997 to $4.7 million for the three months ended
March 31, 1998. The increase was attributable primarily to the implementation
of the Company's acquisition strategy and an increase in corporate level
expenses incurred in preparation of becoming a public company.
Interest Expense. Interest expense increased approximately 1000% form
$200,000 for the three months ended March 31, 1997 to $2.2 million for the
three months ended March 31, 1998. The Company financed a substantial portion
of the purchase price for each of the Acquired Companies with debt financing
and the increase in interest expense was attributable primarily to such
financing activities.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Revenue. Revenue increased approximately 1.5% from $13.2 million for the
year ended June 30, 1996 to $13.4 million for the year ended June 30, 1997.
Revenue growth was attributable to the addition of an eight-color heat set web
press and was partially offset by a decrease in the level of sheet fed
business due to market conditions.
Gross Profit. Gross profit decreased 36.4% from $3.3 million for the year
ended June 30, 1996 to $2.1 million for the year ended June 30, 1997. Gross
margin decreased from 25.0% to 15.7% from the year ended June 30, 1996 to the
corresponding period in 1997. The decrease in gross profit was primarily
attributable to the increased labor costs associated with operation of the new
web press as well as lease expense. This decrease was partially offset by an
increase in revenue.
25
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 11.1% from $2.7 million for the year ended
June 30, 1996 to $3.0 million for the year ended June 30, 1997. The increase
was attributable to increasing revenue as well as personnel related to the web
press. This increase was partially offset by a reduction in professional fees
and prepayment penalties compared to the previous period.
Interest Expense. Interest expense remained relatively consistent at
approximately $.4 million in the year ended June 30, 1996 and in the year
ended June 30, 1997.
Six Months Ended December 31, 1997 compared to Year Ended June 30, 1997.
Revenue increased by 142%, which primarily reflects the addition of three
acquisitions for the full six months and one acquisition for three months. The
increase in gross margin reflects higher margins realized at certain of the
Acquired Companies; the decrease in selling, general and administrative
expense as a percentage of revenue reflects the mix of such expenses from
Acquired Companies. The increase in interest expense reflects increased debt
resulting from acquisitions during the period. The net loss for the six months
ended December 31, 1997 was increased by $1.6 million due to the change in the
fair value of redeemable Common Stock purchase warrants issued to lenders
during that period. Income tax benefits were not recorded on the loss incurred
during the period because the Company has not concluded that realization of
such loss is more likely than not to occur.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Revenue. Revenue increased 15.8% from $11.4 million for the year ended June
30, 1995 to $13.2 million for the year ended June 30, 1996. The increase in
revenues was primarily volume driven and attributable to a strong economy in
the Company's market. One of the Company's large accounts closed down its in-
house print shop resulting in an increase in business for the Company.
Gross Profit. Gross profit increased 32.0% from $2.5 million for the year
ended June 30, 1995 to $3.3 million for the year ended June 30, 1996. Gross
margin increased from 21.9% to 25.0% from the year ended June 30, 1995 to the
corresponding period in 1996. The increase in gross profit was primarily
attributable to efficiencies gained from the sales volume increases.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3.8% from $2.6 million for the year ended
June 30, 1995 to $2.7 million for the year ended June 30, 1996. The increase
was attributable to the increase in selling costs that accompany the volume
increases during the same period.
Interest Expense. Interest expense increased 33.3% from $0.3 million for the
year ended June 30, 1995 to $0.4 million for the year ended June 30, 1996. The
increase related primarily to an increase in amounts borrowed to fund working
capital associated with increasing sales.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company and the Acquired Companies have financed their
operations and equipment with cash flow from operations, capital leases and
secured loans through commercial banks or other institutional lenders and
credit lines from commercial banks. The Company has financed its acquisitions
primarily with funds from its Senior Credit Facility and, to a lesser extent,
with subordinated notes payable to the former owners of the Acquired
Companies. Upon consummating acquisitions, the Company has repaid or
refinanced a substantial amount of the debt of the Acquired Companies with
funds provided under its Senior Credit Facility.
The Company anticipates that its primary requirement for capital after
completion of the Offering will be for the acquisition of additional general
commercial printing companies. The Company intends to finance its acquisitions
with a combination of borrowings under its Senior Credit Facility and
Revolving Credit Facility, and issuance of Common Stock and subordinated
notes. The Company also requires capital to acquire equipment
26
<PAGE>
used in the operation of its printing divisions. During fiscal years ended
June 30, 1996 and 1997, the six-month period ended December 31, 1997 and the
three month periods ended March 31, 1997 and 1998, the Company's capital
expenditures amounted to an aggregate of approximately $374,000, $4.2 million,
$328,000, $132,000 and $173,000, respectively. Fiscal year 1997 expenditures
include approximately $2.6 million related to the financing of a web press.
See "Certain Transactions". The Company generally finances equipment
acquisitions with capital leases, term loans, borrowings under the Credit
Facilities and cash flow from operations.
Presently, the Company's largest source of capital is its Senior Credit
Facility. The Senior Credit Facility closed in June 1997 and has been
periodically increased to provide funding for the acquisitions completed since
that time. The Senior Credit Facility presently provides for a maximum of $85
million of credit. As of March 31, 1998, approximately $78.7 million had been
borrowed by the Company under the Senior Credit Facility. Of the outstanding
borrowings, (i) approximately $30 million is owed pursuant to a term note due
in March 2003, payable in quarterly installments of principal in the amount of
$937,500, plus interest payable monthly at a floating rate equal to the London
Interbank Offered Rate ("LIBOR") plus 3.25%; (ii) approximately $23.7 million
is owed pursuant to a term note due in March 2003, payable in quarterly
installments of principal in the amount of $25,000, plus interest payable
monthly at an annual rate of 12%, which rate may be converted at the option of
the Company to a floating rate; and (iii) approximately $25 million is owed
pursuant to two separate term notes in the principal amounts of $15 million
and $10 million, respectively, due in March 2003, each payable in quarterly
installments of principal in the amount of $12,500 commencing in July 1998,
plus interest payable monthly at an annual rate of 12%, which may be converted
at the option of the senior lender to a floating rate equal to prime plus
3.5%. The Senior Credit Facility is secured by a first priority security
interest in all assets of Premier Graphics except inventory and accounts
receivable, and by a second priority security interest in inventory and
accounts receivable (junior only to the Revolving Credit Facility), and is
senior in priority of payments to all other debt of the Company. Under the
Senior Credit Facility, the Company is required to maintain certain interest
coverage, fixed charge coverage and leverage ratios. The Senior Credit
Facility also contains covenants limiting capital expenditures and the payment
of dividends and requiring a minimum level of earnings before interest, taxes,
depreciation and amortization. The Senior Credit Facility requires mandatory
prepayment based on 75% of annual excess cash flows. The Senior Credit
Facility may be prepaid with a prepayment penalty of 3% of the amount prepaid
during the first year of a loan, 2% during the second year, 1% during the
third year, and without penalty after the third anniversary of the loan except
that the Senior Credit Facility may be prepaid without penalty with the
proceeds of an initial public offering.
In addition, as of March 31, 1998 the Company had borrowed $4.3 million from
the Selling Shareholder to partially finance its initial acquisitions, which
loan is payable in full in May 2002 and bears interest at an annual rate of
13.25%, payable monthly. The loan is secured by a subordinated lien on all
assets of Premier Graphics and may be prepaid at any time without penalty. The
Company intends to prepay the loan in full out of the net proceeds from the
Offering.
As of March 31, 1998 the Company had financed approximately $13.5 million of
the aggregate amount paid for the Acquired Companies by issuing unsecured
subordinated notes to the sellers. Each of these subordinated notes bears
interest at an annual rate of 12%, payable monthly, and is subject to
prepayment at the option of the Company only upon payment of a penalty which
generally equals or exceeds 20% of the amount prepaid. Many of the
subordinated notes may be prepaid out of net proceeds of the Offering, with
the consent of the senior lender, if requested by the holders of the
subordinated notes.
As of March 31, 1998, the Company had approximately $6.3 million of
borrowing capacity under its Senior Credit Facility, which may be utilized to
finance acquisitions with the approval of the senior lender. The Company
intends to use approximately $29.7 million of the net proceeds from the
Offering ($35.8 million if the Underwriters' overallotment option is exercised
in full) to prepay amounts due under the Senior Credit Facility. The Company
has received the commitment of the senior lender to increase the Senior Credit
Facility to $90 million, subject to the negotiation of definitive loan
agreements, satisfaction of certain conditions, and the closing of the
Offering. Pursuant to the commitment, the Senior Credit Facility will consist
of two term loans, the
27
<PAGE>
maximum principal amounts of which shall be $55 million ("Term Loan A") and
$65 million ("Term Loan B"), respectively, but which will not exceed in the
aggregate the $90 million commitment. The amount of funding under each term
loan will be in the discretion of the Senior Lender. Term Loan A will bear
interest at either the index rate (equal to the higher of prime or the
overnight Federal funds rate plus .5%) or LIBOR plus 2.5%, at the Company's
option. Term Loan B will bear interest at either the index rate (equal to the
higher of prime or the overnight Federal funds rate plus .5%) plus .5% or
LIBOR plus 3%. Term Loan A will be payable in full five years after initial
funding, and principal will be payable in quarterly installments based on an
eight year amortization. Term Loan B will be payable in full on the same date
as Term Loan A, and principal will be payable in annual installments of
$350,000. The security for the Senior Credit Facility will be the same as
presently exists, and the Company's covenants will be adjusted only to take
into account the effect of the Offering. Both loans may be prepaid in whole or
in part, without penalty, out of the net proceeds of any subsequent public
offering of Common Stock, but may otherwise be prepaid only upon payment of
prepayment penalties of 3%, decreasing to 2% during the second year of the
loan, 1% during the third year and without penalty after the third anniversary
of the loan.
The Company also may borrow under the Revolving Credit Facility, which is a
$7.5 million working capital line of credit with a commercial bank. Borrowings
under the Revolving Credit Facility are limited by a borrowing base
calculation equal to 85% of eligible receivables and 50% of eligible
inventory. The Revolving Credit Facility is secured by a first priority
security interest in Premier Graphics' inventory and accounts receivable and a
second priority security interest in certain of the Company's other assets,
and contains various covenants, including the maintenance of certain financial
ratios. The Revolving Credit Facility matures on March 31, 2000, and bears
interest at a floating rate (8.5% at December 31, 1997) based on the bank's
base lending rate. The Company is negotiating with the bank to increase the
amount of the Revolving Credit Facility to $15 million subject to the
negotiation of definitive loan agreements, satisfaction of certain conditions,
and the closing of the Offering.
The Company anticipates that its cash flow from operations will provide cash
in excess of its normal working capital needs, debt service requirements and
planned capital expenditures for property and equipment. Master Graphics, Inc.
is dependent upon the cash flow of and the transfer of funds from its
subsidiary, Premier Graphics, which, under the Credit Facilities is subject to
restrictions on its ability to pay dividends to Master Graphics, Inc.
The Company believes its exposure to Year 2000 issues is limited to the
purchase of computer hardware at certain locations. The Company anticipates
that the cost of such computer hardware will be approximately $525,000.
Operating and financial software vendors have certified that current versions
of their products are Year 2000 compliant, or will be by fall 1998. The
Company is undertaking an inventory of its computer hardware to determine
equipment age and the capability to operate Windows based software. Based on
the Company's internal investigation, it does not believe Year 2000 issues
will have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company does not believe that any recently issued accounting standards
will have a material impact on the Company's consolidated financial
statements. Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income which will be effective for the Company's year
ending December 31, 1998, is not expected to have a material impact on the
Company's disclosures because the Company has no material items comprising
"other comprehensive income" as defined in SFAS 130. SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, which will be
effective for the Company's year ending December 31, 1998, is not expected to
have a material impact on the Company's disclosures because the Company
currently operates in the single segment of general commercial printing. SFAS
132, Employers' Disclosures about Pensions and Other Postretirement Benefits,
which will be effective for the Company's year ending December 31, 1998, is
not expected to have a material impact on the Company's disclosures because
SFAS 132 deals primarily with disclosures related to deferred benefit pension
plans and other postretirement benefits, neither of which are material to the
Company.
28
<PAGE>
INDUSTRY OVERVIEW
The printing industry is one of the largest and most fragmented industries
in the United States, with total estimated 1996 sales of $132 billion among an
estimated 50,000 printing companies according to the PIA. The printing
industry includes general commercial printing, financial printing, printing
and publishing of books, newspapers and periodicals, quick printing and
production of business forms and greeting cards. The Company focuses on
providing general commercial printing and related services. According to the
PIA, this segment had approximately $43 billion in revenue in 1996 compared to
$40 billion in 1995. There are approximately 25,000 general commercial
printing companies in the United States according to the PIA.
The general commercial printing industry involves developing a customer's
concept into printable material through the use of design and electronic
prepress services; using printing presses to imprint the printable material
onto paper; cutting, folding, and binding the finished product; and, finally,
storing and distributing the finished product at the customer's direction.
Historically, design and prepress services were performed by advertising
agencies, specialty printing services or the customer, but because of the
decreased cost of and technological advancements in computer-aided design
software and hardware, general commercial printing companies are able to offer
electronic prepress services to their customers on a more efficient and cost-
effective basis.
The primary printing process used by the general commercial printing
industry is offset lithography. Paper is fed into the printing presses
utilized in the offset lithography process either sheet by sheet ("sheet fed
presses") or on continuous rolls ("web presses"). The sheet fed presses are
generally more cost-effective than web presses for jobs of fewer than 50,000
impressions. Web presses are generally used for large printing jobs such as
catalogs and magazines. Sheet fed presses vary in size and are capable of
printing up to 16 pages of letter-sized finished product on a 25 by 38-inch
sheet of paper with eight pages on each side (known as 16-page "signature") at
speeds of up to 15,000 impressions per hour. Web presses print on a continuous
roll of paper and can print on both sides of the paper at the same time, print
32-page signatures at speeds of over 40,000 impressions per hour and fold,
glue and perforate a finished product.
Large printing companies making extensive use of web presses include R.R.
Donnelley, World Color Press and Quebecor. These companies specialize in large
production runs of over 50,000 copies generally pursuant to long-term
contracts. General commercial printing companies relying heavily on sheet fed
presses tend to be smaller, locally owned and operated companies that service
customers predominately on a job-by-job basis. These companies compete by
offering a high level of customer service and rapid turnaround of projects.
Due to the fragmented nature of the general commercial printing industry,
the Company believes an abundance of acquisition opportunities exist. The
general commercial printing business is characterized by a significant number
of locally oriented, privately-held businesses, many of which are viable
acquisition candidates. Owners of these independent companies are often
motivated to sell their printing businesses to access the financial capital
and other operating strengths the Company has to offer to grow the business,
increase their personal financial liquidity or facilitate retirement.
Moreover, consolidators, such as the Company, are motivated to purchase
independent companies because of substantial potential economies of scale to
be achieved from a large multi-plant and geographically diverse organization.
29
<PAGE>
BUSINESS
GENERAL
The Company is a rapidly growing provider of general commercial printing
services to customers throughout the United States. Since June 1997, the
Company has acquired 10 high quality, general commercial printing companies
which the Company believes are market leaders in their respective geographic
areas in terms of customer service, responsiveness and quality. Each of the
Acquired Companies operates as a separate division of the Company, providing a
full range of general commercial printing services. The Acquired Companies
have an average operating history of over 50 years, established customer
relationships and strong reputations for customer service, responsiveness and
quality. The Company's acquisition and operating strategies are focused on
continued selective acquisitions and internal growth. The Company expects that
this strategy will enable each division to offer broader services to existing
customers and attract new customers for existing services. The Company's pro
forma consolidated revenue and operating income for the twelve months ended
December 31, 1997 were $154.0 million and $8.5 million, respectively. The
Company's pro forma consolidated revenue and operating income for the three
months ended March 31, 1998 were $38.5 million and $2.4 million, respectively.
The Company provides service in all areas of general commercial printing,
including prepress, printing and postpress services. The Company's products
include annual reports, direct mail pieces, sales literature, point of
purchase materials, market letters, newsletters, training manuals, product
brochures, catalogs and university recruiting materials for customers such as
Federal Express, IBM, Provident Life, W. W. Grainger, Turner Broadcasting and
G. D. Searle. The Company's operating philosophy emphasizes responding rapidly
to customer requirements and producing high quality printed materials.
Responsiveness is essential because of the typically short lead time on most
general commercial printing jobs.
OPERATING STRATEGY
The Company has developed an integrated operating and acquisition strategy
designed to maximize internal and external growth and maintain and expand its
position as a leading provider of general commercial printing services. The
Company's operating strategy is to combine the service and responsiveness of a
locally-oriented, independent general commercial printing company with the
resources and economies of scale of a large company. The key elements of the
Company's operating strategy are as follows:
. Provide Premium, High Quality Service. The Company targets the premium
segment of the general commercial printing market. The Company's
customers generally choose printers primarily based on service, quality
and responsiveness, and not based solely on price.
. Cross-Sell Production Capabilities. In order to maximize "same store"
revenue growth and profitability, the Company has developed its
proprietary Master Central equipment utilization and marketing process.
Master Central is designed to maximize utilization of the Company's
existing printing capacity and capabilities by (i) allocating, on a real
time basis, certain printing projects to a particular division based on
equipment capabilities and availability; and (ii) training the Company's
sales force to market the production capacity and capabilities of all of
the Company's divisions. See "--Master Central."
. Achieve Economies of Scale. As a result of centralized purchasing, the
Company expects to receive volume discounts and rebates from
manufacturers of paper, film, printing plates and ink that would be
unavailable to the Company's divisions on a stand-alone basis. Paper is
generally the largest cost item for general commercial printing
companies, including the Company. The Company's paper costs were
approximately 27% of revenue for the six months ended December 31, 1997.
The Company has pricing arrangements with five paper suppliers which
provide discounts and rebates based on volume and is currently discussing
with certain manufacturers purchase terms for film, printing plates and
ink and other printing supplies. In addition, the Company intends to
centralize administrative items such as insurance and employee benefits
to further reduce costs.
. Operate on a Decentralized Basis. The Company intends to retain the key
managers of the businesses it acquires and allow them to maintain
substantial responsibility for the day-to-day operations, profitability
and growth of those businesses as separate divisions. The Company
believes that the operating autonomy provided by the decentralized
structure, together with the implementation of
30
<PAGE>
reporting systems and financial controls at the corporate level, will
enable it to combine the service and responsiveness of a locally-oriented,
independent general commercial printing company with the resources and
economies of scale of a large company. Moreover, the Company intends to
motivate its employees and align their interests with those of the
Company's shareholders by using Common Stock as a currency in its
acquisition program and by granting stock options as a part of employee
compensation.
ACQUISITION STRATEGY
The Company's acquisition strategy is to become a leading provider of
general commercial printing services in the United States through the
acquisition of independent general commercial printing companies that are well
managed and market leaders in customer service, responsiveness and quality.
The Company believes that its profile within the industry and its philosophy
of decentralized operations and centralized administration enable it to
identify and acquire high quality, market leading independent general
commercial printing companies. The key elements of the Company's acquisition
strategy are as follows:
. Acquire High Quality, Well Managed Companies. The Company evaluates
potential acquisition candidates based on a variety of factors, including
reputation for quality, service, strength of management, competitive
market position, historical financial performance, growth potential,
customer base, equipment capabilities and available capacity. The Company
seeks to acquire only those companies which maintain high levels of
quality and service consistent with the Company's existing divisions. The
Company believes this strategy is essential to enabling each division of
the Company to cross-sell the capacity and capabilities of the other
divisions without concerns about quality and service.
. Retain Existing Management of Companies Acquired. The Company seeks to
acquire successful companies whose key managers will become employees of
the Company and continue to operate acquired businesses as divisions of
the Company. To preserve local market knowledge and customer
relationships, the Company has entered into employment contracts and
agreements not to compete with the key managers at each Acquired Company
and intends to continue to do so in the future.
ACQUIRED COMPANIES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
1997 REVENUE YEAR SHEET FED WEB
ACQUIRED COMPANY (IN THOUSANDS) (1) FOUNDED LOCATION PRESSES PRESSES
----------------- ------------------ ------- ------------------------ --------- ---------
<S> <C> <C> <C> <C> <C>
B&M Printing, Inc....... $ 13,433 1969 Memphis, Tennessee 6 0
Blackwell Lithographers,
Inc.................... 4,164 1932 Jackson, Mississippi
4 0
Lithograph Printing
Company of Memphis..... 20,118 1947 Memphis, Tennessee 3 2
Sutherland Printing
Company, Inc........... 7,892 1940 Montezuma, Iowa 6 0
Ozark, Missouri 1 0
The Argus Press, Inc.... 23,277 1922 Chicago, Illinois 5 0
Phoenix Communications,
Inc.................... 25,859 1960 Atlanta, Georgia 6 2
Jones Printing Company,
Inc.................... 6,343 1947 Chattanooga, Tennessee 8 1
Hederman Brothers,
Inc.................... 10,459 1898 Jackson, Mississippi 7 0
Phillips Litho Co.,
Inc.................... 12,727 1973 Springdale, Arkansas 4 4
Henderson, North
Harperprints, Inc....... 10,904 1974 Carolina 3 0
McQuiddy Printing
Company................ 16,583 1903 Nashville, Tennessee 4 2
--------
Total Combined Revenue.. $151,759
========
</TABLE>
- --------
(1) The Company and several of the individual Acquired Companies had fiscal
years that differed from December 31, which is the year end the Company
will use effective January 1, 1998.
31
<PAGE>
The Acquired Companies were acquired with a combination of cash, promissory
notes and warrants. The aggregate consideration that was paid by the Company
to acquire the Acquired Companies consists of (i) approximately $52 million in
cash, (ii) approximately $15 million in aggregate principal amount of notes to
the former owners of the Acquired Companies and (iii) warrants to purchase
1,524,037 shares of Common Stock (assuming an initial public offering price
equal to the Mid-Point) at an exercise price equal to the initial public
offering price per share. Former owners of several Acquired Companies have the
opportunity to receive additional amounts of consideration up to a maximum of
approximately $15 million, payable in cash, contingent upon meeting certain
cash flow or earnings targets. See Note 2 in "Notes to Unaudited Pro Forma
Condensed Consolidated Financial Statements" for detailed information
regarding the consideration paid for each of the Acquired Companies.
The consideration paid by the Company for each Acquired Company was the
result of arm's length negotiations between representatives of the Company and
representatives of the Acquired Company and was based generally on the
Company's evaluation of the Acquired Company's operating results, assets and
capitalization. Certain former owners of Acquired Companies were required to
enter into employment agreements containing confidentiality and non-
competition provisions.
MASTER CENTRAL
A successful printing company must have a substantial investment in printing
presses and related equipment and plant facilities. The general commercial
printing industry is characterized by unpredictable demand which affects
equipment utilization. A particular printing facility may at any given time
have either excess capacity or demands from customers which cannot be met.
Further, the size and type of printing jobs a general commercial printing
company is capable of completing is limited by type and number of printing
presses owned by that company. For example, it may not be economically
feasible for one of the Company's divisions which operates only sheet fed
presses to bid on a large printing project which could be produced more
efficiently on a web press.
The Company has established Master Central to utilize more efficiently
printing capacity and effectively allocate print jobs across the range of the
Company's available equipment. Currently, three employees located at the
Company's headquarters and one employee in each division, all under the
direction of the Chief Operating Officer, have been designated as the Master
Central Team. Master Central acts as a clearinghouse whereby a division
submits a job that it cannot print either because of capacity restraints or
because the division does not have necessary equipment. Through Master
Central, this job is routed to the division with the necessary equipment or
available capacity to handle the job. Master Central is an operating process
which focuses on (i) effective marketing of the production capacity and
capabilities of all of the divisions of the Company, (ii) increasing equipment
availability across all divisions, (iii) responsiveness to customer driven
deadlines, and (iv) efficient distribution of finished products to customers.
In connection with Master Central, the Company is training its sales force to
effectively promote and market the production capacity and capabilities of all
of the Company's divisions. Master Central currently operates via facsimile,
telephone and electronic mail; however, the Company is currently evaluating
high speed electronic data transfer systems which will facilitate
communications and data transfers between divisions.
OPERATIONS
The Company provides service in all areas of general commercial printing,
including (i) developing a customer's concept into printable material through
the use of electronic prepress services, (ii) using printing presses to
imprint the printable material onto paper, (iii) cutting, folding, and binding
the finished product and (iv) storing and distributing the finished product.
Design and Prepress Services. One of the most significant technological
advancements in the general commercial printing industry in recent years has
been the computerization of the prepress area. Because of such technological
advances and a decrease in the cost of such technology, the Company is able to
offer design and prepress services to its customers on an efficient and cost-
effective basis. Historically, such design and prepress services were provided
by advertising agencies, specialty printing services or customers in-house.
Prepress services include the development of designs for customers and the
conversion of designs into digitized images. The Company offers commercial
prepress services at all of its facilities, enabling each division to service
customers from inception of the concept through delivery of the finished
product.
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<PAGE>
Printing. Once a project has finished the prepress area, it is moved to the
press area where the image is reproduced on paper. The Company operates 57
sheet fed presses, ranging in size from 11x17 to 28x41, which are capable of
simultaneously printing up to six colors and producing up to 15,000
impressions per hour. The Company also operates 11 web presses which are
capable of producing up to 40,000 impressions per hour, folding, glueing and
perforating a finished product. The Company's web presses are located in five
divisions.
Finishing. The finishing operations provided by the Company include cutting,
folding, binding and other operations to finish the printed product.
Historically, general commercial printing companies outsourced those finishing
operations which required substantial capital investments. Because some of the
Acquired Companies own such equipment, the Company is able to offer finishing
operations and provide a completely integrated service from design to
fulfillment.
Fulfillment. The fulfillment area provides a wide range of labor intensive
services that combine, package, store and ship the Company's finished
products. The fulfillment area also provides electronic tracing services for
customer inventory and accumulates data for marketing departments that
indicates the effectiveness of print related marketing campaigns. Large
corporations utilize a variety of the Company's fulfillment services
including: custom assembly of binders; gathering information from promotional
mailings; returning premium or incentive items to respondents; and combining
magnetic media with printed media prior to shipment.
CUSTOMERS
Most of the Company's top customers are large companies such as Federal
Express, IBM, Provident Life, W. W. Grainger, Turner Broadcasting and G. D.
Searle. Consistent with the general commercial printing industry as a whole,
the Company has no significant long-term contracts with its customers. Due to
the project-oriented nature of customers' printing requirements, sales to
particular customers may vary significantly from year to year. On a pro forma
basis, the Company's top ten customers in 1997 accounted for 17.9% of sales;
no customer accounted for more than 3%.
SALES AND MARKETING
On March 31, 1998, the Company employed 91 salespeople across all of its
divisions, a majority of which are paid on a commission basis. The Company
markets its services based primarily on quality and responsiveness and, to a
lesser degree, on price. Through its salespeople and other management
professionals, the Company maintains strict control of the printing process
from the time a prospective customer is identified through the scheduling,
prepress, printing and postpress operations. The Company's business is
principally service-oriented, and its operating philosophy emphasizes
responding rapidly to customer requirements and producing high quality
products. Responsiveness is essential because of the typically short lead time
on most general commercial printing jobs. The Company, like general commercial
printing companies generally, is designed to maintain maximum flexibility to
meet customer needs both on a scheduled and an emergency basis.
The Company believes that a well trained, experienced sales force is a vital
component of the Company's internal growth strategy. In addition to the
training provided with respect to Master Central, the Company has implemented
a training program designed to enhance the effectiveness and knowledge of the
Company's sales force. The general commercial printing business requires a
substantial amount of interaction with customers, including personal sales
calls, art work and computer disk reviews, reviews of color and other proofs
and "press checks" (customer approval of the printed piece while it is being
printed).
Each division of the Company employs salespeople who are knowledgeable about
the industry and the printing capabilities of the division they serve. As a
result of the implementation of Master Central, each salesperson will also be
trained in the printing capabilities at each of the other divisions. The
Company's sales philosophy stresses frequent sales calls on existing customers
and constant marketing to prospective new customers. Each division emphasizes
to its customers the breadth and sophistication of the particular division's
printing capacity and the printing capacity of the Company as a whole, the
speed and quality of its service and
33
<PAGE>
the personal attention offered by its salespeople. In addition to soliciting
business from existing and prospective customers, the salespeople act as
liaisons between customers and production personnel and provide technical
advice and assistance to customers throughout the printing process.
The general commercial printing industry is characterized by strong
relationships between the purchasers of printing services and the salespeople
who service their accounts. The Company believes that it is important to
retain its existing sales force and attract new salespeople. The Company
believes that its existing compensation structure is competitive with other
companies in the general commercial printing industry. Moreover, because the
Company generally can offer greater capacity and a broader array of
capabilities than smaller, locally-owned general commercial printing
companies, the Company believes it can successfully compete with these other
printing companies to hire additional qualified salespeople.
PURCHASING AND RAW MATERIALS
As a result of centralized purchasing, the Company believes it will be able
to take advantage of volume discounts and rebates from manufacturers and
suppliers of paper, film, printing plates and ink that would be unavailable to
the divisions on a stand-alone basis. The Company purchases various materials,
including paper, prepress supplies, printing plates, ink, film, chemicals,
solvents, glue and wire, from a number of national and local suppliers. Paper
is generally the largest cost item for general commercial printing companies,
including the Company. The Company's paper costs were approximately 27% of
revenue for the six months ended December 31, 1997. The Company does not
maintain a significant inventory of paper and is generally able to pass the
cost of the paper through to its customers. The Company has in place pricing
arrangements with five paper suppliers which provide for discounts and rebates
based on volume.
The Company is currently in the process of negotiating national purchasing
arrangements with other major suppliers and manufacturers. The Company
anticipates that each division will order the goods and services as needed
either in accordance with the terms set forth in the national purchasing
arrangements, if applicable, or on a local basis. The Company will receive
input from each division on market conditions, local supplier service and
product developments which will enable the Company to continually maximize the
benefits of these master purchasing arrangements.
The Company has not experienced any significant difficulty in obtaining raw
materials necessary for its operations.
COMPETITION
The Company competes with a substantial number of other general commercial
printing companies. Because of the nature of the Company's business, most of
the Company's competition is confined to local printing markets. The major
competitive factors in the Company's business are the quality of customer
service, the quality of finished products and price. The ability of the
Company to compete effectively in providing customer service and quality
finished products is primarily dependent on production and distribution
capabilities, the availability of equipment and the ability to perform the
services with speed and accuracy. The Company believes it competes effectively
in all of these areas.
Although the general commercial printing industry in the United States
remains highly fragmented, recent technological developments and over-capacity
in the industry have increased industry consolidation and competitive
pressures. Moreover, the Company competes for potential acquisition candidates
with other printing industry consolidators, some of which have greater
financial resources than the Company.
EMPLOYEES
On March 31, 1998, the Company had approximately 1,100 employees. Less than
five percent of its employees are members of the Graphic Communications Union.
These employees work under a collective bargaining agreement which expires on
March 31, 2000. The Company believes its relationship with its employees,
including those covered by a collective bargaining agreement, is good.
34
<PAGE>
FACILITIES
The Company's principal facilities are described in the table below. All of
the listed facilities contain office, production and storage space. The
Company's facilities are suitable and adequate for the current needs of the
Company. For additional information, see "Certain Transactions."
<TABLE>
<CAPTION>
APPROXIMATE
BUILDING SPACE
FACILITY AND LOCATION OWNED/LEASED (SQUARE FEET)
- --------------------- ------------ --------------
<S> <C> <C>
Master Graphics, Inc.
Memphis, Tennessee.................................. Leased 3,000
B&M Printing Division
Memphis, Tennessee.................................. Leased 70,000
Blackwell Lithographers Division
Richland, Mississippi............................... Owned 18,000
Lithograph Printing Division
Memphis, Tennessee.................................. Leased 64,000
Sutherland Printing Division
Ozark, Missouri..................................... Owned 15,000
Sutherland Printing Division
Montezuma, Iowa..................................... Owned 33,000
Argus Press Division
Niles, Illinois..................................... Leased 56,000
Phoenix Communications Division
Chamblee, Georgia................................... Leased 67,000
King Mailing Services Division
Chamblee, Georgia................................... Leased 10,400
Jones Printing Division
Chattanooga, Tennessee.............................. Leased 31,000
Jones Printing Division
Chattanooga, Tennessee.............................. Leased 16,500
Hederman Brothers Division
Ridgeland, Mississippi.............................. Leased 72,000
Phillips Litho Division
Springdale, Arkansas................................ Leased 73,800
Harperprints Division
Henderson, North Carolina........................... Leased 55,000
McQuiddy Printing Division
Nashville, Tennessee................................ Owned 83,400
</TABLE>
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company's manufacturing operations are subject to numerous federal,
state and local laws and regulations relating to human health and safety and
the environment. These laws and regulations address and regulate, among other
matters, wastewater discharge, air quality and the generation, handling,
storage, treatment, disposal and transportation of solid and hazardous wastes
and releases of hazardous substances into the environment. In addition, third
parties and governmental agencies in some cases have the power under such laws
and regulations to require remediation of environmental conditions and, in the
case of governmental agencies, to impose fines and penalties. The Company
makes capital expenditures from time to time to stay in compliance with
applicable laws and regulations.
35
<PAGE>
The Company has obtained all permits and approvals and filed all
registrations required for the conduct of its business, except where the
failure to obtain any permit or approval or file any registration would not
have a material adverse effect on the Company's business, financial condition
or result of operations. The Company is in compliance in all material respects
with the numerous federal, state and local laws and regulations and permits,
approvals and registrations relating to human health and safety and the
environment except where noncompliance would not have a material adverse
effect on the Company's business, financial condition or results of
operations.
In connection with the acquisition of the Acquired Companies, each of the
Company's properties has been subjected to an ESA (which does not involve
invasive procedures, such as soil sampling or ground water analysis) by
independent environmental consultants. The ESAs have not revealed any
environmental liability that would have a material adverse effect on the
Company. The Company has not been notified by any governmental authority of
any continuing noncompliance, liability or other claim in connection with any
of its properties or its business operations, nor is the Company aware of any
other material environmental condition with respect to any of its properties
or arising out of its business operations at any other location. However, in
connection with the ownership and operation of its properties (including
locations to which the Company may have sent waste in the past) and the
conduct of its business, the Company potentially may be liable for damages or
cleanup, investigation or remediation costs.
No assurances can be given that all potential environmental liabilities have
been identified or properly quantified or that any prior owner, operator, or
tenant has not created an environmental condition unknown to the Company.
Moreover, no assurances can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the properties will not be affected by the
condition of land or operations in the vicinity of the properties (such as the
presence of underground storage tanks), or by third parties unrelated to the
Company. Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on the Company. Such costs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to claims
arising in the normal course of business. The Company maintains insurance
coverage against potential claims in an amount which it believes to be
adequate. While the outcome of lawsuits or other proceedings against the
Company cannot be predicted with certainty, the Company does not believe these
matters whether or not covered by insurance will have a material adverse
effect on its business or financial position, individually or in the
aggregate.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John P. Miller............ 44 Chairman of the Board, Chief Executive Officer
and President, Class III Director
Lance T. Fair............. 35 Senior Vice President--Acquisitions; Chief
Financial Officer
Robert J. Diehl........... 56 Chief Operating Officer
P. Melvin Henson, Jr...... 40 Senior Vice President--Finance and
Administration; Chief Accounting Officer
James B. Duncan........... 55 Senior Vice President--Sales and Marketing
H. Henry (Hap) Hederman, 52 Class I Director, President Hederman Brothers
Jr. ..................... Division
Donald L. Hutson.......... 52 Class I Director
Walter P. McMullen........ 73 Class II Director, Chairman Lithograph Printing
Division
Frederick F. Avery........ 67 Class II Director
Cary Rosenthal............ 58 Class III Director, President Phoenix Division
</TABLE>
John P. Miller has been Chairman of the Board of Directors, Chief Executive
Officer and President of the Company since its inception. Prior to assuming
his position with the Company, Mr. Miller was the Chairman of the Board of
Directors and Chief Executive Officer of B&M Printing from December 1992 to
June 1997.
Lance T. Fair has been the Senior Vice President--Acquisitions and Chief
Financial Officer of the Company since September 1997. From July 1995 until he
joined the Company, Mr. Fair was Vice President and Chief Financial Officer of
Warterfield Holdings, Inc. From June 1989 to July 1995, Mr. Fair was a
principal at Asset Services, L.P., a Memphis, Tennessee-based mergers and
acquisition advisory firm.
Robert J. Diehl has been the Chief Operating Officer of the Company since
January 1998. Mr. Diehl has over 25 years of experience in the general
commercial printing industry. From January 1994 to December 1997, Mr. Diehl
was President of Hollis Digital Imaging Systems, Inc., a digital printing
company located in Tucson, Arizona. From 1989 to December 1993, Mr. Diehl was
Managing Director of R.H. Rosen Associates, Inc., a printing industry
consulting firm.
P. Melvin Henson, Jr. has been the Senior Vice President--Finance and
Administration and Chief Accounting Officer of the Company since December
1997. From July 1979 to December 1997, Mr. Henson was employed in a variety of
financial management positions with International Paper Company including
Manager--Finance for International Paper's business process redesign project
and controller for International Paper's pulp and paper manufacturing facility
in Erie, Pennsylvania.
James B. Duncan has been the Senior Vice President--Sales and Marketing of
the Company since October 1997. From November 1996 to September 1997, Mr.
Duncan operated a consulting practice focused on sales training and
management. From April 1989 to October 1996, Mr. Duncan was a Division
President for Smith & Nephew PLC, where he directed global operations for the
Center of Excellence for Smith & Nephew's ear, nose and throat products.
H. Henry (Hap) Hederman, Jr. has been a Director of the Company since March
1998 and has served as the President of the Hederman Brothers Division since
March 1998. Mr. Hederman has over 30 years of experience in the general
commercial printing industry. From 1982 through March 1998, Mr. Hederman
served
37
<PAGE>
as the President and Chief Executive Officer of Hederman (which was acquired
by the Company in March 1998). Mr. Hederman currently serves as a member of
the board of directors and a member of the executive committee of the board of
directors of MS Diversified Corp.
Donald L. Hutson has been a Director of the Company since March 1998. Since
September 1966, Mr. Hutson has been a business trainer, professional speaker
and consultant to corporations and trade associations on employee development
issues.
Walter P. McMullen has been a Director of the Company since March 1998 and
has served as the Chairman of the Lithograph Printing Company Division since
June 1997. Mr. McMullen has over 50 years of experience in the general
commercial printing industry. From March 1973 to June 1997, Mr. McMullen
served as the Chairman and Chief Executive Officer of Lithograph (which was
acquired by the Company in June 1997).
Frederick F. Avery has been a Director of the Company since March 1998. Mr.
Avery has been a business consultant since April 1994. From July 1987 to March
1994, Mr. Avery served in a variety of roles with Kraft Foods, including
President of Kraft Food Ingredients and Group Vice President.
Cary Rosenthal has been a Director of the Company since March 1998 and has
served as the President of the Phoenix Division since December 1997. Mr.
Rosenthal has over 30 years of experience in the general commercial printing
industry. From September 1979 to December 1997, Mr. Rosenthal served as
President and Chief Executive Officer of Phoenix and King Mailing Services,
Inc. (both of which were acquired by the Company in December 1997). Mr.
Rosenthal currently serves as a member of the board of directors and serves on
the audit and option committees of the board of directors of SED International
Holdings, Inc. Additionally, Mr. Rosenthal serves as a member of the board of
directors of Printing Industries Association of Georgia, a trade organization.
There are no family relationships among any of the executive officers or
directors of the Company.
The Company's Charter divides the Board into three classes of as equal size
as possible, with the terms of each class expiring in consecutive years so
that only one class is elected in any given year. The terms of Messrs.
Hederman and Hutson will expire at the 1999 annual meeting of shareholders;
the terms of Messrs. McMullen and Avery will expire at the 2000 annual meeting
of shareholders; and the terms of Messrs. Miller and Rosenthal will expire at
the 2001 annual meeting of shareholders. The executive officers of the Company
are elected annually by the Board following the annual meeting of shareholders
and serve at the discretion of the Board, subject to the terms of their
respective employment agreements, until their successors are elected and
qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established an Audit Committee, an
Acquisition Committee, an Options and Benefits Committee and a Compensation
Committee. Pursuant to resolutions of the Board, these committees have the
following described responsibilities and authority.
The Audit Committee has the responsibility, among other things, of (i)
recommending the selection of the Company's independent public accountants,
(ii) reviewing and approving the scope of the independent public accountants'
audit activity and the extent of non-audit services, (iii) reviewing with
management and such independent public accountants the adequacy of the
Company's basic accounting systems and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with management and the
independent public accountants the Company's financial statements and
exercising general oversight of the Company's financial reporting process, and
(v) reviewing with the Company litigation and other legal matters that may
affect the Company's financial condition. The members of the Audit Committee
are Messrs. Avery, Hutson and Miller.
The Compensation Committee has the responsibility, among other things, of
(i) establishing the salary rates of executive officers of the Company, and
(ii) examining periodically the compensation structure of the Company. The
members of the Compensation Committee are Messrs. Avery, Hutson and Miller.
38
<PAGE>
The Options and Benefits Committee has the responsibility to administer the
1998 Equity Compensation Plan and to supervise the welfare and pension plans
of the Company. The members of the Options and Benefits committee are Messrs.
Avery and Hutson.
The Acquisition Committee has the authority to approve the terms and
conditions of acquisitions of businesses by the Company, including the
authority to approve the issuance of debt and equity securities of the Company
in connection with such acquisitions, provided that the consideration paid by
the Company for each business is less than $10 million. The members of the
Acquisition Committee are Messrs. Miller, Hederman and Rosenthal.
The Company's Board of Directors may also establish other committees.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company is paid $1,000 for each
meeting attended. All directors are reimbursed for expenses incurred in
attending meetings of the Board of Directors and committee meetings of the
Board of Directors. Non-employee Directors are eligible to receive grants
under the Company's 1998 Non-Employee Director Option Plan. Each non-employee
Director received a grant of an option to purchase 1,666 shares of Common
Stock (assuming an initial public offering price equal to the Mid-Point) at a
purchase price per share equal to the initial public offering price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee of
the Board of Directors. The compensation of the Company's executive officers
has been determined by negotiations between Mr. Miller, the Company's Chief
Executive Officer, and such individuals.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation paid by the Company to the Chief
Executive Officer of the Company and the two other most highly paid executive
officers earning in excess of $100,000 during 1997 (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS (1)
--------------------------- ----------- -------- ---------
<S> <C> <C> <C>
John P. Miller.................................. 1997 $145,833 --
Chairman of the Board, President and Chief
Executive Officer
Lance T. Fair................................... 1997 $ 34,153 $600,000
Senior Vice President--Acquisitions and Chief
Financial Officer
Robert J. Diehl................................. 1997 -- $300,000
Chief Operating Officer
</TABLE>
- --------
(1) Includes deferred compensation payments to the Named Executive Officers as
indicated. The amount indicated is payable in cash on December 31, 2002
or, at the option of the applicable Named Executive Officer, in Common
Stock on or before December 31, 2002. The Company may prepay the full
deferred compensation obligation at any time. If the Named Executive
Officer elects to receive Common Stock in lieu of cash, he is entitled to
receive the number of shares of Common Stock equal to the quotient of (i)
the deferred compensation amount owed to such Named Executive Officer
divided by (ii) the initial public offering price per share of Common
Stock.
The Company has employment agreements with each of the above Named Executive
Officers, P. Melvin Henson, Jr. and James B. Duncan each effective as of March
31, 1998. Each agreement has an initial term of three years and is renewable
automatically for one year periods unless terminated by one of the parties.
The agreements provide for the following annual salaries: Mr. Miller--
$250,000; Mr. Diehl--$175,000; Mr. Fair--$120,000; Mr. Henson--$100,000; and
Mr. Duncan--$100,000. The annual salaries are subject to adjustment at
39
<PAGE>
the discretion of the Board of Directors, but may not be decreased more than
5% from the previous years' salary. In addition, the agreements provide for
annual incentive compensation to each officer of up to 100% of his base salary
based on performance targets established by the Compensation Committee of the
Board of Directors. In the event that the officer's employment is terminated
without cause or the officer suffers a constructive termination of his
employment and there has been no change of control of the Company, the Company
will pay such officer a lump sum severance payment equal to 200% of the sum of
such officer's combined (i) base salary in effect at the time of termination
and (ii) the average of the annual incentive award for the two immediately
preceding calendar years. In the event the officer's employment is terminated
with cause, regardless of whether there has been a change of control of the
Company, the Company will pay such officer only accrued but unpaid base salary
through the date of termination. If the officer's employment is terminated
without cause or the officer suffers a constructive termination of his
employment upon a change of control of the Company, he is entitled to receive
a lump sum upon such termination of an amount equal to the sum of (i) 299% of
such officer's combined (A) base salary in effect at the time of termination
and (B) the average of the annual incentive award for the two immediately
preceding completed calendar years and, (ii) to the extent that such payment
constitutes an "excess parachute payment" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code"), an amount equal
to any tax incurred by such officer pursuant to Section 280G of the Code. Each
agreement contains certain confidentiality and non-competition covenants.
OPTION GRANTS
The following table sets forth the number of options to purchase shares of
Common Stock that have been granted to the Named Executive Officers of the
Company.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (3)(4)
----------------------------------------------------------- ------------------
% OF TOTAL
OPTIONS
OPTIONS GRANTED GRANTED TO EXERCISE PRICE EXPIRATION
(NO. OF SHARES) (1) EMPLOYEES (2) PER SHARE(3) DATE 5% 10%
------------------- ------------- -------------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
John P. Miller.......... -- -- -- -- -- --
Lance T. Fair........... 83,333 13.8% $12.00 March 2008 $628,892 $1,593,694
Robert J. Diehl......... 25,000 4.1 $12.00 March 2008 188,668 478,122
</TABLE>
- --------
(1) The options reported in this column consist of options granted under the
Company's 1998 Equity Compensation Plan. The options will become
exercisable on each of the first, second, and third anniversaries of the
date of grant with respect to 25%, 25% and 50%, respectively, of the
shares subject to the option.
(2) Based on outstanding options to purchase an aggregate of 601,970 shares of
Common Stock.
(3) Assumes an initial offering price equal to the Mid-Point.
(4) The dollar amounts under these columns are the result of calculations at
the 5% and 10% appreciation rates set by the Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of the Common Stock. In order to realize the potential values set
forth in the 5% and 10% columns of this table, the per share price of the
Common Stock would be $19.55 and $31.12 respectively, or 62.9% and 159.3%,
respectively, above the exercise price per share. Because the Common Stock
was not publicly traded prior to the Offering, these amounts were
calculated based on the assumption that the fair market value of one share
of Common Stock on the date of grant was equal to the exercise price.
The following table sets forth the number of options to purchase shares of
Common Stock held, as of March 31, 1998, by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT
MARCH 31, 1998
-------------------------
EXERCISABLE UNEXERCISABLE
----------- -------------
<S> <C> <C>
John P. Miller........................................ -- --
Lance T. Fair......................................... -- 83,333
Robert J. Diehl....................................... -- 25,000
</TABLE>
40
<PAGE>
EQUITY COMPENSATION PLAN
The Company's 1998 Equity Compensation Plan (the "Plan") provides for grants
of (i) stock options, (ii) stock appreciation rights ("SARs") and (iii)
restricted stock (collectively, "Awards") to selected employees, officers,
directors, consultants and advisers of the Company. By encouraging stock
ownership, the Company seeks to attract, retain and motivate such persons and
to encourage them to devote their best efforts to the business and financial
success of the Company.
The Plan authorizes up to 750,000 shares of the Company's Common Stock
(subject to adjustment in certain circumstances) for issuance pursuant to the
terms of the Plan. If Awards expire or are terminated for any reason without
being exercised, the shares of Common Stock subject to such Awards again will
be available for purposes of the Plan. As of the date of this Prospectus, the
Company has granted options to purchase 601,970 shares of Common Stock under
the Plan.
The Plan may be administered by the Board of Directors (the "Board") or by a
committee of the Board (references to the "Committee" refers to the Options
and Benefits Committee). Awards under the Plan may consist of (i) options
intended to qualify as incentive stock options ("ISOs") within the meaning of
section 422 of the Code, (ii) "non-qualified stock options" that are not
intended to so qualify ("NQSOs"), (iii) stock appreciation rights, or (iv)
shares of restricted stock. Awards may be granted to any employee (including
officers) of the Company and consultants and advisers who perform services for
the Company.
In the event of any change of corporate capitalization (such as a stock
split), the number of shares of Common Stock covered by each outstanding
option or SAR and the purchase price thereof will be proportionately adjusted
to take into account any increase or decrease in the number of issued and
outstanding shares of Common Stock.
The option price of any ISO granted under the Plan will not be less than the
fair market value of the underlying shares of Common Stock on the date of
grant. The option price of a NQSO will be determined by the Committee, in its
sole discretion, and may be greater than, equal to or less than the fair
market value of the underlying shares of Common Stock on the date of grant.
The Committee will determine the term of each option, provided that the
exercise period may not exceed ten years from the date of grant. The option
price of an ISO granted to a person who owns more than 10% of the total
combined voting power of all classes of stock of the Company must be at least
equal to 110% of the fair market value of Common Stock on the date of grant,
and the ISO's term may not exceed five years. A grantee may pay the option
price (i) in cash, (ii) by delivering shares of Common Stock already owned by
the grantee and having a fair market value on the date of exercise equal to
the option price, or (iii) by such other method as the Committee may approve.
The Committee may impose on options such vesting and other conditions as the
Committee deems appropriate. The terms and conditions of NQSOs, stock
appreciation rights and restricted stock relating to the effect of termination
of the participant's employment or the participant's death or disability are
specified by the Committee. Each ISO terminates upon the termination of the
employment of the participant holding the ISO for cause or voluntary
termination. Upon a participant's death or disability, ISOs previously granted
to such participant may be exercised within the period ending on the earlier
of the expiration date of the ISO or the one year anniversary of the date of
such participant's death or termination of employment.
SARs may be granted under the Plan in conjunction with all or part of a
stock option and will be exercisable only when the underlying stock option is
exercisable. Once an SAR has been exercised, the related portion of the stock
option underlying the SAR will terminate. Upon the exercise of an SAR, the
Company will pay to the employee or consultant in cash, Common Stock or a
combination thereof (the method of payment to be at the discretion of the
Committee), an amount equal to the excess of the fair market value of the
Common Stock on the exercise date over the option price, multiplied by the
number of SARs being exercised.
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<PAGE>
Restricted stock awards may be granted alone, or in addition to, or in
tandem with, other awards under the Plan or cash awards made outside the Plan.
The provisions attendant to a grant of restricted stock may vary from
participant to participant. In making an award of restricted stock, the
Committee will determine the periods during which the restricted stock is
subject to forfeiture and may provide for such other awards designed to
guarantee a minimum of value for such stock. During the restricted period, the
employee or consultant may not sell, transfer, pledge, assign, or otherwise
encumber the restricted stock but will be entitled to vote the restricted
stock and to receive, at the election of the Committee, cash or deferred
dividends.
In the event of a change of control (as defined in the Plan), all
outstanding Awards will become fully exercisable, unless the Committee
determines otherwise. Except as provided below, unless the Committee
determines otherwise, in the event of a merger where the Company is not the
surviving corporation, all outstanding Awards will be assumed by or replaced
with comparable options by the surviving corporation. The Committee may
require that grantees surrender their outstanding Awards in the event of a
change of control and receive a payment in cash or Common Stock equal to the
amount by which the fair market value of the shares of Common Stock subject to
the Awards exceeds the exercise price of the Awards.
All Awards issued under the Plan will be granted subject to any applicable
federal, state and local withholding requirements; the Company can deduct from
wages paid to the grantee any such taxes required to be withheld with respect
to the options. If the Company so permits, a grantee may choose to satisfy the
Company's income tax withholding obligation with respect to an option by
having shares withheld up to an amount that does not exceed the grantee's
maximum marginal tax rate for federal, local and state taxes.
The Board may amend or terminate the Plan at any time; provided that
shareholder approval will be required for certain amendments pursuant to
Section 162(m) of the Code. The Plan will terminate on April 1, 2008, unless
terminated earlier by the Board or extended by the Board with approval of the
shareholders.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has adopted the 1998 Non-Employee Director Stock Option Plan
(the "Director Option Plan"). The purposes of the Director Option Plan are to
(i) promote a greater identity of interest between the Company's non-employee
Directors and its shareholders, (ii) provide non-employee Directors with an
additional incentive to manage the Company effectively and contribute to its
success, and (iii) provide a form of compensation which will attract and
retain highly qualified individuals as members of the Board of Directors.
The Director Option Plan is administered by the Board of Directors. Pursuant
to the terms of the Director Option Plan, non-employee Directors of the
Company (each an "Eligible Director") will be eligible to participate in the
Director Option Plan. A maximum of 50,000 shares of Common Stock is available
for issuance and available for grants under the Director Option Plan. As of
the date of this Prospectus, the Company has granted options to purchase 1,666
shares of Common Stock under the Director Option Plan.
In the event of any change in corporate capitalization (such as a stock
split), the number of shares of Common Stock covered by each outstanding
option and the purchase price thereof will be proportionately adjusted to take
into account any increase or decrease in the number of issued and outstanding
shares of Common Stock. If the Company undergoes a "change in control" as
defined in the Director Option Plan, to the extent provided in the instrument
granting the option, all options shall immediately vest and become
exercisable. The Board of Directors, in its sole discretion, may direct the
Company to cash out all outstanding options at the highest price per share of
Common Stock paid in any transaction reported on The Nasdaq National Market or
paid or offered in any bona fide transaction related to a change in control at
any time during the 60 day period immediately preceding the occurrence of the
change in control.
Grants and awards under the Director Option Plan are nontransferable other
than by will or the laws of descent and distribution, on a case-by-case basis
as may be approved by the Board in its discretion, in accordance with the
terms of the Director Option Plan.
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<PAGE>
CERTAIN TRANSACTIONS
Premier Graphics, through the B&M Printing division, on December 10, 1992
loaned Mr. Miller $950,000, which bears interest at a rate of 7% per annum and
matures on December 10, 2002. Mr. Miller intends to repay this amount in full
contemporaneously with the closing of the Offering.
The Company leases the facilities in which the B&M Printing division is
located from Mr. Miller. The lease expires on November 30, 2002. The annual
base rent to be paid under this lease is approximately $140,000. The Company
believes that the terms of the lease are no less favorable to the Company than
could have been negotiated by the Company with unaffiliated third parties. For
the years ended December 31, 1995, 1996, and 1997, respectively, the Company
paid Mr. Miller $260,000, $108,333 and $162,567, respectively, under the
lease, and expects to pay Mr. Miller $140,000 for the year ending December 31,
1998.
On December 31, 1997, Mr. Miller purchased from the Company a web press for
total consideration of $2,774,706, which is represented by a promissory note
from Mr. Miller to the Company in the principal amount of $2,774,706. The note
matures on the earlier of (i) December 31, 2002, (ii) Mr. Miller's sale of the
press (which is his intention) or (iii) 30 days after an initial public
offering of the Common Stock, and bears interest at an annual rate of interest
equal to LIBOR plus 3.25%. Mr. Miller intends to repay this amount in full
contemporaneously with the closing of the Offering. Net proceeds realized from
a sale of the press by Mr. Miller that are in excess of the principal amount
of the note will be paid to the Company. B&M Printing acquired the web press
pursuant to a lease in March 1996 and purchased it in June 1997 for total
consideration of $2,623,891.
Sirrom Capital Corporation, the Selling Shareholder and beneficial owner of
approximately 6.2% of the Company's outstanding Common Stock prior to the
Offering, entered into a $4.3 million loan agreement with the Company on June
19, 1997. The loan bears interest at a rate of 13.25% per annum and matures in
May 2002. In connection with this financing transaction, the Company granted
to the Selling Shareholder a warrant to purchase for nominal value shares of
the Company's capital stock outstanding on the date of exercise, with the
number of shares being based on a formula designed to provide the Selling
Shareholder with a 6% ownership interest in the Company's outstanding Common
Stock on a fully-diluted basis. The warrant also provided that the Selling
Shareholder would have been entitled to purchase, for nominal value, up to an
additional 15.7% of the Company's outstanding capital stock in the event any
amounts were owed to Sirrom on certain dates set forth in the warrant. The
Company intends to utilize a portion of the net proceeds of the Offering to
repay in full all amounts owed to the Selling Shareholder and currently does
not intend to borrow any additional amounts from the Selling Shareholder;
therefore, the Company expects that this right will be extinguished by the
Offering and application of the net proceeds therefrom. On April 8, 1998, the
Selling Shareholder exercised the warrant and acquired 266,664 shares of
Common Stock for nominal consideration, which represented approximately 6.2%
of the issued and outstanding capital stock of the Company on the date of
exercise. Assuming an initial public offering price equal to the Mid-Point,
the Selling Shareholder may receive up to $2.2 million of the net proceeds of
the Offering.
In the Company's acquisition of Hederman in March 1998, Mr. Hederman and
members of his immediate family (or trusts for the benefit of such
individuals) received consideration in the form of $1.5 million cash.
Mr. Hederman and such family members and trusts received warrants to purchase
a total of 166,665 shares of Common Stock (assuming an initial public offering
price equal to the Mid-Point) at a price per share equal to the initial public
offering price. Mr. Hederman and such family members and trusts received
promissory notes in the aggregate principal amount of $2,000,000 which mature
on February 28, 2005 and bear interest at a rate of 12% per annum. Moreover,
the Company currently leases its Hederman Brothers division facility from Mr.
Hederman for annual rental of $300,000 per annum. The Company believes that
the terms of such lease are no less favorable to the Company than could have
been negotiated by the Company with unaffiliated third parties.
In the Company's acquisition of Phoenix and King Mailing Services, Inc. in
December 1997, Mr. Rosenthal received consideration in the form of
approximately $3.3 million cash, a warrant to purchase 193,750 shares of
Common Stock (assuming an initial public offering price equal to the Mid-
Point) at a price per share equal to the initial public offering price, and a
promissory note in the principal amount of $557,750 which matures on
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<PAGE>
December 16, 2004 and bears interest at a rate of 12% per annum. Moreover, the
acquisition documents provide up to $611,100 in contingent consideration to be
paid to Mr. Rosenthal in the event the Phoenix division achieves certain
annual earnings targets specified in the acquisition agreement. Mr. Rosenthal
owns 50% of RFTA Associates, LLC, which leases the Phoenix Communications
division facilities to the Company for an annual rent of approximately
$252,000 per year subject to annual adjustment based upon changes in the
consumer price index. The Company believes that the terms of such leases are
no less favorable to the Company than could have been negotiated by the
Company with unaffiliated third parties.
In the Company's acquisition of Lithograph in June 1997, Mr. McMullen and
certain members of his immediate family received consideration in the form of
approximately $6.7 million cash, property valued at approximately $374,273, a
warrant to purchase 312,500 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) at a price per share equal to the
initial public offering price, and a promissory note in the principal amount
of $3.75 million which matures on June 18, 2004 and bears interest at a rate
of 12% per annum. Mr. McMullen's wife is the general partner of Graphic
Development Company, L.P., which leases the Lithograph Printing Company
division facilities to the Company for an annual rent of approximately
$272,400 per year. The Company believes that the terms of such lease are no
less favorable to the Company than could have been negotiated by the Company
with unaffiliated third parties.
On March 30, 1998, GECC exercised two warrants to purchase an aggregate of
177,776 shares of Common Stock. The shares of Common Stock were issued to a
wholly-owned subsidiary of GECC (the "GECC Subsidiary"). On March 31, 1998,
the GECC Subsidiary entered into an exchange agreement with the Company
pursuant to which the 177,776 shares of Common Stock were converted into
177,776 shares of Series A Preferred Stock. See "Description of Capital
Stock--Series A Preferred Stock." On April 1, 1998, the Company issued to GECC
a warrant to purchase 183,333 shares of Common Stock (assuming an initial
public offering price equal to the Mid-Point) for nominal consideration. The
Company has agreed to pay $3 million in advisory fees to GECC for GECC's
advice and assistance in structuring and negotiating the acquisitions of the
Acquired Companies, payable at the earlier of June 30, 1998 or successful
completion of the Offering. In addition, GECC is the Senior Credit Facility
lender. See "Management Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information known by the Company with respect to the beneficial ownership of
shares of the Common Stock by (i) each director of the Company; (ii) each
Named Executive Officer; (iii) each person known by the Company to own
beneficially more than 5% of the Common Stock; (iv) the Selling Shareholder;
and (v) all directors and executive officers of the Company as a group, both
before and after giving effect to the Offering. Information set forth in the
table with respect to the beneficial ownership of the Common Stock has been
provided to the Company by such holders. Unless otherwise indicated, each
person's address is c/o the Company's principal executive offices at 6075
Poplar Avenue, Suite 401, Memphis, Tennessee 38119.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED SUBSEQUENT
TO OFFERING (1) SHARES TO OFFERING (1)
-------------------------- BEING --------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ ------------ ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C>
John P. Miller.......... 4,000,000 93.8% -- 4,000,000 52.2%
General Electric Capital 361,109(2) 7.8 -- 361,109(2) 4.5
Corporation............
977 Long Ridge Road
Building B, First Floor
Stamford, Connecticut
06927
Walter P. McMullen...... 312,500(3) 6.8 -- 312,500(3) 3.9
4222 Pilot Drive
Memphis, Tennessee
Sirrom Capital 266,664 6.2 200,000 66,664 *
Corporation............
P. O. Box 30378
Memphis, Tennessee
38118
Cary Rosenthal.......... 193,750(4) 4.3 -- 193,750(4) 2.5
H. Henry (Hap) Hederman,
Jr..................... 158,625(5) 3.6 -- 158,625(5) 2.0
Lance T. Fair........... 50,000(6) 1.2 -- 50,000(6) *
Robert J. Diehl......... 25,000(7) * -- 25,000(7) *
P. Melvin Henson, Jr.... 4,166(8) * -- 4,166(8) *
James B. Duncan......... 4,166(9) * -- 4,166(9) *
Frederick F. Avery...... -- -- -- -- --
Donald L. Hutson........ -- -- -- -- --
All Named Executive
Officers and directors
of the Company as a
group (10 persons)..... 4,748,207 94.7 -- 4,748,207 54.1
</TABLE>
- --------
* Less than 1%
(1) Applicable percent of ownership is based on 4,266,664 shares of Common
Stock outstanding prior to the Offering and 7,666,664 shares of Common
Stock outstanding upon consummation of this Offering. Beneficial ownership
is determined in accordance with the rules of the Commission and include
voting or investment power with respect to securities. Shares of Common
Stock issuable upon the exercise of stock options, warrants or other
rights to acquire Common Stock, currently exercisable or convertible, or
exercisable or convertible within 60 days of the date of this Prospectus
are deemed outstanding and to be beneficially owned by the person holding
such option, warrant or other right for purposes of computing such
person's percentage ownership, but are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except
for shares held jointly with a person's spouse or subject to applicable
community property laws, or indicated in the footnotes to this table, each
shareholder identified in the table possesses sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by such shareholder.
(2) Includes 177,776 shares of Common Stock issuable upon conversion of the
outstanding Series A Preferred Stock and 183,333 shares of Common Stock
(assuming an initial public offering price equal to the Mid-Point)
issuable upon exercise of the Lender Warrant.
(3) Includes 312,500 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable upon exercise of a warrant
held by Mr. McMullen.
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<PAGE>
(4) Includes 193,750 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable upon exercise of a warrant
held by Mr. Rosenthal.
(5) Includes 58,625 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable upon exercise of a warrant
held by Mr. Hederman and 100,000 shares of Common Stock held by the H.
Henry Hederman, Jr. Trust of which Mr. Hederman is a trustee.
(6) Includes 50,000 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable to Mr. Fair in connection
with the Company's deferred compensation plan.
(7) Includes 25,000 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) issuable to Mr. Diehl, in
connection with the Company's deferred compensation plan.
(8) Includes 4,166 shares of Common Stock (assuming an initial public offering
price equal to the Mid-Point) issuable to Mr. Henson in connection with
the Company's deferred compensation plan.
(9) Includes 4,166 shares of Common Stock (assuming an initial public offering
price equal to the Mid-Point) issuable to Mr. Duncan in connection with
the Company's deferred compensation plan.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $.001 par value per share and 10,000,000 shares of Preferred
Stock, $.001 par value per share (the "Preferred Stock"). As of the date of
this Prospectus, there were 4,266,664 shares of Common Stock outstanding
(assuming no conversion of the Series A Preferred Stock and exercise of
warrants) held of record by two shareholders and 177,776 shares of Series A
Preferred Stock outstanding held of record by one shareholder. No other shares
of Preferred Stock are currently outstanding.
COMMON STOCK
Voting Rights. The holders of Common Stock are entitled to one vote per
share on each matter to be decided by the shareholders and do not have
cumulative voting rights. Accordingly, the holders of a majority of Common
Stock entitled to vote in any election of Directors may elect all of the
Directors standing for election. The holders of Common Stock have no
preemptive, redemption or conversion rights.
Dividends. Subject to the preferential rights of any outstanding Preferred
Stock that may be created by the Board of Directors under the Charter,
dividends may be paid to holders of the Common Stock when, as and if declared
by the Board of Directors out of funds legally available for such purpose. The
Company does not intend to pay dividends at the present time. See "Dividend
Policy."
Liquidation. In the event of liquidation, dissolution or winding up of the
affairs of the Company, after payment or provision for payment of all of the
Company's debts and obligations and any preferential distributions to holders
of Preferred Stock and any series or class of the Company's stock hereafter
issued that ranks senior as to liquidation rights to the Common Stock, if any,
the holders of the Common Stock will be entitled to share ratably in the
Company's remaining assets.
Miscellaneous. All outstanding shares of Common Stock are, and the Common
Stock offered hereby will be, validly issued, fully paid and nonassessable.
There is no established public trading market for the Common Stock.
The transfer agent and registrar for the Common Stock is Union Planters
Bank, N.A.
SERIES A PREFERRED STOCK
The following summary of the terms and provisions of the Series A Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the pertinent sections of the Company's Charter and Charter
Amendment creating the Series A Preferred Stock, each of which is available
from the Company.
Maturity. The Series A Preferred Stock has no stated maturity but will be
subject to mandatory redemption on March 30, 2005.
Rank. The Series A Preferred Stock, with respect to dividend rights and
rights upon liquidation, dissolution and winding up of the Company, ranks (i)
senior to all classes or series of Common Stock of the Company, and to all
equity securities ranking junior to the Series A Preferred Stock with respect
to dividend rights or rights upon liquidation, dissolution or winding up of
the Company; (ii) on parity with all equity securities issued by the Company
the terms of which specifically provide that such equity securities rank on a
parity with the Series A Preferred Stock with respect to dividend rights or
rights upon liquidation, dissolution or winding up of the Company and have
been consented to by the holders of the Series A Preferred Stock; and (iii)
junior to all existing and future indebtedness of the Company. The term
"equity securities" does not include convertible debt securities, which will
rank senior to the Series A Preferred Stock prior to conversion.
Dividends. Holders of the Series A Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, preferential cumulative cash
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<PAGE>
dividends at the rate of 5% per annum of the $12.81 liquidation preference per
share, payable upon the earlier of the redemption of the Series A Preferred
Stock or upon conversion of the Series A Preferred Stock.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the Company, the holders of the Series A Preferred Stock will be entitled to
be paid out of the funds of the Company legally available for distribution to
its shareholders a liquidation preference in cash of $12.81 per share, plus
all accrued and unpaid dividends, but without interest, before any
distribution of assets to holders of Common Stock or any other class or series
of capital stock of the Company that ranks junior to the Series A Preferred
Stock as to dividends or liquidation.
Mandatory Redemption. The Company will redeem all of the issued and
outstanding shares of Series A Preferred Stock on March 30, 2005 at a price
per share equal to the difference of the greater of (i) $12.81 per share plus
all accrued and unpaid dividends or (ii) the fair value thereof calculated as
if such shares had been converted into Common Stock. The redemption price is
subject to equitable adjustment upon the occurrence of certain events
affecting the capital structure of the Company or the issuance of shares for
below market value. If for any reason the Company defaults in its obligation
to pay all or any portion of the redemption price, in addition to any other
rights or remedies of the redeeming holder of Series A Preferred Stock, the
unpaid portion thereof will bear interest at a rate per annum of 14%.
Redemption Upon Material Event. If any of the following events occurs (i) a
change in control, (ii) a payment or prepayment of all or substantially all of
the indebtedness of the Company to an affiliate of the holder of the Series A
Preferred Stock, (iii) a merger, consolidation, share exchange or similar
transaction, (iv) the Company disposes of all or a substantial portion of its
assets or (v) a substantial change in the type of business conducted by the
Company, the holders of the Series A Preferred Stock may require the Company
to purchase the Series A Preferred Stock at a price per share equal to the
difference of (a) the greater of (i) $12.81 per share plus all accrued and
unpaid dividends or (ii) the fair value thereof calculated as if such shares
had been converted into Common Stock, minus (b) an amount equal to 5% of the
$12.81 per share liquidation preference calculated on a per annum basis for
the period commencing on the date of issuance and ending on the redemption
date. The redemption price is subject to equitable adjustment upon the
occurrence of certain events affecting the capital structure of the Company or
the issuance of shares for below market value. If for any reason the Company
defaults in its obligation to pay all or any portion of the redemption price,
in addition to any other rights or remedies of the redeeming holder of Series
A Preferred Stock, the unpaid portion thereof will bear interest at a rate per
annum of 14%.
Voting Rights. Holders of Series A Preferred Stock generally will have no
voting rights except as required by law. However, the consent of the holders
of at least a majority of the outstanding shares of Series A Preferred Stock
is necessary in order for the Company to increase the authorized number of
shares of Series A Preferred Stock or authorize or issue any shares of stock
or any securities convertible into shares of stock which shall rank in any
respect on a parity with the Series A Preferred Stock. In addition, the
holders of at least 80% of the outstanding shares of Series A Preferred Stock
must consent before the Company may amend or alter any of the express terms
and provisions of the Series A Preferred Stock in a manner which would
materially adversely affect the rights or preferences of the Series A
Preferred Stock or authorize or issue any shares of stock or any securities by
their terms convertible into shares of stock which rank in any respect prior
to shares of Series A Preferred Stock. Such special voting provisions shall be
inapplicable in the event no shares of Series A Preferred Stock are
outstanding.
Conversion. Any holder of Series A Preferred Stock may convert into Common
Stock all or any portion of the Series A Preferred Stock at any time and from
time to time upon payment of a conversion fee equal to 5% of the $12.81 per
share liquidation preference, calculated on a per annum basis for the period
commencing on the date of issuance of such share and ending on the date such
share is converted into Common Stock. The Series A Preferred Stock is
convertible into Common Stock at the holder's option at a ratio of one share
of Common Stock for each share of Series A Preferred Stock.
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<PAGE>
The conversion price is subject to equitable adjustment upon the occurrence of
certain events affecting the capital structure of the Company or the issuance
of shares for below market value.
PREFERRED STOCK
The Board of Directors is authorized, without further action by the
shareholders, to provide for the issuance of shares of Preferred Stock as a
class without series or in one or more series, to establish the number of
shares in each class or series and to fix the designation, powers, preferences
and rights of each such class or series and the qualifications, limitations or
restrictions thereof. Because the Board of Directors has the power to
establish the preferences and rights of each class or series of Preferred
Stock, the Board of Directors may afford the holders of any class or series of
Preferred Stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of Common Stock. The issuance of Preferred Stock could
have the effect of delaying or preventing a change in control of the Company.
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS AND TENNESSEE LAW
General. The provisions of the Charter, the Bylaws and Tennessee corporate
law described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of
the Company and its shareholders.
Directors and Officers. Pursuant to the Company's Charter, the members of
the Board of Directors are divided into three classes, each of which serves a
term of three years. The Bylaws provide that the number of directors shall be
no fewer than three or more than 15, with the exact number to be established
by the Board of Directors and subject to change from time to time as
determined by the Board of Directors. Vacancies on the Board of Directors
(including vacancies created by an increase in the number of directors) may be
filled only by the affirmative vote of a majority of the remaining directors.
Generally, officers are elected annually by and serve at the pleasure of the
Board of Directors.
The Charter provides that directors may be removed only for cause and only
by (i) the affirmative vote of the holders of a majority of the voting power
of all the shares of the Company's capital stock then entitled to vote in the
election of directors, voting together as a single class, unless the vote of a
special voting group is otherwise required by law, or (ii) the affirmative
vote of a majority of the entire Board of Directors then in office. This
provision, in conjunction with the provision of the Charter authorizing the
Board of Directors to fill vacant directorships, could prevent shareholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
Advance Notice for Shareholder Proposals or Making Nominations for
Meetings. The Bylaws establish an advance notice procedure for shareholder
proposals to be brought before a shareholders meeting of the Company and for
nominations by shareholders of candidates for election as directors at an
annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, only such business may be
conducted at a shareholders meeting as has been brought before the meeting by,
or at the direction of, the Board of Directors, or by a shareholder who has
given to the Secretary of the Company timely written notice in proper form of
the shareholder's intention to bring that business before the meeting. The
presiding officer at such meeting has the authority to make determinations
regarding the shareholder proposals or nominees. Only persons who are selected
and recommended by the Board of Directors, or the committee of the Board of
Directors designated to make nominations, or who are nominated by a
shareholder who gives the required notice will be eligible for election as
directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not later than
120 days in advance of the anniversary date of the Company's
49
<PAGE>
proxy statement for the previous year's annual meeting or, in the case of
special meetings, at the close of business on the tenth day following the date
on which notice of such meeting is first given to shareholders.
The notice of any shareholder proposal or nomination for election as
director must set forth various information required under the Bylaws. The
person submitting the notice of nomination and any person acting in concert
with such person must provide, among other things, the name and address under
which they appear on the Company's books (if they so appear) and the class and
number of shares of the Company's capital stock that are beneficially owned by
them.
Amendment of the Bylaws and Charter. The Bylaws provide that a majority of
the members of the Board of Directors or the holders of not less than sixty-
six and two-thirds percent (66 2/3%) of the outstanding shares of stock of
each class and series entitled to vote upon the matter have the power to
amend, alter or repeal the Bylaws.
Except as may be set forth in resolutions providing for any class or series
of Preferred Stock and except for provisions in the Charter establishing (i)
the number of directors and the designation of three classes of directors;
(ii) the procedure for filling vacancies in the Board of Directors; (iii) the
allowance of the removal of directors only for cause; (iv) the requirements to
call a special meeting of shareholders; (v) the liability and indemnification
of directors; and (vi) the procedures for amending the Charter and Bylaws,
each of which require the affirmative vote of holders of two-thirds of the
voting power of the shares entitled to vote at an election of directors, any
proposal to amend any other provision of the Charter requires approval by the
affirmative vote of both a majority of the members of the Board of Directors
then in office and the holders of a majority of the voting power of all of the
shares of the Company's capital stock entitled to vote on the amendments, with
shareholders entitled to dissenters' rights as a result of the Charter
amendment voting together as a single class. Shareholders entitled to
dissenters' rights as a result of a Charter amendment are those whose rights
would be materially and adversely affected because the amendment (i) alters or
abolishes a preferential right of the shares; (ii) creates, alters, or
abolishes a right in respect of redemption; (iii) alters or abolishes a
preemptive right; (iv) excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or (v)
reduces the number of shares held by such holder to a fraction if the
fractional share is to be acquired for cash. In general, however, no
shareholder is entitled to dissenter's rights if the security he or she holds
is listed on a national securities exchange or the Nasdaq National Market.
Anti-Takeover Legislation. The Tennessee Investor Protection Act (the
"Investor Protection Act") applies to "takeover offers" directed at an
"Offeree Company." The Investor Protection Act defines a "takeover offer" as
an offer to acquire or the acquisition of any equity security of an Offeree
Company, pursuant to a tender offer or a request or invitation for tenders if,
after the acquisition thereof, the Offeror would be directly or indirectly a
beneficial owner of more than 10% of any class of equity security of the
Offeree Company. The Investor Protection Act defines the term "Offeree
Company" as any corporation or other issuer incorporated in Tennessee or
having its principal place of business in the State of Tennessee. The Investor
Protection Act prohibits an Offeror from making a "takeover offer" if the
Offeror beneficially owns 5% or more of the stock of the "Offeree Company,"
any of which was purchased within one year before the proposed "takeover
offer" unless the Offeror (i) has made a public announcement of the "takeover
offer" and announces its intentions with respect to the management and control
of the "Offeree Company"; (ii) has made full, fair and adequate disclosure to
the holders of the securities to be acquired; and (iii) has filed with the
Commissioner of Commerce and Insurance (the "Commissioner") a Registration
Statement which contains information similar to that which federal law
requires to be disclosed on Schedule 13D (which must be filed within 10 days
of the acquisition of 5% of any class of equity security). After the
Registration Statement is filed with the Commissioner, he may request
additional information material to the "takeover offer" and may call for
hearings. The Investor Protection Act requires a seven day right of rescission
for any shareholder who tenders his shares and additionally provides that if
the "takeover offer" lasts more than 60 days, an Offeree may rescind his
tender. The Offeror must deliver to the Commissioner all solicitation
materials used in connection with the tender offer. The Investor Protection
Act prohibits "fraudulent, deceptive or manipulative acts or practices" by
either side.
50
<PAGE>
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company from
purchasing or agreeing to purchase any of its securities, at a price in excess
of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority
of the outstanding shares of each class of voting stock issued by the Company
or the Company makes an offer of at least equal value per share to all holders
of shares of such class.
The Investor Protection Act and the Greenmail Act may render a change of
control of the Company more difficult.
SHARES ELIGIBLE FOR FUTURE SALE
OUTSTANDING SHARES OF COMMON STOCK
Upon the Closing of the Offering, 8,027,773 shares of Common Stock will be
outstanding (8,567,773 shares if the Underwriters' over-allotment option is
exercised in full), including 177,776 shares issuable upon conversion of the
outstanding Series A Preferred Stock and 183,333 shares (assuming an initial
public offering price equal to the Mid-Point) issuable upon exercise of the
Lender Warrant. The Series A Preferred Stock is immediately convertible and
the Lender Warrant is immediately exercisable for nominal consideration upon
closing of the Offering. Of the shares of Common Stock outstanding, the
3,600,000 shares (4,140,000 if the Underwriters' over-allotment option is
exercised in full) sold in the Offering (other than shares that may be
purchased by "affiliates" of the Company, as that term is defined under the
Securities Act) will be freely tradeable. 4,000,000 shares of Common Stock
owned by Mr. Miller are eligible for resale under Rule 144. See "--
Restrictions on Resale of Restricted Stock; Rule 144." The remaining 427,773
shares of Common Stock outstanding are "restricted" within the meaning of Rule
144 and are not currently eligible for resale under Rule 144. The earliest
point in time when any such restricted shares of Common Stock are eligible for
resale pursuant to Rule 144, subject to volume, manner of sale, and other
limitations thereof, is March 1999.
Prior to this Offering, there has been no active trading market for the
Common Stock. No predictions can be made of the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale
will have on the market price prevailing from time-to-time. Nevertheless,
sales of significant amounts of Common Stock could adversely affect the
prevailing market price of Common Stock, as well as impair the ability of the
Company to raise capital through the issuance of additional equity securities.
See "Risk Factors--Potential Effect of Shares Eligible for Future Sale."
OPTIONS
Upon the closing of the Offering, the Company will have outstanding options
to purchase up to a total of 603,636 shares of Common Stock (assuming an
initial public price equal to the Mid-Point), of which 221,721 shares may be
acquired immediately after the closing of the Offering. The remaining options
are exercisable beginning one year after the date of grant. The Company
expects to file a registration statement on Form S-8 under the Securities Act
to register for resale shares of Common Stock issuable upon exercise of
options granted under the Plan. Accordingly, such shares will be freely
tradeable by holders who are not affiliates of the Company and, subject to the
volume and manner of sale limitations of Rule 144, by holders who are
affiliates of the Company.
WARRANTS AND RIGHTS
In connection with the acquisition of the Acquired Companies, the Company
issued the Seller Warrants to purchase 1,524,037 shares of Common Stock
(assuming an initial public offering price equal to the Mid-Point) at a price
per share equal to the initial public offering price. All Seller Warrants may
be exercised immediately after the closing of the Offering.
In connection with a financing transaction, the Company issued to its senior
lender the Lender Warrant to purchase 183,333 shares of Common Stock (assuming
an initial public offering price equal to the Mid-Point) for nominal
consideration. The Lender Warrant may be exercised immediately after the
closing of the Offering.
51
<PAGE>
In connection with the acquisition of B&M Printing, the Company granted
rights to purchase 108,333 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) at a price per share equal to the
initial public offering price to certain former B&M Printing shareholders in
return for their modification of certain terms of their notes with the Company
regarding the right of the Company to incur additional indebtedness. Such
rights are exercisable immediately after the closing of the Offering.
Pursuant to the Company's deferred compensation plan, the Company issued
rights, which are exercisable immediately after the closing of the Offering,
to purchase 83,333 shares of Common Stock (assuming an initial public offering
price equal to the Mid-Point) at a price per share equal to the initial public
offering price.
RESTRICTIONS ON RESALE OF RESTRICTED STOCK; RULE 144
Generally, restricted securities, as defined in Rule 144, may be resold only
pursuant to an effective registration under the Securities Act or pursuant to
an exemption available from the registration requirements of the Securities
Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who is an "affiliate" of the
Company, who has beneficially owned for at least one year shares of Common
Stock that have not been registered under the Securities Act or who
beneficially owns shares that were acquired from an "affiliate" of the Company
is entitled to sell within any three-month period the number of shares of
Common Stock that does not exceed the greater of (i) one percent of the number
of the then outstanding shares of Common Stock or (ii) the average weekly
reported trading volume of the Common Stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to certain notice
requirements and to the availability of current public information about the
Company and must be made in unsolicited brokers' transactions or to a market
maker. A person (or persons whose shares are aggregated) who is not an
"affiliate" of the Company under the Securities Act during the three months
preceding a sale and who has beneficially owned such shares for at least two
years is entitled to sell such shares under Rule 144(k) without regard to the
information, volume, manner of sale and notice provisions of Rule 144.
REGISTRATION RIGHTS
The holder of Series A Preferred Stock, who also holds the Lender Warrant,
has the right to require the Company to include its 177,776 shares of Common
Stock issued upon conversion of such Series A Preferred Stock and its 183,333
shares of Common Stock (assuming an initial public offering price equal to the
Mid-Point) acquired upon exercise of the Lender Warrant, in a registration of
shares of Common Stock subsequent to this Offering which is initiated by the
Company under the Securities Act or to demand the Company to effect a
registration of the offer and sale of such Common Stock under the Securities
Act. In connection with a registration of shares of Common Stock subsequent to
this Offering which is initiated by the Company under the Securities Act
involving an underwritten offering, the number of shares to be registered by
selling shareholders may be limited or eliminated entirely if the managing
underwriter determines marketing factors require a limitation on the number of
shares to be underwritten.
The Selling Shareholder, subject to certain limitations, has the right to
require the Company to register 66,664 shares of Common Stock in connection
with a registration of shares of Common Stock subsequent to this Offering
which is initiated by the Company under the Securities Act.
Certain holders of Seller Warrants to purchase an aggregate of 491,666
shares of Common Stock (assuming an initial public offering price equal to the
Mid-Point) at a price equal to the initial public offering price per share,
subject to certain limitations, have the right to require the Company to
register such shares in a registration of shares of Common Stock subsequent to
this Offering which is initiated by the Company under the Securities Act.
The registration rights agreements and warrants which contain registration
rights, as applicable, contain customary provisions whereby the Company and
the other parties thereto agree to indemnify and contribute to the other with
regard to losses caused by the misstatement of any information or the omission
of any information required to be provided in a registration statement filed
under the Securities Act. The registration rights require the Company to pay
the expenses associated with any registration other than sales discounts,
commissions, transfer taxes and amounts to be borne by underwriters or as
otherwise required by law.
52
<PAGE>
The summary herein of certain provisions of the registration rights does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all of the provisions of the warrants, copies of which are filed
as exhibits to the Registration Statement.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement") among the Company and the Underwriters named below
for whom Morgan Keegan & Company, Inc. and SunTrust Equitable Securities
Corporation are acting as representatives (the "Representatives"), the Company
has agreed to sell to each of such Underwriters named below, and each of such
Underwriters has severally agreed to purchase from the Company and the Selling
Shareholder, the respective number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ----------
<S> <C>
Morgan Keegan & Company, Inc....................................
SunTrust Equitable Securities Corporation.......................
---
Total.........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below), if
any are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments
of the non-defaulting Underwriter may be increased or the Underwriting
Agreement may be terminated.
The Company has granted the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
540,000 additional shares of Common Stock from the Company on the same terms
and conditions as set forth above. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of the
additional shares of Common Stock as it was obligated to purchase pursuant to
the Underwriting Agreement.
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters or to contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock will be
determined by negotiation among the Company and the Representatives and will
be based on, among other things, the Company's financial and operating history
and condition, its prospects and the prospects for its industry in general,
the management of the Company and the market prices for the securities of
companies in businesses similar to that of the Company.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares offered hereby to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of $ per share, and the
Underwriters and such dealers may allow a discount of $ per share on sales
to certain other dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
Representatives.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
53
<PAGE>
The Company, its officers and directors and certain other shareholders of
the Company have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under the
Securities Act relating to, any shares of Common Stock or securities
convertible into or exchangeable or exercisable for any shares of Common Stock
without the prior written consent of the Representatives for a period of 180
days from the date of this Prospectus, except for (i) issuances of
unregistered Common Stock by the Company in connection with acquiring printing
companies, (ii) issuances of Common Stock by the Company pursuant to the
exercise of stock purchase warrants or stock options outstanding on the date
of this Prospectus or (iii) issuances or registration of options or other
rights granted under the Plan or the Director Option Plan.
The Underwriters have reserved for sale, at the initial public offering
price of $ per share, up to 340,000 shares of Common Stock for employees,
directors and certain other persons who have a business relationship with the
Company who have expressed an interest in purchasing such shares of Common
Stock in the Offering. The number of shares available for sale to the general
public in the Offering will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriters to the general public on the same terms as the other shares
offered hereby. The Representatives are aware of the "Free-Riding and
Withholding" Conduct Rules of the National Association of Securities Dealers
in connection with the sale of certain issuer-directed securities and will
comply with those rules.
The Company has agreed to indemnify the Selling Shareholder against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Selling Shareholder may be required to make
in respect thereof.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
pursuant to which the Underwriters may bid for or purchase Common Stock for
the purpose of stabilizing its market price. The Underwriters also may create
a short position for the account of the Underwriters by selling more Common
Stock in connection with the Offering than they are committed to purchase from
the Company, and in such case the Underwriters may purchase Common Stock in
the open market following completion of the Offering to cover all or a portion
of such short position. The Underwriters may also cover all or a portion of
such short position by exercising the Underwriters' over-allotment option
referred to above. In addition, the Underwriters may impose "penalty bids"
whereby selling concessions allowed to syndicate members or other broker-
dealers for the shares of Common Stock sold in the Offering for their account
may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid might also affect the price of the
Common Stock to the extent that it could discourage resales of the Common
Stock. Neither the Company nor any of the Underwriters make any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters make any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Company has been advised by the Representatives that they presently
intend to make a market in the Common Stock offered hereby; the
Representatives are not obligated to do so, however, and any market making
activity may be discontinued at any time. There can be no assurance that an
active public market for the Common Stock will develop and continue after the
Offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholder by Baker, Donelson, Bearman &
Caldwell, Memphis, Tennessee. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by King & Spalding, Atlanta,
Georgia.
54
<PAGE>
The consolidated statements operations, shareholder's equity, and cash flows
of Master Printing (predecessor of Master Graphics, Inc.) for the year ended
June 30, 1995 have been included herein and in the registration statement in
reliance upon the report of Thompson Dunavant, P.L.L.C., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Jones Printing Company, Inc. as of December 31,
1996, and for each of the years in the two-year period ended December 31,
1996, have been included herein and in the registration statement in reliance
upon the report of Joseph Decosimo and Company, LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Phoenix as of January 31, 1997, and for each of
the years in the two-year period ended January 31, 1997, included in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent certified public accountants, as indicated in
their report with respect thereto and are included herein, in reliance upon
the authority of said firm as experts in accounting and auditing.
The financial statements of McQuiddy as of June 30, 1996 and 1997, and for
each of the years in the three-year period ended June 30, 1997, have been
included herein and in the registration statement in reliance upon the report
of Marlin & Edmondson, P.C., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Phillips as of December 31, 1996 and 1997, and
for each of the years in the three-year period ended December 31, 1997, have
been included herein and in the registration statement in reliance upon the
report of S. F. Fiser & Company, P.A. independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
The financial statements of Harperprints as of December 31, 1996 and 1997,
and for each of the years in the three-year period ended December 31, 1997,
have been included herein and in the registration statement in reliance upon
the report of Becker & Company, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered by this Prospectus. This Prospectus, which
is a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement or the exhibits or
schedules thereto, certain portions having been omitted pursuant to the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement,
including the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected without charge at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's Regional Offices at Seven World Trade Center, Suite 1300, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the registration statement and
certain other filings made with the Commission through its Electronic Data
Gathering Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
55
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA:
Master Graphics, Inc. and subsidiaries:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
1998................................................................... F-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1997....................................... F-5
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the three months ended March 31, 1997.................................. F-6
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998.................................. F-7
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-8
HISTORICAL:
Master Graphics, Inc. and subsidiary:
Reports of Independent Public Accountants............................... F-16
Consolidated Balance Sheets as of June 30, 1996 and 1997 and December
31, 1997............................................................... F-18
Consolidated Statements of Operations for the years ended June 30, 1995,
1996, and 1997, and the six months ended December 31, 1997............. F-19
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1995, 1996, and 1997, and the six months ended December 31, 1997... F-20
Consolidated Statements of Cash Flows for the years ended June 30, 1995,
1996, and 1997, and the six months ended December 31, 1997............. F-21
Notes to Consolidated Financial Statements.............................. F-22
Condensed Consolidated Balance Sheet as of March 31, 1998 (unaudited)... F-33
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1998 (unaudited).............................. F-34
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1998 (unaudited).............................. F-35
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-36
1997 ACQUISITIONS:
Lithograph Printing Company of Memphis:
Report of Independent Public Accountants................................ F-40
Balance Sheets as of December 31, 1995 and 1996, and June 19, 1997...... F-41
Statements of Income for the years ended December 31, 1995 and 1996, and
the period from January 1, 1997 through June 19, 1997.................. F-42
Statements of Stockholders' Equity for the years ended December 31, 1995
and 1996, and the period from January 1, 1997 through June 19, 1997.... F-43
Statements of Cash Flows for the years ended December 31, 1995 and 1996,
and the period from January 1, 1997 through June 19, 1997.............. F-44
Notes to Financial Statements........................................... F-45
Blackwell Lithographers, Inc.:
Report of Independent Public Accountants................................ F-48
Balance Sheet as of June 19, 1997....................................... F-49
Statement of Operations for the period from January 1, 1997 through June
19, 1997............................................................... F-50
Statement of Stockholders' Equity for the period from January 1, 1997
through June 19, 1997.................................................. F-51
Statement of Cash Flows for the period from January 1, 1997 through June
19, 1997............................................................... F-52
Notes to Financial Statements........................................... F-53
The Argus Press, Inc.:
Report of Independent Public Accountants................................ F-56
Balance Sheets as of December 31, 1996, and September 22, 1997.......... F-57
Statements of Operations for the year ended December 31, 1996, and the
period from January 1, 1997 through September 22, 1997................. F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Stockholders' Equity for the year ended December 31,
1996, and the period from January 1, 1997 through September 22, 1997.. F-59
Statements of Cash Flows for the year ended December 31, 1996, and the
period from January 1, 1997 through September 22, 1997................ F-60
Notes to Financial Statements.......................................... F-61
Phoenix Communications, Inc.:
Reports of Independent Public Accountants.............................. F-64
Balance Sheets as of January 31, 1997, and December 16, 1997........... F-66
Statements of Operations and Retained Earnings for the years ended
January 31, 1996 and 1997, and the period from February 1, 1997
through December 16, 1997............................................. F-67
Statements of Cash Flows for the years ended January 31, 1996 and 1997,
and the period from February 1, 1997 through December 16, 1997........ F-68
Notes to Financial Statements.......................................... F-69
Jones Printing Company, Inc.:
Reports of Independent Public Accountants.............................. F-75
Balance Sheets as of December 31, 1996, and December 16, 1997.......... F-77
Statements of Income and Retained Earnings for the years ended December
31, 1995 and 1996, and the period from January 1, 1997 through
December 16, 1997..................................................... F-78
Statements of Cash Flows for the years ended December 31, 1995 and
1996, and the period from January 1, 1997 through December 16, 1997... F-79
Notes to Financial Statements.......................................... F-80
1998 ACQUISITIONS:
McQuiddy Printing Company:
Report of Independent Public Accountants............................... F-84
Balance Sheets as of June 30, 1996 and 1997 and March 31, 1998
(unaudited)........................................................... F-85
Statements of Earnings for the years ended June 30, 1995, 1996 and 1997
and the nine months ended March 31, 1997 and 1998 (unaudited)......... F-86
Statements of Stockholders' Equity for the years ended June 30, 1995,
1996 and 1997 and the nine months ended March 31, 1997 and 1998
(unaudited)........................................................... F-87
Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997 and the nine months ended March 31, 1997 and 1998 (unaudited).... F-88
Notes to Financial Statements.......................................... F-89
Phillips Litho Co., Inc.:
Report of Independent Public Accountants............................... F-95
Balance Sheets as of December 31, 1996 and 1997........................ F-96
Statements of Operations for the years ended December 31, 1995, 1996
and 1997.............................................................. F-97
Statements of Retained Earnings for the years ended December 31, 1995,
1996 and 1997......................................................... F-98
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997.............................................................. F-99
Notes to Financial Statements.......................................... F-100
Hederman Brothers, Inc.:
Report of Independent Public Accountants............................... F-105
Balance Sheets as of December 31, 1996 and 1997........................ F-106
Statements of Operations for the years ended December 31, 1995, 1996
and 1997.............................................................. F-107
Statements of Shareholders' Equity for the years ended December 31,
1995, 1996 and 1997................................................... F-108
Statements of Cash Flows for the years ended December 31, 1995, 1996
and 1997.............................................................. F-109
Notes to Financial Statements.......................................... F-110
Harperprints, Inc.:
Report of Independent Public Accountants............................... F-114
Balance Sheets as of December 31, 1996 and 1997........................ F-115
Statements of Income for the years ended December 31, 1996 and 1997.... F-116
Statements of Changes In Stockholders' Equity for the years ended
December 31, 1996 and 1997............................................ F-117
Statements of Cash Flows for the years ended December 31, 1996 and
1997.................................................................. F-118
Notes to Financial Statements.......................................... F-119
</TABLE>
F-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet of the Company
as of March 31, 1998 gives effect to the May 8, 1998 acquisition of McQuiddy
and the financing thereof as if such transaction had occurred on March 31,
1998. The unaudited pro forma condensed consolidated statement of operations
of the Company for the year ended December 31, 1997 and the three month
periods ended March 31, 1997 and 1998 give effect to the acquisitions of the
Acquired Companies acquired in 1997 (Lithograph, Blackwell, Sutherland, Argus,
Phoenix and Jones) and the Acquired Companies acquired in 1998 (Harperprints,
Hederman, McQuiddy and Phillips) and the financings thereof as if such
transactions had occurred on January 1, 1997. Share amounts reflect an assumed
stock split of 40,000 to 1. The pro forma, as adjusted, financial data gives
effect to the acquisitions and related financings, and additionally gives
effect to (1) the exercise by the Selling Shareholder of a warrant to acquire
266,664 shares of Common Stock (200,000 shares of which are being offered by
the Selling Shareholder in the Offering), and (2) the Offering and the uses of
proceeds thereof. The pro forma data presented herein do not purport to
represent what the Company's financial position or results of operations would
have been had such transactions in fact occurred on such dates or to project
the Company's results of operations for any future period. The unaudited pro
forma consolidated financial statements should be read in conjunction with the
historical audited financial statements of the Company and of the acquired
companies, and "Management's Discussion and Analysis of financial Condition
and Results of Operations" which are included elsewhere in this Prospectus,
except for the historical financial statements of Sutherland which have not
been included.
F-3
<PAGE>
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MCQUIDDY ACQUISITION OFFERING PRO FORMA
(NOTES ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
COMPANY 1 AND 2) (NOTE 3) CONSOLIDATED (NOTE 4) AS ADJUSTED
------- -------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash.................. 4,843 133 -- 4,976 -- 4,976
Trade accounts
receivable, net...... 23,058 2,501 -- 25,559 -- 25,559
Inventories........... 5,822 1,428 60 7,310 -- 7,310
Other current assets.. 2,970 284 -- 3,254 -- 3,254
------- ------ ------ ------- ------- -------
Total current
assets............. 36,693 4,346 60 41,099 -- 41,099
Property, plant and
equipment, net......... 45,117 5,912 1,222 52,251 -- 52,251
Goodwill, net........... 38,682 -- -- 38,862 -- 38,682
Other assets............ 6,863 395 -- 7,258 (610) 6,648
------- ------ ------ ------- ------- -------
127,355 10,653 1,282 139,290 (610) 138,680
======= ====== ====== ======= ======= =======
Current liabilities:
Current installments
of long-term debt.... 4,127 1,055 (1,055) 4,127 -- 4,127
Accounts payable,
trade................ 6,872 788 -- 7,660 -- 7,660
Accrued expenses and
other liabilities.... 7,153 352 -- 7,505 (3,000) 4,505
------- ------ ------ ------- ------- -------
Total current
liabilities........ 18,152 2,195 (1,055) 19,292 (3,000) 16,292
Long-term debt:
Finance companies..... 74,458 -- 7,857 82,315 (30,954) 51,361
Sellers' notes........ 14,723 -- 1,503 16,226 -- 16,226
Other................. 10,551 3,024 (3,024) 10,551 -- 10,551
------- ------ ------ ------- ------- -------
Total long-term
debt............... 99,732 3,024 6,336 109,092 (30,954) 78,138
Other liabilities....... 1,065 -- -- 1,065 -- 1,065
Deferred income tax..... 3,288 309 1,074 4,671 -- 4,671
------- ------ ------ ------- ------- -------
Total liabilities... 122,237 5,528 6,355 136,457 (33,954) 100,166
Redeemable common stock
warrant................ 2,026 -- -- 2,026 (2,026) --
Redeemable preferred
stock.................. 1,350 -- -- 1,350 -- 1,350
Shareholders' equity.... 1,742 5,125 (5,073) 1,794 35,370 37,164
------- ------ ------ ------- ------- -------
127,355 10,653 1,282 139,290 (610) 138,680
======= ====== ====== ======= ======= =======
</TABLE>
F-4
<PAGE>
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACQUISITION OFFERING PRO FORMA
1997 1998 ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
COMPANY ACQUISITIONS ACQUISITIONS (NOTE 5) CONSOLIDATED (NOTE 6) AS ADJUSTED
------- ------------ ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. 39,470 62,895 51,606 -- 153,971 -- 153,971
Cost of revenue......... 32,460 46,375 38,770 (2,424) 115,181 -- 115,181
------ ------ ------ ------ ------- ----- -------
Gross profit........ 7,010 16,520 12,836 2,424 38,790 -- 38,790
Selling, general &
administrative
expenses............... 7,760 12,219 9,840 (596) 29,223 -- 29,223
Amortization of
goodwill............... 98 831 -- 93 1,022 -- 1,022
------ ------ ------ ------ ------- ----- -------
Operating income
(loss)............. (848) 3,470 2,996 2,927 8,545 -- 8,545
Other income (expense):
Redeemable warrant
valuation
adjustment........... (1,635) -- -- 455 (1,180) 1,180(a) --
Interest income....... 82 24 29 -- 135 -- 135
Interest expense...... (2,345) (1,752) (1,240) (6,334) (11,671) 5,138(b) (6,533)
Deferred loan cost
amortization......... (90) -- -- (1,095) (1,185) 731(b) (454)
Other, net............ 156 (234) (48) -- (126) -- (126)
------ ------ ------ ------ ------- ----- -------
Other, net.......... (3,832) (1,962) (1,259) (6,974) (14,027) 7,049 (6,978)
------ ------ ------ ------ ------- ----- -------
Earnings (loss)
before income
taxes.............. (4,680) 1,508 1,737 (4,047) (5,482) 7,049 1,567
Income tax expense
(benefit).............. 45 14 791 (850) -- 674(c) 674
------ ------ ------ ------ ------- ----- -------
Net earnings (loss)... (4,725) 1,494 946 (3,197) (5,482) 6,375 893
====== ====== ====== ====== ======= ===== =======
Net earnings (loss)
per common share:
Basic............... $(1.18) $ (1.43) $ 0.09
====== ======= =======
Diluted............. $(1.18) $ (1.43) $ 0.09
====== ======= =======
</TABLE>
F-5
<PAGE>
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACQUISITION OFFERING PRO FORMA
1997 1998 ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
COMPANY ACQUISITIONS ACQUISITIONS (NOTE 5) CONSOLIDATED (NOTE 6) AS ADJUSTED
------- ------------ ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. 3,161 20,695 11,270 -- 35,126 -- 35,126
Cost of revenue......... 2,691 14,750 8,956 (178) 26,219 -- 26,219
------ ------ ------ ------ ------ ----- ------
Gross profit........ 470 5,945 2,314 178 8,907 -- 8,907
Selling, general &
administrative
expenses............... 552 3,979 1,905 (76) 6,360 -- 6,360
Amortization of
goodwill............... 84 90 -- 81 255 -- 255
------ ------ ------ ------ ------ ----- ------
Operating income
(loss)............. (166) 1,876 409 173 2,292 -- 2,292
Other income (expense):
Interest income....... 21 9 7 -- 37 -- 37
Interest expense...... (157) (558) (454) (2,030) (3,199) 1,267(b) (1,932)
Deferred loan cost
amortization......... -- -- -- (274) (274) 91 (b) (183)
Other, net............ 42 (54) 71 -- 59 -- 59
------ ------ ------ ------ ------ ----- ------
Other, net.......... (94) (603) (376) (2,304) (3,377) 1,358 (2,019)
------ ------ ------ ------ ------ ----- ------
Earnings (loss)
before income
taxes.............. (260) 1,273 33 (2,131) (1,085) 1,358 273
Income tax expense
(benefit).............. (11) 23 (24) -- (12) 129(c) 117
------ ------ ------ ------ ------ ----- ------
Net earnings (loss)... (249) 1,250 57 (2,131) (1,073) 1,229 156
====== ====== ====== ====== ====== ===== ======
Net earnings (loss)
per common share:
Basic............... $(0.06) $(0.28) $ 0.01
====== ====== ======
Diluted............. $(0.06) $(0.28) $ 0.01
====== ====== ======
</TABLE>
F-6
<PAGE>
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACQUISITION OFFERING PRO FORMA
1998 ADJUSTMENTS PRO FORMA ADJUSTMENTS CONSOLIDATED
COMPANY ACQUISITIONS (NOTE 5) CONSOLIDATED (NOTE 6) AS ADJUSTED
------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. 28,020 10,442 -- 38,462 38,462
Cost of revenue......... 20,654 8,596 (131) 29,119 29,119
------ ------ ----- ------ ----- ------
Gross profit........ 7,366 1,846 131 9,343 -- 9,343
Selling, general &
administrative
expenses............... 4,669 2,116 (98) 6,686 6,686
Amortization of
goodwill............... 196 -- 46 242 242
------ ------ ----- ------ ----- ------
Operating income
(loss)............. 2,501 (270) 183 2,415 -- 2,415
Other income (expense):
Interest income....... 85 11 -- 96 96
Interest expense...... (2,065) (304) (735) (3,104) 1,305 (1,799)
Deferred loan cost
amortization......... (183) -- -- (183) (183)
Other, net............ 101 (1,180) 1,199 120 120
------ ------ ----- ------ ----- ------
Other, net.......... (2,062) (1,473) 464 (3,071) 1,305 (1,766)
------ ------ ----- ------ ----- ------
Earnings (loss)
before income
taxes.............. 439 (1,743) 647 (656) 1,305 649
Income tax expense
(benefit).............. (4) (157) 161 -- 279 279
------ ------ ----- ------ ----- ------
Net earnings (loss)... 443 (1,586) 486 (656) 1,026 370
====== ====== ===== ====== ===== ======
Net earnings (loss)
per common share:
Basic............... $ 0.11 ($0.18) $ 0.04
====== ====== ======
Diluted............. $ 0.10 ($0.18) $ 0.04
====== ====== ======
</TABLE>
F-7
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet
presents the pro forma consolidated financial position of the Company as if
the acquisition of McQuiddy and the financing thereof had occurred on March
31, 1998. The accompanying unaudited pro forma condensed consolidated
statements of operations presents the pro forma consolidated results of
operations of the Company as if the acquisitions of the Acquired Companies
acquired in 1997 (Lithograph, Blackwell, Sutherland, Argus, Phoenix and Jones)
and the Acquired Companies acquired in 1998 (Harperprints, Hederman, McQuiddy
and Phillips) and the financings thereof had occurred on January 1, 1997. The
pro forma condensed consolidated balance sheet has been derived from the
historical balance sheets of the Company and McQuiddy as of March 31, 1998;
the pro forma condensed consolidated statements of operations for the year
ended December 31, 1997 and the three month periods ended March 31, 1997 and
1998 have been derived from the historical statements of operations of the
Company and the Acquired Companies prior to their respective acquisitions. The
results of operations of the Acquired Companies subsequent to their
acquisitions have been included in the historical statement of operations of
the Company. The actual acquisition dates of the Acquired Companies are as
follows: 1997--Lithograph, Blackwell, and Sutherland (June 19, 1997), Argus
(September 22, 1997), and Phoenix and Jones (December 16, 1997); 1998--
Hederman (March 1, 1998), Phillips (March 1, 1998), Harperprints (March 31,
1998) and McQuiddy (May 8, 1998).
In addition, the pro forma, as adjusted, financial information gives effect
to the Offering and the use of proceeds thereof, and also gives effect to the
exercise by the Selling Shareholder of a warrant to acquire 266,664 shares of
Common Stock, 200,000 shares of which are being offered by the Selling
Shareholder in the Offering.
The acquisitions have been accounted for in the pro forma condensed
consolidated financial statements using the purchase method of accounting. The
total purchase cost has been allocated to the assets and liabilities acquired
based upon their estimated fair values on the effective dates of the
respective acquisitions. Such allocations are based on studies, all of which
have not been finalized. Accordingly, the effect of the allocation of the
purchase cost on the pro forma balance sheet, and the related effect on pro
forma results of operations, is preliminary. The final values assigned may
differ from those set forth herein; however, it is not expected that the final
allocation of purchase costs will differ materially from those set forth
herein.
The pro forma data presented herein do not purport to represent what the
Company's financial position or results of operations would have been had the
1997 and 1998 acquisitions in fact occurred on such dates or to project the
Company's results of operations for any future period.
(2) ACQUISITIONS AND RELATED FINANCINGS
Acquisitions
On June 19, 1997, the Company acquired all of the outstanding common stock
of Blackwell Lithographers, Inc. and Lithograph Printing Company of Memphis,
and the assets of Sutherland Printing Company. All of these businesses are
engaged in the general commercial printing business. The acquisitions were
financed with a combination of cash ($10.4 million), subordinated notes to the
sellers ($5.1 million) and warrants to acquire Common Stock (valued at
$210,000). In addition, the Company incurred other acquisition costs totalling
approximately $470,000. These acquisitions have been accounted for by the
purchase method and, accordingly, the results of operations of Blackwell,
Lithograph and Sutherland have been included in the Company's consolidated
financial statements from June 19, 1997. The $5 million excess of the
aggregate purchase prices over the aggregate fair value of the net
identifiable assets acquired has been recorded as goodwill and is being
amortized on a straight line basis over 40 years.
During the six months ended December 31, 1997, the Company acquired all of
outstanding common stock of the following companies: as of September 22,
1997--The Argus Press, Inc.; as of December 16, 1997--
F-8
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
Phoenix Communications, Inc., and Jones Printing Company, Inc. All of these
businesses are engaged in the general commercial printing business. The
acquisitions were financed with a combination of cash ($17.8 million),
subordinated notes issued to the sellers ($6.15 million), and warrants to
acquire common stock (valued at $1.4 million). In addition, the Company
incurred other acquisition costs totalling approximately $2.3 million. These
acquisitions have been accounted for by the purchase method and, accordingly,
the results of operations of Argus have been included in the Company's
consolidated financial statements from September 22, 1997, and the results of
operations of Phoenix and Jones have been included in the Company's
consolidated financial statements from December 16, 1997. The $23 million
excess of the aggregate purchase prices over the aggregate fair value of the
net identifiable assets acquired has been recorded as goodwill and is being
amortized on a straight line basis over 40 years.
In March 1998, the Company acquired all of the outstanding common stock of
Harperprints, Inc., Hederman Brothers, Inc., and Phillips Litho Co., Inc.; in
May 1998 the Company acquired all of the outstanding common stock of McQuiddy
Printing Company. All of these businesses are engaged in the general
commercial printing business. The acquisitions were financed with a
combination of cash ($18.7 million), subordinated notes issued to the sellers
($3.7 million) and warrants to acquire common stock (valued at $1.1 million).
In addition, the Company incurred other acquisition costs totalling
approximately $2.3 million. These acquisitions have been accounted for by the
purchase method and, accordingly, the results of operations of Harperprints,
Inc., Hederman, McQuiddy, and Phillips will be included in the Company's 1998
consolidated financial statements from their respective acquisition dates in
1998. The estimated $12.0 million excess of the aggregate purchase prices over
the aggregate fair value of the net identifiable assets acquired will be
recorded as goodwill and amortized on a straight line basis over 40 years.
The Harperprints, Hederman, Jones, Phillips and Phoenix stock purchase
agreements also provide for additional payments over the next three years
contingent on future cash flows, as defined, of the respective businesses.
Management expects that such payments will not exceed $15 million.
Following is a summary of consideration given in each of the acquisitions:
<TABLE>
<CAPTION>
NUMBER OF
WARRANT
COMPANY DATE ACQUIRED CASH(1) SELLER NOTE SHARES(2)
------- ------------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
Lithograph Printing
Company of Memphis...... June 19, 1997 $ 7,433,727 $ 3,750,000 312,500
Blackwell Lithographers,
Inc. ................... June 19, 1997 3,000,000 1,000,000 83,333
Sutherland Printing
Company, Inc............ June 19, 1997 -- 351,053 27,083
The Argus Press, Inc. ... September 23, 1997 8,500,000 3,750,000 312,500
Phoenix Communications,
Inc. ................... December 16, 1997 6,633,030 1,150,000 387,500
Jones Printing Company,
Inc. ................... December 16, 1997 2,672,594 1,250,000 104,166
Hederman Brothers,
Inc. ................... March 1, 1998 1,500,000 193,000 166,665
McQuiddy Printing
Company................. May 8, 1998 5,012,697 1,502,948 17,440
Phillips Litho Co.,
Inc. ................... March 1, 1998 8,113,078 854,219 71,184
Harperprints, Inc. ...... March 31, 1998 4,568,875 1,125,000 41,666
----------- ----------- ---------
Total.................. $47,434,001 $14,926,220 1,524,037
=========== =========== =========
</TABLE>
- --------
(1) In addition to cash consideration paid to sellers, the Company has
incurred, or will incur, other transaction costs which have totaled
approximately $4.6 million.
(2) The respective stock purchase agreements specify a dollar value of Common
Stock which may be acquired by the seller at the Common Stock's initial
public offering price. The number of shares listed above is based on the
mid-point of the range of the estimated offering price.
F-9
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
Financing of Acquisitions
In June 1997 the Company borrowed $4.3 million from Sirrom Capital
Corporation ("Sirrom") to partially finance its June 1997 business
acquisitions described above. The Sirrom loan bears interest at 13.25%,
payable monthly, and the principal is due in May, 2002, with no penalty for
early repayment. The loan is subject to a security agreement providing
subordinated liens on all equipment, inventory, accounts receivable, and
intangible assets. In connection with obtaining the Sirrom loan, the Company
paid a processing fee of $107,500 and issued to Sirrom a common stock warrant
to acquire a 6% interest in the Common Stock of the Company. On April 8, 1998,
Sirrom exercised its warrant and acquired 6.6666 shares of Common Stock
(266,664 shares after the effect of the 40,000 to 1 stock split to be effected
immediately preceding the Offering).
At December 31, 1997, the Company, through its operating subsidiary, Premier
Graphics, is a borrower under a $60 million Amended and Restated Loan and
Security Agreement dated December 16, 1997, with General Electric Capital
Corporation ("Senior Lender"). Proceeds from the loan agreement have been used
primarily to finance the 1997 acquisitions. At December 31, 1997, the loan
agreement was comprised of a Term Loan-A of $30 million, a Term Loan-B of
$17.8 million, and an unused acquisition line of $12.2 million. The Term Loan-
A is due in 19 quarterly installments of approximately $937,500, plus a final
principal payment due in December, 2002; interest on the Term Loan-A which is
payable monthly is based on a LIBOR-adjusted rate (8.94% at December 31,
1997). The Term Loan-B is due in 19 quarterly installments of $25,000, with a
final principal payment due in December, 2002; interest on the Term Loan-B at
an annual rate of 12% is payable monthly, and the Company has an option to
convert such rate to a variable rate. The Term Loan-A is subject to a
prepayment penalty which declines from 3% in the first year to 0% after the
third year; the Term Loan-B is not subject to a prepayment penalty. The Loan
Agreement contains mandatory prepayment provisions which are based on annual
excess cash flows, as defined in the credit agreement. The Term Loans are
collateralized by substantially all of the Company's tangible and intangible
assets. The Term Loans are subject to various covenants, including limits on
dividends, additional debt, total liabilities and capital expenditures, and
the maintenance of levels of EBITDA (as defined) and interest, fixed charge,
and leverage ratios. In conjunction with obtaining the Term Loans, the Company
incurred fees of approximately $1 million; the Company also issued to the
Senior Lender a common stock warrant which is described in Note 12 to the
Company's consolidated financial statements.
In connection with the various acquisitions in 1997, the Company has issued
subordinated unsecured notes to the respective sellers. These subordinated
notes, which totaled $4.8 million and $10.9 million at June 30, 1997 and
December 31, 1997, respectively, are due in seven years, bear interest at 12%
(payable monthly), and generally are subject to 20% prepayment penalties.
In connection with its acquisition of B&M Printing Company, Inc. in 1992,
the Company issued notes to the sellers in the aggregate amount of $1.3
million. The notes bear interest at 10%, payable quarterly, and the principal
is due on November 30, 2002. The Company granted rights to purchase Common
Stock to these sellers in June 1997, in return for certain modifications to
the related loan agreements. Effectively, the holders have the right, if there
has been a public offering of the Company's Common Stock, to acquire up to
approximately $430,000 of Common Stock at an exercise price equal to the of
the Company's Common Stock initial public offering price; such rights expire
three years after any initial public offering of the Company's Common Stock.
In connection with a June 1997 acquisition, the Company issued a $1,090,000
non-interest bearing note payable to the seller maturing in May, 2007. The
Company recorded the note at its net present value and is amortizing the
discount thereon over the life of the note using the interest method. The note
is classified above as "other" long-term debt.
F-10
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
The cash portion of the Hederman acquisition was funded by a $5.9 million
borrowing under on the Company's acquisition line under its Amended and
Restated Credit Agreement with its Senior Lender. In connection with this
financing, the Company agreed to certain modifications to the credit
agreement, including an increase in the quarterly amortization of the Term
Loan-B from $25,000 to $50,000.
The cash portion of the Phillips Litho acquisition was financed by a $15
million term loan from its Senior Lender. The loan is to be repaid in 19
quarterly installments of $12,500, beginning in July 1998, and a twentieth and
final installment, in March 2003, of the remaining balance. Interest at an
annual rate of 12% is payable monthly, provided that the Senior Lender may at
its option convert the rate to a floating rate at 3.5% over prime. The term
loan requires mandatory prepayment based on 75% of annual excess cash flows,
as defined; voluntary prepayments will incur prepayment penalties on a
declining scale during the first three years of the loan. In consideration for
the loan, the Company agreed to pay to the Senior Lender an origination fee of
$500,000.
The cash portion of the Harperprints acquisition was financed with $6.5
million in proceeds from a $10 million term loan from its Senior Lender. The
loan is to be repaid in 19 quarterly installments of $12,500, beginning in
July, 1998, and a twentieth and final installment, in March 2003, of the
remaining balance. Interest at an annual rate of 12% is payable monthly;
provided that the Senior Lender may at its option convert the rate to a
floating rate at 3.5% over prime. The term loan requires mandatory prepayment
based on 75% of annual excess cash flows, as defined; voluntary prepayments
will incur prepayment penalties on a declining scale during the first three
years of the loan. In consideration for the loan, the Company issued a warrant
to the Senior Lender which allows the Senior Lender to acquire a number of
shares of Common Stock equivalent to $2.2 million divided by the initial
public offering price of the Common Stock. The warrant has an exercise price
of $100, and the holder may require the Company to redeem the warrant under
certain conditions at a price equivalent to the then fair value of the
underlying common stock at that date.
The cash portion of the McQuiddy acquisition will be funded by an advance of
$6.3 million from the Company's acquisition line under its Amended and
Restated Credit Agreement with its Senior Lender as well as the remaining $3.5
million from the Harperprints loan. The draw under the acquisition line will
be repayable at March 2003.
In connection with the financings of the 1998 acquisitions,the Company and
the Senior Lender also entered into an exchange agreement whereby the Company
issued 177,776 shares (based on the 40,000 to 1 stock split to be effected
immediately prior to the Offering) of its newly created Series A Cumulative
Convertible Preferred Stock, par value $0.01 ("Series A Preferred Stock") in
exchange for the senior lender's warrant to purchase a 4% interest in the
Company's outstanding common stock. The Series A Preferred Stock carries an
annual dividend rate of 5% of its liquidation value ($12.81 per share);
dividends are payable quarterly and may be paid in cash and/or in kind. The
Series A Preferred Stock is convertible into Common Stock at the holder's
option at a ratio of 1 share of Common Stock for each share of Series A
Preferred Stock. The Series A Preferred Stock is redeemable by the holder at
the end of year seven, if the Sirrom note has been repaid, at a price
effectively equal to the greater of its liquidation value or the fair value of
the underlying common stock on an as-if converted basis.
3. PRO FORMA ACQUISITION ADJUSTMENTS--BALANCE SHEET
a) To record the proceeds from borrowings used to fund the cash portions of
the acquisition (approximately $3.3 million) and refinancing of debt
(approximately $4.6 million),.
b) To record the issuance of notes and warrants issued to sellers as partial
consideration for the acquisitions.
c) To eliminate the historical equity accounts of McQuiddy.
F-11
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
d) To record the purchase of McQuiddy.
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) ADJUSTMENT
----- ------ ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash.............................. 7,857 -- -- (7,857) --
Inventory......................... -- -- -- 60 60
Property, plant & equipment....... -- -- -- 1,222 1,222
Goodwill.......................... -- -- (3,622) 3,622 --
Current installments of long-term
debt............................. -- -- -- (1,055) (1,055)
Long-term debt:
Finance company................. 7,857 -- -- -- 7,857
Sellers' notes.................. -- 1,503 -- -- 1,503
Other........................... -- -- -- (3,024) (3,024)
Deferred tax liability............ -- -- -- 1,074 1,074
Shareholders' equity.............. -- (1,503) (3,622) 52 (5,073)
----- ------ ------ ------ ------
Total........................... -- -- -- -- --
===== ====== ====== ====== ======
</TABLE>
4. PRO FORMA OFFERING ADJUSTMENTS--BALANCE SHEET
a) To record the proceeds ($40.8 million) from the issuance of 3,400,000
shares of the Company's Common Stock, net of $3.8 million underwriting
discounts and estimated offering costs, primarily consisting of accounting and
legal fees, filing and listing fees, and printing expenses.
b) To record the effect of the exercise of a common stock warrant to acquire
266,664 shares of Common Stock (200,000 shares of which are being offered by
the Selling Shareholder in the Offering).
c) To record the payment of accrued acquisition advisory costs ($3.0
million), the repayment of the Sirrom debt ($4.3 million), and the partial
repayment of the senior debt ($29.7 million), and the write-off of the
deferred loan costs and unamortized debt discounts associated with the debt
repaid ($610,000 and $3.0 million, respectively).
d) The net effect on shareholders' equity includes the net proceeds of the
Offerings ($37.0 million) plus the exercise of a warrant ($2.0 million) and
less the write-off of deferred financing costs and unamortized debt discount
($3.6 million).
5. PRO FORMA ACQUISITION ADJUSTMENTS--STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997:
a) To record the net decrease in depreciation expense related to (1)
adjustments to the basis in the fixed assets acquired as a result of applying
purchase accounting, (2) the effect on depreciation of assets not acquired
(see (c) below), and (3) changes in estimated useful lives.
b) To record reductions in rent expense related to equipment previously
leased, which were acquired as a part of the acquisitions.
c) To record additional rent expense for facilities not acquired, but to be
leased from the former owner of the company acquired as a part of the
acquisition agreement.
d) To record increased cost of sales arising from the stepped-up basis in
inventory as a result of applying purchase accounting.
e) To record the amortization ($1.0 million annually) of goodwill ($40.9
million) arising as a result of applying purchase accounting to the
acquisitions over a 40-year estimated life, net of goodwill amortization
previously recorded by an acquired company.
F-12
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
f) To record a reduction in compensation from historical amounts to amounts
agreed to as a part of the acquisition agreements.
g) To record additional interest expense and related amortization arising
from the financings of the acquisitions, including interest on seller
subordinated notes at 12% and senior debt at rates ranging from 9% to 13.25%.
h) To record the elimination of the adjustment of a redeemable warrant to
fair value; on a pro forma basis, effective January 1, 1997 the warrant was
exchanged for redeemable preferred stock as a part of the financing of the
1998 acquisitions.
i) To eliminate income tax expense, as the Company would have had a
consolidated net loss on a pro forma basis.
The following table summarizes the pro forma statement of operations
adjustments necessary to reflect the 1997 and 1998 acquisitions and financings
thereof as if they had occurred on January 1, 1997:
<TABLE>
<CAPTION>
IN THOUSANDS
---------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) (G) (H) (I) ADJUSTMENT
------ ---- --- --- --- ---- ----- --- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of sales........... (2,611) (241) 300 128 (2,424)
Selling, general and
administrative
expenses............... 147 93 (743) (503)
Interest expense........ 7,429 7,429
Amortization of
goodwill...............
Other expense........... 455 455
Income taxes............ (850) (850)
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997:
a) To record the net decrease in depreciation expense related to (1)
adjustments to the basis in the fixed assets acquired as a result of applying
purchase accounting, (2) the effect on depreciation of assets not acquired
(see (b) below), and (3) changes in estimated useful lives.
b) To record additional rent expense for facilities not acquired, but to be
leased from the former owner of the acquired company as a part of the
acquisition agreement.
c) To record reduction in rent expense related to equipment previously
leased, which was acquired as a part of the acquisition.
d) To record increased cost of sales arising from the stepped-up basis in
inventory as a result of applying purchase accounting.
e) to record the amortization of goodwill arising as a result of applying
purchase accounting to the acquisitions over a 40-year estimated life, net of
goodwill amortization previously recorded by acquired company.
f) To record a reduction in compensation from historical amounts to amounts
agreed to as a part of the acquisition agreements.
g) To record additional interest expense and related amortization arising
from the financings of the acquisitions, including interest on seller notes at
12% interest and senior debt at rates ranging from 8.2% to 13.25%.
The following table summarized the pro forma statement of operations
adjustments necessary to reflect the 1997 and 1998 acquisitions and financings
thereof as if they had occurred on January 1, 1997 for the quarter ended
3/31/97:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------------------------------------
PRO FORMA
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENT
---- --- ---- --- --- --- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of sales................... (663) 75 (121) 531 (178)
Selling, general and
administrative expenses........ 22 18 (98) (5)
Other expense................... 2,304 2,304
</TABLE>
F-13
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998:
a) To record the net decrease in depreciation expense related to (1)
adjustments to the basis in the fixed assets acquired as a result of applying
purchase accounting, (2) the effect on depreciation of assets not acquired
(see (b) below), and (3) changes in estimated useful lives.
b) To record additional rent expense for facilities not acquired, but to be
leased from the former owner of the acquired company as a part of the
acquisition agreement.
c) To record the amortization of goodwill arising as a result of applying
purchase accounting to the acquisitions over a 40-year estimated life, net of
goodwill amortization previously recorded by acquired company.
d) To record additional interest expense arising from the financings of the
acquisitions, including interest on seller notes at 12% interest and senior
debt at rates ranging from 8.2% to 13.25%.
e) To record the loss on sale of a building as a result of the acquisition.
f) To eliminate income tax expense, as the Company would have had a
consolidated net loss on a pro forma basis.
The following table summarizes the pro forma statement of operations
adjustments necessary to reflect the 1998 acquisitions and financings thereof
as if they had occurred on January 1, 1998:
<TABLE>
<CAPTION>
IN THOUSANDS
-------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENT
---- --- --- --- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost of sales................... (181) 50 (131)
Selling, general and
administrative expenses........ (41) 46 5
Interest expense................ 734 734
Other expense................... (1,199) (1,199)
Income taxes.................... (161) (161)
</TABLE>
6. PRO FORMA OFFERING ADJUSTMENTS--STATEMENT OF OPERATIONS
a) To record the elimination of the adjustment of the redeemable warrant to
fair value; on a pro forma, as adjusted basis, the warrant was exercised and
shares of Common Stock were issued effective January 1, 1997.
b) To record the decrease in interest expense, including amortization of
deferred financing costs and contractual rate reductions, resulting from the
repayment of Sirrom and senior debt with proceeds of the Offering.
c) To record the income tax effect of the above adjustments; income taxes
are provided at a combined 43% rate, reflecting federal and state taxes at the
estimated statutory rates adjusted for nondeductible goodwill.
7. PRO FORMA EARNINGS PER SHARE
Basic earnings per share (EPS) are computed by dividing net earnings (loss)
less the preferred stock dividend requirement by the weighted-average number
of common shares outstanding (4,000,000 in 1997); as adjusted for the public
offering, outstanding shares also include 3,400,000 shares issued by the
Company in the Offering and 266,664 shares issued to a warrant holder in
April, 1998 (200,000 shares of which will be sold in the Offering).
Diluted EPS are computed assuming the conversion or exercise of dilutive
potential equity instruments. In the Diluted EPS calculations for both pro
forma and pro forma, as adjusted, conversion of the Series A Preferred Stock
is not assumed because of its antidilutive effect. Exercise of the Senior
Lender's warrant is not assumed in the pro forma calculation because of its
antidilutive effect. Exercise of the option effect of the deferred
F-14
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
compensation contracts is not assumed in the pro forma calculation because the
option would not be exercisable until the initial public offering;
additionally, if exercisable, the effect would have been antidilutive.
Following is a reconciliation of the calculation of basic and diluted
earnings per share :
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
-----------------------------------------------------------------------
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------------- ----------------------- -----------------------
PRO FORMA PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss)..... $ (5,482) $ 893 $ (1,059) $ 156 $ (656) $ 370
Less preferred stock
dividend requirement... 114 114 29 29 29 29
Less accretion of
preferred stock
discount............... 116 116 29 29 29 29
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)
available for common
shareholders........... $ (5,712) $ 663 $ (1,117) $ 98 $ (714) $ 312
========== ========== ========== ========== ========== ==========
Basic--Average shares
outstanding............ 4,000,000 7,666,664 4,000,000 7,666,664 4,000,000 7,666,664
========== ========== ========== ========== ========== ==========
Basic EPS........... $ (1.43) $ 0.09 $ (0.28) $ 0.01 $ (0.18) $ 0.04
========== ========== ========== ========== ========== ==========
Diluted:
Average shares
outstanding.......... 4,000,000 7,666,664 4,000,000 7,666,664 4,000,000 7,666,664
Assumed exercise of:
Deferred
compensation
contract........... -- 83,333 -- 83,333 -- 83,333
Warrant............. -- 183,333 -- 183,333 -- 183,333
---------- ---------- ---------- ---------- ---------- ----------
4,000,000 7,933,330 4,000,000 7,933,330 4,000,000 7,933,330
========== ========== ========== ========== ========== ==========
Diluted EPS......... $ (1.43) $ 0.09 $ (0.28) $ 0.01 $ (0.18) $ 0.04
========== ========== ========== ========== ========== ==========
</TABLE>
(8) OTHER MATTERS
The pro forma condensed consolidated balance sheet reflects the write-off of
unamortized deferred financing costs ($610,000) and loan discounts
($3,046,000) as a result of the repayment of certain loans with proceeds from
the Offering. This expense has been appropriately excluded from the pro forma
condensed consolidated statement of operations, but will be reflected in the
Company's historical consolidated financial statements in 1998 as an
extraordinary loss on extinguishment of debt.
The Company's historical consolidated financial statements as of and for the
six months ended December 31, 1997 include a provision for deferred
compensation of approximately $750,000 related to employment arrangements with
certain officers. Since these arrangements were not directly related to the
acquisitions or the Offering, the provision has not been eliminated from the
pro forma condensed consolidated balance sheet or statement of operations.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Master Graphics, Inc. and subsidiary:
We have audited the consolidated balance sheets of Master Graphics, Inc. and
subsidiary as of June 30, 1996 and 1997, and December 31, 1997, and the
related consolidated statements of operations, shareholder's equity and cash
flows for each of the years in the two-year period ended June 30, 1997 and the
six-month period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Master
Graphics, Inc. and subsidiary as of June 30, 1996 and 1997 and December 31,
1997, and the results of their operations and their cash flows for each of the
years in the two-year period ended June 30, 1997 and the six-month period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
April 7, 1998, except as to the third
paragraph of Note 1, which is as of
May 14, 1998.
F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Master Printing, Inc.:
We have audited the accompanying consolidated statements of operations,
changes in stockholder's equity and cash flows of Master Printing, Inc. and
Subsidiary for the year ended June 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash
flows of Master Printing, Inc. and Subsidiary for the year ended June 30, 1995
in conformity with generally accepted accounting principles.
Thompson Dunavant, P.L.L.C.
Memphis, Tennessee
March 20, 1998
F-17
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------- DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 0 $ 497,579 $ 1,173,812
Trade accounts receivable, net......... 2,053,434 6,947,608 14,989,796
Inventories:
Raw materials and supplies........... 47,661 883,920 1,926,692
Work-in-process...................... 127,773 852,973 2,909,206
---------- ----------- -----------
Total inventories................... 175,434 1,736,893 4,835,898
Deferred income taxes.................. 0 0 160,698
Prepaid expenses and other current
assets................................ 771,852 475,400 1,319,609
---------- ----------- -----------
Total current assets................. 3,000,720 9,657,480 22,479,813
---------- ----------- -----------
Property, plant and equipment, net....... 2,007,410 20,472,214 29,550,176
Goodwill, net............................ 0 4,908,380 28,853,263
Deferred loan costs, net................. 0 777,023 1,396,096
Due from shareholder..................... 950,000 950,000 3,894,726
Other.................................... 467,500 449,862 209,604
---------- ----------- -----------
Total assets......................... $6,425,630 $37,214,959 $86,383,678
========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current installments of long-term
debt.................................. $ 161,526 $ 1,813,696 $ 3,833,844
Accounts payable....................... 1,062,725 2,822,173 5,465,707
Accrued expenses....................... 490,848 1,965,188 6,489,064
---------- ----------- -----------
Total current liabilities............ 1,715,099 6,601,057 15,788,615
---------- ----------- -----------
Bank line of credit...................... 113,309 0 569,561
Long-term debt, net of current install-
ments................................... 2,519,267 28,797,993 64,913,896
Deferred income taxes.................... 234,623 397,499 2,266,160
Other liabilities........................ 0 0 1,065,046
Redeemable common stock warrants......... 0 638,176 3,376,060
Commitments and contingencies
Shareholder's equity:
Common stock (no par value at June 30,
1996; $0.001 par value at June 30,
1997 and December 31, 1997);
100,000,000 shares authorized;
4,000,000 shares issued and
outstanding in all periods............ 100,000 4,000 4,000
Additional paid-in capital............. 2,100,000 2,406,213 3,849,748
Retained earnings (deficit)............ (356,668) (1,629,979) (5,449,408)
---------- ----------- -----------
Total shareholder's equity
(deficit)........................... 1,843,332 780,234 (1,595,660)
---------- ----------- -----------
$6,425,630 $37,214,959 $86,383,678
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED
------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue............... $11,426,172 $13,243,535 $13,432,719 $32,394,430
Cost of revenue........... 8,928,152 9,954,851 11,311,910 26,528,378
----------- ----------- ----------- -----------
Gross profit............ 2,498,020 3,288,684 2,120,809 5,866,052
Selling, general and ad-
ministrative expenses.... 2,570,124 2,691,257 3,021,102 5,990,167
Amortization of goodwill.. 0 0 0 97,800
----------- ----------- ----------- -----------
Operating income
(loss)................. (72,104) 597,427 (900,293) (221,915)
Other income (expense):
Redeemable warrant valu-
ation adjustment....... 0 0 0 (1,635,173)
Interest income......... 66,645 67,726 67,777 48,304
Interest expense........ (333,893) (375,890) (438,686) (2,181,247)
Other, net.............. 43,780 44,479 23,265 190,602
----------- ----------- ----------- -----------
Other income (ex-
pense), net.......... (223,468) (263,685) (347,644) (3,577,514)
----------- ----------- ----------- -----------
Income (loss) before in-
come taxes............. (295,572) 333,742 (1,247,937) (3,799,429)
Income tax expense (bene-
fit)..................... (86,374) 161,361 25,374 20,000
----------- ----------- ----------- -----------
Net earnings (loss)..... $ (209,198) $ 172,381 $(1,273,311) $(3,819,429)
=========== =========== =========== ===========
Earnings per share:
Basic................... $ (0.05) $ 0.04 $ (0.32) $ (0.95)
=========== =========== =========== ===========
Diluted................. $ (0.05) $ 0.04 $ (0.32) $ (0.95)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS SHAREHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY (DEFICIT)
--------- -------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at June 30,
1994................... 4,000,000 $100,000 $2,100,000 $ (319,851) $ 1,880,149
Net earnings (loss)
for year ended June
30, 1995............. (209,198) (209,198)
--------- -------- ---------- ----------- -----------
Balances at June 30,
1995................... 4,000,000 100,000 2,100,000 (529,049) 1,670,951
Net earnings (loss)
for year ended June
30, 1996............. 172,381 172,381
--------- -------- ---------- ----------- -----------
Balances at June 30,
1996................... 4,000,000 100,000 2,100,000 (356,668) 1,843,332
Effects of re-incorpo-
ration............... -96,000 96,000 0
Issuance of seller
warrants............. 210,213 (1,063,098)
Net earnings (loss)
for year ended June
30, 1997............. (1,273,311)
--------- -------- ---------- ----------- -----------
Balances at June 30,
1997................... 4,000,000 4,000 2,406,213 (1,629,979) 780,234
Issuance of seller
warrants............. 1,443,535 1,443,535
Net earnings (loss)
for six months ended
December 31, 1997.... (3,819,429) (3,819,429)
--------- -------- ---------- ----------- -----------
Balances at December 31,
1997................... 4,000,000 $ 4,000 $3,849,748 $(5,449,408) $(1,595,660)
========= ======== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------- DECEMBER 31,
1995 1996 1997 1997
--------- --------- ----------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)....... (209,198) 172,381 (1,273,311) (3,819,429)
Adjustments to reconcile
net income to net cash
from operating
activities:
Depreciation............. 416,549 275,343 293,037 1,087,288
Amortization of
intangibles............. 330,000 330,000 330,000 325,621
Deferred compensation
provision............... -- -- -- 765,046
Redeemable warrants
adjustment.............. -- -- -- 1,635,173
Deferred income taxes.... (70,295) 63,213 162,876 --
(Gain) loss on disposal
of equipment............ -- (10,000) -- --
Changes in operating
assets and liabilities,
net of effect of
business acquisitions:
Trade accounts
receivable............. (461,156) (128,534) (1,124,340) 459,020
Inventories............. (16,185) 81,195 (300,098) 651,156
Other assets............ (75,032) (622,446) 197,589 (499,125)
Accounts payable........ 44,541 260,685 797,084 (14,623)
Accrued expenses........ (10,973) 206,235 837,414 1,902,727
--------- --------- ----------- -----------
Net cash provided by
(used in) operating
activities............ (51,749) 628,072 (79,749) 2,492,854
--------- --------- ----------- -----------
Cash flows from investing
activities:
Business acquisitions, net
of cash acquired......... (13,392,127) (28,511,229)
Purchases of equipment.... (47,390) (373,836) (4,151,336) (328,309)
Proceeds from sale of
equipment................ -- 10,000 -- --
--------- --------- ----------- -----------
Net cash used in
investing activities.. (47,390) (363,836) (17,543,463) (28,839,538)
--------- --------- ----------- -----------
Cash flows from financing
activities:
Net borrowings
(repayments) on lines of
credit................... 384,919 (271,610) (113,309) 569,561
Proceeds from issuance of
long-term debt........... -- -- 20,821,586 27,940,625
Principal payments of
long-term debt........... (596,083) (291,187) (1,380,793) (777,875)
Loan costs incurred....... -- -- (777,023) (709,394)
--------- --------- ----------- -----------
Net cash provided by
(used in) financing
activities............ (211,164) (562,797) 18,550,461 27,022,917
--------- --------- ----------- -----------
Net increase (decrease) in
cash...................... (310,303) (298,561) 927,249 676,233
Cash (overdraft) at
beginning of period....... 179,194 (131,109) (429,670) 497,579
--------- --------- ----------- -----------
Cash (overdraft) at end of
period.................... $(131,109) $(429,670) $ 497,579 $ 1,173,812
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997, AND DECEMBER 31, 1997
(1) BASIS OF PRESENTATION
Master Graphics, Inc. and its wholly-owned operating subsidiary, Premier
Graphics, Inc. (collectively the "Company") are engaged in the business of
commercial printing, with 8 facilities in 6 states. Prior to June, 1997, the
Company was comprised of a holding company, Master Printing, Inc. and its
wholly-owned operating subsidiary, B&M Printing, Inc. In June, 1997, the sole
shareholder of Master Printing, Inc. formed a new corporate holding company,
Master Graphics, Inc., and merged Master Printing, Inc. into Master Graphics,
Inc. Contemporaneously, Master Graphics, Inc. formed a new wholly-owned
subsidiary, Premier Graphics, Inc., and merged B&M Printing, Inc. into Premier
Graphics, Inc. References in these consolidated financial statements to the
Company for periods prior to the June, 1997 transactions described above are
to Master Printing, Inc. and B&M Printing, Inc. consolidated. The transactions
discussed above were among entities totally controlled by the sole
shareholder, and, as such, gave rise to no changes in accounting or reporting,
other than an adjustment to the Company's shareholder's equity as a result of
changing the par value of common stock from no par value to $0.001 per share.
The Company operated on a fiscal year ending June 30, through its year ended
June 30, 1997. In conjunction with the corporate reorganization described
above and the acquisitions and related financings described in Notes 3 and 5
below, the Company changed its fiscal year-end to December 31.
On May 14, 1998, the Board of Directors of the Company approved a 40,000 to
1 stock split. All references to share and per share amounts in these
Consolidated Financial Statements have been retroactively restated to reflect
the stock split.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Master
Graphics, Inc. and its wholly-owned subsidiary after the elimination of
intercompany transactions.
(b) Use of Estimates
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
(e) Property, Plant and Equipment
Property, plant, and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from 5 to 39 years. Leasehold improvements are amortized on a
straight-line basis over the estimated useful lives of the related property,
generally fifteen to forty years. Amortization of assets held under capital
leases is included with depreciation expense.
F-22
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Expenditures which materially increase values or extend the useful lives of
assets are capitalized while replacements, maintenance and repairs which do
not improve or extend the lives of the respective assets are charged against
income as incurred. Depreciation expense for fiscal years 1995, 1996 and 1997
and the six months ended December 31, 1997 was $417,000, $275,000, $293,000
and $1,087,000, respectively.
(f) Intangibles
Goodwill represents costs in excess of the fair value of the net assets of
businesses acquired in 1997. Goodwill is being amortized over forty years,
using the straight-line method; accumulated amortization of goodwill was
$97,800 at December 31, 1997, respectively. The Company periodically assesses
the recoverability of goodwill based on reviews of estimated future results of
operations and cash flows.
Costs incurred in obtaining long-term financing are deferred and
subsequently amortized, using the interest method over the life of the
respective financing, as a component of interest expense. Accumulated
amortization at December 31, 1997 was approximately $90,000.
(g) Income Taxes
The Company follows the asset and liability method for deferred income taxes
as required by the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities.
(h) Financial Instruments
The Company's financial instruments recorded on the consolidated balance
sheet include cash and cash equivalents, accounts and notes receivable,
accounts payable and debt. Because of their short maturity, the carrying
amount of cash and cash equivalents, accounts and notes receivable, accounts
payable and short-term bank debt approximates fair value. The fair value of
long-term debt, which approximates its carrying value, is based on rates
available to the Company for debt with similar terms and maturities.
(i) Revenue Recognition
Substantially all revenue is recognized when products are shipped to
customers.
(j) Earnings Per Share
Basic earnings per share for each period presented has been computed by
dividing net earnings (loss) by the weighted-average number of common shares
outstanding. Diluted earnings per share are calculated by dividing net
earnings (loss) by the sum of (1) the weighted-average number of shares
outstanding and (2) the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. A
reconciliation of calculation of basic and diluted earnings per share is
presented in Note 13.
(3) ACQUISITIONS
On June 19, 1997, the Company acquired all of the outstanding common stock
of Blackwell Lithographers, Inc. and of Lithograph Printing Company of
Memphis, and the assets of Sutherland Printing Company. All of these
businesses are engaged in commercial printing. The acquisitions were paid for
with a combination of cash ($10.4 million), notes given to the sellers ($5.1
million) (see Note 5), and warrants to acquire common stock (valued at
$210,000) (see Note 12). In addition, the Company incurred other acquisition
costs totaling approximately $470,000. These acquisitions have been accounted
for by the purchase method and, accordingly, the results of operations of
Blackwell, Lithograph and Sutherland have been included in the Company's
F-23
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consolidated financial statements from June 19, 1997. The excess of the
purchase prices over the fair value of the net identifiable assets acquired of
$4.9 million has been recorded as goodwill and is being amortized on a
straight line basis over 40 years.
During the six months ended December 31, 1997, the Company acquired all of
outstanding common stock of the following companies: as of September 22,
1997--The Argus Press, Inc.; as of December 16, 1997-- Phoenix Communications,
Inc., and Jones Printing Company, Inc. All of these businesses are engaged in
commercial printing. Their acquisitions were paid for with a combination of
cash ($17.8 million), notes given to the sellers ($6.2 million) (see Note 5),
and warrants to acquire common stock (valued at $1.4 million) (see Note 12).
In addition, the Company incurred other acquisition costs totaling
approximately $2.3 million. These acquisitions have been accounted for by the
purchase method and, accordingly, the results of operations of Argus have been
included in the Company's consolidated financial statements from September 22,
1997, and the results of operations of Phoenix and Jones have been included in
the Company's consolidated financial statements from December 16, 1997. The
excess of the purchase prices over the fair value of the net identifiable
assets acquired of $23 million has been recorded as goodwill and is being
amortized on a straight line basis over 40 years. The Phoenix and Jones stock
purchase agreements also provide for additional payments over the next three
years contingent on future cash flows, as defined, of the respective
businesses.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the acquired businesses as
if the acquisitions had occurred as of the beginning of the Company's fiscal
year beginning July 1, 1996, after giving effect to certain adjustments,
including amortization of goodwill, adjusted depreciation expense and
increased interest expense on debt related to the acquisitions. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and the acquired businesses
constituted a single entity during such periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1997
------------- -------------- -----------------
<S> <C> <C> <C>
Net revenue............. $91.9 million $100.6 million $51.7 million
============= ============== =============
Net earnings (loss)..... $(3.6 million) $ (3.3 million) $(4.4 million)
============= ============== =============
Net earnings (loss) per
share.................. $ (0.91) $ (0.82) $ (1.11)
============= ============== =============
</TABLE>
See Note 15 "Subsequent Events" regarding 1998 acquisitions.
(4) BANK LINE OF CREDIT
The Company has a $7.5 million working capital line of credit agreement with
a commercial bank. Borrowings under the credit agreement are limited by a
borrowing base calculation which is based generally on 85% of eligible
receivables and 50% of eligible inventory, as defined. Interest is based on
the bank's floating index rate (8.5% at December 31, 1997) and is payable
monthly. The line of credit is secured primarily by the Company's accounts
receivables, inventory, and intangible assets. The credit agreement contains
various restrictive covenants, including the maintenance of certain financial
ratios. The credit agreement expires on, and all outstanding balances must be
repaid by, March 31, 2000. The working capital line of credit replaced a
previously outstanding $750,000 revolving line of credit.
F-24
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
JUNE 30,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
Term Loans............................... $ 0 $20,500,000 $46,904,824
Sirrom note.............................. 0 3,661,824 3,454,289
Sellers' notes........................... 1,300,000 6,098,811 12,200,000
8.84% note payable....................... 1,364,079 0 0
Other, primarily capital lease........... 16,714 351,054 6,188,627
---------- ----------- -----------
2,680,793 30,611,689 68,747,740
Less current installments................ 161,526 1,813,696 3,833,844
---------- ----------- -----------
Long-term debt, net...................... $2,519,267 $28,797,993 $64,913,896
========== =========== ===========
</TABLE>
The Term Loans are net of unamortized discount of approximately $900,000 at
December 31, 1997. The Sirrom note is net of unamortized discount of
approximately $638,196 and $845,711 at June 30, 1997 and December 31, 1997,
respectively.
In June, 1997 the Company borrowed $4.3 million from Sirrom Capital
Corporation ("Sirrom") to partially finance its June, 1997 business
acquisitions described on Note 3. The loan bears interest at 13.25%, payable
monthly, and the principal is due in May, 2002, with no penalty for early
repayment. The loan is subject to a security agreement, with collateral
consisting of all equipment, inventory, accounts receivable, and intangible
assets. In conjunction with the obtaining of the loan, the Company paid a
processing fee of $107,500 and issued to Sirrom a common stock warrant more
fully described in Note 12.
The Company, through its operating subsidiary, Premier Graphics, is a
borrower under a $60 million Amended and Restated Loan and Security Agreement
dated December 16, 1997, with General Electric Capital Corporation ("Senior
Lender"). Proceeds from the loan agreement have been used primarily to finance
the business acquisitions more fully described in Note 3. At December 31,
1997, the loan agreement was comprised of a Term Loan-A of $30 million, a Term
Loan-B of $17.8 million, and an unused Acquisition Line of $12.2 million to
finance future acquisitions. The Term Loan-A is due in 19 quarterly
installments of approximately $937,500, plus a final principal payment due in
December, 2002; interest on the Term Loan-A which is payable monthly is based
on a LIBOR-adjusted rate (8.94% at December 31, 1997). The Term Loan-B is due
in 19 quarterly installments of $25,000, with a final principal payment due in
March, 2003; interest on the Term Loan-B which is payable monthly is at 12%,
and the Company has an option to convert to a variable rate. The Term Loan-A
is subject to a prepayment penalty which declines from 3% in the first year to
0% after the third year; the Term Loan-B is not subject to a prepayment
penalty. The Loan Agreement contains mandatory prepayment provisions which are
based on annual excess cash flows, as defined. The Term Loans are
collateralized substantially all of the Company's tangible and intangible
assets. The Term Loans are subject to various covenants, including limits on
dividends, additional debt, total liabilities and capital expenditures, and
the maintenance of levels of EBITDA (as defined) and interest, fixed charge,
and leverage ratios. In conjunction with the acquisitions and financings
thereof, the Company incurred fees of approximately $2.4 million, of which
payment of $1.5 million is deferred to the earlier of an initial public
offering or June 30, 1998; the Company also issued to the Senior Lender a
common stock warrant which is described in Note 12.
In connection with the various business acquisitions in 1997, the Company
has issued subordinated notes to the respective sellers. These subordinated
notes, which totaled $4.8 million and $10.9 million at June 30, 1997 and
December 31, 1997, respectively, are due in seven years, bear interest at 12
percent, and generally are subject to 20 percent prepayment penalties.
F-25
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with its acquisition of B&M Printing Company, Inc. in 1992,
the Company issued notes to the sellers in the aggregate amount of $1.3
million. The notes bear interest at 10%, payable quarterly, and the principal
is due on November 30, 2002. The Company issued warrants to purchase common
stock to these sellers in June, 1997, in return for certain modifications to
the related loan agreements. Effectively, the warrants give the holders the
right, if there has been a public offering, to acquire up to approximately
$430,000 of common stock at an exercise price equal to the common stock's
initial public offering price; the warrants expire three years after the
Company's initial public offering
The 8.84% note was payable in monthly installments of $22,750, including
interest, through May, 2003, and is collateralized by certain machinery and
equipment; the note was repaid in June, 1997.
In connection with a June, 1997 acquisition, the Company issued a $1,090,000
non-interest bearing note payable to the seller maturing in June, 2007. The
Company recorded the note at its net present value and is amortizing the
discount thereon over the life of the note using the interest method. The note
is classified above as "other" long-term debt.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1997 are as follows: 1998, $3.8 million; 1999, $4.3
million; 2000, $4.1 million; 2001, $4.2 million; 2002, $36.9 million;
thereafter, $15.4 million.
In March, 1998, the Company modified its existing Loan Agreement with its
Senior Lender, and also entered into two additional loan agreements with the
Senior Lender, all in conjunction with the business acquisitions which
occurred in March, 1998 (see Note 15).
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ------------
1996 1997 1997
---------- ----------- ------------
<S> <C> <C> <C>
Land..................................... $ 0 $ 175,918 $ 175,918
Buildings................................ 0 1,401,460 1,385,545
Leasehold improvements................... 556,673 889,792 991,055
Machinery and equipment.................. 4,907,835 20,170,099 29,508,005
Furniture and fixtures................... 575,907 1,863,493 2,274,580
Vehicles................................. 101,158 398,780 703,530
---------- ----------- -----------
6,141,573 24,899,542 35,038,633
Less accumulated depreciation............ 4,134,163 4,427,328 5,488,457
---------- ----------- -----------
$2,007,410 $20,472,214 $29,550,176
---------- ----------- -----------
</TABLE>
(7) LEASES
The Company is obligated under various capital leases for certain machinery
and equipment that expire at various dates during the next 6 years. At
December 31, 1997, the gross amount of plant and equipment and related
accumulated amortization recorded under capital leases were $2,000,000 and
$41,667, respectively. The recorded liability for capital leases is classified
as other long-term debt.
The Company also has several noncancelable operating leases, primarily for
facilities and printing equipment, that expire over the next 7 years. Rental
expense for operating leases during fiscal years 1995, 1996 and 1997 and the
six months ended December 31, 1997 totaled $320,000, $410,000, $1,050,000, and
$398,000,
F-26
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. Future minimum lease payments under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) and
future minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1998............................................... $ 420,863 $1,177,061
1999............................................... 411,753 1,171,846
2000............................................... 411,753 1,171,294
2001............................................... 411,753 801,053
2002............................................... 411,753 654,737
Later years, through 2005.......................... 709,251 431,300
---------- ----------
Total minimum lease payments..................... $2,777,126 $5,407,291
---------- ----------
Less amount representing interest (at rates ranging
from 9.1% to 10.9%)............................... 669,181
----------
Present value of net minimum capital lease
payments.......................................... 2,107,945
Less current installments of obligations under
capital leases.................................... 246,040
----------
Obligations under capital leases, excluding current
installments...................................... $1,861,905
==========
</TABLE>
(8) RETIREMENT PLANS
The Company has had a 401(k) profit sharing plan for the benefit of
substantially all of the employees of B&M Printing, Inc., which includes a
Company contribution matching a portion of the employees' contributions. The
Company's contributions to the plan were approximately $25,000, $37,000,
$40,000, and $24,000 for the years ended June 30, 1995, 1996, and 1997, and
the six months ended December 31, 1997.
The Company has retained the existing employee benefit plans of each of the
companies acquired from June, 1997 through December, 1997. Each of the
acquired companies had plans similar to the Company's B&M plan described
above. The combined expense recognized for those plans subsequent to the
sponsor company's acquisition was approximately $200,000.
(9) RELATED PARTY TRANSACTIONS
As of December 31, 1997, the Company sold to its sole shareholder certain
printing equipment which was considered to be redundant as a result of the
various 1997 acquisitions. It is the shareholder's intent to sell the
equipment to an unrelated third party. The equipment was sold at its net book
value ($2.8 million), which the Company believes approximates its fair market
value. The Company received a promissory note for the sale amount, which is
classified as an other asset, with interest at LIBOR plus 3.25% (8.94 % at
December 31, 1997); interest is payable annually and principal is due at the
earlier of (1) December 31, 2002, (2) thirty days following an initial public
offering of the Company's common stock, or (3) the sale of the equipment by
the shareholder. The sales agreement also requires the shareholder to pay to
the Company any sale proceeds in excess of the principal amount of the note.
The Company remains liable to a third party lender for indebtedness on the
equipment.
The Company's sole shareholder also has a $950,000 note payable to the
Company; the note is unsecured, bears interest at 7% payable semi-annually,
and matures in December, 2002.
F-27
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has leasing arrangements with its president and with certain of
the former owners of the acquired companies (each of whom is a current
employee of the Company) for certain plant facilities. The Company's aggregate
annual obligation under these operating lease agreements is approximately
$930,000, and the agreements generally expire from 2000 through 2004.
(10) INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- --------
<S> <C> <C> <C>
Year ended June 30, 1995:
U.S. Federal................................. $(62,632) $(10,075) $(72,707)
State and local.............................. 0 (13,667) (13,667)
-------- -------- --------
$(62,632) $(23,742) $(86,374)
======== ======== ========
Year ended June 30, 1996:
U.S. Federal................................. 147,770 18,978 166,748
State and local.............................. 13,010 (18,397) (5,387)
-------- -------- --------
$160,780 $ 581 $161,361
======== ======== ========
Year ended June 30, 1997:
U.S. Federal................................. 0 0 0
State and local.............................. 0 25,374 25,374
-------- -------- --------
$ 0 $ 25,374 $ 25,374
======== ======== ========
Six months ended December 31, 1997:
U.S. Federal................................. 0 0 0
State and local.............................. 20,000 0 20,000
-------- -------- --------
$ 20,000 $ 0 $ 20,000
======== ======== ========
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED
----------------------------- DECEMBER 31,
1995 1996 1997 1997
--------- -------- --------- -----------------
<S> <C> <C> <C> <C>
Computed "expected" tax
expense................... $(100,494) $113,472 $(424,299) $(1,291,806)
Increase (reduction) in
income taxes resulting
from:
Change in the beginning-of-
the-year balance of the
valuation allowance for
deferred tax assets
allocated to income tax
expense................... 527,347 1,272,296
State and local income
taxes, net of federal
income tax benefit........ (10,913) 13,216 (48,418) (150,457)
Effect of S-Corporation
termination............... -- -- -- (318,296)
Warrants valuation
adjustment................ -- -- -- 555,900
Amortization of goodwill... -- -- -- 33,252
Other, net................. 25,033 34,673 (29,256) (80,889)
--------- -------- --------- -----------
$ (86,374) $161,361 $ 25,374 $ 20,000
========= ======== ========= ===========
</TABLE>
F-28
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June 30,
1996 and 1997, and December 31, 1997 are presented below.
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable principally due to
allowance for doubtful accounts........... $ 510 $ 10,823 $ 135,742
Income tax loss carryforwards and tax
credit carryforwards...................... -- 527,347 1,466,926
Vacation accrual........................... -- 29,272 --
Alternative minimum tax credit
carryforwards............................. -- -- 80,000
Deferred compensation...................... -- -- 252,717
Other...................................... -- 7,971 218,467
------- -------- ----------
Total gross deferred tax assets.......... 510 575,413 2,153,852
Less valuation allowance..................... -- (527,347) (1,799,643)
------- -------- ----------
Net deferred tax assets...................... 510 48,066 354,209
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation and
capitalized interest...................... 235,133 295,496 380,996
Purchase accounting adjustments............ 2,028,217
Other...................................... -- 150,069 50,458
------- -------- ----------
Total gross deferred liabilities............. 235,133 445,565 2,459,671
------- -------- ----------
Net deferred tax liability................... 234,623 397,499 2,105,462
======= ======== ==========
</TABLE>
The valuation allowance for deferred tax assets as of June 30, 1997 and
December 31, 1997 was $527,347 and $1,799,643, respectively. The net change in
the total valuation allowance for the six months ended December 31, 1997 and
the year ended June 30, 1997 was an increase of $1,272,296 and an increase of
$527,347 due to a net operating loss and alternative minimum tax credit
carryforwards, respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is not more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 1997.
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $4 million which are available to
offset future federal taxable income, if any, through 2010. In addition, the
Company has alternative minimum tax credit carryforwards of approximately
$80,000 which are available to reduce future federal regular income taxes, if
any, over an indefinite period.
(11) OTHER LIABILITIES
As of December 31, 1997, the Company entered into deferred compensation
agreement with its executive officers. In the aggregate, these agreements
obligate the Company to pay a total of $1,000,000 to those officers
F-29
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on December 31, 2002. The agreements allow the officers to receive common
stock in lieu of cash, with the number of shares calculated based on the
initial public offering price of the common stock. Such calls, for settlement
in stock, may be exercised at any time after an initial public offering. The
net present values of the ultimate obligation was accrued as compensation as
of December 31, 1997, with the discount being amortized as additional
compensation over the five year life of the agreement; an early exercise of
the calls by the officers would result in an acceleration of the discount
amortization.
(12) COMMON STOCK WARRANTS
Sellers' Warrants
As part of the consideration given in each of the acquisitions, the Company
issued common stock warrants to the sellers. The terms of warrants were
generally the same, stating that, if an initial public offering were to occur
within ten years of the respective acquisition, the seller would have the
ability to exercise his warrant at any time during the subsequent ten years.
The exercise price is the initial public offering price, and the shares
obtainable are generally the face amount of the sellers' notes divided by the
initial public offering price. The estimated fair values of the warrants at
the dates of issuance, which totaled $210,000 and $1.7 million at June 30,
1997 and December 31, 1997, respectively, has been recorded in shareholder's
equity as additional paid-in capital.
Lenders' Warrants
In connection with the obtaining of a loan to partially fund its June, 1997
acquisitions, the Company issued a common stock warrant to Sirrom. The warrant
granted Sirrom the right to acquire shares of common stock equivalent to six
percent of the Company's outstanding shares on a diluted basis on the date of
exercise. If the related debt has not been repaid by the second, third, fourth
and fifth anniversary of the loan, then the percentage of shares obtainable
increases to 8.67%, 11.34%, 14%, and 16.67%, respectively. The warrant, which
has an exercise price of $0.01, expires on July 30, 2002. The warrant holder
has piggy back registration rights, and also has an option to put the warrant
back to the Company, if not previously exercised, during the last thirty days
of the exercise period for a purchase price equal to the appraised fair value
of the underlying common stock. In March, 1998, the holder exercised the
warrant and was issued 266,664 shares of common stock.
In connection with the obtaining of acquisition financing under its $60
million loan and security agreement, the Company issued to its Senior Lender a
warrant to acquire a fully-diluted four percent interest in its outstanding
common stock for a total purchase price of $100. The warrant expires, if
unexercised, on September 26, 2007. The Senior Lender was granted demand and
piggyback registration rights, and also has a right to put the warrant back to
the Company under certain conditions, including the passage of three years, a
change in control of the Company (as defined), an event of default under the
loan agreement, or a repayment of substantially all of the senior debt. The
redemption price of the warrant would be its current market value (as defined)
at that date. The Company has the option to call the warrant under certain
conditions, including the passage of five years, at a price equal to the
warrant's current market value at that date. In March, 1998, these warrants
were exchanged for redeemable, convertible preferred stock (see Note 14).
Because both of the lenders' warrant agreements gave the holders the right
to put the warrants back to the Company for cash, these instruments were
recorded, at their respective fair values at the dates of issuance, as
redeemable common stock warrants in the accompanying consolidated balance
sheet, and therefore are excluded from shareholder's equity. The initial fair
market value of the lenders' warrants has been netted against the related debt
and will be amortized as a component of interest expense over the life of the
debt. The carrying value of the redeemable common stock warrants has
subsequently been adjusted to fair value, with a corresponding charge to other
expense in the statement of operations in accordance with EITF Issue No. 96-
13.
F-30
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) EARNINGS PER SHARE
Following is a reconciliation of the numerator and denominator of the
earnings (loss) per share (EPS) computations:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------- SIX MONTHS ENDED
1995 1996 1997 DECEMBER 31, 1997
--------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Net earnings (loss)..... $(209,198) $ 172,381 $(1,273,311) $(3,819,429)
--------- --------- ----------- -----------
Basic--Average shares
outstanding............ 4,000,000 4,000,000 4,000,000 4,000,000
--------- --------- ----------- -----------
Basic EPS............. $ (0.05) $ 0.04 $ (0.32) $ (0.95)
========= ========= =========== ===========
Diluted:
Average shares
outstanding.......... 4,000,000 4,000,000 4,000,000 4,000,000
--------- --------- ----------- -----------
Diluted EPS........... $ (0.05) $ 0.04 $ (0.32) $ (0.95)
========= ========= =========== ===========
</TABLE>
Exercise of potential equity securities, including warrants, has not been
reflected in the computation of diluted EPS because their impact would have
been antidilutive.
(14) OTHER FINANCIAL INFORMATION
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
-------- ---------- ------------
<S> <C> <C> <C>
Accrued compensation........................ $182,635 $ 862,719 $1,840,797
Accrued interest............................ -- 126,981 438,108
Accrued acquisition costs................... -- -- 1,852,000
Other accrued expenses...................... 308,213 975,488 2,358,159
-------- ---------- ----------
$490,848 $1,965,188 $6,489,064
======== ========== ==========
</TABLE>
The allowance for doubtful accounts was $8,500, $195,580, and $661,663, at
June 30, 1996 and 1997, and December 31, 1997, respectively.
(15) SUBSEQUENT EVENTS
In March 1998, The Company acquired all of the outstanding common stock of
Harperprints, Inc., Hederman Brothers, Inc., and Phillips Litho Co., Inc. The
Company also has signed a merger agreement to acquire all of the outstanding
common stock of McQuiddy Printing Company, Inc. All of these businesses are
engaged in commercial printing. These four acquisitions will be paid for with
a combination of cash ($18.7 million), notes given to the sellers ($3.7
million) and warrants to acquire common stock (valued at $1.3 million). In
addition, the Company incurred other acquisition costs totaling approximately
$2.3 million. These acquisitions will be accounted for by the purchase method
and, accordingly, the results of operations of Harperprints, Inc., Hederman,
McQuiddy, and Phillips will be included in the Company's 1998 consolidated
financial statements from their respective acquisition dates in 1998. The
estimated excess of the purchase prices over the fair value of the net
identifiable assets acquired is estimated to be approximately $12 million,
which will be recorded as goodwill and amortized on a straight line basis over
40 years.
The cash portion of the Hederman acquisition was funded by a $5.9 million
draw on the Company's Acquisition Line under its Amended and Restated Credit
Agreement with its Senior Lender. In conjunction with this financing, the
Company agreed to certain modifications to the Credit Agreement, including an
increase in the amortization of the Term Loan-B from $25,000 to $50,000. The
modifications also affected the Company's Credit Agreement covenants,
including its financial ratio requirements.
F-31
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cash portion of the Phillips Litho acquisition was financed by a $15
million term loan from its Senior Lender. The loan is to be repaid in 19
quarterly installments of $12,500, beginning in July, 1998, and a twentieth
and final installment, in March, 2003, of the remaining balance. Interest,
which is payable monthly, is at 12%; the Senior Lender may at its option
convert the rate to a floating rate at 3.5% over prime. The term loan requires
mandatory prepayment based on 75% of annual excess cash flows, as defined;
voluntary prepayments will incur prepayment penalties on a declining scale
during the first three years of the loan. In consideration for the loan, the
Company agreed to pay to the senior lender an origination fee of $500,000 and
an advisory fee of $1,500,000; the advisory fee must be paid at the earlier of
the date of an initial public offering or June 30, 1998.
The cash portion of the Harperprints acquisition was financed by a $10
million term loan from its Senior Lender. The loan is to be repaid in 19
quarterly installments of $12,500, beginning in July, 1998, and a twentieth
and final installment, in March, 2003, of the remaining balance. Interest,
which is payable monthly, is at 12%; the Senior Lender may at its option
convert the rate to a floating rate at 3.5% over prime. The term loan requires
mandatory prepayment based on 75% of annual excess cash flows, as defined;
voluntary prepayments will incur prepayment penalties on a declining scale
during the first three years of the loan, except in certain cases including
prepayments from the proceeds of an initial public offering. In consideration
for the loan, the Company issued a warrant to the Senior Lender, which allows
the Senior Lender to acquire a number of shares of common stock equivalent to
$2.2 million divided by the initial public offering price of the common stock.
The warrant has an exercise price of $100, and the holder may put the warrant
back to the Company in March, 2003, if not previously exercised, at a price
equivalent to the fair value of the underlying common stock at that date.
The cash portion of the McQuiddy acquisition will be funded by an advance of
$6.3 million from the Company's acquisition line under its Amended and
Restated Credit Agreement with its Senior Lender as well as a $3.5 million
draw on its revolving line of credit from its Revolver Credit Lender. The draw
under the acquisition line will be repayable at March 2003.
The Company and its senior lender also entered into an exchange agreement
whereby the Company issued 222,220 shares of its newly created Series A
Cumulative Convertible Preferred Stock, par value $0.001 ("Series A Preferred
Stock") in exchange for the senior lender's warrant to purchase a 4% interest
in the Company's outstanding common stock. The Series A Preferred Stock
carries an annual dividend rate of 5% of its liquidation value ($10.25 per
share); dividends are payable quarterly and may be paid in cash and/or inkind.
The Series A Preferred Stock is convertible into common stock at the holder's
option at a ratio of 1 share of common stock for each share of Series A
Preferred Stock. The Series A Preferred Stock is redeemable by the holder at
the end of seven year, if the Sirrom note has been repaid, at a price
effectively equal to the greater of its liquidation value or the fair value of
the underlying common stock on an as-if converted basis.
F-32
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 4,843
Trade accounts receivable, net.............................. 23,058
Inventories:
Raw materials and supplies................................ 2,903
Work-in-process........................................... 2,919
--------
Total inventories........................................ 5,822
Deferred income taxes....................................... 161
Other current assets........................................ 2,809
--------
Total current assets...................................... 36,693
Property, plant and equipment, net............................ 45,117
Goodwill, net................................................. 38,682
Deferred loan costs, net...................................... 1,822
Due from shareholder.......................................... 4,126
Other......................................................... 915
--------
Total assets.............................................. $127,355
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current installments of long-term debt...................... 4,127
Accounts payable............................................ 6,872
Accrued expenses............................................ 7,153
--------
Total current liabilities................................. 18,152
Long-term debt, net of current installments................... 99,732
Deferred income taxes......................................... 3,288
Other liabilities............................................. 1,065
Redeemable preferred stock.................................... 1,350
Redeemable common stock warrant............................... 2,026
Commitments and contingencies
Shareholder's equity:
Common stock ($0.001 par value); 100,000,000 shares
authorized; 4,000,000 shares issued and outstanding ....... 4
Additional paid-in capital.................................. 6,744
Retained earnings (deficit)................................. (5,006)
--------
Total shareholder's equity................................ 1,742
--------
$127,355
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-33
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Net revenue.............................. $ 3,161 $ 28,020
Cost of revenue.......................... 2,691 20,654
------------- --------------
Gross profit........................... 470 7,366
Selling, general and administrative ex-
penses.................................. 636 4,865
------------- --------------
Operating income (loss)................ (166) 2,501
Other income (expense):
Interest expense....................... (157) (2,248)
Other, net............................. 63 186
------------- --------------
Income (loss) before income taxes...... (260) 439
Income tax expense (benefit)............. (11) (4)
------------- --------------
Net earnings (loss).................... $ (249) $ 443
============= ==============
Earnings per share:
Basic.................................. $(0.06) $ 0.11
============= ==============
Diluted................................ $(0.06) $ 0.10
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-34
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
--------------
1997 1998
----- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................... $(198) $ 443
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization................................ 151 1,174
Changes in operating assets and liabilities, net of effect of
business acquisitions:
Trade accounts receivable................................... 390 (3,162)
Inventories................................................. (94) 494
Other assets................................................ 10 (107)
Accounts payable............................................ 656 (372)
Accrued expenses............................................ 161 (83)
----- -------
Net cash provided by (used in) operating activities........ 1,076 (1,613)
----- -------
Cash flows from investing activities:
Business acquisitions, net of cash acquired................... -- (30,822)
Purchases of equipment........................................ (132) (173)
Other......................................................... -- 116
----- -------
Net cash used in investing activities...................... (132) (30,879)
----- -------
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit................ (692) 169
Proceeds from issuance of long-term debt...................... -- 37,113
Principal payments of long-term debt.......................... (41) (621)
Loan costs incurred........................................... -- (500)
----- -------
Net cash provided by (used in) financing activities........ (733) 36,161
----- -------
Net increase (decrease) in cash................................ 211 3,669
Cash (overdraft) at beginning of period........................ (91) 1,174
----- -------
Cash at end of period.......................................... $ 120 $ 4,843
===== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-35
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Master
Graphics, Inc. and its subsidiaries (collectively "Company") are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto.
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments (consisting of only normal,
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows of the Company as of the dates and for
the periods presented.
Because of the seasonal nature of the Company's business, the results of
operations for the periods presented are not necessarily indicative of the
results of operations for a full fiscal year.
On May 14, 1998, the Board of Directors of the Company approved a 40,000 to
1 stock split. All references to share and per share amounts in these
condensed consolidated financial statements have been retroactively restated
to reflect the stock split.
The accompanying condensed consolidated financial statements of the Company
include the results of operations of Master Graphics, Inc. and its
subsidiaries, on a consolidated basis. All intercompany balances and
transactions have been eliminated in the consolidation.
(2) ACQUISITIONS AND FINANCINGS
In March, 1998, the Company acquired all of the outstanding common stock of
Harperprints, Inc., Hederman Brothers, Inc., and Phillips Litho Co., Inc. All
of these businesses are engaged in commercial printing. These acquisitions
were paid for with a combination of cash ($14.2 million), notes given to the
sellers ($2.2 million) and warrants to acquire common stock (valued at $.3
million). These acquisitions have been accounted for by the purchase method
and, accordingly, the results of operations of Harperprints, Hederman, and
Phillips have been included in the Company's 1998 condensed consolidated
financial statements from their respective acquisition dates. The excess of
the purchase prices over the fair value of the net identifiable assets
acquired is approximately $10 million, which has been recorded as goodwill and
is being amortized on a straight-line basis over 40 years.
In May, 1998, the Company acquired all of the outstanding common stock of
McQuiddy Printing Company, Inc., a general commercial printer. The acquisition
was paid for with a combination of cash ($5 million), sellers' notes ($1.5
million) and warrants to acquire common stock (valued at $17,000). The
McQuiddy acquisition will be accounted for by the purchase method, and
accordingly the results of operations of McQuiddy will be included in the
Company's 1998 consolidated financial statements from the date of its
acquisition. There was no goodwill recognizable from this acquisition.
The cash portion of the Hederman acquisition was funded by a $5.9 million
draw on the Company's Acquisition Line under its Amended and Restated Credit
Agreement with its Senior Lender. In conjunction with this financing, the
Company agreed to certain modifications to the Credit Agreement, including an
increase the amortization of the Term Loan-B from $25,000 to $50,000. The
modifications also affected the Company's Credit Agreement covenants,
including its financial ratio requirements.
F-36
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The cash portion of the Phillips acquisition was financed by a $15 million
term note from the Company's Senior Lender. The loan is to be repaid in 19
quarterly installments of $12,500, beginning in July, 1998, and a twentieth
and final installment, in March 2003, of the remaining balance. Interest,
which is payable monthly, is at 12%, the Senior Lender may at its option
convert the rate to a floating rate at 3.5% over prime. The term loan requires
mandatory prepayment based on 75% of annual excess cash flows, as defined;
voluntary prepayments will incur prepayment penalties on a declining scale
during the first three years of the loan. In consideration for the loan, the
Company agreed to pay to the Senior Lender an origination fee of $500,000 and
an advisory fee of $1,500,000; the advisory fee must be paid at the earlier of
the date of an initial public offering or June 30, 1998.
The cash portion of the Harperprints acquisition was financed by a $10
million term loan from its Senior Lender. The loan is to be repaid in 19
quarterly installments of $12,500, beginning in July, 1998, and a twentieth
and final installment, in March, 2003, of the remaining balance. Interest,
which is payable monthly, is at 12%; the Senior Lender may at its option
convert the rate to a floating rate at 3.5% over prime. The term loan requires
mandatory prepayment based on 75% of annual excess cash flows, as defined;
voluntary prepayments will incur prepayment penalties on a declining scale
during the first three years of the loan, except in certain cases including
prepayments from the proceeds of an initial public offering. In consideration
for the loan, the Company issued a warrant to the Senior Lender, which allows
the Senior Lender to acquire a number of shares of common stock equivalent to
$2.2 million divided by the initial public offering price of the common stock.
The warrant has an exercise price of $100.
The cash portion of the McQuiddy acquisition will be funded by an advance of
$6.3 million from the Company's acquisition line under its Amended and
Restated Credit Agreement with its Senior Lender as well as a $3.5 million
draw on its revolving line of credit from its Revolver Credit Lender. The draw
under the acquisition line will be repayable at March, 2003.
The Company and its Senior Lender also effectively entered into an exchange
agreement in March, 1998, whereby the Company issued 177,776 shares of its
newly created Series A Cumulative Convertible Preferred Stock, par value
$0.001 ("Series A Preferred Stock") in exchange for the Senior Lender's
warrant to purchase a 4% interest in the Company's outstanding common stock.
The Series A Preferred Stock carries an annual dividend rate of 5% of its
liquidation value ($12.8125 per share); dividends are payable quarterly and
may be paid in cash and/or in kind. The Series A Preferred Stock is
convertible into common stock at the holder's option at a ratio of 1 share of
common stock for each share of Series A Preferred Stock. The Series A
Preferred Stock is redeemable by the holder at the end of seven years, if the
Sirrom note has been repaid, at a price effectively equal to the greater of
its liquidation value or the fair value of the underlying common stock on an
as-if converted basis. The preferred stock has been classified out of
stockholder's equity because of certain holder put features which are out of
the control of the Company. The preferred stock was initially recorded at its
fair value at the date of issuance (approximately $1.35 million) and will
subsequently be accreted to its mandatory redemption value.
(3) LENDERS' WARRANTS
In connection with the obtaining of the Harperprints acquisition financing,
the Company issued to its Senior Lender a warrant to acquire common stock. The
warrant expires, if unexercised, on September 26, 2007. The Senior Lender was
granted demand and piggyback registration rights. The Company has the option
to call the warrant under certain conditions, including the passage of five
years, at a price equal to the warrant's current market value at that date.
This instrument was recorded at its fair value at the date of issuance as
additional
F-37
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
paid-in capital in the accompanying consolidated balance sheet. The initial
fair market value of the lender's warrants has been netted against the related
debt and will be amortized as a component of interest expense over the life of
the debt.
In April, 1998, the common stock warrant issued to Sirrom Capital
Corporation ("Sirrom") was exercised and 266,664 shares of common stock were
issued. At the time of exercise, the carrying value of the Sirrom warrant was
reclassified to additional paid-in capital.
(4) LONG-TERM DEBT
Long-term debt at March 31, 1998 consisted of:
<TABLE>
<S> <C>
Term Loans, net of discount..................................... $ 75,101
Sirrom note, net of discount.................................... 3,484
Sellers' notes.................................................. 14,723
Line of credit.................................................. 2,605
Other........................................................... 7,946
--------
103,859
Less current installments....................................... 4,127
--------
Long-term debt, net............................................. $ 99,732
========
</TABLE>
F-38
<PAGE>
MASTER GRAPHICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 1998 was comprised of the
following (in thousands):
<TABLE>
<S> <C>
Land............................................................. $ 376
Building......................................................... 2,193
Leasehold improvements........................................... 1,020
Machinery and equipment.......................................... 43,941
Furniture and fixtures........................................... 2,834
Vehicles......................................................... 947
-------
51,311
Less accumulated depreciation.................................... 6,194
-------
$45,117
=======
</TABLE>
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors Lithograph Printing Company of Memphis:
We have audited the accompanying balance sheets of Lithograph Printing Company
of Memphis as of December 31, 1995 and 1996 and June 19, 1997 and the related
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1995 and 1996 and the period from January 1, 1997 through
June 19, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lithograph Printing of
Memphis as of December 31, 1995 and 1996 and June 19, 1997 and the results of
its operations and its cash flows for the years ended December 31, 1995 and
1996 and the period from January 1, 1997 through June 19, 1997 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 6, 1998
F-40
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 19, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 19,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ 998,182 496,557 538,803
Trade receivables, net................ 2,150,638 2,348,815 2,553,830
Other receivables..................... 88,244 48,242 145,925
Inventories........................... 455,885 209,592 529,546
Prepaids and other assets............. 37,390 -- 9,994
----------- ----------- -----------
Total current assets................ 3,730,339 3,103,206 3,778,098
Property, plant and equipment, net...... 4,465,225 5,402,134 5,182,311
Other assets............................ 462,347 484,386 492,193
----------- ----------- -----------
Total assets........................ $ 8,657,911 8,989,726 9,452,602
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..... $ 637,160 1,858,827 1,688,493
Accounts payable...................... 359,607 784,559 526,869
Accrued expenses...................... 337,787 466,081 517,920
----------- ----------- -----------
Total current liabilities........... 1,334,554 3,109,467 2,733,282
----------- ----------- -----------
Long-term debt, net of current portion.. 3,159,507 1,217,840 1,449,410
----------- ----------- -----------
Stockholders' equity:
Common stock, no par value. Authorized
400,000 voting shares and 400,000
non-voting shares; 188,004 shares
issued at December 31, 1995 and 1996,
and 188,286 shares issued at June 19,
1997................................. 332,071 332,071 357,412
Retained earnings..................... 7,725,179 8,223,748 8,805,898
----------- ----------- -----------
8,057,250 8,555,819 9,163,310
Less treasury stock, at cost; 60,000
shares............................... (3,893,400) (3,893,400) (3,893,400)
----------- ----------- -----------
Total stockholders' equity.......... 4,163,850 4,662,419 5,269,910
----------- ----------- -----------
Total liabilities and stockholders'
equity............................. $ 8,657,911 8,989,726 9,452,602
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ---------
<S> <C> <C> <C>
Net sales................................. $16,658,928 18,953,731 9,529,373
Cost of sales............................. 13,202,341 14,750,384 7,236,701
----------- ---------- ---------
Gross profit.......................... 3,456,587 4,203,347 2,292,672
Selling, general and administrative
expenses................................. 3,378,180 3,508,921 1,650,185
----------- ---------- ---------
Income from operations................ 78,407 694,426 642,487
----------- ---------- ---------
Other income (expense):
Insurance proceeds...................... 1,007,044 -- --
Interest income......................... 89,869 38,916 11,498
Interest expense........................ (281,339) (280,695) (140,755)
Gain on sale of assets.................. (1,010) 40,465 --
Other................................... 3,895 20,053 74,794
----------- ---------- ---------
818,459 (181,261) (54,463)
----------- ---------- ---------
Income before state income taxes...... 896,866 513,165 588,024
State income taxes (benefit).............. 1,077 14,596 (8,000)
----------- ---------- ---------
Net income............................ $ 895,789 498,569 596,024
=========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED TREASURY STOCKHOLDERS'
STOCK EARNINGS STOCK EQUITY
-------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994... $332,071 6,829,390 (3,893,400) 3,268,061
Net income.................... -- 895,789 -- 895,789
-------- --------- ---------- ---------
Balances at December 31,1995.... 332,071 7,725,179 (3,893,400) 4,163,850
Net income.................... -- 498,569 -- 498,569
-------- --------- ---------- ---------
Balances at December 31, 1996... 332,071 8,223,748 (3,893,400) 4,662,419
Repurchase and retirement of
1,614 shares................. (44,982) (13,874) -- (58,856)
Issuance of 1,896 shares
pursuant to stock bonus
plan......................... 70,323 -- -- 70,323
Net income.................... -- 596,024 -- 596,024
-------- --------- ---------- ---------
Balances at June 19, 1997....... $357,412 8,805,898 (3,893,400) 5,269,910
======== ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 895,789 $ 498,569 $ 596,024
Depreciation and amortization............ 863,954 701,576 364,843
(Gain) on life insurance proceeds........ (1,007,044) -- --
Common stock issued pursuant to bonus
plan.................................... -- -- 70,323
(Gain) loss on disposal of equipment..... 1,010 (40,464) --
(Increase) decrease in:
Accounts receivable..................... 887,030 (158,175) (302,698)
Inventories............................. (19,781) 246,293 (319,954)
Prepaid expenses and other current as-
sets................................... (6,056) 6,056 (9,994)
Increase (decrease) in:
Accounts payable........................ 27,271 424,952 (257,690)
Accrued expenses........................ (124,379) 128,294 51,839
----------- ----------- ---------
Net cash provided by operating ac-
tivities........................... 1,517,794 1,807,101 192,693
----------- ----------- ---------
Cash flows from investing activities:
Purchases of property, plant and equip-
ment.................................... (136,674) (1,570,588) (146,802)
Proceeds from sales of property, plant
and equipment........................... 19,000 3,900 1,784
(Increase) decrease in cash surrender
value of life insurance................. (28,153) (14,786) 16,758
Increase in club memberships............. -- (7,252) (8,567)
Life insurance proceeds.................. 1,315,193 -- --
Increase in other assets................. 1,400 -- (16,000)
----------- ----------- ---------
Net cash provided by (used in) in-
vesting activities................. 1,170,766 1,588,726 (152,827)
----------- ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of long term
debt.................................... 1,800,000 -- 350,000
Principal payments on long term debt..... (408,333) (720,000) (288,764)
Treasury stock required.................. (3,893,400) -- --
Repurchase and retirement of common
stock................................... -- -- (58,856)
----------- ----------- ---------
Net cash provided by (used in) fi-
nancing activities................. (2,501,733) (720,000) 2,380
----------- ----------- ---------
Increase (decrease) in cash............... 186,827 (501,625) 42,246
Cash beginning of period.................. 811,355 998,182 496,557
----------- ----------- ---------
Cash end of period........................ $ 998,182 $ 496,557 $ 538,803
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996, AND JUNE 19, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company
are as follows:
(a) Description of Business
The Company provides a full line of superior quality print services and
products to retailers, manufacturers, ad agencies and other users of printed
materials. The majority of the Company's sales are concentrated in the greater
mid-south area.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out (FIFO) basis.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the respective assets ranging from 5 to 39 years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense as incurred
and additions and improvements that significantly extend the lives of assets
are capitalized. Upon sale or other retirement of depreciable property, the
cost and accumulated depreciation are removed from the related accounts and
any gain or loss is reflected in operations.
(d) Income Taxes
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation under the provisions of Section 1362 of the Internal
Revenue Code. The stockholders are personally liable for their proportionate
share of the Company's federal taxable income; therefore, no provision or
liability for federal income taxes is reflected in these financial statements.
The company is a taxable entity for state income tax purposes.
State income taxes are computed based on the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
tax assets and liabilities, if significant, are recognized for the estimated
future tax effects attributed to temporary differences between the book and
tax bases of assets and liabilities and for carryforward items. The
measurement of current and deferred tax assets and liabilities is based on
enacted law. Deferred tax assets are reduced, if necessary, by a valuation
allowance for the amount of tax benefits that may not be realized.
(e) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. The statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the mount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
F-45
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(f) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(g) Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the presentation of the 1997 financial statements.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 19,
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Raw materials and supplies......................... $129,757 78,689 144,759
Work in process.................................... 326,128 130,903 384,787
Finished goods.....................................
-------- ------- -------
$455,885 209,592 529,546
======== ======= =======
</TABLE>
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 19,
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Furniture and fixtures.................. $ 488,346 488,346 557,135
Equipment............................... 9,256,658 10,814,416 10,824,630
Leasehold improvements.................. 181,463 187,973 253,034
Vehicles................................ 119,505 126,196 126,196
----------- ---------- ----------
10,045,972 11,616,931 11,760,995
Less accumulated depreciation......... (5,580,747) (6,214,797) (6,578,684)
----------- ---------- ----------
$ 4,465,225 5,402,134 5,182,311
=========== ========== ==========
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 19,
1995 1996 1997
---------- --------- ---------
<S> <C> <C> <C>
7.2% revolving line of credit, unused and
available balance as of June 19, 1997 was
$1,150,000................................. $ -- -- 350,000
7.8% note payable, with monthly payments of
$21,430 including interest, with the final
payment of $539,228 due November 30,
2000....................................... 1,775,000 1,475,000 1,356,570
8.5% note payable, with monthly payments of
$15,000 for payments 1-27, $31,667 for
payments 28-59, with the entire unpaid
balance due October 1, 1997................ 2,021,667 1,601,667 1,431,333
---------- --------- ---------
3,796,667 3,076,667 3,137,903
Less current portion...................... 637,160 1,858,827 1,688,493
---------- --------- ---------
$3,159,507 1,217,840 1,449,410
========== ========= =========
</TABLE>
F-46
<PAGE>
LITHOGRAPH PRINTING COMPANY OF MEMPHIS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective June 19, 1997, substantially all of the Company's long-term debt was
refinanced as a part of the acquisition of the outstanding common stock of the
Company by Master Graphics, Inc.
(5) LEASES
The Company leases its office and manufacturing space and certain vehicles
under operating lease arrangements which expire at various dates through July
2004. The office and manufacturing space is leased from the Company's majority
stockholder; the lease has two consecutive five-year renewal periods. The
Company leases various equipment and vehicles under leases determined to be
operating leases.
Future minimum lease payments under operating leases as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $ 281,127
1999........................................................... 281,127
2000........................................................... 281,127
2001........................................................... 273,900
2002........................................................... 272,400
2003-04........................................................ 408,600
----------
Total future minimum lease payments............................ $1,798,281
==========
</TABLE>
Rent expense totaled $300,446 for 1995, $293,638 for 1996, and $153,496 for
1997.
(6) EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) deferred salary reduction plan under which
substantially all employees of the Company are eligible. The plan provides for
the Company to match employee contributions, subject to certain limitations.
The Company's contribution to the plan totaled $108,741 for 1995, $117,497 for
1996, and $106,704 for 1997.
The Company has a stock bonus plan in which certain key employees
participate. Awards are made to the participants, in stock and/or cash, based
on annual results exceeding targeted results. The plan also provides for the
repurchase of shares issued upon termination and other events based on a book
value formula. There were no awards under the plan in 1995; in 1996, awards
aggregating approximately $70,000 were accrued and paid primarily in shares of
stock in 1997; and in 1997, awards aggregating approximately $190,000 were
accrued and paid in cash.
(7) SUBSEQUENT EVENT
Effective June 19, 1997, Master Graphics, Inc. acquired all of the
outstanding common stock of the Company and contemporaneously refinanced
substantially all of the then outstanding debt of the Company.
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Blackwell Lithographers, Inc:
We have audited the accompanying balance sheet of Blackwell Lithographers,
Inc. as of June 19, 1997, and the related statements of operations,
shareholders' equity and cash flows for the period from January 1, 1997 to
June 19, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Blackwell Lithographers,
Inc. as of June 19, 1997, and the results of its operations and its cash flows
for the period from January 1, 1997 through June 19, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
February 18, 1998
F-48
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
BALANCE SHEET
JUNE 19, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 201,160
Accounts receivable, net.......................................... 423,797
Inventories....................................................... 184,550
Prepaid expenses and other current assets......................... 78,358
----------
Total current assets............................................ 887,865
Property, plant and equipment, net.................................. 1,696,121
Total assets.................................................... $2,583,986
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............................. 327,742
Accounts payable.................................................. 111,885
Accrued expenses.................................................. 44,484
----------
Total current liabilities....................................... 484,111
Long-term debt, net of current maturities........................... 59,900
Commitments and contingencies
Shareholders' equity:
Common stock, $10 par value; 5,000 share authorized; 4,400 shares
issued and outstanding........................................... 44,000
Retained earnings................................................. 1,995,975
----------
Total shareholders' equity...................................... 2,039,975
----------
Total liabilities and shareholders' equity...................... $2,583,986
==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<S> <C>
Net sales........................................................... $1,921,544
Cost of sales....................................................... 1,213,424
----------
Gross profit...................................................... 708,120
Selling, general and administrative expenses........................ 465,607
----------
Income from operations............................................ 242,513
Other income (expense):
Interest income................................................... 2,663
Interest expense.................................................. (12,143)
Other income...................................................... 279
----------
Net income.......................................................... $ 233,312
==========
</TABLE>
See accompanying to financial statements.
F-50
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
------ --------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996...................... 44,000 2,132,663 2,176,663
Distributions................................. -- (370,000) (370,000)
Net income.................................... -- 233,312 233,312
------ --------- ---------
Balance, June 19, 1997.......................... 44,000 1,995,975 2,039,975
====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 THROUGH JUNE 19, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 233,312
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 103,701
Loss on disposal of equipment..................................... 2,455
Changes in operating assets and liabilities:
(Increase) decrease in-
Accounts receivable.............................................. 367,366
Inventories...................................................... (75,143)
Prepaid expenses and other current assets........................ (46,678)
Increase (decrease) in-
Accounts payable................................................. (118)
Accrued expenses................................................. (43,859)
---------
Net cash provided by operating activities...................... 541,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......................... (140,627)
---------
Net cash used in investing activities.......................... (140,627)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt................................ (93,064)
Shareholder distributions........................................... (370,000)
---------
Net cash used in financing activities.......................... (463,064)
Net (decrease) in cash and cash equivalents.......................... (62,655)
Cash and cash equivalents, beginning of period....................... 263,815
---------
Cash and cash equivalents, end of period............................. $ 201,160
=========
Cash paid for interest............................................... --
---------
Cash paid for taxes.................................................. --
---------
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 19, 1997
1. BUSINESS AND ORGANIZATION
Blackwell Lithographers, Inc. (the Company) is primarily engaged in the
business of full service printing with customers in the southeastern region of
the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Revenue Recognition
Revenue is recognized upon shipment of products.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined on
the first-in, first-out (FIFO) method. The Company uses a job order cost
accumulation system whereby substantially all direct materials, labor, and
overhead are charged to a specific job and are included in work-in-process
inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
over the lesser of the remaining lease-term or the estimated life of the
asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement of disposition of property, plant or equipment, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of operations.
Income Taxes
The shareholders of the Company have elected to be taxed for federal tax
purposes as an S Corporation whereby the shareholder's respective equitable
shares in the taxable income of the Company are reportable on their individual
tax returns. The Company will make distributions to the shareholders each year
at least in amounts necessary to pay personal income taxes payable on the
Company's taxable income.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Raw materials and supplies......................................... $102,468
Work in process.................................................... 82,082
--------
Total............................................................ $184,550
</TABLE>
F-53
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
The principal categories and estimated useful lives of property, plant and
equipment at June 19, 1997 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Land.............................................. -- $ 61,495
Building.......................................... 30 years 544,229
Machinery and equipment........................... 5-11 years 2,388,669
Furniture and fixtures............................ 5-10 years 133,075
Automotive equipment.............................. 3-5 years 126,329
-----------
3,253,797
Less: accumulated depreciation.................... $(1,557,676)
-----------
Total........................................... $ 1,696,121
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to a bank payable in monthly installments of
$5,533, including interest, final payment due on September 20,
1997; variable interest rate of 0.75% above the bank's prime
rate (rate at June 19, 1997 was 8.5%); secured by land, build-
ing and certain equipment, a life insurance policy on a stock-
holder, and the personal guaranty of a stockholder............. $ 138,482
Capital lease obligation for four-color press, with monthly pay-
ments of $15,100 including interest, through October 1998...... 249,160
---------
387,642
Less current maturities....................................... (327,742)
---------
$ 59,900
</TABLE>
Effective June 19, 1997, the Company was acquired by Master Graphics, Inc.
Concurrent with the acquisition, the debt of the Company was refinanced and
the bargain purchase option on the capital lease was exercised.
6. EMPLOYEE BENEFIT PLAN
All full-time employees who meet certain age and length of service
requirements are eligible to participate in the Company's Profit-Sharing
Retirement Plan. The plan provides for contributions by the Company in such
amounts as the Board of Directors may annually determine. Profit-sharing
retirement plan contributions and administrative charges were approximately
$15,000 for the period ended June 19, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-54
<PAGE>
BLACKWELL LITHOGRAPHERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
and long-term debt. The Company believes that the carrying value of these
instruments on the accompanying balance sheet approximates their fair value.
9. ACQUISITION OF COMPANY
Effective June 20, 1997, Master Graphics, Inc. acquired all of the
outstanding shares of the Company for a combination of cash, notes payable and
common stock warrants; the outstanding debt of the Company was also refinanced
as a part of the transaction.
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Argus Press, Inc.:
We have audited the accompanying balance sheets of The Argus Press, Inc. as
of December 31, 1996 and September 22, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year ended December
31, 1996 and the period from January 1, 1997 to September 22, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Argus Press, Inc. as
of December 31, 1996 and September 22, 1997, and the results of its operations
and its cash flows for the year ended December 31, 1996 and the period from
January 1, 1997 through September 22, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 5, 1998
F-56
<PAGE>
THE ARGUS PRESS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 22, 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 22,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ 100,676
Accounts receivable, net.......................... 4,206,680 4,067,491
Inventories....................................... 1,162,886 1,199,582
Prepaid expenses and other current assets......... 151,758 223,797
---------- ----------
Total current assets............................ 5,521,324 5,591,546
Property and equipment, at cost, less accumulated
depreciation of
$3,112,061 and $3,638,161.......................... 1,853,551 1,809,794
---------- ----------
Total assets.................................... $7,374,875 $7,401,340
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft.................................... $ 306,744 $ --
Borrowings under lines of credit.................. -- 300,000
Current maturities of long-term bank debt......... 342,000 478,000
Accounts payable.................................. 1,632,196 1,744,510
Accrued expenses.................................. 1,243,985 957,166
---------- ----------
Total current liabilities....................... 3,524,925 3,479,676
---------- ----------
Long-term bank debt, net of current maturities.... 364,000 --
---------- ----------
Commitments and contingencies.......................
Shareholders' equity:
Common stock, $1 par value; 10,000 shares
authorized; 1,000 shares issued and outstanding.. 1,000 1,000
Additional paid in capital........................ 199,000 199,000
Retained earnings................................. 3,285,950 3,721,664
---------- ----------
Total shareholders' equity...................... 3,485,950 3,921,664
---------- ----------
Total liabilities and shareholders' equity...... $7,374,875 $7,401,340
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE>
THE ARGUS PRESS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM
JANUARY 1, 1997 THROUGH SEPTEMBER 22, 1997
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 22,
1996 1997
------------ -------------
<S> <C> <C>
Net sales........................................... $24,662,538 $17,610,727
Cost of sales....................................... 18,991,178 13,762,026
----------- -----------
Gross profit...................................... 5,671,360 3,848,701
Selling, general and administrative expenses........ 3,775,978 2,714,390
----------- -----------
Income from operations............................ 1,895,382 1,134,311
Other income (expense):
Interest expense.................................. (127,876) (34,872)
Interest income................................... 2,837 9,400
Gain (loss) on disposal of assets................. (22,637) 5,000
Other............................................. 55,171 39,787
----------- -----------
Income before income tax provision.............. 1,802,877 1,153,626
Provision for state income taxes.................... 31,609 17,912
----------- -----------
Net income...................................... $ 1,771,268 $ 1,135,714
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-58
<PAGE>
THE ARGUS PRESS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM
JANUARY 1, 1997 THROUGH SEPTEMBER 22, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........ $1,000 $199,000 $ 3,098,682 $ 3,298,682
Distributions to shareholders..... -- -- (1,584,000) (1,584,000)
Net income........................ -- -- 1,771,268 1,771,268
------ -------- ----------- -----------
Balance, December 31, 1996........ 1,000 199,000 3,285,950 3,485,950
Distributions to shareholders..... -- -- (700,000) (700,000)
Net income........................ -- -- 1,135,714 1,135,714
------ -------- ----------- -----------
Balance, September 22, 1997....... $1,000 $199,000 $ 3,721,664 $ 3,921,664
====== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE>
THE ARGUS PRESS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM
JANUARY 1, 1997 THROUGH SEPTEMBER 22, 1997
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 22,
1996 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 1,771,268 $1,135,714
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 579,488 424,153
(Gain) loss on disposal of equipment............. 22,637 (5,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable....... (520,026) 139,189
Increase in inventories.......................... (30,440) (36,696)
Increase in prepaid expenses and other current
assets.......................................... (44,502) (72,039)
(Decrease) increase in accounts payable.......... (273,755) 112,314
Increase (decrease) in accrued expenses.......... 331,980 (286,819)
----------- ----------
Net cash provided by operating activities..... 1,836,650 1,410,816
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (346,774) (380,396)
Proceeds from sales of property and equipment...... 45,450 5,000
----------- ----------
Net cash used in investing activities......... (301,324) (375,396)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft..................................... 306,744 (306,744)
Net borrowings on (repayments of) lines of credit.. (200,000) 300,000
Payments on bank debt.............................. (342,000) (228,000)
Shareholder distributions.......................... (1,584,000) (700,000)
----------- ----------
Net cash used in financing activities......... (1,819,256) (934,744)
----------- ----------
Net increase (decrease) in cash and cash
equivalents.................................. (283,930) 100,676
Cash and cash equivalents, beginning of year........ 283,930 --
----------- ----------
Cash and cash equivalents, end of year.............. $ -- $ 100,676
----------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid...................................... $ 127,876 $ 34,873
=========== ==========
State taxes paid................................... $ 14,622 $ 32,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE>
THE ARGUS PRESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 22, 1997
(1) NATURE OF BUSINESS
The Argus Press, Inc. is engaged in the business of high quality sheet fed
commercial printing, including advanced electronic pre-press services. Primary
markets include pharmaceutical, industrial and advertising customers located
primarily in the greater Chicagoland area.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market as determined using
the first-in, first out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line or accelerated methods over the useful lives of the assets.
Income Taxes
With the consent of its shareholders, the Company elected under the Internal
Revenue Code to be taxed as an S Corporation. In lieu of corporation income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. The Company continues to pay state
replacement income taxes.
(3) PROPERTY AND EQUIPMENT
The principal categories and estimated useful lives of property and
equipment are as follows:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 22,
USEFUL LIVES 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Machinery and equipment........... 5-10 years $ 4,705,924 $ 5,188,267
Furniture and Fixtures............ 5 years 25,000 25,000
Vehicles.......................... 3-5 years 195,410 195,410
Leasehold improvements............ Term of lease 39,278 39,278
----------- -----------
4,965,612 5,447,955
Less accumulated depreciation..... (3,112,061) (3,638,161)
----------- -----------
$ 1,853,551 $ 1,809,794
=========== ===========
</TABLE>
F-61
<PAGE>
THE ARGUS PRESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) LINE OF CREDIT
On December 31, 1996, the Company maintained two lines of credit with a
bank. These lines of credit provided maximum borrowings of $550,000 and
$450,000 and bore interest at the bank's prime rate plus .75% (9.00% at
December 31, 1996). Borrowings under the lines were subject to certain
restrictions and were secured by substantially all of the Company's assets.
There were no borrowings outstanding under these lines of credit at December
31, 1996.
On March 31, 1997, the Company restructured its two lines of credit with a
bank. The two previous lines of credit were consolidated into a new $1,000,000
line of credit. The new line bears interest at the bank's prime rate plus .75%
and expires on March 31, 1998. Borrowings under the line are subject to
certain restrictions and are secured by eligible accounts receivable and
inventory of the Company. At September 22, 1997, the Company's outstanding
borrowings under the line of credit totaled $300,000 and bore interest at
9.25%.
(5) LONG-TERM DEBT
On December 31, 1996, the Company's long-term debt consisted of an
installment note payable to a bank. This note called for monthly principal
payments of $28,500 plus interest at the bank's prime rate (8.25% at December
31, 1996). The note was secured by substantially all of the assets of the
Company. A final balloon payment of $649,000 was to have been due on March 31,
1997; however, on that date, the Company signed a new installment note that
extended the due date for the final balloon payment to March 31, 1998. The
total unpaid balance of $706,000 at December 31, 1996 has been segregated
between current and long-term liabilities based on the terms of the new
installment note.
The Company's March 31, 1997 installment note for $649,000 calls for monthly
principal payments of $28,500 plus interest at the bank's prime rate (8.50% at
September 22, 1997) and is secured by eligible machinery and equipment of the
Company. A final balloon payment of $250,000 is due on March 31, 1998. The
total unpaid balance of $478,000 at September 22, 1997 has been classified as
a short-term liability.
(6) RETIREMENT PLANS
The Company maintains a qualified profit sharing and a cash deferred 401(k)
plan that covers substantially all employees. Contributions to the profit
sharing plan are determined by the Board of Directors at their discretion. The
401(k) matching contributions to the plan are equal to 25% of the first 5% of
substantially all the employees annual contributions. Profit sharing
contributions for the year ended December 31, 1996 and for the period from
January 1, 1997 to September 22, 1997 were $160,000 and $63,750, respectively
and the 401(k) matching contribution for the year ended December 31, 1996 and
for the period from January 1, 1997 to September 22, 1997 were $60,654 and
$51,144, respectively.
(7) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 22,
1996 1997
------------ -------------
<S> <C> <C>
Raw materials..................................... $ 231,479 $ 255,487
Work in progress.................................. 822,907 821,125
Finished goods.................................... 108,500 122,970
---------- ----------
$1,162,886 $1,199,582
========== ==========
</TABLE>
F-62
<PAGE>
THE ARGUS PRESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) SALES TO SIGNIFICANT CUSTOMERS
During the year ended December 31, 1996 and the period from January 1, 1997
to September 22, 1997, sales to one customer accounted for approximately 13%
and 17%, respectively, of the Company's net sales.
(9) LEASE COMMITMENTS
The Company leases its building and certain equipment under operating lease
arrangements which expire at various dates through June 2003. Rent expense for
the year ended December 31, 1996 and for the period from January 1, 1997 to
September 22, 1997 was $269,128 and $364,125, respectively. Future minimum
lease payments under operating leases as of September 22, 1997 are as follows:
<TABLE>
<S> <C>
Period from September 23, 1997 to December 31, 1997.............. $ 130,749
Year ended December 31,
1998........................................................... 555,753
1999........................................................... 555,753
2000........................................................... 555,753
2001........................................................... 555,753
2002........................................................... 555,753
Thereafter..................................................... 411,752
----------
Total future minimum rentals................................. $3,321,266
==========
</TABLE>
(10) SUBSEQUENT EVENT
On September 22, 1997, all of the Company's outstanding shares were
purchased for $12.25 million by Master Graphics, Inc. The Company has merged
into Premier Graphics, Inc. (Premier), a 100% owned subsidiary of Master
Graphics Inc., whereby Premier does business as The Argus Press, Inc.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Phoenix Communications, Inc.:
We have audited the accompanying balance sheet of Phoenix Communication,
Inc. (a Georgia corporation) as of January 31, 1997 and the related statements
of operations and retained earnings and cash flows for each of the two years
in the period ended January 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Phoenix Communications,
Inc. as of January 31, 1997 and the results of its operations and its cash
flows for each of the two years in the period ended January 31, 1997, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
April 30, 1997
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Phoenix Communications, Inc.:
We have audited the accompanying balance sheet of Phoenix Communication,
Inc. as of December 16, 1997 and the related statements of income and retained
earnings and cash flows for the period from February 1, 1997 through December
16, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Phoenix Communications,
Inc. as of December 16, 1997 and the results of its operations and its cash
flows for the period from February 1, 1997 through December 16, 1997, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 6, 1998
F-65
<PAGE>
PHOENIX COMMUNICATIONS, INC.
BALANCE SHEETS
JANUARY 31, 1997 AND DECEMBER 16, 1997
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 16,
ASSETS 1997 1997
------ ----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................... $ 2,277 $ 1,080,318
Accounts receivable, less allowance for doubtful
accounts of $210,000 at January 31, 1997 and
$200,000 at December 16, 1997, respectively....... 6,122,124 3,368,481
Current notes receivable........................... 77,305 72,805
Receivables from affiliates........................ 107,939 --
Inventories (note 2)............................... 1,060,260 1,780,077
Prepaid expenses and other......................... 29,221 20,215
Income taxes receivable............................ 205,766 --
----------- -----------
Total current assets............................. 7,604,892 6,321,896
----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements............................. 571,115 573,507
Machinery and equipment............................ 8,890,179 9,079,261
Computer equipment................................. -- 154,966
Vehicles........................................... 255,768 255,768
Furniture and fixtures............................. 434,450 434,450
----------- -----------
10,151,512 10,497,952
Less accumulated depreciation and amortization..... (7,014,368) (7,938,854)
----------- -----------
Property and equipment, net...................... 3,137,144 2,559,098
----------- -----------
OTHER ASSETS:
Deferred income taxes.............................. 242,000 253,542
Unearned compensation, net......................... 37,500 25,000
Notes receivable................................... 108,621 97,212
Goodwill and other intangible assets, net of
accumulated amortization of $756,888 and
$1,431,947 at January 31, 1997 and December 16,
1997, respectively................................ 3,934,535 3,213,676
Deposits and other................................. 57,574 42,942
----------- -----------
4,380,230 3,632,372
----------- -----------
$15,122,266 $12,513,366
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt and obligations
under capital leases.............................. $ 1,300,989 $ 2,255,576
Line of credit..................................... 2,540,843 2,071,145
Bank overdraft..................................... 277,290 --
Accounts payable................................... 1,275,522 838,329
Accrued expenses................................... 1,276,373 1,397,780
Due to affiliates.................................. 25,000 25,000
----------- -----------
Total current liabilities........................ 6,696,017 6,587,830
----------- -----------
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES,
LESS CURRENT PORTION................................ 7,450,894 5,191,309
----------- -----------
NOTES PAYABLE TO AFFILIATES.......................... 903,505 903,505
----------- -----------
COMMITMENTS (NOTES 6, 8 AND 9)
Stockholders' equity:
Common stock, no par value; 500 shares authorized,
287 shares issued................................. 65,463 66,182
Additional paid-in capital......................... 39,166 39,166
Retained earnings.................................. 293,153 51,306
----------- -----------
397,782 156,654
Less treasury stock, at cost; 135 shares........... (325,932) (325,932)
----------- -----------
71,850 (169,278)
----------- -----------
$15,122,266 $12,513,366
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
PHOENIX COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED JANUARY 31, 1996 AND 1997 AND THE
PERIOD FROM FEBRUARY 1 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1
YEARS ENDED JANUARY 31, THROUGH
------------------------ DECEMBER 16,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Sales.................................. $20,093,171 $25,859,099 $21,786,132
Cost of sales.......................... 15,287,985 19,522,995 15,034,356
----------- ----------- -----------
Gross profit....................... 4,805,186 6,336,104 6,751,776
Selling, general and administrative
expenses.............................. 5,208,585 6,087,935 5,940,267
----------- ----------- -----------
Income (loss) from operations...... (403,399) 248,169 811,509
----------- ----------- -----------
Other (expense) income:
Interest expense..................... (758,037) (1,406,115) (1,168,696)
Other income, net.................... 75,308 231,078 115,340
----------- ----------- -----------
(682,729) (1,175,037) (1,053,356)
----------- ----------- -----------
Loss before income taxes........... (1,086,128) (926,868) (241,847)
Benefit for income taxes............... 410,000 123,000 --
----------- ----------- -----------
Net loss........................... (676,128) (803,868) (241,847)
Retained earnings, beginning of
period................................ 1,773,149 1,097,021 293,153
----------- ----------- -----------
Retained earnings, end of period....... $ 1,097,021 $ 293,153 $ 51,306
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
PHOENIX COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996 AND 1997 AND THE
PERIOD FROM FEBRUARY 1 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1
YEARS ENDED JANUARY 31, THROUGH
------------------------ DECEMBER 16,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................. $ (676,128) $ (803,868) $ (241,847)
----------- ----------- -----------
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization........ 944,369 1,689,274 1,645,345
Deferred income taxes................ (250,000) -- --
Changes in operating assets and
liabilities:
Receivables......................... 2,236,432 (423,881) 2,753,643
Inventories......................... 360,814 392,243 (719,817)
Prepaid expenses and other.......... 69,506 155,739 323,669
Bank overdraft...................... (71,629) (258,846) (277,290)
Accounts payable and accrued
expenses........................... (482,322) 86,596 (315,786)
Due to affiliates................... (4,122) (33,779) --
Income taxes........................ (228,238) (25,233) --
----------- ----------- -----------
Total adjustments.................. 2,574,810 1,582,113 3,409,764
----------- ----------- -----------
Net cash provided by operating
activities........................ 1,898,682 778,245 3,167,917
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business and related
intangibles.......................... (2,347,500) -- --
Purchase of property and equipment,
net.................................. (207,516) (515,387) (346,440)
Decrease in deposits and other........ 136,315 69,611 14,632
----------- ----------- -----------
Net cash used in investing
activities........................ (2,418,701) (445,776) (331,808)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing (payments) under line-
of-credit agreement.................. (2,627,677) 871,582 (469,698)
Net proceeds (disbursements) under
notes receivable..................... -- -- 15,909
Proceeds from borrowings on long-term
debt................................. 6,761,438 266,076 --
Repayments of long-term debt and
obligations under capital leases..... (3,711,710) (1,597,402) (1,304,998)
Issuance of common stock.............. -- -- 719
Net (payments) borrowings on notes
payable to affiliates................ 222,944 (1,924) --
----------- ----------- -----------
Net cash (used in) provided by
financing activities.............. 644,995 (461,668) (1,758,068)
----------- ----------- -----------
Net (decrease) increase in cash.... 124,976 (129,199) 1,078,041
Cash, at beginning of period............ 6,500 131,476 2,277
----------- ----------- -----------
Cash, at end of period.................. $ 131,476 $ 2,277 $ 1,080,318
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for
interest............................. $ 758,000 $ 1,381,000 $ 1,168,696
=========== =========== ===========
Cash paid during the year for income
taxes................................ $ 133,000 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1997 AND DECEMBER 16, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Phoenix Communications, Inc. (the "Company") was incorporated on December
17, 1975 under the laws of the state of Georgia. The Company is a commercial
printer specializing in high-quality lithographic printing for colleges and
universities, corporations, and nonprofit associates located in the
southeastern region of the United States.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Inventories
Inventories are valued at the lower of cost (first-in, first-out basis) or
market. The Company uses a job order cost accumulation system whereby
substantially all direct materials, labor, and overhead are charged to a
specific job and are included in work-in-process inventory. Market is defined
as replacement cost for raw materials and as net realizable value for work in
process.
Property and Equipment
Property and equipment are depreciated over the estimated useful lives of
the individual assets using the straight-line method. Equipment under capital
leases is amortized over the estimated useful lives of the assets or the lease
terms, as appropriate, on a straight-line basis. The estimated useful lives
are as follows:
<TABLE>
<S> <C>
Machinery and equipment................................ Five to ten years
Vehicles............................................... Three to five years
Furniture and fixtures................................. Five to seven years
</TABLE>
Leasehold improvements are amortized over the lesser of the remaining lease
terms or the service lives of the improvements using the straight-line method.
Revenue Recognition
Revenue is recognized at the time the products are shipped.
Income Taxes
The benefit for income taxes is based on the net loss reported in the
accompanying financial statements, net of appropriate valuation allowance.
Deferred income taxes are recognized on timing differences between amounts
reported for financial reporting and income tax purposes.
Significant Customer
For the year ended January 31, 1997, the Company sold a substantial portion
of its products to one customer, accounting for approximately 15% of the
Company's total fiscal 1997 sales and 6% of the Company's total accounts
receivable at January 31, 1997.
F-69
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) OTHER FINANCIAL DATA
Inventories at January 31, 1997 and December 16, 1997 were as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 16,
1997 1997
----------- ------------
<S> <C> <C>
Raw materials....................................... 608,654 654,998
Work in progress.................................... 451,606 1,125,079
--------- ---------
1,060,260 1,780,077
========= =========
</TABLE>
(3) ACQUISITION
Effective January 1, 1996, the Company acquired substantially all the
operating assets and business of the Cunningham Group, Inc. ("CGI") for
$5,247,000, plus the assumption of liabilities of $656,000. The acquisition
was financed with proceeds from a note payable issued to a credit corporation
and notes issued to the shareholders of CGI of $3,247,000 (Note 4). The
acquisition has been accounted for as a purchase, and accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. This allocation resulted in goodwill of
approximately $2,011,000, which is being amortized over 20 years.
Additionally, the Company entered into noncompete agreements with the
shareholders of CGI. Amounts paid to the shareholders of CGI in connection
with these agreements of $2,492,000 have been capitalized in the accompanying
balance sheets and are being amortized over four years. The operating results
of the acquired business are included in the Company's results of operations
from the date of the acquisition. The acquisition did not have a material pro
forma impact on the results of operations for fiscal 1996.
(4) LINE OF CREDIT, LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
On January 22, 1996, the Company entered into a revolving line of credit
with a credit corporation which provides for borrowings through January 2001
of up to $5,700,000. As of December 16, 1997, available borrowings under this
agreement totaled $3,628,855. Outstanding borrowings under the line of credit
bear interest at the prime rate (8.25% at December 16, 1997) plus 1%. The line
of credit is secured by substantially all assets of the Company not otherwise
encumbered.
Long-term debt and obligations under capital leases of the Company at
January 31, 1997 and December 16, 1997 are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 16,
1997 1997
----------- ------------
<S> <C> <C>
Note payable to credit corporation; interest due
monthly at a variable rate based on the prime
rate; due in monthly installments of principal
of $103,794 through January 2000 and $49,107
from February 2000 through January 2001, with a
final installment due January 2001; secured by
substantially all assets of the Company......... $ 5,270,784 $ 4,080,544
Note payable to shareholders of CGI; interest
payable quarterly at 14%; due in varying annual
installments beginning March 1998, ranging from
$997,260 to $1,212,500 through March 2000....... 3,247,262 3,212,262
Other notes payable and obligations under capital
leases.......................................... 233,837 154,079
----------- -----------
8,751,883 7,446,885
Less current portion............................. 1,300,989 2,255,576
----------- -----------
$ 7,450,894 $ 5,191,309
=========== ===========
</TABLE>
F-70
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The line-of-credit agreement and note payable to credit corporation
agreement contain certain restrictive covenants and conditions, which, among
other matters, require the Company to maintain a minimum net worth, as
defined, and to meet certain minimum cash flow ratios, as defined. The
agreement also restricts changes in the Company's ownership as well as mergers
or acquisitions (Note 11). As of January 31, 1997, the Company was not in
compliance with certain of these restrictive covenants. Subsequent to January
31, 1997, the Company received a waiver of certain violations under these
agreements and certain covenants were amended to place the Company into
compliance. The Company, however, continues to be subject to these restrictive
covenants, as amended, on an ongoing basis, and management anticipates future
compliance with those covenants.
Principal maturities of long-term debt and obligations under capital leases,
net of imputed interest, at December 16, 1997 were as follows:
<TABLE>
<S> <C>
Fiscal year:
1998............................................................. $2,255,576
1999............................................................. 2,639,559
2000............................................................. 1,606,233
2001............................................................. 945,517
2002............................................................. --
----------
$7,446,885
==========
</TABLE>
(5) RELATED-PARTY TRANSACTIONS
The Company leases its main office and operating facility under an operating
lease agreement with a limited partnership (the "Partnership") of which the
Company is the general partner with approximately 4% ownership (Note 7).
Certain stockholders of the Company are the limited partners with
approximately 96% ownership and personal guarantees of the long-term debt of
the Partnership. The Company accounts for its investment in the Partnership
using the equity method. Summarized financial information of the Partnership
as of December 31, 1997 and 1996 and for the years then ended is as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current assets......................................... $ 787 $ 15,208
Current liabilities.................................... (92,160) (92,160)
--------- ---------
Net working capital deficit........................ (91,373) (76,952)
Long-term assets....................................... 549,602 604,857
Long-term debt......................................... (263,341) (355,501)
--------- ---------
Partners' capital...................................... $ 194,888 $ 172,404
========= =========
Rental income.......................................... $ 233,000 $ 240,000
General and administrative expenses.................... (55,255) (54,903)
Interest expense....................................... (35,461) (37,808)
--------- ---------
Net income............................................. $ 142,284 $ 147,289
========= =========
</TABLE>
The Company provides printing services to a company which was affiliated
through common ownership. At January 31, 1996, the Company had a receivable of
approximately $708,000, due from the affiliate. Subsequent to January 31,
1996, the affiliated company was sold to a third party and management
determined that amounts due from the affiliated company were not fully
collectible. As such, the Company recorded a provision of $398,000 during
fiscal 1996 which is included as a component of selling, general, and
administrative expenses in the accompanying statement of operations and
retained earnings for the year ended January 31, 1996 to reserve
F-71
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for the uncollectible amounts. At January 31, 1997, the Company had additional
receivables of $80,000 due on demand from companies affiliated through common
ownership.
The Company performs certain administrative functions for an affiliate
related through common ownership. Fees earned from such services approximated
$21,000 annually. The Company also purchases direct mail services from this
affiliate. During fiscal 1996, 1997 and 1998 such purchases were approximately
$376,000, $234,000 and $231,000, respectively. At January 31, 1997 and
December 16, 1997 approximately $25,000 was payable to this affiliate.
Notes payable to affiliates at January 31, 1997 and December 16, 1997
represent amounts due under informal arrangements to officers, stockholders,
and other related parties. Certain notes bear interest at the prime rate plus
2%, are unsecured, and are due on demand. At December 16, 1997, such notes
have been classified as noncurrent, as the holders of the notes have informed
the Company that they do not intend to demand payment during 1998. Interest
expense incurred related to the notes totaled approximately $83,000, $99,000
and $89,000 during fiscal years 1996, 1997 and 1998, respectively.
(6) INCOME TAXES
The Company records deferred income taxes using enacted tax laws and rates
for the years in which taxes are expected to be paid. Deferred income tax
assets and liabilities are recorded based on the differences between the
financial accounting and tax accounting bases of assets and liabilities.
The income tax benefit for fiscal years 1996 and 1997 and the period from
February 1, 1997 through December 16, 1997 consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, DECEMBER 16,
1996 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
Federal................................. $140,000 $ 123,000 $ --
State................................... 20,000 -- --
-------- --------- -----
Current income tax benefit............ 160,000 123,000 --
Deferred income tax benefit............. 250,000 465,000 --
Valuation allowance..................... -- (465,000) --
-------- --------- -----
$410,000 $ 123,000 $ --
======== ========= =====
</TABLE>
The benefit for income taxes differs from the federal statutory rate of 34%
due to state income taxes, life insurance premiums, alternative minimum taxes,
provision for valuation allowance on deferred income tax assets, and certain
other nondeductible expenses.
F-72
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Components of the net deferred income tax asset at January 31, 1997 and
December 16, 1997 were as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 16,
1997 1997
----------- ------------
<S> <C> <C>
Deferred income tax liabilities:
Depreciation and amortization..................... $ 13,000) $ (57,000)
Other............................................. (74,000) (50,458)
--------- ---------
Subtotals......................................... (287,000) (107,458)
--------- ---------
Deferred income tax assets:
Accounts receivable and inventory reserves........ 84,000 76,000
Alternative minimum tax credit carryover.......... 92,000 80,000
Net operating loss carryforward................... 613,000 465,000
Other............................................. 205,000 205,000
Valuation allowance............................... (465,000) (465,000)
--------- ---------
Subtotals......................................... 529,000 361,000
--------- ---------
Total........................................... $ 242,000 $ 253,542
========= =========
</TABLE>
Management has estimated that due to reversing future taxable differences,
estimated future taxable income exclusive of reversing temporary differences,
and tax-planning strategies to accelerate taxable income, the net deferred tax
asset of $242,000 at January 31, 1997 and $254,000 at December 16, 1997 is
properly stated and realizable under the provisions of SFAS 109.
(7) OPERATING LEASES
The Company leases the main office and operating facility from the
Partnership (Note 5) under a noncancelable agreement accounted for as an
operating lease. The lease, including extension options, expires in April 2001
and is subject to annual escalation based on the consumer price index. Rent
expense under this lease was approximately $240,000, $249,000 and $231,000 in
1996, 1997 and 1998, respectively, and is included in the cost of sales in the
accompanying statements of operations and retained earnings.
Aggregate future minimum rental payments under all noncancelable operating
lease agreements at December 16, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $260,000
1999................................................................ 264,000
2000................................................................ 272,000
2001................................................................ 92,000
2002................................................................ --
</TABLE>
(8) STOCKHOLDERS' EQUITY
Shares of common stock of the Company have been issued pursuant to various
stockholder, redemption, and option agreements. These agreements generally
contain restrictions on the sale or transfer of the shares and require
repurchase by the Company in the event of death, disability, or termination of
employment. The repurchase price under the various agreements will be
determined in accordance with specified criteria contained in the agreements.
F-73
<PAGE>
PHOENIX COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) EMPLOYEE BENEFIT PLAN
The Company has a profit-sharing and 401(k) savings plan (the "Plan") which
covers substantially all full-time employees. Under the Plan, participants may
contribute a portion of their salaries, which is matched by the Company using
a ratio determined annually at the discretion of the board of directors. In
addition, the Company may make discretionary contributions to the Plan. No
discretionary contributions were made during fiscal years 1996, 1997 and 1998.
Matching contributions of $30,000, $30,000 and $47,415 were made during fiscal
years 1996, 1997 and 1998, respectively.
(10) COMMITMENTS
In connection with the Company's purchase of common stock from an employee
(Note 8), the Company entered into noncompete and trade secret protection
agreements with the employee. Under the terms of the agreements, the Company
will pay the employee a total of approximately $405,000 through April 2000 in
varying monthly installments of $2,001 to $7,488. The amounts paid to the
employee are being expensed as paid.
In connection with the Company's fiscal year 1992 acquisition of Oak Tree
Printing Co. ("Oak Tree"), the Company entered into an employment agreement
with an officer of Oak Tree which provides for employment with the Company and
minimum annual compensation for an eight-year period ending on August 5, 1999.
Additionally, the Company made an interest-free loan in the amount of $120,000
to an officer of Oak Tree. The loan is due on August 5, 1999. If the officer
remains with the Company through the maturity of the loan, the loan will be
forgiven. If employment is terminated, the loan must be repaid within 90 days.
The loan is being amortized to expense on a straight-line basis over the term
of the agreement and is classified as unearned compensation in the
accompanying balance sheets. Effective June 30, 1991, the Company entered into
an indemnification agreement with the officer of Oak Tree which indemnifies
the Company against any loss or liability not expressly assumed in the
purchase agreement. Should the Company incur any loss or liability not
assumed, the officer must reimburse the Company within 30 days. If the Company
does not receive payment within 30 days, the loss or liability may be deducted
from any amounts due to the officer under the terms of the employment
agreement. During fiscal years 1998, 1997 and 1996, no losses or liabilities
were incurred or assumed applicable to this agreement.
During February 1996, the Company entered into a purchase agreement with a
supplier whereby the supplier agreed to advance the Company $240,000 in order
to buy out a previous supply agreement and to purchase equipment. Under the
agreement, the Company agreed to purchase a minimum of $450,521 per year
through February 2001. The advance is payable over the term of the agreement,
with 10.5% of each eligible purchase being used to reduce amounts outstanding.
(11) SUBSEQUENT EVENT
On December 16, 1997, Master Graphics, Inc. acquired all of the outstanding
common stock of the Company. In connection with the acquisition, Master
Graphics repaid the outstanding debt of the Company.
F-74
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Jones Printing Company, Inc.:
We have audited the accompanying balance sheet of Jones Printing Company,
Inc. as of December 31, 1996 and the related statements of income and retained
earnings and cash flows for each of the years in the two-year period ended
December 31, 1996. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jones Printing Company,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
February 17, 1997
F-75
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Jones Printing Company, Inc.:
We have audited the accompanying balance sheet of Jones Printing Company,
Inc. as of December 16, 1997 and the related statements of income and retained
earnings and cash flows for the period from January 1, 1997 through December
16, 1997. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jones Printing Company,
Inc. as of December 16, 1997 and the results of its operations and its cash
flows for period from January 1, 1997 through December 16, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
March 6, 1998
F-76
<PAGE>
JONES PRINTING COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND DECEMBER 16, 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................... $ 549,076 $ 413,001
Trade receivables, less allowance for doubtful accounts
of $234,266 and $90,771, respectively................. 1,698,852 1,257,308
Notes receivable (primarily due from stockholder), net
of allowances of $200,000............................. 148,565 --
Inventories............................................ 604,036 360,802
Other.................................................. 19,000 42,693
---------- ----------
Total current assets................................. 3,019,529 2,073,804
Equipment and leasehold improvements, net.............. 2,213,053 2,318,777
Other assets........................................... 55,300 64,741
---------- ----------
Total assets......................................... $5,287,882 $4,457,322
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes--related party............................ $ 40,000 $ --
Current portion of long-term debt...................... 454,846 516,338
Accounts payable....................................... 291,827 98,810
Accrued expenses....................................... 563,981 298,233
---------- ----------
Total current liabilities............................ 1,350,654 913,381
---------- ----------
Long-term debt, net of current portion................... 1,864,628 1,400,833
---------- ----------
Deferred state income tax liability...................... 49,600 49,600
---------- ----------
Stockholders' equity:
Common stock--no par value--2,000 shares authorized;
76 shares issued and outstanding...................... 15,707 15,707
Additional paid-in capital............................. 19,908 19,908
Retained earnings...................................... 1,987,385 2,057,893
---------- ----------
Total stockholders' equity........................... 2,023,000 2,093,508
---------- ----------
Total liabilities and stockholders' equity........... $5,287,882 $4,457,322
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-77
<PAGE>
JONES PRINTING COMPANY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $6,983,554 $7,952,136 $6,075,634
Cost of sales............................. 4,809,936 5,863,704 4,834,475
---------- ---------- ----------
Gross profit.......................... 2,173,618 2,088,432 1,241,159
Selling, general and administrative
expenses................................. 1,471,240 1,482,197 1,035,723
---------- ---------- ----------
Income from operations................ 702,378 606,235 205,436
---------- ---------- ----------
Other income (expense):
Service charge income................... 55,549 58,618 52,251
Gain (loss) on sale of assets........... (8,209) 11,182 8,500
Interest expense........................ (225,591) (207,597) (191,679)
---------- ---------- ----------
(178,251) (137,797) (130,928)
---------- ---------- ----------
Income before state income taxes...... 524,127 468,438 74,508
Provision for state income taxes.......... 16,000 20,408 4,000
---------- ---------- ----------
Net income............................ 508,127 448,030 70,508
Retained earnings--beginning of period.... 1,031,228 1,539,355 1,987,385
---------- ---------- ----------
Retained earnings--end of period.......... $1,539,355 $1,987,385 $2,057,893
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-78
<PAGE>
JONES PRINTING COMPANY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE PERIOD FROM JANUARY 1, 1997 THROUGH DECEMBER 16, 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income................................. $ 508,127 $ 448,030 $ 70,508
Depreciation and amortization.............. 409,732 418,180 420,129
Provision for doubtful accounts............ 167,000 74,124 --
Deferred income taxes...................... 4,000 4,600 --
(Gain) loss on sale of assets.............. 8,209 (11,182) (8,500)
Other...................................... -- 35,059 --
Changes in operating assets and
liabilities:
Decrease (increase) in receivables........ (599,252) 272,158 590,109
Decrease (increase) in inventories........ (225,653) (129,007) 243,234
Decrease (increase) in other.............. (12,861) 12,861 (35,848)
Increase (decrease) in accounts payable
and accrued expenses..................... 185,566 158,617 (458,765)
Increase (decrease) in customer advances.. (60,939) 104,121 --
--------- --------- ---------
Net cash provided by operating
activities.............................. 383,929 1,387,561 820,867
--------- --------- ---------
Cash flows from investing activities:
Advances to stockholders................... (9,168) (121,054) --
Capital expenditures....................... (259,902) (330,588) (524,977)
Proceeds from sale of equipment............ 13,100 14,116 8,500
Collections of notes receivable............ 7,374 -- --
Cash surrender value of life insurance..... (3,374) (2,817) 1,838
--------- --------- ---------
Net cash used in investing activities.... (251,970) (440,343) (514,639)
--------- --------- ---------
Cash flows from financing activities:
Bank overdraft............................. $ 141,491 $(141,491) $ --
Net short-term borrowings (repayments)..... 66,985 (302,888) --
Issuance of long-term debt................. -- 445,000 23,438
Repayment of long-term debt................ (392,826) (421,179) (425,741)
Repayment of related party demand note..... (135,882) -- (40,000)
--------- --------- ---------
Net cash used in financing activities.... (320,232) (420,558) (442,303)
--------- --------- ---------
Net increase (decrease) in cash.......... (188,273) 526,660 (136,075)
Cash--beginning of period.................... 210,689 22,416 549,076
--------- --------- ---------
Cash--end of period.......................... $ 22,416 $ 549,076 $ 413,001
========= ========= =========
Cash paid for interest....................... $ 226,707 208,049 167,361
========= ========= =========
Cash paid for taxes.......................... $ 19,420 $ 8,850 $ 24,267
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-79
<PAGE>
JONES PRINTING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND DECEMBER 16, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the Company
are as follows:
(a) Description of Business
The Company provides a full line of superior quality print services and
products to retailers, manufacturers, ad agencies and other users of printed
materials. The majority of the Company's sales are concentrated in
southeastern Tennessee and north Georgia.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
a first-in, first-out (FIFO) basis.
(c) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the respective assets ranging from 5 to 12 years. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense as incurred
and additions and improvements that significantly extend the lives of assets
are capitalized. Upon sale or other retirement of depreciable property, the
cost and accumulated depreciation are removed from the related accounts and
any gain or loss is reflected in operations.
(d) Goodwill
The excess of cost of a purchased business over the fair value of the net
assets acquired is being amortized on the straight-line method over a forty-
year period.
(e) Income Taxes
The Company, with the consent of its stockholders, has elected to be taxed
as an S corporation under the provisions of Section 1362 of the Internal
Revenue Code. The stockholders are personally liable for their proportionate
share of the Company's federal taxable income; therefore, no provision or
liability for federal income taxes is reflected in these financial statements.
The company is a taxable entity for state income tax purposes.
State income taxes are computed based on the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
tax assets and liabilities, if significant, are recognized for the estimated
future tax effects attributed to temporary differences between the book and
tax bases of assets and liabilities and for carryforward items. The
measurement of current and deferred tax assets and liabilities is based on
enacted law. Deferred tax assets are reduced, if necessary, by a valuation
allowance for the amount of tax benefits that may not be realized.
(f) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. The statement requires that long-lived assets
F-80
<PAGE>
JONES PRINTING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the mount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(g) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(h) Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the presentation of the 1997 financial statements.
(2) INVENTORIES
Inventories consist of the following at December 31, 1996 and December 16,
1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Raw materials and supplies................................. $212,668 $155,738
Work in process............................................ 391,368 205,064
-------- --------
$604,036 $360,802
======== ========
</TABLE>
(3) EQUIPMENT AND LEASHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following at December
31, 1996 and December 16, 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures............................. $ 500,887 $ 515,988
Equipment.......................................... 4,537,870 4,639,355
Leasehold improvements............................. 541,762 680,149
Vehicles........................................... 92,701 100,615
----------- -----------
5,673,220 5,936,107
Less accumulated depreciation...................... (3,460,167) (3,617,330)
----------- -----------
$ 2,213,053 $ 2,318,777
=========== ===========
</TABLE>
F-81
<PAGE>
JONES PRINTING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and December
16, 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
8.55% note payable, with monthly payments of $31,337
including interest, through January, 2002............ $1,545,772 $1,314,142
8.75% machinery and equipment note payable, with
monthly payments of $9,211 including interest,
through June, 2001................................... 408,847 335,256
Prime plus 1.25% bank note, with monthly payments of
$3,600 including interest, through December, 1999.... 111,497 80,674
Capital lease obligation for graphics plotter, with
monthly payments of $6,006 including interest,
through October, 1999................................ 173,828 120,830
Other................................................. 79,530 66,269
---------- ----------
2,319,474 1,917,171
Less current portion................................ 454,846 516,338
---------- ----------
$1,864,628 $1,400,833
========== ==========
</TABLE>
The Company has a revolving line of credit with a local bank under which it
may borrow up to $500,000. Borrowings under this arrangement accrued interest
at 1.25% above the bank's base commercial rate. Any outstanding principal
balance is due within 120 days of demand for payment. The line of credit is
collateralized by accounts receivable, inventories, certain life insurance
policies and a personal guaranty of the major stockholder. There was no
balance outstanding under the revolving line of credit as of December 31, 1996
and December 16, 1997.
Effective December 16, 1997, substantially all of the Company's long-term
debt was refinanced as a part of the acquisition of the outstanding common
stock of the Company by Master Graphics, Inc.
(5) LEASES
The Company leases its office and plant facilities under a five year
operating lease with its majority stockholder. The Company also leases certain
computer and typesetting equipment under capital lease agreements.
Future minimum lease payments under the capital leases and the noncancelable
operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING: CAPITAL OPERATING
------------ -------- ---------
<S> <C> <C>
December 31, 1998........................................ $ 82,483 $134,000
December 31, 1999........................................ 60,059 134,000
December 31, 2000........................................ -- 134,000
-------- --------
Total minimum lease payments............................. 142,542 $402,000
========
Less amounts representing interest....................... (11,712)
--------
Present value of net minimum lease payments.............. $130,830
========
</TABLE>
Rent expense totaled $95,520 for 1995, $137,712 for 1996, and $121,600 for
1997, the majority of which was with related parties.
F-82
<PAGE>
JONES PRINTING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) deferred salary reduction plan under which
substantially all employees of the Company are eligible. The plan provides for
the Company to match employee contributions, subject to certain limitations.
The Company's contribution to the plan totaled $12,757 for 1995, $15,054 for
1996, and $12,064 for 1997.
(7) MAJOR CUSTOMERS
Two customers accounted for $3,613,901 or 51.8% of net sales for 1995,
$4,852,151 or 61% of sales for 1996 and $2,821,878 or 46.4% of net sales for
1997. One customer accounted for $603,592 (33%) of trade receivables at
December 31, 1996 and $501,249 (34%) at December 16, 1997.
(8) SUBSEQUENT EVENT
Effective December 16, 1997, Master Graphics, Inc. acquired all of the
outstanding common stock of the Company and contemporaneously refinanced
substantially all of the then outstanding debt of the Company.
F-83
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors McQuiddy Printing Company:
We have audited the accompanying balance sheets of McQuiddy Printing Company
as of June 30, 1996 and 1997, and the related statements of earnings,
stockholders' equity, and cash flows for the years ended June 30, 1995, 1996
and 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McQuiddy Printing Company,
as of June 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the years ended June 30, 1995, 1996 and 1997 in conformity
with generally accepted accounting principles.
Marlin & Edmondson, P.C.
Nashville, Tennessee
August 8, 1997, except for Note 11, which is April 6, 1998
F-84
<PAGE>
MCQUIDDY PRINTING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------- ----------
1996 1997 1998
---------- ---------- ----------
AUDITED UNAUDITED
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1).......... $ 240,548 37,759 132,805
Receivables:
Trade accounts, less allowance for
doubtful accounts........................ 2,768,626 3,327,517 2,501,305
Inventories (notes 1 and 2)................. 1,379,486 1,022,100 1,428,184
Prepaid expenses and deposits............... 184,328 127,980 35,606
Income taxes receivable (note 5)............ 109,765 31,057 182,208
Deferred income taxes--current (note 5)..... 55,312 110,721 66,124
---------- ---------- ----------
Total current assets.................... 4,738,065 4,657,134 4,346,232
---------- ---------- ----------
Property, plant and equipment, net (notes 1, 3
and 4)....................................... 3,340,244 5,589,759 5,912,363
Other assets:
Notes receivable............................ 3,584 3,584 --
Investment ................................. 67,448 34,951 --
Cash surrender value of officers' life
insurance (note 9)......................... 335,445 396,513 394,379
---------- ---------- ----------
Total other assets...................... 406,477 435,048 394,379
---------- ---------- ----------
$8,484,786 10,681,941 10,652,974
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (note
4)......................................... $ 528,625 867,242 1,054,551
Accounts payable............................ 445,816 601,273 788,392
Accrued liabilities......................... 325,641 356,879 336,318
Income taxes payable........................ -- -- 15,512
---------- ---------- ----------
Total current liabilities............... 1,300,082 1,825,394 2,194,773
---------- ---------- ----------
Deferred income taxes (note 5)................ 192,412 270,261 309,185
Long-term debt (note 4)....................... 2,349,742 3,655,679 3,024,420
Stockholder's equity:
Common stock................................ 841,310 841,310 841,310
Additional paid-in capital.................. 230,229 230,229 230,229
Retained earnings........................... 5,991,292 6,119,341 6,193,131
---------- ---------- ----------
7,062,831 7,190,880 7,264,670
---------- ---------- ----------
Less reduction in stockholders' equity for
note payable of 401(k) and Employee Stock
Ownership Plan (notes 5 and 7)............. 773,332 613,324 493,125
Less treasury stock, at cost................ 1,646,949 1,646,949 1,646,949
---------- ---------- ----------
Total stockholders' equity.............. 4,642,550 4,930,607 5,124,596
---------- ---------- ----------
$8,484,786 10,681,941 10,652,974
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
MCQUIDDY PRINTING COMPANY
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ---------- ---------- ---------- ----------
AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Sales................... $15,680,821 15,574,308 16,583,201 12,176,357 13,205,659
Cost of sales........... 12,176,152 12,558,905 13,145,115 9,849,054 10,609,706
----------- ---------- ---------- ---------- ----------
Gross profit........ 3,504,669 3,015,403 3,438,086 2,327,303 2,595,953
Selling, general and
administrative
expenses............... 2,589,315 2,605,816 2,741,593 1,978,482 2,236,820
----------- ---------- ---------- ---------- ----------
Earnings from
operations......... 915,354 409,587 696,493 348,821 359,133
Other income (expenses),
net.................... 466,367 (170,451) (483,848) (374,717) (229,812)
----------- ---------- ---------- ---------- ----------
Earnings (loss)
before provision
for income taxes... 1,381,721 239,136 212,645 (25,896) 129,321
Income taxes (note 6):
Current provision..... 563,949 52,416 62,156 -- 49,090
Deferred benefit...... 6,470 87,107 22,440 (3,522) 6,436
----------- ---------- ---------- ---------- ----------
Total income taxes.. 570,419 139,523 84,596 (3,522) 55,526
----------- ---------- ---------- ---------- ----------
Net earnings
(loss)............. $ 811,302 99,613 128,049 (22,374) 73,795
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-86
<PAGE>
MCQUIDDY PRINTING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ---------- ---------- ---------- ----------
AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Beginning balance:
Common Stock.......... $ 841,310 841,310 841,310 841,310 841,310
Additional Paid-in
Capital.............. 230,229 230,229 230,229 230,229 230,229
Retained Earnings..... 5,122,780 5,900,158 5,991,292 5,991,292 6,119,341
Less: Treasury stock.. (1,646,949) (1,646,949) (1,646,949) (1,646,949) (1,646,949)
Less: Reduction in
Equity for ESOP
note................. -- -- (773,332) (773,332) (613,324)
----------- ---------- ---------- ---------- ----------
4,547,370 5,324,748 4,642,550 4,642,550 4,930,607
Changes:
Net earnings.......... 811,302 99,613 128,049 (22,374) 73,790
Increase (reduction)
in Equity for ESOP
note................. -- (773,332) 160,008 120,007 120,199
Dividends paid........ (33,924) (8,479) -- -- --
----------- ---------- ---------- ---------- ----------
$ 5,324,748 4,642,550 4,930,607 4,740,183 5,124,596
=========== ========== ========== ========== ==========
Ending balance:
Common stock.......... $ 841,310 841,310 841,310 841,310 841,310
Additional Paid-in
Capital.............. 230,229 230,229 230,229 230,229 230,229
Retained Earnings..... 5,900,158 5,991,292 6,119,341 5,968,919 6,193,131
Less: Treasury stock.. (1,646,949) (1,646,949) (1,646,949) (1,646,949) (1,646,949)
Less: Reduction in
Equity for ESOP
note................. -- (773,332) (613,324) (653,326) (493,125)
----------- ---------- ---------- ---------- ----------
$ 5,324,748 4,642,550 4,930,607 4,740,183 5,124,596
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-87
<PAGE>
MCQUIDDY PRINTING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- --------- ---------- ---------- ---------
AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net earnings........... $ 811,302 99,613 128,049 (22,374) 73,795
---------- --------- ---------- ---------- ---------
Adjustments to
reconcile net earnings
to net cash provided
by operating
activities:
Depreciation........... 844,216 735,348 788,839 549,712 625,054
Amortization of
financing costs....... 1,506 -- -- -- --
Amortization of
noncorporate
agreements income..... (22,500) -- -- -- --
Increase in deposits... (10,458) -- -- -- --
Increase in deferred
income taxes.......... 136,627 124,050 22,440 (3,522) 83,520
Gain on sale of
property.............. (638,314) (2,601) (8,700) 8,100 --
(Increase) decrease in
accounts receivable... 329,057 (465,139) (558,891) 532,729 826,212
(Increase) decrease in
investment in joint
venture............... (61,950) (5,498) 32,497 31,508 34,951
(Increase) decrease in
income taxes
receivable............ -- (109,765) 78,708 11,745 (151,151)
(Increase) decrease in
inventory............. (924,607) 276,487 357,386 379,998 (406,084)
(Increase) decrease in
prepaid expenses and
deposits.............. (729) (122,011) 56,348 151,515 92,374
Increase (decrease) in
accounts payable...... (209,647) 73,293 155,457 93,370 187,119
Increase (decrease) in
accrued liabilities... 121,540 (62,464) 31,238 (14,048) (20,561)
Increase (decrease) in
income taxes payable.. 346,605 (359,240) -- 680 15,512
---------- --------- ---------- ---------- ---------
Total adjustments..... (88,654) 82,460 955,322 1,741,787 1,286,946
---------- --------- ---------- ---------- ---------
Net cash provided by
operating
activities........... 722,648 182,073 1,083,371 1,719,413 1,360,741
---------- --------- ---------- ---------- ---------
Cash flows from
investing activities:
(Increase) decrease in
cash surrender value
of officers' life
insurance............. (8,161) (57,639) (61,068) (42,534) 2,134
Purchase of property,
plant and equipment... (757,137) (512,970) (3,038,354) (2,989,525) (947,663)
Proceeds from sale of
property, plant and
equipment............. 732,750 2,601 8,700 -- --
(Increase) decrease of
notes receivable...... 5,700 (3,584) -- -- 3,584
---------- --------- ---------- ---------- ---------
Net cash used in
investing
activities........... (26,848) (571,592) (3,090,722) (3,032,059) (941,945)
---------- --------- ---------- ---------- ---------
Cash flows from
financing activities:
Proceeds from the
issuance of ESOP
note.................. -- 800,000 -- -- --
Increase (reduction) in
equity for ESOP note
payable............... -- (773,332) 160,008 120,006 120,199
Proceeds from the
issuance of long term
debt.................. -- -- 2,218,900 2,218,900 248,676
Retirement of long-term
debt.................. (710,211) (523,510) (574,346) (427,959) (692,625)
Dividends paid......... (33,923) (8,479) -- -- --
---------- --------- ---------- ---------- ---------
Net cash provided by
(used in) financing
activities........... (744,134) (505,321) 1,804,562 1,910,947 (323,750)
---------- --------- ---------- ---------- ---------
Net increase (decrease)
in cash................ (48,334) (894,840) (202,789) 598,301 95,046
Cash and cash equivalent
beginning.............. 1,183,722 1,135,388 240,548 240,548 37,759
---------- --------- ---------- ---------- ---------
Cash and cash equivalent
ending................. $1,135,388 240,548 37,759 838,849 132,805
========== ========= ========== ========== =========
Supplemental disclosures
of cash flows
information:
Cash paid (received)
during the year for:
Interest............... $ 208,972 186,892 314,585 230,723 237,992
Income taxes........... 211,179 496,490 (98,020) -- --
========== ========= ========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The Company was organized in 1908 to carry on the business of commercial
printing. The Company serves customers nationally and in the normal course of
its business grants credit to those customers.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make reasonable
estimates and assumptions that may affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could differ from those
estimates; however, management believes the estimates to be conservative and
no significant adjustment to the estimates are anticipated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(see note 2).
Property, Plant and Equipment
Property, plant and equipment is stated in the accounts at cost. The Company
provides for depreciation on such assets principally using accelerated
methods.
The following is a summary of the estimated useful lives used for computing
depreciation.
<TABLE>
<S> <C>
Building and improvements...................................... 20 - 40 years
Machinery and equipment........................................ 5 - 10 years
Furniture and fixtures......................................... 5 - 10 years
Vehicles....................................................... 5 years
</TABLE>
Expenditures for maintenance and repairs are charged against earnings.
Expenditures for improvements and major renewals are capitalized. Cost and
accumulated depreciation for properties sold or retired are removed from the
accounts with any gain or loss included in earnings in the year of disposition
(See note 4).
Income Taxes
Income taxes are provided for the tax effect of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to differences between the basis of financial transactions for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences which will
either be taxable or deductible when assets and liabilities are recovered or
settled. (See note 6).
F-89
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) INVENTORIES
Inventories (first-in, first-out), consisted of the following:
<TABLE>
<CAPTION>
AUDITED UNAUDITED
-------------------- ---------
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Raw materials:
Paper....................................... $ 969,993 549,400 552,868
Bindery materials........................... 6,509 2,965 4,204
Litho materials............................. 6,160 6,775 14,830
Ink......................................... 517 1,854 32,313
Indigo...................................... -- -- 5,271
---------- --------- ---------
983,179 560,994 609,486
Manufactured stock.......................... 37,593 49,367 47,756
Work in process............................. 291,603 379,135 601,757
Finished goods.............................. 67,111 32,604 169,185
---------- --------- ---------
$1,379,486 1,022,100 1,428,184
========== ========= =========
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
AUDITED UNAUDITED
------------------------ ----------
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Land.................................... $ 110,000 110,000 110,000
Building................................ 1,447,408 1,447,408 1,447,408
Building improvements................... 247,547 247,547 240,856
Machinery and equipment................. 9,691,511 12,223,333 13,041,595
Furniture and fixtures.................. 374,658 405,569 535,281
Automobiles and trucks.................. 87,629 54,779 54,778
----------- ----------- ----------
11,958,753 14,488,636 15,429,918
Less accumulated depreciation........... (8,618,509) (8,898,877) 9,517,555
----------- ----------- ----------
$ 3,340,244 5,589,759 5,912,363
=========== =========== ==========
</TABLE>
Depreciation expense was $844,216, $735,348 and $788,839 for June 30, 1995,
1996 and 1997, respectively using principally accelerated methods.
Depreciation expense was $549,712 and $625,054 for the nine months ended
March 31, 1997 and 1998 using principally accelerated methods.
F-90
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
AUDITED UNAUDITED
-------------------- ---------
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
SunTrust Bank Equipment note................ $ -- 2,218,900 2,003,174
SunTrust Bank--ESOP note payable............ 773,332 613,324 493,125
Capital lease obligation--Fleet Credit
Corporation................................ -- -- --
Capital lease obligation--NationsBanc
Leasing Corporation........................ 2,105,035 1,690,697 1,360,069
PBCC lease.................................. -- -- 222,603
---------- --------- ---------
2,878,367 4,522,921 4,078,971
Less current maturities..................... 528,625 867,242 1,054,551
---------- --------- ---------
$2,349,742 3,655,679 3,024,420
========== ========= =========
</TABLE>
The Equipment note payable with SunTrust Bank dated August 20, 1996, was
used to fund the purchase of equipment. The interest rate is based on a
varying rate of interest which is equal to the lesser of 150 basis points
above the 30-day LIBOR Rate as defined in the note or 135 basis points below
the bank's base rate and requires monthly payments of $30,818 plus interest.
The interest rate at June 30, 1997 and March 31, 1998 was 7.15%. The note is
secured by equipment. The note is due August 2003.
The ESOP note payable with SunTrust Bank dated April 23, 1996, is to fund
the purchase of 6,400 shares of the Company's outstanding stock for the
Company's 401(k) and Employee Stock Ownership Plan. At June 30, 1997 SunTrust
Bank held the 5,547 shares as collateral on the loan. As principal payments
are made the bank will release a pro-rata amount of shares held as collateral.
The interest rate is based on a varying rate of interest which is equal to 180
basis points above the 30-day LIBOR Rate as defined in the note and requires
monthly payments of $9,524 plus interest. The interest rate at June 30, 1996
and 1997 was 7.49%. The interest rate at December 31, 1997 was 7.52%. The note
is due April 2003 (See note 6).
The capital lease obligation with NationsBanc Leasing Corporation dated
March 26, 1992, is a financing lease for the acquisition of printing
equipment. The fixed rate lease bears interest at 7.06% and requires monthly
payments of $45,832. The lease matures in August 1999.
The PBCC lease obligation dated March 30, 1995, is a financing lease for the
acquisition of printing equipment. The fixed rate lease bears interest at
9.97% and requires monthly payments of $10,019. The lease matures in May of
2000.
Current maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
---------- ---------
AUDITED UNAUDITED
<S> <C> <C>
1998.................................................... $ 867,242 --
1999.................................................... 961,331 1,054,551
2000.................................................... 1,252,795 1,496,400
2001.................................................... 484,102 484,133
2002.................................................... 484,102 484,127
Thereafter.............................................. 473,349 559,760
---------- ---------
$4,522,921 4,078,971
========== =========
</TABLE>
F-91
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Notes payable are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
SunTrust Bank--Line of credit................................. $-- -- --
==== === ===
</TABLE>
The Company has available a $750,000 line of credit, with an interest rate
of 8.50% at June 30, 1997.
(5) INCOME TAXES
The Company adopted FASB Statement 109 as of July 1, 1993 and there was no
significant cumulative effect adjustment.
The Company has previously accounted for the credit carryforwards when used.
A deferred tax liability has been provided for the tax and book depreciation
differences and a deferred tax benefit has been recorded for the allowances
for doubtful accounts.
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Federal:
Current..................... $471,886 46,127 56,093 -- 41,331
Deferred.................... 5,423 74,167 49,836 (2,965) 5,419
State:
Current..................... 92,063 (379) 6,063 -- 7,759
Deferred.................... 1,047 19,608 (27,396) (557) 1,017
-------- ------- ------- ------ ------
$570,419 139,523 84,596 (3,522) 55,526
======== ======= ======= ====== ======
</TABLE>
A reconciliation of the "expected" tax expense computed at the federal
statutory rate of 34% to actual expense is as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
AUDITED UNAUDITED
<S> <C> <C> <C> <C> <C>
Computed "expected" tax
expense (benefit)........... $469,786 81,306 72,300 (9,830) 43,969
State income tax (benefit),
net of federal income tax
benefits and industrial
excise tax credit......... 61,453 12,691 (29,983) (1,025) 9,108
Other, net................. 39,180 45,526 42,279 7,333 2,449
-------- ------- ------- ------ ------
Actual tax expense........... $570,419 139,523 84,596 (3,522) 55,526
======== ======= ======= ====== ======
</TABLE>
F-92
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liability, are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
--------- -------- ---------
AUDITED UNAUDITED
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts--current.. $ 55,312 66,252 66,252
Industrial machinery credit carryforward--
current.................................. -- 44,469 (128)
--------- -------- --------
55,312 110,721 66,124
Deferred tax liabilities:
Depreciation--long-term................... 192,412 270,261 309,185
--------- -------- --------
Net deferred tax liability.............. $(137,100) (159,540) (243,061)
========= ======== ========
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) and Employee Stock Ownership Plan. The plan is
contributory and employees are eligible to participate after service and age
requirements are satisfied. Plan costs are funded as they accrue.
Contributions and expenses under the plan amounted to $97,718, $104,736 and
$211,941 for the years ended June 30, 1995, 1996 and 1997, respectively.
Expenses of the Plan for the nine months ended March 31, 1997 and 1998 were
$143,226 and $147,998, respectively.
The Company has guaranteed the bank debt of the plan. The balance
outstanding at June 30, 1996 and 1997 was $773,332 and $613,324. The balance
outstanding at March 31, 1998 was $493,125. Accordingly such debt has been
shown in the accompanying financial statements as a long-term liability (see
note 4) with a corresponding reduction in stockholders' equity.
(7) CONCENTRATIONS OF CREDIT RISK
The Company maintains its checking and investment accounts with financial
institutions in the middle Tennessee area. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation up to $100,000.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
The carrying amounts of cash, receivables and accounts payable approximate
fair value due to the short-term nature of those items.
The carrying amount of other financial instruments is a reasonable estimate
of their fair value.
The fair value of all debt obligations is estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rate. Based
on the analyses, the carrying amounts approximate fair value.
F-93
<PAGE>
MCQUIDDY PRINTING COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(9) CASH SURRENDER VALUE OF LIFE INSURANCE
The components of cash surrender value of life insurance are as follows:
<TABLE>
<CAPTION>
AUDITED UNAUDITED
---------------------------------------- ---------
JUNE 30, JUNE 30, MARCH 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C>
$335,445 396,513 394,379
</TABLE>
- --------
(A) The Company is the owner of six policies with The New England which have a
face value of $1,450,000.
(B) The Company pays premiums on split dollar life insurance policies of seven
executives. These policies are with The New England.
(C) The Company pays premiums on a policy for one of the executives through
American General. The Company owns the policy which has a face value of
$25,000.
(D) The Company pays premiums on a split dollar life insurance policy for one
of the executives through National Life of Vermont. The Company owns the
policy which has a face value of $500,000.
Total premiums paid on all above policies for the year ended June 30,
1995, 1996 and 1997, respectively, were $110,601, $116,026 and $116,026.
Total premiums paid on all the above policies for the nine months ended
March 31, 1997 and 1998, respectively, were $96,206 and $84,106.
(10) CONTINGENCIES
The Company is a defendant in a lawsuit filed by a former employee. On April
2, 1998 the Company, the former employee and Master Graphics, Inc. have
entered into an agreement to settle the litigation in the amount of $228,120.
The settlement is contingent upon Master Graphics, Inc. completing its
acquisition of the Company.
F-94
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Phillips Litho Co., Inc.
Springdale, Arkansas
We have audited the accompanying balance sheets of Phillips Litho Co., Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
retained earnings, and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the management of Phillips Litho Co., Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Phillips Litho Co., Inc.
as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
S.F. Fiser & Company, P.A.
Springdale, Arkansas
February 19, 1998
F-95
<PAGE>
PHILLIPS LITHO CO., INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash............................................... $ 126,541 $ 1,670
Trade accounts receivable, less allowances of
$41,647 in 1996 and $73,810 in 1997............... 2,410,370 2,751,733
Accounts receivable stockholder.................... 63,387 351,191
Note receivable stockholder........................ 175,141
Inventories........................................ 673,273 772,348
Income taxes refundable............................ 58,850
Deferred income tax asset.......................... 171,909 14,288
Other.............................................. 72,927 38,722
----------- -----------
Total current assets............................. 3,577,257 4,105,093
----------- -----------
Property, plant and equipment, at cost
Land............................................... 192,450 192,450
Buildings.......................................... 1,289,298 1,406,684
Equipment.......................................... 7,631,526 7,991,147
Vehicles........................................... 381,315 270,405
Office furniture and equipment..................... 287,345 400,860
----------- -----------
9,781,934 10,261,546
Less accumulated depreciation...................... 2,740,798 3,356,044
----------- -----------
Total property, plant and equipment.............. 7,041,136 6,905,502
----------- -----------
$10,618,393 $11,010,595
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt............... $ 797,415 $ 886,296
Notes payable...................................... 655,998 971,261
Accounts payable................................... 1,020,790 981,930
Income taxes currently payable..................... 180,000
Accrued expenses................................... 76,724 68,224
----------- -----------
Total current liabilities........................ 2,550,927 3,087,711
----------- -----------
Noncurrent deferred income taxes..................... 541,367 596,397
----------- -----------
Long-term debt less current maturities............... 5,407,557 4,344,136
----------- -----------
Stockholder's equity
Common stock, no par value 1,000 shares authorized
100 shares issued................................. 300 300
Retained earnings.................................. 2,347,726 3,211,535
Less 25 treasury shares, at cost................... (229,484) (229,484)
----------- -----------
Total stockholder's equity....................... 2,118,542 2,982,351
----------- -----------
$10,618,393 $11,010,595
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
PHILLIPS LITHO CO., INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales................................... $12,162,315 $11,661,188 $12,726,710
Cost of sales........................... 8,776,481 9,013,436 8,639,791
----------- ----------- -----------
Gross profit............................ 3,385,834 2,647,752 4,086,919
Selling and general and administrative
expenses............................... 2,597,722 2,771,707 2,870,507
----------- ----------- -----------
Operating income (loss)................. 788,112 (123,955) 1,216,412
----------- ----------- -----------
Other income (expenses)
Loss on disposition of airplane....... (54,845)
Proceeds in settlement of lawsuit..... 150,000
Miscellaneous......................... 14,789 3,877 42,365
----------- ----------- -----------
Total other income.................. 14,789 3,877 137,520
----------- ----------- -----------
Income (loss) before income taxes....... 802,901 (120,078) 1,353,932
Provision for income taxes (benefit).... 282,431 (43,137) 490,123
----------- ----------- -----------
Net income (loss)....................... $ 520,470 $ (76,941) $ 863,809
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE>
PHILLIPS LITHO CO., INC.
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<S> <C>
Balance January 1, 1995............................................. $1,904,197
Net income........................................................ 520,470
----------
Balance December 31, 1995........................................... 2,424,667
Net loss.......................................................... (76,941)
----------
Balance December 31, 1996........................................... 2,347,726
Net income........................................................ 863,809
----------
Balance December 31, 1997........................................... $3,211,535
==========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE>
PHILLIPS LITHO CO., INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)...................... $ 520,470 $ (76,941) $ 863,809
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities
Depreciation......................... 350,051 524,119 631,630
Proceeds in settlement of lawsuit.... (150,000)
Increase (decrease) in deferred
income taxes........................ 96,533 (43,137) 212,651
Net change in income taxes refundable
and currently payable............... (18,782) (118,311) 238,850
Decrease (increase) in accounts
receivable.......................... (1,358,216) 662,654 (629,167)
Decrease (increase) in inventories... (308,747) 317,830 (99,075)
Increase (decrease) in accounts
payable............................. 300,948 36,453 (38,860)
Other................................ (148,023) 8,049 80,550
----------- ----------- ----------
Cash provided (used) by operating
activities.............................. (565,766) 1,310,716 1,110,388
----------- ----------- ----------
Cash flows from investing activities
Loan to stockholder.................... (175,141)
Purchase of property and equipment..... (1,136,070) (3,633,587) (473,822)
Disposition of equipment............... 44,995 72,981
----------- ----------- ----------
Cash used by investing activities........ (1,091,075) (3,633,587) (575,982)
----------- ----------- ----------
Cash flows from financing activities
Net change in notes payable............ 598,544 (474,000) 315,263
Long-term borrowings................... 1,332,450 6,346,547 17,500
Repayments of long-term debt........... (353,056) (3,432,297) (992,040)
----------- ----------- ----------
Cash provided (used) by financing
activities.............................. 1,577,938 2,440,250 (659,277)
----------- ----------- ----------
Increase (decrease) in cash.............. (78,903) 117,379 (124,871)
Cash at beginning of year................ 88,065 9,162 126,541
----------- ----------- ----------
Cash at end of year...................... $ 9,162 $ 126,541 $ 1,670
=========== =========== ==========
Supplemental information
Cash payments for
Interest............................. $ 268,927 $ 480,473 $ 510,200
Income taxes......................... 204,680 116,355 40,000
Noncash transaction
Equipment received in settlement of
lawsuit............................. 150,000
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE>
PHILLIPS LITHO CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business activity--
Phillips Litho Co., Inc. is an Arkansas corporation specializing in the
production of printed materials. The Company's sales are primarily to
commercial customers throughout Northwest Arkansas and surrounding areas.
Settlement of lawsuit--
During 1996 the Company experienced severe operating problems with certain
new printing equipment. Due to excessive waste and lack of product quality,
these problems had a significant negative impact on the Company's gross
margins and established customer relationships. Ultimately, the Company sued
the manufacturer of the equipment. In 1997 the lawsuit was settled in favor of
Phillips Litho Co., Inc. The settlement agreement required the manufacturer to
deliver and install certain additional equipment having an estimated fair
value of $150,000. These alterations to the original equipment eliminated the
problems experienced in 1996.
Restatement of 1996 financial statements--
Due to the problems experienced in 1996 as detailed above, the Company lost
a significant customer for failure to produce printed material of a desired
quality. In order to salvage the relationship, Phillips Litho Co., Inc.
entered into a binding commitment to print the 1997 product for the amount
previously paid by the customer in 1996. This commitment was not originally
recorded in the 1996 financial statements.
The 1996 financial statements have been restated to reflect the effect of
the above described commitment resulting in a decrease in net income before
income taxes of $252,917 and in net income of $170,015.
Depreciation--
Depreciation is provided for using the straight-line method. Estimated
useful lives are as follows:
<TABLE>
<S> <C>
YEARS
---------
Buildings.......................................................... 30-31 1/2
Equipment.......................................................... 5-10
Vehicles........................................................... 5-7
Office furniture and equipment..................................... 5-7
</TABLE>
Income taxes--
Deferred income taxes are provided based upon the asset-and-liability method
of accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Allowance for uncollectible accounts--
The Company uses the allowance method of accounting for bad debts. This
allowance, as of the end of each year, is determined by management based upon
a review of all individual account balances comprising total accounts
receivable. Management considers past credit history, customer's financial
condition, subsequent payment of account balances, and other facts as
appropriate.
F-100
<PAGE>
Interest--
Total interest expense was $291,518, $481,377 and $494,046 in 1995, 1996 and
1997, respectively. No interest expense was capitalized in any year.
Cash--
Checks outstanding in excess of related cash balances totaling approximately
$162,000 and $79,000 at December 31, 1996 and 1997, respectively, were
included in trade accounts payable.
Cash equivalents--
For purposes of the statement of cash flows, the Company considers all
highly liquid short-term securities purchased with a maturity of three months
or less to be cash equivalents. However, no such securities were owned by the
Company during 1996 or 1997.
Advertising cost--
The Company expenses all advertising cost as incurred. Total advertising
cost for the years ended December 31, 1995, 1996 and 1997, was $33,269,
$54,805 and $39,735, respectively.
Estimates and assumptions--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2) INVENTORIES:
Inventories are valued at the lower of cost (first-in first-out) or market
and were composed of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Paper...................................................... $382,054 $405,782
Supplies................................................... 83,632 103,678
Work in process............................................ 207,587 262,888
-------- --------
$673,273 $772,348
======== ========
</TABLE>
NOTE 3) NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
8.5% note payable to a bank, collateralized by accounts
receivable, inventory, furniture and fixtures, and
equipment............................................... $625,998 $790,998
9.5% note payable to an individual, unsecured............ 30,000 30,000
8.875% note payable to a bank, unsecured................. 150,263
-------- --------
$655,998 $971,261
======== ========
</TABLE>
F-101
<PAGE>
PHILLIPS LITHO CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4) BANK LINE OF CREDIT:
The Company has a $2,250,000 line of credit through a commercial bank, which
expires April 15, 1998. At December 31, 1997, $790,998 had been advanced
through this agreement.
NOTE 5) LONG-TERM DEBT:
Long-term debt is composed of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
7.35% to 7.625% notes payable to a bank, payable
$57,676 monthly and $50,000 quarterly including
interest, collateralized by accounts receivable,
inventory, furniture and fixtures, equipment and real
estate............................................... $5,928,650 $5,217,721
10% note payable to a bank, payable $563 monthly
including interest, collateralized by a certain
vehicle.............................................. 12,711
8.75% to 9.0% notes payable to a bank, payable $7,980
monthly including interest, collateralized by
equipment, vehicles and a certain airplane........... 276,322
---------- ----------
6,204,972 5,230,432
Less current maturities............................... 797,415 886,296
---------- ----------
$5,407,557 $4,344,136
========== ==========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 886,296
1999.............................................................. 1,109,895
2000.............................................................. 596,741
2001.............................................................. 450,000
2002.............................................................. 450,000
Thereafter........................................................ 1,737,500
</TABLE>
NOTE 6) RELATED PARTY TRANSACTIONS:
From time to time, the Company may loan funds to, or borrow funds from, its
stockholder and members of his immediate family at prevailing market interest
rates. Such amounts are generally unsecured and due on demand. These amounts
are disclosed in the balance sheets as "Note receivable stockholder" and as
part of "Notes Payable" (see Note 3). Interest expense on affiliated
borrowings was $11,791 in 1995, and $2,850 in 1996 and 1997. Interest earned
on loans to stockholder was $13,059 in 1997.
NOTE 7) MAJOR CUSTOMERS:
The Company's gross sales to one major customer were $3,120,909 or 25.7% of
sales for the year ended December 31, 1995. Gross sales to two major customers
were $1,682,096 and $1,838,275 or 29.5% of total sales in 1996 and $1,580,377
and $2,452,983 or 31.7% of total sales in 1997.
F-102
<PAGE>
PHILLIPS LITHO CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8) INCOME TAXES:
The income tax provision for the years ended December 31, 1995, 1996 and
1997, is composed of the following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal........................................ $146,804 $237,000
State.......................................... 39,094 40,472
-------- --------
185,898 277,472
-------- --------
Deferred
Federal........................................ 77,354 $(36,873) 170,284
State.......................................... 19,179 (6,264) 42,367
-------- -------- --------
96,533 (43,137) 212,651
-------- -------- --------
$282,431 $(43,137) $490,123
======== ======== ========
</TABLE>
A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Statutory tax rate................................... 34.0 % (34.0)% 34.0 %
State income taxes, net of federal income tax
benefit............................................. 4.3 (3.4) 4.0
Other items, net..................................... (3.1) 1.5 (1.8)
---- ----- ----
Effective tax rate................................... 35.2 % (35.9)% 36.2 %
==== ===== ====
</TABLE>
Deferred tax liabilities (assets) are composed of the following:
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
Net operating loss and alternative minimum tax credit
carryovers.......................................... $(171,909) $(14,288)
Depreciation......................................... 541,367 596,397
--------- --------
$ 369,458 $582,109
========= ========
</TABLE>
Net deferred income taxes are disclosed in the accompanying balance sheets
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Current assets
Deferred income tax asset............................... $171,909 $ 14,288
Noncurrent deferred income taxes.......................... 541,367 596,397
-------- --------
$369,458 $582,109
======== ========
</TABLE>
NOTE 9) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash--
The carrying amount of cash is its fair value.
F-103
<PAGE>
PHILLIPS LITHO CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Note receivable--
The terms of the Company's note receivable from stockholder are reset
periodically to reflect current market conditions. Consequently, the carrying
value of such assets approximates fair value.
Notes payable--
The interest rates on the Company's notes payable are reset periodically to
reflect current market rates. Consequently, the carrying value of such
liabilities approximates fair value.
NOTE 10) EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) plan with profit-sharing features in which
its employees are eligible to participate after they complete one year of
service. Contributions to the plan are made each year by the Company in
discretionary amounts determined by its Board of Directors. Contributions were
$46,471 in 1995, $25,082 in 1996, and $26,534 in 1997.
F-104
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors Hederman Brothers, Inc.:
We have audited the accompanying balance sheets of Hederman Brothers, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hederman Brothers, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Memphis, Tennessee
February 27, 1998
F-105
<PAGE>
HEDERMAN BROTHERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 78,669 $ 87,852
Accounts receivable, net.......................... 1,209,418 1,335,750
Inventories....................................... 351,198 433,970
Prepaid expenses and other current assets......... 221,429 191,168
---------- -----------
Total current assets............................ 1,860,714 2,048,740
---------- -----------
Property, plant and equipment, net.................. 6,961,821 7,788,259
Cash surrender value of life insurance less policy
loan of $178,928 in 1997 and $143,863 in 1996...... 144,411 156,098
Other assets........................................ 7,799 12,032
---------- -----------
Total assets.................................... $8,974,745 $10,005,129
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash Overdraft.................................... 0 112,373
Current maturities of long-term debt.............. 786,494 872,437
Accounts payable.................................. 364,366 476,615
Accrued expenses.................................. 232,298 320,860
---------- -----------
Total current liabilities....................... 1,383,158 1,782,285
---------- -----------
Long-term debt, net of current maturities........... 5,309,347 6,281,090
Long-term debt to stockholders...................... 1,788,000 1,807,000
Commitments and contingencies
Shareholders' equity:
Common stock, $100 par value; 50,000 shares
authorized;
7,421 shares issued and outstanding.............. 721,400 721,400
Additional paid in capital........................ 831,852 831,852
Retained earnings (deficit)....................... (1,059,012) (1,418,498)
---------- -----------
Total shareholders' equity...................... 494,240 134,754
---------- -----------
Total liabilities and shareholders' equity...... $8,974,745 $10,005,129
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE>
HEDERMAN BROTHERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Net sales................................ $8,556,102 $9,359,500 $10,458,663
Cost of sales............................ 6,491,668 6,850,953 8,104,057
---------- ---------- -----------
Gross profit........................... 2,064,434 2,508,547 2,354,606
Selling, general and administrative
expenses................................ 1,860,712 2,030,855 2,032,217
---------- ---------- -----------
Income from operations................. 203,722 477,692 322,389
Other income (expense):
Interest expense....................... (670,585) (688,906) (732,827)
Interest income........................ 7,008 18,476 11,888
Gain on disposal of assets............. 99,966 12,387 8,145
Other.................................. 50,305 4,832 30,919
---------- ---------- -----------
Other expense, net................... (513,306) (653,211) (681,875)
---------- ---------- -----------
Net income............................... $ (309,584) $ (175,519) $ (359,486)
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE>
HEDERMAN BROTHERS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1994..... $650,000 $ 3,252 $ (573,909) $ 79,343
Issuance of 714 shares of
common stock upon conversion
of stockholders' notes....... 71,400 828,600 -- 900,000
Distributions--1995........... -- -- -- --
Net income--1995.............. -- -- (309,584) (309,584)
-------- -------- ----------- ---------
Balances, December 31, 1995..... 721,400 831,852 (883,493) 669,759
Distributions--1996........... -- -- -- --
Net income--1996.............. -- -- (175,519) (175,519)
-------- -------- ----------- ---------
Balances, December 31, 1996..... 721,400 831,852 (1,059,012) 494,240
Distributions--1997........... -- -- -- --
Net income--1997.............. -- -- (359,486) (359,486)
-------- -------- ----------- ---------
Balances, December 31, 1997..... $721,400 $831,852 $(1,418,498) $ 134,754
======== ======== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE>
HEDERMAN BROTHERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ (309,584) $ (175,519) $ (359,486)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 631,740 673,110 787,297
(Gain) loss on disposal of
equipment........................... (99,966) (12,387) (8,145)
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable................. 193 (57,713) (126,332)
Inventories......................... 19,340 19,335 (82,772)
Prepaid expenses and other current
assets............................. (70,415) 30,472 30,261
Increase (decrease) in:
Accounts payable.................... (176,464) 37,170 112,249
Accrued expenses.................... (12,918) 124,351 88,562
----------- ----------- -----------
Net cash provided by (used in)
operating activities............. (18,074) 638,819 441,634
----------- ----------- -----------
Cash flows from investing activities:
Decrease (increase) in non-current
receivables........................... (5,080) 112,281 (4,233)
Purchases of property, plant and
equipment............................. (1,563,668) (320,776) (1,614,790)
Proceeds from sales of property, plant
and equipment......................... 721,877 19,800 9,200
Decrease (increase) in cash surrender
value of life insurance............... (10,777) 858 (11,687)
----------- ----------- -----------
Net cash used in investing
activities....................... (857,648) (187,837) (1,621,510)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt........... 1,785,700 1,311,770 4,111,500
Principal payments on installment
debt.................................. (1,091,528) (1,653,400) (3,053,814)
Proceeds from stockholder loans........ 100,000 0 19,000
Book overdraft in bank account......... 44,261 (44,261) 112,373
----------- ----------- -----------
Net cash used in financing activi-
ties............................. 838,433 (385,891) 1,189,059
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (37,289) 65,091 9,183
Cash and cash equivalents, beginning of
year................................... 50,867 13,578 78,669
----------- ----------- -----------
Cash and cash equivalents, end of year.. $ 13,578 $ 78,669 $ 87,852
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE>
HEDERMAN BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Hederman Brothers, Inc. (The Company) was organized in June 1982. Its
principal business activity is commercial printing.
(b) Property, Plant, and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
over the estimated useful lives of the assets using straight-line and
accelerated methods.
(c) Inventories
Inventories are stated at the lower of cost or market on a specific
identification basis.
(d) Income Taxes
The stockholders of the Company have elected, under the S Corporation
provisions of the Internal Revenue Code and similar provisions of Mississippi
law, for earnings and losses to be taxed directly to the stockholders.
(e) Cash Equivalents
The Company considers money market accounts, and certificates of deposit
with an original maturity of three months or less, to be cash equivalents.
(f) Use of Estimates
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(g) Pension Plan
The Company has a defined benefit pension plan (the Plan) covering
substantially all of its employees. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for Federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. Plan assets are invested primarily in equity and fixed income
securities. The Company accounts for the Plan under Statement of Financial
Accounting Standards No. 87, "Employers' Accounting for Pensions."
(h) Trade Receivables
The Company's trade receivables are primarily concentrated with its printing
customers in the Mid-South area. The Company performs on-going credit
evaluations of its customers and generally does not require collateral on
trade receivables. The Company believes that adequate allowances are
maintained for any uncollectible accounts.
(i) Long-lived Assets
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets and certain identifiable intangibles to be
disposed are reported at the lower of carrying amount or fair value less cost
to sell.
F-110
<PAGE>
2. INVENTORIES
Inventories as of December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Raw materials.............................................. $171,633 $219,242
Work in-process............................................ 133,911 174,720
Finished goods............................................. 45,654 40,008
-------- --------
Total.................................................... $351,198 $433,970
======== ========
</TABLE>
3. PENSION PLAN
The following table sets forth the Plan's funded status and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,510,574 and $1,452,461............. $1,527,211 $1,469,095
---------- ----------
Projected benefit obligation for service rendered
to date........................................... $1,804,752 $1,733,504
Plan assets at fair value.......................... 1,875,911 2,515,458
---------- ----------
Plan assets in excess of projected benefit obliga-
tion.............................................. 71,159 781,954
Unrecognized net (gain) or loss from past experi-
ence different from that assumed.................. 276,508 (489,143)
Unrecognized net transition asset.................. (174,542) (152,724)
---------- ----------
Prepaid pension cost included in prepaid expenses.. $ 173,125 $ 140,087
---------- ----------
</TABLE>
The present value of the projected benefit obligation at December 31, 1996
and 1997 was determined using discount rates of 7.25% and 7.00%, respectively,
and an assumed rate of increase in compensation of 5.00% for both years.
Net pension cost included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the
year.................................... $ 46,172 $ 53,148 $ 66,203
Interest cost on projected benefit
obligation.............................. 97,240 111,044 127,691
Actual (return)/loss on Plan assets...... (546,126) 20,287 (755,304)
Net amortization and deferral............ 415,996 (185,880) 602,378
--------- --------- ---------
Net periodic pension cost.............. $ 13,282 $ (1,401) $ 40,968
========= ========= =========
</TABLE>
Assumptions used in developing the net periodic costs were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 7.50% 7.25% 7.25%
Rate on increase in compensation........................... 5.00% 5.00% 5.00%
Expected long-term rate of return of plan assets........... 8.00% 8.00% 8.00%
</TABLE>
F-111
<PAGE>
HEDERMAN BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED ------------------------
USEFUL LIVES 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Land................................. -- $ 350,000 $ 350,000
Building............................. 39 years 4,439,190 4,439,190
Printing machinery and equipment..... 5-10 years 5,053,678 6,210,351
Office equipment..................... 5-7 years 391,145 410,586
Automotive equipment................. 5 years 207,379 194,323
----------- -----------
$10,441,392 $11,604,450
Accumulated depreciation............. (3,479,571) (3,816,191)
----------- -----------
$ 6,961,821 $ 7,788,259
=========== ===========
</TABLE>
5. NOTES PAYABLE TO BANK
The Company has a revolving credit agreement for loans up to $500,000, with
a variable interest rate based on prime. At December 31, 1996 and 1997, there
were no balances outstanding under this line. The line expires on May 17, 1998
and is secured by inventories and accounts receivable.
6. LONG-TERM DEBT TO STOCKHOLDERS
Long-term notes payable to stockholders were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
8% unsecured note due January 1, 1999................. $ 588,000 $ 607,000
8% unsecured note due January 1, 1999................. 1,200,000 1,200,000
---------- ----------
$1,788,000 $1,807,000
========== ==========
</TABLE>
Notes in the principal amount of $900,000 were converted to 714 shares of
common stock in 1995. Interest paid on the above stockholders' notes amounted
to $216,000, $152,000 and $147,510 in 1995, 1996 and 1997, respectively.
7. OTHER LONG-TERM DEBT
A summary of long-term debt, excluding notes to stockholders, follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
------- -----------
<S> <C> <C>
Notes payable to bank in monthly installments of
$20,944, including interest at 7.0%, due January 1
2004; secured by printing machinery................ $ -- $ 1,229,502
Note payable to bank in monthly installments of
$12,812; including interest at 7.5%, due March 15,
1999; secured by printing machinery................ 317,581 183,312
</TABLE>
F-112
<PAGE>
HEDERMAN BROTHERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Note payable to February 1, 1998, interest at 7.56
% secured by printing machinery. The Company has
a bank commitment to refinance on February 1,
1998............................................. -- 2,380,000
Note payable to bank in monthly installments of
$35,416, including interest at 8.0%, due January
1, 2004; secured by land and building............ 3,253,695 3,086,453
Note payable to January 1, 1997, interest at
7.93%, secured by printing machinery; refinanced
January 1, 1997.................................. 1,285,700 --
Note payable to bank in monthly installments of
$11,792, plus interest at 7%, due August 15,
2000, secured by printing machinery.............. 518,865 --
Note payable to bank in monthly installments of
$10,785, including interest at 8.0%, due April
15, 2000; secured by equipment................... -- 274,260
Note payable to bank in monthly installments of
$15,000, plus interest at prime, due December 31,
2000, secured by accounts receivable and
inventory........................................ 720,000 --
---------- ----------
6,095,841 7,153,527
Less current portion.............................. 786,494 872,437
---------- ----------
$5,309,347 $6,281,090
========== ==========
</TABLE>
Interest paid to non-related parties was $450,955, $425,542 and $512,593 in
1995, 1996, and 1997, respectively. Future maturities of long-term debt at
December 31, 1997 follow:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
----------- ----------
<S> <C>
1998............................................................. $ 872,437
1999............................................................. 848,402
2000............................................................. 784,936
2001............................................................. 800,979
2002............................................................. 863,554
Thereafter....................................................... 2,983,219
----------
$7,153,527
==========
</TABLE>
8. SUBSEQUENT EVENT
As of March 4, 1998, Master Graphics, Inc. acquired all of the outstanding
common stock of the Company and simultaneously refinanced the Company's
outstanding debt. Prior to the closing, the Company's land and building and
the related mortgage debt were sold to the Company's previous stockholders,
who have entered into a lease agreement with Premiere Graphics, Inc., a
subsidiary of Master Graphics, for the use of the facility.
F-113
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
HARPERPRINTS, INC.
We have audited the accompanying Balance Sheets of HARPERPRINTS, INC. (the
"Company") as of December 31, 1996 and 1997, and the related Statements of
Income, Changes in Stockholders' Equity and Cash Flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the Company's financial position as of December 31,
1996 and 1997, and the results of its operations and cash flows for the years
then ended, in conformity with generally accepted accounting principles.
Becker & Company, P.C.
February 26, 1998, except for Note 14, which is as of March 25, 1998
Lanham, Maryland
F-114
<PAGE>
HARPERPRINTS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ $ 268,200 $ 5,768
Trade accounts receivable, net of allowance for doubtful
accounts of $8,027 in 1996 and $12,396 in 1997.......... 1,211,432 1,430,976
Current portion of employee notes receivable............. 2,199 275
Raw materials inventory.................................. 158,426 139,677
Unbilled receivables..................................... 137,275 490,013
Prepaid expenses......................................... 15,416 14,871
Prepaid income taxes..................................... 121,360 27,404
Current portion of mortgage note receivable.............. 2,453 2,657
Current portion of stockholder note receivable........... 76,667 153,333
Stockholder loan (see Note 9)............................ 199,631 8,569
Other receivables........................................ -- 10,956
---------- ----------
Total Current Assets.................................... 2,193,059 2,284,499
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated amortization
and depreciation (see Note 3)........................... 2,789,378 3,155,114
---------- ----------
LEASED PROPERTY UNDER CAPITAL LEASES, net of accumulated
amortization (see Note 4)............................... 686,406 531,224
---------- ----------
OTHER ASSETS
Deposits................................................. 25,919 33,809
Mortgage note receivable (see Note 5).................... 97,204 94,547
Stockholder note receivable, noncurrent portion (see Note
9)...................................................... 153,334 76,667
Employee notes receivable, noncurrent portion............ 780 --
Life insurance cash surrender value, net of policy loans
of $20,382 in 1996 and $16,150 in 1997.................. 279,255 297,051
---------- ----------
Total Other Assets...................................... 556,492 502,074
---------- ----------
TOTAL ASSETS............................................ $6,225,335 $6,472,911
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligations............. $ 161,298 $ 118,844
Current portion of long-term debt........................ 786,672 872,966
Trade accounts payable................................... 374,748 805,741
Advance billings......................................... 258,347 156,807
Payroll and sales taxes payable.......................... 11,736 15,561
Accrued expenses......................................... 313,992 246,332
---------- ----------
Total Current Liabilities............................... 1,906,793 2,216,251
---------- ----------
NONCURRENT LIABILITIES
Capital lease obligations, net of current portion (see
Note 4)................................................. 209,884 98,548
Long-term debt, net of current portion (see Note 7)...... 1,215,232 1,077,476
---------- ----------
Total Noncurrent Liabilities............................ 1,425,116 1,176,024
---------- ----------
DEFERRED INCOME TAXES (see Note 8)....................... 424,281 439,578
---------- ----------
Total Liabilities...................................... 3,756,190 3,831,853
---------- ----------
STOCKHOLDERS' EQUITY
Common stock............................................. 48,031 48,031
Retained earnings........................................ 2,472,994 2,644,907
---------- ----------
2,521,025 2,692,938
Less Treasury stock, at cost............................. 51,880 51,880
---------- ----------
Total Stockholders' Equity............................. 2,469,145 2,641,058
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $6,225,335 $6,472,911
========== ==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-115
<PAGE>
HARPERPRINTS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
SALES, net............................................ $10,428,129 $10,904,116
Manufacturing costs................................... 7,512,931 8,296,689
----------- -----------
GROSS PROFIT.......................................... 2,915,198 2,607,427
Administrative expenses............................... 846,751 968,304
Selling expenses...................................... 900,548 952,657
Profit sharing and incentives (see Note 10)........... 199,996 111,500
----------- -----------
OPERATING EXPENSES.................................... 1,947,295 2,032,461
----------- -----------
OPERATING INCOME...................................... 967,903 574,966
Other income (expenses), net.......................... 20,848 (100,887)
Interest (expense).................................... (223,388) (177,296)
----------- -----------
INCOME BEFORE INCOME TAXES............................ 765,363 296,783
Income tax expense (see Note 8)....................... 306,585 124,870
----------- -----------
NET INCOME............................................ $ 458,778 $ 171,913
=========== ===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-116
<PAGE>
HARPERPRINTS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK ($100 PAR VALUE) TREASURY STOCK
---------------------------------- --------------- TOTAL
SHARES SHARES RETAINED SHARES STOCKHOLDERS
AUTHORIZED ISSUED AMOUNT EARNINGS HELD AMOUNT EQUITY
----------------------- ---------- ---------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31,
1995................... 1,000 480.3082 $ 48,031 $2,014,216 60 $(51,880) $2,010,367
NET INCOME............ -- -- -- 458,778 -- -- 458,778
-------- ----------- ---------- ---------- --- -------- ----------
BALANCE at December 31,
1996................... 1,000 480.3082 48,031 2,472,994 60 (51,880) 2,469,145
NET INCOME............ -- -- -- 171,913 -- -- 171,913
-------- ----------- ---------- ---------- --- -------- ----------
BALANCE at December 31,
1997................... 1,000 480.3082 $ 48,031 $2,644,907 60 $(51,880) $2,641,058
======== =========== ========== ========== === ======== ==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statements
F-117
<PAGE>
HARPERPRINTS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 458,778 $171,913
Adjustment to reconcile net income to net cash provided
by operating activities
Depreciation and amortization............................ 713,329 820,142
(Gain) on sale of assets................................. (21,932) (24,392)
Deferred taxes........................................... 73,786 15,651
Deposits................................................. 166,129 --
Trade accounts receivable, net........................... 95,310 (219,544)
Raw materials inventory and unbilled receivables......... 58,210 (333,990)
Other current assets..................................... (5,265) (18,846)
Trade accounts payable................................... 74,925 430,993
Income taxes payable..................................... (401,196) 93,602
Other current liabilities................................ 123,305 (168,275)
--------- --------
Net Cash Provided By Operating Activities................ 1,335,379 767,254
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................... (421,361) (282,984)
Proceeds from sale of assets............................. 55,695 55,500
Cash surrender value of life insurance, net of loans..... (14,116) (17,796)
Stockholder loan repayment............................... (429,632) 178,163
--------- --------
Net Cash (Used for) Investing Activities................. (809,414) (67,117)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments from mortgage note receivable......... 2,266 2,453
Principal payments on long-term debt and capital leases.. (854,012) (967,726)
Principal payments from employee loans................... 5,559 2,704
--------- --------
Net Cash (Used for) Financing Activities................. (846,187) (962,569)
--------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (320,222) (262,432)
Beginning of year........................................ 588,422 268,200
--------- --------
End of year.............................................. $ 268,200 $ 5,768
========= ========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid interest of $215,983 and $172,855 for the years ending
December 31, 1996 and 1997, respectively.
The Company paid income taxes of $636,796 and $15,617 for the years ending
December 31, 1996 and 1997, respectively.
The Company incurred capital lease and notes payable obligations for new
equipment of $1,157,369 and $762,475 for the years ended December 31, 1996 and
1997, respectively.
See Independent Auditors' Report and Notes to Financial Statements
F-118
<PAGE>
HARPERPRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND PURPOSE
HARPERPRINTS, INC. (the "Company") was incorporated on May 31, 1974 under
the laws of the State of North Carolina. The Company manufactures and sells
printed products from its location in Henderson, North Carolina. The Company
grants credit to customers, substantially all of whom are commercial
establishments located in North Carolina and Southern Virginia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's financial statements are prepared on the accrual basis of
accounting. Therefore, revenues and related assets are recognized when earned,
and expenses and related liabilities are recognized when the obligations are
incurred.
Investments
Investments are stated at amortized cost which approximates market value.
Raw Materials Inventory
Inventories of paper and materials are stated at the lower of cost or market
on a first-in, first-out (FIFO) basis.
Unbilled Receivables
Unbilled receivables represent direct costs, estimated overhead recovery and
estimated profit on printing jobs in process, and approximates revenue
recognition on the percentage of completion basis.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the
estimated losses that will be incurred on current year sales. Direct write
offs are made to the allowance when an account is determined to be
uncollectible.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations. Renewals and betterments that
materially extend the life of the assets are capitalized.
The cost of assets sold, retired, or otherwise disposed of, and the related
allowance for depreciation and amortization are eliminated from the accounts,
and any resulting gain or loss is included in income.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on the
straight-line basis, ranging from 3 to 12 years. Assets purchased under
capital lease obligations are amortized over their estimated lives on the
straight-line basis, ranging from 5 to 10 years.
Depreciation and amortization expenses totaled $713,329 and $820,142 for the
years ended December 31, 1996 and 1997, respectively.
F-119
<PAGE>
Cash and Cash Equivalents
The Company considers all short-term investments with a maturity of three
months or less to be cash equivalents, allowing for reasonable comparisons of
cash flows. The Company maintains balances which at times may exceed federally
insured limits. Management monitors the soundness of the financial
institution(s) and feels the risk is negligible.
Income Taxes
Deferred income taxes reflect timing differences which occur when income and
expense items are reported for financial and tax purposes in different
periods. These differences are attributable to accelerated depreciation
methods used for income tax purposes, versus straight-line depreciation used
for financial statement purposes.
Use of Estimates
These financial statements have been prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
estimates and assumptions by management. Actual results could differ from
these amounts.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Leasehold improvements................................ $ 69,599 $ 101,066
Machinery and equipment............................... 5,632,096 6,203,359
Furniture and fixtures................................ 157,810 224,675
Vehicles.............................................. 59,836 64,176
---------- ----------
5,919,341 6,593,276
Less accumulated amortization and depreciation........ 3,129,963 3,438,162
---------- ----------
$2,789,378 $3,155,114
========== ==========
</TABLE>
4. CAPITAL LEASES
Equipment financed by capital leases at December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Machinery and equipment............................... $1,424,429 $1,455,322
Less accumulated amortization......................... 738,023 924,098
---------- ----------
$ 686,406 $ 531,224
========== ==========
</TABLE>
Future minimum lease payments under capital lease obligations are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998............................................................... $131,485
1999............................................................... 50,495
2000............................................................... 33,198
2001............................................................... 28,778
--------
Total minimum lease payments....................................... $243,956
Less amount representing interest.................................. 26,564
--------
Present value of net minimum lease payments........................ $217,392
========
</TABLE>
F-120
<PAGE>
HARPERPRINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. MORTGAGE NOTE RECEIVABLE
The Company's majority stockholders are indebted under a second mortgage
note (see Note 9), bearing interest at 8%, collectible in monthly payments of
$861, including interest, with the final payment due June 1, 2015.
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Total mortgage note receivable.............................. $99,657 $97,204
Less current portion........................................ 2,453 2,657
------- -------
Noncurrent portion of note receivable..................... $97,204 $94,547
======= =======
</TABLE>
6. REVOLVING LOAN
The Company maintains a Line of Credit ("LOC") at NationsBank (the "Bank")
with a $1,000,000 principal ceiling. The LOC is payable on demand with an
expiration date of May 31, 1998. It is secured by the Company's accounts
receivable and inventory, and bears interest at the Bank's 30-day libor rate
plus 2.75%. There were no balances outstanding as of December 31, 1996 and
1997. This LOC is subject to the following covenants:
1. Debt to equity ratio not to exceed 2.4 to 1
2. Debt service coverage ratio not less than 1.2 to 1
The Company was in compliance with the covenants as of December 31, 1996.
The Company was not in compliance with the debt service covenant as of
December 31, 1997 and received a waiver from the Bank.
F-121
<PAGE>
HARPERPRINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT UNDER NOTES PAYABLE
Long-term debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Notes payable (2) to CIT Group; secured by printing
presses and guaranteed by the majority stockholders;
refinanced November 1993; secured by equipment
costing $2,887,085; beginning December 24, 1993,
payable in monthly payments of $56,774, including
interest at 8.5%; final payment due November 24,
1998................................................. $1,201,072 $ 598,768
Note payable to Estate of Elizabeth Harper (a related
party); payable in monthly payments of $801,
including interest at 9.5%; final payment made April
1, 1997.............................................. 2,365 --
Note payable to CIT Group; secured by equipment
costing $222,080; payable in monthly payments of
$4,556, including interest at 8.5%; final payment due
February 17, 1999.................................... 107,849 60,524
Notes payable (2) to Bobst Equipment Finance Co.;
secured by bindery equipment costing $849,000;
monthly payments of $15,658, including interest at
8.45%; final payment due May 2001.................... 690,618 544,196
Notes payable (2) to Phoenixcor; secured by equipment
costing $939,960; monthly payments of $11,813,
including interest at 8.5%; final payment due October
21, 2004............................................. -- 732,855
Note payable to NationsBank; secured by a van costing
$23,515; monthly payments of $527, including interest
at 9%; final payment due June 30, 2000............... -- 14,099
---------- ----------
2,001,904 1,950,442
Less current portion.................................. 786,672 872,966
---------- ----------
$1,215,232 $1,077,476
========== ==========
</TABLE>
Notes payable maturities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998........................................................... $ 872,966
1999........................................................... 264,114
2000........................................................... 274,317
2001........................................................... 183,210
2002........................................................... 115,963
Thereafter..................................................... 239,872
----------
$1,950,442
==========
</TABLE>
8. INCOME TAXES
The income tax provision at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Federal and state income taxes, current year.............. $232,799 $117,475
Income tax expense, deferred.............................. 73,786 7,395
-------- --------
$306,585 $124,870
======== ========
</TABLE>
F-122
<PAGE>
HARPERPRINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes are provided for temporary differences between income
tax and financial statement recognition of revenues and expenses. Deferred tax
liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
GROSS DEFERRED TAX LIABILITIES
Depreciation and amortization................................ $485,405 $485,298
-------- --------
GROSS DEFERRED TAX ASSETS
Items deductible in future years............................. -- 7,116
Alternative minimum tax credit............................... 61,124 38,604
-------- --------
61,124 45,720
-------- --------
NET DEFERRED TAX LIABILITY................................... $424,281 $439,578
======== ========
</TABLE>
The income tax rate on earnings differed from the federal statutory rate are
as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net federal statutory rate...................................... 34.0% 33.4%
State income and franchise taxes, net of federal tax benefits... 5.6 6.9
Other adjustments............................................... .5 1.8
---- ----
EFFECTIVE RATE.................................................. 40.1% 42.1%
==== ====
</TABLE>
9. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS
On May 31, 1994, the Company entered into a sale and leaseback agreement
with the majority stockholders for the purchase of land and building for its
offices and manufacturing operations. The land and building were sold for
$530,000 (the estimated fair value at that time). First Deed of Trust
financing in the amount of $425,000 was provided by NationsBank of North
Carolina and the Company took back a Second Deed of Trust note in the amount
of $105,000 (see Note 5). At the same time, the Company entered into a lease
agreement for the rental of the land and building under a noncancelable 5-year
lease expiring May 31, 1999. During 1997, the majority stockholders completed
a major expansion and renovation of their facility to accommodate Company
growth. Rent on the new facilities is $24,979 per month (which approximates
fair market value) beginning August 1, 1996 with an annual escalation of 2.5%.
The Company has the option of extending the lease agreement for an additional
five years with written notice before the expiration of the fourth year of the
term of the lease. Rent expense charged to operations was $130,703 and
$304,121 for the years ended December 31, 1996 and 1997, respectively.
Future minimum lease payments under this lease are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1998............................................................. $311,724
1999............................................................. 131,219
</TABLE>
The Company advanced the majority stockholders $465,851 for plant addition
and renovation construction costs. The stockholders repaid $227,282 in 1997;
$230,000 is payable under a note agreement in annual principal payments of
$76,667, plus quarterly interest payments of 7.08%, with the final payment due
by December 31, 1999 (the "Note Agreement"); and a balance remains of $8,569.
Future principal payment receipts under the Note Agreement are as follows:
<TABLE>
<S> <C>
1998................................................................ $153,333
1999................................................................ 76,667
--------
Total............................................................. $230,000
========
</TABLE>
F-123
<PAGE>
HARPERPRINTS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The December 31, 1997 payment under the Note Agreement was not received by
the Company. The overdue payment of $76,667 and the remaining balance of
$8,569 are expected to be paid by the end of the first quarter of 1998.
The Company maintains various operating leases for equipment and vehicles.
Future minimum monthly rentals and service contract commitments under these
equipment leases are as follows:
<TABLE>
<S> <C>
1998................................................................ $188,748
1999................................................................ 170,462
2000................................................................ 59,485
2001................................................................ 11,102
</TABLE>
On December 20, 1993, the Company entered into a deferred compensation
agreement with a retired employee. Beginning in January 1994, the Company is
required to make 15 annual payments of $5,600. The required payments were made
in 1996 and 1997.
10. PROFIT SHARING PLAN AND INCENTIVES
The Company maintains a 401(k) profit sharing plan, effective January 1,
1987, for all employees who (1) elect to be covered, (2) are at least 18 years
of age, and (3) work at least 1,000 hours per year. The participating
employees may contribute from 2% to 12% of eligible compensation.
The Company's contribution is discretionary and is determined annually by
the Board of Directors. The provision for the discretionary contribution to
the 401(k) profit sharing plan was $27,500 and $11,125 for the years ended
December 31, 1996 and 1997, respectively.
In addition, the Company awarded bonuses of $172,496 and $100,375 for the
years ended December 31, 1996 and 1997, respectively.
11. CONTINGENCY
The Company maintains a self-insurance program for its employees' health
care costs. The Company is liable for losses on claims up to $15,000 per
employee per year. The Company has third party insurance coverage for any
losses in excess of such amounts. Self-insurance costs are accrued based upon
claims reported as of the Balance Sheet date as well as an estimated liability
for claims incurred, but not reported.
12. CONCENTRATION OF RISK
The Company made sales to a single customer that were approximately 45% of
total sales in 1997.
13. RECLASSIFICATION OF FINANCIAL DATA
During 1997, the Company reclassified the presentation of various expense
line items. These reclassifications had no effect on net income.
14. RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements were reformatted and additional income tax
disclosure was provided in conjunction with a proposed S-1 filing with the
Securities and Exchange Commission.
F-124
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCK-
HOLDER OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER
OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 17
Selected Historical, Pro Forma and Combined Financial Data............... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Industry Overview........................................................ 29
Business................................................................. 30
Management............................................................... 37
Certain Transactions..................................................... 43
Principal and Selling Shareholders....................................... 45
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 53
Legal Matters............................................................ 54
Experts.................................................................. 54
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,600,000 SHARES
MASTER GRAPHICS, INC.
COMMON STOCK
LOGO
---------------
PROSPECTUS
---------------
MORGAN KEEGAN & COMPANY, INC.
SUNTRUST EQUITABLE SECURITIES
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Registrant in connection with the Offering described in the Registration
Statement.
<TABLE>
<S> <C>
Registration fee to the SEC..................................... $ 15,877
NASD fee........................................................ 5,882
Nasdaq Stock Market application fee............................. 69,375
Accounting fees and expenses.................................... 500,000*
Legal fees and expenses......................................... 200,000*
Printing and engraving expenses................................. 100,000*
Blue sky fees and expenses...................................... 10,000*
Transfer agent and registrar fees............................... 4,500
Miscellaneous fees and expenses................................. 10,000*
--------
Total......................................................... $915,634
========
</TABLE>
- --------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interests, and, in all other cases, that his or her conduct
was not opposed to the best interests of the corporation, and (iii) the
director or officer in connection with any criminal proceeding had no
reasonable cause to believe that his or her conduct was unlawful. In actions
brought by or in the right of the corporation, however, the TBCA provides that
no indemnification may be made if the director or officer is adjudged liable
to the corporation. Similarly, the TBCA prohibits indemnification in
connection with any proceeding charging improper personal benefit to a
director or officer, if such director or officer is adjudged liable on the
basis that a personal benefit was improperly received. In cases where the
director or officer is wholly successful, on the merits or otherwise, in the
defense of any proceeding instigated because of his or her status as a
director or officer of a corporation, the TBCA mandates that the corporation
indemnify the director or officer against reasonable expenses incurred in the
proceeding. Notwithstanding the foregoing, the TBCA provides that a court of
competent jurisdiction, upon application, may order that a director or officer
be indemnified for reasonable expense if, in consideration of all relevant
circumstances, the court determines that such individual is fairly and
reasonably entitled to indemnification, whether or not the standard of conduct
set forth above was met.
The Company's bylaws (the "Bylaws") provide that the Company will indemnify
from liability, and advance expenses to, any present or former director or
officer of the Company to the fullest extent allowed by the TBCA The Bylaws
also provide for mandatory indemnification of a director or officer who was
wholly successful, on the merits or otherwise, against reasonable expenses
incurred by the director or officer.
The Company's charter (the "Charter") states that, to the fullest extent
permitted by the TBCA, the directors will not be liable to the Company or its
shareholders for monetary damages for breach of their fiduciary duty as a
director. The Charter provides for the indemnification of a director or
officer made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or
she is or was a director or officer of the Company, against all expense,
liability and loss actually and reasonably incurred to the fullest extent
permitted by applicable law.
II-1
<PAGE>
The proposed form of the Underwriting Agreement filed as Exhibit 1 to this
Registration Statement contains certain provisions relating to the
indemnification of the Company and its controlling persons by the Underwriters
and relating to the indemnification of the Underwriters by the Company, its
controlling persons and the Selling Shareholder.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to certain note modification agreements, on May 20, 1997 the
Company issued to Jack Gammon and Harold Martin, former B&M Printing
shareholders, rights to purchase 50,000 and 16,666 shares of Common Stock,
respectively (assuming an initial offering price equal to the Mid-Point). In
addition, pursuant to a third note modification agreement, on May 22, 1997 the
Company issued to Carl Nelson, also a former B&M Printing shareholder, the
right to purchase 41,666 shares of Common Stock (assuming an initial offering
price equal to the Mid-Point).
In connection with the formation of the Company on June 19, 1997 the Company
issued 100 shares of Common Stock to John P. Miller for $1.00 per share. In
connection with the redomestication of the Company from the State of Delaware
to the State of Tennessee on March 26, 1998, the 100 shares of the Delaware
corporation were converted into 100 shares of the Tennessee corporation. Both
of such transactions were completed without registration under the Securities
Act of 1933, as amended (the "Securities Act") in reliance upon the exemption
provided by Section 4(2) of the Securities Act.
On June 19, 1997, the Company issued to Sirrom Capital Corporation a warrant
to purchase 6% of the Common Stock at an exercise price of $.01 per share in
connection with the extension of a $4.3 million loan from Sirrom Capital
Corporation to the Company. The sale was completed without registration under
the Securities Act in reliance upon the exemption provided by Section 4(2) of
the Securities Act.
On December 19, 1997, the Company issued to General Electric Capital
Corporation a warrant to purchase 3.8674 shares of Common Stock for an
aggregate exercise price of $100 and a warrant to purchase .57704 shares of
Common Stock for an aggregate purchase price of $100. The lender exercised the
warrant on March 27, 1998 and exchanged the Common Stock for 177,776 (assuming
a 40,000 to one stock split) shares of Series A Preferred Stock. Moreover, in
connection with the financing of an acquisition the lender was issued a
warrant to purchase 183,333 shares of Common Stock (assuming an initial public
offering price equal to the Mid-Point) for nominal value. Each sale was
completed without registration under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
In connection with the acquisition of the Acquired Companies, the Company
has issued warrants to purchase an aggregate of 1,524,037 shares of Common
Stock (assuming an initial public offering price equal to the Mid-Point) at an
exercise price equal to the initial public offering price of the Common Stock.
Moreover, the Company has issued to the former owners of the acquired
companies promissory notes in the aggregate principal amount of $15.4 million,
which bear interest at 12% per annum. Each sale was completed without
registration under the Securities Act in reliance upon the exemption provided
by Section 4(2) of the Securities Act. The following table indicates the
purchaser, the securities offered, and the date of the offering.
<TABLE>
<CAPTION>
DOLLAR
VALUE OF DOLLAR VALUE
HOLDER WARRANTS(1) OF NOTES DATE OF GRANT
- ------ ----------- ------------ ------------------
<S> <C> <C> <C>
William J. and Brenda M. Blackwell $1,000,000 $1,000,000 June 19, 1997
Walter P. McMullen 3,750,000 3,750,000 June 19, 1997
David Sutherland, III 325,000 1,090,000 June 19, 1997
Joseph M. Jensen 1,875,000 1,875,000 September 22, 1997
Allan R. Bartel 1,875,000 1,875,000 September 22, 1997
Joseph Segal 2,325,000 557,750 December 16, 1997
Cary Rosenthal 2,325,000 557,750 December 16, 1997
Wendell Burns 1,117,105 1,217,105 December 16, 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DOLLAR
VALUE OF DOLLAR VALUE
HOLDER WARRANTS(1) OF NOTES DATE OF GRANT
- ------ ----------- ------------ -----------------
<S> <C> <C> <C>
Robert Rymer 132,895 32,895 December 16, 1997
Phil Phillips, Jr. 854,219 854,219 March 6, 1998
Scott Diamond -- 11,500 December 16, 1997
Ross Lenhart -- 11,500 December 16, 1997
Richard Roberts -- 11,500 December 16, 1997
H. Henry Hederman 9,604 9,604 March 1, 1998
Hap Hederman 703,500 703,500 March 1, 1998
H. Henry Hederman Grandchild
Trust No. 1 U/A dated 12/31/87 43,448 43,448 March 1, 1998
H. Henry Hederman Grandchild
Trust No. 2 U/A dated 12/31/87 43,448 43,448 March 1, 1998
H. Henry Hederman, Jr.
Trust U/A 12/31/75 1,200,000 1,200,000 March 1, 1998
Gerald A. Barrick -- 88,984.53 March 1, 1998
Michael G. Harper 250,000 1,125,000 March 31, 1998
Lynn H. Harper 250,000 -- March 31, 1998
David McQuiddy, Jr. -- 1,502,948 May 8, 1998
Coleman Family Trust 104,300 -- May 8, 1998
John S. Frazer 35,000 -- May 8, 1998
Ron L. Martin, Sr. 70,000
</TABLE>
- --------
(1) Each warrant holder is entitled to purchase a maximum number of shares
equal to the Dollar Value of Warrants granted divided by the initial public
offering price of the shares. The exercise price is the initial public
offering price (i.e., if the Dollar Value of the warrant is $1,000,000 and
the initial public offering price is $12.00, the holder is entitled to
purchase 83,333 shares at the exercise price of $12.00 per share).
II-3
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1+ Charter of Master Graphics, Inc.
3.2+ Certificate of Incorporation of Premier Graphics, Inc.
3.3+ Bylaws of Master Graphics, Inc.
3.4+ Bylaws of Premier Graphics, Inc.
4.1+ Form of Common Stock Certificate
4.2+ Form of 5% Series A Cumulative Redeemable Preferred Stock
Certificate
4.3+ Articles of Amendment to the Charter of Master Graphics, Inc.
Designating and Fixing the Rights and Preferences of a Series and
Preferred Shares of Stock
4.4+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and Sirrom Capital Corporation
4.5+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and William J. Blackwell and Brenda M. Blackwell
4.6+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and Walter P. McMullen
4.7+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and David Sutherland, III
4.8+ Stock Purchase Warrant dated September 22, 1997 between Master
Graphics, Inc., John P. Miller and Joseph M. Jensen
4.9+ Stock Purchase Warrant dated September 22, 1997 between Master
Graphics, Inc., John P. Miller and Allan R. Bartel
4.10+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Joseph Segal
4.11+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Cary Rosenthal
4.12+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Wendell Burns
4.13+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Robert Rymer
4.14+ Stock Purchase Warrant dated March 6, 1998 between Master Graphics,
Inc., John P. Miller and Phil Phillips, Jr.
4.15+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc., John P. Miller and Michael G. Harper
4.16+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc., John P. Miller and Lynn H. Harper
4.17+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and H. Henry Hederman
4.18+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Martha Dean Hederman, Trustee of the H.
Henry Hederman Grandchild Trust No. 1 U/A dated 12/31/87
4.19+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Martha Dean Hederman, Trustee of the H.
Henry Hederman Grandchild Trust No. 2 U/A dated 12/31/87
4.20+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and H. Henry Hederman, Jr. and Zach T.
Hederman, as Trustees of the H. Henry Hederman, Jr. Trust U/A dated
December 31, 1975
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
4.21+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Hap Hederman, Jr.
4.22+ Form of Stock Purchase Warrant
4.23+ Form of Nonqualified Stock Option Agreement
4.24+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc. and General Electric Capital Corporation
4.25+ Note Modification Agreement dated May 20, 1997 between Harold Martin
and Master Printing, Inc.
4.26+ Note Modification Agreement dated May 22, 1997 between Carl Nelson
and Master Printing, Inc.
4.27+ Note Modification Agreement dated May 20, 1997 between Jack Garmon
and Master Printing, Inc.
4.28+ Registration Rights Agreement dated March 30, 1998 between Master
Graphics, Inc. and General Electric Capital Corporation
4.29+ Exchange Agreement dated March 30, 1998 between General Electric
Capital Corporation and Master Graphics, Inc.
5.1** Opinion of Baker, Donelson, Bearman & Caldwell, a professional
corporation regarding legality of securities being registered
10.1+ Agreement and Plan of Merger dated as of June 18, 1997 by and
between B&M Printing Company, Inc. and Premier Graphics, Inc.
10.2+ Agreement for Sale and Purchase of Corporate Stock dated as of June
17, 1997, between William J. Blackwell and Brenda M. Blackwell and
Master Graphics, Inc.
10.3+ Agreement and Plan of Merger dated as of June 18, 1997 by and
between Blackwell Lithographers, Inc. and Premier Graphics, Inc.
10.4+ Stock Purchase Agreement dated as of June 4, 1997 among Master
Graphics, Inc. and Walter P. McMullen
10.5+ First Amendment to Stock Purchase Agreement dated as of June 19,
1997 by and between Master Graphics, Inc. and Walter P. McMullen
10.6+ Agreement and Plan of Merger dated as of June 18, 1997 between
Lithograph Printing Company of Memphis and Premier Graphics, Inc.
10.7+ Asset Purchase Agreement dated as of May 20, 1997 among Sutherland
Printing Company, Inc., David Sutherland, III and Master Printing,
Inc.
10.8+ Assignment of Asset Purchase Agreement dated June 19, 1997 between
Master Printing, Inc. and Premier Graphics, Inc.
10.9+ Agreement for Sale and Purchase of Corporate Stock dated September
22, 1997 between The Argus Press, Inc., Joseph M. Jensen, Allan R.
Bartel and Master Graphics, Inc.
10.10+ Agreement and Plan of Merger dated as of September 22, 1997, between
The Argus Press, Inc. and Premier Graphics, Inc.
10.11+ Stock Purchase Agreement dated as of December 15, 1997 by Master
Graphics, Inc., Cary Rosenthal, Joseph Segal, Ross Lenhart, Richard
Roberts and Scott Diamond.
10.12+ Agreement and Plan of Merger dated as of December 16, 1997, between
Phoenix Communications, Inc. and Premier Graphics, Inc.
10.13+ Agreement and Plan of Merger dated as of December 16, 1997, between
King Mailing Services, Inc. and Premier Graphics, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
10.14+ Stock Purchase Agreement dated December 16, 1997 between Master
Graphics, Inc. and Wendell Burns and Robert Rymer
10.15+ Agreement and Plan of Merger dated as of December 16, 1997, between
Jones Printing Company, Inc. and Premier Graphics, Inc.
10.16+ Stock Purchase Agreement dated as of March 1, 1998 between Master
Graphics, Inc. and H. Henry Hederman, H. Henry Hederman, Jr., and
Martha Dean Hederman, as Trustee of the H. Henry Hederman Grandchild
Trust No. 1 U/A dated 12/31/87, and Martha Dean Hederman, as Trustee
of the H. Henry Hederman Grandchild Trust No. 2 U/A dated 12/31/87
10.17+ Agreement and Plan of Merger dated as of March 1, 1998 between
Hederman Brothers, Inc. and Premier Graphics, Inc.
10.18+ Stock Purchase Agreement dated March 1, 1998 between Master
Graphics, Inc., Premier Graphics, Inc., John P. Miller and Phil
Phillips, Jr.
10.19+ Stock Purchase Agreement dated March 31, 1997 between Master
Graphics, Inc. and Michael G. Harper, individually and as custodian
for Emily Hines Harper, a minor, and Lynn H. Harper, individually
and as custodian for Davis Hillman Harper, a minor
10.20 [Intentionally Deleted.]
10.21+ Merger Agreement dated April 8, 1998 between Master Graphics, Inc.,
Master Acquisitionsub, Inc., and McQuiddy Printing Company
10.22+ Agreement and Plan of Merger between McQuiddy Printing Company and
Premier Graphics, Inc.
10.23+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and John P. Miller
10.24+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and Robert J. Diehl
10.25+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and P. Melvin Henson, Jr.
10.26+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and Lance T. Fair
10.27+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and James B. Duncan
10.28+ Noncompetition Agreement dated as of June 19, 1997 between Premier
Graphics, Inc. and David Sutherland, III, and Sutherland Printing
Company, Inc.
10.29+ Noncompetition Agreement dated as of December 16, 1997 between
Master Graphics, Inc. and Joseph Segal
10.30+ Noncompetition Agreement dated as of December 16, 1997 between
Master Graphics, Inc. and Cary Rosenthal
10.31+ Noncompetition Agreement dated as of December 16, 1997 by and
between Master Graphics, Inc. and Wendell Burns
10.32+ Noncompetition Agreement dated as of March 1, 1998 by and between
Master Graphics, Inc. and H. Henry Hederman, Jr.
10.33+ Noncompetition Agreement by and between David L. McQuiddy, III and
Master Graphics, Inc.
10.34+ Noncompetition Agreement dated as of March 31, 1998 by and between
Master Graphics, Inc. and Lynn H. Harper
10.35+ Noncompetition Agreement dated as of March 1, 1998 by and between
Master Graphics, Inc. and Phil Phillips, Jr.
10.36+ Commercial Lease Agreement dated December 4, 1992 between John P.
Miller, as Lessor and B&M Printing Company, as Lessee, Memphis,
Tennessee
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
10.37+ Amended and Restated Lease Agreement--Office, Commercial Printing
and Commercial Warehouse Facility dated as of June 16, 1997 between
Graphic Development Company, L.P. and Lithograph Printing Company of
Memphis, Memphis, Tennessee
10.38+ Industrial Building Lease Agreement dated June 1, 1971 and assigned
by The Argus Press, Inc. to Premier Graphics, Inc. as of September
26, 1997, by and between LaSalle National Bank as Trustee of Trust
#42560, as Lessor and Premier Graphics, Inc., as Lessee, Niles,
Illinois
10.39+ Lease Agreement dated May 1, 1995 by and between RFTA Associates,
LLC, a Georgia limited liability company, and Phoenix
Communications, Inc., Chamblee, Georgia
10.40+ Standard Industrial Lease Agreement dated October 17, 1994 by and
between RSH Properties, L.L.C., as Lessor and King Mailing Services,
Inc., as Lessee, Chamblee, Georgia
10.41+ Commercial Lease Agreement dated as of December 16, 1997 by and
between Wendell H. Burns and Premier Graphics, Inc., Chattanooga,
Tennessee
10.42+ Commercial Lease Agreement for Hederman Brothers, Inc.--Ridgeland,
Mississippi -- dated as of March 1, 1998 by and between Arrowhead
Real Estate, LLC and Premier Graphics, Inc.
10.43+ Standard Industrial Lease Agreement dated October 14, 1997 by and
between Fl Corp, as Lessor and Hederman Brothers, Inc, as Lessee,
Little Rock, Arkansas
10.44+ Commercial Lease Agreement dated March 1, 1998 by and between Phil
Phillips, Jr. and Premier Graphics, Inc., Springdale, Arkansas
10.45+ Commercial Lease Agreement dated January 8, 1998 by and between
Crescent Center Limited Partnership, as Lessor and Master Graphics,
Inc., as Lessee, Memphis, Tennessee
10.46+ Commercial Lease Agreement dated March 1, 1998 between Arrowhead
Real Estate, LLC and Premier Graphics, Inc.
10.47+ Loan Agreement by and between Sirrom Capital Corporation and Master
Graphics, Inc. and Premier Graphics, Inc. dated June 19, 1997
10.48+ Loan and Security Agreement by and between First American National
Bank and Master Graphics, Inc. and Premier Graphics, Inc. dated June
19, 1997
10.49+ Amended and Restated Loan and Security Agreement by and between
General Electric Capital Corporation and Premier Graphics, Inc.
dated December 16, 1997
10.50+ Noncompetition Agreement dated as of March 31, 1998 by and between
Master Graphics, Inc. and Michael G. Harper
10.51+ Bill of Sale dated December 31, 1997 between B & M Printing Company
and John P. Miller
10.52+ Promissory Note dated December 31, 1997 between John P. Miller and
Premier Graphics, Inc.
10.53+ Promissory Note dated December 10, 1992 between John P. Miller and B
& M Printing Company
10.54+ Noncompetition Agreement dated as of March 1, 1998 between Master
Graphics, Inc. and H. Henry Hederman
10.55+ Commercial Lease Agreement dated March 31, 1998 by and between
Michael G. and Lynn H. Harper and Harperprints, Inc.
11.1+ Statement re: computation of per share earnings
21.1+ List of subsidiaries
23.1** Consent of KPMG Peat Marwick LLP
23.2** Consent of Arthur Andersen LLP
23.3** Consent of Marlin & Edmondson, P.C.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
23.4** Consent of Joseph Decosimo and Company
23.5** Consent of Thompson Dunavant PLC
23.6** Consent of S. F. Fiser & Company, P.A.
23.7** Consent of Becker & Company, P.C.
23.8** Consent of Baker, Donelson, Bearman & Caldwell, a professional
corporation (included in its opinion filed as Exhibit 5.1).
24.1+ Power of Attorney (included on signature page of Registration
Statement).
27.1+ Financial Data Schedule
</TABLE>
- --------
** Filed herewith
+ Previously filed
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Registrant's Certificate of Incorporation, its
Bylaws, the Underwriting Agreement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MEMPHIS, TENNESSEE ON JUNE 2, 1998.
Master Graphics, Inc.
a Tennessee corporation
/s/ John P. Miller
By: ___________________________________
JOHN P. MILLER,
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John P. Miller Chief Executive
- ------------------------------------ Officer, President June 2, 1998
JOHN P. MILLER and Chairman of
the Board of
Directors
/s/ Lance T. Fair Senior Vice
- ------------------------------------ President-- June 2, 1998
LANCE T. FAIR Acquisitions;
Chief Financial
Officer
* Chief Operating
- ------------------------------------ Officer June 2, 1998
ROBERT J. DIEHL
* Senior Vice
- ------------------------------------ President--Finance June 2, 1998
P. MELVIN HENSON, JR. and
Administration;
Chief Accounting
Officer
* Senior Vice
- ------------------------------------ President--Sales June 2, 1998
JAMES B. DUNCAN and Marketing
<PAGE>
SIGNATURE TITLE DATE
* Director, President
- ------------------------------------ Hederman Brothers June 2, 1998
H. HENRY (HAP) HEDERMAN, JR. Division
* Director, Chairman
- ------------------------------------ of Lithograph June 2, 1998
WALTER P. MCMULLEN Printing Division
* Director, President
- ------------------------------------ Phoenix Division June 2, 1998
CARY ROSENTHAL
* Director
- ------------------------------------ June 2, 1998
FREDERICK F. AVERY
* Director
- ------------------------------------ June 2, 1998
DONALD L. HUTSON
/s/ Lance T. Fair
*By: _______________________________
(ATTORNEY-IN-FACT FOR THE PERSONS
INDICATED)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1+ Charter of Master Graphics, Inc.
3.2+ Certificate of Incorporation of Premier Graphics, Inc.
3.3+ Bylaws of Master Graphics, Inc.
3.4+ Bylaws of Premier Graphics, Inc.
4.1+ Form of Common Stock Certificate
4.2+ Form of 5% Series A Cumulative Redeemable Preferred Stock
Certificate
4.3+ Articles of Amendment to the Charter of Master Graphics, Inc.
Designating and Fixing the Rights and Preferences of a Series and
Preferred Shares of Stock
4.4+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and Sirrom Capital Corporation
4.5+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and William J. Blackwell and Brenda M. Blackwell
4.6+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and Walter P. McMullen
4.7+ Stock Purchase Warrant dated June 19, 1997 between Master Graphics,
Inc. and David Sutherland, III
4.8+ Stock Purchase Warrant dated September 22, 1997 between Master
Graphics, Inc., John P. Miller and Joseph M. Jensen
4.9+ Stock Purchase Warrant dated September 22, 1997 between Master
Graphics, Inc., John P. Miller and Allan R. Bartel
4.10+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Joseph Segal
4.11+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Cary Rosenthal
4.12+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Wendell Burns
4.13+ Stock Purchase Warrant dated December 16, 1997 between Master
Graphics, Inc., John P. Miller and Robert Rymer
4.14+ Stock Purchase Warrant dated March 6, 1998 between Master Graphics,
Inc., John P. Miller and Phil Phillips, Jr.
4.15+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc., John P. Miller and Michael G. Harper
4.16+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc., John P. Miller and Lynn H. Harper
4.17+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and H. Henry Hederman
4.18+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Martha Dean Hederman, Trustee of the H.
Henry Hederman Grandchild Trust No. 1 U/A dated 12/31/87
4.19+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Martha Dean Hederman, Trustee of the H.
Henry Hederman Grandchild Trust No. 2 U/A dated 12/31/87
4.20+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and H. Henry Hederman, Jr. and Zach T.
Hederman, as Trustees of the H. Henry Hederman, Jr. Trust U/A dated
December 31, 1975
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
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<C> <S>
4.21+ Stock Purchase Warrant dated March 1, 1998 between Master Graphics,
Inc., John P. Miller and Hap Hederman, Jr.
4.22+ Form of Stock Purchase Warrant
4.23+ Form of Nonqualified Stock Option Agreement
4.24+ Stock Purchase Warrant dated March 31, 1998 between Master Graphics,
Inc. and General Electric Capital Corporation
4.25+ Note Modification Agreement dated May 20, 1997 between Harold Martin
and Master Printing, Inc.
4.26+ Note Modification Agreement dated May 22, 1997 between Carl Nelson
and Master Printing, Inc.
4.27+ Note Modification Agreement dated May 20, 1997 between Jack Garmon
and Master Printing, Inc.
4.28+ Registration Rights Agreement dated March 30, 1998 between Master
Graphics, Inc. and General Electric Capital Corporation
4.29+ Exchange Agreement dated March 30, 1998 between General Electric
Capital Corporation and Master Graphics, Inc.
5.1** Opinion of Baker, Donelson, Bearman & Caldwell, a professional
corporation regarding legality of securities being registered
10.1+ Agreement and Plan of Merger dated as of June 18, 1997 by and
between B&M Printing Company, Inc. and Premier Graphics, Inc.
10.2+ Agreement for Sale and Purchase of Corporate Stock dated as of June
17, 1997, between William J. Blackwell and Brenda M. Blackwell and
Master Graphics, Inc.
10.3+ Agreement and Plan of Merger dated as of June 18, 1997 by and
between Blackwell Lithographers, Inc. and Premier Graphics, Inc.
10.4+ Stock Purchase Agreement dated as of June 4, 1997 among Master
Graphics, Inc. and Walter P. McMullen
10.5+ First Amendment to Stock Purchase Agreement dated as of June 19,
1997 by and between Master Graphics, Inc. and Walter P. McMullen
10.6+ Agreement and Plan of Merger dated as of June 18, 1997 between
Lithograph Printing Company of Memphis and Premier Graphics, Inc.
10.7+ Asset Purchase Agreement dated as of May 20, 1997 among Sutherland
Printing Company, Inc., David Sutherland, III and Master Printing,
Inc.
10.8+ Assignment of Asset Purchase Agreement dated June 19, 1997 between
Master Printing, Inc. and Premier Graphics, Inc.
10.9+ Agreement for Sale and Purchase of Corporate Stock dated September
22, 1997 between The Argus Press, Inc., Joseph M. Jensen, Allan R.
Bartel and Master Graphics, Inc.
10.10+ Agreement and Plan of Merger dated as of September 22, 1997, between
The Argus Press, Inc. and Premier Graphics, Inc.
10.11+ Stock Purchase Agreement dated as of December 15, 1997 by Master
Graphics, Inc., Cary Rosenthal, Joseph Segal, Ross Lenhart, Richard
Roberts and Scott Diamond.
10.12+ Agreement and Plan of Merger dated as of December 16, 1997, between
Phoenix Communications, Inc. and Premier Graphics, Inc.
10.13+ Agreement and Plan of Merger dated as of December 16, 1997, between
King Mailing Services, Inc. and Premier Graphics, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
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<C> <S>
10.14+ Stock Purchase Agreement dated December 16, 1997 between Master
Graphics, Inc. and Wendell Burns and Robert Rymer
10.15+ Agreement and Plan of Merger dated as of December 16, 1997, between
Jones Printing Company, Inc. and Premier Graphics, Inc.
10.16+ Stock Purchase Agreement dated as of March 1, 1998 between Master
Graphics, Inc. and H. Henry Hederman, H. Henry Hederman, Jr., and
Martha Dean Hederman, as Trustee of the H. Henry Hederman Grandchild
Trust No. 1 U/A dated 12/31/87, and Martha Dean Hederman, as Trustee
of the H. Henry Hederman Grandchild Trust No. 2 U/A dated 12/31/87
10.17+ Agreement and Plan of Merger dated as of March 1, 1998 between
Hederman Brothers, Inc. and Premier Graphics, Inc.
10.18+ Stock Purchase Agreement dated March 1, 1998 between Master
Graphics, Inc., Premier Graphics, Inc., John P. Miller and Phil
Phillips, Jr.
10.19+ Stock Purchase Agreement dated March 31, 1997 between Master
Graphics, Inc. and Michael G. Harper, individually and as custodian
for Emily Hines Harper, a minor, and Lynn H. Harper, individually
and as custodian for Davis Hillman Harper, a minor
10.20 [Intentionally Deleted.]
10.21+ Merger Agreement dated April 8, 1998 between Master Graphics, Inc.,
Master Acquisitionsub, Inc., and McQuiddy Printing Company
10.22+ Agreement and Plan of Merger between McQuiddy Printing Company and
Premier Graphics, Inc.
10.23+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and John P. Miller
10.24+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and Robert J. Diehl
10.25+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and P. Melvin Henson, Jr.
10.26+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and Lance T. Fair
10.27+ Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and James B. Duncan
10.28+ Noncompetition Agreement dated as of June 19, 1997 between Premier
Graphics, Inc. and David Sutherland, III, and Sutherland Printing
Company, Inc.
10.29+ Noncompetition Agreement dated as of December 16, 1997 between
Master Graphics, Inc. and Joseph Segal
10.30+ Noncompetition Agreement dated as of December 16, 1997 between
Master Graphics, Inc. and Cary Rosenthal
10.31+ Noncompetition Agreement dated as of December 16, 1997 by and
between Master Graphics, Inc. and Wendell Burns
10.32+ Noncompetition Agreement dated as of March 1, 1998 by and between
Master Graphics, Inc. and H. Henry Hederman, Jr.
10.33+ Noncompetition Agreement by and between David L. McQuiddy, III and
Master Graphics, Inc.
10.34+ Noncompetition Agreement dated as of March 31, 1998 by and between
Master Graphics, Inc. and Lynn H. Harper
10.35+ Noncompetition Agreement dated as of March 1, 1998 by and between
Master Graphics, Inc. and Phil Phillips, Jr.
10.36+ Commercial Lease Agreement dated December 4, 1992 between John P.
Miller, as Lessor and B&M Printing Company, as Lessee, Memphis,
Tennessee
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
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<C> <S>
10.37+ Amended and Restated Lease Agreement--Office, Commercial Printing
and Commercial Warehouse Facility dated as of June 16, 1997 between
Graphic Development Company, L.P. and Lithograph Printing Company of
Memphis, Memphis, Tennessee
10.38+ Industrial Building Lease Agreement dated June 1, 1971 and assigned
by The Argus Press, Inc. to Premier Graphics, Inc. as of September
26, 1997, by and between LaSalle National Bank as Trustee of Trust
#42560, as Lessor and Premier Graphics, Inc., as Lessee, Niles,
Illinois
10.39+ Lease Agreement dated May 1, 1995 by and between RFTA Associates,
LLC, a Georgia limited liability company, and Phoenix
Communications, Inc., Chamblee, Georgia
10.40+ Standard Industrial Lease Agreement dated October 17, 1994 by and
between RSH Properties, L.L.C., as Lessor and King Mailing Services,
Inc., as Lessee, Chamblee, Georgia
10.41+ Commercial Lease Agreement dated as of December 16, 1997 by and
between Wendell H. Burns and Premier Graphics, Inc., Chattanooga,
Tennessee
10.42+ Commercial Lease Agreement for Hederman Brothers, Inc.--Ridgeland,
Mississippi -- dated as of March 1, 1998 by and between Arrowhead
Real Estate, LLC and Premier Graphics, Inc.
10.43+ Standard Industrial Lease Agreement dated October 14, 1997 by and
between Fl Corp, as Lessor and Hederman Brothers, Inc, as Lessee,
Little Rock, Arkansas
10.44+ Commercial Lease Agreement dated March 1, 1998 by and between Phil
Phillips, Jr. and Premier Graphics, Inc., Springdale, Arkansas
10.45+ Commercial Lease Agreement dated January 8, 1998 by and between
Crescent Center Limited Partnership, as Lessor and Master Graphics,
Inc., as Lessee, Memphis, Tennessee
10.46+ Commercial Lease Agreement dated March 1, 1998 between Arrowhead
Real Estate, LLC and Premier Graphics, Inc.
10.47+ Loan Agreement by and between Sirrom Capital Corporation and Master
Graphics, Inc. and Premier Graphics, Inc. dated June 19, 1997
10.48+ Loan and Security Agreement by and between First American National
Bank and Master Graphics, Inc. and Premier Graphics, Inc. dated June
19, 1997
10.49+ Amended and Restated Loan and Security Agreement by and between
General Electric Capital Corporation and Premier Graphics, Inc.
dated December 16, 1997
10.50+ Noncompetition Agreement dated as of March 31, 1998 by and between
Master Graphics, Inc. and Michael G. Harper
10.51+ Bill of Sale dated December 31, 1997 between B & M Printing Company
and John P. Miller
10.52+ Promissory Note dated December 31, 1997 between John P. Miller and
Premier Graphics, Inc.
10.53+ Promissory Note dated December 10, 1992 between John P. Miller and B
& M Printing Company
10.54+ Noncompetition Agreement dated as of March 1, 1998 between Master
Graphics, Inc. and H. Henry Hederman
10.55+ Commercial Lease Agreement dated March 31, 1998 by and between
Michael G. and Lynn H. Harper and Harperprints, Inc.
11.1+ Statement re: computation of per share earnings
21.1+ List of subsidiaries
23.1** Consent of KPMG Peat Marwick LLP
23.2** Consent of Arthur Andersen LLP
23.3** Consent of Marlin & Edmondson, P.C.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION
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<C> <S>
23.4** Consent of Joseph Decosimo and Company
23.5** Consent of Thompson Dunavant PLC
23.6** Consent of S. F. Fiser & Company, P.A.
23.7** Consent of Becker & Company, P.C.
23.8** Consent of Baker, Donelson, Bearman & Caldwell, a professional
corporation (included in its opinion filed as Exhibit 5.1).
24.1+ Power of Attorney (included on signature page of Registration
Statement).
27.1+ Financial Data Schedule
</TABLE>
- --------
** Filed herewith
+ Previously filed
t
<PAGE>
Exhibit 1.1
MASTER GRAPHICS, INC.
(A TENNESSEE CORPORATION)
COMMON STOCK
FORM OF
UNDERWRITING AGREEMENT
DATED: JUNE ____, 1998
<PAGE>
MASTER GRAPHICS, INC.
FORM OF
UNDERWRITING AGREEMENT
June ___, 1998
MORGAN KEEGAN & COMPANY, INC.
SUNTRUST EQUITABLE SECURITIES CORPORATION
As Representatives of the Several
Underwriters Named in Schedule A hereto
c/o Morgan Keegan & Company, Inc.
50 Front Street
Memphis, Tennessee 38103
Dear Sirs:
Master Graphics, Inc., a Tennessee corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
underwriters named in Schedule A (collectively, the "Underwriters") an aggregate
----------
of 3,400,000 shares of common stock, $.001 par value per share (the "Common
Stock"), of the Company (the "Firm Company Shares") and Sirrom Capital
Corporation (the "Selling Shareholder") proposes, subject to the terms and
conditions stated herein, to sell to the Underwriters an aggregate of 200,000
shares of Common Stock (the "Selling Shareholder Shares" and, together with the
Firm Company Shares, the "Firm Shares"). The Firm Shares are to be sold to each
Underwriter, acting severally and not jointly, in such amounts as are set forth
in Schedule A opposite the name of such Underwriter.
----------
The Company also grants to the Underwriters the option described in Section
3 to purchase, on the same terms as the Firm Shares, up to 540,000 additional
shares of Common Stock (the "Option Shares") solely to cover over-allotments.
The Firm Shares, together with all or any part of the Option Shares, are
collectively herein called the "Shares."
Prior to the date hereof, the Company has acquired each of the companies set
forth in Schedule B (the "Acquired Companies"). Each of the Acquired Companies
----------
was merged with and into Premier Graphics, Inc., a wholly owned subsidiary of
the Company, except Harperprints, Inc. and Phillips Litho Co., Inc., with
respect to which the Company acquired 100% of the capital stock and which are
wholly-owned subsidiaries of Premier Graphics, Inc. ("Premier Graphics"), a
wholly owned subsidiary of the Company (collectively, the "Subsidiaries") and
except Sutherland Printing Company, Inc., with respect to which the Company
acquired certain assets and assumed certain liabilities.
Section 1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to and agrees with each of the Underwriters that:
A. A registration statement on Form S-1 (File No. 333-49861) with
respect to the Shares, including a preliminary form of prospectus subject to
<PAGE>
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "1933 Act"), and
the applicable rules and regulations (the "1933 Act Regulations") of the
Securities and Exchange Commission (the "Commission"), and has been filed
with the Commission; and such amendments to such registration statement as
may have been required prior to the date hereof have been filed with the
Commission, and such amendments have been similarly prepared. Copies of
such registration statement and amendment or amendments and of each related
preliminary prospectus, and the exhibits, financial statements and
schedules, as finally amended and revised, have been delivered to you. The
Company has prepared in the same manner, and proposes so to file with the
Commission, one of the following: (i) prior to effectiveness of such
registration statement, a further amendment thereto, including the form of
final prospectus, (ii) if the Company does not rely on Rule 434 of the 1933
Act, a final prospectus in accordance with Rules 430A and 424(b) of the 1933
Act Regulations or (iii) if the Company relies on Rule 434 of the 1933 Act,
a term sheet relating to the Shares that shall identify the preliminary
prospectus that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) of the 1933 Act. The Company also
may file a related registration statement with the Commission pursuant to
Rule 462(b) of the 1933 Act for the purpose of registering certain
additional shares of Common Stock, which registration statement will be
effective upon filing with the Commission. As filed, such amendment, any
registration statement filed pursuant to Rule 462(b) of the 1933 Act and any
term sheet and form of final prospectus, or such final prospectus, shall
include all Rule 430A Information (as defined below) and, except to the
extent that you shall agree in writing to a modification, shall be in all
respects in the form furnished to you prior to the date and time that this
Agreement was executed and delivered by the parties hereto, or, to the
extent not completed at such date and time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest preliminary prospectus) as the Company shall have previously advised
you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Time (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include all Rule 430A Information (as hereinafter defined)
contained in any Prospectus and any Term Sheet (as hereinafter defined) and
deemed to be included in such registration statement at the time such
registration statement becomes effective as provided by Rule 430A of the
1933 Act Regulations. The term "Preliminary Prospectus" shall mean any
preliminary prospectus referred to in the preceding paragraph and any
preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus"
as used in this Agreement shall mean (a) if the Company relies on Rule 434
of the 1933 Act, the Term Sheet relating to the Shares that is first filed
pursuant to Rule 424(b)(7) of the 1933 Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements or (b) if the
Company does not rely on Rule 434 of the 1933 Act, the prospectus relating
2
<PAGE>
to the Shares in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the 1933 Act Regulations or, if no filing
pursuant to Rule 424(b) of the 1933 Act Regulations is required, shall mean
the form of final prospectus included in the Registration Statement at the
time such Registration Statement becomes effective. The term "Rule 430A
Information" means information with respect to the Shares and the offering
thereof permitted pursuant to Rule 430A of the 1933 Act Regulations to be
omitted from the Registration Statement when it becomes effective. The term
"462(b) Registration Statement" means any registration statement filed with
the Commission pursuant to Rule 462(b) under the 1933 Act (including the
Registration Statement and any Preliminary Prospectus or Prospectus
incorporated therein at the time such registration statement becomes
effective). The term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 of the 1933 Act. Any reference to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
B. No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and no proceedings for that
purpose have been instituted or, to the knowledge of the Company, threatened
by the Commission or the state securities or blue sky authority of any
jurisdiction, and each Preliminary Prospectus and any amendment or
supplement thereto, at the time of filing thereof, conformed in all material
respects to the requirements of the 1933 Act and the 1933 Act Regulations,
and did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter expressly for use in the Registration Statement or any
462(b) Registration Statement.
C. When the Registration Statement and any 462(b) Registration
Statement shall become effective, or any Term Sheet that is part of the
Prospectus is filed with the Commission pursuant to Rule 434, when the
Prospectus is first filed pursuant to Rule 424(b) of the 1933 Act
Regulations, when any amendment to the Registration Statement or any 462(b)
Registration Statement becomes effective, and when any supplement to the
Prospectus or any Term Sheet is filed with the Commission and at the Closing
Time and Date of Delivery (as hereinafter defined), (i) the Registration
Statement, the 462(b) Registration Statement, the Prospectus, the Term Sheet
and any amendments thereof and supplements thereto will conform in all
material respects with the applicable requirements of the 1933 Act and the
1933 Act Regulations, and (ii) neither the Registration Statement, the
462(b) Registration Statement, the Prospectus, any Term Sheet nor any
amendment or supplement thereto will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to
any statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter expressly
for use in the Registration Statement or any 462(b) Registration Statement.
3
<PAGE>
D. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of Tennessee with
all requisite corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus. The Company is duly qualified to transact
business as a foreign corporation and is in good standing in each of the
jurisdictions in which the ownership or leasing of its properties or the
nature or conduct of its business as described in the Registration Statement
and the Prospectus requires such qualification, except where the failure to
do so would not have a material adverse effect on the condition (financial
or other), business, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole.
E. Each of the Subsidiaries has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state of
its incorporation with all requisite corporate power and authority to own,
lease and operate its properties and conduct its business as described in
the Registration Statement and the Prospectus. Each such entity is duly
qualified to do business and is in good standing as a foreign corporation in
each other jurisdiction in which the ownership or leasing of its properties
or the nature or conduct of its business as described in the Registration
Statement and the Prospectus conducted requires such qualification, except
where the failure to do so would not have a material adverse effect on the
condition (financial or other), business, properties, net worth or results
of operations of the Company and the Subsidiaries taken as a whole.
F. The Company has full corporate right, power and authority to enter
into this Agreement, to issue, sell and deliver the Firm Company Shares and
the Option Shares as provided herein and to consummate the transactions
contemplated herein. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of
the Company, enforceable in accordance with its terms, except to the extent
that enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other laws of general applicability relating to or
affecting creditors' rights, or by general principles of equity whether
considered at law or at equity and except to the extent enforcement of the
indemnification provisions set forth in Section 8 of this Agreement may be
limited by federal or state securities laws or the public policy underlying
such laws.
G. Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with any
governmental agency or body necessary for the valid authorization, issuance,
sale and delivery of the Shares, the execution, delivery and performance of
this Agreement and the consummation by the Company of the transactions
contemplated hereby has been made or obtained and is in full force and
effect, except as may be required under applicable state securities laws.
H. Neither the issuance, sale and delivery by the Company of the Firm
Company Shares and the Option Shares, nor the execution, delivery and
4
<PAGE>
performance of this Agreement, nor the consummation of the transactions
contemplated hereby will conflict with or result in a breach or violation of
any of the terms and provisions of, or (with or without the giving of notice
or the passage of time or both) constitute a default under the charter or
bylaws of the Company or the Subsidiaries, respectively, or under any
indenture, mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company or the Subsidiaries,
respectively, is a party or to which the Company or the Subsidiaries,
respectively, any of their respective properties or other assets is subject;
or any applicable statute, judgment, decree, order, rule or regulation of
any court or governmental agency or body applicable to any of the foregoing
or any of their respective properties; or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property or
asset of the Company or the Subsidiaries, respectively.
I. The Shares to be issued and sold to the Underwriters hereunder have
been validly authorized by the Company. When issued and delivered against
payment therefor as provided in this Agreement, the Shares will be duly and
validly issued, fully paid and nonassessable. No preemptive rights of
shareholders exist with respect to any of the Shares which have not been
satisfied or waived. No person or entity holds a right to require or
participate in the registration under the 1933 Act of the Shares pursuant to
the Registration Statement which has not been satisfied or waived, and,
except as set forth in the Prospectus, no person holds a right to require
registration under the 1933 Act of any shares of Common Stock of the Company
at any other time which has not been satisfied or waived.
J. The Company's authorized, issued and outstanding capital stock is
as disclosed in the Prospectus. All of the issued shares of capital stock
of the Company have been duly authorized and validly issued, are fully paid
and nonassessable and conform to the description of the Company's capital
stock contained in the Prospectus.
K. All of the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned directly by the Company or Premier Graphics,
as applicable, free and clear of all liens, security interests, pledges,
charges, encumbrances, defects, shareholders' agreements, voting trusts,
equities or claims of any nature whatsoever, except as disclosed in the
Prospectus. Other than the Subsidiaries, the Company does not own, directly
or indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, joint venture or
other association.
L. Except as disclosed in the Prospectus, there are no outstanding
(i) securities or obligations of the Company or any of its Subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
such Subsidiary, (ii) warrants, rights or options to subscribe for or
purchase from the Company or any such Subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (iii)
obligations of the Company or any such Subsidiary to issue any shares of
5
<PAGE>
capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options.
M. The Company and the Subsidiaries have good and marketable title in
fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except
such as are disclosed in the Prospectus or such as do not materially and
adversely interfere with the use made or proposed to be made of such
property by the Company and the Subsidiaries; and any real property and
buildings held under lease by the Company or any Subsidiary are held under
valid, existing and enforceable leases, with such exceptions as are
disclosed in the Prospectus or are not material and do not interfere with
the use made or proposed to be made of such property and buildings by the
Company or such Subsidiary.
N. The financial statements of the Company and those Acquired
Companies whose financial statements are included in the Registration
Statement and Prospectus present fairly the financial position of the
Company and such Acquired Companies as of the dates indicated and the
results of operations and cash flows for the Company and such Acquired
Companies for the periods specified, all, except with respect to the
Combined Financial Data, in conformity with generally accepted accounting
principles applied on a consistent basis. The financial statement schedules
included in the Registration Statement and the amounts in the Prospectus
under the captions "Prospectus Summary -- Summary Pro Forma Financial Data"
and "Selected Historical, Pro Forma and Combined Financial Data" fairly
present the information shown therein and have been compiled on a basis
consistent with the financial statements included in the Registration
Statement and the Prospectus. The unaudited pro forma condensed
consolidated financial data (including the related notes) included in the
Prospectus or any Preliminary Prospectus complies as to form in all material
respects to the applicable accounting requirements of the 1933 Act and the
1933 Act Regulations, and the Company believes that the assumptions
underlying the pro forma adjustments are reasonable. Such pro forma
adjustments have been properly applied to the historical amounts in the
compilation of the information and such information fairly presents with
respect to the Company and the Acquired Companies, the financial position,
results of operations and other information purported to be shown therein at
the respective dates and for the respective periods specified.
O. (i) KPMG Peat Marwick, LLP who have examined and are reporting
upon the audited financial statements of (A) Master Graphics, Inc. as of and
for the periods ended June 30, 1996 and 1997 and December 31, 1997 and (B)
Lithograph Printing Company of Memphis, Blackwell Lithographers, Inc., The
Argus Press, Inc., Jones Printing Company, Inc., Phoenix Communications,
Inc., and Hederman Brothers, Inc. included in the Registration Statement,
(ii) Thompson Dunavant, P.L.L.C. who have examined and are reporting upon
the audited financial statements of Master Graphics, Inc. as of and for the
period ended June 30, 1995 included in the Registration Statement, (iii)
Arthur Andersen & Co. LLP who have examined and are reporting on the audited
6
<PAGE>
financial statements of Phoenix Communications, Inc. included in the
Registration Statement, (iv) Marlin & Edmundson, P.C. who have examined and
are reporting on the audited financial statements of McQuiddy Printing
Company, Inc. included in the Registration Statement, (v) Joseph DeCosimo
and Company who have examined and are reporting on the financial statements
of Jones Printing Company, Inc., (vi) S. F. Fiser & Company who have
examined and are reporting on the financial statements of Phillips Litho
Co., Inc., and (vii) Becker & Company, P.C. who have examined and are
reporting on the financial statements of Harperprints, Inc., are, and were
during the periods covered by their reports included in the Registration
Statement and the Prospectus, independent public accountants within the
meaning of the 1933 Act and the 1933 Act Regulations.
P. None of the Company or the Subsidiaries has sustained, since
December 31, 1997 any material loss or interference with its business from
fire, explosion, flood, hurricane, accident or other calamity, whether or
not covered by insurance, or from any labor dispute or arbitrators' or court
or governmental action, order or decree; and, since the respective dates as
of which information is given in the Registration Statement and the
Prospectus, and except as otherwise stated in the Registration Statement and
Prospectus, there has not been (i) any material change in the capital stock,
long-term debt, obligations under capital leases or short-term borrowings of
the Company or the Subsidiaries, or (ii) any material adverse change, or any
development which could reasonably be seen as involving a prospective
material adverse change, in or affecting the business, prospects,
properties, assets, results of operations or condition (financial or other)
of the Company and the Subsidiaries taken as a whole.
Q. Neither the Company nor either of the Subsidiaries is in violation
of its respective charter, or by-laws, and no default exists, and no event
has occurred, nor state of facts exists, which, with notice or after the
lapse of time to cure or both, would constitute a default in the due
performance and observance of any obligation, agreement, term, covenant,
consideration or condition contained in any indenture, mortgage, deed of
trust, loan agreement, note, lease or other agreement or instrument to which
any such entity is a party or to which any such entity or any of its
properties is subject. None of the Company or the Subsidiaries is in
violation of, or in default with respect to, any statute, rule, regulation,
order, judgment or decree, except as may be properly described in the
Prospectus or such as in the aggregate do not now have and will not in the
future have a material adverse effect on the financial position, results of
operations or business of the Company and the Subsidiaries taken as a whole.
R. There is not pending or, to the knowledge of the Company,
threatened, any action, suit, proceeding, inquiry or investigation against
the Company, the Subsidiaries or any of their respective officers and
directors or to which the properties, assets or rights of any such entity
are subject, before or brought by any court or governmental agency or body
or board of arbitrators that are required to be described in the
Registration Statement or the Prospectus but are not described as required.
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S. The descriptions in the Registration Statement and the Prospectus
of the contracts, leases and other legal documents therein described present
fairly the information required to be shown, and there are no contracts,
leases, or other documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required.
T. The Company and each of the Subsidiaries owns, possesses or has
obtained all material permits, licenses, franchises, certificates, consents,
orders, approvals and other authorizations of governmental or regulatory
authorities or other entities as are necessary to own or lease, as the case
may be, and to operate its respective properties and to carry on its
respective business as presently conducted, or as contemplated in the
Prospectus to be conducted, and the Company has not received any notice of
proceedings relating to revocation or modification of any such licenses,
permits, franchises, certificates, consents, orders, approvals or
authorizations.
U. The Company and each of the Subsidiaries owns or possesses
adequate license or other rights to use all patents, trademarks, service
marks, trade names, copyrights, software and design licenses, trade secrets,
manufacturing processes, other intangible property rights and know-how
(collectively "Intangibles") necessary to entitle the Company and the
Subsidiaries, to conduct their respective businesses as described in the
Prospectus, and neither the Company nor either of the Subsidiaries has
received notice of infringement of or conflict with (and knows of no such
infringement of or conflict with) asserted rights of others with respect to
any Intangibles which could materially and adversely affect the business,
prospects, properties, assets, results of operations or condition (financial
or otherwise) of the Company and the Subsidiaries taken as a whole.
V. The Company's and the Subsidiaries' respective systems of internal
accounting controls taken as a whole is sufficient to meet the broad
objectives of internal accounting control insofar as those objectives
pertain to the prevention or detection of errors or irregularities in
amounts that would be material in relation to the Company's or the
Subsidiaries' financial statements; and, none of the Company, the
Subsidiaries, or, to the knowledge of the Company, any employee or agent
thereof, has made any payment of funds of the Company or the Subsidiaries,
or received or retained any funds and no funds of the Company or the
Subsidiaries, have been set aside to be used for any payment, in each case
in violation of any law, rule or regulation.
W. Each of the Company and the Acquired Companies has filed on a
timely basis all necessary federal, state, local and foreign income and
franchise tax returns required to be filed through the date hereof and have
paid all taxes shown as due thereon; and no tax deficiency has been asserted
against any such entity or the Company with respect to another such entity,
nor does the Company or any such entity know of any tax deficiency which is
likely to be asserted against the Company or any other such entity which if
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determined adversely to any such entity, could materially adversely affect
the business, prospects, properties, assets, results of operations or
condition (financial or otherwise) of the Company and the Subsidiaries taken
as a whole. All tax liabilities are adequately provided for on the
respective books of such entities.
X. Each of the Company and its Subsidiaries maintains insurance
(issued by insurers of recognized financial responsibility) of the types and
in the amounts generally deemed adequate for their respective businesses
and, consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering real
and personal property owned or leased by the Company and its Subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect.
Y. Each of the Company, the Subsidiaries, and, to the knowledge of
the Company, their officers, directors or affiliates has not taken and will
not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in or constitute the
stabilization or manipulation of any security of the Company or to
facilitate the sale or resale of the Shares.
Z. The Company is not, will not become as a result of the
transactions contemplated hereby, or will not conduct its respective
businesses in a manner in which the Company would become, "an investment
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.
Section 2. Representations and Warranties of the Selling Shareholder. The
---------------------------------------------------------
Selling Shareholder represents and warrants to, and agrees with, each of the
several Underwriters and the Company that:
A. The Selling Shareholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement
(as hereinafter defined) and to sell, assign, transfer and deliver to the
Underwriters the Shares to be sold by the Selling Shareholder hereunder; and
the execution and delivery of this Agreement, the Power of Attorney and the
Custody Agreement have been duly authorized by all necessary action of the
Selling Shareholder.
B. The Selling Shareholder has duly executed and delivered this
Agreement, the Power of Attorney and the Custody Agreement, and each
constitutes the valid and binding agreement of the Selling Shareholder
enforceable against the Selling Shareholder in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting
the enforcement of creditors' rights generally and to general equitable
principles and except to the extent enforcement of the indemnification
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<PAGE>
provisions set forth in Section 8 of this Agreement may be limited by
federal or state securities laws or public policy underlying such laws.
C. No consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or
governmental agency or body is required for the sale of the Shares to be
sold by the Selling Shareholder or the consummation of the transactions
contemplated by this Agreement, the Power of Attorney or the Custody
Agreement, except the registration of such Shares under the 1933 Act (which,
if the Registration Statement is not effective as of the time of execution
hereof, shall be obtained as provided in this Agreement) and such as may be
required under state securities or blue sky laws in connection with the
offer, sale and distribution of such Shares by the Underwriters.
D. The sale of the Shares to be sold by such Selling Shareholder and
the performance of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with, or (with or without the giving of
notice or the passage of time or both) result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement
or instrument to which the Selling Shareholder is a party or to which any of
its properties or assets is subject, nor will such action conflict with or
violate any provision of the charter or bylaws or other governing
instruments of the Selling Shareholder, if any, or any statute, rule or
regulation or any order, judgment or decree of any court or governmental
agency or body having jurisdiction over the Selling Shareholder or any of
the Selling Shareholder's properties or assets.
E. At the Closing Time (as defined in Section 3 hereof), the Selling
Shareholder will have good and valid title to the Selling Shareholder Shares
free and clear of all liens, security interests, pledges, charges,
encumbrances, defects, shareholders' agreements, voting trusts and claims of
any nature whatsoever; and, upon delivery of such Selling Shareholder Shares
against payment therefor as provided herein, good and valid title to such
Selling Shareholder Shares, free and clear of all liens, security interests,
pledges, charges, encumbrances, defects, shareholders' agreements, voting
trusts, equities or claims of any nature whatsoever, will pass to the
several Underwriters.
F. The Selling Shareholder has not (i) taken, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
the Shares or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased or paid anyone any compensation for soliciting purchases
of, the Shares or (B) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company.
G. When any Preliminary Prospectus was filed with the Commission (i)
it contained all statements required to be stated therein regarding the
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Selling Shareholder in accordance with, and complied in all material
respects regarding the Selling Shareholder with the requirements of, the
1933 Act and the rules and regulations of the Commission thereunder, and
(ii) such statements in the Preliminary Prospectus as are made in reliance
upon and in conformity with written information furnished to the Company by
the Selling Shareholder for use therein did not include any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. When the Registration Statement or any
amendment thereto or any 462(b) Registration Statement or any amendment
thereto was or is declared effective and at the Closing Time or the Date of
Delivery, as the case may be, (i) it contained or will contain all
statements required to be stated therein regarding the Selling Shareholder
in accordance with, and complied or will comply in all material respects
regarding the Selling Shareholders with the requirements of, the 1933 Act
and the rules and regulations of the Commission thereunder and (ii) such
statements in the Registration Statement, any 462(b) Registration Statement
or any amendment thereto as are made in reliance upon and in conformity with
written information furnished to the Company by the Selling Shareholder
specifically for use therein did not or will not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading. When the Prospectus or any
amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective), and at the Closing Time or the Date of Delivery, as the
case may be, (i) the Prospectus, as amended or supplemented at any such
time, contained or will contain all statements required to be stated therein
regarding the Selling Shareholder in accordance with, and complied or will
comply in all material respects regarding the Selling Shareholder with the
requirements of, the 1933 Act and the rules and regulations of the
Commission thereunder and (ii) such statements in the Prospectus, as amended
or supplemented at any such time, as are made in reliance upon and in
conformity with written information furnished to the Company by the Selling
Shareholder specifically for use therein did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Internal Revenue Code of 1986, as amended, with
respect to the transactions herein contemplated, the Selling Shareholder agrees
to deliver to you prior to or at the Closing Time (as hereinafter defined) a
properly completed and executed United States Treasury Department form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
The Selling Shareholder represents and warrants that the certificates in
negotiable form representing the Selling Shareholder Shares have been placed in
custody under a custody agreement (the "Custody Agreement"), in the form
heretofore furnished to and approved by you, duly executed and delivered by such
Selling Shareholder to Union Planters Bank, N.A. as custodian (the "Custodian"),
and that such Selling
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Shareholder has duly executed and delivered a power of attorney (the "Power of
Attorney"), in the form heretofore furnished to and approved by you, appointing
Lance T. Fair and John P. Miller as such Selling Shareholder's attorneys-in-fact
(the "Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Shareholder, to determine the purchase price to be
paid by the Underwriters to the Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Shares to be sold by such Selling
Shareholder hereunder and otherwise to act on behalf of such Selling Shareholder
in connection with the transactions contemplated by this Agreement and the
Custody Agreement.
The Selling Shareholder specifically agrees that the Shares represented by
the certificates held in custody for the Selling Shareholder under the Custody
Agreement are subject to the interests of the Underwriters hereunder, and that
the arrangements made by such Selling Shareholder for such custody, and the
appointment by the Selling Shareholder of the Attorneys-in-Fact by the Power of
Attorney, are irrevocable. The Selling Shareholder specifically agrees that the
obligations of the Selling Shareholder hereunder shall not be terminated by
operation of law, whether by the dissolution of the Selling Shareholder, or by
the occurrence of any other event.
Section 3. Sale and Delivery of the Shares to the Underwriters; Closing.
------------------------------------------------------------
A. On the basis of the representations and warranties herein
contained, and subject to the terms and conditions herein set forth, the
Company agrees to issue and sell to each of the Underwriters the Firm
Company Shares, and the Selling Shareholder agrees to sell to each of the
Underwriters the Selling Shareholder Shares and each Underwriter agrees,
severally and not jointly, to purchase from the Company and the Selling
Shareholder the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule A (the proportion which each Underwriter's share of
----------
the total number of the Firm Shares bears to the total number of Firm Shares
is hereinafter referred to as such Underwriter's "underwriting obligation
proportion"), at a purchase price of $__________ per share.
B. In addition, on the basis of the representations and warranties
herein contained, and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the Underwriters to purchase up to an
additional 540,000 Option Shares at the same purchase price as shall be
applicable to the Firm Shares. The option hereby granted will expire if not
exercised within the thirty (30) day period after the date of the Prospectus
by giving written notice to the Company. The option granted hereby may be
exercised in whole or in part (but not more than once), only for the purpose
of covering over-allotments that may be made in connection with the offering
and distribution of the Firm Shares. The notice of exercise shall set forth
the number of Option Shares as to which the several Underwriters are
exercising the option, and the time and date of payment and delivery
thereof. Such time and date of delivery (the "Date of Delivery") shall be
determined by you but shall not be later than three full business days after
the exercise of such option, nor in any event prior to the Closing Time. If
the option is exercised as to all or any portion of the Option Shares, the
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<PAGE>
Option Shares as to which the option is exercised shall be purchased by the
Underwriters, severally and not jointly, in their respective underwriting
obligation proportions.
C. Payment of the purchase price for and delivery of certificates in
definitive form representing the Firm Shares shall be made at the offices of
Morgan Keegan & Company, Inc., 50 Front Street, Memphis, Tennessee 38103 or
at such other place as shall be agreed upon by the Company and you, at 10:00
a.m., either (i) on the third full business day after the execution of this
Agreement, or (ii) at such other time not more than ten full business days
thereafter as you and the Company shall determine (unless, in either case,
postponed pursuant to the term hereof), (such date and time of payment and
delivery being herein called the "Closing Time"). In addition, in the event
that any or all of the Option Shares are purchased by the Underwriters,
payment of the purchase price for and delivery of certificates in definitive
form representing the Option Shares shall be made at the offices of Morgan
Keegan & Company, Inc. in the manner set forth above, or at such other place
as the Company and you shall determine, on the Date of Delivery as specified
in the notice from you to the Company. Payment for the Firm Shares and the
Option Shares shall be made to the Company and the Selling Shareholder by
wire transfer in same-day funds to the accounts designated to the
Underwriters in writing by the Company, respectively, and the Selling
Shareholder against delivery to you for the respective accounts of the
Underwriters of the Shares to be purchased by them.
D. The certificates representing the Shares to be purchased by the
Underwriters shall be in such denominations and registered in such names as
you may request in writing at least two full business days before the
Closing Time or the Date of Delivery, as the case may be. The certificates
representing the Shares will be made available at the offices of Morgan
Keegan & Company, Inc. or at such other place as Morgan Keegan & Company,
Inc. may designate for examination and packaging not later than 10:00 a.m.
at least one full business day prior to the Closing Time or the Date of
Delivery as the case may be.
E. After the Registration Statement becomes effective, you intend to
offer the Shares to the public as set forth in the Prospectus, but after the
initial public offering of such Shares you may in your discretion vary the
public offering price.
Section 4. Certain Covenants of the Company. The Company covenants and
--------------------------------
agrees with each Underwriter as follows:
A. The Company will use its best efforts to cause the Registration
Statement to become effective (if not yet effective at the date and time
that this Agreement is executed and delivered by the parties hereto). If the
Company elects to rely upon Rule 430A of the 1933 Act Regulations or the
filing of the Prospectus is otherwise required under Rule 424(b) of the 1933
Act Regulations, the Company will comply with the requirements of Rule 430A
and will file the Prospectus, properly completed, pursuant to the applicable
provisions of Rule 424(b), or a Term Sheet pursuant to and in accordance
with Rule 434, within the time period prescribed. If the Company elects to
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<PAGE>
rely upon Rule 462(b), the Company shall file a 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m.,
Washington, D.C. time on the date of this Agreement, and the Company shall
at the time of filing either pay to the Commission the filing fee for the
Rule 462(b) Registration Statement or give irrevocable instructions for the
payment of such fee. The Company will notify you immediately, and confirm
the notice in writing, (i) when the Registration Statement, 462(b)
Registration Statement or any post-effective amendment to the Registration
Statement, shall have become effective, or any supplement to the Prospectus
or any amended Prospectus shall have been filed, (ii) of the receipt of any
comments from the Commission, (iii) of any request by the Commission to
amend the Registration Statement or 462(b) Registration Statement or amend
or supplement the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or any 462(b) Registration Statement or of any
order preventing or suspending the use of any Preliminary Prospectus or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceeding for any
such purposes. The Company will use every reasonable effort to prevent the
issuance of any such stop order or of any order preventing or suspending
such use and, if any such order is issued, to obtain the withdrawal thereof
at the earliest possible moment.
B. The Company will not at any time file or make any amendment to the
Registration Statement, or any amendment or supplement (i) to the
Prospectus, if the Company has not elected to rely upon Rule 430A, (ii) if
the Company has elected to rely upon Rule 430A, to either the Prospectus
included in the Registration Statement at the time it becomes effective or
to the Prospectus filed in accordance with Rule 424(b) or any Term Sheet
filed in accordance with Rule 434, or (iii) if the Company has elected to
rely upon Rule 462(b), to any 462(b) Registration Statement in any case if
you shall not have previously been advised and furnished a copy thereof a
reasonable time prior to the proposed filing, or if you or counsel for the
Underwriters shall reasonably object to such amendment or supplement.
C. The Company has furnished or will furnish to you, at its expense,
as soon as available, three copies of the Registration Statement as
originally filed and of all amendments thereto, whether filed before or
after the Registration Statement becomes effective, copies of all exhibits
and documents filed therewith and signed copies of all consents and
certificates of experts, as you may reasonably request, and has furnished or
will furnish to each Underwriter, one conformed copy of the Registration
Statement as originally filed and of each amendment thereto.
D. The Company will deliver to each Underwriter, at the Company's
expense, from time to time, as many copies of each Preliminary Prospectus as
such Underwriter may reasonably request, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company
will deliver to each Underwriter, at the Company's expense, as soon as the
Registration Statement shall have become effective and thereafter from time
to time as requested during the period when the Prospectus is required to be
14
<PAGE>
delivered under the 1933 Act, such number of copies of the Prospectus (as
supplemented or amended) as each Underwriter may reasonably request. The
Company will comply to the best of its ability with the 1933 Act and the
1933 Act Regulations so as to permit the completion of the distribution of
the Shares as contemplated in this Agreement and in the Prospectus. If the
delivery of a prospectus is required at any time prior to the expiration of
nine months after the time of issue of the Prospectus or any Term Sheet in
connection with the offering or sale of the Shares and if at such time any
events shall have occurred as a result of which the Prospectus or any Term
Sheet as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made when such Prospectus or any Term Sheet is delivered not misleading, or,
if for any reason it shall be necessary during such same period to amend or
supplement the Prospectus or any Term Sheet in order to comply with the 1933
Act or the 1933 Act Regulations, the Company will notify you and upon your
request prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as you may from time to time reasonably
request of an amended Prospectus or any Term Sheet or a supplement to the
Prospectus or any Term Sheet or an amendment or supplement to any such
incorporated document which will correct such statement or omission or
effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus or any Term Sheet,
upon your request but at the expense of such Underwriter, the Company will
prepare and deliver to such Underwriter as many copies as you may request of
an amended or supplemented Prospectus or any Term Sheet complying with
Section 10(a)(3) of the 1933 Act.
E. The Company will use its best efforts to qualify the Shares for
offering and sale under the applicable securities laws of such states and
other jurisdictions as you may designate and to maintain such qualifications
in effect for as long as may be necessary to complete the distribution of
the Shares; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to make
any undertakings in respect of doing business in any jurisdiction in which
it is not otherwise so subject. The Company will file such statements and
reports as may be required by the laws of each jurisdiction in which the
Shares have been qualified as above provided.
F. The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the end of the
fiscal quarter first occurring after the first anniversary of the "effective
date of the Registration Statement" (as defined in Rule 158(c) of the 1933
Act Regulations), an earnings statement (in reasonable detail but which need
not be audited) complying with the provisions of Section 11(a) of the 1933
Act and Rule 158 thereunder and covering a period of at least 12 months
beginning after the effective date of the Registration Statement.
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<PAGE>
G. The Company will use the net proceeds received by it from the sale
of the Shares in the manner specified in the Prospectus under the caption
"Use of Proceeds."
H. The Company will furnish to its securityholders, as soon as
practicable after the end of each respective period, annual reports
(including financial statements audited by independent public accountants)
and unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year. During a period of five years after the date
hereof, the Company will furnish to you: (i) concurrently with furnishing
such reports to its securityholders, statements of operations of the Company
for each of the first three quarters in the form furnished to the Company's
securityholders; (ii) concurrently with furnishing to its securityholders, a
balance sheet of the Company as of the end of such fiscal year, together
with statements of operations, of cash flows and of securityholders' equity
of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent public accountants; (iii) as
soon as they are available, copies of all reports (financial or otherwise)
mailed to securityholders; (iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission,
any securities exchange or the National Association of Securities Dealers,
Inc. (the "NASD"); (v) every material press release in respect of the
Company or its affairs which is released by the Company; and (vi) any
additional information of a public nature concerning the Company or its
business that you may reasonably request. During such five-year period, the
foregoing financial statements shall be on a consolidated basis to the
extent that the accounts of the Company are consolidated with any
subsidiaries, and shall be accompanied by similar financial statements for
any significant subsidiary that is not so consolidated.
I. During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, the
Company will not, without the prior written consent of Morgan Keegan &
Company, Inc., offer, pledge, issue, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, or announce any offer,
pledge, sale, grant of any option to purchase or other disposition, directly
or indirectly, any shares of Common Stock or securities convertible into,
exercisable or exchangeable for, shares of Common Stock, except (i) as
provided in Section 3 of this Agreement; (ii) issuances by the Company of
unregistered Common Stock in connection with the acquisition of printing
companies; (iii) issuances by the Company of Common Stock pursuant to the
exercise of stock purchase warrants or options outstanding on the date of
the Prospectus; or (iv) issuances or registration of options or other rights
granted under the Company's 1998 Equity Compensation Plan or the Company's
1998 Non-Employee Director Stock Option Plan.
J. The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be
the same entity as the transfer agent) for its Common Stock.
K. The Company will use its best efforts to cause the Shares to be
listed, subject to notice of issuance, on the Nasdaq Stock Market's National
16
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Market (the "Nasdaq Stock Market") and will use its best efforts to maintain
the listing of the Shares on the Nasdaq Stock Market.
L. The Company has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner so as to ensure that the
Company was not and will not be an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
M. The Company will not, and will use its best efforts to cause its
officers, directors and affiliates not to, (i) take, directly or indirectly
prior to termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of any
security of the Company, or which may cause or result in, or which might in
the future reasonably be expected to cause or result in, the stabilization
or manipulation of the price of any security of the Company, to facilitate
the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay
anyone any compensation for soliciting purchases of the Shares or (iii) pay
or agree to pay to any person any compensation for soliciting any order to
purchase any other securities of the Company.
N. If at any time during the 30-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus) and after
written notice from you advising the Company to the effect set forth above,
the Company agrees to forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
O. The Company will file timely and accurate information with the
Commission in accordance with Rule 463 of the Commission under the 1933 Act
or any successor provision.
Section 5. Covenants of the Selling Shareholder. The Selling Shareholder
------------------------------------
covenants and agrees with each of the Underwriters:
A. During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, the
Selling Shareholder will not, without the prior written consent of Morgan
Keegan & Company, Inc., offer, pledge, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, (or announce any offer,
pledge, sale, grant of an option to purchase or other disposition, directly
or indirectly) any shares of Common Stock or securities convertible into,
exercisable or exchangeable for, shares of Common Stock, except as provided
in Section 3 of this Agreement.
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B. The Selling Shareholder will not (i) take, directly or indirectly,
prior to the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
any of the Shares, (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of, the Shares or (iii) pay to or
agree to pay any person any compensation for soliciting another to purchase
any other securities of the Company.
Section 6. Payment of Expenses. The Company and the Selling Shareholder
-------------------
will pay and bear all costs, fees and expenses incident to the performance of
their respective obligations under this Agreement pro rata based on the number
of shares to be sold by the Company and the Selling Shareholder hereunder
(excluding fees and expenses of counsel for the Underwriters, except as
specifically set forth in this Agreement), including (a) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), as originally filed and as amended, the Preliminary
Prospectuses, the Prospectus and any Term Sheet and any amendments or
supplements thereto, and the cost of furnishing copies thereof to the
Underwriters, (b) the preparation, printing and distribution of this Agreement,
the certificates representing the Shares and any instruments relating to any of
the foregoing, (c) the issuance and delivery of the Shares to the Underwriters,
including any transfer taxes payable upon the sale of the Shares to the
Underwriters (other than transfer taxes on resales by the Underwriters), (d) the
fees and disbursements of the Company's counsel and accountants, (e) the
qualification of the Shares under the applicable securities laws in accordance
with the terms of this Agreement, including filing fees and fees and
disbursements of counsel for the Underwriters in connection therewith, (f) all
costs, fees and expenses in connection with the notification to the Nasdaq Stock
Market of the proposed issuance of the Shares, (g) filing fees relating to the
review of the offering by the NASD, (h) the transfer agent's and registrar's
fees and all miscellaneous expenses referred to in Part II of the Registration
Statement, (i) costs related to travel and lodging incurred by the Company and
its representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by the Underwriters to be
necessary or desirable to effect the sale of the Shares to the public, and (j)
all other costs and expenses incident to the performance of their respective
obligations hereunder (including costs incurred in closing the purchase of the
Option Shares, if any) that are not otherwise specifically provided for in this
section. In addition, the Selling Shareholder will pay all costs and expenses
incident to (i) the fees, disbursements and expenses of its counsel; (ii) the
fees and expenses of the Attorneys-in-Fact and the Custodian; and (iii) the sale
and delivery of the Shares to be sold by it to the Underwriters hereunder. The
Company, upon your request, will provide funds in advance for filing fees in
connection with "blue sky" qualifications.
Section 7. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the Underwriters to purchase and pay for (i) the Firm Shares that they have
respectively agreed to purchase pursuant to this Agreement (and any Option
Shares as to which the option granted in Section 3 has been exercised and the
Date of Delivery determined by you is the same as the Closing Time) at the
Closing Time and (ii) the Option Shares at the Date of Delivery of the Option
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Shares, are subject to the accuracy of the representations and warranties of the
Company and the Selling Shareholder contained herein as of the Closing Time or
the Date of Delivery, as the case may be, and to the accuracy of the
representations and warranties of the Company and the Selling Shareholder
contained in certificates of any officer of the Company and the Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company and the Selling Shareholder of their respective obligations
hereunder, and to the following further conditions:
A. The Registration Statement shall have become effective not later
than 5:30 p.m. on the date of this Agreement or, with your consent, at a
later time and date not later, however, than 5:30 p.m. on the first business
day following the date hereof, or at such later time or on such later date
as you may agree to in writing; if the Company has elected to rely upon Rule
462(b), the 462(b) Registration Statement shall have become effective by
10:00 p.m., Washington, D.C. time, on the date of this Agreement; and at the
Closing Time no stop order suspending the effectiveness of the Registration
Statement or any 462(b) Registration Statement shall have been issued under
the 1933 Act and no proceedings for that purpose shall have been instituted
or shall be pending or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
satisfaction of counsel for the Underwriters. If the Company has elected to
rely upon Rule 430A, a Prospectus or a Term Sheet containing the Rule 430A
Information shall have been filed with the Commission in accordance with
Rule 424(b) (or a post-effective amendment providing such information shall
have been filed and declared effective in accordance with the requirements
of Rule 430A).
B. At the Closing Time, you shall have received a favorable opinion
of Baker, Donelson, Bearman & Caldwell, counsel for the Company, dated as of
the Closing Time, together with signed or reproduced copies of such opinion
for each of the other Underwriters, in form and substance satisfactory to
counsel for the Underwriters, to the effect that:
1. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Tennessee with the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus. The Company is qualified
or registered to transact business as a foreign corporation and is in
good standing as a foreign corporation in each of the jurisdictions in
which the ownership or leasing of the Company's properties or the
nature or conduct of its business requires such qualification, except
where the failure to do so would not have a material adverse effect on
the condition (financial or other), business, properties, net worth or
results of operations of the Company and the Subsidiaries taken as a
whole.
2. Each of the Subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
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the state of its incorporation. Each such entity has all requisite
corporate power and authority to own, lease and operate its properties
and conduct its business as described in the Registration Statement
and the Prospectus. Each such entity is duly qualified to do business
and is in good standing as a foreign corporation in each other
jurisdiction in which the ownership or leasing of its properties or
the nature or conduct of its business requires such qualification,
except where the failure to do so would not have a material adverse
effect on the condition (financial or other), business, properties,
net worth or results of operations of the Company and the Subsidiaries
taken as a whole.
3. The Company has the corporate power and authority to enter
into this Agreement, to issue, sell and deliver the Shares as provided
herein and to consummate the transactions contemplated herein. This
Agreement has been duly authorized, executed and delivered by the
Company and, assuming due authorization, execution and delivery by the
other parties thereto, constitutes a valid and binding agreement of
the Company, enforceable in accordance with its terms, except to the
extent enforceability may be limited by bankruptcy, insolvency,
moratorium, reorganization or other laws affecting creditors' rights
or by general principles of equity whether considered at law or in
equity and except to the extent that enforcement of the
indemnification provisions set forth in Section 8 of this Agreement
may be limited by federal or state securities laws or the public
policy underlying such laws.
4. Each consent, approval, authorization, order, license,
certificate, permit, registration, designation or filing by or with
any governmental agency or body necessary for the valid authorization,
issuance, sale and delivery of the Firm Company Shares and Option
Shares, the execution, delivery and performance of this Agreement and
the consummation by the Company of the transactions contemplated
hereby, has been made or obtained and is in full force and effect,
except such as may be necessary under state securities laws or
required by the NASD in connection with the purchase and distribution
of the Shares by the Underwriters, as to which such counsel need
express no opinion.
5. Neither the issuance, sale and delivery by the Company of the
Firm Company Shares and Option Shares, nor the execution, delivery and
performance of this Agreement, nor the consummation of the
transactions contemplated hereby by the Company will conflict with or
result in a breach or violation of any of the terms and provisions of,
or (with or without the giving of notice or the passage of time or
both) constitute a default under, the charter or by-laws of the
Company or the Subsidiaries, respectively, or, under any indenture,
mortgage, deed of trust, loan agreement, note, lease or other
agreement or instrument to which the Company or the Subsidiaries,
respectively, is a party or to which the Company or Subsidiaries,
respectively, any of their respective properties or other assets, is
20
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subject; or, to such counsel's knowledge, any applicable statute,
judgment, decree, order, rule or regulation of any court or
governmental agency or body; or to such counsel's knowledge, result in
the creation or imposition of any lien, charge, claim or encumbrance
upon any property or asset of the Company or the Subsidiaries,
respectively.
6. The Common Stock conforms in all material respects as to
legal matters to the description thereof contained in the Registration
Statement and the Prospectus under the heading "Description of Capital
Stock."
7. The Shares to be issued and sold to the Underwriters hereunder
have been validly authorized by the Company. When issued and delivered
against payment therefor as provided in this Agreement, the Shares
will be validly issued, fully paid and nonassessable. To such
counsel's knowledge, no preemptive rights of shareholders exist with
respect to any of the Shares which have not been satisfied or waived.
To such counsel's knowledge, no person or entity holds a right to
require or participate in the registration under the 1933 Act of the
Shares pursuant to the Registration Statement which has not been
satisfied or waived, and, except as set forth in the Prospectus, no
person holds a right to require registration under the 1933 Act of any
shares of Common Stock at any other time which has not been satisfied
or waived. The form of certificates evidencing the Shares complies
with all applicable requirements of Tennessee law.
8. The Company has an authorized capitalization as set forth in
the Prospectus under the caption "Capitalization." All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable. None of the issued
shares of capital stock of the Company has been issued or is owned or
held in violation of any preemptive rights of shareholders. All
offers and sales of the Company's capital stock prior to the date
hereof were at all relevant times duly registered under the 1933 Act
or were exempt from the registration requirements of the 1933 Act by
reason of Sections 3(b), 4(2) or 4(6) thereof and, solely with respect
to offers and sales of the Company's securities to residents of
Tennessee and Mississippi, were duly registered or the subject of an
available exemption from the registration requirements of the
applicable state securities or blue sky laws, provided, however, that
such counsel need not express any opinion with respect to the
registration or availability of an exemption under applicable state
securities or blue sky laws for shares of Common Stock issued pursuant
to an underwritten public offering.
9. All of the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned directly by the Company free and
clear of all liens, security interests, pledges, charges,
encumbrances, defects, shareholders' agreements, voting trusts,
21
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equities or claims of any nature whatsoever. Other than the
Subsidiaries, the Company does not own, directly or indirectly, any
capital stock or other equity securities of any other corporation or
any ownership interest in any partnership, joint venture or other
association.
10. Except as disclosed in the Prospectus, there are no
outstanding (i) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such Subsidiary, (ii) warrants, rights or options
to subscribe for or purchase from the Company or any such Subsidiary
any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company or any
such Subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligation, or any such
warrants, rights or options.
11. To such counsel's knowledge, the Company and the
Subsidiaries have good and marketable title in fee simple to all real
property, if any, and good title to all personal property owned by
them, in each case free and clear of all liens, security interests,
pledges, charges, encumbrances, mortgages and defects, except such as
are disclosed in the Prospectus or such as do not materially and
adversely affect the value of such property and do not interfere with
the use made or proposed to be made of such property by the Company
and the Subsidiaries; and any real property and buildings held under
lease by the Company or any Subsidiary are held under valid, existing
and enforceable leases, with such exceptions as are disclosed in the
Prospectus or are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company
or such Subsidiary.
12. Neither the Company nor any of the Subsidiaries is in
violation of its respective charter or by-laws, and to such counsel's
knowledge no material default exists, and no event has occurred nor
state of facts exist which, with notice or after the lapse of time to
cure or both, would constitute a material default in the due
performance and observance of any obligation, agreement, term,
covenant, or condition contained in any indenture, mortgage, deed of
trust, loan agreement, note, lease or other agreement or instrument to
which any such entity is a party or to which any such entity or any of
its properties is subject.
13. To such counsel's knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation
against the Company, the Subsidiaries or any of their respective
officers and directors or to which the properties, assets or rights of
any such entity are subject, before or brought by any court or
governmental agency or body or board of arbitrators, that are required
to be described in the Registration Statement or the Prospectus but
are not described as required.
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14. The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein
described present fairly the information required to be shown and
there are no contracts, leases or other documents known to such
counsel of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required.
15. The Common Stock has been approved for quotation on the
Nasdaq Stock Market upon official notification of issuance.
16. The Registration Statement and any 462(b) Registration
Statement have become effective under the 1933 Act and, to the
knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement or any 462(b) Registration Statement has
been issued and no proceeding for that purpose has been instituted or
is pending or contemplated under the 1933 Act. Other than financial
statements and other financial and operating data and schedules
contained therein, as to which counsel need express no opinion, the
Registration Statement, any 462(b) Registration Statement, all
Preliminary Prospectuses, the Prospectus and any amendment or
supplement thereto, appear on their face to conform as to form in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations.
17. The Company is not, or solely as a result of the
consummation of the transactions contemplated hereby will not become,
an "investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as
amended.
18. The descriptions in the Prospectus of statutes, regulations,
legal or governmental proceedings are accurate and present fairly a
summary of the information required to be shown under the 1933 Act and
the 1933 Act Regulations. The information in the Prospectus under the
caption "Shares Available for Future Sale" to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by
such counsel, is correct in all material respects and presents fairly
the information required to be disclosed therein under the 1933 Act
and the 1933 Act Regulations.
Such counsel also shall state that they have no reason to believe that
the Registration Statement, any 462(b) Registration Statement or any further
amendment thereto made prior to the Closing Time or the Date of Delivery, as
the case may be, on its effective date and as of the Closing Time or the
Date of Delivery, as the case may be, contained or contains any untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus, or any amendment or supplement
thereto made prior to the Closing Time or the Date of Delivery, as the case
23
<PAGE>
may be, as of its issue date and as of the Closing Time or the Date of
Delivery, as the case may be, contained or contains any untrue statement of
a material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading (provided that such counsel need
express no belief regarding the financial statements and related schedules
and other financial data contained in the Registration Statement, any 462(b)
Registration Statement, any amendment thereto, or the Prospectus, or any
amendment or supplement thereto).
C. You shall have received an opinion, dated such Closing Time or
Date of Delivery, as the case may be, of Baker, Donelson, Bearman & Caldwell
counsel for the Selling Shareholder, in form and substance satisfactory to
you and your counsel, to the effect that:
1. The Power of Attorney and the Custody Agreement have been
duly executed and delivered by the Selling Shareholder, and each is
enforceable against the Selling Shareholder in accordance with its
terms subject, as to enforcement, to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws relating
to or affecting the enforcement of creditors' rights generally and to
general equitable principles.
2. This Agreement has been duly executed and delivered by or on
behalf of the Selling Shareholder; the sale of the Shares to be sold
by the Selling Shareholder at Closing Time and the performance of this
Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions herein and therein contemplated will
not conflict with or (with or without the giving of notice or the
passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to counsel to which the Selling
Shareholder is a party or to which any of its properties or assets is
subject, nor will such action conflict with or violate any provision
of the charter or bylaws or other governing instruments of the Selling
Shareholder or any statute, rule or regulation or any order, judgment
or decree of any court or governmental agency or body having
jurisdiction over the Selling Shareholder or any of the Selling
Shareholder's properties or assets.
3. No consent, approval, authorization, order or declaration of
or from, or registration, qualification or filing with, any court or
governmental agency or body is required for the issue and sale of the
Shares being sold by the Selling Shareholder or the consummation of
the transactions with respect to the Selling Shareholder contemplated
by this Agreement, the Power of Attorney or the Custody Agreement,
except the registration of such Shares under the Act and such as may
be required under state securities or blue sky laws in connection with
the offer, sale and distribution of such Shares by the Underwriters.
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4. The Selling Shareholder has, and immediately prior to such
Closing Time the Selling Shareholder will have, good and valid title
to the Shares to be sold by the Selling Shareholder hereunder, free
and clear of all liens, security interests, pledges, charges,
encumbrances, defects, shareholders' agreements, voting trusts,
equities or claims of any nature whatsoever; and, upon delivery of
such Shares against payment therefor as provided herein, good and
valid title to such Shares, free and clear of all liens, security
interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting trusts, equities or claims of any nature
whatsoever, will pass to the several Underwriters.
In rendering the opinions set forth in Sections 7(b) and 7(c), such
counsel may rely on the following:
(a) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are
admitted, to the extent such counsel deems proper and to the extent
specified in such opinion, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' counsel) of other
counsel familiar with the applicable laws, and
(b) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and certificates
or other written statements of officers or departments of various
jurisdictions, having custody of documents respecting the existence or
good standing of the Company provided that copies of all such
opinions, statements or certificates shall be delivered to
Underwriters' counsel. The opinion of counsel for the Company shall
state that the opinion of any other counsel, or certificate or written
statement, on which such counsel is relying is in form satisfactory to
such counsel and that you and they are justified in relying thereon.
D. At the Closing Time, you shall have received a favorable opinion
from King & Spalding counsel for the Underwriters, dated as of the Closing
Time, with respect to the incorporation of the Company, the issuance and
sale of the Shares, the Registration Statement, the Prospectus and other
related matters as the Underwriters may reasonably require, and the Company
shall have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass on such matters.
E. At the Closing Time, (i) the Registration Statement, any 462(b)
Registration Statement, and the Prospectus, as they may then be amended or
supplemented, shall contain all statements that are required to be stated
therein under the 1933 Act and the 1933 Act Regulations and in all material
respects shall conform to the requirements of the 1933 Act and the 1933 Act
Regulations; the Company shall have complied in all material respects with
Rule 430A (if it shall have elected to rely thereon) and neither the
Registration Statement, any
25
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462(b) Registration Statement, nor the Prospectus, as they may then be
amended or supplemented, shall contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) no action,
suit or proceeding at law or in equity shall be pending or, to the best of
Company's knowledge, threatened against the Company that would be required
to be set forth in the Prospectus other than as set forth therein and no
proceedings shall be pending or, to the best knowledge of the Company,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding could materially adversely affect the business, prospects,
assets, results of operations or condition (financial or otherwise) of the
Company, other than as set forth in the Prospectus, (iii) the Company shall
have complied with all agreements and satisfied all conditions on their part
to be performed or satisfied at or prior to the Closing Time, and (iv) the
representations and warranties of the Company set forth in Section 1 shall
be accurate as though expressly made at and as of the Closing Time. At the
Closing Time, you shall have received a certificate executed by the
President and Chief Financial Officer of the Company dated as of the Closing
Time, to such effect and with respect to the following additional matters:
(A) the Registration Statement has become effective under the 1933 Act and
no stop order suspending the effectiveness of the Registration Statement or
preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the
best of their knowledge, threatened under the 1933 Act; and (B) they have
reviewed the Registration Statement and the Prospectus and, when the
Registration Statement and any 462(b) Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement, any 462(b) Registration Statement
and the Prospectus and any amendments or supplements thereto contained all
statements and information required to be included therein or necessary to
make the statements therein not misleading and neither the Registration
Statement, any 462(b) Registration Statement, nor the Prospectus nor any
amendment or supplement thereto included any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus that has
not been so set forth. The representations and warranties of the Selling
Shareholder set forth herein shall be accurate as though expressly made at
and as of the Closing Time. At the Closing Time, you shall have received a
certificate executed on behalf of the Selling Shareholder to such effect.
F. You shall have received from each of KPMG Peat Marwick, LLP,
Thompson Dunavant, P.L.L.C., Arthur Andersen & Co. LLP, Marlin and
Edmondson, P.C., Becker & Company, P.C., Joseph DeCosimo and Company, LLP
and S. F. Fiser & Company letters dated, respectively, the date hereof (or,
if the Registration Statement has been declared effective prior to the
execution and delivery of this Agreement, dated such effective date and the
date of this Agreement) and the Closing Time and the Date of Delivery, in
form and substance satisfactory to you, to the effect set forth in Annex I
hereto. In the event that any letter referred to in this subsection sets
forth any changes, decreases or increases in the items specified in
paragraph (iv) of Annex I, it shall
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be a further condition to the obligations of the Underwriters that (i) such
letter shall be accompanied by a written explanation by the entity to which
such letter relates as to the significance thereof, unless the Underwriters
deem such explanation unnecessary, and (ii) such changes, decreases or
increases do not, in your sole judgment, make it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares as
contemplated by the Registration Statement, as amended as of the date of
such letter.
G. At the Closing Time, you shall have received from each of KPMG Peat
Marwick, LLP, Thompson Dunavant, P.L.L.C., Arthur Andersen & Co. LLP, Marlin
and Edmondson, P.C., Becker & Company, P.C., Joseph DeCosimo and Company,
LLP and S. F. Fiser & Company a letter, in form and substance satisfactory
to you and dated as of the Closing Time, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (f)
above, except that the specified date referred to shall be a date not more
than five days prior to the Closing Time.
H. At the Closing Time, counsel for the Underwriters shall have been
furnished with all such documents, certificates and opinions as they may
reasonably request for the purpose of enabling them to pass upon the
issuance and sale of the Shares as contemplated in this Agreement and the
matters referred to in Section 7(d) and in order to evidence the accuracy
and completeness of any of the representations, warranties or statements of
the Company, the performance of any of the covenants of the Company, or the
fulfillment of any of the conditions herein contained; and all proceedings
taken by the Company at or prior to the Closing Time in connection with the
authorization, issuance and sale of the Shares as contemplated in this
Agreement shall be reasonably satisfactory in form and substance to you and
to counsel for the Underwriters. The Company will furnish you with such
number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
I. The NASD, upon review of the terms of the public offering of the
Shares, shall not have objected to such offering, such terms or the
Underwriters' participation in the same.
J. Since the date of the latest audited financial statements included
in the Prospectus, neither the Company nor any of the Subsidiaries shall
have sustained (i) any loss or interference with their respective businesses
from fire, explosion, flood, hurricane or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by
the Prospectus or (ii) any change, or any development involving a
prospective change (including without limitation any change in management or
control of the Company), in or affecting the position (financial or
otherwise), results of operations, net worth or business prospects of the
Company and its subsidiaries, otherwise than as disclosed in or contemplated
by the Prospectus, the effect of which, in either such case, is in your
judgment so material and adverse as to make it impracticable or inadvisable
to proceed with the purchase, sale and
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delivery of the Shares being delivered at such time as contemplated by the
Registration Statement, as amended as of the date hereof.
K. Subsequent to the date hereof, there shall not have occurred any
of the following: (i) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political
conditions the effect of which on the financial markets of the United States
is such as to make it, in your judgment, impracticable to market the Shares
or enforce contracts for the sale of the Shares, (ii) any suspension or
limitation in trading in any securities of the Company by the Commission or
by the Nasdaq Stock Market, or trading generally on the New York Stock
Exchange or in the over-the-counter market, (iii) any downgrading in the
rating of any of the Company's debt securities or preferred stock by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the 1933 Act), or (iv) a banking moratorium
declared by federal or New York or Tennessee authorities.
L. At the Closing Time, you shall have received satisfactory evidence
that all offers and sales of the Company's capital stock prior to the date
hereof were duly registered or the subject of an available exemption from
the registration requirements of the applicable state securities or blue sky
laws.
The several obligations of the Underwriters to purchase Option Shares
hereunder are subject to the satisfaction on and as of any Date of Delivery for
Option Shares of the conditions set forth in this Section 7, except that, if any
Date of Delivery for Option Shares is other than the Closing Time, the
certificates, opinions and letters referred to in paragraphs (b), (c) and (d)
shall be revised to reflect the sale of Option Shares.
Section 8. Indemnification and Contribution.
--------------------------------
A. The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to
which such Underwriter may become subject under the 1933 Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) (i) arise out of or are based upon any breach of any
warranty or covenant of the Company herein contained, (ii) arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact contained in (A) any Preliminary Prospectus, the Registration
Statement, any 462(b) Registration Statement or the Prospectus, or any
amendment or supplement thereto, or (B) any application or other document,
or any amendment or supplement thereto, executed by the Company or based
upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Shares under the securities or blue
sky laws thereof or filed with the Commission or any securities association
or securities exchange (each an "Application"), or (iii) arise out of or are
based upon the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement, any 462(b) Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any Application a
material fact required to be stated
28
<PAGE>
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in any Preliminary Prospectus, the Registration Statement, any 462(b)
Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter expressly for use therein. In
addition to its other obligations under this Section 8(a), the Company
agrees that, as an interim measure during the pendency of any such claim,
action, investigation, inquiry or other proceeding arising out of or based
upon any statement or omission, or any alleged statement or omission,
described in this Section 8(a), it will reimburse the Underwriters on a
monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. Any such interim reimbursement payments
that are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the prime rate (or reference rate or
other commercial lending rate for borrowers of the highest credit standing)
published from time to time by The Wall Street Journal (the "Prime Rate")
from the date of such request. This indemnity agreement shall be in addition
to any liabilities that the Company may otherwise have. The Company will
not, without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or
threatened action or claim or related cause of action or portion of such
cause of action in respect of which indemnification may be sought hereunder
(whether or not such Underwriter is a party to such action or claim), unless
such settlement, compromise or consent includes an unconditional release of
such Underwriter from all liability arising out of such action or claim (or
related cause of action or portion thereof).
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the 1933
Act to the same extent as such agreement applies to the Underwriters.
B. The Selling Shareholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the 1933 Act, or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) (i) arise out of or are based upon any breach of
any warranty or covenant of the Selling Shareholder herein contained, (ii)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in (A) any Preliminary Prospectus,
the Registration Statement, any 462(b) Registration Statement or the
29
<PAGE>
Prospectus, or any amendment or supplement thereto, in each case to the
extent but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by the Selling
Shareholder expressly for use therein or (B) any Application, or (iii) arise
out of or are based upon the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement, any 462(b) Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
Application a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent but
only to the extent that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by the Selling Shareholder
expressly for use therein, and will reimburse each Underwriter for any legal
or other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Selling Shareholder shall not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement, any 462(b) Registration Statement,
or the Prospectus, or any such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter expressly for use therein; provided, further, however, that the
Selling Shareholder shall be liable hereunder in any and all cases in the
aggregate only to the extent of the total net proceeds from the offering
(before deducting expenses) received by the Selling Shareholder from the
Underwriters for the Shares sold by such Selling Shareholder hereunder,
unless any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any 462(b) Registration
Statement or any amendment or supplement thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by the Selling Shareholder expressly for use
therein, in which case such limitation of the liability of the Selling
Shareholder shall not apply. In addition to their other obligations under
this Section 8(b), the Selling Shareholder agrees that, as an interim
measure during the pendency of any such claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section
8(b), the Selling Shareholder will reimburse the Underwriters on a monthly
basis for all reasonable legal and other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Selling
Shareholder's obligation to reimburse the Underwriters for such expenses and
the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. Any such interim reimbursement
payments that are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the prime rate (or reference rate or
other commercial lending rate for borrowers of the highest credit standing)
published from time to time by The Wall Street Journal (the "Prime Rate")
from the date of such request. This indemnity
30
<PAGE>
agreement shall be in addition to any liabilities that the Selling
Shareholder may otherwise have. The Selling Shareholder will not, without
the prior written consent of each Underwriter, settle or compromise or
consent to the entry of any judgment in any pending or threatened action or
claim or related cause of action or portion of such cause of action in
respect of which indemnification may be sought hereunder (whether or not
such Underwriter is a party to such action or claim), unless such
settlement, compromise or consent includes an unconditional release of such
Underwriter from all liability arising out of such action or claim (or
related cause of action or portion thereof).
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the 1933
Act to the same extent as such agreement applies to the Underwriters.
C. Each Underwriter, severally but not jointly, will indemnify and
hold harmless the Company and the Selling Shareholder against any losses,
claims, damages or liabilities to which the Company and the Selling
Shareholder may become subject, under the 1933 Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any breach of any warranty or covenant by
such Underwriter herein contained or any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement, any 462(b) Registration Statement or the Prospectus,
or any amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter expressly for use therein; and will reimburse the Company and
the Selling Shareholder for any legal or other expenses reasonably incurred
by the Company and the Selling Shareholder in connection with investigating
or defending any such loss, claim, damage, liability or action. In addition
to its other obligations under this Section 8(c), the Underwriters agree
that, as an interim measure during the pendency of any such claim, action,
investigation, inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
this Section 8(c), they will reimburse the Company and the Selling
Shareholder on a monthly basis for all reasonable legal and other expenses
incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability
of their obligation to reimburse the Company or the Selling Shareholder for
such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. Any such interim
reimbursement payments that are not made to the Company or the Selling
Shareholder within 30 days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This
31
<PAGE>
indemnity agreement shall be in addition to any liabilities that the
Underwriters may otherwise have. No Underwriter will, without the prior
written consent of the Company, settle or compromise or consent to the entry
of judgment in any pending or threatened action or claim or related cause of
action or portion of such cause of action in respect of which
indemnification may be sought hereunder (whether or not the Company is a
party to such action or claim), unless such settlement, compromise or
consent includes an unconditional release of the Company from all liability
arising out of such action or claim (or related cause of action or portion
thereof).
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each
officer and director of the Company and each person, if any, who controls
the Company or the Selling Shareholder within the meaning of the 1933 Act to
the same extent as such agreement applies to the Company and the Selling
Shareholder.
D. Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify the indemnifying party
in writing of the commencement thereof; no indemnification provided for in
subsection (a) or (b) shall be available to any party who shall fail to give
notice as provided in this subsection (c) if the party to whom notice was
not given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice, but the
omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability that it may have to any indemnified
party otherwise than under Section 8. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, except that if the indemnified party has
been advised by counsel in writing that there are one or more defenses
available to the indemnified party which are different from or additional to
those available to the indemnifying party, then the indemnified party shall
have the right to employ separate counsel and in that event the reasonable
fees and expenses of such separate counsel for the indemnified party shall
be paid by the indemnifying party; provided, however, that if the
indemnifying party is the Company or the Selling Shareholder, the Company or
the Selling Shareholder, as the case may be, shall only be obligated to pay
the reasonable fees and expenses of a single law firm (and any reasonably
necessary local counsel) employed by all of the indemnified parties. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without
32
<PAGE>
its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
E. It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 8(a), (b) and
(c) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts
shall be apportioned among the indemnifying parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the
National Association of Securities Dealers, Inc. Any such arbitration must
be commenced by service of a written demand for arbitration or a written
notice of intention to arbitrate, therein electing the arbitration tribunal.
In the event the party demanding arbitration does not make such designation
of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 8(a), (b) and (c) hereof and will not
resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses that is created by the provisions of Sections 8(a),
(b) and (c).
F. In order to provide for just and equitable contribution in
circumstances under which the indemnity provided for in this Section 8 is
for any reason judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the right of appeal) to be unenforceable by the
indemnified parties although applicable in accordance with its terms, the
Company and the Selling Shareholder, on the one hand and the Underwriters on
the other shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity incurred
by the Company and the Selling Shareholder, and one or more of the
Underwriters, as incurred, in such proportions that (a) the Underwriters are
responsible pro rata for that portion represented by the percentage that the
underwriting discount appearing on the cover page of the Prospectus bears to
the public offering price (before deducting expenses) appearing thereon, and
(b) the Company and the Selling Shareholder are responsible for the balance,
provided, however, that no person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation; provided, further, that if the allocation provided above
is not permitted by applicable law, the Company and the Selling Shareholder,
on the one hand, and the Underwriters on the other shall contribute to the
aggregate losses in such proportion as is appropriate to reflect not only
the relative benefits referred to above but also the relative fault of the
Company and the Selling Shareholder, on the one hand, and the Underwriters
on the other in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the Company and the Selling Shareholder,
on the one hand, or by the Underwriters on the other hand and the parties'
relative
33
<PAGE>
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling Shareholder and
the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 8(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 8(f). The
amount paid or payable by a party as a result of the losses, claims, damages
or liabilities referred to above shall be deemed to include any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending such action or claim. Notwithstanding the
provisions of this Section 8(f), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. The Underwriters'
obligations in this Section 8(f) to contribute are several in proportion to
their respective underwriting obligations and not joint. For purposes of
this Section 8(f), each person, if any, who controls an Underwriter within
the meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company or the Selling Shareholder, within
the meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as the Company or the Selling Shareholder.
Section 9. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. The representations, warranties, indemnities, agreements and other
- --------
statements of the Company and the Selling Shareholder or their respective
officers set forth in or made pursuant to this Agreement will remain operative
and in full force and effect regardless of any investigation made by or on
behalf of the Company, the Selling Shareholder or any Underwriter or controlling
person, and with respect to an Underwriter or the Company will survive delivery
of and payment for the Shares or termination of this Agreement.
Section 10. Effective Date of Agreement and Termination.
-------------------------------------------
A. This Agreement shall become effective immediately as to Sections 6
and 8 and, as to all other provisions, (i) if at the time of execution of
this Agreement the Registration Statement has not become effective, at 10:00
a.m., on the first full business day following the effectiveness of the
Registration Statement, or (ii) if at the time of execution of this
Agreement the Registration Statement has been declared effective, at 10:00
a.m. on the first full business day following the date of execution of this
Agreement; but this Agreement shall nevertheless become effective at such
earlier time after the Registration Statement becomes effective as you may
determine on and by notice to the Company or by release of any of the Shares
for sale to the public. For the purposes of this Section 10, the Shares
shall be deemed to have been so released upon the release of publication of
any newspaper advertisement relating to the Shares or upon the release by
you of telegrams (i) advising the Underwriters that the Shares are
34
<PAGE>
released for public offering, or (ii) offering the Shares for sale to
securities dealers, whichever may occur first. By giving notice before the
time this Agreement becomes effective, you, as representative of the several
Underwriters, or the Company, may prevent this Agreement from becoming
effective, without liability of any party to any other party, except that
the Company shall remain obligated to pay costs and expenses to the extent
provided in Section 6 hereof.
B. This Agreement may be terminated with respect to the Firm Shares
or the Option Shares in your sole discretion by notice to the Company given
prior to the Closing Time or the Date of Delivery, as the case may be, in
the event that (i) any condition to the obligations of the Underwriters set
forth in Section 7 hereof has not been satisfied or (ii) the Company or the
Selling Shareholder shall have failed, refused or been unable to deliver the
Shares or to perform all obligations and satisfy all conditions on their
respective parts to be performed or satisfied hereunder at or prior to such
Closing Time or Date of Delivery, as applicable, other than by reason of a
default by any of the Underwriters. If this Agreement is terminated
pursuant to this Section 10(b), the Company and the Selling Shareholder, pro
rata in accordance with the number of Shares proposed to be sold by each
hereunder will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale
of the Shares.
C. If this Agreement is terminated pursuant to this Section 10, such
termination shall be without liability of any party to any other party,
except to the extent provided in this Section 10. Notwithstanding any such
termination, the provisions of Section 8 shall remain in effect.
Section 11. Default by One or More of the Underwriters. If one or more
------------------------------------------
of the Underwriters shall fail at the Closing Time to purchase the Shares that
it or they are obligated to purchase pursuant to this Agreement (the "Defaulted
Securities"), you shall have the right, within 36 hours thereafter, to make
arrangements for one or more of the non-defaulting Underwriters, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms set forth in
this Agreement; if, however, you have not completed such arrangements within
such 36-hour period, then:
A. If the aggregate number of Firm Shares which are Defaulted
Securities does not exceed 10% of the aggregate number of Firm Shares to be
purchased pursuant to this Agreement, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligation proportions bear to the
underwriting obligations of all non-defaulting Underwriters, and
B. If the aggregate number of Firm Shares which are Defaulted
Securities exceeds 10% of the aggregate number of Firm Shares to be
purchased pursuant to this Agreement, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter.
35
<PAGE>
No action taken pursuant to this Section 11 shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default that does not result in a termination of
this Agreement, either you or the Company shall have the right to postpone the
Closing Time for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus that
may thereby be made necessary. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section 11.
Section 12. Notices. All notices and other communications under this
-------
Agreement shall be in writing and shall be deemed to have been duly given if
delivered, mailed or transmitted by any standard form of telecommunication.
Notices to the Underwriters shall be directed c/o Morgan Keegan & Company, Inc.,
50 Front Street, Memphis, Tennessee 38103, Attention: John H. Grayson, Jr. (with
a copy sent in the same manner to King & Spalding, 191 Peachtree Street,
Atlanta, Georgia 30303, Attention: John J. Kelley III); notices to the Company
shall be directed to it at 6075 Poplar Avenue, Suite 401, Memphis, Tennessee
38119, Attention: Lance T. Fair (with a copy sent in the same manner to Baker,
Donelson, Bearman & Caldwell, 165 Madison Avenue, Suite 2000, Memphis, Tennessee
38103, Attention: John A. Good) and notices to the Selling Shareholder shall be
directed to it at P.O. Box 30378, Nashville, Tennessee 37241-0378, Attention:
Burton Harvey.
Section 13. Parties. This Agreement is made solely for the benefit of
-------
and is binding upon the Underwriters, the Company and the Selling Shareholder,
and to the extent provided in Section 8, any person controlling the Company, the
Selling Shareholder or any of the Underwriters, the officers and directors of
the Company, and their respective executors, administrators, successors and
assigns and subject to the provisions of Section 8, no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from any of the several Underwriters of the Shares.
All of the obligations of the Underwriters hereunder are several and not
joint.
Section 14. Governing Law and Time. This Agreement shall be governed by
----------------------
the laws of the State of Tennessee. Specified time of the day refers to United
States Eastern Time. Time shall be of the essence of this Agreement.
Section 15. Counterparts. This Agreement may be executed in one or more
------------
counterparts and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
36
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us a counterpart hereof, and upon the acceptance
hereof by Morgan Keegan & Company, Inc., on behalf of each of the Underwriters,
this instrument will become a binding agreement among the Company and the
several Underwriters in accordance with its terms. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in the Master Agreement among Underwriters, a copy of
which shall be submitted to the Company for examination, upon request, but
without warranty on your part as to the authority of the signers thereof.
Very truly yours,
MASTER GRAPHICS, INC.
By:
--------------------------------
Name:
Title:
SIRROM FUNDING CORPORATION
By:
---------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above:
MORGAN KEEGAN & COMPANY, INC.
By:
---------------------------------
(Authorized Representative)
On behalf of each of the Underwriters
37
<PAGE>
SCHEDULE A
Number of
Firm Shares
to be Purchased
---------------
Underwriter
- -----------
Morgan Keegan & Company, Inc.
---------------
SunTrust Equitable Securities Corporation
---------------
TOTAL
===============
<PAGE>
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement,
(i) each of Arthur Andersen & Co. LLP, Becker & Company, P.C., Joseph
DeCosimo and Company, LLP, Thompson Dunavant, P.L.L.C. and S. F. Fiser &
Company shall furnish letters to the Underwriters to the effect that:
(A) they are independent public accountants with respect to the
entity or entities, for which they have prepared financial statements
included in the Prospectus and the Registration Statements and its
consolidated subsidiaries within the meaning the 1933 Act and the
applicable published rules and regulations thereunder; and
(B) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus, the
Registration Statement and any 462(b) Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the related published rules and
regulations thereunder; and
(C) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(E) below, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Underwriters included in the
Registration Statement and the Prospectus, or which appear in Part II
of, or in exhibits and schedules to, the Registration Statement
specified by the Underwriters, and have compared certain of such
amounts, percentages and financial information with the accounting
records of the entity or entities, for which they have prepared
financial statements included in the Prospectus and the Registration
Statement and have found them to be in agreement.
(ii) Marlin and Edmondson, P.C. shall furnish letters to the
Underwriters to the affect that:
(A) they are independent public accountants with respect to the
entity or entities, for which they have prepared financial statements
included in the Prospectus and the Registration Statements and its
consolidated subsidiaries within the meaning the 1933 Act and the
applicable published rules and regulations thereunder;
(B) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus, the
Registration Statement and any 462(b) Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the related published rules and
regulations thereunder;
<PAGE>
(C) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(E) below, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Underwriters included in the
Registration Statement and the Prospectus, or which appear in Part II
of, or in exhibits and schedules to, the Registration Statement
specified by the Underwriters, and have compared certain of such
amounts, percentages and financial information with the accounting
records of the entity or entities, for which they have prepared
financial statements included in the Prospectus and the Registration
Statement and have found them to be in agreement; and
(D) the financial statements as of and for the nine month periods
ended March 31, 1997 and 1998 were reviewed by them in accordance with
the standards established by the American Institute of Certified
Public Accountants and based upon their review they are not aware of
any material modifications that should be made to such financial
statements for them to be in conformity with generally accepted
accounting principles, and such financial statements comply as to form
in all material respects with the applicable accounting requirements
of the 1933 Act and the applicable rules and regulations thereunder.
(iii) KPMG Peat Marwick, LLP shall furnish letters to the
Underwriters to the effect that:
(A) they are independent public accountants with respect to the
entity or entities, for which they have prepared financial statements
included in the Prospectus and the Registration Statements and its
consolidated subsidiaries within the meaning the 1933 Act and the
applicable published rules and regulations thereunder; and
(B) in their opinion, the consolidated financial statements and
schedules audited by them and included in the Prospectus, the
Registration Statement and any 462(b) Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the 1933 Act and the related published rules and
regulations thereunder;
(C) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(E) below, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Underwriters included in the
2
<PAGE>
Registration Statement and the Prospectus, or which appear in Part II
of, or in exhibits and schedules to, the Registration Statement
specified by the Underwriters, and have compared certain of such
amounts, percentages and financial information with the accounting
records of the entity or entities, for which they have prepared
financial statements included in the Prospectus and the Registration
Statement and have found them to be in agreement.
(D) the balance sheet as of March 31, 1998 and the related
statements of operations and cash flows for the three month periods
ended March 31, 1997 and 1998 were reviewed by them in accordance with
the standards established by the American Institute of Certified
Public Accountants and based upon their review they are not aware of
any material modifications that should be made to such financial
statements for them to be in conformity with generally accepted
accounting principles, and such financial statements comply as to form
in all material respects with the applicable accounting requirements
of the 1933 Act and the applicable rules and regulations thereunder;
and
(E) on the basis of limited procedures, not constituting an audit
in accordance with generally accepted auditing standards, consisting
of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements, of the entity or entities, for which
they have audited financial statements included in the Prospectus and
the Registration Statements and such entity's consolidated
subsidiaries, inspection of the minute books of such entity and its
consolidated subsidiaries since the date of the latest audited
financial statements included in the Prospectus, inquiries of
officials of such entity and its consolidated subsidiaries responsible
for financial accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(1) the unaudited consolidated condensed financial
statements of such entity and its consolidated subsidiaries
included in the Registration Statement and the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act and the related published
rules and regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and
the Prospectus;
(2) as of a specified date not more than 5 days prior to the
date of such letter, there were any changes in the capital stock
(other than the issuance of capital stock upon exercise of
options which were outstanding on the date of the latest balance
sheet included in the Prospectus) or any increase in the long-
term debt or short-term debt of the Company and its
3
<PAGE>
subsidiaries, or any decreases in net current assets or net
assets or other items specified by the Underwriters, or any
increases in any items specified by the Underwriters, in each
case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(3) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (B) there were any decreases in revenue or
operating income or the total or per share amounts of net income
or other items specified by the Underwriters, or any increases in
any items specified by the Underwriters, in each case as compared
with the comparable period of the preceding year and with any
other period of corresponding length specified by the
Underwriters, except in each case for increases or decreases
which the Prospectus discloses have occurred or may occur which
are described in such letter; and
(F) In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph
(E) above, they have carried out certain specified procedures, not
constituting an audit in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Underwriters included in the
Registration Statement and the Prospectus, or which appear in Part II
of, or in exhibits and schedules to, the Registration Statement
specified by the Underwriters, and have compared certain of such
amounts, percentages and financial information with the accounting
records of the entity or entities, for which they have prepared
financial statements included in the Prospectus and the Registration
Statement and have found them to be in agreement.
(G) on the basis of a reading of the unaudited pro forma
consolidated condensed financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(vi), inquiries of certain officials of the Company and the acquired
companies, if appropriate, who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in
the unaudited pro forma condensed consolidated financial statements,
nothing came to their attention that caused them to believe that the
unaudited pro forma condensed consolidated financial statements do not
comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the
pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
4
<PAGE>
References to the Registration Statement and the Prospectus in this
Annex I shall include any amendment or supplement thereto at the date of
such letter.
5
<PAGE>
Exhibit 5.1
[Baker, Donelson, Bearman & Caldwell Letterhead]
June 4, 1998
Board of Directors
Master Graphics, Inc.
6075 Poplar Avenue, Suite 401
Memphis, Tennessee 38119
Gentlemen:
We have acted as counsel to Master Graphics, Inc., a Tennessee corporation
(the "Company"), in connection with the preparation and filing of its
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission relating to the proposed public offering and
sale by the Company of 3,400,000 shares (3,940,000 shares if the underwriters
over-allotment option is exercised in full) of the Company's common stock, $.001
par value per share (the "Company Shares") and by the Selling Shareholder of
200,000 shares of the Company's common stock, $.001 par value per share (the
"Selling Shareholder Shares," and together with the Company Shares, the
"Shares") as set forth in the prospectus which forms a part of the Registration
Statement (the "Prospectus"). This opinion letter is furnished to you at your
request to enable you to fulfill the requirements of Item 601(b)(5) of
Regulation S-K, 17 C.F.R. (S) 229.601(b)(5), in connection with the Registration
Statement.
In delivering this opinion, we have examined such documents as we have
deemed necessary, including copies of the following documents:
1. an executed copy of the Registration Statement and all amendments
thereto;
2. the Charter, as amended, certified by the Secretary of the Company on
the date hereof as being complete, accurate and in effect;
3. the Amended and Restated Bylaws of the Company, certified by the
Secretary of the Company on the date hereof as being complete,
accurate and in effect;
4. the corporate proceedings taken to date with respect to the
authorization, issuance and sale of the Common Stock; and
<PAGE>
5. a form of underwriting agreement (the "Underwriting Agreement") to be
executed between the Company and the underwriters to be named therein.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
accuracy and completeness of all documents submitted to us, the authenticity of
all original documents, and the conformity to authentic original documents of
all documents submitted to us as certified, telecopied, photostatic, or
reproduced copies.
We call your attention to the fact that our firm only requires lawyers to
be qualified to practice law in the States of Tennessee and Mississippi and the
District of Columbia and, in rendering the foregoing opinions, we express no
opinion with respect to any laws relevant to this opinion other than the laws
of those jurisdictions and of the United States.
Based upon and limited by the foregoing, and subject to the following
qualifications and limitations, we are of the opinion that, as of the date
hereof:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Tennessee; and
2. The Company Shares are duly authorized, and (subject to the
Registration Statement becoming effective and any applicable Blue Sky
laws being complied with) upon the issuance and delivery thereof in
accordance with the terms of the Underwriting Agreement and as set
forth in the Registration Statement, against receipt by the Company of
the purchase price thereof, the Company Shares will be legally
issued, fully paid, and non assessable.
3. The Selling Shareholder Shares are legally issued, fully paid and
nonassessable.
Our opinion is subject to the following qualifications and limitations:
(a) The opinions expressed herein are subject to the effect of
applicable bankruptcy, insolvency, reorganization or similar laws
affecting the enforcement of creditors' rights and equitable
principles limiting the availability of equitable remedies on the
enforceability of contracts, agreements and instruments.
(b) The opinions set forth herein are expressed as of the date hereof
and we disclaim any undertaking to advise you of any changes
which may subsequently be brought to our attention in the facts
and the law upon which such opinions are based.
This opinion letter has been prepared solely for your use in connection
with the filing of the Registration Statement on the date of this opinion letter
and should not be quoted in whole or in part or otherwise be referred to, nor
filed with or furnished to any governmental agency or other person or entity,
without the prior written consent of this firm.
<PAGE>
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus included in the Registration Statement. By giving
such consent we do not admit that we are experts with respect to any part of the
Registration Statement, including this exhibit, within the meaning of the term
"expert" as used in the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission issued thereunder.
Very truly yours,
Baker, Donelson, Bearman & Caldwell
a professional corporation
By: /s/ John A. Good
---------------------------------
John A. Good
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
We consent to the use of our reports with respect to the: (1) the consolidated
balance sheets of Master Graphics, Inc. as of June 30, 1996 and 1997, and
December 31, 1997 and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the years in the two-year
period ended June 30, 1997 and the six-month period ended December 31,1997;
(2) the balance sheets of Lithograph Printing Company of Memphis as of
December 31,1995 and 1996, and June 19, 1997 and the related statements of
income, stockholders' equity and cash flows for each of the years in the two-
year period ended December 31, 1996 and the period from January 1, 1997
through June 19, 1997; (3) the balance sheet of Blackwell Lithographers, Inc.
as of June 19, 1997 and the related statements of operations, stockholders'
equity and cash flows for the period from January 1, 1997 through June 19,
1997; (4) the balance sheets of The Argus Press, Inc. as of December 31, 1996
and September 22, 1997 and the related statements of operations, stockholders'
equity and cash flows for the year ended December 31,1996 and the period from
January 1, 1997 through September 22, 1997; (5) the balance sheet of Phoenix
Communications, Inc. as of December 16, 1997 and the related statements of
operations, stockholders' equity and cash flows for the period from February
1, 1997 through December 16, 1997; (6) the balance sheet of Jones Printing Co.
as of December 16, 1997 and the related statements of operations,
stockholders' equity and cash flows for the period from January 1, 1997
through December 16, 1997; and (7) the balance sheets of Hederman Brothers,
Inc. as of December 31, 1996 and 1997 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, all included herein, and to the
references to our firm under the heading of "Experts" in the Prospectus.
KPMG Peat Marwick LLP
Memphis, Tennessee
June 2, 1998
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
EXHIBIT 23.2
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Atlanta, Georgia
June 2, 1998
<PAGE>
EXHIBIT 23.3
The Board of Directors
McQuiddy Printing Company:
We consent to the use of our report on the financial statements of McQuiddy
Printing Company included in the registration statement of Master Graphics,
Inc. on Form S-1 and to the reference to our firm under the heading "Experts"
in the Prospectus.
Marlin & Edmondson, P.C.
Nashville, Tennessee
June 2, 1998
<PAGE>
EXHIBIT 23.4
The Board of Directors
Jones Printing Company, Inc.:
We consent to the use of our report on the financial statements of Jones
Printing Company, Inc. included in the registration statement of Master
Graphics, Inc. on Form S-1 and to the reference to our firm under the heading
"Experts" in the Prospectus.
Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
June 2, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Master Graphics, Inc.:
We consent to the use of our report on the consolidated financial statements
of Master Printing, Inc. and Subsidiary for the year ended June 30, 1995 in the
Registration Statement of Master Graphics, Inc. on Form S-1, and to the
reference to our firm under the heading "Experts" in the Prospectus.
Thompson Dunavant PLC
Memphis, Tennessee
June 2, 1998
<PAGE>
EXHIBIT 23.6
The Board of Directors
Phillips Litho Co., Inc.:
We consent to the use of our report on the financial statements of Phillips
Litho Co., Inc. included in the registration statement of Master Graphics,
Inc. on Form S-1 and to the reference to our firm under the heading "Experts"
in the Prospectus.
S.F. Fiser & Company, P.A.
Springdale, Arkansas
June 1, 1998
<PAGE>
EXHIBIT 23.7
The Board of Directors
Harperprints, Inc.:
We consent to the use of our report on the financial statements of
Harperprints, Inc. included in the registration statement of Master Graphics,
Inc. on Form S-1 and to the reference to our firm under the heading "Experts"
in the Prospectus.
Becker & Company, P.C.
Lanham, Maryland
June 1, 1998
