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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-24411
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MASTER GRAPHICS, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1694322
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State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification No.)
70 Timber Creek Drive, Suite 5, Cordova, Tennessee 38018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (901) 685-2020
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of April 10, 2000 was $ 4,521,692, computed by reference
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to a price of $ 0.625 per share, the last reported sales price of the
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registrant's common stock as of such date.
The number of shares outstanding of the registrant's common stock, $0.001
par value, as of April 13, 2000 was 7,923,026.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Shareholders'
Meeting to be held on or about June 15, 2000, to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended, are incorporated by reference into Part III of this
report on Form 10-k. The Proxy Statement, except for the portions thereof which
are specifically incorporated herein by reference, shall not be deemed "filed"
for purposes of this report on Form 10-K.
PART I
Item 1. Business.
General
Throughout this report on Form 10-K, unless the context indicates
otherwise, when we refer to "us," "we," "our" or the "company," we are
describing Master Graphics together with its wholly-owned operating subsidiary,
Premier Graphics. References to Master Graphics or Premier Graphics include
only the named company.
Our initial strategy was to be a consolidator in the general commercial
printing industry. From June 1997 through July 1999, we acquired 19 general
commercial printing companies. In the third quarter of 1999, we closed our
Blackwell Lithographers Division located in Richland, Mississippi, and we
consolidated the operations of our two divisions in Indianapolis, Indiana into a
single division. Otherwise, the companies we acquired continue to operate as
separate unincorporated divisions of Premier Graphics. Our acquisitions were
financed primarily through borrowings under our senior credit facility with
General Electric Capital Corporation, as agent, and the issuance of $130.0
million of 11.5% Senior Notes due 2005. We provide service in all areas of
general commercial printing, including prepress, printing and postpress
services. Our products include annual reports, direct mail pieces, sales
literature, point of purchase materials, market letters, newsletters, training
manuals, product brochures and catalogs for customers such as Federal Express,
IBM, Provident Life, W. W. Grainger and G. D. Searle. Our 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.
Fiscal 1999 was the first year in which we attempted to operate all of our
divisions as a cohesive unit, while at the same time adding new divisions
through acquisitions. We experienced difficulties implementing corporate-wide
policies across a geographically dispersed group of operating divisions,
effectively managing the combined operations of all of our divisions, and
achieving expected operating efficiencies and economies of scale. In August
1999, we concluded that continuing our acquisition strategy was not in our best
interests, and we discontinued all pending acquisition negotiations. The focus
of our senior management team is now on operations rather than acquisitions, and
we believe that the consolidation difficulties we experienced in 1999 will not
be repeated in 2000.
We developed a strategy to become a sole source provider of printing
services to corporate America. To implement that strategy, in 1998 we set out to
become one of the most technologically advanced general commercial printing
companies in the country. We entered into an agreement with Heidelberg USA in
May 1999 to install 14 state of the art, sheet-fed printing presses at nine of
our divisions, replacing 27 older, less-efficient printing presses. The new
presses took longer to install than anticipated and once they were installed,
costs associated with the training cycle were likewise greater than expected.
These delays had an immediate negative impact on our performance because our
ability to produce printed products was severely impaired. In addition, the
delays had a negative impact on our order backlog because the ability of our
sales force to solicit business was limited by the uncertain timing of the press
installation and completion of training. Now that the new Heidelberg printing
presses have been installed and training has effectively been completed, we are
operating 14 of the most technologically advanced printing presses available.
Another tactical approach in our strategy to be able to provide sole source
printing services to corporate America involved ISO 9001 certification. We
believe more and more American companies are consolidating their supplier base
and we believe that those suppliers that can guarantee consistent quality of
products across the supplier's
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manufacturing system will be in a better position to participate in this
consolidated environment. In late 1998, we embarked upon a process to gain ISO
9001 certification across our facilities, with the majority of this effort
occurring during the 2nd and 3rd quarters of 1999. This certification process
requires the formal documentation of internal work flows and procedures, and
involves all functional areas. Eight divisions gained certification in 1999.
However, the certification process took significant time away from day-to-day
operations. Functional teams were required to develop and document the steps
involved to complete their jobs. Operators were taken away from their machines,
or worked on overtime; sales representatives were confined to the office and
were not in the field; and senior division management was needed to oversee
this effort, as well as the press installations and the management information
system installation. The overall result was a lean organization overextended on
a variety of non-revenue generating projects. Therefore, we have postponed
further ISO certification activities until our operations stabilize.
Prior to its acquisition, each independent acquired company had its own
management information and financial reporting system. These systems generally
were incompatible with each other and we were not able to electronically convert
data from field systems to our corporate system. Moreover, some systems were
not Year 2000 compliant. To remedy the incompatibility issue and Year 2000
problems, we had to select a management information system that could satisfy
the needs of a 19 division general commercial printing company and install and
implement that system on a division by division basis. We identified a system
that would best satisfy our needs for a company-wide system because of its
programming focus towards the printing industry, the integrated nature of the
software and the installation support being offered by its manufacturer. The
installation process of the new system began in November 1998. Installation
responsibility fell to each division, with our corporate office providing
guidance and insight. Those divisions that did not apply effective resources
prior to system installation incurred a loss of operating focus after
installation, as the time required to solve start-up problems took longer than
the time required by those divisions that took a more proactive installation
approach. The installation and training process for the new system was
completed in September 1999.
In July 1999, our Board of Directors determined that it would be in the
best interest of our shareholders to engage Donaldson, Lufkin & Jenrette
Securities Corporation and Prudential Securities Incorporated to seek strategic
alternatives to maximize shareholder value. Our senior management spent several
weeks assisting in the preparation of an offering memorandum and engaging in
discussions and interviews with potential suitors. We believe that this
additional distraction negatively affected our 1999 operating results. No
strategic transaction resulted from these discussions. We have determined not
to continue to seek strategic alternatives but instead have focused all
management efforts on operations at this point in time.
Management Changes
Our former President, Chief Executive Officer and Chairman of the Board of
Directors, John P. Miller, has resigned from all positions that he held with the
Company. All of Mr. Miller's shares of stock in Master Graphics were sold in
November and December 1999 to cover margin calls, and we do not believe Mr.
Miller currently owns any shares of our common stock. In addition to Mr.
Miller's resignation, Lance T. Fair, formerly our Senior Vice President of
Acquisitions and Chief Financial Officer, resigned effective December 31, 1999.
We promoted Robert J. Diehl (formerly Chief Operating Officer) to the offices of
President and Chief Executive Officer, P. Melvin Henson, Jr. (formerly Chief
Accounting Officer) to the role of Chief Financial Officer, and Donald H.
Goldman (formerly Chief Information Officer) to the roles of Chief Operating
Officer and Chief Information Officer. Additionally, we added a new independent
director, Michael B. Bemis, who now serves as our Chairman of the Board.
Operating Strategy
In December 1999, our new management team, in consultation with the
leadership of each division, developed an operating plan for the year 2000. The
operating plan for the year 2000 focuses on the following issues:
. Centralized Operations. We operate multiple plants in several areas.
Accordingly, there are economies of scale to be obtained through thoughtful
integration of various departments and services in these areas. Savings from
centralization include duplicate personnel costs and productivity from higher
utilization of our existing assets.
. Regional Accountability. Our 19 divisions have been grouped into four
regions. Each region consists of four or five divisions and functions as a
small scale peer group for each division within the region. Our primary
division performance measure, EBITDA (earnings before interest, taxes,
depreciation and amortization), has been developed at the regional level and
committed to by each division. By directing accountability to this region
base, we expect to create a more cohesive relationship between divisions,
and create a more dynamic working atmosphere where attaining EBITDA becomes a
shared versus individual responsibility.
. Decreased Costs. The primary cost target of our year 2000 plan focuses on our
primary cost component-labor. In the December 1999 planning session, our
divisions identified over 5.5% of our workforce that could be reduced from
the mid-1999 levels due to lower sales volumes or workflow improvements. By
early January 2000, these reductions were implemented, and by the end of
February, our headcount had been reduced by just over 9% from mid-1999
levels. In addition to labor costs, our divisions identified other line items
to be attacked by tightening purchasing and approval processes.
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. Increased Sales. The underlying basis of our year 2000 plan is to achieve the
same level of expenses (as a percent of value added or sales less the cost
of paper, direct materials and outside services) as that realized in 1998.
The second and third quarters of 1999 were used to predict sales and valve
added for 2000. We believe there were competitive changes during the last
half of 1999 including an industry-wide consolidation of vendors. The result
is fewer printers enjoying a larger portion of the corporate budget and more
intense competition among remaining printers.
. We have re-engaged our division executive teams in the sales process through
their review and approval of jobs carrying a sales value margin below a
standard threshold. We eliminated our corporate Master Central organization
and moved Master Central into our divisions, where pricing and scheduling
decisions carry a better awareness of the marketplace.
. Cash Management. We have adopted a cash management policy that limits each
division's weekly cash disbursements. Amounts available that are not spent
may be carried forward into future weeks. A division needing to make a cash
expenditure in excess of the maximum permitted under the policy must
negotiate a transfer from a division with surplus cash prior to making the
expenditure.
The General Commercial Printing Market
The printing industry is one of the largest and most fragmented industries
in the United States, with total estimated 1998 sales of $149.5 billion among an
estimated 51,000 printing companies according to the Printing Institute of
America. 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. We focus on
providing general commercial printing and related services. According to the
Printing Institute of America, this segment had approximately $49.4 billion in
revenue in 1998 among approximately 24,000 general commercial printing
companies.
The business of the general commercial printing industry involves
developing a customer's concept into printable material through the use of
design and electronic prepress services; printing presses to imprint the
printable material onto paper; cutting, folding, and binding finished product;
and, finally, storing and distributing the finished product at the customer's
direction. Historically, design and prepress services have been performed by
advertising agencies, specialty printing services or the customer; but, because
of the decreased cost of, and the 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 on sheet fed presses or
on continuous rolls on 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 press sheet of 25 by 38 inches with
eight pages on each side at speeds of up to 15,000 impressions per hour. Web
presses print on both sides of a continuous roll of paper at the same time. Web
presses can print 16-page impressions on a press sheet of 23 by 35 inches 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 and Quebecor World. 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 and 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.
Operations
We provide service in all areas of general commercial printing, including:
(1) developing a customer's concept into printable material through the use
of electronic prepress services;
(2) using printing presses to imprint the printable material onto paper;
(3) cutting, folding, and binding the finished product; and
(4) 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, we are able to offer
design and prepress services to our customers on an efficient and cost-effective
basis. Historically, such design and prepress services were provided by
advertising agencies, specialty printing services or by our customer's from
their own in-house processes. Prepress services include the development of
designs for customers and the conversion of designs into
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digitized images. We offer commercial prepress services at all of our
facilities, enabling each division to service customers from inception of the
concept through delivery of the finished product.
Printing. Once a project has finished the prepress area, it is moved to the
press area where the image is reproduced on paper. We operate 77 sheet fed
presses. Our presses range in size from 11 by 17 inches to 28 by 41 inches, have
a color range capable of simultaneously printing up to ten colors and print up
to 15,000 impressions per hour. We also operate 13 web presses which are capable
of printing up to 40,000 impressions per hour, and fold, glue and perforate a
finished product. Our web presses are located in 6 divisions.
Finishing. Our finishing operations include cutting, folding, binding and
other operations to finish the printed product. Historically, general commercial
printing companies have outsourced those finishing operations, due to the
substantial amount of capital investment required for the equipment. Because
some of the acquired companies own such equipment, we are able to offer
finishing operations and provide a completely integrated service from design
through fulfillment.
Fulfillment. The fulfillment area provides a wide range of labor intensive
services that combine, package, store and ship our finished products. The
fulfillment area also provides electronic tracing services for customer
inventory and accumulates data for marketing departments that indicate the
effectiveness of print-related marketing campaigns. Large corporations utilize a
variety of our 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. Through the acquisition of our Eagle Direct division in May 1999, we
also added a range of database marketing and internet fulfillment capabilities.
Customers
Most of our top customers are large companies such as Federal Express, IBM,
Provident Life, W. W. Grainger and G. D. Searle. Consistent with the general
commercial printing industry as a whole, we have a small percentage of
significant long-term contracts with our customers. Due to the project-oriented
nature of our customers' printing requirements, sales to particular customers
may vary significantly from year to year. Our top ten customers in 1999
accounted for less than 14% of sales; and no customer accounted for more than
2.5%.
Sales and Marketing
On February 29, 2000, we employed 171 salespeople across all of our
divisions, a majority of which are paid on a commission basis. We market our
services based primarily on quality and responsiveness and, to a lesser degree,
on price. Through our salespeople and other management professionals, we
maintain strict control of the printing process from the time a prospective
customer is identified through the scheduling, prepress, printing and postpress
operations. Our business is principally service-oriented, and our 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.
We believe that a well trained, experienced sales force is a vital
component of our operating strategy. We have implemented a training program
designed to enhance the effectiveness and knowledge of our 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 customer approval
of the printed piece while it is being printed.
Each of our divisions employs salespeople who are knowledgeable about the
industry and the printing capabilities of the divisions they serve.
Additionally, training is provided on the printing capabilities at each of the
other divisions. Our 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 entire company,
the speed and quality of our
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service and the personal attention offered by our 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. We believe that it is important to field a
competitive sales force and to attract new salespeople seeking to capitalize on
our opportunities. We believe that our existing compensation structure is
competitive with other companies in the general commercial printing industry.
Moreover, because we generally can offer greater capacity and a broader array of
capabilities than smaller, locally-owned general commercial printing companies,
we believe we can successfully compete with these other printing companies to
hire additional qualified salespeople.
Purchasing and Raw Materials
As a result of centralized purchasing, we are able to take advantage of
volume discounts and rebates from manufacturers and suppliers of paper, film,
printing plates and ink that are otherwise unavailable to the divisions on a
stand-alone basis. We purchase 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 our largest cost item, with
paper costs at approximately 26% of revenue for the year ended December 31,
1999. We do not maintain a significant inventory of paper and are generally able
to pass the cost of the paper through to our customers. We have pricing
arrangements in place with several paper suppliers that provide for volume based
discounts and rebates.
We continue to negotiate purchasing arrangements with other major suppliers
and manufacturers. We anticipate 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. We receive input
from our divisions on market conditions, local supplier service and product
developments which enables us to continually maximize the benefits of these
master purchasing arrangements.
Due to our poor operating performance in 1999, we have met with several of
our key vendors to discuss with them our past performance and our plans to
improve performance in the future. To date, we have not experienced any
significant difficulty in obtaining the raw materials necessary for our
operations.
Competition
We compete with a substantial number of other general commercial printing
companies. Because of the nature of our business, most of our competition is
confined to local printing markets. The major competitive factors in our
business are the quality of customer service, the quality of finished products
and price. Our ability 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. We believe we compete 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.
Employees
On February 29, 2000, we had approximately 1,900 employees. Less than
five percent of our employees are members of the Graphic Communications
International Union (GCIU). These employees work under a collective bargaining
agreement which has recently been extended to March 31, 2003.
In March 1999, we became aware of considerable employee discontent at our
Stephenson Printing
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Division, one of our largest divisions, due to circumstances existing at the
division prior to its acquisition. This discontent culminated with efforts to
unionize the division workforce. In opposition to the union efforts, we expended
significant time and expense. During this period, the employee discontent and
union fight adversely affected the division's operating results; the attention
and focus of the employees and division management alike were on the
unionization. However, we were successful in our defense of the unionization
efforts, and we have taken remedial measures to lower the chances that similar
employee discontent will occur in the future. Otherwise at this time, we believe
our relationship with our employes, including those covered by a collective
bargaining agreement, is acceptable.
Government and Environmental Regulation
Our 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. We make capital
expenditures from time to time to stay in compliance with applicable laws and
regulations.
We have obtained all permits and approvals and filed all registrations
required for the conduct of our business, except where the failure to obtain any
permit or approval or file any registration would not have a material adverse
effect on our business, financial condition or results of operations. We are 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 our business, financial condition or results of
operations.
In connection with each of our acquisitions, the properties involved were
subjected to a Phase I environmental site assessment (which does not involve
invasive procedures, such as soil sampling or ground water analysis) by
independent environment consultants. The purpose of a Phase I environmental site
assessment is to identify potential sources of contamination for which we may be
responsible and to assess the status of environmental regulatory compliance. We
conduct further environmental testing when we believe it prudent and advisable.
The Phase I environmental site assessment obtained for the property used by
the Stephenson Printing division revealed that there are two underground storage
tanks listed with the Virginia Department of Environmental Quality as "currently
in use" on the property. The owner of the property has informed us that the
underground storage tanks were removed in the mid-1980's, although there is no
documentation of the removal of the tanks. The storage tanks were previously
used for the storage of alcohol and solvent. Although we are not aware of any
contamination, there is a potential for soil or groundwater contamination on the
property if there were any releases from the underground storage tanks.
The Phase I environmental site assessment obtained for the property used by
our Columbia Graphics division disclosed that asbestos-containing materials may
be present in building materials. As a result, we conducted an asbestos survey
and removed and/or abated all friable asbestos that we found. Although the
Phase I study also pointed out possible deficiencies in the filing and record-
keeping practices of the division, we believe any such possible deficiencies
have been remedied.
No other environmental testing has revealed any environmental condition,
liability or compliance concern that we believe would have a material adverse
effect on our business, assets or results of operations, nor are we aware of any
such condition, liability or concern by any other means. However, it is possible
that the environmental testing relating to any one of the properties did not
reveal all environmental conditions, liabilities or compliance concerns. It is
also possible that there are material environmental conditions, liabilities or
compliance concerns that arose at a property after the related review was
completed. If environmental contamination exists or existed at a property, we
may be liable for the costs of removal or remediation of the contamination and
may be liable for personal injury or similar claims by private plaintiffs.
Moreover, if there is an environmental compliance issue, we
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may be liable for the costs of and penalties associated with any action
necessary to correct this deficiency. The existence of environmental liabilities
with regard to a property could adversely affect our ability to sell or borrow
against that property.
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 us. Moreover, no
assurances can be given that
. future laws, ordinances or regulations will not impose any material
environmental liability or
. 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.
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 us. Such costs could have a material
adverse effect on our business, financial condition and results of operations.
Item 2. Properties.
Our principal facilities are described in the table below. All of the
listed facilities contain office, production and storage space. Our facilities
are suitable and adequate for our current needs.
Approximate
Building Space
Facility and Location Owned/Leased (Square Feet)
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Master Graphics, Inc.
Cordova, Tennessee......................... Leased 3,200
B&M Printing Division
Memphis, Tennessee......................... Leased 70,000
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 65,000
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Approximate
Building Space
Facility and Location Owned/Leased (Square Feet)
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King Mailing Division
Chamblee, Georgia.......................... Leased 10,000
Jones Printing Division
Chattanooga, Tennessee..................... Leased 16,500
Phillips Litho Division
Springdale, Arkansas....................... Owned 73,800
Harperprints Division
Henderson, North Carolina.................. Leased 55,000
McQuiddy Printing Division
Nashville, Tennessee....................... Owned 83,400
Golden Rule Printing Division
Huntsville, Alabama........................ Leased 65,000
Hederman Brothers Division
Ridgeland, Mississippi..................... Leased 72,000
Stephenson Printing Division
Alexandria, Virginia....................... Leased 94,000
Technigrafiks Division
Houston, Texas............................. Leased 30,300
Woods Lithographics Division
Phoenix, Arizona........................... Leased 54,500
Eagle Direct
Denver, Colorado........................... Leased 87,000
Thomasson Printing
Carrolton, Georgia......................... Leased 63,900
White Arts/TPC Division
Indianapolis, Indiana...................... Owned 64,000
White Arts/TPC Division
Indianapolis, Indiana...................... Leased 22,000
Columbia Graphics Division
Chicago, Illinois.......................... Leased 80,000
In addition, we own an 18,000 square foot facility located in Richland,
Mississippi that was previously occupied by our Blackwell Lithographers
division. We closed the Blackwell Lithographers division in July 1999, and the
facility is currently listed for sale.
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Item 3. Legal Proceedings.
We are party to various claims and matters of litigation that arise in the
normal course of our business. We believe the resolution of these matters will
not have a material adverse effect on our results of operations or financial
condition.
In addition, on February 15, 2000, Margaret Webb McQuiddy, individually and
as executrix of the Estate of David L. McQuiddy, Jr., filed a complaint against
Master Graphics in the Chancery Court for Davidson County, at Nashville,
Tennessee. The complaint alleges that Master Graphics owes the Estate of David
L. McQuiddy, Jr. $1,502,948 plus interest relating to a demand promissory note
issued to Mr. McQuiddy by Master Graphics in connection with the acquisition of
our McQuiddy Printing Division. Master Graphics has filed on answer to
McQuiddy's complaint.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted during the 1999 fourth quarter to a vote of the
holders of our common stock.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
From June 10, 1998 until January 21, 2000, Master Graphics' common stock
was traded on the NASDAQ National Market. Master Graphics' common stock is now
traded on the OTC Bulletin Board. As such, an established public trading market
currently does not exist for the common stock, but a few brokers may make a
market from time to time over-the-counter. The OTC Bulletin Board is a regulated
quotation service that displays quotes, last-sales price and volume information
in over-the-counter equity securities. The symbol under which Master Graphics'
common stock trades is "MAGR." Prior to June 10, 1998, there was no public
market for Master Graphics' common stock. As of March 27, 2000, there were
110 shareholders of record. This number does not reflect the number of
beneficial owners of the common stock as determined by securities position
listings.
The following table reflects the range of the high and low bid information
for Master Graphics' common stock for the periods indicated.
High Low
---- ---
Fiscal 1999 - Quarter Ended
December 31, 1999 3.6875 0.6875
September 30, 1999 5.625 3.50
June 30, 1999 6.50 3.625
March 31, 1999 6.8125 5.00
Fiscal 1998 - Quarter Ended
December 31, 1998 7.00 4.875
September 30, 1998 9.875 4.875
June 10 - June 30, 1998 9.50 9.00
Master Graphics currently intends to retain all future earnings to finance
the continuing development of its business and does not anticipate paying cash
dividends on the common stock in the foreseeable future. Any payment of cash
dividends in the future will depend upon the financial condition, loan
covenant restrictions and requirements, capital spending requirements and
earnings of Master Graphics, as well as other factors the Board of Directors may
deem relevant. Master Graphics is dependent upon the transfer of funds from
Premier Graphics, its operating subsidiary, which, under Premier Graphics'
credit facilities, is subject to restrictions on its ability to pay dividends to
Master Graphics and is generally limited by specific amounts or amounts in
relation to the profitability of Premier Graphics.
9
<PAGE>
In March 1999, Master Graphics issued 43,029 shares of its common stock
valued at $233,000 to the sellers in partial consideration for the acquisition
of Woods Lithographics. All of those shares of common stock were issued by
Master Graphics in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations adopted thereunder, as transactions by the issuer not involving a
public offering. Pursuant to an agreement between the Company and Woods
Lithographers, the shares issued were subsequently placed into an escrow
account. If the Woods Lithographers Division does not satisfy specified EBITDA
targets, the shares will be cancelled and will become authorized but unissued
shares of common stock.
10
<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating information
on an historical basis for the Company and its predecessor entities. The
following information should be read in conjunction with the Company's
historical financial statements including the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, December 31, Years ended June 30,
1999 1998 1997 (1) 1997 1996 1995
-------------- ---------- ----------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Statement of Operations Data:
Revenue $ 261,541 $ 163,277 $ 32,394 $13,433 $13,244 $11,426
Gross profit 54,403 41,937 5,866 2,121 3,288 2,498
Depreciation and amortization 12,695 6,660 1,413 623 605 747
Impairment loss 77,746 (3) 0 0 0 0 0
Operating income (loss) (81,098) 14,054 (222) (900) 597 (72)
Net earnings (loss) before
extraordinary loss (105,208) 3,973 (2) (3,819) (1,273) 172 (209)
Net earnings (loss) (105,208) 1,875 (3,819) (1,273) 172 (209)
Earnings (loss) per share before
Extraordinary item:
Basic $ (13.32) $ 0.62 $ (0.95) $ (0.32) $ 0.04 $ (0.05)
Diluted $ (13.32) $ 0.60 $ (0.95) $ (0.32) $ 0.04 $ (0.05)
Balance Sheet Data (at end of period):
Total assets $ 187,439 $ 207,876 $ 86,384 $37,215 $ 6,426 $ 6,102
Working capital (145,812)(4) 47,925 6,691 3,056 1,286 765
Long-term obligations, including
current maturities 207,563 145,147 69,317 30,612 2,794 3,382
Redeemable common stock warrants 2,200 (5) 0 3,376 638 0 0
Redeemable preferred stock 1,580 1,437 0 0 0 0
</TABLE>
- ----------
(1) Effective January 1, 1998, we changed our annual accounting period to a
calendar year.
(2) We incurred an after-tax extraordinary loss in June 1998 of approximately
$2.1 million ($0.34 per share basic and $0.33 per share diluted) related to
the write-off of deferred financing costs and unamortized debt discounts
resulting from the repayment of certain indebtedness in connection with our
initial public offering of common stock.
(3) In 1999, we incurred an impairment loss of approximately $77.7 million. See
further discussion in Management's Discussion and Analysis and in note 4 to
our consolidated financial statements.
(4) Due to violations of certain debt covenants, lenders have the right to
accelerate demand for their repayment. As a result, we have reclassified
the related debt to current liabilities in the consolidated balance sheet.
See note 6 to our consolidated financial statements. Also see note 19 for a
discussion of uncertainties, and our plans regarding our ability to
continue as a going concern.
(5) In 1999 in connection with obtaining an additional loan with our senior
secured lender, we modified our existing warrant agreement with the senior
secured lender to allow a put feature. The modified warrant which had an
estimated fair value of approximately $2.2 million at the modification
date, will be amortized over the five year term of the note and has been
reflected as a liability in our consolidated financial statements. See note
15 to our consolidated financial statements.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the historical
consolidated financial statements and related notes of Master Graphics and
Selected Financial Data included elsewhere in this report on Form 10-K.
Introduction
From June 1997 through December 31, 1999, we acquired 19 general commercial
printing companies. We acquired five commercial printing companies in 1999 and
financed the cash portion of the purchase price for the acquired companies
primarily with debt. Each acquisition was accounted for on the purchase basis,
and any purchase price in excess of the fair value of the assets acquired was
allocated to goodwill which, through December 31, 1999, was amortized over 40
years. See note 4 regarding impairment of long-lived assets. Our results of
operations are also impacted by the effects of purchase accounting applied to
in-process inventory acquired. Such inventory is recorded at its fair value,
which may include manufacturing profit not otherwise recognizable until the
goods are sold. The resulting cost of sales when such goods are sold, usually in
the period immediately following the acquisition date, may be substantially
higher than in a period when acquisitions are not being made.
Results of Operations
The following table sets forth certain financial data for the periods
indicated and such results as a percentage of revenue (dollars in millions).
<TABLE>
<CAPTION>
Year ended
Years ended December 31, Six months ended December 31, June 30,
1999 1998 1997(1) 1996(2) 1997(2)
---------------- ---------------- -------------- ---------------- ------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 261.5 100.0% $163.3 100.0% $32.4 100.0% $ 6.4 100.0% $13.4 100.0%
Gross profit 54.4 20.8 41.9 25.7 5.9 18.2 1.0 15.6 2.1 15.7
Selling, general and
administrative expenses 55.4 21.2 26.9 16.5 6.0 18.5 1.3 20.3 3.0 22.4
Operating income (loss) (3) (81.1) (31.0) 14.1 8.6 (0.2) (0.6) (0.3) (4.7) (0.9) (6.7)
Interest expense 22.2 8.5 10.3 6.3 2.2 6.8 0.2 3.1 0.4 3.0
Income tax expense 0.7 0.3 0.6 0.4 0.0 0.0 0.0 0.0 0.0 0.0
Net earnings (loss) before
extraordinary loss (105.2) (40.2) 4.0 2.4 (3.8) (11.7) (0.4) (6.3) (1.3) (9.7)
Extraordinary loss (4) 0.0 0.0 (2.1) (1.3) 0.0 0.0 0.0 0.0 0.0 0.0
Net earnings (loss) $(105.2) (40.2) $ 1.9 1.2% $(3.8) (11.7)% $(0.4) (6.3)% $(1.3) (9.7)%
</TABLE>
(1) Effective January 1, 1998, we changed our annual accounting period to a
calendar year.
(2) The results of operations for all periods through June 30, 1997 effectively
reflect only the operations of B&M Printing.
(3) In 1999, we incurred an impairment loss of approximately $77.7 million. See
further discussion below in note 4 to our consolidated financial
statements.
(4) We incurred an extraordinary loss in June 1998 of approximately $2.1
million (net of tax benefit of $1.5 million) related to the write-off of
deferred financing costs and unamortized debt discounts resulting from the
repayment of certain indebtedness in connection with our initial public
offering of common stock.
12
<PAGE>
Year Ended December 31, 1999 Compared To Year Ended December 31, 1998
Revenue. Revenue increased from $163.3 million for the year ended
December 31, 1998 to $261.5 for the year ended December 31, 1999. This growth
in revenue is attributed to a full year of sales from our 1998 acquisitions and
partial year sales from our 1999 acquisitions.
On a same store basis, year over year revenue declined from $293.1 million
in 1998 to $274.8 million in 1999, or 6.2%. This decline is primarily due to the
inability of our Master Central process to produce incremental sales at the
division, distractions across all of our divisions caused primarily by the pace
of corporate initiatives during the year and competitive pricing pressures
experienced by the industry during the latter half of 1999.
Revenues generated from our Master Central system increased from $6.2
million in 1998, or approximately 3% of reported sales, to $17.5 million in
1999, or approximately 8% of reported sales. This increase was due to higher
participation rates by our divisional sales representatives in the Master
Central system and the addition of a dedicated sales force that reported
directly to the Master Central corporate organization. At its peak, the Master
Central corporate sales force numbered 12 representatives.
The objective of our Master Central strategy was to generate incremental
capacity utilization of our fixed assets, both by generating new sales by the
sales force described above and by coordinating the transfer of production of
jobs among our divisions and thereby driving margin improvement. This strategy
assumed jobs generated through the Master Central system could be scheduled and
produced on an incremental basis. During 1999, almost 65% of Master Central
generated revenue was produced at three of the Company's web press plants.
During 1999, our web divisions were unsuccessful in scheduling work from Master
Central on an incremental basis, which resulted in Master Central jobs replacing
jobs that were historically produced at higher margins. This replacement effect
was compounded by lower year over year sales performance from the web divisions'
existing sales forces. Sales volume, excluding Master Central generated
business, at the three web plants was down 19.9% when compared to 1998, while
sales at the Company's sheet fed plants were down 2.1% for the same period.
Effective January 1, 2000, we restructured our Master Central organization.
Individual divisions now take a direct role in determining pricing and
scheduling requirements. Prior to January 1, 2000, a significant portion of the
pricing decisions were managed by the corporate Master Central organization,
without the benefit of on-site market information from the divisions.
In 1999, we undertook an initiative to replace 27 older model printing
presses with 14 technologically advanced presses, completed our installation of
a common management information system across all divisions and also gained ISO
9001 certification at eight of our divisions. The pace of these initiatives
caused major disruptions throughout our plants due to aggressive project plans,
management of press dismantling and installation efforts and documentation of
process flows. Each of these efforts required the participation from our sales
force in some regard and detracted from day to day selling.
Gross Profit. Gross profit increased from $41.9 million for the year ended
December 31, 1998 to $54.4 million for the year ended December 31, 1999. The
increase in gross profit was attributable primarily to our acquisitions in 1998
and 1999.
Gross profit as a percentage of sales decreased to 20.8% for the year ended
December 31, 1999, from 25.7% in the year ended December 31, 1998. Our overall
direct margin on revenues (sales less the cost of paper, direct materials and
outside services) declined over 2% in 1999 due primarily to the impact of the
Master Central replacement effect described above. Our press replacement and ISO
certification efforts described above also had negative impacts on efficiencies
in our cost of production. In addition, 1999 factory labor costs, as a
percentage of reported sales, increased approximately 5% when compared to 1998.
This growth in percentage was not offset by productivity improvements and was
not supported by incremental sales volumes. In December 1999, the Company began
implementing its year 2000 operating plan, which includes a reduction in force
of approximately 5.5% from mid-1999 levels.
In addition to technological advances in the pressroom, in the second half
of 1999 we also directed our prepress departments towards a total digital
workflow. As part of this strategy, we are updating prepress systems, adding
digital proofing and selectively installing computer to plate devices. This new
equipment and software is replacing traditional prepress platemaking and
stripping operations. While implementing these new technologies, interruptions
in productivity occurred due to construction, training and learning curve
issues. These one-time occurrences have a negative effect on prepress costs
during the installation phase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $26.9 million for the year ended
December 31, 1998 to $55.4 million for the year ended December 31, 1999, and
is directly related to our acquisitions.
13
<PAGE>
As a percentage of sales, selling, general and administrative expenses were
16.5% in 1998 and 21.2% in 1999. Impacting the 1999 percentage change were the
lower sales revenues described above. Also affecting the percentage change was
an increase, by mid-year, of our selling and administrative headcount by
approximately 5.2% from the beginning of the year.
During the fourth quarter of 1999, we incurred a $1.5 million
charge for restructuring costs resulting from implementing our year 2000
operating plan. Included in the charge were costs related to moving the
corporate offices and severance costs related to work force reductions.
Impairment. As a result of its periodic review of operations for impairment
of assets, management has determined that several events occurred during late
1999 that will permanently affect the Company's future cash flow expectations.
Accordingly, the Company has recorded a loss from the impairment of certain
long-lived assets totaling $77.7 million. See note 4 to the consolidated
financial statements.
Interest Expense. Interest expense increased from $10.3 million for the
year ended December 31, 1998 to $22.2 million for the year ended December 31,
1999. A substantial portion of the purchase price for each of our acquisitions
was financed with debt. Accordingly, the increase in interest expense is
primarily attributable to our acquisition program and related financing
activities. In addition, the issuance of the 11 1/2% Senior Notes in December
1998, and the use of proceeds therefrom largely to repay acquisition
indebtedness with lower rates of interest has increased interest expense in
1999.
Income Tax Expense. Income tax expense of approximately $0.7 million in
1999 is a result of an increase in the valuation allowance to fully reserve
previously recorded deferred tax assets. Management's current assessment is that
realization of such benefits is more likely not to occur during the tax benefit
period.
Year Ended December 31, 1998 Compared To Year Ended June 30, 1997
Revenue. Revenue increased from $13.4 million for the year ended June 30,
1997 to $163.3 for the year ended December 31, 1998. Revenue growth was
attributable primarily to our acquisition of 14 general commercial printing
companies in 1997 and 1998.
Gross Profit. Gross profit increased from $2.1 million for the year ended
June 30, 1997 to $41.9 million for the year ended December 31, 1998. The
increase in gross profit was attributable primarily to our acquisitions in 1997
and 1998. Gross profit as a percentage of sales increased to 25.7% for the year
ended December 31, 1998, from 15.7% in the year ended June 30, 1997. The 1997
gross profit percentage, which as stated above relates only to the operations of
B&M Printing, was negatively impacted by an increase in lease expense and labor
costs related to a then newly-installed and initially under-utilized web press.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $3.0 million for the year ended June 30,
1997 to $26.9 million for the year ended December 31, 1998. Selling expenses
increased primarily due to increased revenue mentioned above.
Interest Expense. Interest expense increased from $0.4 million for the year
ended June 30, 1997 to $10.3 million for the year ended December 31, 1998. A
substantial portion of the purchase price for each of our acquisitions was
financed with debt. Accordingly, the increase in interest expense is primarily
attributable to our acquisition program and related financing activities.
Extraordinary Loss. We incurred an extraordinary loss in 1998 of
approximately $2.1 million (net of tax benefit of $1.5 million) related to the
write-off of deferred financing costs and unamortized debt
14
<PAGE>
discounts resulting from the repayment of certain indebtedness in connection
with Master Graphics' initial public offering.
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996.
Revenue. Revenue increased 406% from $6.4 million for the six months ended
December 31, 1996 to $32.4 million for the six months ended December 31, 1997.
The increase in revenue was primarily driven by volume and attributable to the
six acquisitions during the seven months ended December 31, 1997.
Gross Profit. Gross profit increased 490% from $1.0 million for the six
months ended December 31, 1996 to $5.9 million for the six months ended
December 31, 1997. Gross profit percentage increased from 15.7% to 18.2% from
the six months ended December 31, 1996 to the six months ended December 31,
1997. The increase in gross profit percentage was due primarily to the
marginally higher average gross profit percentage of the businesses acquired.
The increase in absolute gross profit was primarily attributable to our
increasing revenue, which was driven by acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 362% from $1.3 million for the six months
ended December 31, 1996 to $6.0 million for the six months ended December 31,
1997. This increase was primarily attributable to the increases in selling costs
that accompany the volume increases during the same period.
Interest Expense. Interest expense increased from $0.2 million for the six
months ended December 31, 1996 to $2.2 million for the six months ended December
31, 1997. The increase related to increasing amounts of borrowed funds for our
acquisition strategy.
Liquidity and Capital Resources
Our primary cash requirements have been for debt service, capital
expenditures, acquisitions and working capital. Historically, we have financed
our operations and equipment purchases with cash flow from operations, capital
leases and secured loans through commercial banks or other institutional lenders
and credit lines from commercial banks. We have financed our acquisitions
primarily with funds under credit facilities as well as subordinated notes
payable to a number of former owners of the acquired companies. At December 31,
1999, we had a working capital deficit of $145.8 million, a decrease in working
capital of $193.7 million from December 31, 1998. This decrease was primarily
due to violations of certain financial and non-financial debt covenants, which
give our lenders the right to accelerate demand for repayment of their loans. As
a result, we have reclassified the related debt to current liabilities in the
consolidated balance sheet. See note 6 to the consolidated financial statements.
Also see note 19 for a discussion of uncertainties, and our plans regarding our
ability to continue as a going concern.
In the second quarter of 1998, we completed an initial public offering of
common stock, the net proceeds of which were used primarily to repay
approximately $25 million of debt outstanding under our secured credit facility
along with $4 million of other debt. Through the third quarter of 1998, our
largest source of capital had been our secured credit facility with General
Electric Capital Corporation, which originally closed in September 1997 and was
periodically increased to provide for the funding of acquisitions completed
since that time. During the fourth quarter of 1998, we completed an offering of
$130 million 11 1/2% Senior Notes due 2005. Net proceeds from the offering were
used to repay substantially all of the debt under our credit facilities as well
as to fund our Technigrafiks acquisition and to partially fund three
acquisitions in March 1999.
In 1999, we acquired five businesses, which were financed primarily with
cash previously generated by the notes offering and by $41.2 million borrowed
under our secured credit facility. In addition, we entered into an amended and
restated loan and security agreement with General Electric Capital Corporation,
as agent. The $80 million senior secured credit facility consisted of two term
loan facilities, each of $30 million, and a revolving credit facility of $20
million. Loans made under the term loan facilities and the revolving credit
facility may bear interest based upon LIBOR or the "Base Rate," which is the
prime rate for corporate loans from U.S. financial institutions as published by
The Wall Street Journal from time to time. The Term Loan A facility bears
interest at a floating rate equal to either (a)
15
<PAGE>
LIBOR plus 3.5% for loans bearing interest based upon LIBOR or (b) the Base Rate
plus 0.5% for loans bearing interest based upon the Base Rate. The Term Loan B
facility bears interest at a floating rate equal to either (a) LIBOR plus 4.0%
for loans bearing interest based upon LIBOR or (b) the Base Rate plus 1.0% for
loans bearing interest based upon the Base Rate. The revolving credit facility
bears interest at a floating rate equal to LIBOR plus 3.5% for advances bearing
interest based upon LIBOR or the Base Rate plus 0.5% for advances bearing
interest based upon the Base Rate. The Term Loan A facility matures in March
2004, and principal is payable in quarterly installments of $746,000. The Term
Loan B facility matures in March 2005 with quarterly principal payments equal to
$298,000 with a final balloon payment at maturity. The revolver, which has
certain borrowing base limitations, is repayable in full in March 2004.
Currently all debt under Term Loans A and B bear interest based upon LIBOR, and
we will not be able to convert the LIBOR debt to Base Rate debt in the future.
In November 1999, we completed an amendment to our secured credit facility that
terminated the remaining Term Loan availability.
In December 1999, we completed an amendment to the Revolver to provide for
an overline amount of $12.5 million ("Overline Loan"). This Overline Loan bears
interest at a floating rate equal to the Basic Rate plus 3.5% (12.00% at
December 31, 1999), payable monthly. We incurred cash financing fees of
approximately $1.8 million related to this agreement which will be amortized
over five years. In addition, we amended the senior lender's common stock
warrant agreement as described in note 15 to our financial statements. This
amendment resulted in an additional $2.2 million in deferred loan costs that
will be amortized over five years.
We financed a portion of the aggregate amount paid for certain of the
acquired companies by issuing unsecured subordinated notes ("Seller Notes") to
the former owners of these companies. The total principal amount of Seller Notes
issued was approximately $15.0 million. Master Graphics also issued unsecured
subordinated notes ("Replacement Notes") to the former owners of Hederman and
Phoenix, which replaced notes between such companies and their owners. The
aggregate principal amount of Replacement Notes issued by Master Graphics was
approximately $5.3 million. In connection with the acquisition of B&M Printing,
approximately $1.3 million of unsecured subordinated notes were issued to the
former owners of B&M Printing.
In connection with the December 1998 closing of the notes offering, we
restructured approximately $12.5 million of Seller Notes and Replacement Notes
to have the following features: (i) balloon maturity date of June 30, 2006; (ii)
monthly interest payments at 12% per annum if paid when due or, if not paid when
due, interest will accrue at 16% per annum, until all accrued interest has been
paid; (iii) no restrictive covenants; and (iv) no rights or remedies against
Master Graphics until maturity. After September 1999, we ceased paying interest
under these notes. Since that time, interest has accrued under the notes as 16%
per annum.
In addition, we used approximately $4.8 million of the net proceeds of the
notes offering to repay amounts outstanding under the B&M Notes and certain
seller notes or seller replacement notes. The remaining $4.0 million of seller
notes and replacement notes generally (i) bear interest at 12% per annum which
is payable quarterly; (ii) are subject to prepayment at our option only upon
payment of a penalty which equals 20% of the amount prepaid; and (iii) mature
seven years from the date of issuance. In 1999, $1.0 million of Seller Notes
were repaid.
As part of the respective purchase agreements, we agreed to pay the
former owners of 11 of the acquired companies additional purchase price
consideration if such companies surpass certain EBITDA-based targets, which
generally exceed the pre-acquisition performance levels of those companies.
Reaching these targets will result in additional cash inflow to us arising from
the incremental EBITDA above the targets and additional cash outflow from the
consideration required to be paid. The periods for which the targets will be
measured vary for each of the companies, and the measurement periods range from
one year to five years of operations. For some of the companies, additional
consideration will be payable by us annually for each year in which the EBITDA-
based target is surpassed, and for other companies, only a single lump sum
payment will be made by us if the performance of the company exceeds the target.
The maximum additional purchase price consideration payable to the former owners
of 10 of the companies is limited to a specified amount. The amount of
additional consideration payable to the former owners of the other company is
not limited once the EBITDA-based target is surpassed. We paid former owners
$7.7 million of additional purchase price consideration in 1999 including the
payment of our additional purchase price obligations to former owners of the
acquired companies. We do not anticipate paying former owners additional
purchase price consideration in 2000. Thereafter, assuming that the former
owners become entitled to receive the maximum amount of additional purchase
price consideration at the earliest possible time, we would pay the former
owners $3.0 million in 2000, $16.3 million in 2001, $8.5 million in 2002, $15.5
million in 2003 and $0.5 million in 2004. Approximately $7.5 million payable in
2003 according to the preceding sentence would be payable in shares of our
common stock. Otherwise, any additional purchase price consideration is payable
in cash. These payments are typically recorded as adjustments to goodwill.
However, pending management's ongoing evaluation of asset impairment, these
payments may be recorded as a direct charge to earnings. Based on the Company's
current performance trend, it does not expect a significant portion of these
amounts to be earned. See note 4 to consolidated financial statements regarding
impairment of long-lived assets.
16
<PAGE>
We are dependent upon the cash flow of, and the transfer of funds from,
Premier Graphics, our operating subsidiary, which, under its various credit
facilities, is subject to restrictions on its ability to pay dividends to Master
Graphics and is generally limited by specific amounts or amounts in relation to
the profitability of Premier Graphics. To the extent that cash flow from
operating activities is insufficient to fund the payment of any additional
purchase price consideration, we will need to finance the payment of such
consideration through credit facilities.
The security for our secured credit facility includes a lien on all of the
assets of Premier Graphics as well as a pledge by Master Graphics on all of the
issued and outstanding stock of Premier Graphics. Under the credit facility, we
are required to maintain certain financial tests and ratios including, but not
limited to, a covenant requiring a minimum level of prepayment of the term loan
facilities based on 50% of annual excess cash flows. Largely as a result of our
poor 1999 operating performance, as of December 31, 1999 we were in violation of
certain of the financial and other covenants related to our secured credit
facility. These violations are events of default under the terms of the
facility, and because of cross-default provisions create an event of default
under the senior notes indenture. Independent events of default also exist under
the indenture. An event of default under both our secured credit facility and
the senior notes indenture gives our lenders the right to accelerate payment of
the underlying debt. As of December 31, 1999, and continuing through March 30,
2000, we had not obtained waivers of any events of default. Currently, we are
negotiating a forbearance agreement with our secured lenders. In the forbearance
agreement our secured lenders will agree not to take any action against us based
on existing defaults until the earlier of May 25, 2000 or the occurrence of
another event of default under the facility. There can be no assurance that we
will be successful in our negotiations to obtain a forbearance agreement.
Notwithstanding the existence of the forbearance agreement, our secured lenders
may have the discretion to stop future advances under our revolving line of
credit. If the secured lenders refuse to advance additional working capital
funds, such an event would have a material adverse effect on our ability to
operate our business. During the forbearance period, we expect our operations to
improve from fourth quarter 1999 levels as a result of our year 2000 operating
plan. We also intend to pursue alternative financing to restructure our balance
sheet. Even if we reach a forbearance agreement with our secured lenders, the
holders of our senior notes will have the right to accelerate payment of the
notes due to the cross-default provisions set forth in the senior note
indenture. See note 19 for a discussion of uncertainties, and our ability to
continue as a going concern.
We believe the baseline level of EBITDA generated by our divisions has been
eroded due to market pressures and the overall difficulties our division
management teams have had in adapting to a general corporate environment. While
we believe the improvement efforts identified in our year 2000 operating plan
will be achieved, we recognize that the transition from an entrepreneurial
based, acquisition oriented corporate strategy into a operations oriented
cohesive unit strategy will be evolutionary and will involve further transitions
at some divisions. We believe that this new baseline level of EBITDA is adequate
to support our ongoing working capital requirements, a level of capital
expenditures for machinery and equipment (currently anticipated at $3 million
annually) and a level of other long-term debt service. We do not believe our new
baseline EBITDA is capable of supporting our current level of debt service,
which includes amounts required to finance the premiums paid for our
acquisitions.
Master Graphics' Board of Directors has appointed a Finance Committee,
which has been in active negotiations with various lenders to develop the
financing alternatives necessary for our long term objectives. We are cautiously
optimistic on the success of these negotiations.
Year-2000 Readiness Program
We have had no disruption to our operations to date as a result of any year
2000 (Y2K) issue. The Y2K internal issues are the result of computer programs
being written using two digits rather than four to define the applicable year.
As a result, computer programs that have time-sensitive software are at risk to
recognize a date using "00" as the year 1900 rather than the year 2000. We
completed a company-wide program to ensure its systems were Y2K compliant during
1999.
The total cost to modify existing software for Y2K compliance, expended
over the period 1998-1999, was approximately $0.7 million. In many instances, we
installed new hardware and software with greatly enhanced functionality that
also solved potential Y2K compliance issues and capitalized the costs of those
installations.
We have contingency plans to address situations that may result if we
encounter a future Y2K issue in a mission critical operating system. These
contingency plans cover the critical order processing and distribution systems
as well as plant operating and process control systems. If both our Y2K
solutions and contingency plans fail for a critical system for a prolonged
period, the impact on the Company would be material.
Despite assurances from outside parties of their timely readiness, we
cannot ensure that our suppliers, vendors and customers have resolved all Y2K
issues. Given the responses from suppliers and our experience thus far in 2000,
we believe it is highly unlikely that a large number of outside parties will
experience any significant problems due to unresolved Y2K issues. In the event
that a large number of customers suffer Y2K compliance issues over a prolonged
period, the impact on the Company would be material.
17
<PAGE>
Impact of Recently Issued Accounting Standards
We do not believe that any recently issued accounting standards, which have
not yet been adopted, will have a material impact on our consolidated financial
statements. SFAS 133, "Accounting for Derivative Financial Instruments," as
amended by SFAS 137, which will be effective for our year ending December 31,
2000, is not expected to have a material impact on our financial statements
because SFAS 133 deals with derivative financial instruments, which presently
are not instruments that we are involved in to a material extent.
Forward-Looking Statements-Safe Harbor Provisions
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. Investors are
cautioned, to the extent that such statements are not recitations of historical
fact, they constitute forward-looking statements, which, by definition, involve
risks and uncertainties that could cause actual results to differ materially
from those included herein. For example, our expectations concerning run-rate
revenues, future sales and profits assume, among other things, stability and
reasonable growth in the economy and in the demand for our products, the
continued availability of raw materials at affordable prices and retention of
our key management and operating personnel. There can be no assurance that any
or all of these assumptions will prove to be correct. For a discussion
identifying some other important factors that could cause actual results to vary
materially from those anticipated in the forward looking statements, see the
consolidated financial statements and notes thereto which begin on page F-2 of
this Annual Report on Form 10-K as well as other Securities and Exchange
Commission filings, including but not limited to our registration statement on
Form S-1 (Registration No. 333-49861) and our registration statement on Form S-4
(Registration No. 333-71157).
18
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk at December 31, 1999 is generally limited to interest rate risk
related to indebtedness under our secured credit facility, which bears interest
based on the Base Rate plus 0.5% for the Revolver to LIBOR plus margin bases
ranging from 3.5% for the Term Loan A traunche to 4.0% for the Term Loan B
traunche. We do not currently deal in any derivative instruments nor are we
exposed to any currency translation fluctuations. We do not have any commodity
derivative instruments because we generally pass any paper price fluctuations
through to our customers using product pricing.
The following table summarizes principal cash flows and related interest
rates, by expected maturity dates, with respect to our indebtedness as of
December 31, 1999. The interest rates represent weighted-average rates, with the
period end rate used for the variable rate debt obligations.
<TABLE>
<CAPTION>
December 31, 1999
Scheduled Maturity Date
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total
Fixed rate $1,516 $1,610 $1,239 $1,550 $ 149 $145,627 $151,691
Average interest rate 11.93% 11.94% 11.95% 11.97% 11.97% 11.97%
Variable rate $7,577 $7,292 $4,792 $4,792 $3,300 $ 32,083 $ 59,836
Average interest rate 9.56% 9.70% 9.82% 9.99% 10.15% 10.15%
</TABLE>
As disclosed in note 19 to the consolidated financial statements, at
December 31, 1999, we were in violation of certain covenants under our secured
credit facility. At April 3, 2000, we were notified by our lenders that those
violations are events of default. Among the lenders' rights and remedies as a
results of these events of default are (1) the right to declare indebtedness due
and payable at any time, (2) the right to foreclose on collateral, and (3) the
right to charge interest at the default rate which is 2% greater than the
otherwise applicable rate (lenders have availed themselves of this right). The
lenders have also limited the making of Revolver advances to a day-to-day
discretionary basis.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company, together with the
report thereon of KPMG LLP, independent auditors, are set forth on pages F-2
to F-22 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this item with respect to the directors of
Master Graphics is incorporated herein by reference to the information set forth
under the captions "Executive Officers," "Other Information about the General
Meeting" and "Proposal 1 - Election of Directors" in Master Graphics' Proxy
Statement for its Annual Meeting of Shareholders to be held on or about June 16,
2000, to be filed with the SEC pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
Item 11. Executive Compensation.
The information called for by this item is incorporated herein by reference
to the information set forth under the caption "Executive Compensation" in
Master Graphics' Proxy Statement for its Annual Meeting of Shareholders to be
held on or about June 16, 2000, to be filed with the SEC pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated herein by reference
to the information set forth under the caption "Master Graphics Stock
Ownership" in Master Graphics' Proxy Statement for its Annual Meeting of
Shareholders to be held on or about June 16, 2000, to be filed with the SEC
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by reference
to the information set forth under the caption "Certain Transactions" in Master
Graphics' Proxy Statement for its Annual Meeting of Shareholder to be held on or
about June 16, 2000, to be filed with the SEC pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements:
See the Index to Financial Statements of Master Graphics, Inc. and
subsidiary on page F-1 hereof.
2. Financial Statement Schedules:
Financial Statement Schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the financial statements or the notes thereto.
20
<PAGE>
3. Exhibits
Exhibit
Number Description
- ------- -----------
3.1* Charter of Master Graphics, Inc. (Exhibit 3.1)
3.2* Bylaws of Master Graphics, Inc. (Exhibit 3.3)
4.1** Indenture, dated December 11, 1998, among Premier Graphics, Inc., as
issuer, Master Graphics, Inc. and Harperprints, Inc., as guarantors,
and United States Trust Company of New York, as trustee, relating to
the 11 1/2% Senior Notes due 2005 (Exhibit 4.1)
4.2** Form of 11 1/2% Senior Note due 2005 of Premier Graphics, Inc.
(the "Old Note") (Exhibit 4.2)
4.3** Form of 11 1/2% Senior Note due 2005 of Premier Graphics, Inc. (the
"Exchange Note") (Exhibit 4.3)
4.4** Form of Guarantee of Master Graphics, Inc. (Exhibit 4.4)
4.5** Registration Rights Agreement, dated as of December 11, 1998, by and
among Premier Graphics, Inc., Master Graphics, Inc., Harperprints,
Inc. and the Initial Purchasers relating to $130,000,000 aggregate
principal amount of Old Notes (Exhibit 4.5)
4.6** Form of First Supplemental Indenture between Premier Graphics,
Master Graphics and United States Trust Company of New York, as
trustee (Exhibit 4.6)
10.1 Employment Agreement dated as of February 22, 2000 by and between
Master Graphics, Inc. and Robert J. Diehl+
10.2 Employment Agreement dated as of February 22, 2000 by and between
Master Graphics, Inc. and P. Melvin Henson, Jr.+
10.3* Employment Agreement dated as of March 1, 1998 by and between Master
Graphics, Inc. and James B. Duncan+ (Exhibit 10.27)
10.4 Employment Agreement dated as of February 22, 2000 between Master
Graphics, Inc. and Donald Goldman+
10.5* Noncompetition Agreement dated as of March 1, 1998 by and between
Master Graphics, Inc. and H. Henry Hederman, Jr. (Exhibit 10.32)
10.6* 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
(Exhibit 10.16)
10.7* Agreement and Plan of Merger dated as of March 1, 1998 between
Hederman Brothers, Inc. and Premier Graphics, Inc. (Exhibit 10.17)
10.8** Third Amended and Restated Loan and Security Agreement dated as of
March 15, 1999 between Premier Graphics, Inc., a Delaware corporation
and General Electric Capital Corporation, a New York corporation, as a
Lender and as Agent to Lenders, Deutsche Financial Services
Corporation, a Nevada corporation, as a Lender and as Revolving Credit
Agent for Lenders and Transamerica Equipment Financial Services
Corporation, a Delaware corporation, as Lender (Exhibit 10.1)
10.9+ Stock Purchase Agreement dated as of March 15, 1999 between
Premier Graphics, Inc. and David P. Bornheoft (Exhibit 2.1)
10.10+ Agreement and Plan of Merger dated as of March 15, 1999 between
Columbia Graphics Corporation and Premier Graphics, Inc. (Exhibit 2.2)
10.11++ Master Graphics, Inc. 1998 Non-Employee Director Stock Option Plan
(Exhibit 4.4)+
10.12++ Master Graphics, Inc. 1998 Equity Compensation Plan (Exhibit 4.5)+
10.13++ Amendment No. 1 to the Master Graphics, Inc. 1998 Equity
Compensation Plan (Exhibit 4.6) +
10.14 Consulting Agreement between Master Graphics, Inc. and Michael B.
Bemis+
11.1 Computation of Per Share Earnings
21.1## List of Subsidiaries (Exhibit 21.1)
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
21
<PAGE>
* Incorporated by reference to Master Graphics' Registration Statement on
Form S-1 (Registration No. 333-49861). The parenthetical exhibit number
indicates where the exhibit is found in that filing.
** Incorporated by reference to Master Graphics' and Premier Graphics'
Registration Statement on Form S-4 (Registration Number 333-71157). The
parenthetical exhibit number indicates where the exhibit is found in that
filing.
+ Incorporated by reference to Master Graphics' Form 8-K filed on March 29,
1999. The parenthetical exhibit number indicates where the exhibit is
found in that filing.
++ Incorporated by reference to Master Graphics' Registration Statement on
Form S-8 (Registration No. 333- 80271). The parenthetical exhibit
number indicates where the exhibit is found in that filing.
## Incorporated by reference to Master Graphics' Form 10-K filed on March 30,
1999. The parenthetical exhibit number indicates where the exhibit is found
in the filing.
# Indicates a compensatory plan
(b) Reports on Form 8-K.
(c) Exhibits.
See Item 14(a)(3) above.
(d) Financial Statement Schedules.
See Item 14(a)(2) above.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MASTER GRAPHICS, INC.
By: /s/ Robert J. Diehl
--------------------------------
Robert J. Diehl, President and
Chief Executive Officer
Date: April 13, 2000
------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Michael B. Bemis Chairman, Board of Directors April 13, 2000
- ------------------------------------
Michael B. Bemis
/s/ Robert J. Diehl President, Chief Executive Officer, April 13, 2000
- ------------------------------------ Director
Robert J. Diehl
/s/ P. Melvin Henson, Jr. Chief Financial Officer & Secretary April 13, 2000
- ------------------------------------
P. Melvin Henson, Jr.
/s/ J. Denton Pearson, Jr. Corporate Controller April 13, 2000
- ------------------------------------
J. Denton Pearson, Jr.
/s/ H. Henry Hederman, Jr. Director, President of Hederman April 13, 2000
- ------------------------------------ Brothers Division
H. Henry Hederman, Jr.
/s/ Cary Rosenthal Director, President Phoenix Division April 13, 2000
- ------------------------------------
Cary Rosenthal
/s/ Frederick F. Avery Director April 13, 2000
- ------------------------------------
Frederick F. Avery
/s/ Donald L. Hutson Director April 13, 2000
- ------------------------------------
Donald L. Hutson
</TABLE>
23
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Master Graphics, Inc. and Subsidiary:
Report of Independent Public Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998, the six months ended
December 31, 1997 and the year ended June 30, 1997............ F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999 and 1998, the six months ended December 31,
1997 and the year ended June 30, 1997......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998, the six months ended
December 31, 1997 and the year ended June 30, 1997............ F-6
Notes to Consolidated Financial Statements......................... F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Master Graphics, Inc.:
We have audited the accompanying consolidated balance sheets of Master Graphics,
Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the two-year period ended December 31, 1999, the six-month
period ended December 31, 1997, and the year ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1999, the six-month period ended December 31, 1997 and the
year ended June 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 19 to
the consolidated financial statements, the Company has suffered losses from
operations, is in violation of its debt covenants and has been unable to obtain
waivers for debt covenant violations. These issues raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 19. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Memphis, Tennessee
April 10, 2000
F-2
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,341 $ 13,525
Trade accounts receivable, net 52,334 38,529
Inventories:
Raw materials and supplies 5,097 2,909
Work-in-process 12,047 5,186
-------- --------
Total inventories 17,144 8,095
Deferred loan costs, net 6,317 0
Deferred income taxes 0 1,057
Other current assets 1,505 4,012
-------- --------
Total current assets 78,641 65,218
Property, plant and equipment, net 80,130 75,251
Goodwill, net 25,318 64,469
Deferred loan costs, net 0 1,352
Other 3,350 1,586
-------- --------
Total assets $187,439 $207,876
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt $ 184,905 $ 924
Accounts payable 21,609 10,829
Accrued expenses 15,739 5,540
Put warrant 2,200 0
--------- --------
Total current liabilities 224,453 17,293
Long-term debt, net of current installments 22,658 144,223
Deferred income taxes 6,816 7,554
Other liabilities 973 1,177
Redeemable preferred stock 1,580 1,437
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock ($0.001 par value; 100,000,000 shares authorized;
7,923,026 shares issued and outstanding at December 31, 1999 and
7,879,997 shares issued and outstanding at December 31, 1998) 8 8
Additional paid-in capital 39,933 39,843
Retained earnings (deficit) (108,982) (3,659)
--------- --------
Total shareholders' equity (deficit) (69,041) 36,192
--------- --------
Total liabilities and shareholders' equity $ 187,439 $207,876
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended Year ended
Years ended December 31, December 31, June 30,
1999 1998 1997 1997
------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Net revenue $261,541 $163,277 $32,394 $13,433
Cost of revenue 207,138 121,340 26,528 11,312
-------- -------- ------- -------
Gross profit 54,403 41,937 5,866 2,121
Selling, general and administrative expenses 55,433 26,876 5,990 3,021
Impairment loss 77,746 0 0 0
Amortization of goodwill 2,322 1,007 98 0
-------- -------- ------- -------
Operating income (loss) (81,098) 14,054 (222) (900)
Other income (expense):
Redeemable warrant valuation adjustment 0 0 (1,635) 0
Interest income 215 250 48 68
Interest expense (22,159) (10,271) (2,181) (439)
Other, net (1,497) 568 191 23
-------- -------- ------- -------
Other income (expense), net (23,441) (9,453) (3,577) (348)
-------- -------- ------- -------
Income (loss) before income taxes
and extraordinary loss (104,539) 4,601 (3,799) (1,248)
Income tax expense 669 628 20 25
-------- -------- ------- -------
Net earnings (loss) before extraordinary loss (105,208) 3,973 (3,819) (1,273)
Extraordinary loss on extinguishment of debt,
net of income tax benefit of $1,458 0 (2,098) 0 0
-------- -------- ------- -------
Net earnings (loss) $(105,208) $ 1,875 $(3,819) $(1,273)
======== ======== ======= =======
Basic earnings per share:
Net earnings (loss) before extraordinary loss $ (13.32) $ 0.62 $ (0.95) $ (0.32)
Extraordinary loss, net 0.00 (0.34) 0.00 0.00
-------- -------- ------- -------
Net earnings (loss) $ (13.32) $ 0.28 $ (0.95) $ (0.32)
======== ======== ======= =======
Diluted earnings per share:
Net earnings (loss) before extraordinary loss $ (13.32) $ 0.60 $ (0.95) $ (0.32)
Extraordinary loss 0.00 (0.33) 0.00 0.00
-------- -------- ------- -------
Net earnings (loss) $ (13.32) $ 0.27 $ (0.95) $ (0.32)
======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Additional Retained Total
Common Stock paid-in earnings shareholders'
Shares Amount capital (deficit) equity (deficit)
------------ --------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1996 4,000,000 $100 $ 2,100 $ (358) $ 1,842
Effects of re-incorporation 0 (96) 96 0 0
Issuance of seller warrants 0 0 210 0 210
Net (loss) for year
ended June 30, 1997 0 0 0 (1,273) (1,273)
--------- ---- ------- --------- --------
Balances at June 30, 1997 4,000,000 $ 4 $ 2,406 $ (1,631) $ 779
Issuance of seller warrants 0 0 1,444 0 1,444
Net (loss) for six months
ended December 31, 1997 0 0 0 (3,819) (3,819)
--------- ---- ------- --------- --------
Balances at December 31, 1997 4,000,000 $ 4 $ 3,850 $ (5,450) $ (1,596)
Initial public offering 3,400,000 4 29,818 0 29,822
Acquisition of businesses 213,333 0 1,282 0 1,282
Exercise of lender warrants 266,664 0 2,025 0 2,025
Issuance of seller warrants 0 0 755 0 755
Issuance of lender warrants 0 0 2,200 0 2,200
Preferred stock accretion 0 0 (87) 0 (87)
Preferred stock dividend 0 0 0 (84) (84)
Net earnings for year
ended December 31, 1998 0 0 0 1,875 1,875
--------- ---- ------- --------- --------
Balances at December 31, 1998 7,879,997 $ 8 $39,843 $ (3,659) $ 36,192
Acquisition of businesses 43,029 0 233 0 233
Preferred stock accretion 0 0 (143) 0 (143)
Preferred stock dividend 0 0 0 (115) (115)
Net (loss) for year
ended December 31, 1999 0 0 0 (105,208) (105,208)
--------- ---- ------- --------- --------
Balances at December 31, 1999 7,923,026 $ 8 $39,933 $(108,982) $(69,041)
========= ==== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six months ended Year ended
Years ended December 31, December 31, June 30,
1999 1998 1997 1997
----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(105,208) $ 1,875 $ (3,819) $ (1,273)
Adjustments to reconcile net income
to net cash from operating
activities:
Impairment loss 77,746 0 0 0
Depreciation 9,126 4,998 1,087 293
Amortization of intangibles 3,569 1,662 326 330
Deferred compensation provision 47 47 765 0
Redeemable warrants valuation
adjustment 0 0 1,635 0
Deferred income taxes 1,139 437 0 163
Loss on disposal of equipment 1,120 0 0 0
Extraordinary loss on
extinguishment of debt, net of
income tax benefit 0 2,098 0 0
Changes in operating assets and
liabilities, net of effect of
business acquisitions:
Trade accounts receivable (5,916) (7,411) 459 (1,124)
Inventories (5,134) 3,937 651 (300)
Other assets 2,746 1,285 (499) 197
Accounts payable 7,131 (2,322) (15) 797
Accrued expenses 7,688 (2,850) 1,903 837
--------- --------- -------- --------
Net cash provided by (used
in) operating activities (5,946) 3,756 2,493 (80)
--------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash
acquired (57,064) (90,212) (28,511) (13,392)
Purchases of equipment (12,050) (2,177) (328) (4,151)
Disposals of equipment 9,393
Repayment of shareholder note
receivable 0 3,895 0 0
--------- --------- -------- --------
Net cash used in investing
activities (59,721) (88,494) (28,839) (17,543)
--------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on
lines of credit 27,326 (748) 570 (113)
Proceeds from issuance of long-term
debt 45,978 72,606 27,940 20,821
Net proceeds from initial public
offering of stock 0 29,822 0 0
Principal payments on long-term debt (16,494) (129,846) (778) (1,381)
Net proceeds from issuance of
senior notes 0 126,100 0 0
Loan costs incurred (3,327) (845) (709) (777)
--------- --------- -------- --------
Net cash provided by
financing activities 53,483 97,089 27,023 18,550
--------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH (12,184) 12,351 677 927
CASH AND CASH EQUIVALENTS, beginning
of period 13,525 1,174 497 (430)
--------- --------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period $ 1,341 $ 13,525 $ 1,174 $ 497
========= ========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 19,763 $ 8,980 $ 1,780 $ 312
Income taxes $ 150 $ 0 $ 25 $ 156
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation
Master Graphics, Inc. (Master Graphics) and its wholly-owned operating
subsidiary, Premier Graphics, Inc. (Premier) (collectively the "Company") are
primarily engaged in the business of general commercial printing, with 23
facilities in 14 states at December 31, 1999. 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,
and merged Master Printing, Inc. into Master Graphics. Contemporaneously, Master
Graphics formed a new wholly-owned subsidiary, Premier Graphics, Inc., and
merged B&M Printing, Inc. into Premier. Subsequent acquisitions generally have
been liquidated and their assets contributed to Premier. 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 note 3 below, the
Company changed its fiscal year-end to December 31.
(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.
Impairment charges more fully described in note 4 are based on the
Company's projected cash flows. While the estimates of projected cash flows,
discount rates and interest charges are based on management's best estimates of
the amounts expected to be realized, the amounts the Company will ultimately
realize could differ materially in the near term from the amounts assumed in
arriving at the amount of the impairment loss.
(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 primarily stated at the lower of cost (first-in, first-out
method) or market.
F-7
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
(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 40 years. Leasehold improvements are amortized on a
straight-line basis over the estimated useful lives of the related property,
generally 15 to 40 years. Amortization of assets held under capital leases of
approximately $450,000 is included with depreciation expense.
Expenditures that materially increase values or extend the useful lives of
assets are capitalized while replacements, maintenance and repairs that do not
improve or extend the lives of the respective assets, are charged against income
as incurred. Depreciation expense for the years ended December 31, 1999 and
1998, the six months ended December 31, 1997 and the year ended June 30, 1997
was approximately $9,126,000, $4,998,000, $1,087,000 and $293,000, respectively.
(f) Intangibles and Other Long-lived Assets
Goodwill represents costs in excess of the fair value of the net assets of
businesses acquired. Through 1999, goodwill was amortized over forty years
using the straight-line method; accumulated amortization of goodwill was
approximately $3,520,000 and $1,198,000 at December 31, 1999 and 1998. In
accordance with Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", long-lived assets, including goodwill related to those long-lived assets,
are reviewed for impairment whenever events and circumstances indicate that
their carrying value may not be recoverable. Such reviews are performed using
estimated undiscounted cash flows over the remaining lives of the assets. If
these reviews indicate impairment of the asset has occurred, the amount of the
impairment is calculated using industry-accepted market valuation methods.
The Company evaluates the carrying value of goodwill that is not identified
with impaired assets ("enterprise level goodwill") according to Accounting
Principles Board Opinion No. 17 "Intangible Assets". The Company regularly
evaluates whether events and circumstances warrant revised estimates of useful
lives or recognition of charge-off of carrying amounts of such goodwill.
Impairment of such goodwill is determined using a discounted cash flow method.
The discount rate used in the evaluation is management's expected rate of return
or hurdle rate for investments of similar risk. See note 4 regarding impairment
of long-lived assets.
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, 1999 and 1998 was approximately $934,000 and
$356,000, respectively.
(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 carrying value of the Company's
long-term debt including the Term Debt, Revolver, and Overline Loan approximates
fair value due to the floating interest rate features of these instruments. The
fair value of the Company's Senior Notes is estimated based on market quotations
made on the same or similar issues. At December 31, 1999 and 1998, the carrying
value of the Senior Notes was $126.0 million and $125.4 million, respectively.
The fair value of these notes approximated $93.6 million and $130.0 million at
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the
carrying value of notes due to certain former owners was $15.6 million and $16.6
million. The fair value of these notes approximated $16.6 million in 1998.
Management is unable to determine an approximate fair value as of December 31,
1999, largely because of the issues more fully described in note 19.
F-8
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
(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 potentially dilutive common shares had been issued. A reconciliation of the
calculation of basic and diluted earnings per share is presented in note 16.
(k) Segment Reporting
The Company considers its entire business to be in the single reporting
segment of general commercial printing.
(3) Acquisitions
In June 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 were engaged
in general 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 6), and warrants to acquire common stock (valued at $210,000) (see
note 15). 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 (closed
the third quarter of 1999), Lithograph and Sutherland have been included in the
Company's consolidated financial statements from June 19, 1997. The excess of
the purchase prices over the fair value of the net identifiable assets acquired
of $6.4 million has been recorded as goodwill and, beginning January 1, 2000, is
being amortized on a straight line basis primarily over 20 years. See note 4
regarding impairment of long-lived assets.
During the six months ended December 31, 1997, the Company acquired all of
the outstanding common stock of the following companies: The Argus Press, Inc.
(September 1997); Phoenix Communications, Inc. (December 1997); and Jones
Printing Company, Inc (December 1997). All of these businesses were engaged in
general commercial printing. The acquisitions were paid for with a combination
of cash ($17.8 million), notes given to the sellers ($6.2 million) (see note 6),
and warrants to acquire common stock (valued at $1.4 million) (see note 15). 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, their results of operations have been included in the
Company's consolidated financial statements from their respective acquisition
dates. The excess of the purchase prices over the fair value of the net
identifiable assets acquired of $24.9 million has been recorded as goodwill and,
beginning January 1, 2000, is being amortized on a straight-line basis primarily
over 20 years. See note 4 regarding impairment of long-lived assets.
F-9
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
During 1998, the Company acquired eight businesses, primarily by stock
purchases, which were engaged in general commercial printing. The businesses
acquired were Harperprints, Inc., Hederman Brothers, Inc., and Phillips Litho
Company, Inc. (March 1998); McQuiddy Printing Company, Inc. (May 1998); Golden
Rule Printing (August 1998); The Printing Company and Stephenson Incorporated
(September 1998); and Technigrafiks, Inc. (December 1998). These acquisitions
were paid for with a combination of cash ($45.6 million), sellers' notes ($3.7
million) (see note 6), common stock (valued at $1.3 million) and warrants to
acquire common stock (valued at $0.8 million) (see note 15). In addition, the
Company incurred other acquisition costs totaling approximately $0.9 million.
All of these acquisitions have been accounted for by the purchase method, and
accordingly, the results of their operations have been included in the company's
consolidated financial statements from their respective acquisition dates. The
aggregate excess of the purchase prices over the fair value of the net assets
acquired of approximately $34.4 million has been recorded as goodwill and,
beginning January 1, 2000, is being amortized on the straight-line basis
primarily over 20 years. See note 4 regarding impairment of long-lived assets.
During 1999, the Company acquired five businesses, primarily by stock
purchases, which were engaged in general commercial printing. The businesses
acquired were Columbia Graphics (March 1999), Woods Lithographics (March 1999),
White Arts, Inc. (March 1999), Eagle Direct, Inc. (May 1999), and Thomasson
Printing (June 1999). These acquisitions were paid for with a combination of
cash ($29.8 million), and common stock (valued at $0.2 million). In addition,
the Company incurred other acquisition costs totaling approximately $0.8
million. Approximately $13 million of the cash amount paid was funded by cash
from the Company's Senior Notes offering (see note 6). The additional cash was
funded from the Company's senior credit facility. All of these acquisitions have
been accounted for by the purchase method, and accordingly, the results of their
operations have been included in the Company's consolidated financial statements
from their respective acquisition dates. The aggregate excess of the purchase
prices over the fair value of the net assets acquired of approximately $21.9
million has been recorded as goodwill and, beginning January 1, 2000, is being
amortized on the straight-line basis primarily over 20 years. See note 4
regarding impairment of long-lived assets.
As a part of their respective acquisition agreements, the Company agreed to
pay the former owners of 11 of the acquired businesses additional cash purchase
price consideration, based on their surpassing certain cash flow-based targets
which generally exceed the pre-acquisition performances of those businesses. The
measurement periods range from one to five years of post-acquisition operations.
Management believes that the aggregate maximum payout will not exceed
approximately $44 million, of which $1.8 million is held in escrow and is
classified as other non-current assets in the accompanying balance sheet.
Payments will primarily be due in 1999-2001. Such payments are typically
recorded as adjustments to goodwill. However, pending management's ongoing
evaluation of asset impairment, these payments may be recorded as a direct
charge to earnings.
The following unaudited pro forma financial information presents the
combined results of operations of Master Graphics and the 1998 and 1999 acquired
businesses as if those acquisitions and financing, including the issuance of
common stock and Senior Notes, had occurred as of January 1, 1998, and January
1, 1999, 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
Master Graphics and the acquired businesses constituted a single entity during
such periods.
Years ended December 31,
1999 1998
---- ----
(In thousands, except per share amounts)
Net revenue $ 274,974 $293,075
Operating income (81,252) 22,683
Interest expense 22,914 21,862
Net earnings (loss) (106,085) 1,238
Net earnings (loss) per share
Basic $ (13.40) $ 0.19
Diluted $ (13.40) $ 0.19
F-10
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
(4) Impairment of Long-Lived Assets
During 1999, the Company recorded a charge of $71.4 million related to the
impairment of goodwill and $6.3 related to the impairment of property, plant and
equipment. Master Graphics experienced significant changes in market conditions
that led to substantial declines in sales and operating cash flows in 1999.
These declines led to the special charge described in note 14. After these
events occurred, new management of the Company began an evaluation of the
operations of the various divisions of Master Graphics. As a result of these
evaluations, management determined it was necessary to perform an analysis of
the recoverability of all of the assets of Master Graphics as described in
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
and Accounting Principles Board Opinion No. 17 "Intangible Assets". Management
concluded from these evaluations that significant impairment of goodwill as well
as property, plant and equipment had occurred. An impairment charge was required
at several of the divisions because the projected cash flows were less than the
carrying value of the assets. Management has also concluded that the remaining
useful life of the goodwill is approximately 20 years. Such goodwill will be
amortized over this term in the future.
(5) Initial Public Offering
In June 1998, the Company completed an initial public offering of 3,400,000
shares ($0.001 par value; 100,000,000 shares authorized) of common stock at
$10.00 per share. Proceeds of the initial public offering were used to repay
$4.3 million of indebtedness owed to Sirrom Capital, to repay $25.0 million of
the indebtedness owed to its senior lender and to pay $1.5 million of
acquisition advisory fees deferred until the completion of the offering. The
write-off of related deferred loan costs ($0.6 million) and unamortized debt
discounts ($3.0 million) has been recorded as a $2.1 million extraordinary loss,
net of tax of $1.5 million.
(6) Long-Term Debt
Long-term debt consisted of (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------- --------
<S> <C> <C>
Senior Notes $130,000 $130,000
Credit Facility:
Term Debt 27,749 262
Revolver 14,826 0
Overline Loan 12,500 0
Sellers' Notes 15,627 16,599
Capital leases (note 8) 6,065 2,297
Other 4,760 622
-------- --------
211,527 149,780
Less unamortized debt discount 3,964 4,633
-------- --------
207,563 145,147
Less current maturities 184,905 924
-------- --------
$ 22,658 $144,223
======== ========
</TABLE>
The aggregate stated maturities of long-term debt, including capital lease
obligations, for each of the five years subsequent to December 31, 1999 are as
follows: 2000, $9.1 million; 2001, $8.9 million; 2002, $6.0 million; 2003, $6.3
million; 2004, $3.5 million; thereafter, $177.7 million. However, see note 19
regarding reclassification of certain debt to current liabilities as a result of
unwaived covenant violations.
F-11
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
In December 1998, Premier Graphics issued $130 million of senior notes
(Senior Notes). The approximate $125.6 million of net proceeds from issuance
were used to (1) repay the outstanding borrowings under Premier's acquisition
credit facility ($88.6 million); (2) repay $4.8 million of sellers' notes; (3)
repay outstanding borrowings under Premier's working capital line of credit
($6.5 million); and (4) acquire Technigrafiks, Inc., a general commercial
printing company, for $12.0 million; the remaining $13.7 million was available
for general corporate purposes, and in March, 1999 was effectively used to
partially finance acquisitions (see note 3). The Senior Notes are guaranteed by
Master Graphics. The Senior Notes mature in December 2005 and bear interest at
11 1/2% payable semi-annually. The Senior Notes are redeemable, in whole or in
part, beginning in December 2002 at a premium of 5.75%, declining to 2.875% in
December 2003 and to the face amount in December 2004. Additionally, during the
first three years after issuance, the Company may redeem up to 35% of the
aggregate principal amount of the Senior Notes with the net proceeds of equity
offerings; the redemption price would include an 11.5% premium.
The Company, through Premier Graphics, has borrowed term debt under various
loan and security agreements (Term Debt) from its senior secured lender.
Proceeds from the loan agreement have been primarily used for acquisitions
described in note 3. After four acquisitions in 1998, the Term Debt balance
reached approximately $85 million. Proceeds from the Company's initial public
offering were in part used to pay the Term Debt down to approximately $60
million. Subsequent to its initial public offering and after an additional three
acquisitions in 1998, the Company's Term Debt reached approximately $90 million.
Proceeds from its Senior Notes offering were used to substantially repay the
outstanding balance under its Term Debt. At December 31, 1998, the loan balance
under its Term Debt was $0.3 million. In conjunction with the acquisitions and
financing thereof through 1998, the Company incurred fees of approximately $2.3
million. The Company also issued to the senior lender common stock warrants that
are described in note 15.
In March 1999, the Company completed a restructuring of its senior secured
credit facility. Pursuant to the amended agreement, the facility consists of two
term loans ("Term Loan A" and "Term Loan B") each of $30 million and a revolving
credit facility ("Revolver") of $20 million. Term Loan A bears interest,
payable monthly, at a floating rate equal to LIBOR plus 3.5% (9.1075% at
December 31, 1999), and Term Loan B bears interest, payable monthly, at a
floating rate equal to LIBOR plus 4.0% (9.6075% at December 31, 1999). Term
Loan A matures in March 2004, and is payable in quarterly installments. Term
Loan B matures in March 2005, and is payable in quarterly installments and a
final balloon payment at maturity. The annual amortization of the $27.7 million
outstanding as of December 31, 1999 will approximate $4.2 million for each of
the next five years. The Revolver, which contains certain borrowing base
limitations, bears interest at the "Base Rate" or the prime rate for corporate
loans from U.S. financial institutions as published by The Wall Street Journal
from time to time plus 0.5% (9.00% at December 31, 1999) and is repayable in
full in March 2005. The security for the facility includes a lien on all of the
assets of Premier Graphics, as well as a pledge by Master Graphics on all of the
issued and outstanding stock of Premier Graphics. The facility includes a
prepayment penalty of 1% of the amount prepaid and requires a minimum level of
prepayment to Term Loan A and Term Loan B based on 50% of annual excess cash
flows as defined. In November 1999, we completed an amendment to our secured
credit facility that terminated the remaining Term Loan availability. The
Company incurred cash financing fees of approximately $0.3 million related to
this agreement which will be amortized over the five year term of the note.
In December 1999, the Company completed an amendment to the Revolver to
provide for an overline amount of $12.5 million ("Overline Loan"). This Overline
Loan bears interest at a floating rate equal to Base Rate plus 3.5% (12.00% at
December 31, 1999), payable monthly. The Company incurred cash financing fees of
approximately $1.8 million related to this agreement which will be amortized
over the five year term of the note. In addition, the Company amended the senior
lender's common stock warrant agreement as described in note 15. This amendment
resulted in an additional $2.2 million in deferred loan costs that will be
amortized over the five year term of the note.
The Company has financed a portion of the purchase price paid for certain
of the acquired businesses by issuing unsecured subordinated notes (Seller
Notes) to the former owners of those companies. The Company also issued $5.3
million of unsecured subordinated notes to the former owners of Hederman and
Phoenix that replaced notes between such companies and their owners. In general,
the Seller Notes (i) bore interest at 12% per annum
F-12
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
payable quarterly, (ii) were subject to prepayment at the option of Master
Graphics upon payment of a penalty which equaled or exceeded 20% of the amount
prepaid; and (iii) matured seven years from the date of issuance. In connection
with closing of the Senior Notes offering, the holders of approximately $12
million of Seller Notes agreed to exchange their existing notes for new
unsecured subordinated notes with the following features: (i) balloon maturity
date of June 30, 2006; (ii) monthly interest payments at 12% per annum if paid
when due, or if not paid when due interest will accrue at 16% per annum until
all accrued interest has been paid; (iii) no restrictive covenants; and (iv) no
rights or remedies against the Company until maturity. As noted above, $4.8
million of Seller Notes were repaid with a portion of the net proceeds of the
Senior Notes offering. The Company did not pay the interest expense due on the
Seller Notes as of October 1, 1999 and has accrued the additional 4% penalty
interest thereafter.
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 bore interest at 13.25%, payable monthly and was
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 15. As discussed
in note 5 above, the Sirrom note was repaid with a portion of the net proceeds
of the June 1998 initial public offering.
The Senior Notes Indenture includes restrictive covenants which limit
Premier's ability to pay dividends or make distributions to Master Graphics,
make investments, incur additional debt, issue preferred stock, incur liens,
enter into sale-leaseback, consolidation, merger, conveyance, lease or transfer
transactions, enter into transactions with affiliates, and engage in unrelated
businesses; the covenants also may require the repurchase of Senior Notes with
the proceeds of the sale of significant amounts of assets.
Under its senior secured credit facility, Premier is required to maintain
certain financial ratios, including tests related to net worth, EBITDA, interest
coverage, fixed charge coverage and leverage ratios. Premier is also subject to
affirmative and negative covenants which, among other things, limit capital
expenditures and the payment of dividends, and require certain debt repayments
based on 50% of annual excess cash flows, as defined. As of December 31, 1999,
Premier was in violation of its covenants under the credit facility and has
been unable to date to obtain waivers for those violations. See note 19.
(7) Property, Plant and Equipment
Property, plant and equipment was comprised of the following
(in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
------- -------
<S> <C> <C>
Land $ 725 $ 486
Buildings 5,414 3,830
Leasehold improvements 1,973 1,115
Machinery and equipment 82,690 75,602
Furniture and fixtures 4,347 3,331
Vehicles 1,342 1,374
-------- -------
96,491 85,738
Less accumulated depreciation 16,361 10,487
-------- -------
$ 80,130 $75,251
======== =======
</TABLE>
F-13
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
In 1999, the Company sold printing equipment with a carrying value of $10.6
million to Heidelberg Print Finance Americas, Inc. in conjunction with the lease
arrangement discussed at note 8. As a result of these sales, a net loss of $1.2
million was recorded in other expense. Cash was received for the full carrying
value of the equipment and an amount equivalent to the loss was recorded as a
deferred credit to be repaid to the lessor over the lives of the leases (see
note 8). The cash received was used to pay Term Debt.
(8) Leases
The Company is obligated under various capital leases for certain machinery
and equipment that expire at various dates during the next 5 years. At December
31, 1999, the gross amount of machinery and equipment and related accumulated
amortization recorded under capital leases were approximately $6,892,000 and
$712,000, respectively. The liability for capital leases is classified as long-
term debt.
The Company also has various non-cancelable operating leases, primarily for
facilities and printing equipment that expire over the next seven years. Rental
expense for operating leases for the years ended December 31, 1999 and 1998, the
six months ended December 31, 1997, and year ended June 30, 1997 totaled
approximately $5,917,000, $2,267,000, $398,000 and $1,050,000, respectively.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1999 are:
Capital Leases Operating Leases
-------------- ----------------
Year ending December 31,
2000 $2,085 $10,017
2001 1,992 9,282
2002 1,465 9,096
2003 1,646 8,152
2004 154 6,969
2005 and thereafter 0 19,324
------ -------
Total minimum lease payments 7,342 $62,840
Less amount representing interest (at rates =======
ranging from 5.0% to 11.5%) 1,277
------
Present value of net minimum capital
lease payments 6,065
Less current installments of obligations
under capital leases 1,516
------
Obligations under capital leases,
excluding current installments $4,549
======
Included in the above schedule of minimum operating lease payments are
expected payments related to a leasing arrangement with Heidelberg Print Finance
Americas, Inc. that was entered into in 1999. The Company has leased 14 printing
presses with lease terms of 10 years. The Company has accounted for the leases
as operating as the leases are expected to be cancelled by the Company in less
than six years. Termination penalties of approximately $7.4 million are being
accrued by the Company on a straight-line basis over six years. Lease payments
related to these agreements are expected to be $4,012,000 per year through 2004
and $12,934,000 (including termination penalties) thereafter. Rent expense
recorded in 1999 related to these leases was approximately $459,000.
(9) Retirement Plans
The Company has retained the acquired companies' existing employee benefit
plans, primarily 401(k)-type arrangements with the Company matching amounts. The
Company's benefit plan expense for the plans was approximately $873,000,
$348,000, $24,000 and $40,000 for the years ended December 31, 1999 and 1998,
the six months ended December 31, 1997, and the year ended June 30, 1997.
F-14
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
Of those retirement plans, there is one defined benefit plan covering
employees of the Hederman Division, which represents approximately 100 of the
Company's 1,900 total employees. As of December 31, 1999 and 1998, the plan had
a pension benefit obligation of $1.6 and $1.9 million, respectively; plan assets
of $3.0 and $2.2 million, respectively; and prepaid pension cost of $0.8 and
$0.8 million, respectively; recorded in other non-current assets. Related net
pension cost (credit) for the periods was $(1,000) and $(58,000) in 1999 and
1998.
(10) Related Party Transactions
The Company has leasing arrangements with its former president and with
certain of the former owners of the acquired companies (who are generally
current employees of the Company) for certain plant facilities and equipment.
The Company's aggregate annual obligation under these lease agreements is
approximately $3.7 million, and the agreements generally expire from 2000
through 2007.
(11) Income Taxes
Income tax expense (benefit) consists of (in thousands):
<TABLE>
<CAPTION>
Six months ended Year ended
Years ended December 31, December 31, June 30,
1999 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income tax (benefit) from:
Net earnings before
extraordinary item $ 669 $ 628 $ 20 $ 25
Extraordinary loss 0 (1,458) 0 0
------ ------- ------ ------
$ 669 $ (830) $ 20 $ 25
====== ======= ====== ======
Current Deferred Total
------- -------- -----
Year ended June 30, 1997:
U.S. Federal $ 0 $ 0 $ 0
State and local 0 25 25
------- ------ ------
$ 0 $ 25 $ 25
======= ====== ======
Six months ended December 31, 1997:
U.S. Federal $ 0 $ 0 $ 0
State and local 20 0 20
------- ------ ------
$ 20 $ 0 $ 20
======= ====== ======
Year ended December 31, 1998:
U.S. Federal $ (199) $ (578) $ (777)
State and local (53) 0 (53)
------- ------ ------
$ (252) $ (578) $ (830)
======= ====== ======
Year ended December 31, 1999:
U.S. Federal $ 0 $ 606 $ 606
State and local 0 63 63
------- ------ ------
$ 0 $ 669 $ 669
======= ====== ======
</TABLE>
Income tax expense (credit) differed from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to pretax income (loss) as a
result of the following:
F-15
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Six months ended Year ended
Years Ended December 31, December 31, June 30,
1999 1998 1997 1997
----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Computed "expected"
tax expense (credit) $(35,543) $ 355 $(1,292) $(424)
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 16,934 (951) 1,272 527
State and local income taxes,
net of federal income tax benefit (2,122) (35) (150) (49)
Impairment of goodwill 22,414 0 0 0
Purchase accounting adjustments (1,288) 0 0 0
Effect of S-Corporation
termination 0 0 (318) 0
Warrants valuation adjustment 0 0 556 0
Other, net 274 (199) (48) (29)
-------- ----- ------- -----
$ 669 $(830) $ 20 $ 25
======== ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below.
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Amortization of intangibles $ 5,279 $ 0
Inventory capitalization 358 0
Accounts receivable principally
due to allowance for
doubtful accounts 859 417
Income tax loss carryforwards and
tax credit carryforwards 9,970 1,482
Vacation accrual 365 264
Alternative minimum tax
credit carryforwards 80 80
Deferred compensation 279 357
Other 593 376
-------- ------
Total gross deferred tax assets $ 17,783 2,976
Less valuation allowance (17,783) (849)
-------- ------
Net deferred tax assets $ 0 $2,127
======== ======
Deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation and capitalized
interest $ 6,714 $8,498
Other 102 126
-------- ------
Total gross deferred tax
liabilities 6,816 8,624
-------- ------
Net deferred tax liability $ 6,816 $6,497
======== ======
</TABLE>
F-16
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
The valuation allowance for deferred tax assets as of December 31, 1999 and
1998 was $17,783,000 and $849,000, respectively. The increase in the total
valuation allowance from December 31, 1998 to December 31, 1999 of $16,934,000
was due to management's belief that the Company will not be able to realize
its deferred tax assets. 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 in which the deferred tax assets are deductible, management believes it
is not likely the Company will realize the benefits of these deductible
differences.
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $25.8 million which are available,
with limitations, 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.
(12) Other Liabilities
As of December 31, 1997, the Company entered into deferred compensation
agreements with certain of its executive officers. In the aggregate, these
agreements obligate the Company to pay a total of $1,000,000 to those persons on
December 31, 2002. The agreements allowed those persons to receive an aggregate
of 100,000 shares of common stock in lieu of cash. Such calls for settlement in
stock may be exercised at any time. The total cash obligation was reduced to
approximately $915,000 in 1999. The net present value of the ultimate obligation
was accrued as compensation expense as of December 31, 1997, with the discount
being amortized as additional compensation expense over the five year life of
the agreement; the net present value at December 31, 1999 was approximately
$774,000. An early exercise of the calls would result in an acceleration of the
discount amortization.
(13) Redeemable Preferred Stock
The Company and its senior lender effectively entered into an exchange 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). No dividends have been paid to date;
accrued and unpaid dividends were $199,000 at December 31, 1999. 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
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 Series A
Preferred Stock has been classified out of stockholders' equity because of
certain holder put features that are out of the control of the Company (see note
15). The preferred stock was initially recorded at its fair value at the date of
issuance (approximately $1.35 million) and is being accreted to its mandatory
redemption value.
(14) Non-Recurring Charges
In December 1999, the Company decided to reduce headcount and move the
Company's corporate headquarters facility. The Company recorded a special
charge of $1,452,000 in the fourth quarter of 1999. Approximately $104,000 of
the charge is recorded as cost of goods sold and $1,348,000 was recorded as
selling,
F-17
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
general and administrative expense. Approximately $1,294,000 of the charge
relates to severance of both plant employees and executive personnel; and
$158,000 relates to costs to close the corporate headquarters facility. After
payments of $651,000 in December 1999, the Company had a remaining liability of
$801,000 at December 31, 1999, that has been classified in current liabilities
as the amounts are expected to come due within one year.
(15) Shareholders' Equity
The Company has reserved 2,976,918 shares of common stock for issuance upon
the conversion of its Series A Preferred Stock, the exercise of its seller and
lender warrants, and the exercise of its stock options.
Sellers' Warrants and Rights
As part of the consideration given in certain of the acquisitions, the
Company issued common stock warrants to the sellers. The terms of warrants were
generally the same, stating that the seller would have the ability to exercise
his warrant at any time during the ten years subsequent to an initial public
offering of common stock (June 1998). The exercise price is the initial public
offering price ($10 per share), and the shares obtainable are generally the face
amount of the sellers' notes divided by the initial public offering price
(231,000 shares). The estimated fair value of the warrants at the dates of
issuance, which totaled $2.4 million at December 31, 1999, has been recorded in
shareholders' equity as additional paid-in capital.
In connection with the acquisition of B&M Printing and related financing,
the Company gave rights to acquire common stock to the former owners of B&M
Printing. As of December 31, 1999 rights to acquire 43,000 shares of common
stock at $10 per share were outstanding; the rights will expire in June 2001.
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, at exercise price of $0.01. In March 1998, Sirrom exercised the
warrant and was issued 266,664 shares of common stock.
In connection with the obtaining of original acquisition financing under
its 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 Senior Lender was granted a
right to put the warrant back to the Company under certain conditions. The
redemption price of the warrant was its current market value (as defined) on the
date of redemption. In March 1998, this warrant was exchanged for redeemable,
convertible preferred stock (see note 13).
Because both of the lenders' warrants described above 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 were initially excluded from shareholders' equity. The initial
fair market value of the lenders' warrants was 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 was adjusted to
fair value, with a corresponding charge to other expense in the statement of
operations in accordance with EITF Issue No. 96-13 until their respective
exercise and exchange as described above. Additionally, upon their exercise and
exchange, the carrying values of those warrants were reclassified to additional
paid-in capital and redeemable preferred stock, respectively.
In connection with the obtaining of certain acquisition financing in March
1998, the Company issued to its senior lender a warrant to acquire 220,000
shares of common stock. The warrant expires, if unexercised, on September
F-18
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
26, 2007. The senior lender was granted demand and piggyback registration
rights. The Company had 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 paid in capital. The
initial fair market value of this warrant was netted against the related debt,
and the resulting discount was being amortized as a component of interest
expense over the life of the debt. As discussed above in note 5, the remaining
unamortized discount was written off upon the extinguishment of the related debt
in June 1998. In connection with the obtaining of financing in December 1999,
the Company modified this warrant to include a put option whereby the senior
lender may put the warrant back to the Company for cash upon the occurrence of
certain events, including a sale of substantially all of the assets of the
Company, a change in control of the Company, a merger or similar transaction
involving the Company or an event of default under the senior credit agreement.
The put price is dependent upon circumstances present at the time of exercise
but can in no case be less than $2.2 million. The put option may be exercised
at any time after the earlier of two years or the occurrence of one of the above
events. The Company has recorded a liability of $2.2 million and deferred loan
costs for the same amount, which approximates the fair value of the warrant at
the time of modification due to the events of default discussed at note 19. The
deferred loan costs will be amortized over the five year life of the related
loan. Subsequent to the date of the financial statements, the senior lender
exercised the put feature of the warrant.
Stock Options
During 1998, the Company adopted the 1998 Equity Compensation Plan, which
provides for grants of stock options, stock appreciation rights, and restricted
stock to selected employees, officers, directors, consultants, and advisers to
the Company. The plan authorizes the issuance of up to 750,000 shares of the
Company's common stock. As of December 31, 1998, options to purchase 724,363
shares had been granted to employees of the Company. No options were granted in
1999. The exercise price for all shares under option is the fair market value on
the grant date ($10 per share). The options vest over three years, and will
expire, if unexercised, from five to ten years from the grant date. The weighted
average remaining contractual life of the options is 4.6 years.
During 1998, the Company also adopted the 1998 Non-Employee Director Stock
Option Plan, which authorizes the issuance of up to 50,000 shares of common
stock. Under this plan, non-employee directors have been granted options
covering 2,000 shares of common stock; the options vest over 3 years and may be
exercised over the five-year period following the grant. The exercise price is
the fair market value of the common stock at the date of grant ($10 per share).
Changes in outstanding options under the Plans during the year ended
December 31, 1999 and options exercisable at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Outstanding at December 31, 1997 0
Granted 724,363
Exercised 0
Canceled or expired 10,934
-------
Outstanding at December 31, 1998 713,429
Granted 0
Exercised 0
Canceled or expired 150,730
-------
Outstanding at December 31, 1999 562,699
=======
Exercisable at December 31, 1999 at $10.00 156,187
=======
Exercisable at December 31, 1998 at $10.00 0
=======
</TABLE>
F-19
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
The Company accounts for its stock based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for fixed stock-option plans. In accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," a valuation using the fair-value-based accounting method has been
made for stock options issued in 1998. That valuation was performed using the
Black-Schols option-pricing model.
The Company's options were valued assuming a risk-free interest rate of
4.87% as of their issuance date in 1998, a dividend yield of 0%, an average
expected-option life of 5.7 years, and volatility of 78.5%. The valuation
determined a per share weighted-average fair value for the options granted
during 1998 of $2.60. Had those options been accounted for using the fair-value
method, they would have resulted in additional compensation cost in 1999 and
1998 of $0.6 million and $0.3 million; net earnings (loss) would have been
$(105.8) million (loss of ($13.40) per share diluted) and $1.7 million ($0.24
per share diluted), respectively.
(16) Earnings Per Share
Basic earnings per share are calculated by dividing net earnings less
preferred stock dividend and discount accretion by the weighted average number
of common shares outstanding. For the years ended December 31, 1999 and 1998,
there were 7,916,071 and 6,130,117 basic weighted average shares outstanding;
for the six months ended December 31, 1997, and the year ended June 30, 1997,
there were 4,000,000 basic weighted average shares outstanding. There were no
potentially dilutive equity instruments outstanding in the year ended June 30,
1997. Exercise of potential equity securities has not been reflected in the
computation of diluted EPS for the year ended December 31, 1999 and the six
months ended December 31, 1997 because their impact would have been
antidilutive. Conversion of the preferred stock is not assumed in the 1998
diluted earnings per share calculations, as the effect is anti-dilutive on an
incremental basis. Exercise of employee stock options and certain other warrants
is not assumed in 1998 because the effect would be anti-dilutive using the
treasury stock method. For the years ended December 31, 1999 and 1998, the six
months ended December 31, 1997 and the year ended June 30, 1997, the diluted
weighted average shares outstanding were 7,916,071, 6,367,340, 4,000,000 and
4,000,000, respectively. Following is a reconciliation of the numerator and
denominator of the earnings (loss) per share (EPS) computations (in thousands
except shares and per share amounts):
<TABLE>
<CAPTION>
Six months ended Year ended
Years ended December 31, December 31, June 30,
1999 1998 1997 1997
------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss) before extraordinary loss $ (105,208) $ 3,973 $ (3,819) $ (1,273)
Less preferred stock dividends (115) (84) 0 0
Less accretion of preferred stock discount (143) (87) 0 0
---------- ---------- ---------- ----------
Net earnings (loss) before extraordinary loss
applicable to common shares (105,466) 3,802 (3,819) (1,273)
Extraordinary loss 0 (2,098) 0 0
---------- ---------- ---------- ----------
Net earnings (loss) applicable to common shares $ (105,466) $ 1,704 $ (3,819) $ (1,273)
========== ========== ========== ==========
Basic:
Weighted average common shares
outstanding 7,916,071 6,130,117 4,000,000 4,000,000
========== ========== ========== ==========
Basic earnings (loss) per share before
extraordinary loss $ (13.32) $ 0.62 $ (0.95) $ (0.32)
Basic loss per share - extraordinary loss 0.00 (0.34) 0.00 0.00
---------- ---------- ---------- ----------
Basic earnings (loss) per share $ (13.32) $ 0.28 $ (0.95) $ (0.32)
========== ========== ========== ==========
</TABLE>
F-20
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Diluted:
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 7,916,071 6,130,117 4,000,000 4,000,000
Assumed exercise of warrants 0 237,223 0 0
---------- ---------- ---------- ----------
7,916,071 6,367,340 4,000,000 4,000,000
========== ========== ========== ==========
Diluted earnings (loss) per share before
extraordinary loss $ (13.32) $ 0.60 $ (0.95) $ (0.32)
Diluted loss per share - extraordinary loss 0.00 (0.33) 0.00 0.00
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ (13.32) $ 0.27 $ (0.95) $ (0.32)
========== ========== ========== ==========
(17) Other Financial Information
Accrued expenses (in thousands) consist of the following:
December 31,
1999 1998
---------- ----------
Accrued compensation $ 6,470 $ 2,666
Accrued interest 2,346 1,181
Other accrued expenses 6,923 1,693
------- ----------
$15,739 $ 5,540
======= ==========
</TABLE>
The allowance for doubtful accounts was $2,383,000 and $1,182,000, at
December 31, 1999 and 1998, respectively.
The Company is party to various legal proceedings generally incidental to
its business and is subject to a variety of environmental and pollution control
laws and regulations. As is the case with other companies in similar industries,
the Company faces exposure from actual or potential claims and legal
proceedings.
Although the ultimate disposition of legal proceedings cannot be predicted
with certainty, it is the opinion of the Company's management that the outcome
of any claim which is pending or threatened, either individually or on a
combined basis, will not have a materially adverse effect on the consolidated
financial condition of the Company, but could materially affect consolidated
results of operations in a given year.
(18) Wholly-owned Operating Subsidiary
Master Graphics is a holding company with no operating assets or
operations. Premier Graphics, its primary operating subsidiary, is the primary
obligor for the Senior Notes. The Senior Notes are fully and unconditionally
guaranteed on a joint and several basis by Master Graphics. Following is
summarized financial information of Premier Graphics as of December 31, 1999 and
1998 and for the years then ended (in thousands).
<TABLE>
<CAPTION>
December 31,
1999 1998
------- ---------
<S> <C> <C>
Balance sheet data:
Current assets $ 71,817 $ 62,956
Property, plant and equipment 79,918 74,943
Goodwill, net 25,318 63,771
Due from Shareholder 40,128 46,025
Other non-current assets 9,153 1,523
-------- --------
Total assets $226,334 $249,218
======== ========
Current liabilities, including
current installments of
long-term debt of $187,355 and
$924 in 1999 and 1998 $222,676 $ 16,327
Long-term debt, net 22,250 127,624
Other liabilities 2,024 3,551
-------- --------
Total liabilities 246,950 147,502
-------- --------
Shareholder's equity (deficit) (20,616) 101,716
-------- --------
Total liabilities and
shareholder's equity $226,334 $249,218
======== ========
</TABLE>
F-21
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998
- ------------------------------- -------- --------
<S> <C> <C>
Statement of operations data:
Net revenue $ 261,545 $163,277
Gross profit 54,518 41,937
Operating income (76,258) 14,864
Interest expense 20,126 9,677
Income tax expense 0 628
Extraordinary (loss) 0 (2,098)
Net earnings (loss) (98,149) 1,181
</TABLE>
The following unaudited pro forma financial information presents the
results of operations of Premier Graphics and the businesses acquired in 1998
and 1999 as if the acquisitions and related financing, including the initial
public offering of Master Graphics common stock and the Senior Notes offering
had occurred as of January 1, 1998 and January 1, 1999, 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 Premier and the acquired businesses
constituted a single entity during such periods (in thousands).
December 31,
1999 1998
---- ----
Net revenue $ 274,979 $293,075
Operating income (76,412) 23,493
Depreciation and amortization 12,296 12,349
Net earnings (loss) (98,357) 3,949
Management believes that there are specific items included in the
acquirees' results of operations which are non-recurring and which, if removed
from the pro forma results noted above, would increase earnings by $0.3 million
and $2.7 million for the years ended December 31, 1999 and 1998, respectively.
(19) Going Concern
During 1999, the Company experienced significant declines in sales,
operating income and operating cash flows. The Company's projected cash flows
for future years are not adequate to cover interest expense related to current
debt levels. In addition, the Company is currently in violation of financial and
other covenants related to the senior secured credit facility and the Senior
Notes. As of April 10, 2000, the Company has been unable to obtain waivers for
these covenant violations from its senior lender. As a result of the violations
and inability to obtain waivers, the senior secured credit facility and the
Senior Notes may be called and therefore have been classified as current in the
December 31, 1999 balance sheet, as have the related deferred loan costs.
Subsequent to the date of the financial statements, the Company received a
notice of default from its senior lender. Among the lenders' rights and remedies
as a result of this default are (1) the right to declare indebtedness due and
payable at any time, (2) the right to foreclose on collateral, and (3) the right
to charge interest at the default rate which is 2% greater than the otherwise
applicable rate (lenders have availed themselves of this right). The lenders
have also limited the making of revolver advances to a day-to-day discretionary
basis. These conditions result in substantial doubt about the Company's ability
to continue as a going concern. Management is currently exploring its options
related to the refinance of these debt instruments. Several potential new
lenders have been identified that have expressed interest in effecting the
refinance; however, there is no definitive agreement in place.
F-22
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made
as of the 22nd day of February, 2000 and effective as of January 1, 2000, by and
between MASTER GRAPHICS, INC., a Tennessee corporation (the "Company"), and
ROBERT J. DIEHL (the "Executive").
WHEREAS, the Company and Executive entered into that certain employment
agreement between the Company and Executive effective as of March 31, 1998 (the
"Original Employment Agreement");
WHEREAS, the Company and the Executive desire to enter into this Agreement
which supercedes and replaces in its entirety the Original Employment Agreement;
WHEREAS, the Company is engaged in the business of providing general
commercial printing services to its customers; and
WHEREAS, the Company desires to employ the Executive to devote full time to
the business of the Company as the President and Chief Executive Officer of the
Company;
WHEREAS, the Executive desires to be employed by the Company on the terms
and subject to the conditions hereinafter stated.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
SUPERSESSION OF ORIGINAL EMPLOYMENT AGREEMENT
The Company and the Executive acknowledge and agree that the Original
Employment Agreement is hereby terminated by mutual consent and neither the
Company nor the Executive shall have any continuing obligation to the other
pursuant to the terms of the Original Employment Agreement. The mutual
agreements and covenants contained in this Agreement shall replace and supercede
in their entirety the provisions of the Original Employment Agreement.
ARTICLE 2
TERM AND DUTIES
2.1 Term; Extension. The term of this Agreement (the "Term of this
---------------
Agreement") shall commence as of January 1, 2000, and shall continue through
December 31, 2001. On the second and each successive anniversary of the
effective date of this Agreement, the Term of this Agreement shall be extended
for an additional one (1) year period, unless either party gives notice of such
party's intent not to extend the Term of this Agreement not later than ninety
(90) days prior to the end of the then current Term of this Agreement.
Termination of the Executive's employment pursuant to this Agreement shall be
governed by Article 4 and Article 5.
--------- ---------
<PAGE>
2.2 Duties. The Executive shall be employed as the President and Chief
------
Executive Officer of the Company, reporting to the Company's Board of Directors
and assuming and discharging such responsibilities as are commensurate with the
Executive's position. The Executive shall perform his duties faithfully and to
the best of his ability and shall devote his full business time and effort to
the performance of his duties hereunder. The Executive shall be responsible
for the implementation of the policies of the Company, as determined and
directed by the Board of Directors and for the implementation and administration
of the business affairs of the Company.
2.3 Location. The duties of the Executive shall be performed at such
--------
locations and places as may be directed by the Board of Directors; provided,
however, that the Executive shall not be required to relocate from the Memphis,
Tennessee M.S.A. without the consent of the Executive.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1 Base Compensation. The Company shall pay the Executive a base salary
-----------------
("Base Salary") of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00)
per annum, subject to applicable withholdings. Base Salary shall be payable
according to the customary payroll practices of the Company but in no event less
frequently than once each month. The Base Salary shall be reviewed annually and
shall be subject to increase according to the policies and practices adopted by
the Board of Directors from time to time; provided, however, that in no event
shall the Base Salary be decreased.
3.2 Annual Performance Bonus. The Company shall pay the Executive annual
------------------------
incentive compensation (each an "Annual Incentive Award") of up to one hundred
percent (100%) of his Base Salary, in accordance with policies and based on
performance targets established annually by the Compensation Committee of the
Board of Directors. The Annual Incentive Award and performance targets for
earning the Annual Incentive Award for the period beginning on the effective
date hereof and ending on December 31, 2000 are attached hereto as Schedule 3.2
------------
and are incorporated herein by this reference. At such time as the Compensation
Committee establishes new levels for incentive awards and new targets, Schedule
--------
3.2 shall be updated to reflect the new criteria set forth by the Compensation
- ---
Committee; provided, however, that Schedule 3.2 shall not be amended more than
------------
one time per year.
3.3 Stock Options. Contemporaneously with the execution of this
-------------
Agreement, the Company shall enter into that certain Incentive Stock Option
Agreement between the Company and the Executive (the "ISO Agreement"), which
shall be in substantially the form attached hereto as Exhibit 3.3.
-----------
3.4 Additional Benefits. The Executive shall be entitled to participate
-------------------
in all employee benefit plans or programs and receive all benefits and
perquisites to which salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive shall participate to the extent permissible under the terms and
provisions
2
<PAGE>
of such plans or programs in accordance with applicable program provisions.
These may include group hospitalization, health, dental care, life or other
insurance, tax qualified pension, car allowance, savings, thrift and profit
sharing plans, termination pay programs, sick leave plans, travel or accident
insurance, disability insurance, and contingent compensation plans, including
capital accumulation programs, restricted stock programs, stock purchase
programs and stock options plans. Nothing in this Agreement shall preclude the
Company from amending or terminating any of the plans or programs applicable to
salaried employees or senior executives. The Executive shall be entitled to an
annual paid vacation as established by the Board of Directors.
3.5 Life Insurance. For so long as the Executive is employed by the
--------------
Company, the Company, at no cost to the Executive (other than taxes owed as a
result of the provision of such insurance), shall pay annually up to the lesser
of (i) Five Thousand Dollars ($5,000.00) in life insurance premiums or (ii) the
amount of premium required to obtain a life insurance policy on the life of the
Executive with a death benefit equal to twice the Executive's Base Salary for
the year prior to the year in which such policy is procured. The
beneficiary(ies) under the Policy shall be designated by the Executive.
3.6 Business Expenses. The Company shall reimburse the Executive for all
-----------------
reasonable travel and other expenses incurred by the Executive in connection
with the performance of his duties and obligations under this Agreement to the
extent the same shall be properly documented in accordance with the Company's
policies and rules of the Internal Revenue Service.
3.7 Withholding. The Company may directly or indirectly withhold from any
-----------
payments under this Agreement all federal, state, city or other taxes that shall
be required pursuant to any law or governmental regulation.
ARTICLE 4
DEATH AND DISABILITY
4.1 Death of Executive. In the event of the death of the Executive during
------------------
the Term of this Agreement, this Agreement shall terminate and the Company's
obligation to make payments under this Agreement shall cease as of the date of
death, except for earned but unpaid Base Salary and Annual Incentive Awards,
which would be payable on a pro-rated basis for the year in which death
occurred, through the date of death.
4.2 Disability of Executive. Notwithstanding the disability of the
-----------------------
Executive, the Company shall continue to pay the Executive pursuant to Article 3
---------
hereof during the Term of this Agreement, unless the Executive's employment is
earlier terminated in accordance with this Agreement. In the event the
disability continues for a period of three (3) months, the Company may
thereafter terminate this Agreement and the Executive's employment. Following
such termination, the Company shall pay the Executive amounts equal to his
regular installments of Base Salary, as of the date of termination, for a period
of six (6) months. All other compensation shall cease except for earned but
unpaid Annual Incentive Awards which would be payable on a pro-rated basis for
the year in which the disability occurred, through the date of termination.
3
<PAGE>
4.3 Responsibilities of Executive in the Event of Disability. During the
--------------------------------------------------------
period the Executive is receiving payments following his disability and as long
as he is physically and mentally able to do so, the Executive shall furnish
information and assistance to the Company and from time to time shall make
himself available to the Company to undertake assignments consistent with his
position or prior position with the Company and his physical and mental health.
If the Company continuously fails to make payments or provide benefits required
as part of this Agreement, the Executive's obligation to provide information and
assistance shall end.
4.4 Definition of Disability. For purposes of this Agreement, the term
------------------------
"disability" shall have the same meaning as is ascribed to such term, or any
substantially similar term, in the Company's long term income disability plan as
in effect from time to time or if no such plan exists, the meaning ascribed to
such term in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code").
ARTICLE 5
TERMINATION OF EMPLOYMENT OTHER THAN FOR DEATH OR DISABILITY
5.1 Termination Without Cause; Constructive Termination.
---------------------------------------------------
(a) Without a Change in Control. If the Executive suffers a Termination
Without Cause (hereinafter defined) or Constructive Termination (hereinafter
defined) and a Change in Control (hereinafter defined) shall not have occurred
within one (1) year prior thereto, the Company shall pay to the Executive upon
such termination a lump sum in an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) annual Base
Salary as in effect at the date of the termination; and (iv) the average of the
Annual Incentive Award paid to the Executive for the two (2) immediately
preceding completed fiscal years of the Company. For six (6) months following
such Termination Without Cause or Constructive Termination, the Company shall
reimburse the Executive for the cost of the Executive's major medical health
insurance as in effect at the date of termination. The exercisability of stock
options granted to the Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
(b) Upon a Change in Control. If the Executive suffers a Termination
Without Cause or Constructive Termination at the time of or within one (1) year
following a Change in Control, the Company shall pay to the Executive in a lump
sum upon such termination an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) 299% of the
Executive's (A) annual Base Salary as in effect at the date of the termination
plus (B) the average of the Annual Incentive Award for the two (2) immediately
preceding completed fiscal years of the Company. To the extent that such
foregoing amount, when added to any other payment in the nature of compensation
(within the meaning of Section 280G of the Code, and the regulations promulgated
thereunder ("Section 280G")) to or for the benefit of the Executive (or any part
of such amount or other payment) constitutes an "excess
4
<PAGE>
parachute payment" within the meaning of Section 280G, the amount, if any, of
(A) such "excess parachute payment" multiplied by a fraction, the numerator of
which is the number one (1.00) and the denominator of which is (I) the number
one (1.00) minus (II) the effective tax rate under Section 280G applicable to
the Executive expressed as a decimal, minus (B) the amount of such "excess
parachute payment." For six (6) months following such Termination Without Cause
or Constructive Termination, the Company shall reimburse the Executive for the
cost of the Executive's major medical health insurance as in effect at the date
of termination. The exercisability of stock options granted to the Executive
shall be governed by any applicable stock option agreements and the terms of the
respective stock option plans.
(c) No Obligation to Mitigate. In the event the Executive's employment is
Terminated Without Cause or the Executive suffers a Constructive Termination,
the Executive shall have no duty to seek other employment and there shall be no
offset against any amounts due to the Executive pursuant to this Section 5.1
-----------
attributable to any subsequent employment that the Executive may accept.
5.2 Termination with Cause; Voluntary Termination. If the Executive
----------------------------------------------
suffers a Termination with Cause (hereinafter defined) or the Executive
voluntarily terminates his employment with the Company (a "Voluntary
Termination"), then, whether or not there has been a Change in Control, the
Company shall not be obligated to pay the Executive any amounts of compensation
or benefits following the date of termination. However, earned but unpaid Base
Salary through the date of termination shall be paid in a lump sum at such time,
and the earned but unpaid Annual Incentive Award, if any, for the year during
which such termination occurs shall be pro rated for the portion of the year
prior to the date of termination and paid in accordance with the Company's
customary practice for payment of incentive compensation.
5.3 Definitions. For purposes of this Article 5, the following terms have
----------- ---------
the following meanings:
(a) A "Change in Control" shall occur if an event or series of events
occurs after the effective date of this Agreement which would constitute either
a change in ownership of the Company, within the meaning of Section 280G, or a
change in the ownership of a substantial portion of the Company's assets, within
the meaning of Section 280G, but for purposes of this definition, the fair
market value threshold for determining "substantial portion of the Company's
assets" shall be "greater than 50%."
(b) "Constructive Termination" means termination of the Executive's
employment by the Executive (i) as a result of a declined reassignment of a job
that is not the equivalent of his then current position as set forth herein (in
responsibility, compensation or geographic area of service, or (ii) on account
of conduct by the Company or the Board that constitutes continuous and material
interference by the Company or the Board with the Executive's performance of his
duties as set forth in Article 2. The Executive shall have a period of one (1)
---------
year after termination of his employment to assert against the Company that he
has suffered a Constructive Termination, and after the
5
<PAGE>
expiration of such one year period, the Executive shall be deemed to have
irrevocably waived the right to such assertion.
(c) "Termination With Cause" means termination of the Executive's
employment by the Company, acting in good faith, by written notice to the
Executive specifying the event relied upon for such termination, due to (i) the
Executive's conviction for a felony or a crime involving moral turpitude or the
commission of any other act or omission involving dishonesty or fraud with
respect to the Company or any affiliate or any of their respective customers or
suppliers; (ii) conduct tending to bring the Company or any of its affiliates
into substantial public disgrace or disrepute; (iii) the Executive's theft,
embezzlement, misappropriation of or intentional infliction of material damage
to the Company's property or business opportunities; (iv) the Executive's
intentional breach of the noncompetition provisions of this Agreement; or (v)
the Executive's repeated neglect of or failure to perform his duties hereunder
or his ongoing willful failure or refusal to follow any reasonable, unambiguous
duly adopted written directive of the Board of Directors or any duly constituted
committee thereof that is not inconsistent with the description of the
Executive's duties set forth in this Agreement.
(d) "Termination Without Cause" means termination of the Executive's
employment by the Company other than due to the Executive's death or disability
or Termination With Cause.
ARTICLE 6
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE TERM OF THIS AGREEMENT
6.1 Additional Information. The Executive shall, upon reasonable notice,
----------------------
during or after the Term of this Agreement, furnish information as may be in his
possession and cooperate with the Company as may reasonably be requested in
connection with any claims or legal actions in which the Company is or may
become a party. After the Term of this Agreement, the Executive shall be
entitled to receive reasonable compensation for the time expended by him
pursuant to this Section 6.1.
-----------
6.2 Confidentiality.
---------------
(a) Access to and Use of Confidential Information. The Executive agrees
and acknowledges that through the nature of his work, he shall have access to
and shall acquire information and knowledge concerning the business and
operations of the Company and its affiliates including, without limitation, any
and all trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and development, current and
planned manufacturing or distribution methods and processes, customer lists,
current and anticipated customer requirements, price lists, market studies,
business plans, computer software and programs (including object code and source
code), computer software and database technologies, systems, structures, and
architectures (and related formulae, compositions, processes, improvements,
devices, know-how, inventions,
6
<PAGE>
discoveries, concepts, ideas, designs, methods and information, and any other
information, however documented), and other items that are trade secrets within
the meaning of any applicable law; information concerning the business and
affairs of the Company and its affiliates (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials, however documented; and notes,
analysis, compilations, studies, summaries, and other material prepared by or
for the Company or its affiliates containing or based on, in whole or in part,
any information included in the foregoing (collectively, "Confidential
Information"). The Executive acknowledges that all such Confidential Information
is the property of the Company and its affiliates solely and constitutes
valuable, proprietary and confidential information of the Company and its
affiliates; that the disclosure thereof would cause substantial loss to the
goodwill of the Company and its affiliates; that disclosure thereof to the
Executive is being made only because of the position of trust and confidence
which he shall occupy and because of his agreement to the restrictions herein
contained. The Executive shall not during the Term of this Agreement or
thereafter, except to the extent reasonably necessary in the performance of his
duties under this Agreement, give to any person, firm, association, corporation,
entity or governmental agency any information concerning the affairs, business,
clients, customers or other relationships of the Company except as required by
law. The Executive shall not make use of this type of information for his own
purposes or for the benefit of any person, entity or organization other than the
Company. The Executive shall also use his best efforts to prevent the disclosure
of this information by others. All records, memoranda, etc. relating to the
business of the Company whether made by the Executive or otherwise coming into
his possession are confidential and shall remain the property of the Company.
None of the foregoing obligations and restrictions applies to any part of the
Confidential Information that the Executive demonstrates was or became generally
available to the public other than as a result of a disclosure by the Executive.
(b) Proprietary Items. The Executive shall not remove from the Company's
premises (except to the extent such removal is for purposes of the performance
of the Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Company) any document, record, notebook, plan,
model, component, device, or computer software or code, whether embodied in a
disk or in any other form (collectively, the "Proprietary Items"). The Executive
recognizes that, as between the Company and the Executive, all of the
Proprietary Items, whether or not developed by the Executive, are the exclusive
property of the Company. Upon termination of this Agreement by either party, or
upon the request of the Company during the Term, the Executive shall return to
The Company all of the Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of the
Proprietary Items.
(c) Disputes or Controversies. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. The
Executive and the Company shall use their best efforts to cause all pleadings,
documents, testimony, and records relating to any such adjudication to be
maintained in secrecy and to make the same available for inspection by the
Company, the Executive, and their
7
<PAGE>
respective attorneys and experts, who shall agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be limited
by them in writing.
6.3 Noncompetition.
--------------
(a) During the Term of Employment. The Executive shall not Compete with
the Company (hereinafter defined) at any time while he is employed by the
Company or receiving payments from the Company.
(b) Voluntary Termination; Termination With Cause. In the event of a
Voluntary Termination or a Termination With Cause, the Executive shall not
Compete with the Company for a period consisting of the longer of (i) the
remaining Term of this Agreement or (ii) one (1) year; provided that if a
Voluntary Termination follows a notice by the Company under Section 2.1 that the
-----------
Term of this Agreement shall not be automatically extended, there shall be no
restriction on the Executive's right to Compete with the Company after the date
his employment terminates.
(c) Termination Without Cause; Constructive Termination. In the event of a
Termination Without Cause or Constructive Termination, the Executive shall not
Compete with the Company for the shorter of (i) the then remaining Term of this
Agreement or (ii) one year from the date of such termination.
(d) Definition of "Compete" with the Company. For the purposes of this
Article 6, the term "Compete with the Company" means action by the Executive,
- ---------
direct or indirect, for his own account or for the account of others, to: (i)
engage or invest in, own, manage, operate, finance, control, or participate in
the ownership, management, operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the Executive's name or
any similar name to, lend the Executive's credit to or render services or advice
to, any business whose products or activities compete in whole or in part with
the products or activities of the Company anywhere within a fifty (50) mile
radius of any location where the Company or any affiliate of the Company
performs such services at the date of a termination of the Executive's
employment or has performed such services within one year prior to such
termination of employment; provided, however, that Employee may purchase or
otherwise acquire up to (but not more than) 4.99 percent of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934; (ii) solicit business of the same or similar
type being carried on by the Company, from any person or entity known by the
Executive to be a customer of the Company or its affiliates, whether or not the
had personal contact with such person during and by reason of the Executive's
employment with the Company; (iii) solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is an employee of
the Company or its affiliates or in any manner induce or attempt to induce any
employee of the Company or its affiliates to terminate his or her employment
with the Company or its affiliates; (iv) interfere with the Company's or its
affiliates' relationship with any person or entity, including any person or
entity who at any time during the Term was an employee, contractor, supplier, or
customer of the Company or its affiliates; or (v)
8
<PAGE>
(e) Reasonableness of Scope and Duration. The Executive acknowledges that:
(i) the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (ii) the Company's
business is national in scope and its products are marketed throughout the
United States; (iii) the Company competes with other businesses that are or
could be located in any part of the United States; and (iv) the covenants
contained in this Section 6.3 are reasonable as to geographic and temporal
-----------
scope.
6.4 Injunctive Relief and Additional Remedy. The Executive acknowledges
---------------------------------------
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Article 6) would be
---------
irreparable and that an award of monetary damages to the Company for such a
breach would be an inadequate remedy. Consequently, the Company shall have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and the Company shall not be obligated to post
bond or other security in seeking such relief. Without limiting the Company's
rights under this Section 6.4 or any other remedies of the Company, if the
-----------
Executive breaches any of the provisions of Article 6, the Company shall have
---------
the right to cease making any payments otherwise due to the Executive under this
Agreement.
6.5 Covenants of Section 6.2 and Section 6.3 are Essential and Independent
----------------------------------------------------------------------
Covenants. The covenants by the Executive in Section 6.2 and Section 6.3 are
- --------- ----------- -----------
essential elements of this Agreement, and without the Executive's agreement to
comply with such covenants, the Company would not have entered into this
Agreement or employed or continued the employment of the Executive. The Company
and the Executive have independently consulted their respective counsel and have
been advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by the
Company, the Executive's covenants in Section 6.2 and Section 6.3 are
----------- -----------
independent covenants and the existence of any claim by the Executive against
the Company under this Agreement or otherwise, shall not excuse the Executive's
breach of any covenant in Section 6.2 or Section 6.3. If the Executive's
----------- -----------
employment hereunder expires or is terminated, this Agreement shall continue in
full force and effect as is necessary or appropriate to enforce the covenants
and agreements of the Executive in Section 6.2 and Section 6.3.
----------- -----------
ARTICLE 7
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all or substantially all of its assets to,
another corporation or organization which assumes this Agreement and all
obligations and undertakings of the Company hereunder. Upon such a
consolidation, merger or sale of assets, the term "the Company" as used herein
shall mean or include the other corporation or organization and this Agreement
shall continue in full force and effect. This Article 7 is not intended to
---------
modify or limit the rights of the Executive hereunder.
9
<PAGE>
ARTICLE 8
MISCELLANEOUS
8.1 Entire Agreement. This Agreement contains the entire understanding
----------------
between the Company and the Executive and supersedes any prior employment or
severance agreements between the Company and its affiliates, and the Executive.
8.2 Amendment; Waiver. This Agreement may not be modified or amended
-----------------
except in writing signed by the parties. No term or condition of this Agreement
shall be deemed to have been waived except in writing by the party charged with
waiver. A waiver shall operate only as to the specific term or condition waived
and shall not constitute a waiver for the future or act on anything other than
that which is specifically waived.
8.3 Severability; Modification of Covenant. Should any part of this
--------------------------------------
Agreement be declared invalid for any reason, such invalidity shall not affect
the validity of any remaining portion hereof and such remaining portion shall
continue in full force and effect as if this Agreement had been originally
executed without including the invalid part. Should any covenant of this
Agreement be unenforceable because of its geographic scope or term, its
geographic scope or term shall be modified to such extent as may be necessary to
render such covenant enforceable.
8.4 Effect of Captions. Titles and captions in no way define, limit,
------------------
extend or describe the scope of this Agreement nor the intent of any provision
thereof.
8.5 Counterpart Execution. This Agreement may be executed in any number
---------------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6 Governing Law. This Agreement has been executed and delivered in the
-------------
State of Tennessee and its validity, interpretation, performance and enforcement
shall be governed by the laws of that state. Any dispute among the parties
hereto shall be settled by arbitration in Memphis, Tennessee, in accordance with
the rules then obtaining of the American Arbitration Association and judgment
upon the award rendered may be entered in any court having jurisdiction thereof.
All provisions hereof are for the protection and are intended to be for the
benefit of the parties hereto and enforceable directly by and binding upon each
party. Each party hereto agrees that the remedy at law of the other for any
actual or threatened breach of this Agreement would be inadequate and that the
other party shall be entitled to specific performance hereof or injunctive
relief or both, by temporary or permanent injunction or such other appropriate
judicial remedy, writ or orders as may be decided by a court of competent
jurisdiction in addition to any damages which the complaining party may be
legally entitled to recover together with reasonable expenses of litigation,
including attorney's fees incurred in connection therewith, as may be approved
by such court.
8.7 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage
10
<PAGE>
prepaid by registered mail, return receipt requested, or when delivered if by
hand, overnight delivery service or confirmed facsimile transmission, to the
following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018 or at such other address as may have been furnished to
the Executive by the Company in writing; or
(b) If to the Executive, at 2669 Halle Parkway, Collierville, Tennessee
38017 or such other address as may have been furnished to the Company
by the Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8.8 Binding Agreement. This Agreement shall be binding on the parties'
-----------------
successors, heirs and assigns.
[The remainder of this page is intentionally left blank.]
11
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MASTER GRAPHICS, INC.
By: /s/ Michael B. Bemis
---------------------------
Name: Michael B. Bemis
-------------------------
Title: Chairman
------------------------
EXECUTIVE:
/s/ Robert J. Diehl
------------------------------
Robert J. Diehl
12
<PAGE>
Schedule 3.2
Annual Performance Bonus for Year Ended December 31, 2000
Pursuant to Section 3.2 of the Employment Agreement between Master Graphics,
Inc. and Robert J. Diehl, the Compensation Committee of the Board of Directors
of Master Graphics has set Mr. Diehl's maximum Annual Incentive Award at 100% of
his current Base Salary, or $250,000. The Annual Incentive Award shall be
earned based upon satisfaction of the following criteria:
1. 12.5% ($31,250) shall be earned if the Company achieves Target 1 (break-
even cash flow for first quarter ended March 31, 2000)
2. 12.5% ($31,250) shall be earned if the Company achieves Target 2 (book
profitability for the quarter ended September 30,2000);
3. 25% ($62,500) shall be earned if the Company has sufficient funds available
under its existing credit facility (or a replacement facility) and under
the terms of the Indenture to make the interest payment on the Senior Notes
required to be made on June 1, 2000 or if the Company is not legally
required to make an interest payment on the Senior Notes on June 1, 2000;
4. 25% ($62,500) shall be earned if the Company restructures its debt or
recapitalizes during 2000 in such a fashion as to decrease the Company's
annualized interest costs by at least 20% from January 2000 levels; and
5. 25% ($62,500) shall be earned if the Company achieves $37.5 million of
EBITDA and $2.5 million in pre-tax profit for the year ended December 31,
---
2000.
All Annual Incentive Awards shall be payable on or before ninety (90) days
following the date upon which such Annual Incentive Award is conclusively
determined to be earned.
Schedule 3.2 - 1
<PAGE>
Exhibit 3.3
INCENTIVE STOCK OPTION
This INCENTIVE STOCK OPTION AGREEMENT (this "Option Agreement"), dated as
of the 22nd day of February, 2000 (the "Date of Grant"), by and between Master
Graphics, Inc., a Tennessee corporation (the "Company"), and Robert J. Diehl
(the "Optionee"). Any capitalized terms not defined herein shall have their
respective meanings set forth in the Plan.
WHEREAS, the Board of Directors of the Company (the "Board") has adopted
and the shareholders of the Company have approved the Company's 1998 Equity
Compensation Plan (the "Plan") pursuant to which the Committee is authorized to
grant key employees of the Company and its Subsidiaries incentive stock options
to purchase shares of the Company's common stock, par value $.001 per share (the
"Common Stock");
WHEREAS, the Committee appointed by the Board, as the Administrator of the
Plan, has determined that the Optionee is to be granted an incentive option to
purchase shares of the Company's Common Stock, on the terms and conditions set
forth herein; and
WHEREAS, It is intended that the Option constitute an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained here in, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Grant of Option. Subject to the terms and conditions hereinafter set
---------------
forth, the Company, with the approval and at the direction of the Committee,
hereby grants to the Optionee, as of the Date of Grant, an option to purchase up
to 100,000 shares of Common Stock at a price of $.8125 per share (the "Exercise
Price"), which price is at least equal to the Fair Market Value of the Common
Stock on the Date of Grant. Such option is hereinafter referred to as the
"Option" and the shares of Common Stock purchasable upon exercise of the Option
are hereinafter referred to as the "Option Shares."
2. Incentive Stock Option. The Option is granted under the Plan and is
----------------------
intended to qualify as, and shall be treated by the parties hereto as, an
incentive stock option as that terms is used in Section 422 of the Code. The
Option is subject to the terms and conditions set forth in the Plan.
3. Vesting.
-------
(a) Subject to such further limitations as are provided herein, upon the
continuous employment of the Optionee by the Company through the applicable date
indicated below, the Option shall vest and become exercisable in four (4)
installments, the Optionee having the right
Exhibit 3.3-1
<PAGE>
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option:
(i) on and after June 30, 2000, up to twenty-five percent (25%) of
the total number of Option Shares;
(ii) on and after December 31, 2000, up to fifty percent (50%) of the
total number of Option Shares;
(iii) on and after June 30, 2001, up to seventy-five percent (75%)
of the total number of Option Shares; and
(iv) on and after December 31, 2001, up to one hundred percent (100%)
of the total number of Option Shares.
(b) In the event Optionee's employment by the Company is terminated (i) by
the Company in a Termination Without Cause, as such term is defined in that
certain employment agreement dated of even date herewith between the Company and
the Optionee (the "Employment Agreement") or (ii) by the Optionee in a
Constructive Termination, as such term is defined in the Employment Agreement,
one hundred percent (100%) of the Option Shares shall vest immediately upon any
such termination.
(c) In the event Optionee's employment by the Company is terminated as a
result of the death or Disability, as defined in the Employment Agreement, of
the Optionee, one hundred percent (100%) of the Option Shares shall vest
immediately upon any such termination.
(d) In the event Optionee's employment by the Company is terminated as a
result of (i) by the Company in a Termination for Cause, as defined in the
Employment Agreement; or (ii) by the Optionee as a Voluntary Termination, as
defined in the Employment Agreement, the Option to the extent not previously
vested pursuant to Section 3(a) shall terminate and become null and void
------------
immediately upon such termination of the Optionee's employment.
4. Termination of Option.
---------------------
(a) The Option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null and
void after the expiration of ten (10) years from the Date of Grant (the "Option
Term").
(b) Upon a termination of the Optionee's employment with the Company, the
Option may be exercised during the following periods, but only to the extent
that the Option was vested and exercisable on the date of termination:
Exhibit 3.3 - 2
<PAGE>
(i) the one-year period following the date of termination of the
Optionee's employment by the Company in the case of a termination for
Disability, as defined in the Employment Agreement;
(ii) the six-month period following the date of issuance of letters
testamentary or letters of administration to the executor or administrator
of the Optionee's estate, in the case of the Optionee's death during his
employment by the Company, but not later than one-year after the Optionee's
death; and
(iii) the three-month period following the date of any other
termination of the Optionee's employment by the Company.
(iv) In no event however, shall any such period described in this
Section 4(b) extend beyond the Option Term.
------------
(c) After termination of the Optionee's employment by the Company, any
portion of the Option not exercised within the time periods provided in Section
-------
4(b) shall become immediately null and void.
- ----
5. Nontransferability of Option. This Option shall not be transferable
----------------------------
by the Optionee otherwise than by the Optionee's will or by the laws of descent
and distribution. During the lifetime of the Optionee, the Option shall be
exercisable only by him. Any heir or legatee of the Optionee shall take rights
herein granted subject to the terms and conditions hereof. No such transfer of
this Option Agreement to heirs or legatees of Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem necessary
to establish the validity of the transfer and the acceptance by the transferee
or transferees of the terms and conditions hereof.
6. Method of Exercise of Option. The vested portion of the Option may be
----------------------------
exercised by written notice by the Optionee to the Secretary of the Company
setting forth the number of Option Share with respect to which the Option is to
be exercised accompanied by payment for the shares to be purchased, and
specifying the address to which the certificate for such Option Shares is to be
mailed. The notice shall be accompanied by one or a combination of the
following payment methods, equal in value to the aggregate Exercise Price: (i)
cash, personal check, cashier's check, bank draft, or postal or express money
order payable to the order of the Company, (ii) certificates representing freely
transferable shares of Common Stock owned by the Optionee duly endorsed for
transfer to the Company, or (iii) a written election by Optionee to transact a
"cashless exercise" as described in the Plan. Notice may also be delivered by
facsimile provided that the Exercise Price of the Option Shares is received by
the Company via wire transfer on the same day the facsimile transmission is
received by the Company. An option to purchase Option Shares in accordance with
the Plan shall be deemed to have been exercised immediately prior to the close
of business on the date (i) written notice of such exercise and (ii) payment in
full of the Exercise Price for the number of Option Shares for which the Option
is being exercised, are both received by the Company, and the Optionee shall be
treated for all purposes as the record holder of such Option Shares as of such
Exhibit 3.3 - 3
<PAGE>
date. As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to the Optionee certificates for the number
of shares with respect to which the Option has been so exercised, issued in the
Optionee's name or such other name as the Optionee directs; provided, however,
that such delivery shall be deemed effective for all purposes when a stock
transfer agent of the Company shall have deposited such certificates in the
United States mail, addressed to Optionee at the address specified herein.
7. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018 or at such other address as may have been furnished to
the Executive by the Company in writing; or
(b) If to the Executive, at 2669 Halle Parkway, Collierville, Tennessee or
such other address as may have been furnished to the Company by the
Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8. Securities Laws Requirements. The Option shall not be exercisable to
----------------------------
any extent, and the Company shall not be obligated to transfer any Option Shares
to the Optionee upon exercise of such Option, if such exercise, in the opinion
of counsel for the Company, would violate the Securities Act (or any other
federal or state statutes having similar requirements as may be in effect at
that time).
9. Protections Against Violations of Agreement. No purported sale,
-------------------------------------------
assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift,
transfer in trust (voting or other) or other disposition of, or creation of a
security interest in or lien on, any of the Option Shares by any holder thereof
in violation of the provisions of this Agreement or the Charter or the Bylaws of
the Company, will be valid, and the Company will not transfer any of said Option
Shares on its books nor will any of said Option Shares be entitled to vote, nor
will any dividends be paid thereon, unless and until there has been full
compliance with said provisions to the satisfaction of the Company. The
foregoing restrictions are in addition to and not in lieu of any other remedies,
legal or equitable, available to enforce said provisions.
10. Withholding Requirements. The Company's obligations under this Option
------------------------
Agreement shall be subject to all applicable tax and other withholding
requirements, and the Company shall, to the extent permitted by law, have the
right to deduct any withholding amounts from any payment or transfer of any kind
otherwise due to the Optionee.
Exhibit 3.3 - 4
<PAGE>
11. Failure to Enforce Not a Waiver. The failure of the Company to
-------------------------------
enforce at any time any provision of this Option Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
12. Governing Law. This Option Agreement shall be governed by and
-------------
construed according to the laws of the State of Tennessee without regard to its
principles of conflict of laws.
13. Incorporation of Plan. The Plan is hereby incorporated by reference
---------------------
and made a part hereof, and the Option and this Option Agreement shall be
subject to all terms and conditions of the Plan.
14. Amendments. This Option Agreement may be amended or modified at any
----------
time only by an instrument in writing signed by each of the parties hereto.
15. No Rights as a Stockholder. Neither the Optionee nor any of the
--------------------------
Optionee's successors in interest shall have any rights as a stockholder of the
Company with respect to any shares of Common Stock subject to the Option until
the date of issuance of a stock certificate for such shares of Common Stock.
16. Agreement Not a Contract of Employment. Neither the Plan, the granting
--------------------------------------
of the Option, this Option Agreement nor any other action taken pursuant to the
Plan shall constitute or be evidence of any agreement or understanding, express
or implied, that the Optionee has a right to continue to provide services as an
officer, director, employee, consultant or advisor of the Company or any
affiliate of the Company for any period of time or at any specific rate of
compensation.
[The remainder of this page is intentionally left blank]
Exhibit 3.3 - 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Option Agreement on the day and year first above written.
MASTER GRAPHICS, INC.
By
---------------------------
Name
-------------------------
Title
------------------------
Accepted and Agreed:
-----------------------------
Robert J. Diehl
Exhibit 3.3 - 6
<PAGE>
EXHIBIT 10.2
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made
as of the 22nd day of February, 2000 and effective as of January 1, 2000, by and
between MASTER GRAPHICS, INC., a Tennessee corporation (the "Company"), and P.
MELVIN HENSON, JR. (the "Executive").
WHEREAS, the Company and Executive entered into that certain employment
agreement between the Company and Executive effective as of March 31, 1998 (the
"Original Employment Agreement");
WHEREAS, the Company and the Executive desire to enter into this Agreement
which supercedes and replaces in its entirety the Original Employment Agreement;
WHEREAS, the Company is engaged in the business of providing general
commercial printing services to its customers; and
WHEREAS, the Company desires to employ the Executive to devote full time to
the business of the Company as the Chief Financial Officer of the Company;
WHEREAS, the Executive desires to be employed by the Company on the terms
and subject to the conditions hereinafter stated.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
SUPERSESSION OF ORIGINAL EMPLOYMENT AGREEMENT
The Company and the Executive acknowledge and agree that the Original
Employment Agreement is hereby terminated by mutual consent and neither the
Company nor the Executive shall have any continuing obligation to the other
pursuant to the terms of the Original Employment Agreement. The mutual
agreements and covenants contained in this Agreement shall replace and supercede
in their entirety the provisions of the Original Employment Agreement.
ARTICLE 2
TERM AND DUTIES
2.1 Term; Extension. The term of this Agreement (the "Term of this
---------------
Agreement") shall commence as of January 1, 2000, and shall continue through
December 31, 2001. On the second and each successive anniversary of the
effective date of this Agreement, the Term of this Agreement shall be extended
for an additional one (1) year period, unless either party gives notice of such
party's
<PAGE>
intent not to extend the Term of this Agreement not later than ninety (90) days
prior to the end of the then current Term of this Agreement. Termination of the
Executive's employment pursuant to this Agreement shall be governed by Article 4
---------
and Article 5.
---------
2.2 Duties. The Executive shall be employed as the Chief Financial
------
Officer of the Company, reporting to the Company's Board of Directors and
assuming and discharging such responsibilities as are commensurate with the
Executive's position. The Executive shall perform his duties faithfully and to
the best of his ability and shall devote his full business time and effort to
the performance of his duties hereunder. The Executive shall be responsible
for the financial affairs of the Company, including the financing of the
Company's business, accounting for its assets, liabilities and operations, and
the implementation and maintenance of internal accounting controls, subject to
direction and control by the Chief Executive Officer and the Board of Directors
(including the audit committee of the Board of Directors).
2.3 Location. The duties of the Executive shall be performed at such
--------
locations and places as may be directed by the Board of Directors; provided,
however, that the Executive shall not be required to relocate from the Memphis,
Tennessee M.S.A. without the consent of the Executive.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1 Base Compensation. The Company shall pay the Executive a base salary
-----------------
("Base Salary") of One Hundred Thirty Thousand and 00/100 Dollars ($130,000.00)
per annum, subject to applicable withholdings. Base Salary shall be payable
according to the customary payroll practices of the Company but in no event less
frequently than once each month. The Base Salary shall be reviewed annually and
shall be subject to increase according to the policies and practices adopted by
the Board of Directors from time to time; provided, however, that in no event
shall the Base Salary be decreased.
3.2 Annual Performance Bonus. The Company shall pay the Executive annual
------------------------
incentive compensation (each an "Annual Incentive Award") of up to one hundred
percent (100%) of his Base Salary, in accordance with policies and based on
performance targets established annually by the Compensation Committee of the
Board of Directors. The Annual Incentive Award and performance targets for
earning the Annual Incentive Award for the period beginning on the effective
date hereof and ending on December 31, 2000 are attached hereto as Schedule 3.2
------------
and are incorporated herein by this reference. At such time as the Compensation
Committee establishes new levels for incentive awards and new targets, Schedule
--------
3.2 shall be updated to reflect the new criteria set forth by the Compensation
- ---
Committee; provided, however, that Schedule 3.2 shall not be amended more than
------------
one time per year.
3.3 Stock Options. Contemporaneously with the execution of this
-------------
Agreement, the Company shall enter into that certain Incentive Stock Option
Agreement between the Company and the Executive (the "ISO Agreement"), which
shall be in substantially the form attached hereto as Exhibit 3.3.
-----------
2
<PAGE>
3.4 Additional Benefits. The Executive shall be entitled to participate
-------------------
in all employee benefit plans or programs and receive all benefits and
perquisites to which salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive shall participate to the extent permissible under the terms and
provisions of such plans or programs in accordance with applicable program
provisions. These may include group hospitalization, health, dental care, life
or other insurance, tax qualified pension, car allowance, savings, thrift and
profit sharing plans, termination pay programs, sick leave plans, travel or
accident insurance, disability insurance, and contingent compensation plans,
including capital accumulation programs, restricted stock programs, stock
purchase programs and stock options plans. Nothing in this Agreement shall
preclude the Company from amending or terminating any of the plans or programs
applicable to salaried employees or senior executives. The Executive shall be
entitled to an annual paid vacation as established by the Board of Directors.
3.5 Life Insurance. For so long as the Executive is employed by the
--------------
Company, the Company, at no cost to the Executive (other than taxes owed as a
result of the provision of such insurance), shall pay annually up to the lesser
of (i) Five Thousand Dollars ($5,000.00) in life insurance premiums or (ii) the
amount of premium required to obtain a life insurance policy on the life of the
Executive with a death benefit equal to twice the Executive's Base Salary for
the year prior to the year in which such policy is procured. The
beneficiary(ies) under the Policy shall be designated by the Executive.
3.6 Business Expenses. The Company shall reimburse the Executive for all
-----------------
reasonable travel and other expenses incurred by the Executive in connection
with the performance of his duties and obligations under this Agreement to the
extent the same shall be properly documented in accordance with the Company's
policies and rules of the Internal Revenue Service.
3.7 Withholding. The Company may directly or indirectly withhold from any
-----------
payments under this Agreement all federal, state, city or other taxes that shall
be required pursuant to any law or governmental regulation.
ARTICLE 4
DEATH AND DISABILITY
4.1 Death of Executive. In the event of the death of the Executive during
------------------
the Term of this Agreement, this Agreement shall terminate and the Company's
obligation to make payments under this Agreement shall cease as of the date of
death, except for earned but unpaid Base Salary and Annual Incentive Awards,
which would be payable on a pro-rated basis for the year in which death
occurred, through the date of death.
4.2 Disability of Executive. Notwithstanding the disability of the
-----------------------
Executive, the Company shall continue to pay the Executive pursuant to Article 3
---------
hereof during the Term of this Agreement, unless the Executive's employment is
earlier terminated in accordance with this Agreement. In the event the
disability continues for a period of three (3) months, the Company may
thereafter terminate this Agreement and the Executive's employment. Following
such termination,
3
<PAGE>
the Company shall pay the Executive amounts equal to his regular installments of
Base Salary, as of the date of termination, for a period of six (6) months. All
other compensation shall cease except for earned but unpaid Annual Incentive
Awards which would be payable on a pro-rated basis for the year in which the
disability occurred, through the date of termination.
4.3 Responsibilities of Executive in the Event of Disability. During the
--------------------------------------------------------
period the Executive is receiving payments following his disability and as long
as he is physically and mentally able to do so, the Executive shall furnish
information and assistance to the Company and from time to time shall make
himself available to the Company to undertake assignments consistent with his
position or prior position with the Company and his physical and mental health.
If the Company continuously fails to make payments or provide benefits required
as part of this Agreement, the Executive's obligation to provide information and
assistance shall end.
4.4 Definition of Disability. For purposes of this Agreement, the term
------------------------
"disability" shall have the same meaning as is ascribed to such term, or any
substantially similar term, in the Company's long term income disability plan as
in effect from time to time or if no such plan exists, the meaning ascribed to
such term in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code").
ARTICLE 5
TERMINATION OF EMPLOYMENT OTHER THAN FOR DEATH OR DISABILITY
5.1 Termination Without Cause; Constructive Termination.
---------------------------------------------------
(a) Without a Change in Control. If the Executive suffers a Termination
Without Cause (hereinafter defined) or Constructive Termination (hereinafter
defined) and a Change in Control (hereinafter defined) shall not have occurred
within one (1) year prior thereto, the Company shall pay to the Executive upon
such termination a lump sum in an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) annual Base
Salary as in effect at the date of the termination; and (iv) the average of the
Annual Incentive Award paid to the Executive for the two (2) immediately
preceding completed fiscal years of the Company. For six (6) months following
such Termination Without Cause or Constructive Termination, the Company shall
reimburse the Executive for the cost of the Executive's major medical health
insurance as in effect at the date of termination. The exercisability of stock
options granted to the Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
(b) Upon a Change in Control. If the Executive suffers a Termination
Without Cause or Constructive Termination at the time of or within one (1) year
following a Change in Control, the Company shall pay to the Executive in a lump
sum upon such termination an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) 299% of the
Executive's (A) annual Base Salary as in effect
4
<PAGE>
at the date of the termination plus (B) the average of the Annual Incentive
Award for the two (2) immediately preceding completed fiscal years of the
Company. To the extent that such foregoing amount, when added to any other
payment in the nature of compensation (within the meaning of Section 280G of the
Code, and the regulations promulgated thereunder ("Section 280G")) to or for the
benefit of the Executive (or any part of such amount or other payment)
constitutes an "excess parachute payment" within the meaning of Section 280G,
the amount, if any, of (A) such "excess parachute payment" multiplied by a
fraction, the numerator of which is the number one (1.00) and the denominator of
which is (I) the number one (1.00) minus (II) the effective tax rate under
Section 280G applicable to the Executive expressed as a decimal, minus (B) the
amount of such "excess parachute payment." For six (6) months following such
Termination Without Cause or Constructive Termination, the Company shall
reimburse the Executive for the cost of the Executive's major medical health
insurance as in effect at the date of termination. The exercisability of stock
options granted to the Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
(c) No Obligation to Mitigate. In the event the Executive's employment is
Terminated Without Cause or the Executive suffers a Constructive Termination,
the Executive shall have no duty to seek other employment and there shall be no
offset against any amounts due to the Executive pursuant to this Section 5.1
-----------
attributable to any subsequent employment that the Executive may accept.
5.2 Termination with Cause; Voluntary Termination. If the Executive
----------------------------------------------
suffers a Termination with Cause (hereinafter defined) or the Executive
voluntarily terminates his employment with the Company (a "Voluntary
Termination"), then, whether or not there has been a Change in Control, the
Company shall not be obligated to pay the Executive any amounts of compensation
or benefits following the date of termination. However, earned but unpaid Base
Salary through the date of termination shall be paid in a lump sum at such time,
and the earned but unpaid Annual Incentive Award, if any, for the year during
which such termination occurs shall be pro rated for the portion of the year
prior to the date of termination and paid in accordance with the Company's
customary practice for payment of incentive compensation.
5.3 Definitions. For purposes of this Article 5, the following terms have
----------- ---------
the following meanings:
(a) A "Change in Control" shall occur if an event or series of events
occurs after the effective date of this Agreement which would constitute either
a change in ownership of the Company, within the meaning of Section 280G, or a
change in the ownership of a substantial portion of the Company's assets, within
the meaning of Section 280G, but for purposes of this definition, the fair
market value threshold for determining "substantial portion of the Company's
assets" shall be "greater than 50%."
(b) "Constructive Termination" means termination of the Executive's
employment by the Executive (i) as a result of a declined reassignment of a job
that is not the equivalent of his then current position as set forth herein (in
responsibility, compensation or geographic area of service,
5
<PAGE>
or (ii) on account of conduct by the Company or the Board that constitutes
continuous and material interference by the Company or the Board with the
Executive's performance of his duties as set forth in Article 2. The Executive
---------
shall have a period of one (1) year after termination of his employment to
assert against the Company that he has suffered a Constructive Termination, and
after the expiration of such one year period, the Executive shall be deemed to
have irrevocably waived the right to such assertion.
(c) "Termination With Cause" means termination of the Executive's
employment by the Company, acting in good faith, by written notice to the
Executive specifying the event relied upon for such termination, due to (i) the
Executive's conviction for a felony or a crime involving moral turpitude or the
commission of any other act or omission involving dishonesty or fraud with
respect to the Company or any affiliate or any of their respective customers or
suppliers; (ii) conduct tending to bring the Company or any of its affiliates
into substantial public disgrace or disrepute; (iii) the Executive's theft,
embezzlement, misappropriation of or intentional infliction of material damage
to the Company's property or business opportunities; (iv) the Executive's
intentional breach of the noncompetition provisions of this Agreement; or (v)
the Executive's repeated neglect of or failure to perform his duties hereunder
or his ongoing willful failure or refusal to follow any reasonable, unambiguous
duly adopted written directive of the Board of Directors or any duly constituted
committee thereof that is not inconsistent with the description of the
Executive's duties set forth in this Agreement.
(d) "Termination Without Cause" means termination of the Executive's
employment by the Company other than due to the Executive's death or disability
or Termination With Cause.
ARTICLE 6
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE TERM OF THIS AGREEMENT
6.1 Additional Information. The Executive shall, upon reasonable notice,
----------------------
during or after the Term of this Agreement, furnish information as may be in his
possession and cooperate with the Company as may reasonably be requested in
connection with any claims or legal actions in which the Company is or may
become a party. After the Term of this Agreement, the Executive shall be
entitled to receive reasonable compensation for the time expended by him
pursuant to this Section 6.1.
-----------
6.2 Confidentiality.
---------------
(a) Access to and Use of Confidential Information. The Executive agrees
and acknowledges that through the nature of his work, he shall have access to
and shall acquire information and knowledge concerning the business and
operations of the Company and its affiliates including, without limitation, any
and all trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and development, current and
planned manufacturing or distribution
6
<PAGE>
methods and processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans, computer software and
programs (including object code and source code), computer software and database
technologies, systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how, inventions,
discoveries, concepts, ideas, designs, methods and information, and any other
information, however documented), and other items that are trade secrets within
the meaning of any applicable law; information concerning the business and
affairs of the Company and its affiliates (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials, however documented; and notes,
analysis, compilations, studies, summaries, and other material prepared by or
for the Company or its affiliates containing or based on, in whole or in part,
any information included in the foregoing (collectively, "Confidential
Information"). The Executive acknowledges that all such Confidential Information
is the property of the Company and its affiliates solely and constitutes
valuable, proprietary and confidential information of the Company and its
affiliates; that the disclosure thereof would cause substantial loss to the
goodwill of the Company and its affiliates; that disclosure thereof to the
Executive is being made only because of the position of trust and confidence
which he shall occupy and because of his agreement to the restrictions herein
contained. The Executive shall not during the Term of this Agreement or
thereafter, except to the extent reasonably necessary in the performance of his
duties under this Agreement, give to any person, firm, association, corporation,
entity or governmental agency any information concerning the affairs, business,
clients, customers or other relationships of the Company except as required by
law. The Executive shall not make use of this type of information for his own
purposes or for the benefit of any person, entity or organization other than the
Company. The Executive shall also use his best efforts to prevent the disclosure
of this information by others. All records, memoranda, etc. relating to the
business of the Company whether made by the Executive or otherwise coming into
his possession are confidential and shall remain the property of the Company.
None of the foregoing obligations and restrictions applies to any part of the
Confidential Information that the Executive demonstrates was or became generally
available to the public other than as a result of a disclosure by the Executive.
(b) Proprietary Items. The Executive shall not remove from the Company's
premises (except to the extent such removal is for purposes of the performance
of the Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Company) any document, record, notebook, plan,
model, component, device, or computer software or code, whether embodied in a
disk or in any other form (collectively, the "Proprietary Items"). The Executive
recognizes that, as between the Company and the Executive, all of the
Proprietary Items, whether or not developed by the Executive, are the exclusive
property of the Company. Upon termination of this Agreement by either party, or
upon the request of the Company during the Term, the Executive shall return to
The Company all of the Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of the
Proprietary Items.
(c) Disputes or Controversies. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court,
7
<PAGE>
arbitration panel, or other third party, the preservation of the secrecy of
Confidential Information may be jeopardized. The Executive and the Company shall
use their best efforts to cause all pleadings, documents, testimony, and records
relating to any such adjudication to be maintained in secrecy and to make the
same available for inspection by the Company, the Executive, and their
respective attorneys and experts, who shall agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be limited
by them in writing.
6.3 Noncompetition.
--------------
(a) During the Term of Employment. The Executive shall not Compete with
the Company (hereinafter defined) at any time while he is employed by the
Company or receiving payments from the Company.
(b) Voluntary Termination; Termination With Cause. In the event of a
Voluntary Termination or a Termination With Cause, the Executive shall not
Compete with the Company for a period consisting of the longer of (i) the
remaining Term of this Agreement or (ii) one (1) year; provided that if a
Voluntary Termination follows a notice by the Company under Section 2.1 that the
-----------
Term of this Agreement shall not be automatically extended, there shall be no
restriction on the Executive's right to Compete with the Company after the date
his employment terminates.
(c) Termination Without Cause; Constructive Termination. In the event of a
Termination Without Cause or Constructive Termination, the Executive shall not
Compete with the Company for the shorter of (i) the then remaining Term of this
Agreement or (ii) one year from the date of such termination.
(d) Definition of "Compete" with the Company. For the purposes of this
Article 6, the term "Compete with the Company" means action by the Executive,
- ---------
direct or indirect, for his own account or for the account of others, to: (i)
engage or invest in, own, manage, operate, finance, control, or participate in
the ownership, management, operation, financing, or control of, be employed by,
associated with, or in any manner connected with, lend the Executive's name or
any similar name to, lend the Executive's credit to or render services or advice
to, any business whose products or activities compete in whole or in part with
the products or activities of the Company anywhere within a fifty (50) mile
radius of any location where the Company or any affiliate of the Company
performs such services at the date of a termination of the Executive's
employment or has performed such services within one year prior to such
termination of employment; provided, however, that Employee may purchase or
otherwise acquire up to (but not more than) 4.99 percent of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934; (ii) solicit business of the same or similar
type being carried on by the Company, from any person or entity known by the
Executive to be a customer of the Company or its affiliates, whether or not the
had personal contact with such person during and by reason of the Executive's
employment with the Company; (iii) solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is an employee of
the Company or its affiliates or in any manner induce or attempt to
8
<PAGE>
induce any employee of the Company or its affiliates to terminate his or her
employment with the Company or its affiliates; (iv) interfere with the Company's
or its affiliates' relationship with any person or entity, including any person
or entity who at any time during the Term was an employee, contractor, supplier,
or customer of the Company or its affiliates; or (v)
(e) Reasonableness of Scope and Duration. The Executive acknowledges that:
(i) the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (ii) the Company's
business is national in scope and its products are marketed throughout the
United States; (iii) the Company competes with other businesses that are or
could be located in any part of the United States; and (iv) the covenants
contained in this Section 6.3 are reasonable as to geographic and temporal
-----------
scope.
6.4 Injunctive Relief and Additional Remedy. The Executive acknowledges
---------------------------------------
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Article 6) would be
---------
irreparable and that an award of monetary damages to the Company for such a
breach would be an inadequate remedy. Consequently, the Company shall have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and the Company shall not be obligated to post
bond or other security in seeking such relief. Without limiting the Company's
rights under this Section 6.4 or any other remedies of the Company, if the
-----------
Executive breaches any of the provisions of Article 6, the Company shall have
---------
the right to cease making any payments otherwise due to the Executive under this
Agreement.
6.5 Covenants of Section 6.2 and Section 6.3 are Essential and Independent
----------------------------------------------------------------------
Covenants. The covenants by the Executive in Section 6.2 and Section 6.3 are
- --------- ----------- -----------
essential elements of this Agreement, and without the Executive's agreement to
comply with such covenants, the Company would not have entered into this
Agreement or employed or continued the employment of the Executive. The Company
and the Executive have independently consulted their respective counsel and have
been advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by the
Company, the Executive's covenants in Section 6.2 and Section 6.3 are
----------- -----------
independent covenants and the existence of any claim by the Executive against
the Company under this Agreement or otherwise, shall not excuse the Executive's
breach of any covenant in Section 6.2 or Section 6.3. If the Executive's
----------- -----------
employment hereunder expires or is terminated, this Agreement shall continue in
full force and effect as is necessary or appropriate to enforce the covenants
and agreements of the Executive in Section 6.2 and Section 6.3.
----------- -----------
ARTICLE 7
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all or substantially all of its assets to,
another corporation or organization which assumes this Agreement and all
obligations and undertakings of the Company hereunder.
9
<PAGE>
Upon such a consolidation, merger or sale of assets, the term "the Company" as
used herein shall mean or include the other corporation or organization and this
Agreement shall continue in full force and effect. This Article 7 is not
---------
intended to modify or limit the rights of the Executive hereunder.
ARTICLE 8
MISCELLANEOUS
8.1 Entire Agreement. This Agreement contains the entire understanding
----------------
between the Company and the Executive and supersedes any prior employment or
severance agreements between the Company and its affiliates, and the Executive.
8.2 Amendment; Waiver. This Agreement may not be modified or amended
-----------------
except in writing signed by the parties. No term or condition of this Agreement
shall be deemed to have been waived except in writing by the party charged with
waiver. A waiver shall operate only as to the specific term or condition waived
and shall not constitute a waiver for the future or act on anything other than
that which is specifically waived.
8.3 Severability; Modification of Covenant. Should any part of this
--------------------------------------
Agreement be declared invalid for any reason, such invalidity shall not affect
the validity of any remaining portion hereof and such remaining portion shall
continue in full force and effect as if this Agreement had been originally
executed without including the invalid part. Should any covenant of this
Agreement be unenforceable because of its geographic scope or term, its
geographic scope or term shall be modified to such extent as may be necessary to
render such covenant enforceable.
8.4 Effect of Captions. Titles and captions in no way define, limit,
------------------
extend or describe the scope of this Agreement nor the intent of any provision
thereof.
8.5 Counterpart Execution. This Agreement may be executed in any number
---------------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6 Governing Law. This Agreement has been executed and delivered in the
-------------
State of Tennessee and its validity, interpretation, performance and enforcement
shall be governed by the laws of that state. Any dispute among the parties
hereto shall be settled by arbitration in Memphis, Tennessee, in accordance with
the rules then obtaining of the American Arbitration Association and judgment
upon the award rendered may be entered in any court having jurisdiction thereof.
All provisions hereof are for the protection and are intended to be for the
benefit of the parties hereto and enforceable directly by and binding upon each
party. Each party hereto agrees that the remedy at law of the other for any
actual or threatened breach of this Agreement would be inadequate and that the
other party shall be entitled to specific performance hereof or injunctive
relief or both, by temporary or permanent injunction or such other appropriate
judicial remedy, writ or orders as may be decided by a court of competent
jurisdiction in addition to any damages which the complaining party may be
legally entitled to recover together with reasonable expenses of litigation,
including attorney's fees incurred in connection therewith, as may be approved
by such court.
10
<PAGE>
8.7 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018 or at such other address as may have been furnished to
the Executive by the Company in writing; or
(b) If to the Executive, at 2186 Grandbury Way Cove, Germantown, Tennessee
38139 or such other address as may have been furnished to the Company
by the Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8.8 Binding Agreement. This Agreement shall be binding on the parties'
-----------------
successors, heirs and assigns.
[The remainder of this page is intentionally left blank.]
11
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MASTER GRAPHICS, INC.
By: /s/ Michael B. Bemis
---------------------------
Name: Michael B. Bemis
-------------------------
Title: Chairman
------------------------
EXECUTIVE:
/s/ P. Melvin Henson, Jr.
------------------------------
P. Melvin Henson, Jr.
12
<PAGE>
Schedule 3.2
Annual Performance Bonus for Year Ended December 31, 2000
Pursuant to Section 3.2 of the Employment Agreement between Master Graphics,
Inc. and P. Melvin Henson, Jr., the Compensation Committee of the Board of
Directors of Master Graphics has set Mr. Henson's maximum Annual Incentive Award
at 100% of his current Base Salary, or $130,000. The Annual Incentive Award
shall be earned based upon satisfaction of the following criteria:
1. 12.5% ($16,250) shall be earned if the Company achieves Target 1 (break-
even cash flow for first quarter ended March 31, 2000)
2. 12.5% ($16,250) shall be earned if the Company achieves Target 2 (book
profitability for the quarter ended September 30,2000);
3. 25% ($32,500) shall be earned if the Company has sufficient funds available
under its existing credit facility (or a replacement facility) and under
the terms of the Indenture to make the interest payment on the Senior Notes
required to be made on June 1, 2000 or if the Company is not legally
required to make an interest payment on the Senior Notes on June 1, 2000;
4. 25% ($32,500) shall be earned if the Company restructures its debt or
recapitalizes during 2000 in such a fashion as to decrease the Company's
annualized interest costs by at least 20% from January 2000 levels; and
5. 25% ($32,500) shall be earned if the Company achieves $37.5 million of
EBITDA and $2.5 million in pre-tax profit for the year ended December 31,
---
2000.
All Annual Incentive Awards shall be payable on or before ninety (90) days
following the date upon which such Annual Incentive Award is conclusively
determined to be earned.
Schedule 3.2 - 1
<PAGE>
Exhibit 3.3
INCENTIVE STOCK OPTION
This INCENTIVE STOCK OPTION AGREEMENT (this "Option Agreement"), dated as
of the 22nd day of February, 2000 (the "Date of Grant"), by and between Master
Graphics, Inc., a Tennessee corporation (the "Company"), and P. Melvin Henson,
Jr. (the "Optionee"). Any capitalized terms not defined herein shall have their
respective meanings set forth in the Plan.
WHEREAS, the Board of Directors of the Company (the "Board") has adopted
and the shareholders of the Company have approved the Company's 1998 Equity
Compensation Plan (the "Plan") pursuant to which the Committee is authorized to
grant key employees of the Company and its Subsidiaries incentive stock options
to purchase shares of the Company's common stock, par value $.001 per share (the
"Common Stock");
WHEREAS, the Committee appointed by the Board, as the Administrator of the
Plan, has determined that the Optionee is to be granted an incentive option to
purchase shares of the Company's Common Stock, on the terms and conditions set
forth herein; and
WHEREAS, It is intended that the Option constitute an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained here in, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Grant of Option. Subject to the terms and conditions hereinafter set
---------------
forth, the Company, with the approval and at the direction of the Committee,
hereby grants to the Optionee, as of the Date of Grant, an option to purchase up
to 50,000 shares of Common Stock at a price of $.8125 per share (the "Exercise
Price"), which price is at least equal to the Fair Market Value of the Common
Stock on the Date of Grant. Such option is hereinafter referred to as the
"Option" and the shares of Common Stock purchasable upon exercise of the Option
are hereinafter referred to as the "Option Shares."
2. Incentive Stock Option. The Option is granted under the Plan and is
----------------------
intended to qualify as, and shall be treated by the parties hereto as, an
incentive stock option as that terms is used in Section 422 of the Code. The
Option is subject to the terms and conditions set forth in the Plan.
3. Vesting.
-------
(a) Subject to such further limitations as are provided herein, upon the
continuous employment of the Optionee by the Company through the applicable date
indicated below, the Option shall vest and become exercisable in four (4)
installments, the Optionee having the right
Exhibit 3.3 - 1
<PAGE>
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option:
(i) on and after June 30, 2000, up to twenty-five percent (25%) of
the total number of Option Shares;
(ii) on and after December 31, 2000, up to fifty percent (50%) of the
total number of Option Shares;
(iii) on and after June 30, 2001, up to seventy-five percent (75%)
of the total number of Option Shares; and
(iv) on and after December 31, 2001, up to one hundred percent (100%)
of the total number of Option Shares.
(b) In the event Optionee's employment by the Company is terminated (i) by
the Company in a Termination Without Cause, as such term is defined in that
certain employment agreement dated of even date herewith between the Company and
the Optionee (the "Employment Agreement") or (ii) by the Optionee in a
Constructive Termination, as such term is defined in the Employment Agreement,
one hundred percent (100%) of the Option Shares shall vest immediately upon any
such termination.
(c) In the event Optionee's employment by the Company is terminated as a
result of the death or Disability, as defined in the Employment Agreement, of
the Optionee, one hundred percent (100%) of the Option Shares shall vest
immediately upon any such termination.
(d) In the event Optionee's employment by the Company is terminated as a
result of (i) by the Company in a Termination for Cause, as defined in the
Employment Agreement; or (ii) by the Optionee as a Voluntary Termination, as
defined in the Employment Agreement, the Option to the extent not previously
vested pursuant to Section 3(a) shall terminate and become null and void
------------
immediately upon such termination of the Optionee's employment.
4. Termination of Option.
---------------------
(a) The Option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null and
void after the expiration of ten (10) years from the Date of Grant (the "Option
Term").
(b) Upon a termination of the Optionee's employment with the Company, the
Option may be exercised during the following periods, but only to the extent
that the Option was vested and exercisable on the date of termination:
Exhibit 3.3 - 2
<PAGE>
(i) the one-year period following the date of termination of the
Optionee's employment by the Company in the case of a
termination for Disability, as defined in the Employment
Agreement;
(ii) the six-month period following the date of issuance of letters
testamentary or letters of administration to the executor or
administrator of the Optionee's estate, in the case of the
Optionee's death during his employment by the Company, but not
later than one-year after the Optionee's death; and
(iii) the three-month period following the date of any other
termination of the Optionee's employment by the Company.
(iv) In no event however, shall any such period described in this
Section 4(b) extend beyond the Option Term.
------------
(c) After termination of the Optionee's employment by the Company, any
portion of the Option not exercised within the time periods provided in Section
-------
4(b) shall become immediately null and void.
- ----
5. Nontransferability of Option. This Option shall not be transferable
----------------------------
by the Optionee otherwise than by the Optionee's will or by the laws of descent
and distribution. During the lifetime of the Optionee, the Option shall be
exercisable only by him. Any heir or legatee of the Optionee shall take rights
herein granted subject to the terms and conditions hereof. No such transfer of
this Option Agreement to heirs or legatees of Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem necessary
to establish the validity of the transfer and the acceptance by the transferee
or transferees of the terms and conditions hereof.
6. Method of Exercise of Option. The vested portion of the Option may be
----------------------------
exercised by written notice by the Optionee to the Secretary of the Company
setting forth the number of Option Share with respect to which the Option is to
be exercised accompanied by payment for the shares to be purchased, and
specifying the address to which the certificate for such Option Shares is to be
mailed. The notice shall be accompanied by one or a combination of the
following payment methods, equal in value to the aggregate Exercise Price: (i)
cash, personal check, cashier's check, bank draft, or postal or express money
order payable to the order of the Company, (ii) certificates representing freely
transferable shares of Common Stock owned by the Optionee duly endorsed for
transfer to the Company, or (iii) a written election by Optionee to transact a
"cashless exercise" as described in the Plan. Notice may also be delivered by
facsimile provided that the Exercise Price of the Option Shares is received by
the Company via wire transfer on the same day the facsimile transmission is
received by the Company. An option to purchase Option Shares in accordance with
the Plan shall be deemed to have been exercised immediately prior to the close
of business on the date (i) written notice of such exercise and (ii) payment in
full of the Exercise Price for the number of Option Shares for which the Option
is being exercised, are both received by the Company, and the Optionee shall be
treated for all purposes as the record holder of such Option Shares as of such
Exhibit 3.3 - 3
<PAGE>
date. As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to the Optionee certificates for the number
of shares with respect to which the Option has been so exercised, issued in the
Optionee's name or such other name as the Optionee directs; provided, however,
that such delivery shall be deemed effective for all purposes when a stock
transfer agent of the Company shall have deposited such certificates in the
United States mail, addressed to Optionee at the address specified herein.
7. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018 or at such other address as may have been furnished to
the Executive by the Company in writing; or
(b) If to the Executive, at 2186 Grandbury Way Cove, Germantown, Tennessee
38139 or such other address as may have been furnished to the Company
by the Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8. Securities Laws Requirements. The Option shall not be exercisable to
----------------------------
any extent, and the Company shall not be obligated to transfer any Option Shares
to the Optionee upon exercise of such Option, if such exercise, in the opinion
of counsel for the Company, would violate the Securities Act (or any other
federal or state statutes having similar requirements as may be in effect at
that time).
9. Protections Against Violations of Agreement. No purported sale,
-------------------------------------------
assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift,
transfer in trust (voting or other) or other disposition of, or creation of a
security interest in or lien on, any of the Option Shares by any holder thereof
in violation of the provisions of this Agreement or the Charter or the Bylaws of
the Company, will be valid, and the Company will not transfer any of said Option
Shares on its books nor will any of said Option Shares be entitled to vote, nor
will any dividends be paid thereon, unless and until there has been full
compliance with said provisions to the satisfaction of the Company. The
foregoing restrictions are in addition to and not in lieu of any other remedies,
legal or equitable, available to enforce said provisions.
10. Withholding Requirements. The Company's obligations under this Option
------------------------
Agreement shall be subject to all applicable tax and other withholding
requirements, and the Company shall, to the extent permitted by law, have the
right to deduct any withholding amounts from any payment or transfer of any kind
otherwise due to the Optionee.
Exhibit 3.3 - 4
<PAGE>
11. Failure to Enforce Not a Waiver. The failure of the Company to
-------------------------------
enforce at any time any provision of this Option Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
12. Governing Law. This Option Agreement shall be governed by and
-------------
construed according to the laws of the State of Tennessee without regard to its
principles of conflict of laws.
13. Incorporation of Plan. The Plan is hereby incorporated by reference
---------------------
and made a part hereof, and the Option and this Option Agreement shall be
subject to all terms and conditions of the Plan.
14. Amendments. This Option Agreement may be amended or modified at any
----------
time only by an instrument in writing signed by each of the parties hereto.
15. No Rights as a Stockholder. Neither the Optionee nor any of the
--------------------------
Optionee's successors in interest shall have any rights as a stockholder of the
Company with respect to any shares of Common Stock subject to the Option until
the date of issuance of a stock certificate for such shares of Common Stock.
16. Agreement Not a Contract of Employment. Neither the Plan, the granting
--------------------------------------
of the Option, this Option Agreement nor any other action taken pursuant to the
Plan shall constitute or be evidence of any agreement or understanding, express
or implied, that the Optionee has a right to continue to provide services as an
officer, director, employee, consultant or advisor of the Company or any
affiliate of the Company for any period of time or at any specific rate of
compensation.
[The remainder of this page is intentionally left blank]
Exhibit 3.3 - 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Option Agreement on the day and year first above written.
MASTER GRAPHICS, INC.
By
----------------------------
Name
--------------------------
Title
-------------------------
Accepted and Agreed:
------------------------------
P. Melvin Henson, Jr.
Exhibit 3.3-6
<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made
as of the 22nd day of February, 2000 and effective as of January 1, 2000, by and
between MASTER GRAPHICS, INC., a Tennessee corporation (the "Company"), and
DONALD H. GOLDMAN (the "Executive").
WHEREAS, the Company and Executive entered into that certain employment
agreement between the Company and Executive effective as of March 31, 1998 (the
"Original Employment Agreement");
WHEREAS, the Company and the Executive desire to enter into this Agreement
which supercedes and replaces in its entirety the Original Employment Agreement;
WHEREAS, the Company is engaged in the business of providing general
commercial printing services to its customers; and
WHEREAS, the Company desires to employ the Executive to devote full time to
the business of the Company as the Chief Operating Officer and Chief Information
Officer of the Company;
WHEREAS, the Executive desires to be employed by the Company on the terms
and subject to the conditions hereinafter stated.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
SUPERSESSION OF ORIGINAL EMPLOYMENT AGREEMENT
The Company and the Executive acknowledge and agree that the Original
Employment Agreement is hereby terminated by mutual consent and neither the
Company nor the Executive shall have any continuing obligation to the other
pursuant to the terms of the Original Employment Agreement. The mutual
agreements and covenants contained in this Agreement shall replace and supercede
in their entirety the provisions of the Original Employment Agreement.
ARTICLE 2
TERM AND DUTIES
2.1 Term; Extension. The term of this Agreement (the "Term of this
---------------
Agreement") shall commence as of January 1, 2000, and shall continue through
December 31, 2001. On the second and each successive anniversary of the
effective date of this Agreement, the Term of this Agreement shall be extended
for an additional one (1) year period, unless either party gives notice of such
<PAGE>
party's intent not to extend the Term of this Agreement not later than ninety
(90) days prior to the end of the then current Term of this Agreement.
Termination of the Executive's employment pursuant to this Agreement shall be
governed by Article 4 and Article 5.
--------- ---------
2.2 Duties. The Executive shall be employed as the Chief Operating
------
Officer and Chief Information Officer of the Company, reporting to the Company's
Board of Directors and assuming and discharging such responsibilities as are
commensurate with the Executive's position. The Executive shall perform his
duties faithfully and to the best of his ability and shall devote his full
business time and effort to the performance of his duties hereunder. As Chief
Operating Officer, the Executive shall be responsible for the operation of the
Company's business as set forth by the Board of Directors or the Chief Executive
Officer. As Chief Information Officer, the Executive shall be responsible for
overseeing the Company's management information systems and all other technology
as directed by the Board of Directors or the Chief Executive Officer.
2.3 Location. The duties of the Executive shall be performed at such
--------
locations and places as may be directed by the Board of Directors; provided,
however, that the Executive shall not be required to relocate from the Memphis,
Tennessee M.S.A. without the consent of the Executive.
ARTICLE 3
COMPENSATION AND BENEFITS
3.1 Base Compensation. The Company shall pay the Executive a base salary
-----------------
("Base Salary") of One Hundred Thirty Thousand and 00/100 Dollars ($130,000.00)
per annum, subject to applicable withholdings. Base Salary shall be payable
according to the customary payroll practices of the Company but in no event less
frequently than once each month. The Base Salary shall be reviewed annually and
shall be subject to increase according to the policies and practices adopted by
the Board of Directors from time to time; provided, however, that in no event
shall the Base Salary be decreased.
3.2 Annual Performance Bonus. The Company shall pay the Executive annual
------------------------
incentive compensation (each an "Annual Incentive Award") of up to one hundred
percent (100%) of his Base Salary, in accordance with policies and based on
performance targets established annually by the Compensation Committee of the
Board of Directors. The Annual Incentive Award and performance targets for
earning the Annual Incentive Award for the period beginning on the effective
date hereof and ending on December 31, 2000 are attached hereto as Schedule 3.2
------------
and are incorporated herein by this reference. At such time as the Compensation
Committee establishes new levels for incentive awards and new targets, Schedule
--------
3.2 shall be updated to reflect the new criteria set forth by the Compensation
- ---
Committee; provided, however, that Schedule 3.2 shall not be amended more than
------------
one time per year.
3.3 Stock Options. Contemporaneously with the execution of this
-------------
Agreement, the Company shall enter into that certain Incentive Stock Option
Agreement between the Company and the Executive (the "ISO Agreement"), which
shall be in substantially the form attached hereto as Exhibit 3.3.
-----------
2
<PAGE>
3.4 Additional Benefits. The Executive shall be entitled to participate
-------------------
in all employee benefit plans or programs and receive all benefits and
perquisites to which salaried employees are eligible under any existing or
future plan or program established by the Company for salaried employees. The
Executive shall participate to the extent permissible under the terms and
provisions of such plans or programs in accordance with applicable program
provisions. These may include group hospitalization, health, dental care, life
or other insurance, tax qualified pension, car allowance, savings, thrift and
profit sharing plans, termination pay programs, sick leave plans, travel or
accident insurance, disability insurance, and contingent compensation plans,
including capital accumulation programs, restricted stock programs, stock
purchase programs and stock options plans. Nothing in this Agreement shall
preclude the Company from amending or terminating any of the plans or programs
applicable to salaried employees or senior executives. The Executive shall be
entitled to an annual paid vacation as established by the Board of Directors.
3.5 Life Insurance. For so long as the Executive is employed by the
--------------
Company, the Company, at no cost to the Executive (other than taxes owed as a
result of the provision of such insurance), shall pay annually up to the lesser
of (i) Five Thousand Dollars ($5,000.00) in life insurance premiums or (ii) the
amount of premium required to obtain a life insurance policy on the life of the
Executive with a death benefit equal to twice the Executive's Base Salary for
the year prior to the year in which such policy is procured. The
beneficiary(ies) under the Policy shall be designated by the Executive.
3.6 Business Expenses. The Company shall reimburse the Executive for all
-----------------
reasonable travel and other expenses incurred by the Executive in connection
with the performance of his duties and obligations under this Agreement to the
extent the same shall be properly documented in accordance with the Company's
policies and rules of the Internal Revenue Service.
3.7 Withholding. The Company may directly or indirectly withhold from any
-----------
payments under this Agreement all federal, state, city or other taxes that shall
be required pursuant to any law or governmental regulation.
ARTICLE 4
DEATH AND DISABILITY
4.1 Death of Executive. In the event of the death of the Executive during
------------------
the Term of this Agreement, this Agreement shall terminate and the Company's
obligation to make payments under this Agreement shall cease as of the date of
death, except for earned but unpaid Base Salary and Annual Incentive Awards,
which would be payable on a pro-rated basis for the year in which death
occurred, through the date of death.
4.2 Disability of Executive. Notwithstanding the disability of the
-----------------------
Executive, the Company shall continue to pay the Executive pursuant to Article 3
---------
hereof during the Term of this Agreement, unless the Executive's employment is
earlier terminated in accordance with this Agreement. In the event the
disability continues for a period of three (3) months, the Company may
thereafter terminate this Agreement and the Executive's employment. Following
such termination,
3
<PAGE>
the Company shall pay the Executive amounts equal to his regular installments of
Base Salary, as of the date of termination, for a period of six (6) months. All
other compensation shall cease except for earned but unpaid Annual Incentive
Awards which would be payable on a pro-rated basis for the year in which the
disability occurred, through the date of termination.
4.3 Responsibilities of Executive in the Event of Disability. During the
--------------------------------------------------------
period the Executive is receiving payments following his disability and as long
as he is physically and mentally able to do so, the Executive shall furnish
information and assistance to the Company and from time to time shall make
himself available to the Company to undertake assignments consistent with his
position or prior position with the Company and his physical and mental health.
If the Company continuously fails to make payments or provide benefits required
as part of this Agreement, the Executive's obligation to provide information and
assistance shall end.
4.4 Definition of Disability. For purposes of this Agreement, the term
------------------------
"disability" shall have the same meaning as is ascribed to such term, or any
substantially similar term, in the Company's long term income disability plan as
in effect from time to time or if no such plan exists, the meaning ascribed to
such term in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code").
ARTICLE 5
TERMINATION OF EMPLOYMENT OTHER THAN FOR DEATH OR DISABILITY
5.1 Termination Without Cause; Constructive Termination.
---------------------------------------------------
(a) Without a Change in Control. If the Executive suffers a Termination
Without Cause (hereinafter defined) or Constructive Termination (hereinafter
defined) and a Change in Control (hereinafter defined) shall not have occurred
within one (1) year prior thereto, the Company shall pay to the Executive upon
such termination a lump sum in an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) annual Base
Salary as in effect at the date of the termination; and (iv) the average of the
Annual Incentive Award paid to the Executive for the two (2) immediately
preceding completed fiscal years of the Company. For six (6) months following
such Termination Without Cause or Constructive Termination, the Company shall
reimburse the Executive for the cost of the Executive's major medical health
insurance as in effect at the date of termination. The exercisability of stock
options granted to the Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
(b) Upon a Change in Control. If the Executive suffers a Termination
Without Cause or Constructive Termination at the time of or within one (1) year
following a Change in Control, the Company shall pay to the Executive in a lump
sum upon such termination an amount equal to the sum of the Executive's (i)
earned but unpaid Base Salary, if any, for the current fiscal year through the
date of termination; (ii) earned but unpaid Annual Incentive Award, if any, for
the current fiscal year through the date of termination; (iii) 299% of the
Executive's (A) annual Base Salary as in effect
4
<PAGE>
at the date of the termination plus (B) the average of the Annual Incentive
Award for the two (2) immediately preceding completed fiscal years of the
Company. To the extent that such foregoing amount, when added to any other
payment in the nature of compensation (within the meaning of Section 280G of the
Code, and the regulations promulgated thereunder ("Section 280G")) to or for the
benefit of the Executive (or any part of such amount or other payment)
constitutes an "excess parachute payment" within the meaning of Section 280G,
the amount, if any, of (A) such "excess parachute payment" multiplied by a
fraction, the numerator of which is the number one (1.00) and the denominator of
which is (I) the number one (1.00) minus (II) the effective tax rate under
Section 280G applicable to the Executive expressed as a decimal, minus (B) the
amount of such "excess parachute payment." For six (6) months following such
Termination Without Cause or Constructive Termination, the Company shall
reimburse the Executive for the cost of the Executive's major medical health
insurance as in effect at the date of termination. The exercisability of stock
options granted to the Executive shall be governed by any applicable stock
option agreements and the terms of the respective stock option plans.
(c) No Obligation to Mitigate. In the event the Executive's employment is
Terminated Without Cause or the Executive suffers a Constructive Termination,
the Executive shall have no duty to seek other employment and there shall be no
offset against any amounts due to the Executive pursuant to this Section 5.1
-----------
attributable to any subsequent employment that the Executive may accept.
5.2 Termination with Cause; Voluntary Termination. If the Executive
----------------------------------------------
suffers a Termination with Cause (hereinafter defined) or the Executive
voluntarily terminates his employment with the Company (a "Voluntary
Termination"), then, whether or not there has been a Change in Control, the
Company shall not be obligated to pay the Executive any amounts of compensation
or benefits following the date of termination. However, earned but unpaid Base
Salary through the date of termination shall be paid in a lump sum at such time,
and the earned but unpaid Annual Incentive Award, if any, for the year during
which such termination occurs shall be pro rated for the portion of the year
prior to the date of termination and paid in accordance with the Company's
customary practice for payment of incentive compensation.
5.3 Definitions. For purposes of this Article 5, the following terms have
----------- ---------
the following meanings:
(a) A "Change in Control" shall occur if an event or series of events
occurs after the effective date of this Agreement which would constitute either
a change in ownership of the Company, within the meaning of Section 280G, or a
change in the ownership of a substantial portion of the Company's assets, within
the meaning of Section 280G, but for purposes of this definition, the fair
market value threshold for determining "substantial portion of the Company's
assets" shall be "greater than 50%."
(b) "Constructive Termination" means termination of the Executive's
employment by the Executive (i) as a result of a declined reassignment of a job
that is not the equivalent of his then current position as set forth herein (in
responsibility, compensation or geographic area of service,
5
<PAGE>
or (ii) on account of conduct by the Company or the Board that constitutes
continuous and material interference by the Company or the Board with the
Executive's performance of his duties as set forth in Article 2. The Executive
---------
shall have a period of one (1) year after termination of his employment to
assert against the Company that he has suffered a Constructive Termination, and
after the expiration of such one year period, the Executive shall be deemed to
have irrevocably waived the right to such assertion.
(c) "Termination With Cause" means termination of the Executive's
employment by the Company, acting in good faith, by written notice to the
Executive specifying the event relied upon for such termination, due to (i) the
Executive's conviction for a felony or a crime involving moral turpitude or the
commission of any other act or omission involving dishonesty or fraud with
respect to the Company or any affiliate or any of their respective customers or
suppliers; (ii) conduct tending to bring the Company or any of its affiliates
into substantial public disgrace or disrepute; (iii) the Executive's theft,
embezzlement, misappropriation of or intentional infliction of material damage
to the Company's property or business opportunities; (iv) the Executive's
intentional breach of the noncompetition provisions of this Agreement; or (v)
the Executive's repeated neglect of or failure to perform his duties hereunder
or his ongoing willful failure or refusal to follow any reasonable, unambiguous
duly adopted written directive of the Board of Directors or any duly constituted
committee thereof that is not inconsistent with the description of the
Executive's duties set forth in this Agreement.
(d) "Termination Without Cause" means termination of the Executive's
employment by the Company other than due to the Executive's death or disability
or Termination With Cause.
ARTICLE 6
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE TERM OF THIS AGREEMENT
6.1 Additional Information. The Executive shall, upon reasonable notice,
----------------------
during or after the Term of this Agreement, furnish information as may be in his
possession and cooperate with the Company as may reasonably be requested in
connection with any claims or legal actions in which the Company is or may
become a party. After the Term of this Agreement, the Executive shall be
entitled to receive reasonable compensation for the time expended by him
pursuant to this Section 6.1.
-----------
6.2 Confidentiality.
---------------
(a) Access to and Use of Confidential Information. The Executive agrees
and acknowledges that through the nature of his work, he shall have access to
and shall acquire information and knowledge concerning the business and
operations of the Company and its affiliates including, without limitation, any
and all trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and development, current and
planned manufacturing or distribution
6
<PAGE>
methods and processes, customer lists, current and anticipated customer
requirements, price lists, market studies, business plans, computer software and
programs (including object code and source code), computer software and database
technologies, systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how, inventions,
discoveries, concepts, ideas, designs, methods and information, and any other
information, however documented), and other items that are trade secrets within
the meaning of any applicable law; information concerning the business and
affairs of the Company and its affiliates (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and materials, however documented; and notes,
analysis, compilations, studies, summaries, and other material prepared by or
for the Company or its affiliates containing or based on, in whole or in part,
any information included in the foregoing (collectively, "Confidential
Information"). The Executive acknowledges that all such Confidential Information
is the property of the Company and its affiliates solely and constitutes
valuable, proprietary and confidential information of the Company and its
affiliates; that the disclosure thereof would cause substantial loss to the
goodwill of the Company and its affiliates; that disclosure thereof to the
Executive is being made only because of the position of trust and confidence
which he shall occupy and because of his agreement to the restrictions herein
contained. The Executive shall not during the Term of this Agreement or
thereafter, except to the extent reasonably necessary in the performance of his
duties under this Agreement, give to any person, firm, association, corporation,
entity or governmental agency any information concerning the affairs, business,
clients, customers or other relationships of the Company except as required by
law. The Executive shall not make use of this type of information for his own
purposes or for the benefit of any person, entity or organization other than the
Company. The Executive shall also use his best efforts to prevent the disclosure
of this information by others. All records, memoranda, etc. relating to the
business of the Company whether made by the Executive or otherwise coming into
his possession are confidential and shall remain the property of the Company.
None of the foregoing obligations and restrictions applies to any part of the
Confidential Information that the Executive demonstrates was or became generally
available to the public other than as a result of a disclosure by the Executive.
(b) Proprietary Items. The Executive shall not remove from the Company's
premises (except to the extent such removal is for purposes of the performance
of the Executive's duties at home or while traveling, or except as otherwise
specifically authorized by the Company) any document, record, notebook, plan,
model, component, device, or computer software or code, whether embodied in a
disk or in any other form (collectively, the "Proprietary Items"). The Executive
recognizes that, as between the Company and the Executive, all of the
Proprietary Items, whether or not developed by the Executive, are the exclusive
property of the Company. Upon termination of this Agreement by either party, or
upon the request of the Company during the Term, the Executive shall return to
The Company all of the Proprietary Items in the Executive's possession or
subject to the Executive's control, and the Executive shall not retain any
copies, abstracts, sketches, or other physical embodiment of any of the
Proprietary Items.
(c) Disputes or Controversies. The Executive recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court,
7
<PAGE>
arbitration panel, or other third party, the preservation of the secrecy of
Confidential Information may be jeopardized. The Executive and the Company shall
use their best efforts to cause all pleadings, documents, testimony, and records
relating to any such adjudication to be maintained in secrecy and to make the
same available for inspection by the Company, the Executive, and their
respective attorneys and experts, who shall agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be limited
by them in writing.
6.3 Noncompetition.
--------------
(a) During the Term of Employment. The Executive shall not Compete with
the Company (hereinafter defined) at any time while he is employed by the
Company or receiving payments from the Company.
(b) Voluntary Termination; Termination With Cause. In the event of a
Voluntary Termination or a Termination With Cause, the Executive shall not
Compete with the Company for a period consisting of the longer of (i) the
remaining Term of this Agreement or (ii) one (1) year; provided that if a
Voluntary Termination follows a notice by the Company under Section 2.1 that the
-----------
Term of this Agreement shall not be automatically extended, there shall be no
restriction on the Executive's right to Compete with the Company after the date
his employment terminates.
(c) Termination Without Cause; Constructive Termination. In the event of a
Termination Without Cause or Constructive Termination, the Executive shall not
Compete with the Company for the shorter of (i) the then remaining Term of this
Agreement or (ii) one year from the date of such termination.
(d) Definition of "Compete" with the Company. For the purposes of
this Article 6, the term "Compete with the Company" means action by the
---------
Executive, direct or indirect, for his own account or for the account of others,
to: (i) engage or invest in, own, manage, operate, finance, control, or
participate in the ownership, management, operation, financing, or control of,
be employed by, associated with, or in any manner connected with, lend the
Executive's name or any similar name to, lend the Executive's credit to or
render services or advice to, any business whose products or activities compete
in whole or in part with the products or activities of the Company anywhere
within a fifty (50) mile radius of any location where the Company or any
affiliate of the Company performs such services at the date of a termination of
the Executive's employment or has performed such services within one year prior
to such termination of employment; provided, however, that Employee may purchase
or otherwise acquire up to (but not more than) 4.99 percent of any class of
securities of any enterprise (but without otherwise participating in the
activities of such enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934; (ii) solicit business of the same or similar
type being carried on by the Company, from any person or entity known by the
Executive to be a customer of the Company or its affiliates, whether or not the
had personal contact with such person during and by reason of the Executive's
employment with the Company; (iii) solicit, employ, or otherwise engage as an
employee, independent contractor, or otherwise, any person who is an employee of
the Company or its affiliates or in any manner induce or attempt to
8
<PAGE>
induce any employee of the Company or its affiliates to terminate his or her
employment with the Company or its affiliates; (iv) interfere with the Company's
or its affiliates' relationship with any person or entity, including any person
or entity who at any time during the Term was an employee, contractor, supplier,
or customer of the Company or its affiliates; or (v)
(e) Reasonableness of Scope and Duration. The Executive acknowledges that:
(i) the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (ii) the Company's
business is national in scope and its products are marketed throughout the
United States; (iii) the Company competes with other businesses that are or
could be located in any part of the United States; and (iv) the covenants
contained in this Section 6.3 are reasonable as to geographic and temporal
-----------
scope.
6.4 Injunctive Relief and Additional Remedy. The Executive acknowledges
---------------------------------------
that the injury that would be suffered by the Company as a result of a breach of
the provisions of this Agreement (including any provision of Article 6) would be
---------
irreparable and that an award of monetary damages to the Company for such a
breach would be an inadequate remedy. Consequently, the Company shall have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and the Company shall not be obligated to post
bond or other security in seeking such relief. Without limiting the Company's
rights under this Section 6.4 or any other remedies of the Company, if the
-----------
Executive breaches any of the provisions of Article 6, the Company shall have
---------
the right to cease making any payments otherwise due to the Executive under this
Agreement.
6.5 Covenants of Section 6.2 and Section 6.3 are Essential and Independent
----------------------------------------------------------------------
Covenants. The covenants by the Executive in Section 6.2 and Section 6.3 are
- --------- ----------- -----------
essential elements of this Agreement, and without the Executive's agreement to
comply with such covenants, the Company would not have entered into this
Agreement or employed or continued the employment of the Executive. The Company
and the Executive have independently consulted their respective counsel and have
been advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by the
Company, the Executive's covenants in Section 6.2 and Section 6.3 are
----------- -----------
independent covenants and the existence of any claim by the Executive against
the Company under this Agreement or otherwise, shall not excuse the Executive's
breach of any covenant in Section 6.2 or Section 6.3. If the Executive's
----------- -----------
employment hereunder expires or is terminated, this Agreement shall continue in
full force and effect as is necessary or appropriate to enforce the covenants
and agreements of the Executive in Section 6.2 and Section 6.3.
----------- -----------
ARTICLE 7
CONSOLIDATION, MERGER OR SALE OF ASSETS
Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all or substantially all of its assets to,
another corporation or organization which assumes this Agreement and all
obligations and undertakings of the Company hereunder.
9
<PAGE>
Upon such a consolidation, merger or sale of assets, the term "the Company" as
used herein shall mean or include the other corporation or organization and this
Agreement shall continue in full force and effect. This Article 7 is not
---------
intended to modify or limit the rights of the Executive hereunder.
ARTICLE 8
MISCELLANEOUS
8.1 Entire Agreement. This Agreement contains the entire understanding
----------------
between the Company and the Executive and supersedes any prior employment or
severance agreements between the Company and its affiliates, and the Executive.
8.2 Amendment; Waiver. This Agreement may not be modified or amended
-----------------
except in writing signed by the parties. No term or condition of this Agreement
shall be deemed to have been waived except in writing by the party charged with
waiver. A waiver shall operate only as to the specific term or condition waived
and shall not constitute a waiver for the future or act on anything other than
that which is specifically waived.
8.3 Severability; Modification of Covenant. Should any part of this
--------------------------------------
Agreement be declared invalid for any reason, such invalidity shall not affect
the validity of any remaining portion hereof and such remaining portion shall
continue in full force and effect as if this Agreement had been originally
executed without including the invalid part. Should any covenant of this
Agreement be unenforceable because of its geographic scope or term, its
geographic scope or term shall be modified to such extent as may be necessary to
render such covenant enforceable.
8.4 Effect of Captions. Titles and captions in no way define, limit,
------------------
extend or describe the scope of this Agreement nor the intent of any provision
thereof.
8.5 Counterpart Execution. This Agreement may be executed in any number
---------------------
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.6 Governing Law. This Agreement has been executed and delivered in the
-------------
State of Tennessee and its validity, interpretation, performance and enforcement
shall be governed by the laws of that state. Any dispute among the parties
hereto shall be settled by arbitration in Memphis, Tennessee, in accordance with
the rules then obtaining of the American Arbitration Association and judgment
upon the award rendered may be entered in any court having jurisdiction thereof.
All provisions hereof are for the protection and are intended to be for the
benefit of the parties hereto and enforceable directly by and binding upon each
party. Each party hereto agrees that the remedy at law of the other for any
actual or threatened breach of this Agreement would be inadequate and that the
other party shall be entitled to specific performance hereof or injunctive
relief or both, by temporary or permanent injunction or such other appropriate
judicial remedy, writ or orders as may be decided by a court of competent
jurisdiction in addition to any damages which the complaining party may be
legally entitled to recover together with reasonable expenses of litigation,
including attorney's fees incurred in connection therewith, as may be approved
by such court.
10
<PAGE>
8.7 Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018 or at such other address as may have been furnished to the
Executive by the Company in writing; or
(b) If to the Executive, at 2366 Carroll Ridge Lane, Cordova, Tennessee
38018 or such other address as may have been furnished to the Company by
the Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8.8 Binding Agreement. This Agreement shall be binding on the parties'
-----------------
successors, heirs and assigns.
[The remainder of this page is intentionally left blank.]
11
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MASTER GRAPHICS, INC.
By: /s/ Michael B. Bemis
------------------------------
Name: Michael B. Bemis
----------------------------
Title: Chairman
---------------------------
EXECUTIVE:
/s/ Donald H. Goldman
---------------------------------
Donald H. Goldman
12
<PAGE>
Schedule 3.2
Annual Performance Bonus for Year Ended December 31, 2000
Pursuant to Section 3.2 of the Employment Agreement between Master Graphics,
Inc. and Donald H. Goldman, the Compensation Committee of the Board of Directors
of Master Graphics has set Mr. Goldman's maximum Annual Incentive Award at 100%
of his current Base Salary, or $130,000. The Annual Incentive Award shall be
earned based upon satisfaction of the following criteria:
1. 12.5% ($16,250) shall be earned if the Company achieves Target 1 (break-
even cash flow for first quarter ended March 31, 2000)
2. 12.5% ($16,250) shall be earned if the Company achieves Target 2 (book
profitability for the quarter ended September 30,2000);
3. 25% ($32,500) shall be earned if the Company has sufficient funds available
under its existing credit facility (or a replacement facility) and under
the terms of the Indenture to make the interest payment on the Senior Notes
required to be made on June 1, 2000 or if the Company is not legally
required to make an interest payment on the Senior Notes on June 1, 2000;
4. 25% ($32,500) shall be earned if the Company restructures its debt or
recapitalizes during 2000 in such a fashion as to decrease the Company's
annualized interest costs by at least 20% from January 2000 levels; and
5. 25% ($32,500) shall be earned if the Company achieves $37.5 million of
EBITDA and $2.5 million in pre-tax profit for the year ended December 31,
---
2000.
All Annual Incentive Awards shall be payable on or before ninety (90) days
following the date upon which such Annual Incentive Award is conclusively
determined to be earned.
Schedule 3.2 - 1
<PAGE>
Exhibit 3.3
INCENTIVE STOCK OPTION
This INCENTIVE STOCK OPTION AGREEMENT (this "Option Agreement"), dated as
of the 22nd day of February, 2000 (the "Date of Grant"), by and between Master
Graphics, Inc., a Tennessee corporation (the "Company"), and Donald H. Goldman
(the "Optionee"). Any capitalized terms not defined herein shall have their
respective meanings set forth in the Plan.
WHEREAS, the Board of Directors of the Company (the "Board") has adopted
and the shareholders of the Company have approved the Company's 1998 Equity
Compensation Plan (the "Plan") pursuant to which the Committee is authorized to
grant key employees of the Company and its Subsidiaries incentive stock options
to purchase shares of the Company's common stock, par value $.001 per share (the
"Common Stock");
WHEREAS, the Committee appointed by the Board, as the Administrator of the
Plan, has determined that the Optionee is to be granted an incentive option to
purchase shares of the Company's Common Stock, on the terms and conditions set
forth herein; and
WHEREAS, It is intended that the Option constitute an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained here in, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Grant of Option. Subject to the terms and conditions hereinafter set
---------------
forth, the Company, with the approval and at the direction of the Committee,
hereby grants to the Optionee, as of the Date of Grant, an option to purchase up
to 50,000 shares of Common Stock at a price of $.8125 per share (the "Exercise
Price"), which price is at least equal to the Fair Market Value of the Common
Stock on the Date of Grant. Such option is hereinafter referred to as the
"Option" and the shares of Common Stock purchasable upon exercise of the Option
are hereinafter referred to as the "Option Shares."
2. Incentive Stock Option. The Option is granted under the Plan and is
----------------------
intended to qualify as, and shall be treated by the parties hereto as, an
incentive stock option as that terms is used in Section 422 of the Code. The
Option is subject to the terms and conditions set forth in the Plan.
3. Vesting.
-------
(a) Subject to such further limitations as are provided herein, upon the
continuous employment of the Optionee by the Company through the applicable date
indicated below, the Option shall vest and become exercisable in four (4)
installments, the Optionee having the right
Exhibit 3.3 - 1
<PAGE>
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option:
(i) on and after June 30, 2000, up to twenty-five percent (25%)
of the total number of Option Shares;
(ii) on and after December 31, 2000, up to fifty percent (50%) of
the total number of Option Shares;
(iii) on and after June 30, 2001, up to seventy-five percent (75%)
of the total number of Option Shares; and
(iv) on and after December 31, 2001, up to one hundred percent
(100%) of the total number of Option Shares.
(b) In the event Optionee's employment by the Company is terminated (i) by
the Company in a Termination Without Cause, as such term is defined in that
certain employment agreement dated of even date herewith between the Company and
the Optionee (the "Employment Agreement") or (ii) by the Optionee in a
Constructive Termination, as such term is defined in the Employment Agreement,
one hundred percent (100%) of the Option Shares shall vest immediately upon any
such termination.
(c) In the event Optionee's employment by the Company is terminated as a
result of the death or Disability, as defined in the Employment Agreement, of
the Optionee, one hundred percent (100%) of the Option Shares shall vest
immediately upon any such termination.
(d) In the event Optionee's employment by the Company is terminated as a
result of (i) by the Company in a Termination for Cause, as defined in the
Employment Agreement; or (ii) by the Optionee as a Voluntary Termination, as
defined in the Employment Agreement, the Option to the extent not previously
vested pursuant to Section 3(a) shall terminate and become null and void
------------
immediately upon such termination of the Optionee's employment.
4. Termination of Option.
---------------------
(a) The Option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null and
void after the expiration of ten (10) years from the Date of Grant (the "Option
Term").
(b) Upon a termination of the Optionee's employment with the Company, the
Option may be exercised during the following periods, but only to the extent
that the Option was vested and exercisable on the date of termination:
Exhibit 3.3 - 2
<PAGE>
(i) the one-year period following the date of termination of the
Optionee's employment by the Company in the case of a
termination for Disability, as defined in the Employment
Agreement;
(ii) the six-month period following the date of issuance of letters
testamentary or letters of administration to the executor or
administrator of the Optionee's estate, in the case of the
Optionee's death during his employment by the Company, but not
later than one-year after the Optionee's death; and
(iii) the three-month period following the date of any other
termination of the Optionee's employment by the Company.
(iv) In no event however, shall any such period described in this
Section 4(b) extend beyond the Option Term.
------------
(c) After termination of the Optionee's employment by the Company, any
portion of the Option not exercised within the time periods provided in Section
-------
4(b) shall become immediately null and void.
- ----
5. Nontransferability of Option. This Option shall not be transferable
----------------------------
by the Optionee otherwise than by the Optionee's will or by the laws of descent
and distribution. During the lifetime of the Optionee, the Option shall be
exercisable only by him. Any heir or legatee of the Optionee shall take rights
herein granted subject to the terms and conditions hereof. No such transfer of
this Option Agreement to heirs or legatees of Optionee shall be effective to
bind the Company unless the Company shall have been furnished with written
notice thereof and a copy of such evidence as the Committee may deem necessary
to establish the validity of the transfer and the acceptance by the transferee
or transferees of the terms and conditions hereof.
6. Method of Exercise of Option. The vested portion of the Option may be
----------------------------
exercised by written notice by the Optionee to the Secretary of the Company
setting forth the number of Option Share with respect to which the Option is to
be exercised accompanied by payment for the shares to be purchased, and
specifying the address to which the certificate for such Option Shares is to be
mailed. The notice shall be accompanied by one or a combination of the
following payment methods, equal in value to the aggregate Exercise Price: (i)
cash, personal check, cashier's check, bank draft, or postal or express money
order payable to the order of the Company, (ii) certificates representing freely
transferable shares of Common Stock owned by the Optionee duly endorsed for
transfer to the Company, or (iii) a written election by Optionee to transact a
"cashless exercise" as described in the Plan. Notice may also be delivered by
facsimile provided that the Exercise Price of the Option Shares is received by
the Company via wire transfer on the same day the facsimile transmission is
received by the Company. An option to purchase Option Shares in accordance with
the Plan shall be deemed to have been exercised immediately prior to the close
of business on the date (i) written notice of such exercise and (ii) payment in
full of the Exercise Price for the number of Option Shares for which the Option
is being exercised, are both received by the Company, and the Optionee shall be
treated for all purposes as the record holder of such Option Shares as of such
Exhibit 3.3 - 3
<PAGE>
date. As promptly as practicable after receipt of such written notice and
payment, the Company shall deliver to the Optionee certificates for the number
of shares with respect to which the Option has been so exercised, issued in the
Optionee's name or such other name as the Optionee directs; provided, however,
that such delivery shall be deemed effective for all purposes when a stock
transfer agent of the Company shall have deposited such certificates in the
United States mail, addressed to Optionee at the address specified herein.
7. Notices. All notices, requests, consents and other communications
-------
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first-class postage prepaid by registered mail, return
receipt requested, or when delivered if by hand, overnight delivery service or
confirmed facsimile transmission, to the following:
(a) If to the Company, at 70 Timber Creek Drive, Suite 5, Cordova,
Tennessee 38018or at such other address as may have been furnished to
the Executive by the Company in writing; or
(b) If to the Executive, at 2366 Carroll Ridge Lane, Cordova, Tennessee
38018 or such other address as may have been furnished to the Company
by the Executive in writing.
Either party hereto may change such party's address for notices by notice duly
given pursuant hereto.
8. Securities Laws Requirements. The Option shall not be exercisable to
----------------------------
any extent, and the Company shall not be obligated to transfer any Option Shares
to the Optionee upon exercise of such Option, if such exercise, in the opinion
of counsel for the Company, would violate the Securities Act (or any other
federal or state statutes having similar requirements as may be in effect at
that time).
9. Protections Against Violations of Agreement. No purported sale,
-------------------------------------------
assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift,
transfer in trust (voting or other) or other disposition of, or creation of a
security interest in or lien on, any of the Option Shares by any holder thereof
in violation of the provisions of this Agreement or the Charter or the Bylaws of
the Company, will be valid, and the Company will not transfer any of said Option
Shares on its books nor will any of said Option Shares be entitled to vote, nor
will any dividends be paid thereon, unless and until there has been full
compliance with said provisions to the satisfaction of the Company. The
foregoing restrictions are in addition to and not in lieu of any other remedies,
legal or equitable, available to enforce said provisions.
10. Withholding Requirements. The Company's obligations under this Option
------------------------
Agreement shall be subject to all applicable tax and other withholding
requirements, and the Company shall, to the extent permitted by law, have the
right to deduct any withholding amounts from any payment or transfer of any kind
otherwise due to the Optionee.
Exhibit 3.3 - 4
<PAGE>
11. Failure to Enforce Not a Waiver. The failure of the Company to
-------------------------------
enforce at any time any provision of this Option Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
12. Governing Law. This Option Agreement shall be governed by and
-------------
construed according to the laws of the State of Tennessee without regard to its
principles of conflict of laws.
13. Incorporation of Plan. The Plan is hereby incorporated by reference
---------------------
and made a part hereof, and the Option and this Option Agreement shall be
subject to all terms and conditions of the Plan.
14. Amendments. This Option Agreement may be amended or modified at any
----------
time only by an instrument in writing signed by each of the parties hereto.
15. No Rights as a Stockholder. Neither the Optionee nor any of the
--------------------------
Optionee's successors in interest shall have any rights as a stockholder of the
Company with respect to any shares of Common Stock subject to the Option until
the date of issuance of a stock certificate for such shares of Common Stock.
16. Agreement Not a Contract of Employment. Neither the Plan, the granting
--------------------------------------
of the Option, this Option Agreement nor any other action taken pursuant to the
Plan shall constitute or be evidence of any agreement or understanding, express
or implied, that the Optionee has a right to continue to provide services as an
officer, director, employee, consultant or advisor of the Company or any
affiliate of the Company for any period of time or at any specific rate of
compensation.
[The remainder of this page is intentionally left blank]
Exhibit 3.3 - 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this Option
Agreement on the day and year first above written.
MASTER GRAPHICS, INC.
By
------------------------------
Name
----------------------------
Title
---------------------------
Accepted and Agreed:
--------------------------------
Donald H. Goldman
Exhibit 3.3 - 6
<PAGE>
EXHIBIT 10.14
Consulting Agreement
--------------------
THIS AGREEMENT is effective as of February 1, 2000 by and between MASTER
GRAPHICS, INC., a Tennessee corporation (the "Company") and MICHAEL B. BEMIS, a
resident of the State of Mississippi ("Consultant").
WHEREAS, the Company desires to procure certain consulting services (the
"Services") from Consultant, as more particularly set forth herein; and
WHEREAS, Consultant desires to provide such Services to the Company on the
terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, the Company and Consultant agree as follows:
1. Engagement. The Company shall engage Consultant to render the
----------
Services, and Consultant accepts such engagement with the Company, upon the
terms and conditions set forth in this Agreement for the period beginning on
February 1, 2000 and ending on January 31, 2001 (the "Consulting Period").
2. Consulting Services.
-------------------
(a) During the term of this Agreement, Consultant shall render such
Services to the Company related to financial structure, negotiation with
lenders, and any other matter deemed appropriate by the Company and Consultant,
all as the Company's President (the "President") may from time to time direct.
(b) Consultant shall provide such advice with respect to the business of
the Company as may reasonably be requested by the President of the Company.
Consultant shall perform his duties under this Agreement competently, taking
into account his other commitments and business activities.
(c) The Company will reimburse Consultant for any expenses incurred by
Consultant in the performance of his duties hereunder, in accordance with
customary Company practice with respect to the reimbursement of business
expenses.
3. Compensation and Benefits.
-------------------------
(a) In consideration for the Services rendered by Consultant to the
Company, the Company shall pay to Consultant a retainer in the amount of Four
Thousand Nine Hundred Ninety-Nine and 99/100 Dollars ($4,999.99) per month
during the Consulting Period.
(b) Consultant expressly acknowledges and agrees that the Company shall
have no duty or obligation to provide any medical, dental or other form of
insurance coverage to Consultant.
<PAGE>
4. Independent Contractor Status. Consultant hereby acknowledges and
-----------------------------
agrees that he is aware that he will not be treated as an employee of the
Company for any purposes with respect to the Services rendered under this
Agreement. Consultant agrees to comply with all tax laws applicable to his
status as an independent contractor of the Company. Consultant further
acknowledges and agrees that as an independent contractor, he will not be
entitled to participate in any of the employee benefit plans customarily
provided by the Company to its employees.
5. Restrictive Covenants. Consultant agrees and acknowledges that he has
---------------------
acquired and will acquire information and knowledge concerning the business
operations of the Company, the identity of vendors and suppliers of the Company,
the corporate structure of the Company, the identity of and information
concerning the Company's shareholders, directors, officers and employees, the
Company's methods of operation and doing business, business practices related to
the operation of the Company's business, financial information, procedures,
data, information concerning the Company's customers, finances, plans for
expansion, processes, methods, formulae, apparatus, specifications, materials,
discoveries, inventions or patents including applications and rights in
discoveries, which information is "Confidential Commercial Information."
Consultant shall not, at any time during or after the termination of this
Agreement divulge to any person, firm, corporation or other entity any
knowledge, information, or fact related to the Confidential Commercial
Information, which information Consultant shall hold in trust in a fiduciary
capacity for the sole benefit of the Company and its successors and assigns.
This provision does not preclude the confidential disclosure by Consultant of
Confidential Commercial Information to third parties, such as financial
institutions or trade creditors, or disclosures in the ordinary course of
business which are in the best interest of the Company or its subsidiaries, nor
does this provision apply to Confidential Commercial Information that has become
generally publicly available from the Company prior to the time of disclosure by
the Consultant.
6. Injunction and Damages. Consultant acknowledges and agrees that a
----------------------
material breach by him of the covenants contained in Section 5 hereof will
---------
result in harm and continuing damage to the Company, its successors or assigns,
for which there is no adequate remedy at law and, in the event of a material
breach of such covenants by the Consultant, the Company shall be entitled to
injunctive relief as well as other and further relief, including damages, as may
be proper, without the necessity of showing actual damage. If a judicial
determination is made that any of the provisions of Section 5 constitute an
---------
unreasonable and unenforceable restriction against Consultant, the parties agree
that the court making such determination shall have the authority to reform the
terms of Section 5 to the extent necessary to make the restrictions contained in
---------
those paragraphs reasonable and enforceable. Consultant acknowledges that a
material breach of such covenants will result in substantial detriment and
damage to the Company for which the Consultant agrees that the Company shall be
entitled to have and recover any and all actual damages, expenses, and costs
resulting from said breach.
7. Notice. All notices, requests, demands, claims, and other
------
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be
2
<PAGE>
deemed duly given if (and then two business days after) it is sent by registered
or certified mail, return receipt requested, postage prepaid, and addressed to
the intended recipient as set forth below:
If to Consultant: Copy to:
Michael B. Bemis
Hederman Bros.
P. O. Box 6100
Ridgeland, Mississippi 39158-6100
If to the Company: Copy to:
Robert J. Diehl Robert J. DelPriore, Esq.
Master Graphics, Inc. Bass Berry & Sims PLC
70 Timber Creek Drive, Ste. 5 100 Peabody Place, Ste. 950
Cordova, Tennessee 38018 Memphis, Tennessee 38103
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
8. Amendment and Waiver. The provisions of this Agreement may be amended
--------------------
or waived only with the prior written consent of the Company and Consultant, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
9. Captions. Captions appearing in this Agreement are for convenience
--------
only and shall not be deemed to explain, limit or amplify the provisions hereof.
10. Choice of Law and Jurisdiction. In consideration for Consultant's
------------------------------
engagement by the Company, Consultant hereby agrees to submit to the personal
jurisdiction of the State and Federal Courts for the State of Tennessee in the
United States of America for any and all proceedings, claims or controversies
which arise as a result of this Agreement. Also in consideration for
Consultant's engagement by the Company, Consultant hereby agrees that the
substantive, contract, and procedural law of the State of Tennessee will govern
any and all proceedings, claims or controversies arising as a result of this
Agreement.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
MASTER GRAPHICS, INC.
By: /s/ P. Melvin Henson, Jr.
----------------------------
Title: CFO
-------------------------
/s/ Michael B. Bemis
--------------------------------
Michael B. Bemis
4
<PAGE>
EXHIBIT 11.1
MASTER GRAPHICS, INC. AND SUBSIDIARY
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended Year ended
Years ended December 31, December 31, June 30,
1999 1998 1997 1997
----------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (105,208) $ 3,973 $ (3,819) $ (1,273)
Less preferred stock dividends (115) (84) 0 0
Less accretion of preferred stock discount (143) (87) 0 0
---------- ---------- ---------- ----------
Net earnings (loss) applicable to common shares--
before extraordinary loss (105,466) 3,802 (3,819) (1,273)
Extraordinary loss 0 (2,098) 0 0
---------- ---------- ---------- ----------
Net loss applicable to common shares $ (105,466) $ 1,704 $ (3,819) $ (1,273)
========== ========== ========== ==========
Basic:
Weighted average common shares outstanding 7,916,071 6,130,117 4,000,000 4,000,000
========== ========== ========== ==========
Basic earnings (loss) per share--
before extraordinary loss $ (13.32) $ 0.62 $ (0.95) $ (0.32)
Basic extraordinary loss per share 0.00 (0.34) 0.00 0.00
---------- ---------- ---------- ----------
Basic loss per share $ (13.32) $ 0.28 $ (0.95) $ (0.32)
---------- ---------- ---------- ----------
Diluted:
Net earnings (loss) applicable to common shares $ (105,466) $ 3,802 $ (3,819) $ (1,273)
Plus preferred stock dividends 115 84 0 0
Plus accretion of preferred stock discount 143 87 0 0
Plus deferred compensation provision 47 47 0 0
---------- ---------- ---------- ----------
Net earnings (loss) applicable to common shares--
before extraordinary loss (105,161) 4,020 (3,819) (1,273)
Extraordinary loss 0 (2,098) 0 0
---------- ---------- ---------- ----------
Net loss applicable to common shares $ (105,161) $ 1,922 $ (3,819) $ (1,273)
========== ========== ========== ==========
Weighted average common shares outstanding 7,916,071 6,130,117 4,000,000 4,000,000
Assumed exercise of lender warrants 220,000 237,223 0 0
Assumed exercise of the stock option clause in the
deferred compensation agreements 100,000 100,000 0 0
Assumed exercise of redeemable preferred stock 177,776 177,776 0 0
---------- ---------- ---------- ----------
8,413,847 6,645,116 4,000,000 4,000,000
========== ========== ========== ==========
Diluted earnings (loss) per share--
before extraordinary loss $ (12.50) $ 0.60 $ (0.95) $ (0.32)
Diluted extraordinary loss per share 0.00 (0.31) 0.00 0.00
---------- ---------- ---------- ----------
Diluted loss per share $ (12.50) $ 0.29 $ (0.95) $ (0.32)
========== ========== ========== ==========
</TABLE>
<PAGE>
Exhibit 23.1
The Board of Directors
Master Graphics, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-80271) on Form S-8 of Master Graphics, Inc. of our report dated March 30,
2000, relating to the consolidated balance sheets of Master Graphics, Inc. and
subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1999, the six-month period ended
December 31, 1997 and the year ended June 30, 1997, which report appears in the
December 31, 1999 annual report on Form 10-K of Master Graphics, Inc.
KPMG LLP
Memphis, Tennessee
April 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MASTER
GRAPHICS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,341 13,525
<SECURITIES> 0 0
<RECEIVABLES> 54,717 39,711
<ALLOWANCES> 2,383 1,182
<INVENTORY> 17,144 8,095
<CURRENT-ASSETS> 78,641 65,218
<PP&E> 80,130 75,251
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 187,439 207,876
<CURRENT-LIABILITIES> 224,453 17,293
<BONDS> 130,000 130,000
1,580 1,437
0 0
<COMMON> 8 8
<OTHER-SE> (69,049) 36,184
<TOTAL-LIABILITY-AND-EQUITY> 187,439 207,876
<SALES> 261,541 163,277
<TOTAL-REVENUES> 261,541 163,277
<CGS> 207,138 121,340
<TOTAL-COSTS> 342,639 149,223
<OTHER-EXPENSES> 1,282 (818)
<LOSS-PROVISION> 1,321 53
<INTEREST-EXPENSE> 22,159 10,271
<INCOME-PRETAX> (104,539) 4,601
<INCOME-TAX> 669 628
<INCOME-CONTINUING> (105,208) 3,973
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (2,098)
<CHANGES> 0 0
<NET-INCOME> (105,208) 1,875
<EPS-BASIC> (13.32) 0.28
<EPS-DILUTED> (13.32) 0.27
</TABLE>
