As filed with the Securities and Exchange Commission on October 25, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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EagleDirect.com, inc.
(Exact name of registrant as specified in its charter)
Colorado 2752 74-2931925
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization) --------------
5105 East 41st Avenue Howard J. Harris
Denver, Colorado 80216-4434 5105 East 41st Avenue
(303) 320-5411 Denver, Colorado 80216-4434
(Address, including zip (303) 320-5411
code, and telephone number, Name, address including zip
including area code, of code, and telephone number,
registrant's principal including area code, of
executive offices) agent for service)
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Copies to:
John A. Good William R. Hays, III
Robert J. DelPriore Robert R. Kibby
Bass, Berry & Sims PLC Haynes and Boone, LLP
119 South Main Street, 901 Main Street, Suite 3100
Suite 500 Dallas, Texas 75202-3789
Memphis, Tennessee 38103 (214) 651-5000
(901) 312-5570
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_] ___________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Aggregate Offering Price Amount of
Securities To Be Registered (1) Registration Fee
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Common Stock, $.001 par value........ $35,000,000 $9,730
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(1) Estimated solely for the purpose of estimating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission acting pursuant to said
Section 8(a) may determine.
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+Information in this prospectus is not complete and may be changed. We may not +
+sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 25, 1999
Shares
[EAGLEDIRECT.COM LOGO]
Common Stock
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Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $ and $ per
share. We have applied to list our common stock on The Nasdaq National Market
under the symbol "EGLD."
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We are offering of the shares, and as we describe more fully on page 43, our
sole shareholder is offering of the shares. We will not receive any of the
proceeds from the sale of shares by the selling shareholder.
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We are currently a subsidiary of Master Graphics, Inc. When the offering is
completed, Master Graphics will continue to own approximately % of our
outstanding shares of common stock.
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5 to read about risks you should consider before buying shares of our
common stock.
Per
Share Total
Public Offering Price............................................... $ $
Underwriting Discounts and Commissions.............................. $ $
Proceeds, before expenses, to EagleDirect.com....................... $ $
Proceeds, before expenses, to the selling shareholder............... $ $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have given the underwriters a 30-day option to purchase up to additional
shares to cover any over-allotment.
The underwriters expect to deliver the shares on or about , 1999.
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Hoak Breedlove Wesneski & Co.
The date of this prospectus is , 1999
[Graphics of our facility and a map showing the location of Master Graphics'
and Mail-Well's facilities appear on the inside front cover of this prospectus]
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999 (25 days after the commencement of the offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
----
Prospectus Summary.................. 1
Risk Factors........................ 5
Use of Proceeds..................... 14
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Selected Financial Data............. 17
Management's Discussion And Analysis
of Financial Condition And Results
of Operations...................... 19
Quantitative and Qualitative Market
Risk............................... 22
Business............................ 23
Page
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Management......................... 33
Relationship with Master Graphics.. 39
Certain Transactions............... 41
Principal and Selling
Shareholders...................... 42
Description of Capital Stock....... 43
Shares Eligible For Future Sale.... 45
Underwriting....................... 47
Legal Matters...................... 49
Experts............................ 49
Additional Information............. 49
Index to Consolidated Financial
Statements........................ F-1
ABOUT THIS PROSPECTUS
You may rely only on the information contained in this prospectus or to which
we have referred you. We have not authorized anyone to provide you with
information that is different from the information contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
As used in this prospectus, the terms "EagleDirect.com," "we," "our," "the
Company" and "our company" refer to EagleDirect.com, inc., unless otherwise
indicated.
Except where indicated, the information in this prospectus does not take into
account the possible issuance of additional shares of our common stock relating
to the underwriters' over-allotment option.
This prospectus includes statistical data concerning the business-to-business
e-commerce industry, the general commercial printing industry, and the data
warehousing industry that we obtained from industry publications. These
publications generally indicate that they have obtained information from
sources that they believe are reliable, but that they do not guarantee the
accuracy and completeness of the information. Although we believe that these
industry publications are reliable, we have not independently verified their
data. We also have not sought the consent of any of these publications to refer
to their data in this prospectus.
PROSPECTUS SUMMARY
The following summary highlights some information from this prospectus. You
should read this summary together with the more detailed information and
financial statements and the notes to those financial statements appearing
elsewhere in this prospectus.
EagleDirect.com
Our Business
We are a leading single-source provider of Internet-enabled, integrated
commercial printing and database marketing solutions that allow businesses to
market their products more effectively and reduce the costs and inefficiencies
associated with traditional printing and marketing processes. We introduced our
database marketing services in 1984 and our Internet-enabled print procurement
services in 1996. Our Internet-enabled solutions allow businesses to:
. access and analyze information in marketing databases;
. develop effective marketing campaigns based on the marketing databases;
. design, modify and personalize marketing and other printed materials;
. initiate the printing, sorting and mailing of marketing and other
printed materials; and
. track and analyze the results of marketing campaigns.
Clients may combine one or more of these solutions in an interactive, customer-
specific Web site to best suit their unique needs.
Total revenue from Internet-enabled services and other services we provided
to customers that used our Internet-enabled services, not including pass-
through charges for freight and postage, increased from approximately $4.4
million in 1996 to approximately $8.1 million in 1998. Our top ten customers
during the first six months of 1999 were Century Communications, Cable One,
Showtime Networks, Gates Rubber Company, Bresnan Communications, MCI,
International Channel, Derring Elliot, JD Edwards Corp., and Reebok Fitness.
All of our top ten customers use our Internet-enabled services.
Our recently developed strategic relationships with Mail-Well, Inc. and our
parent company, Master Graphics, Inc., two of the largest general commercial
printing companies in the United States, provide us access to more than 100
printing facilities located throughout North America. We believe our ability to
procure high-quality printing, mailing and fulfillment services from this
geographically dispersed network of facilities is a key strategic advantage
that allows us to manage the schedule, cost and quality of manufacturing and
transporting custom printed business materials. Our recently developed
strategic relationships with Claritas, NCR and Master Graphics have
significantly increased the number of sales people available to market our
products and services.
Our address is 5105 East 41st Avenue, Denver, Colorado 80126-4434. Our
telephone number is (303) 320-5411.
Our Markets
The Internet has emerged as a medium to deliver products and services from
business to business that can streamline complex processes, increase accuracy
and product quality, lower costs and improve productivity. Forrester Research,
Inc. estimates that businesses bought and sold $43 billion in goods and
services over the Internet in 1998 and predicts that business-to-business e-
commerce will grow to $1.3 trillion by 2003, representing more than 90% of the
total projected e-commerce market.
1
The U.S. printing industry is large and highly fragmented. We provide
services within the general commercial printing portion of the industry which,
according to the Printing Industries of America, had approximately $49.4
billion in revenue in 1998, compared to $46.8 billion in revenue in 1997 and
$42.9 billion in revenue in 1996. In 1998, industry sources state that there
were approximately 24,000 general commercial printing companies located in the
United States.
The combination of recent advances in information technology, ever
increasing amounts of raw data and changing household and population profiles
has spurred a transition from traditional advertising by mass media to targeted
one-to-one marketing. Database marketing services analyze data in data
warehouses to allow companies to engage in one-to-one marketing. Businesses are
increasing corporate expenditures allocated to building data warehouses, where
information is maintained and analyzed. International Data Corporation projects
that the portion of the data warehouse market we serve will grow from $9.4
billion in 1998 to $21.7 billion in 2002, a compounded annual growth rate of
approximately 23.3%.
Our Solutions
Through customer-specific, secure Web sites, we meet the unique and specific
needs of businesses' print procurement and marketing departments.
EagleDirect.com provides comprehensive, real-time, online solutions that reduce
many of the inefficiencies associated with:
. the error-prone, time-consuming and labor-intensive traditional general
commercial printing process;
. creating and populating data warehouses;
. direct mailing;
. product storage and fulfillment; and
. creating, delivering, tracking and analyzing the results of one-to-one
marketing.
Our Web sites offer menus that enable a user to access a digital catalog of
standard printed business materials that may include photographs, brochures,
posters, product catalogs, and price sheets, along with other custom-printed
business material--from direct mail to stationery and business cards. Our
interactive, Internet-enabled data warehousing, sales lead management, customer
profiling and analysis, and performance tracking solutions allow businesses to
design database marketing programs and measure how well these programs perform.
Our Business Strategy
Our objective is to be a single-source provider of our Internet-enabled
services to businesses' print procurement and marketing departments. The key
elements of our strategy are to:
. rapidly add new customers through increased direct sales efforts and
strategic alliances;
. cross-sell our comprehensive suite of services to existing clients;
. maintain product and technology leadership through continuing
development and innovation; and
. capitalize on our market position and build brand recognition.
Our Relationship with Master Graphics
From February 15, 1957 to April 27, 1999, Eagle Direct, Inc., the predecessor
of EagleDirect.com, operated as an independent company. On April 27, 1999,
Premier Graphics, Inc. acquired all of the outstanding common stock of Eagle
Direct, Inc. Premier Graphics is the wholly-owned operating subsidiary of
Master Graphics, Inc. After the acquisition, Eagle Direct was merged into
Premier Graphics. In anticipation of this
2
offering, Master Graphics formed EagleDirect.com, inc. as a subsidiary of
Master Graphics in September 1999. On October 1, 1999, EagleDirect.com acquired
from Premier Graphics all of the assets formerly owned by Eagle Direct. The
information in this prospectus describes the business and results of operations
of Eagle Direct, Inc. for all periods prior to April 27, 1999; the Eagle Direct
division of Premier Graphics from April 27, 1999 through September 30, 1999;
and EagleDirect.com, inc. from October 1, 1999 through the date of this
prospectus.
We are currently a wholly-owned subsidiary of Master Graphics, Inc., one of
the largest general commercial printing companies in the United States. After
the completion of this offering, Master Graphics will own approximately % of
the outstanding shares of our common stock. We have entered into several
agreements with Master Graphics and its subsidiary, Premier Graphics, regarding
our business. These agreements are described below under the caption
"Relationship with Master Graphics."
Risk Factors
An investment in our common stock involves a high degree of risk. We
anticipate that we will incur losses in the future. In addition, we face a
number of risks which are described in more detail under the caption "Risk
Factors" beginning on page 5. You should carefully consider all of the risks
under the "Risk Factors" caption before deciding whether to invest in shares of
our common stock.
The Offering
Common stock offered by
EagleDirect.com............. shares
Common stock offered by the
selling shareholder......... shares
Common stock to be
outstanding after the
offering.................... shares
Use of proceeds............. . approximately $ million for sales and
marketing;
. approximately $ million for research and
development;
. approximately $ million to repay debt to
Premier Graphics;
. approximately $ to Premier Graphics' Senior
Note holders for a consent to release (1) our
guarantee of the Senior Notes; and (2)
restrictions placed on our activities by the
indenture; and
. the remainder for general corporate purposes,
including working capital. See "Use of
Proceeds."
Proposed Nasdaq National
Market symbol............... EGLD
The number of shares of common stock that will be outstanding after this
offering excludes shares available for issuance under our 1999 Equity
Compensation Plan under options that have not yet been granted and shares
available for issuance under our 1999 Non-Employee Director Stock Option Plan
under options that have not yet been granted. On the day we determine the
initial public offering price of the common stock, we intend to grant our
employees and non-employee directors options to purchase approximately
shares of our common stock under our option plans at the initial public
offering price of the common stock.
3
Summary Financial Data
(in thousands except per share data)
Six Months Ended
Year Ended December 31, June 30,
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1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
Statement of Operations Data:
Revenue...................... $14,767 $13,116 $15,722 $ 7,106 $ 7,433
Cost of revenue.............. 11,111 9,726 11,139 5,252 5,191
Gross profit................. 3,656 3,390 4,583 1,854 2,242
Operating expenses........... 3,422 3,503 3,907 1,878 2,179
Operating income (loss)...... 234 (113) 676 (25) 63
Net income (loss)............ (23) (325) 430 (155) (182)
Pro forma (unaudited):
Net income (loss).......... 270 (125)
Net income (loss) per
share.....................
December 31,
1998 June 30, 1999
------------ -------------------
Pro Forma
Actual Actual As Adjusted
------------ ------- -----------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents...................... $ 101 $ 5 $
Working capital................................ 1,147 889
Total assets................................... 5,143 12,789
Long-term obligations.......................... 1,776 11,000
Total equity................................... 1,770 121
In the statement of operations data, we have shown both net income (loss)
and net income (loss) per share on a pro forma basis for the year ended
December 31, 1998 and the six months ended June 30, 1999. Net income (loss) is
shown on a pro forma basis to reflect income tax expense (benefit), which was
not actually recorded because Eagle Direct was an S-corporation before its
acquisition by Premier Graphics and a division of Premier Graphics after the
acquisition. Pro forma net income (loss) per share is based on pro forma net
income (loss) as described above divided by pro forma common shares
outstanding. The pro forma number of common shares is based on the number of
shares subsequently issued to capitalize EagleDirect.com.
The significant changes in total assets, long-term obligations and total
equity from December 31, 1998 to June 30, 1999 reflected in the balance sheet
data were primarily the result of the acquisition of Eagle Direct by Premier
Graphics in April 1999 and the application of purchase accounting to that
transaction. Since the acquisition was entirely financed by debt incurred by
Premier Graphics under its acquisition credit line, total equity of Eagle
Direct as of June 30, 1999 reflects only the earnings of Eagle Direct after its
acquisition by Premier Graphics.
In the balance sheet data, we have shown the June 30, 1999 information on a
pro forma as adjusted basis. This gives effect at June 30, 1999 to (1) the
incorporation of EagleDirect.com, inc. and the acquisition of its assets from
Premier Graphics and (2) this offering. See "Capitalization" for more details.
4
RISK FACTORS
This offering involves a high degree of risk. You should consider carefully
the risks and uncertainties described below and the other information in this
prospectus before you decide to invest in shares of our common stock. These are
not the only risks we face. Additional risks and uncertainties of which we are
not presently aware or that we currently deem immaterial also could impair our
business.
If any of the following risks actually occurs, our business, financial
condition and operating results could be affected materially and adversely, the
trading price of our common stock could decline, and you might lose all or part
of your investment.
Risks Related to Our Business
We are competing in a new market which may not develop or where we may fail
to gain market acceptance for our products and services. Procurement of printed
business materials and database marketing services via the Internet is a new
and evolving market. We cannot assure you that businesses will accept
procurement of printed business materials or database marketing services via
the Internet as a replacement for traditional sources of our products and
services. Market acceptance depends upon continued growth in the use of the
Internet generally and, in particular, its use as a source of our products and
services. If this e-commerce market fails to develop, develops more slowly than
expected or becomes saturated with competitors, or our products and services do
not achieve or sustain market acceptance, our business will suffer. To date,
many businesses have refrained from doing business over the Internet for a
number of reasons, including:
. security concerns;
. unavailability of cost-effective, high-speed Internet access;
. inconsistent quality of service;
. potentially inadequate development of the global Internet
infrastructure; and
. the difficulty of integrating existing business software applications
with online purchasing systems.
Companies that have already invested substantial resources in traditional
methods of procuring printed business materials and conducting database
marketing may be reluctant to adopt new Internet-enabled systems.
Failure to manage growth of our operations and infrastructure effectively
could disrupt our operations and prevent us from successfully implementing our
business plan. To manage our anticipated growth, we must successfully
implement, constantly improve and effectively utilize our product delivery and
financial systems while aggressively expanding our workforce. Our existing or
planned product delivery and financial systems may not be sufficient to support
our growth, and our management may not be able to identify, manage and exploit
existing and emerging market opportunities effectively.
We may fail to properly develop or nurture our strategic relationships. If
these relationships deteriorate, our former partners could become our
competitors. We have entered into strategic relationships with Mail-Well,
Master Graphics, Claritas and NCR to manage more effectively the design,
production and delivery of custom printed business materials and to increase
the number of sales people available to market our products and services. If
these relationships do not develop as we expect, if we fail to maintain our
responsibilities with respect to these relationships, or if our strategic
partners fail to carry out their responsibilities, our strategic relationships
may deteriorate. If these relationships deteriorate, our business may not grow
as we expect. In addition, if our strategic relationships deteriorate, our
strategic partners may compete against us either individually or in conjunction
with other competitors.
5
We may not be able to hire and retain a sufficient number of qualified
employees, and as a result, we may not be able to grow as we expect or maintain
the quality of our services. Our future success will depend on our ability to
attract, train, retain and motivate direct sales, customer support, highly
skilled technical and managerial employees. Competition for these people is
intense. Although we are an Internet-enabled business-to-business intermediary,
personal contact is a key component of our sales process. We may not be able to
successfully expand our direct sales force, which would limit our ability to
expand our customer base. We may be unable to hire highly trained customer
support personnel, which would make it difficult for us to meet our clients'
demands. Engineers, Web designers and database marketers are in short supply,
and we may be unable to attract sufficiently qualified personnel. If we cannot
successfully integrate new employees into our business, we will not be able to
manage our growth effectively. Also, our inability to hire, integrate and
retain a sufficient number of qualified personnel may reduce the quality of our
products and services.
Our business operations could be significantly disrupted if we lose members
of, or fail to properly integrate, our management team. Our future success
depends to a significant extent on the continued service of our key sales,
senior management and technical personnel, particularly, Mr. Howard J. Harris,
our President and Chief Executive Officer, Mr. Joel I. Susel, our Senior Vice
President of Business Development, and Mr. Charles S. Oliver, our Vice
President of Technical Coordination. The loss of the services of
Messrs. Harris, Susel, Oliver or certain other key employees, would likely hurt
our business, results of operations and financial condition. Howard Harris is
the only employee with whom we have an employment agreement. Competition for
employees in our industry is intense, and we have at times in the past
experienced difficulty in recruiting qualified personnel. In addition,
companies in technology industries whose employees accept positions with
competitors have in the past claimed that their competitors have engaged in
unfair competition or hiring practices. We could face such claims in the future
as we seek to hire qualified personnel. These claims could result in material
litigation. We could incur substantial costs in defending against any such
claims, regardless of their merits. Please refer to the discussion under the
caption "Management" for detailed information on our key personnel.
Without the continued development and maintenance of the Internet and the
availability of increased bandwidth to consumers, our business may not
succeed. Given our dependence on the Internet for conducting our business,
without the continued development and maintenance of the Internet
infrastructure, we could fail to meet our overall strategic objectives and
ultimately fail to generate the revenue we expect. This continued development
of the Internet includes maintenance of a reliable network with the necessary
speed, data capacity and security, as well as timely development of
complementary products, including high speed modems, for providing reliable
Internet access and services. The success of our business will depend on the
ability of our clients to access and use our services, as well as to conduct
commercial transactions with us, without significant delays or aggravation that
may be associated with decreased availability of Internet bandwidth and access
to their customer-specific Web sites. Because the business-to-business e-
commerce is new and evolving, we cannot predict whether the Internet will prove
to be a viable commercial marketplace in the long term.
The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased
frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increased users or bandwidth requirements may impair the performance of the
Internet. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of our products and
services.
We have lost a number of our cable television industry clients as a result
of consolidations, and we may continue to lose cable industry
clients. Companies within the cable television industry represented
approximately 33% of our revenue for 1998. Recently, the cable television
industry has experienced an increased level of consolidation. Several of our
cable television clients have been acquired by their larger
6
competitors. In some cases, after these acquisitions, the acquiror has not
continued to use EagleDirect.com products and services either because of its
in-house capabilities or relationships with other vendors. If we continue to
lose cable television clients because of industry consolidation, our business
may suffer.
Our dependence on sales to a relatively small number of customers for a
significant portion of our revenue exposes us to financial risks. A loss or a
significant reduction or delay in sales to any of our major customers could
materially and adversely affect our revenue. We depend on a small number of
customers for a substantial portion of our revenue. During 1998, our top 10
customers accounted for an aggregate of 43% of our revenue. Although a ranking
by revenue of our largest customers will vary from period to period, we expect
that revenue from a relatively small number of customers will account for a
substantial portion of our revenue in any accounting period for the foreseeable
future. Consolidation in the cable television industry may result in increased
customer concentration and the potential loss of customers as a result of
acquisitions. Unless we diversify and expand our customer base, our future
success will significantly depend upon certain factors which are not within our
control, including:
. the timing and size of future purchase orders, if any, from our larger
customers;
. the product requirements of our customers; and
. the financial and operational success of our customers.
If any of our largest customers were to stop or reduce their purchasing from
us, our financial results could be adversely affected. A significant decrease
in sales to a major customer or the deferral or cancellation of any significant
order would have a material adverse effect on our operating results.
Developments in technology could reduce the demand for our printed
products. In recent years, the markets for printed business materials have
changed significantly as a result of advances in computer and communication
technologies. Certain products that were once commercially printed are now
generated on computers through word processing or desktop publishing software.
In addition, some information is now disseminated in a digital or electronic
format rather than in a paper format. These trends could continue in the
future, resulting in decreased demand for printed business materials.
Maintaining technological competitiveness of our data products, software
systems and services is vital to our continued success. The Internet and
Internet markets are characterized by rapidly changing technologies, evolving
industry standards, frequent new product and service introductions, and
changing customer demands. Our future success will depend on our ability to
adapt to and incorporate rapidly changing technologies, to enhance existing
solutions and to develop and introduce a variety of new solutions to address
our clients' changing demands. We may experience difficulties that could delay
or prevent the successful design, development, introduction or marketing of our
solutions. In addition, our new solutions or enhancements must meet the
requirements of our current and prospective clients and must achieve
significant market acceptance. Material delays in introducing new solutions and
enhancements may cause clients to forgo purchases of our solutions and purchase
those of our competitors.
If we are unable to compete successfully against printing and database
marketing companies or future businesses offering products and services
competitive with ours, our business will fail. The general commercial printing
industry is intensely competitive. We compete primarily with local and regional
printers, which are either independent or owned by print industry
consolidators. The U.S. general commercial printing industry is large, highly
fragmented, and capital intensive, with over 24,000 local, regional and
national commercial printers operating nationwide in 1998. Many of the
potential customers that we pursue through our direct sales process have long-
standing business relationships and personal ties with printers who compete
with us. These customers may be reluctant to change their existing ordering and
production processes to take advantage of our Internet-based printing services.
To sell our products successfully, we must devote the time and resources
necessary to educate our potential customers on the use and benefits of our
solutions.
7
The database marketing industry is also highly competitive. Within the
industry, there are many different types of service providers that compete with
us, such as advertising companies, market research companies and companies
specializing in data gathering, storage and management. In the future we also
may face direct competition from other companies that develop and market
integrated Internet-enabled services similar to ours. Many of our current and
potential competitors have substantially greater financial, technical,
marketing and other resources, greater name recognition, and larger customer
bases than we do. As a result, they may be able to market their products,
services and branding more aggressively than we are able to, and may be able to
significantly undercut our pricing for extended periods of time. They may also
be able to respond more quickly and effectively to emerging technologies and to
changes in customer requirements and preferences. Please refer to the
discussion under the caption "Business--Competition" for a more complete
description of the competitive factors we face.
We must continue to upgrade our technology infrastructure, including our
network hardware and software, or we will be unable to satisfy demand on our
Web site effectively. We must continue to add hardware and enhance software to
accommodate the increased content in our marketing databases and online
catalogs. If we are unable to increase the data storage and processing capacity
of our systems at least as fast as the growth in demand, our systems may become
unstable and may fail to operate for extended periods of time. Unscheduled
downtime could harm our business and also could discourage clients from
continuing to use us and could reduce future revenue. In addition, as traffic
on our system continues to increase, we must expand and upgrade our technology,
transaction processing, systems and network hardware and software. We may not
be able to accurately project the rate of increase in traffic on our systems.
In addition, we may not be able to expand and upgrade our systems and network
hardware and software capabilities to accommodate increased use of our systems.
If we do not appropriately upgrade our systems and network hardware and
software, our business, financial condition and operating results may be
adversely affected.
We may not be able to protect our proprietary rights, and we may infringe on
the proprietary rights of others. Proprietary rights are important to our
success and our competitive position. To protect our proprietary rights, we
rely generally on copyright, trademark, and trade secret laws, confidentiality
agreements with employees and third parties, and license agreements with
consultants, vendors, and customers. Despite such protections, a third party
could, without authorization, copy or otherwise misappropriate our technology
and duplicate it. Our agreements with employees, consultants and others who
participate in development activities could be breached. We may not have
adequate remedies for any breach, and our trade secrets may otherwise become
known or independently developed by competitors. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent as
do the laws of the United States. Effective copyright, trademark and trade
secret protection may not be available in those jurisdictions.
There has been substantial litigation in the technology industries regarding
intellectual property assets. Third parties may claim infringement by us with
respect to current and future products, trademarks or other proprietary rights,
or we may counterclaim against such parties in such actions. Any such claims or
counterclaims could be time-consuming, result in costly litigation, divert
management's attention, cause product release delays, require us to redesign
our products and services or require us to enter into royalty or licensing
agreements. Any of these results could have a material, adverse effect upon our
business, financial condition and operating results. Such royalty and licensing
agreements, if required, may not be available or may be available on terms
unacceptable to us.
Increases in paper prices or postal rates, or shortages in paper supply
could adversely affect our gross margins and operating results. The cost of
paper is a principal factor in the pricing we receive from our strategic
partners. We generally have been able to reflect increases and decreases in the
cost of paper in the prices charged to our customers. If we are unable to pass
future paper cost increases on to our customers, or if our customers reduce
their order volume as a result of increases in paper costs, our profit margins
and cash flows could be adversely affected.
In periods of high demand, certain paper grades have been in short supply,
including grades we and our commercial printing vendors use. Any loss of paper
supply sources or any disruption in our suppliers'
8
businesses or any failure on their part to meet our product needs on a timely
basis could have a material, adverse effect on our operating results, sales,
profit margins and cash flows.
The direct marketing activities of our clients are adversely affected by
postal rate increases, especially increases that are imposed without sufficient
advance notice to allow adjustments to be made to marketing budgets. Higher
postal rates may result in fewer mailings of direct marketing materials, with a
corresponding decline in the need for certain of our direct marketing services.
Increased postal rates can also lead to pressure on us from our clients to
reduce prices for our services to offset the postal rate increase.
We may be exposed to environmental liabilities and may face increased costs
of compliance with environmental laws and regulations. The printing business
generates substantial quantities of inks, solvents and other waste products
requiring disposal. Our printing facility is subject to federal, state and
local environmental laws and regulations concerning emissions into the air,
discharges into waterways and the generation, handling and disposal of waste
materials. We believe our facility is in substantial compliance with these laws
and regulations at this time. However, changes to these laws and regulations
could increase our cost of doing business or otherwise have a material, adverse
effect on our business, financial condition and operating results. In addition,
although we maintain commercial property insurance, it may not be adequate to
cover any claims against us for environmental liabilities.
Our data warehousing and Web server systems may stop working or work
improperly due to natural disasters, failure of third-party services and other
unexpected problems. An unexpected event like a power or telecommunications
failure, fire, flood or earthquake at our on-site data warehousing facility or
at our Internet service providers' facilities could cause the loss of critical
data and prevent us from offering our products and services to our clients. Our
business interruption insurance may not adequately compensate us for losses
that may occur. In addition, we rely on third parties to securely store our
archived data and connect us to the Internet. A failure by any of these third
parties to provide these services satisfactorily would impair our ability to
access archives and operate our systems. Any failure in our systems could
materially and adversely affect our business.
We may lose clients and lose revenue if our online security measures
fail. If the security measures that we use to protect information or the
inappropriate use of our Web sites are ineffective, we may lose clients, which
would reduce our revenue. In addition, our software, databases and servers may
be vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. We may need to spend significant resources to protect against
security breaches or to alleviate problems caused by any breaches. We may not
be able to prevent all security breaches.
Year 2000 problems could lead to malfunctions of our computer and
communications systems or those of our clients, and prevent us from running our
business. Many existing computer programs cannot distinguish between a year
beginning with "20" and a year beginning with "19" because they use only the
last two digits to refer to a year. For example, these programs cannot tell the
difference between the year 2000 and the year 1900. Significant uncertainty
exists in the software industry concerning the potential effects associated
with the failure to be year 2000 compliant. Programs that are not year 2000
compliant may malfunction or fail completely. If we or any third parties with
whom we have a material relationship fail to achieve year 2000 readiness, our
business may be seriously harmed. In particular, year 2000 problems could
temporarily prevent us from offering our goods and services. Please refer to
the discussion under the caption "Management's Discussion and Analysis of
Financial Condition and Operating Results--Year 2000" for detailed information
relating to our year 2000 readiness.
Government regulation may require us to change the way we do
business. Currently, there are few laws or regulations that specifically
regulate Internet communications or commerce. The existing laws and regulations
that govern our business change rapidly. Although our operations are currently
based in Colorado, the United States government and the governments of other
states and foreign countries have attempted to regulate activities on the
Internet. Evolving areas of law that are relevant to our business include
privacy law, proposed encryption laws, content regulation and sales and use tax
laws and regulations. Several
9
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. This could increase the cost of transmitting data over
the Internet. Because of this rapidly evolving and uncertain regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by increasing our expenses, subjecting us to
liability or forcing us to change how we do business.
Legislation relating to consumer privacy may affect our ability to collect
and use data. There could be a material, adverse impact on our marketing
business due to the enactment of legislation or industry regulations arising
from public concern over consumer privacy issues. Restrictions could be placed
upon the collection and use of information that is currently legally available,
in which case our cost of collecting some kinds of data might be increased
materially. We could also be prohibited from collecting or disseminating
certain types of data, which could, in turn, materially and adversely affect
our ability to meet our clients' requirements.
We may be liable to third parties for content that is available on our Web
sites. We may be liable to third parties for the content of our Web sites if
the text, graphics, software or other content in our databases violates their
copyright, trademark, or other intellectual property rights; or our clients
violate their contractual obligations to others when they provide content to
our databases.
We may also be liable for anything that is accessible from our Web sites
through links to other Web sites. Alleged liability could harm our business by
damaging our reputation, requiring us to incur legal costs in defense, exposing
us to awards of damages and costs and diverting management's attention away
from our business.
Risks Related to Master Graphics
Your interests as holders of the common stock may conflict with those of our
controlling shareholder. Master Graphics beneficially owns all of our
outstanding common stock and after this offering will continue to own
approximately % of our outstanding common stock. As a result, Master
Graphics has and will continue to have control over all matters affecting our
company, including the power to:
. elect all of our directors, and as a result of that power, control any
decisions with respect to the directions and policies of our company,
including the appointment and removal of officers;
. amend our articles of incorporation or bylaws;
. approve or prevent mergers, consolidations or the sale of all or
substantially all of our assets;
. control future issuances of our common stock and other securities;
. cause us to incur debt;
. cause us to pay or not pay dividends; and
. make decisions with respect to the treatment of items in those tax
returns which are consolidated or combined with Master Graphics' tax
returns.
Master Graphics also will be able to prevent or cause a change of control
relating to us. Master Graphics' control over us, and its ability to prevent or
cause a change in control relating to us, may delay or prevent such a change in
control, which could adversely affect the market price of the common stock.
Master Graphics and its affiliates are not obligated to advise us of any
investment or business opportunities of which they are aware, and they are not
restricted or prohibited from competing with us.
10
We may have potential business conflicts of interest with Master
Graphics. Master Graphics will continue to be our controlling shareholder. As a
result, conflicts of interest may arise between us and Master Graphics
including conflicts related to the nature, quality and pricing of services we
provide to Master Graphics; and the nature, quality and pricing of services
Master Graphics provides to us. We cannot assure you that we will be able to
resolve any potential conflicts or that, if resolved, we would not be able to
receive more favorable resolution if we were dealing with an unaffiliated
party. Our agreements with Master Graphics may be amended from time to time
upon agreement between the parties. As long as we are controlled by Master
Graphics, we cannot assure you that Master Graphics will not require us to
agree to an amendment to the transition services agreement or any other
agreement that may be more or less favorable to us than the current terms of
the agreement.
Master Graphics could undergo a change of control that could materially and
adversely affect our relationship. John P. Miller, a member of our Board of
Directors and the President and Chief Executive Officer and Chairman of the
Board of Directors of Master Graphics, currently owns approximately 52% of the
outstanding common stock of Master Graphics. Mr. Miller could sell all or a
portion of his ownership interest in Master Graphics to an unaffiliated party
or Master Graphics could otherwise undergo a change of control. If Master
Graphics undergoes a change of control, we cannot assure you that the
relationship between EagleDirect.com and Master Graphics will not change, that
we will still have access to the Master Graphics' sales force or production
facilities, or that Master Graphics will continue to provide services to us.
These events could have a material and adverse affect on our business.
We have potential liability for Master Graphics' tax obligations. For all
periods in which Master Graphics owns or owned 80% or more of our capital
stock, we will file a consolidated federal income tax return with Master
Graphics. If Master Graphics or other members of the consolidated group fail to
make any federal income tax payments, we would be liable for the shortfall
since each member of a consolidated group is liable for the group's entire tax
obligation.
Risks Related to this Offering
Our stock price may be particularly volatile because of our industry. The
stock market in general, and the market for common stock of Internet-related
and technology companies in particular, has been highly volatile. As a result,
the market price of our common stock is likely to be highly volatile. Investors
may not be able to resell their shares of our common stock at or above the
initial offering price. The trading prices of many technology and Internet-
related companies' stocks have reflected valuations substantially above
traditional levels. We cannot assure you that our stock will trade at the same
levels as other Internet stocks or that Internet stocks in general will sustain
their current market prices. Factors that could cause such volatility may
include:
. announcements of technological innovations;
. changes in financial estimates by securities analysts;
. changes in the market valuations of other Internet companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
. additions or departures of key personnel; and
. sales of common stock.
Many of these factors are beyond our control. These factors may materially and
adversely affect the market price of our common stock, regardless of our
operating performance.
Our quarterly revenue and operating results vary significantly and may not
be indicative of future performance, which is difficult to forecast. Our stock
price may fall if our performance does not meet analysts' or investors'
expectations. Our quarterly revenue, expenses and operating results have varied
11
significantly in the past and are likely to vary significantly from quarter-to-
quarter in the future. The general commercial printing industry is
characterized by individual orders from customers for specific printing
projects rather than multi-year contracts. Continued engagement for successive
jobs depends on the customers' satisfaction with the services provided. As a
result, we cannot predict the number, size and profitability of printing jobs
in a given period. Moreover, although database marketing involves longer-term
contracts and relatively predictable revenue, it also requires a long sales
cycle while systems and programs are being established. During the sales cycle,
revenue from database marketing is difficult to predict. As a result, we cannot
predict the number or profitability of database marketing agreements into which
we will enter. Our operating results may fall below market analysts' or
investors' expectations in some future quarters, which could lead to a
significant decline in the market price of our stock. In addition to the risk
factors described elsewhere, quarterly fluctuations may also result from:
. our ability to obtain new customers;
. changes in our operating expenses and capital expenditure requirements;
. our ability to retain our existing customers and increase sales to them;
. changes in the mix of printing and database marketing services we sell;
. the timing of customer orders;
. the announcement of new or enhanced products by us or our customers;
. technological innovations by us or our competitors;
. increased competition; and
. general or industry-specific economic conditions.
Based on all of these factors, we believe that our quarterly revenues, expenses
and operating results will be difficult to predict.
Our securities have never been traded in the public markets prior to this
offering and we cannot assure you that our stock price will not decline after
this offering. Before this offering, there has not been a public market for our
common stock and the trading market price of our common stock may decline below
the initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this
offering.
The book value of the shares you purchase will be substantially less than
the price you pay for the shares, and if a liquidation were to occur, you may
receive significantly less than your full investment in the shares. The initial
public offering price is substantially higher than the net tangible book value
of each outstanding share of common stock. As a result, purchasers of common
stock in this offering will suffer immediate and substantial dilution in the
book value of shares they purchase in this offering. The dilution will be $
per share in the net tangible book value of the common stock from the initial
public offering price. If additional shares are sold by the underwriters
following exercise of their over-allotment option, there will be further
dilution. As a result of this dilution, common shareholders purchasing stock in
this offering may receive upon a liquidation significantly less than their full
investment in the shares purchased in this offering. Please refer to the
discussion under the caption "Dilution" for a more complete description of the
amount of dilution.
Our articles of incorporation and our bylaws contain provisions that may
make it difficult for a third party to acquire our company, and this could
depress our stock price. Our articles of incorporation and our bylaws contain
provisions that could delay, defer or prevent a change in control of our
company or our
12
management. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. As a result, these provisions could limit the price that
investors are willing to pay in the future for shares of our common stock.
These provisions:
. authorize us to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior shareholder approval, with rights senior to those of common stock;
. provide for a staggered board of directors, so that no more than 1/3 of
our directors could be replaced each year and it would take three
successive annual meetings to replace all directors;
. prohibit shareholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting.
You should not rely on forward-looking statements we make in this
prospectus. This prospectus contains forward-looking statements that involve
risks and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology including "could," "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the volatility of the stock market, the impact of
year 2000 problems and the other risks and information in this prospectus.
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus in order to
conform them to actual results or to changes in our expectations.
Future sales of our common stock may depress our stock price. If our
shareholder sells substantial amounts of our common stock in the public market
following this offering, then the market price for our common stock could fall.
These sales might also make it harder for us to sell equity securities in the
future. Restrictions under the securities laws and lock-up agreements limit the
number of shares of common stock available for sale in the public market. After
this offering, shares of our common stock will be outstanding. shares
will be outstanding if the underwriters' over-allotment option is exercised in
full. The shares sold in this offering will be freely tradable unless these
shares are purchased by our affiliates. The remaining shares of common stock
held by the existing shareholder are restricted securities and may only be sold
in the public market if registered or if they qualify for an exemption from the
registration requirements of the Securities Act of 1933. Our sole shareholder,
Master Graphics, has agreed not to sell any of these securities for 180 days
after this offering without the prior written consent of Hoak Breedlove
Wesneski & Co.
13
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common
stock offered by EagleDirect.com in this offering will be approximately $
million, assuming an initial public offering price of $ per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that the net proceeds will be approximately $ million.
The following describes how we will use the net proceeds of the offering:
. We will use approximately $ million to expand our sales and marketing
capabilities.
. We will use approximately $ million for research and development.
. We will use approximately $ million to repay a portion of our
indebtedness to our sister company, Premier Graphics. We incurred $11.5
million of debt to purchase our assets from Premier Graphics. The
purchase price for the assets was the approximate book value of the
assets. This indebtedness was incurred on October 1, 1999 and matures
five years from the closing of the offering. The indebtedness bears
interest at 8 1/2% per annum.
. We will use approximately $ to pay the holders of Premier Graphics'
Senior Notes a fee for their consent to release us from: (1) the
guarantee of the Senior Notes; and (2) restrictions placed on our
activities by the indenture which governs the Senior Notes.
. The remainder of the net proceeds will be used for general corporate
purposes, including working capital.
Pending such uses, we intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment grade securities, certificates of
deposit or direct guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not expect to pay any cash dividends on our capital stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the growth of our business. We may incur indebtedness in the
future which may prohibit or effectively restrict the payment of dividends. Any
future determination to pay cash dividends will be at the discretion of our
board of directors.
14
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented on:
. an actual basis as a division of Premier Graphics;
. a pro forma basis to give effect to the incorporation of
EagleDirect.com and the sale of assets by Premier Graphics to
EagleDirect.com;
. a pro forma as adjusted basis to give effect to (1) the incorporation
of EagleDirect.com and the sale of assets by Premier Graphics to
EagleDirect.com; and (2) the receipt and application of the estimated
net proceeds from the sale of the shares of common stock offered by
EagleDirect.com in this offering at an assumed initial public offering
price of $ per share.
As of June 30, 1999
------------------------
Pro
Pro Forma As
Actual Forma Adjusted
------- ------- --------
(in thousands)
Intercompany debt..................................... $11,000 $11,500
Equity:
Parent's equity in division (1)..................... 121 -- --
Preferred stock, $.001 par value per share,
10,000,000 shares authorized; no shares issued and
outstanding actual, pro forma and pro forma as
adjusted........................................... -- -- --
Common stock, $.001 par value per share, 100,000,000
shares authorized; no shares issued and outstanding
actual; 1,000 shares issued and outstanding pro
forma; shares issued and outstanding, pro forma
as adjusted........................................ -- --
Additional paid-in capital.......................... -- 121
Retained earnings (deficit)......................... -- --
------- ------- ----
Total equity........................................ 121 121
------- ------- ----
Total capitalization.............................. $11,121 $11,621 $
======= ======= ====
- --------
(1) From April 27, 1999 (the date of acquisition by Premier Graphics) to
October 1, 1999, Eagle Direct was operated as a division of Premier
Graphics and, therefore, had no corporate capital accounts.
Please read the capitalization table together with "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements included in other parts of
this prospectus.
15
DILUTION
As of June 30, 1999, our pro forma net tangible book value was approximately
$ million, or $ per share of common stock. Pro forma net tangible book
value per share represents the amount of our total tangible assets, less total
liabilities, divided by the pro forma shares of common stock outstanding as of
June 30, 1999. The pro forma number of shares is based on the actual number of
shares issued to incorporate EagleDirect.com. After giving effect to the
incorporation of EagleDirect.com, the acquisition of our assets from Premier
Graphics, the issuance and sale of the shares of common stock offered in
this offering, and the application of the estimated net proceeds, our pro forma
net tangible book value as of June 30, 1999 would have been $ million, or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing shareholders and an immediate dilution
of $ per share to new investors. The following table illustrates this per
share dilution:
Initial public offering price per share.............................. $
Pro forma net tangible book value per share at June 30, 1999....... $
Increase in pro forma net tangible book value per share
attributable to new investors.....................................
Pro forma net tangible book value per share after offering...........
----
Dilution per share to new investors.................................. $
====
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by the existing
shareholders and the new investors purchasing shares of common stock in this
offering:
Shares Total
Purchased Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
Existing shareholders............... % $ % $
New investors.......................
---- --- ----- ---
Total............................. 100% $ 100%
==== === ===== ===
16
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our financial statements and the notes thereto included elsewhere in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The selected statement of operations data presented
below for the three-year period ended December 31, 1998 and the balance sheet
data at December 31, 1997 and 1998, are derived from financial statements
audited by KPMG LLP, our independent auditors, that are included elsewhere in
this prospectus. The selected statement of operations data presented below for
the two-year period ended December 31, 1995 and the balance sheet data at
December 31, 1994, 1995, and 1996 are derived from unaudited financial
statements that are not included in this prospectus. The statement of
operations data for the six months ended June 30, 1998 and June 30, 1999 and
balance sheet data as of June 30, 1999 are unaudited and are derived from
unaudited financial statements that are included elsewhere in this prospectus.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included to present fairly the
unaudited interim results when read in connection with the audited financial
statements and notes to those statements. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of the results of operations
that may be expected for the year ended December 31, 1999. The selected
financial data presented below reflect the operations of Eagle Direct, Inc. as
a stand-alone entity for all periods prior to April 27, 1999 and as a division
of Premier Graphics from and after April 27, 1999. The significant changes in
total assets, long-term obligations and equity from December 31, 1998 to June
30, 1999 reflected in the balance sheet data were primarily the result of the
acquisition of Eagle Direct by Premier Graphics in April 1999 and the
application of purchase accounting for that transaction.
Prior to its acquisition by Premier Graphics, Eagle Direct was a Subchapter-
S corporation for Federal and state income tax purposes, and as such did not
provide for income tax expense in its financial statements. After its
acquisition, Eagle Direct was operated as a division of Premier Graphics and as
a division did not record a provision for income taxes. For purposes of the
selected financial data set forth below, income tax expense (benefit) is shown
on a pro forma basis for the year ended December 31, 1998 and the six months
ended June 30, 1999, based on statutory income tax rates in effect during the
periods. As a division of Premier Graphics, Eagle Direct had no shares of
common stock outstanding. For purposes of disclosing pro forma earnings per
share, the number of common shares outstanding is based on the number of shares
subsequently issued to capitalize EagleDirect.com, the successor to Eagle
Direct, as more fully discussed in note 4 to Eagle Direct's June 30, 1999
condensed financial statements, which are contained elsewhere in this
prospectus.
17
Six Months
Ended June
Year Ended December 31, 30,
------------------------------------------------- --------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ------- ------- ------- ------ ------
(unaudited) (unaudited) (unaudited)
(in thousands, except share and per share data)
Statement of Operations
Data:
Revenue................. $11,389 $12,403 $14,767 $13,116 $15,721 $7,106 $7,433
Cost of revenue......... 8,364 9,120 11,111 9,726 11,139 5,252 5,191
Gross profit (loss)..... 3,025 3,283 3,656 3,390 4,583 1,854 2,242
Operating expenses...... 2,655 2,953 3,422 3,503 3,906 1,878 2,179
Income (loss) from
operations............. 370 330 234 (113) 676 (25) 63
Other income (expense).. (207) (224) (257) (212) (246) (130) (245)
Net income (loss)....... 163 106 (23) (325) 430 (155) (182)
Pro forma (unaudited):
Net income (loss)...... 270 (125)
Net income (loss) per
share.................
Common shares
outstanding...........
December 31,
----------------------------- June 30,
1994 1995 1996 1997 1998 1999
----- ----- ----- ----- ----- -----------
(in thousands) (unaudited)
Balance Sheet Data:
Cash and cash equivalents............. $ 42 $ 126 $ 176 $ 12 $ 101 $ 5
Working capital....................... 830 878 797 430 1,147 889
Total assets.......................... 5,774 5,698 5,869 4,592 5,143 12,789
Long-term obligations................. 2,135 2,214 1,984 1,774 1,776 11,000
Equity................................ 1,581 1,688 1,665 1,340 1,770 121
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes to those statements appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Our actual results may differ significantly from
those projected in the forward-looking statements. Factors that might cause
future results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in "Risk Factors"
and elsewhere in the prospectus.
Overview
We provide Internet-enabled, integrated commercial printing and database
marketing services. We introduced our database marketing services in 1984 and
our Internet-enabled print procurement services in 1996.
During the last three years, we have developed our Internet-enabled services
to satisfy the unique requirements of our clients. We believe that our limited
capital resources for selling, marketing and product development have
constrained the revenue growth of our Internet-enabled services. Despite this
limitation, total revenue from Internet-enabled services and other services we
provided to customers that used our Internet-enabled services, not including
pass-through charges for freight and postage, increased from approximately $4.4
million in 1996 to approximately $8.1 million in 1998. During 1999, these
revenues continued to grow to approximately $4.2 million in the first half of
1999 compared to approximately $3.3 million in the first half of 1998. We
believe the proceeds from this offering that we will use for selling, marketing
and product development; our substantially larger sales force; and our
strategic relationships with NCR, Claritas, and Master Graphics will accelerate
the growth in revenue from Internet-enabled services.
We derive revenue from printing services, mailing and fulfillment services
and database marketing services. We also generate revenue from services related
to the setup and maintenance of each customer-specific online procurement
solution. Historically, we have generated more than half of our revenue in the
second half of the calendar year. There are two broad categories of our cost of
revenue: (1) fixed costs, consisting primarily of payroll, equipment
depreciation and building costs, including rent; and (2) variable costs,
consisting primarily of material costs. Our gross margins are higher on our
database marketing revenue than our print-related revenue. Postage and freight
charges, which are a significant portion of our mailing and fulfillment
revenue, have minimal gross margin because we generally pass these costs on to
our customers without markup.
Our business incurs operating expenses in three broad expense categories:
sales and marketing, product development and general and administrative. Most
of our historical expenditures have been in the sales and marketing and general
and administrative categories. We expect that sales and marketing expenses and
product development expenses will account for a larger percentage of our
operating expenses following this offering. As a result of Master Graphics'
acquisition of Eagle Direct and the arrangements we entered into with Howard
Harris described under "Certain Transactions," we will record approximately
$18.0 million of goodwill that will be amortized over 40 years as a charge
against earnings of approximately $450,000 per year.
19
Results of Operations
The following table sets forth certain financial data for the periods
indicated (dollars in thousands) and such results as a percentage of revenue:
Year ended December 31, Six Months Ended June 30,
--------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
-------------- -------------- ------------- ------------- -------------
Revenue................. $14,767 100.0% $13,116 100.0% $15,721 100.0% $7,106 100.0% $7,433 100.0%
Cost of revenue......... 11,111 75.2 9,726 74.2 11,139 70.8 5,252 73.9 5,191 69.8
Gross profit (loss)..... 3,656 24.8 3,390 25.9 4,583 29.2 1,854 26.1 2,242 30.2
Sales and marketing..... 1,915 13.0 1,814 13.9 1,848 11.7 873 12.3 1,032 13.9
General and
administrative......... 1,292 8.7 1,403 10.7 1,634 10.4 792 11.1 894 12.0
Research and
development............ 215 1.5 286 2.2 424 2.7 213 3.0 253 3.4
Income (loss) from
operations............. 234 1.6 (113) (0.9) 676 4.3 (25) (0.3) 63 0.1
Net income (loss)....... (23) (.2) (324) (2.5) 430 2.7 (155) (2.2) (182) (2.4)
Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998
Revenue. Revenue increased 4.2%, from $7.1 million for the six months ended
June 30, 1998 to $7.4 million for the six months ended June 30, 1999. The
increase was primarily attributable to the addition of new customers, most of
whom use our Internet-enabled services.
Gross Profit. Gross profit increased 15.8%, from $1.9 million for the six
months ended June 30, 1998 to $2.2 million for the six months ended June 30,
1999. Gross margin increased from 26.1% to 30.2%. The increase in gross profit
was primarily attributable to higher revenue and gross margin. The increase in
gross margin was primarily due to an increase in our higher-margin revenue from
sources other than the production of printed materials.
Research and Development Expenses. Research and development expenses in the
first half of 1999 increased 18.8% from the first half of 1998 due to added
personnel.
Net Income. Despite an increase in income from operations, net income (loss)
remained relatively constant for the six months ended June 30, 1999 compared to
the same period for 1998 because of higher interest expense. For the first half
of 1999, interest expense increased 90.8% to approximately $208,000 from
approximately $109,000 for the first six months of 1998 due to the long-term
debt incurred by Premier Graphics when it acquired us.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue increased 19.8%, from $13.1 million in 1997 to $15.7
million in 1998 as a result of greater sales to the majority of our top 20
customers, as well as the addition of new customers.
Gross Profit. Gross profit increased 35.3% from $3.4 million in 1997 to $4.6
million in 1998. Gross margin increased from 25.7% to 29.2%. The increase in
gross profit was primarily attributable to higher revenue and gross margin. The
increase in gross margin was attributable to an increase in our higher-margin
revenue from sources other than the production of printed materials.
Research and Development Expenses. Research and development expenses in 1998
increased 48.3% from 1997 due to added personnel.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. Revenue decreased 11.5%, from $14.8 million in 1996 to $13.1
million in 1997. In 1997, we started requiring customers to make deposits
against anticipated postage expenses. As a result, some customers paid their
postage directly, which decreased our postage revenue during the period. In
addition, we lost two significant customers who were acquired by other
businesses.
20
Gross Profit. Gross profit decreased 8.1% from $3.7 million in 1996 to $3.4
million in 1997. Gross margin remained relatively flat for 1997 compared to
1996. The decrease in gross profit was primarily attributable to decreasing
sales. Gross margin did not change because low-margin postage revenue decreased
as a percentage of total revenue.
Research and Development Expenses. Research and development expenses in 1997
increased 33.0% from 1996 due to added personnel.
Liquidity and Capital Resources
Historically, our operations and growth have been financed through
internally generated working capital and borrowings from commercial banks or
other lenders. During the past three and one-half fiscal years, we generated
increasing levels of cash from operating activities, which totaled $2.6
million. We used this cash primarily to fund capital expenditures totalling
$1.5 million and to repay $1.1 million of debt. We incurred $11.5 million of
debt to purchase our assets from Premier Graphics. We will use $ million of
net proceeds to repay a portion of this debt. The debt that remains outstanding
will be payable in equal quarterly installments of principal plus accrued
interest and will mature five years from the closing of the offering.
We have received a term sheet from General Electric Capital Corporation to
provide a credit facility with an initial borrowing capacity of $2 million upon
completion of the offering and are currently negotiating the definitive
documentation for this facility. There is no assurance, however, that we will
be able to successfully negotiate this facility.
We currently expect to increase our operating expenses substantially in
connection with our aggressive growth strategy. These additional operating
expenses will consume a material amount of our cash resources, including a
portion of the net proceeds of this offering. We believe that the net proceeds
of this offering will be sufficient to meet our anticipated cash needs for
working capital, and capital expenditures for at least the next 12 months.
However, our cash needs could exceed our expectations, and we may choose to
seek additional financing before that time. There is no assurance that we will
be able to obtain additional financing on favorable terms, if at all.
Year 2000
If internal systems do not correctly recognize and process date information
beyond the year 1999, there could be an adverse impact on our operations. The
year 2000 compliance issues stem from the computer industry's practice of
conserving data storage by using two digits to represent a year. Systems and
hardware using this format may process data incorrectly or fail with the use of
dates in the next century. These types of failures can influence applications
that rely on dates to perform calculations (such as an accounts receivable
aging report), as well as systems such as building security and heating.
Significant uncertainty exists concerning the scope and magnitude of problems
associated with the century change.
We have completed our review program of the potential impact of the change
in the century on our computer systems and software. Based on our assessment,
we believe that all of our systems will be able to distinguish the twenty-first
century dates from dates of the twentieth century before the century change. In
addition, we have installed a new internal management information system to
assure that our accounting and operating systems are year 2000 compliant.
Finally, we have assessed third party systems on which we rely, and we are not
aware of any material year 2000 problems with these third party products or
services.
The costs incurred to date in our year 2000 compliance program include the
purchase of our new management information system for approximately $100,000
and the expense of our salaried employees devoted to our year 2000 assessment
and remediation efforts.
21
If year 2000 issues in our systems and equipment are not addressed
satisfactorily, we could experience a disruption in business and loss of
customers which would have a material, adverse effect on our earnings and cash
flow.
Impact of Recently Issued Accounting Standards
We do not believe that any recently issued, but not yet adopted, accounting
standards will have a material impact on our financial statements. We adopted
the AICPA's Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, effective January 1,
1999. The impact on our financial statements as of and for the six months ended
June 30, 1999 were not material. Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Financial Instruments, amended as to
its effective date by SFAS No. 137, will be effective for our year ending
December 31, 2001. We do not expect this SFAS to have a material impact on our
financial statements since we do not currently invest in such instruments.
QUANTITATIVE AND QUALITATIVE MARKET RISK
Market risks are not considered to be material to us at the present. We do
not have any risk involving foreign currency because all of our operations are
based in the United States. We do not have any commodity derivative
instruments, and the related market risk, because we have generally been able
to pass on to customers in our pricing the fluctuations that we experience in
paper costs, the largest and most volatile of our product costs. We have not
dealt in the past, nor do we anticipate dealing in the near future, in interest
rate derivative instruments. A substantial portion of our debt bears interest
at fixed rates and, therefore, we currently do not have significant exposure to
interest rate fluctuations.
22
BUSINESS
EagleDirect.com
We are a leading single-source provider of Internet-enabled, integrated
commercial printing and database marketing solutions that allow businesses to
market their products more effectively and reduce the costs and inefficiencies
associated with traditional printing and marketing processes. We introduced our
database marketing solutions in 1984 and our Internet-enabled print procurement
solutions in 1996. Our Internet-enabled solutions allow businesses to:
/0/access and analyze information in marketing databases;
. develop effective marketing campaigns based on the marketing databases;
. design, modify and personalize marketing materials;
. initiate the printing, sorting and mailing of marketing and other
printed materials; and
. track and analyze the results of marketing campaigns.
Clients may combine one or more of these solutions within an interactive,
customer specific Web site to best suit their unique needs.
The following chart compares the traditional process for ordering printed
marketing materials with the process available to a client using the
EagleDirect.com solution to assist in its marketing program:
[Flow Chart comparing the EagleDirect process to the traditional process
appears here.]
As this chart illustrates, the traditional printing and marketing processes
are labor intensive and repetitive. Our Internet-enabled solutions
significantly reduce the inefficiencies traditionally associated with these
processes.
Industry Background
The Emergence of Business-to-Business Electronic Commerce
The Internet has emerged as a medium to deliver products and services from
business to business that offers the potential for organizations to streamline
complex processes, increase accuracy and product quality, lower costs and
improve productivity. Forrester Research, Inc. estimates that businesses bought
and sold $43 billion in goods over the Internet in 1998 and predicts that
business-to-business e-commerce will grow to $1.3 trillion by 2003,
representing more than 90% of the total projected e-commerce market.
The dynamics of business-to-business e-commerce relationships differ
significantly from those of other e-commerce relationships. Business-to-
business e-commerce solutions frequently automate or otherwise impact workflows
or processes that are fundamental to operations by replacing various paper-
based transactions with electronic communications. In addition, business-to-
business e-commerce solutions must often be integrated with an organization's
existing information systems. Finally, personnel throughout the organization
must be trained to use the solution. Consequently, selection and implementation
of a business-to-business e-commerce solution represents a significant
commitment by an organization, and the costs of switching solutions are high.
Business-to-business e-commerce solutions that offer improved efficiency
through the automation of business processes and workflows are being targeted
toward a variety of industries. We believe these solutions are likely to be
most readily accepted by industries characterized by a large number of buyers
and sellers, a high degree of fragmentation among buyers, sellers or both,
significant dependence on information exchange, large transaction volume and
user acceptance of the Internet.
23
The Printing Industry
The U.S. printing industry is large and highly fragmented. We provide
services within the general commercial printing portion of the industry which,
according to the Printing Industries of America, had approximately $49.4
billion in revenue in 1998, compared to $46.8 billion in revenue in 1997 and
$42.9 billion in revenue in 1996. In 1998, there were approximately 24,000
general commercial printing companies located in the United States.
The general commercial printing industry involves developing a customer's
concept into printable material through the use of design and electronic
prepress services; using printing presses to imprint printable material onto
paper; cutting, folding, and binding the finished product; and, finally,
storing and distributing the finished product. We believe that businesses
desire a more efficient process for ordering and customizing printed business
materials to minimize the time and cost of procurement. Customers also wish to
limit the number of vendors they must deal with to satisfy their printed
business materials requirements. We believe our Internet-enabled solutions can
significantly reduce the inefficiencies traditionally associated with the
general commercial printing process.
Database Marketing
Businesses increasingly use data about customers, prospective customers and
the marketplace to manage their businesses. Recent advances in information
technology have allowed data to be accessed and processed more cost effectively
into useful strategic information and shared more efficiently within an
organization. This has caused many companies to invest in managing and
maintaining their own internal data and integrating their data with external
data sources to improve business decision-making.
The combination of recent advances in information technology, ever
increasing amounts of raw data and changing household and population profiles
has spurred a transition from traditional advertising by mass media to targeted
one-to-one marketing. Database marketing services analyze data in data
warehouses to allow companies to engage in one-to-one marketing. Businesses are
increasing corporate expenditures allocated to building data warehouses, where
information is maintained and analyzed. International Data Corporation projects
that the portion of the data warehouse market we serve will grow from $9.4
billion in 1998 to $21.7 billion in 2002, a compounded annual growth rate of
approximately 23.3%.
The EagleDirect.com Solutions
Through customer-specific, secure Web sites, we meet the unique and specific
needs of businesses' print procurement and marketing departments.
EagleDirect.com provides comprehensive, real-time online solutions that reduce
many of the inefficiencies associated with:
. the error-prone, time-consuming and labor-intensive traditional general
commercial printing process;
. creating and populating data warehouses;
. direct mailing;
. product storage and fulfillment; and
. creating, delivering, tracking and analyzing the results of one-to-one
marketing.
24
Print Solutions
Our clients may use our Internet-enabled print procurement solutions to
order printed business materials, including marketing materials and general
office products. We offer customer-specific menus that enable a user to access
a digital catalog of standard printed business materials that may include
photographs, brochures, posters, product catalogs, price sheets and business
supplies, along with other custom-printed business material--from direct mail
to stationery and business cards. Our printing procurement solutions offer the
following key features:
Integration with
Marketing Databases....... Our clients have the ability to combine
customer-specific printed marketing materials
with the information contained in marketing
databases to improve the effectiveness and
efficiency of their marketing processes.
Efficiency................ Our online procurement systems are designed to
allow clients to create, modify, proof, and
order customer-specific printed business
materials from their desktops on a real-time
basis, reducing inefficiencies traditionally
associated with general commercial printing.
Accuracy.................. Our system allows users to enter, proof, update
and maintain their information online. We
believe our solutions reduce errors associated
with data reentry, typesetting and the
inadvertent use of outdated document versions.
Technology and
Production................ Our automated system routes print-ready files
directly to either our printing facility or the
printing facilities of Mail-Well or Master
Graphics. This eliminates typesetting and other
labor intensive pre-press manufacturing steps.
Our relationships with Mail-Well and Master
Graphics allow us to rapidly deliver high-
quality printed business materials from more
than 100 printing facilities.
Marketing Solutions
Our Internet-enabled marketing solutions allow our clients to retain and
increase the value of existing customers and acquire new customers by focusing
investment resources on those customers with the greatest current and potential
value. Our marketing solutions offer the following key features:
Performance Measurement... We have expertise in designing performance
tracking and measurement methodologies that are
integrated with our direct mail, fulfillment
and database systems. By measuring marketing
performance, our clients are able to measure
return on marketing investment and fine-tune
the performance of marketing programs.
Data Warehousing and
Modeling.................. Data warehousing involves pulling data from
disparate client marketing files and
commercially available consumer lists into an
integrated database. Data modeling enables our
clients to predict the results of a direct
marketing product or service offering and to
quantify and measure the return on their
marketing investment.
Real-time Information..... Using our proprietary software, we create an
Internet link between our clients' database
mainframes and our systems so that any update
to consumer information is automatically
transmitted to our systems. Since marketing
analysis is performed on our systems
25
rather than our clients' systems, the analysis
does not result in downtime or delays in our
clients' systems.
Comprehensive Solution.... Our comprehensive offering of software, data
management and consulting services helps
businesses develop and implement more effective
direct marketing programs.
Increased Marketing
Velocity.................... Our systems create fully-automated marketing
campaigns, allowing clients to develop
customized communications triggered by:
. specific events such as cancellations of
service, changes in spending patterns or
customer complaints status;
. customer characteristics such as age,
income, presence of children and buying
behavior; or
. dates such as birth dates or contract
renewal dates.
Our systems enable businesses to reduce
dramatically the cycle time from planning
through design, execution and measurement of
campaigns, to better respond to competitive and
market pressures and to quickly evaluate new
campaigns.
We believe that our unique Internet-enabled integration of all critical
marketing and purchasing activities will decrease the possibility of print
errors and reduce the time associated with procuring printed business materials
from several days to minutes and creating a direct mail program from weeks to
hours.
Business Strategy
Our objective is to be a single-source provider of our Internet-enabled
services to businesses' print procurement and marketing departments. The key
elements of our strategy are to:
. Rapidly add new customers through increased direct sales efforts and
strategic alliances. In October 1999, Master Graphics transferred to
EagleDirect.com 10 people from Master Graphics' national sales force,
bringing our total sales force to 20 people. In addition, through our
strategic relationships, we have the ability to leverage Master
Graphics' sales force, Claritas' cable television and telecommunications
sales force and NCR Systemedia Group's sales force, which total
approximately 370 people. We believe that a significant portion of these
outside sales people will have the ability and desire to market our
Internet-enabled solutions to their customers. Please refer to the
discussion under "Strategic Relationships and Alliances" for a more
complete description of our relationships with Master Graphics, Claritas
and NCR.
. Cross-sell our comprehensive suite of services to existing
clients. Currently, EagleDirect.com has more than 200 active clients. We
believe that substantial opportunity exists for us to sell additional
Internet-enabled products and services to our existing clients. Our
strategy is to become the single-source provider of printed business
materials and marketing services to our clients. We intend to accomplish
this goal by selling additional products and services through our
existing sales relationships and by developing new sales relationships
with our clients.
. Maintain product and technology leadership through continuing
development and innovation. We intend to continue to improve our
technology to meet the evolving needs of our clients. We will continue
to develop, purchase or license technological advancements for our print
procurement and marketing solutions to enhance their reliability,
functionality and ease of integration with existing or newly developed
systems.
. Capitalize on market position and build brand recognition. We intend to
capitalize on the fact that we are one of the first companies to offer
comprehensive e-commerce solutions for print
26
procurement and marketing. In addition, we will pursue strategic
relationships with industry leaders, such as Mail-Well, Master Graphics,
Claritas and NCR, to accelerate market awareness and demand for our e-
commerce solutions. We also intend to pursue an aggressive brand
development strategy through targeted advertising and promotions, press
coverage and participation in trade associations and industry events.
Strategic Relationships and Alliances
Mail-Well, Inc.
We have formed a strategic alliance with Mail-Well, Inc., one of the
largest general commercial printing companies in the United States. Mail-Well
has a network of more than 100 printing facilities located throughout North
America that are staffed by more than 12,000 employees. Our strategic alliance
allows us to use Mail-Well's printing facilities when appropriate based on
geography, pricing, timing and other factors. Mail-Well has agreed to provide
us with favorable pricing terms.
Master Graphics, Inc.
Our parent company, Master Graphics, Inc., is also one of the largest
general commercial printing companies in the United States. Master Graphics
has a network of 19 printing facilities located across 15 states that are
staffed by more than 2,000 employees. We intend to capitalize on our
relationship with Master Graphics in two key areas: (1) sales and marketing
and (2) production facilities. We are training the Master Graphics sales force
about the benefits our Internet-enabled solutions can offer their 10,000
customers. In addition, we will have access to Master Graphics' printing
facilities to meet the production requirements of our clients. Master Graphics
has electronically linked each of its facilities so that we will be able to
track each order through the production and delivery process. Master Graphics
has agreed contractually to provide us with pricing no less favorable than it
offers its largest customer.
Claritas
In June 1999, we formed a marketing alliance with Claritas, a subsidiary of
VNU, to co-develop and sell marketing products and services to the cable
television industry. Claritas is a leading provider of industry-specific
marketing information and analysis solutions. Our alliance with Claritas
offers cable operators improved marketing results through a unique combination
of real-time access to customer billing information, household-level data,
industry-specific benchmarks, one-to-one marketing communications and
performance measurement systems. In the future, we intend to expand our
marketing alliance with Claritas to include other industries such as banking,
insurance, telecommunications and utilities.
NCR Corporation
In March 1999, Master Graphics entered into a strategic alliance with the
Systemedia Group of NCR Corporation to sell general commercial printing to
national accounts. In October 1999, this alliance was expanded to encourage
NCR Systemedia Group's sales force to sell our Internet-enabled solutions to
NCR Systemedia's customers. We will give NCR Systemedia Group salespeople
online access to our system to enable them to quote prices for printing jobs
using our network of printers and track those printing jobs to completion. The
NCR Systemedia Group develops, produces and markets business forms for all
industries.
Customers
Our target clients are the marketing departments of medium to large sized
companies across the United States. We have approximately 200 active
customers. Our top ten customers made up 43% of our business during 1998.
27
The following are case studies of J.D. Edwards, Gates Rubber Company, Cherry
Creek Mortgage and Marcus Cable, four clients that have adopted our Internet-
enabled solutions:
J.D. Edwards--A worldwide software company with approximately $1 billion in
1998 revenue and over 4,000 employees, one third of whom are employed outside
of the United States.
Problem EagleDirect.com Solution Results
_________________________ _________________________ _________________________
. hundreds of locations . implemented online . reduced the time and
independently ordered ordering system; costs of production
letterhead, through instant
envelopes, business . created corporate- online ordering,
cards and other wide print and design proofing and
business standards; tracking;
communication
materials; . established just-in- . increased order
time print delivery accuracy;
. program costs were to eliminate storage
escalating due to and excess inventory . better allocation of
small quantities and reduce printing costs among
being ordered and the procurement costs; separate departments;
dedicated man-hours and
necessary to perform . eliminated inventory
the ordering and . increased invoicing costs with just-in-
tracking at each efficiency with use time print delivery
location; and of passwords for cost solutions; and
center control.
. ink color, price, . established
paper quality and uniformity among
corporate design locations.
varied by location.
Gates Rubber Company--A worldwide manufacturing company with over 24,000
employees, 70 factories and 20 distribution centers in 18 countries.
Problem EagleDirect.com Solution Results
_________________________ _________________________ _________________________
. hundreds of . implemented online . reduced ordering,
distributors, product ordering system that shipping and
representatives and reduced the order production costs;
sales people cycle from weeks to
demanding that days; . increased order
marketing materials accuracy to 99.98%,
be supplied in . stabilized costs by reduced required
short amounts of simplifying ordering personnel and
time; procedures; and decreased overall
procurement to
. program costs were . reduced costs delivery time from an
increasing due to associated with rush average of two weeks
rush orders and orders and priority to 72 hours; and
priority shipping and shipping through
as a result of online reporting and . reduced accounting
lengthy procurement automatic time by 95% due to
process; and notifications. online reporting.
. internal procurement
systems created
costly bottlenecks
and late orders.
Cherry Creek Mortgage--A large independent mortgage company in Colorado,
serving local, national and wholesale markets.
Problem EagleDirect.com Solution Results
_________________________ _________________________ _________________________
. Cherry Creek Mortgage . worked with CCMC's . built customized Web
needed to cultivate advertising agency site with real-time
customer loyalty and to create marketing database integration;
grow its business; campaign using
regional and national . positive response by
channels; loan officers; and
. processes relating to . provided loan
customer retention officers with an . automated marketing
and referral program online marketing programs, increased
were not working solution to increase accuracy and speed of
effectively; and program processes and lowered
participation; overall printing
. marketing activity cost.
and return on . simplified the
investment were marketing process to
difficult to track allow loan officers
and measure. to create marketing
campaigns online; and
. monthly reporting
and billing
to individual loan
officers based on
performance.
28
Marcus Cable--Marcus Cable was one of the ten largest cable operators in the
United States, serving over one million customers on 35 cable systems in 12
states. Recently, Marcus merged into Charter Communications. EagleDirect.com
has continued to provide solutions to Charter since the merger.
Problem EagleDirect.com Solution Results
_________________________ _________________________ _________________________
. Marcus Cable set . developed campaign . final marketing,
extremely aggressive strategy and segmentation and
performance goals completely designed creative plans were
before merger; the first of four approved in two days
mailers on first day; using Internet
. company-wide systems;
marketing initiative . developed unique
demanded rapid marketing materials . first wave of mail
development of two without having to was sent out within 6
waves of direct mail create a printed days; and
in 6-week time frame; draft;
. 4 different direct . proofs were sent to . internet solutions
mail efforts, with the client on-line resulted in improved
combined volume of for approval; and accuracy and delivery
nearly 3 million time.
units; and . people in three
different cities
. the first 750 million participated in
units of mail needed reviewing and
to be designed, approving the
printed, and mailed marketing materials,
in less than 7 days. looking at PDF
images.
Sales and Marketing
We market and sell our print procurement and marketing solutions through a
combination of our direct sales force, telemarketing sales, and our recently
created strategic relationships with Master Graphics, Claritas and NCR. Our
sales and marketing approach is designed to help businesses understand both the
strategic and technical benefits of our solutions through one-on-one education
and training. In addition, we conduct a variety of marketing programs to
educate our target market, create awareness and attract customers.
We believe that we can establish and maintain long-term relationships with
our clients and encourage repeat purchases if, among other things, we have good
account management, customer support and service. Our customer support and
service personnel handle general customer inquiries and basic technical
questions, answer customer questions about the ordering process and investigate
the status of orders, shipments and payments. We have automated some of the
tools used by our customer support and service staff. At any time in the
purchasing process, a customer can access our support staff by fax or e-mail by
following prompts located throughout our Web site or by calling our support
center through our toll free telephone line.
As of October 1, 1999, we had 31 sales and account management personnel to
support our direct sales efforts. We intend to increase the size of our sales
and account management force to sell to and support medium-to large-sized
businesses as we promote new business development efforts and expand our
Internet-enabled product and service solutions in print production and direct
marketing.
Privacy
The growth of e-commerce and companies wanting consumer information means
that we must work hard to guarantee that our policies offer individuals the
protection to which they are entitled. We have put in place guidelines
regarding the protection of consumers' privacy rights. Our multi-level security
systems are designed to ensure that only authorized clients can access our
data.
Technology
Our programmers and technical personnel combine our proprietary software
with off-the-shelf software products to create customer-specific Web sites,
automated data collection systems, systems that replicate our customers'
databases onto our system, online database marketing and print procurement
systems, mailing systems, laser generated imaging systems and fulfillment
systems that satisfy the unique needs of our clients.
29
Security
During the login and authentication process, using encryption and secure Web
sites, the user name and password are checked against the client's user
database. If the user name and password are correct, the user is granted access
and the appropriate business rules for that user are loaded. Each client
determines the business rules that will apply to various users in the client's
organization. The business rules determine the actions that a particular user
may take on the Web site. Typical business rules include the following: which
product lines and inventory the user can access; quantities the user can order;
whether the user can download electronic versions of the item; and which
shipping methods are available.
Print Procurement
Print procurement is becoming a frequently used feature of our suite of
Internet-enabled solutions. If a client uses only our Internet-enabled print
procurement solution, we build a customized, secure Web site for that client.
The print procurement section of the Web site contains a customized catalog of
the client's print products and our client's predetermined business rules. Each
customer-specific Web site provides the client with a high level of security,
ease of navigation, order management and administrative controls. Clients can
access all of the print procurement functions on their Web sites using standard
browser software. Our online print procurement systems:
. provide a user with a digital catalog of printed business materials that
user is authorized to order;
. prompt the user through a series of pull-down menus to customize the
printed business materials;
. provide online pricing based on a matrix of pre-determined services and
products;
. create and render in real time an on-screen proof of the document for
approval;
. submit the order into the manufacturing queuing system; and
. prepare a PostScript or PDF file to be delivered to the printing
facility preparing the end product.
Database Marketing
The technology we use in our database marketing solutions varies depending
on the size and complexity of the system we build for our clients. The most
critical step of building and maintaining database marketing systems is
initiating the stream of customer data into our system. Our proprietary Data
Harvester(TM) system automates the process of pulling data and customer events
from disparate client marketing files into our integrated database. Our system
also allows our clients to determine the reports and notifications concerning
their customers that help optimize marketing efforts. Our systems minimize the
computer and labor resources our clients would otherwise use to program and
physically extract data from their computers and reduce the possibility of
human error present in traditional data warehouse systems by capturing customer
events, such as cancellations of service and changes in buying behavior, as
they happen and copying them to our database marketing system. We call this
process "automatic marketing" because predetermined actions will be taken by
our system when specified customer events occur. By using technologies such as
Microsoft SQL, dedicated point-to-point data circuits, and proprietary software
systems, we offer access to marketing data that will enable our clients to
react quickly to events affecting their customers or markets.
Comprehensive Solution
By integrating the print procurement and database marketing systems, we
offer our clients fully automated marketing systems that optimize print
production, market segmentation, and measurement of return on their marketing
investment. Our system is customized to the needs of our clients and can be
configured to trigger marketing actions upon pre-determined customer events. We
combine the technology of high speed laser printers, integrated postal
processing and automated data processing with our print procurement and
database
30
marketing systems to automate one-to-one marketing communications and reduce
dramatically the time necessary to execute effective marketing campaigns.
Product Development
Our future success will depend on our ability to maintain and develop
competitive technologies, to continue to enhance our current products and
services, and to develop and introduce new services that meet changing
conditions, including evolving client needs, new competitive service offerings,
emerging industry standards and rapidly changing technology in a timely and
cost-effective manner. The product development team has expertise in database
systems, network technology, digital print imaging systems, Internet protocols
and security, and computer-integrated manufacturing. Product development
expenses were $214,976 in 1996, $285,910 in 1997, $424,363 in 1998, and
$252,900 for the six months ended June 30, 1999. We expect to continue our
product innovation and maintain our leadership position by substantially
increasing investments in research and development.
Intellectual Property
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a
combination of copyright, trademark and trade secret laws and contractual
restrictions to establish and protect the proprietary aspects of our
technology. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. Finally, we
seek to avoid disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source
code.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, and to
determine the validity and scope of the proprietary rights of others. Any
resulting litigation could result in substantial costs and diversion of
resources and could have a material, adverse effect on our business operating
results.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability
to license the infringed technology, our business and operating results would
be significantly harmed.
Competition
The market for business-to-business e-commerce and Internet ordering and
purchasing is new and rapidly evolving, and competition is intense and is
expected to increase significantly in the future. Barriers to entry are
relatively insubstantial. We believe that the critical success factors for
companies seeking to create Internet business-to-business e-commerce solutions
include the following:
. quality and reliability of the Internet solution;
. infrastructure to support activities;
. access to capital to finance product development and marketing efforts;
. breadth and depth of product offerings;
. marketing, selling and brand recognition;
. strategic partnerships;
. installed base of customers;
. experience; and
. ease of use and convenience.
31
The market for printed business materials is intensely competitive. We
compete primarily with general commercial printers, which are either
independent or owned by print industry consolidators. The U.S. general
commercial printing industry is highly fragmented, with over 24,000 general
commercial printers.
Traditional general commercial printers often have long-standing
relationships with customers. We face substantial challenges in convincing
businesses to consider alternatives to their traditional printer. In addition,
printers typically have extensive local sales forces that regularly canvass and
solicit businesses in the areas they serve. General commercial printers compete
primarily on product pricing, product and service quality. To attract new
customers and retain our existing customers, we must compete effectively in
each of these areas. Imagex.com, Inc. is our primary competitor that offers
Internet-enabled print procurement solutions.
The database marketing industry in which we operate is highly competitive,
with no single dominant competitor. Within the industry, there are database
marketing service providers, analytical data application vendors, enterprise
software providers, systems integrators, consulting, market research and
advertising firms, list brokerage/list management firms and teleservices
companies. Many firms offer a limited number of services within a particular
geographic area, and several participants offer a broad array of information
services on a national or international basis. Competition is based on the
quality and reliability of products and services, technological expertise,
historical experience, ability to develop customized solutions for clients,
processing capabilities and price. Competitors in the data warehousing and
database services and mailing list processing sectors include Acxiom, Harte-
Hanks, Metromail, Experian, Dynamark, Epsilon and KnowledgeBase Marketing.
Many of our current and potential future competitors have or may have
substantially greater financial, marketing and other resources than we do. As a
result, they may be able to market their products, services and branding more
aggressively than we are able to, and may be able to significantly undercut our
pricing for extended periods of time. They may also be able to respond more
quickly and effectively to emerging new technologies and to changes in customer
requirements and preferences.
Employees
As of October 1, 1999, we employed 138 persons. We are not subject to any
collective bargaining agreement, and we believe that our relationship with our
employees is satisfactory.
Facilities
Our principal executive offices are located in Denver, Colorado. Our lease
for approximately 80,000 square feet at this location expires in 2015. We lease
our offices from KIMCO, a Colorado general partnership. Howard Harris, our
President and Chief Executive Officer, is a general partner of KIMCO. See
"Certain Transactions" for a description of the terms of this lease. In
addition, we lease a 40,000 square foot warehouse facility in Denver, Colorado
from an unrelated third party. After completion of this offering, we intend to
lease additional space in the Denver, Colorado area. We will locate our
research and development personnel and selected equipment at this new facility.
Legal Proceedings
We are not a party to any material legal proceedings.
32
MANAGEMENT
Executive Officers and Directors
The following table presents information about our executive officers and
directors:
Name Age Position
- ---- --- --------
Howard J. Harris.......... 50 President, Chief Executive Officer and Director
Joel I. Susel............. 42 Senior Vice President of Business Development
Gerald V. Harris.......... 74 Senior Vice President of Administration
David E. Born............. 44 Vice President of Database Marketing and Analysis
Charles S. Oliver......... 34 Vice President of Technical Coordination
Myles J. Joyce............ 52 Vice President of Sales
John P. Miller............ 45 Director
George W. Bryan........... 55 Director
Richard Gorelick.......... 60 Director
Jack Soden................ 53 Director
Howard J. Harris joined us in 1974 as Vice President of Marketing and
Design. In 1984, he was promoted to his current position of President and Chief
Executive Officer. Mr. Harris is also a member of our board of directors.
Before joining us, Mr. Harris was responsible for marketing and design at ABT
Associates, a government supported think tank in Cambridge, Massachusetts.
Before joining ABT, Mr. Harris worked for JFN Associates, a New York-based
design firm, where he was responsible for creating computer-assisted systems to
be used for space planning and interior design. Mr. Harris received a Bachelor
of Fine Arts degree from the Kansas City Art Institute and a Masters of
Industrial Design from the Pratt Institute in Brooklyn, New York. Mr. Harris is
the son of Gerald V. Harris.
Joel I. Susel joined us in 1991 as Vice President of Marketing. In 1997, he
was promoted to his current position of Senior Vice President of Business
Development. Prior to joining us, Mr. Susel spent five years with United
Artists Cable where he was responsible for national direct marketing,
advertising and consumer research. Prior to that, Mr. Susel spent three years
with Pepsi USA where he helped develop information-based marketing strategies
that utilized scanner tracking information and planned new product
introductions. Mr. Susel also spent two years in general management consulting
with Booz-Allen & Hamilton, Inc. Mr. Susel received a Bachelor of Arts degree
in Economics from Claremont McKenna College and a Masters of Business
Administration from the Harvard Business School.
Gerald V. Harris was our president and chief executive officer from 1957 to
1984. Currently, Mr. Harris serves as our Senior Vice President of
Administration. Mr. Harris received an undergraduate degree in marketing and
sales from the University of Denver. Gerald V. Harris is the father of Howard
J. Harris.
David E. Born serves as our Vice President of Database Marketing and
Analysis. Mr. Born joined us in 1992 as our Director of Database Marketing.
Prior to joining us, Mr. Born worked for both United Artists Cable and Daniels
and Associates where he was involved in the development and introduction of
several new cable industry products. Before joining United Artists, Mr. Born
served as a manager of US West's Research and Statistics group, where he
tracked customer satisfaction and attitudes and assessed demand for various
telephony products. Mr. Born graduated from the University of Iowa with an
undergraduate degree in psychology and a Masters of Business Administration.
Charles S. Oliver serves as our Vice President of Technical Coordination.
Mr. Oliver joined us in 1990 as a Computer Services Manager and was promoted to
his current position in 1997. Mr. Oliver received a degree in Computer Science
and Economics from the University of Colorado at Boulder.
Myles J. Joyce serves as our Vice President of Sales. Mr. Joyce joined us in
1996 as our Director of National Accounts. Mr. Joyce was promoted to his
current position in 1997. From 1989 to 1996, Mr. Joyce
33
served as Sales Manager for CFG Industries, a Denver-based printing company.
Mr. Joyce attended Richard J. Daly College in Chicago.
John P. Miller is President and Chief Executive Officer of Master Graphics,
our parent company, and a member of our board of directors. Prior to assuming
his positions with Master Graphics, Mr. Miller was the Chairman of the Board of
Directors and Chief Executive Officer of B&M Printing from December 1992 to
June 1997. Prior to 1992, Mr. Miller was a financial consultant, developer and
operator of businesses in the lodging, medical services and hospitality
industries. Mr. Miller received a Certified Financial Planner's degree
following his undergraduate studies at Louisiana State University.
George W. Bryan is a member of our board of directors. Mr. Bryan is Chief
Executive Officer of Sara Lee Foods in Memphis, Tennessee. Prior to being
appointed to his current position, Mr. Bryan was Senior Vice President at Sara
Lee Corporation. Mr. Bryan is currently a member of the board of directors of
Union Planters Corporation. Mr. Bryan graduated from Mississippi State
University in 1967 with a degree in Business Administration.
Richard Gorelick is a member of our board of directors. Mr. Gorelick is
president of Gorelick and Associates, Inc., a consulting firm working
exclusively within the graphic arts industry. Mr. Gorelick is also president of
the Graphic Arts Sales Foundation, a training organization in the graphic arts
industry. Mr. Gorelick has over thirty years of experience in the printing and
publishing industry. Before joining Gorelick and Associates, Mr. Gorelick was
Vice President of Sales and Marketing for Braceland Industries from 1980
through 1983. Mr. Gorelick received a Bachelor of Arts degrees in Journalism,
Political Science and Humanities from the University of Missouri.
Jack Soden is a member of our board of directors. Mr. Soden is President and
Chief Executive officer of Elvis Presley Enterprises, Inc. Mr. Soden joined
Elvis Presley Enterprises in 1981 and was named CEO in 1991 and President in
1998. Elvis Presley Enterprises is responsible for the management and marketing
of the Elvis Presley name. Prior to joining Elvis Presley Enterprises, Mr.
Soden worked as an investment banker.
Classes of Directors
Under the terms of our articles of incorporation, the board of directors has
been divided into three classes: Class I, Class II and Class III. Members of
each class hold office for staggered three-year terms. At each annual meeting
of shareholders, the shareholders will elect the successors to the directors
whose terms are expiring to serve from the time of their election and
qualification until the third annual meeting of shareholders following their
election or until a successor has been duly elected and qualified. Messrs.
Miller and Soden are Class I directors whose terms expires at the 2000 annual
meeting of shareholders. Messrs. Harris and Bryan are Class II directors whose
terms expire at the 2001 annual meeting of shareholders. Mr. Gorelick is a
Class III director whose term expires at the 2002 annual meeting of
shareholders.
Board Committees
The board of directors recently created an audit committee and a
compensation committee. The audit committee will review accounting practices
and procedures, the scope of the financial statement audit and recommend the
employment of the independent auditors. The members of the audit committee are
Messrs. Bryan and Gorelick. The compensation committee will evaluate and
approve the compensation policies for the executive officers and will
administer our employee benefit plans. The members of the compensation
committee are Messrs. Bryan and Gorelick.
Director Compensation
Upon completion of this offering, each non-employee director, other than Mr.
Miller, will be granted a fully-vested option to purchase 50,000 shares of our
common stock at the initial public offering price. Additionally, each non-
employee director, other than Mr. Miller, will be granted an option to purchase
10,000
34
shares of our common stock upon the date of the first board meeting in the
second calendar quarter of each year. The options will vest immediately and
will have an exercise price equal to the fair market value of the common stock
on the grant date. Each non-employee director will be paid $1,000 for each
directors or committee meeting he attends. We will reimburse all directors for
expenses they incur to attend directors' meetings.
Compensation Committee Interlocks and Insider Participation
Before this offering, we did not have a compensation committee, and
compensation decisions were made by the full board of directors. Upon
completion of this offering, the compensation committee will make all
compensation decisions. No interlocking relationship exists between the board
of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past.
Executive Compensation
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1998 by our chief
executive officer and each of our other four most highly compensated executive
officers.
Summary Compensation Table
Annual Compensation
-----------------------------
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ------ -------- ------- ------------
Howard J. Harris......................... 1998 $167,904 -- $9,668
President and Chief Executive Officer
Joel I. Susel............................ 1998 230,577 -- 3,408
Senior Vice President of Business
Development
Gerald V. Harris......................... 1998 159,872 -- 8,946
Senior Vice President of Administration
David E. Born............................ 1998 118,391 -- 4,182
Vice President of Database Marketing and
Management
Myles J. Joyce........................... 1998 112,724 -- 2,188
Vice President of Sales
Stock Options
We have never granted any stock option or other compensatory right to
acquire our common stock. Please refer to the discussion under the caption
"Prospectus Summary--The Offering" and "Shares Eligible for Future Sale--Stock
Options" for a description of options we intend to grant at the completion of
this offering.
Employment Agreements
Agreement with Howard Harris. Under a 5 year employment agreement dated
October 1, 1999, Mr. Harris serves as our President and Chief Executive
Officer. Under the terms of this agreement, Mr. Harris must devote
substantially all of his time and attention during business hours to our
affairs and to perform such duties and responsibilities as assigned to him by
our board of directors. He must also cooperate with us in any legal actions in
which we are a party and maintain the confidentiality of our affairs both
during and after his
35
employment. With limited exceptions, Mr. Harris has agreed not to compete with
us for up to one year (or the remaining term of his contract) after his
employment is terminated, depending upon the circumstances of the termination.
Our agreement with Mr. Harris may be extended for successive one year periods
unless either party gives notice not to extend the agreement.
Mr. Harris' initial base salary will be $225,000. His salary will be
reviewed annually and is subject to change each year based on our board's
determinations. Mr. Harris' salary may not be decreased by more than 5% from
his base salary in the prior year. Mr. Harris is also entitled to receive
incentive awards of up to 100% of his base salary based on certain performance
targets set by the compensation committee of our board of directors. Mr. Harris
may participate in all benefit programs available to our salaried employees. In
addition, we will maintain a life insurance policy on Mr. Harris' behalf for
the duration of his employment for the benefit of the beneficiary that he
selects.
Our employment agreement with Mr. Harris may be terminated at any time. If
we terminate Mr. Harris' employment without cause, we are required to pay him a
lump sum equal to 200% of the sum of his base salary and the annual average
incentive award that he received in the prior two years. If we terminate Mr.
Harris' employment without cause when we have undergone a change in control, we
will pay Mr. Harris at least 299% of the sum of his base salary and the annual
average incentive award that he received in the prior 2 years. Any stock
options granted to Mr. Harris will be exercisable in accordance with the terms
of the stock option agreement. If Mr. Harris' employment is terminated for a
valid reason or if he resigns his employment with us, we will only be required
to pay any unpaid base salary that is owed to him and any incentive
compensation pro rated for the period during which he was employed by us.
In the event of Mr. Harris' death, our obligations under the agreement will
terminate except to the extent of any unpaid base salary and any incentive
compensation payable on a pro rata basis for the year of death. In the event of
Mr. Harris' disability, we will continue to make payments under the agreement.
If his disability continues for three months, we may terminate the employment
agreement and continue to pay to him his base salary for a period of six
months. During the period of his disability and during which he is receiving
payments from us, Mr. Harris will continue to perform his duties under the
agreement to the extent that he is physically and mentally able to do so.
Employee Benefit Plans
1999 Equity Compensation Plan
In October 1999, our board of directors adopted and our shareholder approved
the 1999 Equity Compensation Plan and reserved 1,700,000 shares of common stock
for issuance under the plan. By encouraging stock ownership, we seek to
encourage our employees, officers, directors, advisers and consultants to
devote their best efforts to our economic success. Under the plan, our
employees, officers, directors, advisers and consultants may be granted:
. incentive stock options, which are stock options that qualify for
preferential treatment under section 422 of the Internal Revenue Code;
. non-qualified stock options, which are stock options that do not qualify
for such treatment under Section 422 of the Internal Revenue Code;
. stock appreciation rights, which allow an optionee to surrender its
stock options for payment; and
. shares of stock subject to restrictions.
The plan may be administered by our board of directors or a committee
appointed by the board of directors. The committee will have full power,
authority and discretion to administer and interpret the plan, to make factual
determinations with respect to the plan and to adopt and amend the rules,
regulations and
36
agreements necessary to conduct the plan. In determining who will be granted an
award under the plan and the number of shares to be granted, the committee may
take into account the nature of services rendered, the types of
responsibilities borne, the present and potential contributions to our success
and any other factors that the committee deems relevant.
Incentive stock options may be granted only to our employees, while non-
qualified stock options may be granted to any of the other eligible persons.
The option price of an incentive stock option may not be less than the fair
market value of the underlying shares of common stock on the date that the
option is granted. The option price of any non-qualified stock option will be
determined in the committee's sole discretion and may be greater than, less
than or equal to the fair market value of the underlying shares of common stock
on the date that the non-qualifying stock option is granted. The committee will
determine the term of each option provided that the term does not exceed ten
years. With respect to incentive stock options granted to holders of 10% of the
total combined voting power of our stock, the option price per share may not be
less than 110% of the fair market value of common stock on the date that the
option was granted and the term may not exceed five years. Options are
exercisable in accordance with the terms and conditions of the plan as
determined by the committee.
Stock appreciation rights may be granted under the plan to the holder of an
option either at the time the option is granted or at any time after the option
is granted as long as it is during the period when stock appreciation rights
may be granted under the plan. Any stock appreciation rights will be subject to
the terms and conditions of the committee as specified in the agreement with
respect to the award. Upon exercise of any stock appreciation rights, the
grantee will receive cash, our common stock, additional options or a
combination thereof, to be determined in the sole discretion of the committee.
When any stock appreciation rights are exercised, any options surrendered with
respect to the stock appreciation rights will no longer be exercisable.
The committee may grant restricted stock to such grantees in the amounts and
under the terms that it deems appropriate. Restricted stock will be subject to
restrictions on transfer, alienation, vesting, forfeitability and such other
restrictions as determined by the committee. Such restrictions may lapse
separately or in combination at such times and under such circumstances as
specified by the committee. Generally, the holder of restricted stock will have
the right to vote the restricted stock and to receive dividends with respect to
the stock until the shares are forfeited.
In the event that we merge with another company or our control otherwise
changes, unless the committee determines otherwise, all outstanding awards will
become fully exercisable. If we are not the surviving corporation, all
outstanding awards that are not exercised will be assumed by or replaced with
comparable options of the surviving corporation. If our control changes, the
committee may require that grantees surrender their outstanding awards in
exchange for payments from us in cash or common stock in an amount by which the
then fair market value of the shares of common stock subject to the grantee's
outstanding awards exceeds the option price.
The board may amend or terminate the plan at any time provided that if the
common stock becomes publicly traded, shareholder approval will be obtained if
it is required by section 162(m) of the Internal Revenue Code. In any event,
the plan will automatically terminate 10 years after its effective date.
1999 Non-Employee Director Stock Option Plan
In October 1999, our board of directors adopted and our sole shareholder
approved the 1999 Non-Employee Director Stock Option Plan and reserved 300,000
shares of our common stock for issuance under the plan. The purposes of the
plan are to:
. promote a greater identity of interest between our non-employee
directors and our shareholders;
. provide non-employee directors with an additional incentive to manage us
effectively and contribute to our success; and
37
. provide a form of compensation that will attract and retain highly
qualified individuals as members of our board of directors.
Any director who is not our employee or the employee of any of our
subsidiaries is eligible to participate in the plan.
The board of directors will administer the plan and have discretionary
authority to determine the details of each stock option agreement, to
interpret, prescribe, amend and rescind rules relating to the plan and to make
all other decisions for the plan's effective administration.
The board of directors will determine from time to time the non-employee
directors to be granted options, the number of shares of common stock subject
to the options and the terms and conditions with respect to the options. The
terms of each option may be not greater than 10 years from the date that the
option is granted. An option's exercise price will be equal to 100% of the fair
market value of the shares of common stock on the date the option is granted.
In the event that there is a stock split or other change in our
capitalization, the number of shares covered by each outstanding option and the
purchase price per share shall be proportionately adjusted as a result of the
change in the number of shares of common stock outstanding. If we merge with
another company or if our control otherwise changes, any option awarded under
the plan will become fully exercisable. If our control changes, our board of
directors may, in its sole discretion, direct us to cash out all outstanding
options at the highest price per share of common stock paid or offered in any
bona fide transaction related to a change in control at any time during the 60-
day period immediately preceding the occurrence of the control change.
Grants and awards under the plan are nontransferable other than by will or
the laws of descent and distribution (where there is no will in place) or as
approved by the board of directors on a case by case basis.
401(k) Plan
We sponsor a profit sharing plan with a Section 401(k) option intended to
qualify under Section 401 of the Internal Revenue Code of 1986. Participants
may make pre-tax contributions to the plan, subject to statutorily prescribed
annual limits. We match eligible contributions at a rate of 20%. Participant
contributions are held in trust as required by law. The Board of Directors may
authorize additional contributions of up to 15% of eligible employee
compensation. Individual participants may direct the trustee to invest their
accounts in authorized investment alternatives.
38
RELATIONSHIP WITH MASTER GRAPHICS
Eagle Direct, Inc. was formed on February 15, 1957. From February 15, 1957
to April 27, 1999, Eagle Direct operated as an independent general commercial
printing company. On April 27, 1999, Premier Graphics acquired all of the
outstanding common stock of Eagle Direct, Inc. for approximately $11 million.
Premier Graphics is the operating subsidiary of Master Graphics. After the
acquisition, Eagle Direct was merged into Premier Graphics. In anticipation of
this offering:
. Master Graphics formed EagleDirect.com, inc. as a subsidiary of Master
Graphics in September 1999; and
. Premier Graphics sold all of the assets formerly owned by Eagle Direct
to EagleDirect.com for $11.5 million.
The separation of EagleDirect.com from Master Graphics will be effected
pursuant to a Separation Agreement and other ancillary agreements that will
govern various interim and ongoing relationships between EagleDirect.com and
Master Graphics. These agreements relate to the acquisition of our assets, this
offering, the acquisition of printing services from Master Graphics, tax
matters and the provision of interim services.
All of our agreements with Master Graphics were made in the context of a
parent-subsidiary relationship and were negotiated within the context of our
relationship with Master Graphics. Although we generally believe that the terms
of these agreements are consistent with fair market values, we cannot assure
you that the prices charged to us, or by us, under these agreements are not
higher or lower than the prices that may be charged by, or to, unaffiliated
third parties for similar services.
We have set forth below a summary description of the Separation Agreement
and each of the ancillary agreements. This description, which summarizes the
material terms of such agreements, is not complete. You should read the full
text of these agreements, which have been filed with the SEC as exhibits to the
registration statement and of which this prospectus is a part.
Separation Agreement
The Separation Agreement sets forth our agreements with Master Graphics with
respect to the principal corporate transactions required to effect the
transfers of assets and assumptions of liabilities necessary to separate our
company from Master Graphics, and other agreements governing our relationship
thereafter.
Transfer of Assets and Assumption of Liabilities
On October 1, 1999, Premier Graphics transferred to us all assets used in or
related to the Eagle Direct division of Premier Graphics. In exchange for these
assets, we delivered a promissory note in the principal amount of $11.5 million
to Premier Graphics. The promissory note bears interest at a rate of 8 1/2% per
year. We will use $ of the net proceeds of this offering to repay a portion
of the promissory note. The remaining portion of the promissory note will be
payable in equal quarterly installments of principal plus accrued interest and
will mature five years from the closing of this offering. Premier Graphics did
not make any representation or warranty with respect to any assets transferred
to us. At the time of the transfer, we assumed all liabilities associated with
the operation of the Eagle Direct division of Premier Graphics.
Indemnification
We have agreed to indemnify Master Graphics against any losses, claims,
damages or liabilities arising from the liabilities transferred to us and the
conduct of our business after October 1, 1999. Master Graphics has agreed to
retain and indemnify us against any losses, claims, damages or liabilities
arising from the conduct of our business prior to October 1, 1999.
39
Covenants
After the offering, Master Graphics will continue to own a significant
portion of our common stock. We have agreed that, for so long as Master
Graphics is required to consolidate our results of operations and financial
position or account for its investment in our company, we will provide Master
Graphics financial information regarding our company, including copies of all
quarterly and annual financial information and other reports and documents we
intend to file with the SEC prior to such filings, as well as final copies upon
filing, and copies of our budgets and financial projections, as well as the
opportunity to meet with our management to discuss such budgets and
projections. We have also agreed to consult with Master Graphics regarding the
timing and content of earnings releases and cooperate fully (and cause our
accountants to cooperate fully) with Master Graphics in connection with any of
its public filings. This covenant is subject to appropriate confidentiality
provisions to protect the confidentiality commitments we have made to our
customers.
We have agreed that, for so long as Master Graphics is required to
consolidate our results of operations and financial position or account for its
investment in our company, we will not change our auditors, which currently are
the same auditors as those retained by Master Graphics, without Master
Graphics' prior written consent and will use our best efforts to enable our
auditors to complete their audit of our financial statements so that they will
date their opinion the same date that they date their opinion on Master
Graphics' financial statements. We have also agreed to provide to Master
Graphics and its auditors all information required for Master Graphics to meet
its schedule for the filing and distribution of its financial statements and to
make available to Master Graphics and its auditors all work papers related to
the annual audit of our company and make available to Master Graphics the
personnel who perform the annual audit and our subsidiaries' books and records
so that Master Graphics and its auditors may conduct reasonable audits relating
to our financial statements. We have also agreed to adhere to certain specified
accounting standards and to notify and consult with Master Graphics regarding
any changes to our accounting principles and to make any changes to our
accounting estimates and principles requested by Master Graphics.
We have agreed generally to indemnify Master Graphics and its affiliates
against all liabilities arising out of any material untrue statements and
omissions in this prospectus and the registration statement of which it is a
part. However, our indemnification of Master Graphics does not apply to
information relating to Master Graphics. Master Graphics has agreed to
indemnify us for this information.
Tax Matters
We will enter into a tax allocation agreement with Master Graphics to govern
the allocation of tax liabilities and to set forth agreements with respect to
certain other tax matters. Generally, under the Internal Revenue Code, we will
cease to be a member of the Master Graphics' affiliated group if Master
Graphics owns less than 80% of our outstanding capital stock.
For tax periods (or portions thereof) during which we are a member of the
Master Graphics consolidated, combined or unitary group, we will be apportioned
our share of the group's income tax liability based on our taxable income
determined separately from Master Graphics' taxable income. We will pay our
calculated taxes to Master Graphics, which will then file a consolidated,
combined or unitary return with the appropriate tax authorities. There may be
certain U.S. state or local jurisdictions in which we will file separate, not
combined or consolidated, income tax returns for such tax periods. In that
circumstance, we would file a tax return with the appropriate tax authorities,
and pay all taxes directly to the tax authority. We will be compensated for tax
benefits generated by our company before tax deconsolidation and used by the
Master Graphics consolidated group. We will prepare and file all tax returns,
and pay all income taxes due with respect to all tax returns required to be
filed by us for all tax periods after we cease to be a member of the Master
Graphics consolidated, combined or unitary group.
Master Graphics is responsible for most U.S. tax adjustments related to
EagleDirect.com for all periods or portions thereof ending on or before the
effective date of the offering. In addition, we and Master Graphics
40
have agreed to cooperate in any tax audits, litigation or appeals that involve,
directly or indirectly, periods prior to the time that we cease to be a member
of the Master Graphics consolidated group. EagleDirect.com and Master Graphics
have agreed to indemnify each other for tax liabilities resulting from the
failure to cooperate in such audits, litigation or appeals, and for any tax
liability resulting from the failure to maintain adequate records.
Notwithstanding the tax allocation agreement, for all periods in which
Master Graphics owns or owned 80% or more of our capital stock, we will be
included in Master Graphics' consolidated group for federal income tax
purposes. If Master Graphics or other members of the consolidated group fail to
make any federal income tax payments, we would be liable for the shortfall
since each member of a consolidated group is liable for the group's entire tax
obligation.
Transition Services Agreement
We have entered into a transition services agreement with Master Graphics.
Under this agreement, Master Graphics will provide us with various services
relating to employee payroll and benefits, use of facilities, certain
management information systems, insurance coverage and other administrative
services. Master Graphics will provide us with these services for a period of
up to 2 years.
The agreement requires us to use all commercially reasonable efforts to
obtain these transition services from a source other than Master Graphics prior
to September 30, 2001. If, however, we cannot obtain any transition service
from a source other than Master Graphics and the transition service is
necessary for us to continue to operate our business, then, we may require
Master Graphics to continue to provide the transition service for an additional
period not to exceed six months.
Generally, we will pay Master Graphics for these transition services an
amount equal to the cost historically allocated by Master Graphics to our
business, adjusted to reflect any changes in the nature, cost or level of the
services so provided. If we require Master Graphics to provide us with any
transition service after the expiration of the 2-year transition period, we
will pay Master Graphics the fair market value of these services.
CERTAIN TRANSACTIONS
We lease our premises from KIMCO, a Colorado general partnership with Howard
Harris, our President and Chief Executive Officer, as its general partner. We
entered into the lease agreement on September 1, 1995 and the lease was amended
on April 26, 1999. The lease will expire on September 1, 2015. The rent payable
for the full term of the lease is $4,186,776, of which $17,444.90 is payable on
a monthly basis on the first of each month. For each of the years ended
December 31, 1996, 1997 and 1998, we paid $198,600 under the lease. We believe
that the terms of the lease are as favorable to us as we would have received
from a party unaffiliated with us.
We have entered into arrangements with Howard J. Harris, our President and
Chief Executive Officer, that replace existing rights Mr. Harris had to receive
payments in the future based on our performance. Master Graphics had granted
Mr. Harris these rights to future payments as part of the purchase price it
paid when it bought our company. Under these arrangements, we granted Mr.
Harris a warrant to purchase shares of our common stock for $.01 a share. The
number of shares subject to the warrant will be determined by dividing $6
million by the initial public offering price of our common stock. The warrant
will be fully vested and exercisable at the closing of our initial public
offering. Additionally, Master Graphics has agreed to give a $3 million
subordinated promissory note to Mr. Harris and $2 million of the cash proceeds
it receives from the sale of shares in this offering.
On December 31, 1998, Eagle Direct owed $358,796 to Howard Harris, $893,671
to Leona Harris, and $546,044 to Gerald V. Harris. On April 29, 1999, Eagle
Direct owed $433,796 to Howard Harris, $890,386 to Leona Harris, and $543,991
to Gerald V. Harris. These notes bore interest at 10% per annum and were paid
off in April 1999 in connection with the acquisition of Eagle Direct by Premier
Graphics.
41
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of September 30, 1999 and as adjusted to
reflect the sale of the shares of common stock offered in this offering by:
. each person who owns beneficially more than 5% of our common stock;
. each of our executive officers;
. each of our directors; and
. all of our executive officers and directors as a group.
For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares that the person or group has the right to
acquire within 60 days or with respect to which the person has or shares voting
or investment power. For purposes of computing the percentages of outstanding
shares held by each person or group of persons, shares which the person or
group has the right to acquire within 60 days after such date are deemed to be
outstanding for purposes of computing the percentage for the person or group
but are not deemed to be outstanding for the purpose of computing the
percentage of any other person or group. As of September 30, 1999, there were
1,000 shares of common stock outstanding.
Percentage of
Common Stock
Beneficially
Owned
Number of -----------------
Shares Shares
Beneficially Being Before After
Name of Beneficial Owner Owned Offered Offering Offering
- ------------------------ ------------ ------- -------- --------
Master Graphics, Inc (1)
6075 Poplar Avenue, Suite 401
Memphis, Tennessee 38119................ 1,000 100%
John P. Miller (2)
6075 Poplar Avenue, Suite 401
Memphis, Tennessee 38119................ 1,000 100%
Howard J. Harris (3)....................
Gerald V. Harris........................ 0 * *
Joel I. Susel........................... 0 * *
David E. Born........................... 0 * *
Charles S. Oliver....................... 0 * *
Myles J. Joyce.......................... 0 * *
George W. Bryan......................... 0 * *
Richard Gorelick........................ 0 * *
Jack Soden.............................. 0 * *
All Directors and executive officers as
a group
(10 persons)(3)........................ 1,000 100%
- --------
* Less than one percent
(1) Master Graphics is currently the sole shareholder of EagleDirect.com.
Master Graphics is offering of its shares of common stock and has granted
the underwriters an option to purchase shares at the public offering price
to cover any over-allotments.
(2) John P. Miller is the majority shareholder, President, Chief Executive
Officer and a member of the board of directors of Master Graphics. Because
of Mr. Miller's relationship with Master Graphics, he may be deemed to
beneficially own the shares of EagleDirect.com common stock owned by Master
Graphics.
(3) All of these shares are subject to a warrant that is described in "Certain
Transactions."
42
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
articles of incorporation and bylaws are only summaries and are qualified by
reference to our charter and bylaws filed as exhibits to the Registration
Statement of which this prospectus is a part. Our authorized capital stock
consists of 100,000,000 shares of common stock, $.001 par value per share, and
10,000,000 shares of preferred stock, $.001 par value per share.
Common Stock
Holders of the common stock are entitled to receive, as, when and if
declared by the board of directors, dividends and other distributions in cash,
stock or property from our assets or funds legally available for those purposes
subject to any dividend preferences that may be attributable to preferred
stock. Holders of common stock are entitled to one vote for each share held of
record on all matters on which shareholders may vote. Holders of common stock
are not entitled to cumulative voting for the election of directors.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable. In the event of our liquidation, dissolution or
winding up, holders of common stock are entitled to share ratably in the assets
available for distribution.
Preferred Stock
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 10,000,000 shares of preferred stock.
Before this offering, there were no shares of preferred stock outstanding.
Currently, we have no plans to issue a series of preferred stock. Our board of
directors may, without shareholder approval, issue preferred stock with
dividend rates, redemption prices, preferences on liquidation or dissolution,
conversion rights, voting rights and any other preferences, which rights and
preferences could adversely affect the voting power of the holders of common
stock. Issuance of preferred stock could make it harder for a third party to
acquire, or could discourage or delay a third party from acquiring, a majority
of our outstanding stock.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board
of directors will be elected each year. This provision, along with the
provision authorizing the board of directors to fill vacant directorships or
increase the size of the board of directors, may deter a shareholder from
removing incumbent directors and gaining control of the board of directors by
filling vacancies created by the removal with its own nominees.
Shareholder Action; Special Meeting of Shareholders
The articles of incorporation state that shareholders may not take action by
written consent, but only at duly called annual or special meetings of
shareholders. The articles of incorporation also provide that special meetings
of shareholders may be called only in the event (a) our board of directors or
our President calls such a meeting or (b) the holders of at least fifty percent
(50%) of all the votes entitled to be cast sign, date, and deliver to our
secretary one or more written demands for the meeting describing the purpose or
purposes for which it is to be held, including all statements necessary to make
any statement of such purpose not incomplete, false or misleading, and include
any other information specified in Schedule 14A, Rule 14e-3, Rule 14a-8, or
Rule 14a-11 of the Rules and Regulations of the Securities and Exchange
Commission.
Advance Notice Requirements For Shareholder Proposals and Director Nominations
The bylaws provide that shareholders who want to nominate candidates for
election as directors at an annual meeting of shareholders must provide timely
notice in writing. To be timely, a shareholder's notice must
43
be given, either by personal delivery or the United States mail to the
Secretary of the Corporation not later than one hundred twenty (120) days in
advance of the anniversary date of the proxy statement for the previous year's
annual meeting.
For a proposal to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing
to the Secretary of the Corporation and the proposal and the shareholder must
comply with Rule 14a-8 under the Securities Exchange Act of 1934, as amended.
The bylaws also specify requirements as to the form and content of a
shareholder's notice. These provisions may keep shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make it more difficult or discourage an attempt to
obtain control of us by a proxy contest, tender offer, merger or otherwise.
Limitations on Liability and Indemnification of Officers and Directors
Our articles of incorporation eliminate, subject to certain exceptions, the
personal liability of our directors for monetary damages for their breach of
fiduciary duty. However, these provisions do not eliminate or limit the
personal liability of directors for the following:
. any breach of the director's duty of loyalty;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful corporate distributions; or
. any transaction from which a director derives an improper personal
benefit.
These provisions will limit the remedies available to you as a shareholder.
If you are dissatisfied with a decision of the board of directors protected by
this provision your only remedy may be to bring a suit to prevent the action of
the board. This remedy may not be effective in many situations because
shareholders are often unaware of a transaction or event before board action
relating to that transaction or event. In these cases, the shareholders could
be injured by a board's decision and have no effective remedy.
Our articles of incorporation and bylaws also provide that we will indemnify
our directors and officers to the fullest extent permitted by Colorado law. We
have been advised that, in the opinion of the Securities and Exchange
Commission, indemnification for liabilities under the Securities Act is against
public policy and is unenforceable.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Union Planters
National Bank. Its address is 6200 Poplar Avenue, Memphis, Tennessee 38119, and
its telephone number at this location is (901) 580-5200.
Nasdaq National Market Listing
We have applied for listing on the Nasdaq National Market under the symbol
"EGLD."
44
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and
our ability to raise equity capital in the future on terms favorable to us.
After the offering, shares of our common stock will be outstanding,
assuming that the underwriters do not exercise the over-allotment option. Of
these shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining shares of common stock held by
our existing shareholder are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, is entitled to
sell the shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Our sole shareholder,
Master Graphics, will be our affiliate for purposes of Rule 144 for so long as
it controls, is controlled by, or under common control with EagleDirect.com.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with certain restrictions, including the holding period, contained in
Rule 144. We have not issued any options or shares to which Rule 701 would
apply.
Lock-Up Agreements
Master Graphics and all of our executive officers and directors have signed
lock-up agreements under which they have agreed not to transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Hoak
Breedlove Wesneski & Co.
45
Stock Options
Immediately after this offering we intend to file a registration statement
under the Securities Act covering 2,000,000 shares of common stock reserved for
issuance under our stock option plans. We intend to issue options to purchase
shares of our common stock at an exercise price equal to the initial
public offering price of our common stock. This registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under that
registration statement will, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after any lock-up agreements expire.
46
UNDERWRITING
Under the underwriting agreement dated the date of this prospectus, the
underwriters named below, through their representative Hoak Breedlove Wesneski
& Co., have each agreed to purchase from EagleDirect.com and the selling
shareholder the following respective numbers of shares of common stock at the
initial public offering price less the underwriting discounts and commissions
listed on the cover page of this prospectus.
Number
of
Underwriter Shares
- ----------- -------
Hoak Breedlove Wesneski & Co. ..........................................
-------
Total.................................................................
=======
The underwriting agreement provides that the obligations of the underwriters
to purchase the shares of common stock are subject to specified conditions. The
underwriters are obligated to purchase all of the shares of common stock
offered hereby, other than those covered by the over-allotment option described
below, if any of the shares are purchased.
The following table shows the per-share and total underwriting discounts and
commissions to be paid to the underwriters by EagleDirect.com and the selling
shareholder. These amounts are shown assuming both no exercise and full
exercise of the underwriters' over-allotment option to purchase
additional shares from EagleDirect.com.
Paid by the Selling
Paid by EagleDirect.com Shareholder
------------------------- -------------------------
No exercise Full exercise No exercise Full exercise
----------- ------------- ----------- -------------
Per Share................... $ $ $ $
Total..................... $ $ $ $
The underwriters have an option to buy up to an additional shares from
EagleDirect.com to cover over-allotments at the same price per share as the
initial shares to be issued to the underwriters. They may exercise that option,
in whole or in part, at any time within 30 days after the date of this
prospectus. If the underwriters exercise this option, then each underwriter
will be obligated, subject to specified conditions, to purchase additional
shares of common stock proportionate to the underwriter's initial commitment as
indicated in the preceding table, EagleDirect.com will be obligated, under the
over-allotment option, to sell such shares to the underwriters.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be $ million.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to selected dealers at the public offering price less a selling concession not
in excess of $ per share. The underwriters may allow, and the selected
dealers may reallow, a concession not in excess of $ per share to certain
brokers and other dealers. After the offering, the underwriters may change the
offering price and other selling terms. The underwriters expect to
47
deliver the shares against payment in New York, New York, on , 1999. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments
which the underwriters are required to make as a result of those liabilities.
Master Graphics and each of our executive officers and directors have agreed
not to offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction which is designed to, or could be expected to, dispose of any
portion of, any common stock for a period of 180 days after the effective date
of the registration statement of which this prospectus is a part without the
prior written consent of Hoak Breedlove Wesneski & Co. This consent may be
given at any time without public notice. We have entered into a similar
agreement, except that we may issue, and grant options or warrants to purchase
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, pursuant to the exercise of
outstanding options and warrants under the existing stock option plans or the
exercise of Howard Harris' warrant.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase shares of common
stock. As an exemption to these rules, the representative is permitted to
engage in certain transactions that stabilize the price of the common stock.
Such transactions may consist of bids or purchases for the purposes of pegging,
fixing or maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering (i.e., they sell more shares than are set forth on
the cover page of this prospectus), the representative may purchase common
stock in the open market to reduce that short position. The representative also
may elect to reduce any short position by exercising all or part of the over-
allotment option. The underwriters have informed us that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
The representative also may impose a penalty bid on certain underwriters and
selling group members. This means that if the representative purchases shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might affect the price of a security by
discouraging resales of the security by purchasers in an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the effect that the transactions described above may have on
the price of our common stock. In addition, neither we nor any of the
underwriters makes any representation that the representatives will engage in
these transactions or that these transactions, once commenced, will not be
discontinued without notice.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. The initial offering price for our common stock was determined by
negotiation between the representative of the underwriters, the selling
shareholder and us. The representative considered the following factors in
determining the public offering price:
. prevailing market and economic conditions;
. our historical operations;
. assessment of our management;
48
. the present stage of our development;
. our business potential and future prospects; and
. the market capitalizations and stages of development of other companies
which the representatives believe to be comparable to us.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Bass, Berry & Sims PLC, Memphis, Tennessee. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Haynes and Boone, LLP, Dallas, Texas.
EXPERTS
The financial statements of Eagle Direct, Inc. as of December 31, 1997 and
1998 and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act of 1933, that registers the
shares of common stock offered hereby. This prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedule filed with the Registration Statement. For more information about us
and the common stock offered hereby, you should review the Registration
Statement and the exhibits and schedule filed with the Registration Statement.
Statements contained in this prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete
and, in each instance, you should review the copy of such contract or other
document filed as an exhibit to the Registration Statement. A copy of the
Registration Statement and the exhibits and schedule filed with the
Registration Statement may be inspected and copied at the following location of
the Securities and Exchange Commission:
Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
You may also obtain copies of all or any part of the Registration Statement
from that office at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
public reference room. The Securities and Exchange Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
49
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-2
Balance Sheets as of December 31, 1997 and 1998.......................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998.................................................................... F-4
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1997, and 1998....................................... F-5
Statements of Cash Flow for the years ended December 31, 1996, 1997, and
1998.................................................................... F-6
Notes to Financial Statements............................................ F-7
Condensed Balance Sheet as of June 30, 1999 (unaudited).................. F-11
Condensed Statements of Operations for the six months ended June 30, 1998
and 1999 (unaudited).................................................... F-12
Condensed Statements of Cash Flow for the six months ended June 30, 1998
and 1999 (unaudited).................................................... F-13
Notes to Condensed Financial Statements (unaudited)...................... F-14
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Eagle Direct, Inc.:
We have audited the accompanying balance sheets of Eagle Direct, Inc. as of
December 31, 1997 and 1998, and the related statements of operations, changes
in shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eagle Direct, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998
in conformity with generally accepted accounting principles.
KPMG LLP
Memphis, Tennessee
October 1, 1999
F-2
EAGLE DIRECT, INC.
BALANCE SHEETS
December 31,
---------------------
1997 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 12,063 $ 100,958
Accounts receivable, net................................ 1,526,744 2,225,946
Inventories............................................. 265,991 269,658
Prepaid expenses and other current assets............... 103,135 145,936
---------- ----------
Total current assets.................................. 1,907,933 2,742,498
---------- ----------
Property, plant and equipment, net........................ 2,657,762 2,373,750
Other assets.............................................. 26,330 26,330
---------- ----------
Total assets.......................................... $4,592,025 $5,142,578
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................... $ 210,212 $ 127,508
Bank line of credit..................................... 450,000 0
Accounts payable........................................ 196,568 251,728
Customer deposits....................................... 251,113 771,912
Accrued compensation.................................... 282,279 343,964
Other accrued expenses.................................. 87,782 100,817
---------- ----------
Total current liabilities............................. 1,477,954 1,595,929
---------- ----------
Notes payable, officers, net of current maturities........ 1,668,796 1,776,339
Notes payable, net of current maturities.................. 105,336 0
Commitments and contingencies
Shareholders' equity:
Common stock, $1 par value; 50,000 shares authorized;
4,000 shares issued and outstanding.................... 4,000 4,000
Retained earnings....................................... 1,335,939 1,766,310
---------- ----------
Total shareholders' equity............................ 1,339,939 1,770,310
---------- ----------
Total liabilities and shareholders' equity............ $4,592,025 $5,142,578
========== ==========
See accompanying notes to financial statements.
F-3
EAGLE DIRECT, INC.
STATEMENTS OF OPERATIONS
Years ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
Net revenue............................. 14,766,887 13,116,414 15,721,872
Cost of revenue......................... 11,110,618 9,725,648 11,138,707
----------- ----------- -----------
Gross profit........................ 3,656,269 3,390,766 4,583,165
Sales and marketing expenses............ 1,914,754 1,814,165 1,848,020
General and administrative expenses..... 1,292,056 1,403,228 1,634,431
Research and development expenses....... 214,976 285,910 424,363
----------- ----------- -----------
Income (loss) from operations....... 234,483 (112,537) 676,351
Other income (expense):
Interest expense...................... (276,902) (228,568) (213,553)
Investment income..................... 6 6,049 4,182
Gain (loss) on disposal of assets..... 7,571 1,181 (44,457)
Other................................. 12,008 9,101 7,848
----------- ----------- -----------
Other expense, net.................. (257,317) (212,237) (245,980)
----------- ----------- -----------
Net income (loss)................... $ (22,834) $ (324,774) $ 430,371
=========== =========== ===========
Pro forma information (note 10):
Reported net income................... $ 430,371
Pro forma income tax expense
(benefit)............................ 160,529
-----------
Pro forma net income.................. $ 269,842
-----------
Pro forma earnings per share.......... $ 269.84
-----------
See accompanying notes to financial statements.
F-4
EAGLE DIRECT, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
Total
Common Retained shareholders'
stock earnings equity
------ ---------- -------------
Balances, December 31, 1995.................... $4,000 $1,683,547 $1,687,550
Net income (loss)--1996...................... -- (22,834) (22,834)
------ ---------- ----------
Balances, December 31, 1996.................... 4,000 1,660,713 1,664,713
Net income (loss)--1997...................... -- (324,774) (324,774)
------ ---------- ----------
Balances, December 31, 1997.................... 4,000 1,335,939 1,339,939
Net income (loss)--1998...................... -- 430,371 430,371
------ ---------- ----------
Balances, December 31, 1998.................... $4,000 $1,766,310 $1,770,310
====== ========== ==========
See accompanying notes to financial statements.
F-5
EAGLE DIRECT, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------
1996 1997 1998
--------- ---------- ---------
Cash flows from operating activities:
Net income (loss).......................... $ (22,834) $ (324,774) $ 430,371
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 639,305 639,042 622,425
Changes in operating assets and liabili-
ties:
(Increase) decrease in:
Accounts receivable.................... (313,532) 684,480 (699,202)
Inventories............................ (5,052) 86,776 (3,667)
Prepaid expenses and other assets...... 1,612 140,805 (42,801)
Increase (decrease) in:
Accounts payable....................... 24,218 (25,596) 55,160
Accrued expenses....................... 225,427 (405,238) 595,519
--------- ---------- ---------
Net cash provided by operating activ-
ities............................... 549,144 795,495 957,805
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securi-
ties...................................... 7,793 32,885 --
Purchases of property, plant and equip-
ment...................................... (457,476) (467,186) (338,413)
Decrease (increase) in cash surrender value
of life
insurance................................. (2,227) (3,556) --
--------- ---------- ---------
Net cash used in investing activi-
ties................................ (451,910) (437,857) (338,413)
--------- ---------- ---------
Cash flows from financing activities
Repayments of long-term debt............... (148,426) (191,889) (194,460)
Proceeds from (repayments of) draws on bank
line of credit............................ 150,000 (300,000) (450,000)
Proceeds from (repayments of) borrowings
from officers............................. (49,474) (29,245) 113,963
--------- ---------- ---------
Net cash used in financing
activities.......................... (47,900) (521,134) (530,497)
--------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 49,334 (163,496) 88,895
Cash and cash equivalents, beginning of
year........................................ 126,225 175,559 12,063
--------- ---------- ---------
Cash and cash equivalents, end of year....... $ 175,559 $ 12,063 $ 100,958
========= ========== =========
Cash paid for interest....................... $ 262,794 $ 241,940 $ 214,289
========= ========== =========
See accompanying notes to financial statements.
F-6
EAGLE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
1. Organization and Summary of Significant Accounting Policies
(a) Organization and Nature of Business
Eagle Direct, Inc. (the "Company") was organized in 1957 and is
headquartered in Denver, Colorado. The Company is a fully integrated marketing
services organization. It develops concepts for direct marketing programs,
produces the printed material required, fulfills orders and tracks them, mails
and delivers the material, and reports on and evaluates the success of the
programs. The Company performs print production and database management
services using the Internet when applicable to provide on-line access to its
customers. The Company operates nationally and grants credit to customers
throughout the United States.
(b) Property, Plant, and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided
over the estimated useful lives of the assets using straight-line and
accelerated methods.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
(d) Income Taxes
The shareholders of the Company have elected, under the Subchapter S
Corporation provisions of the Internal Revenue Code, for earnings and losses
to be taxed directly to the shareholders. Accordingly, no provision for income
taxes has been made in the accompanying statements of operations.
(e) Cash Equivalents
The Company considers money market accounts, and certificates of deposit
with an original maturity of three months or less, to be cash equivalents.
(f) Use of Estimates
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosures of contingent assets
and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from
those estimates.
(g) Profit Sharing Plan
The Company sponsors a profit sharing plan with a Section 401(k) option
covering all eligible employees. The Company matches employee contributions at
a rate of 20%. Matching contributions were $29,364, $26,029, and $39,681 for
the years ended December 31, 1996, 1997, and 1998. The Board of Directors may
authorize additional contributions of up to 15% of eligible employee
compensation. No additional contributions were authorized for the years ended
December 31, 1996, 1997 and 1998.
(h) Trade Receivables
The Company's trade receivables represent billings for completed jobs or
delivered products. The Company performs on-going credit evaluations of its
customers and generally does not require collateral on trade receivables. The
Company believes that adequate allowances are maintained for any uncollectible
accounts.
F-7
EAGLE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(i) Revenue Recognition
Revenue from the sales of printed materials, as well as revenue attributable
to fulfillment and mailing services, is recognized upon shipment. Revenue from
marketing performance measurement services is recognized upon delivery of
related reports to the Company's customers.
(j) Research and Development
Research and development costs are expensed as incurred.
2. Inventories
Inventories as of December 31, 1997 and 1998 consisted of the following:
1997 1998
-------- --------
Raw materials........................................... $109,399 $ 99,234
Work in-process......................................... 156,592 170,424
-------- --------
Total................................................. $265,991 $269,658
======== ========
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Estimated December 31
Useful ------------------------
Lives 1997 1998
----------- ----------- -----------
Leasehold improvements............. 20-25 years $ 1,723,536 $ 1,734,935
Machinery and equipment............ 3-10 years 5,439,050 5,144,001
Office furniture and equipment..... 3-10 years 222,598 225,585
Automotive equipment............... 3-5 years 117,354 144,106
----------- -----------
$ 7,502,538 $ 7,248,627
Accumulated depreciation........... (4,844,776) (4,874,877)
----------- -----------
$ 2,657,762 $ 2,373,750
=========== ===========
F-8
EAGLE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Bank Line of Credit
The Company had a $1,000,000 revolving line of credit with a commercial
bank. At December 31, 1998 there were no balances outstanding. The line of
credit is secured by accounts receivable, inventory, fixed assets and
intangible assets of the Company and personal guarantees of the sole
stockholder and the officers. The line of credit expired on April 26, 1999.
6. Notes Payable--Officers
Notes payable to officers totaling $1.7 million and $1.8 million at December
31, 1997 and 1998, respectively, were comprised of a series of unsecured 10%
notes, the majority of which were due in lump sum in June and July, 2003;
interest was generally payable on an annual basis. These notes were paid off
by Premier Graphics, Inc. upon its acquisition of the Company in April 1999
(see note 11).
7. Notes Payable
A summary of long-term debt, excluding notes to officers, follows:
December 31
--------------------
1997 1998
--------- ---------
Note payable to bank in monthly installments of
$11,360,
including interest at 9.0%, due May 1999; secured
by
equipment and stockholder guarantee............... $ 180,680 $ 55,543
Note payable to bank in monthly installments of
$6,436;
including interest at 9.2%, due August 1999; se-
cured by
equipment and stockholder guarantee............... 119,116 49,793
--------- ---------
Total notes payable................................ $ 299,796 $ 105,336
Less current maturities............................ (194,460) (105,336)
--------- ---------
Notes payable, net of current maturities......... $ 105,336 $ --
========= =========
This debt was paid off by Premier Graphics, Inc. upon its acquisition of the
Company in April 1999 (see note 11).
8. Operating Lease Commitments
The Company leases its business premises from Kimco, a partnership owned by
the stockholder and a family member. The lease requires monthly rent payments
of $17,445 and requires the Company to pay all operating expenses of the
business premises including insurance and property tax. The lease expires in
September, 2015.
The Company, as well as two officers of the Company, were guarantors of debt
incurred by Kimco to acquire certain property, a portion of which is leased to
the Company as described above. The outstanding debt at December 31, 1998 for
which the Company was contingently liable was $1,400,000. The debt was repaid
in April, 1999.
The Company also leases additional warehouse space adjacent to its business
premises. The lease requires monthly rent payments of $3,490. The lease
expired in May 1999, and the space is currently being rented on a month-to-
month basis.
F-9
EAGLE DIRECT, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of December 31, 1998 are:
1999........................................................... $ 223,300
2000........................................................... 209,340
2001........................................................... 209,340
2002........................................................... 209,340
2003........................................................... 209,340
Thereafter..................................................... 2,459,745
----------
$3,520,405
==========
Total rent expense for the years ended December 31, 1996, 1997 and 1998 was
$211,933, $230,600 and $236,361 respectively.
9. Segment and Related Information
Based on the criteria of Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information,
management of the Company concluded that it operates in the single segment of
marketing services. Revenues attributable to the Company's significant
services are presented below.
Years ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
Printing............................. $ 4,677,686 $ 3,941,074 $ 5,329,455
Mailing and fulfillment.............. 6,832,332 5,896,757 6,716,897
Marketing performance measurement.... 2,907,389 2,868,208 3,162,142
Other................................ 349,480 410,375 513,378
----------- ----------- -----------
Total revenues..................... $14,766,887 $13,116,414 $15,721,872
=========== =========== ===========
Included in mailing and fulfillment revenues are charges to customers for
related freight and postage incurred by the Company. These charges, which are
equivalent to the Company's cost of freight and postage, totaled $5.0 million,
$3.8 million and $4.7 million in 1996, 1997 and 1998, respectively.
10. Pro Forma Financial Information
Until its acquisition by Premier Graphics, in April, 1999, the Company was
treated as a Subchapter S Corporation for income tax purposes, and
consequently no income tax provision was required in the Company's financial
statements. For pro forma purposes, income taxes have been calculated for 1998
based on the statutory rates then in effect.
Pro forma earnings per share information have been calculated by dividing
pro forma net earnings for 1998 by the 1,000 shares of common stock issued in
September, 1999 to capitalize EagleDirect.com, inc. (see note 11).
11. Subsequent Events
In April, 1999, Premier Graphics, Inc., a wholly-owned subsidiary of Master
Graphics, Inc. acquired all of the outstanding common stock of the Company and
simultaneously refinanced the Company's outstanding debt. The Company was
merged into Premier Graphics, and operated as a division thereafter. In
October, 1999, the Company's net assets were sold to EagleDirect.com, inc., a
direct subsidiary of Master Graphics.
F-10
EAGLE DIRECT
(A Division of Premier Graphics, Inc.)
CONDENSED BALANCE SHEET
(Unaudited)
June 30,
1999
-----------
Current assets:
Cash and cash equivalents........................................ $ 4,575
Accounts receivable, net......................................... 1,841,718
Inventories...................................................... 391,348
Prepaid expenses and other current assets........................ 318,681
-----------
Total current assets........................................... 2,556,322
Property, plant and equipment, net................................. 2,777,872
Goodwill, net...................................................... 7,369,820
Other assets....................................................... 84,657
-----------
Total assets................................................... $12,788,671
===========
Current liabilities:
Accounts payable................................................. 367,941
Customer deposits................................................ 691,461
Accrued expenses................................................. 608,320
-----------
Total current liabilities...................................... 1,667,722
Intercompany debt.................................................. 11,000,000
Commitments and contingencies
Parent's equity in division........................................ 120,949
-----------
Total liabilities and equity................................... $12,788,671
===========
See accompanying notes to condensed financial statements.
F-11
EAGLE DIRECT
(A Division of Premier Graphics, Inc.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended
June 30,
----------------------
1998 1999
---------- ----------
Net revenue............................................ $7,105,831 $7,433,307
Cost of revenue........................................ 5,252,028 5,191,102
---------- ----------
Gross profit....................................... 1,853,803 2,242,205
Sales and marketing expenses........................... 872,690 1,032,142
General and administrative expenses.................... 792,183 893,797
Research and development expenses...................... 213,458 252,900
---------- ----------
Operating income (loss)............................ (24,528) 63,366
Other income (expense):
Interest expense..................................... (109,456) (208,405)
Other, net........................................... (20,876) (36,602)
---------- ----------
Net income (loss).................................. $ (154,860) $ (181,641)
========== ==========
Pro forma financial information (note 1):
Reported net income (loss)........................... $ (181,641)
Pro forma income tax expense (benefit)............... (56,562)
----------
Pro forma net income (loss).......................... $ (125,079)
==========
Pro forma earnings (loss) per share.................. $ (125.08)
==========
See accompanying notes to condensed financial statements.
F-12
EAGLE DIRECT
(A Division of Premier Graphics, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
--------------------
1998 1999
--------- ---------
Cash flows from operating activities:
Net loss............................................... $(154,863) $(181,641)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 276,002 267,026
Changes in operating assets and liabilities:
Trade accounts receivable.......................... (606,686) 295,963
Inventories........................................ (65,657) 18,710
Other assets....................................... (262,183) (231,072)
Accounts payable................................... 126,721 116,213
Accrued expenses................................... 948,523 (37,033)
--------- ---------
Net cash provided by operating activities........ 261,857 248,166
--------- ---------
Cash flows from investing activities:
Purchases of equipment................................. (153,600) (307,063)
--------- ---------
Net cash used in investing activities............ (153,600) (307,063)
Cash flows from financing activities:
Net borrowings on line of credit....................... (55,000) 67,850
Proceeds from issuance of long-term debt............... 140,000 --
Principal payments on long-term debt................... (110,800) (105,336)
--------- ---------
Net cash used in financing activities............ (25,800) (37,486)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 82,457 (96,383)
Cash and cash equivalents, beginning of period........... 12,063 100,958
--------- ---------
Cash and cash equivalents, end of period................. $ 94,520 $ 4,575
========= =========
See accompanying notes to condensed financial statements.
F-13
EAGLE DIRECT
(A Division of Premier Graphics, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying condensed financial statements of Eagle Direct (also
referred to herein as the "Company") are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These condensed financial
statements should be read in conjunction with the financial statements as of
and for the year ended December 31, 1998, contained elsewhere herein.
In the opinion of the Company, the accompanying condensed financial
statements contain all adjustments (consisting of only normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows of the Company as of the dates and for the periods
presented. Because of the seasonal nature of the Company's business, the
results of operations for the periods presented are not necessarily indicative
of the results of operations for a full fiscal year.
In April, 1999, the common stock of Eagle Direct, Inc. was acquired by
Premier Graphics, Inc., a wholly-owned subsidiary of Master Graphics, Inc.
Eagle Direct, Inc. was merged into Premier Graphics. Subsequent to its
acquisition, the Company has operated as a division of Premier Graphics. The
Company's debt that was outstanding at the acquisition date was refinanced at
closing.
Pursuant to the SEC's accounting rules, the cost to Master Graphics of
acquiring Eagle Direct has been "pushed down" to the financial statements of
Eagle Direct. The principal effects of reflecting the new basis in its assets
and liabilities were (1) an increase of approximately $315,000 to the cost of
property, plant and equipment; (2) the recording of approximately $7.7 million
of goodwill, representing the excess of the cost of acquisition over the fair
value of the underlying assets and liabilities; (3) the recording of the
related acquisition debt (an incremental $9.1 million) incurred by Master
Graphics; and (4) a decrease in depreciation of plant and equipment (due
primarily to revised estimated useful lives), an increase in amortization of
goodwill (over 40 years), and an increase in interest expense, all from the
acquisition date.
Prior to the acquisition, Eagle Direct was a Sub-S Corporation for Federal
and State income tax purposes, and as such did not provide for income tax
expense in its financial statements. Subsequent to the acquisition, the
Company has been operated as a division of Premier Graphics and, as a
division, has not recorded a provision for income taxes. For the purposes of
these financial statements, income tax expense (benefit) is shown on a pro
forma basis for the six months ended June 30, 1999 based on statutory income
tax rates in effect during the period.
As a division of Premier Graphics, the Company has no shares of common stock
outstanding. For purposes of disclosing pro forma earnings per share, as
required by SEC accounting rules, the number of common shares outstanding is
based on the number of shares subsequently issued to capitalize
EagleDirect.com, inc., the successor to the Company, as more fully discussed
in note 4.
F-14
EAGLE DIRECT
(A Division of Premier Graphics, Inc.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
2. Property, Plant and Equipment
The following is a summary of the Company's property, plant and equipment as
of June 30, 1999:
Leasehold improvements........................................ $ 88,507
Machinery and equipment....................................... 2,024,589
Furniture and fixtures........................................ 680,000
Vehicles...................................................... 40,000
----------
Total property, plant and equipment......................... 2,833,096
Accumulated depreciation...................................... (55,224)
----------
Total property, plant and equipment, net.................... 2,777,872
==========
3. Intercompany Debt
Intercompany debt of $11 million is comprised of (1) approximately $1.9
million related to previously outstanding notes payable refinanced as part of
the April, 1999 acquisition, and (2) an additional $9.1 million which
effectively financed the cash portion of the purchase price. Interest on the
$11 million is based on Premier Graphic's floating rate on its acquisition
line of credit of LIBOR +2.75% (7.7% at June 30, 1999). The Company's assets
serve as security on the acquisition line. The acquisition line of credit
agreement includes a number of limitations and covenants which apply to the
Eagle Direct division as well as to Premier Graphics.
4. Subsequent Events
On October 1, 1999, Premier Graphics sold the net assets of its Eagle Direct
division to EagleDirect.com, inc., a newly-formed and wholly-owned subsidiary
of Master Graphics, in return for a note from EagleDirect.com, inc. for
approximately $11.5 million. Master Graphics has announced its intention to
conduct an initial public offering of a minority interest in EagleDirect.com,
inc. The Company expects to repay a portion of the note with proceeds of the
offering and to modify the terms to require equal quarterly principal
repayments over the five-year period following the closing of the offering,
and with interest payable quarterly at 8.5%.
In connection with the sale of the net assets by Premier Graphics to Eagle,
Premier and Eagle have entered into a two-year transition services agreement.
The agreement obligates Master Graphics to provide administrative services,
including those related to payroll, benefits, facility usage, management
information systems, insurance and other, generally at the levels historically
charged.
EagleDirect.com, inc. was capitalized with a common stock authorization of
100 million shares, $.001 par value per share, of which 1,000 shares were
issued, and 10 million shares of preferred stock, $.001 par value per share.
EagleDirect.com, inc.'s board of directors has approved, and its shareholder
approved, the 1999 Equity Compensation Plan and the 1999 Non-Employee Director
Stock Option Plan; 1,700,000 and 300,000 shares of common stock were reserved
for issuance under each of the respective plans. The 1999 Equity Compensation
Plan provides for the granting of incentive stock options, non-qualified stock
options, stock appreciation rights and restricted stock. No options had been
granted at October 18, 1999.
F-15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[ED LOGO]
Common Stock
--------------
PROSPECTUS
--------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount payable by us in connection with the sale of the common
stock being registered. All amounts are estimates except the SEC registration
fee.
Amount To
Be Paid
---------
SEC registration fee.................................................. $ 9,730
NASD Fee.............................................................. 10,000
Nasdaq National Market listing fee.................................... 30,000
Printing and engraving................................................ 150,000
Legal fees and expenses............................................... 200,000
Accounting fees and expenses.......................................... 250,000
Blue sky fees and expenses (including legal fees)..................... 10,000
Transfer agent fees................................................... 30,000
Miscellaneous......................................................... 50,000
--------
Total............................................................... $739,730
========
Item 14. Indemnification of Directors and Officers
Reference is made to C.R.S. (S) 7-108-102 (1994), which provides for
indemnification of directors, officers and other employees in certain
circumstances, and to C.R.S. (S) 7-108-402 (1994), which provides for the
elimination or limitation of the personal liability for monetary damages of
directors under certain circumstances. The Articles of Incorporation of the
Company eliminate the personal liability for monetary damages of directors
under certain circumstances and provides indemnification to directors and
officers of the Company to the fullest extent permitted by the Colorado
Business Corporation Act. Among other things, these provisions provide
indemnification for officers and directors against liabilities for judgments in
and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following unregistered securities
since its inception:
In connection with its incorporation and organization, EagleDirect.com
issued 1,000 shares of common stock to Master Graphics for an aggregate of
$1,000. EagleDirect.com believes that this issuance was exempt from
registration under Section 4(2) of the Securities Act as a transaction not
involving any public offering. In addition, EagleDirect.com issued to our
President and Chief Executive Officer, Howard J. Harris, a warrant to
purchase shares of our common stock with an exercise price of $.01 per
share. The number of shares subject to the warrant will be determined by
dividing $6 million by the initial public offering price of our common
stock. We believe that this issuance was exempt from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
II-1
Item 16. Exhibits And Financial Statement Schedules
(a) Exhibits.
Number Description
------ -----------
1.1* Underwriting Agreement dated as of , 1999 between EagleDirect.com,
inc. and Hoak Breedlove Wesneski & Co.
2.1* Separation Agreement between Master Graphics, Inc., Premier Graphics,
Inc., and EagleDirect.com, inc.
2.2* Transition Services Agreement dated October 1, 1999 between Master
Graphics, Inc. and EagleDirect.com, inc.
2.3* Tax Sharing Agreement between Master Graphics, Inc., Premier Graphics,
Inc. and EagleDirect.com, inc.
2.4* Promissory Note between EagleDirect.com,inc. and Premier Graphics, Inc.
3.1 Articles of Incorporation
3.2 Bylaws
5.1* Opinion of Bass, Berry & Sims PLC
10.1 1999 Equity Compensation Plan
10.2 1999 Non-Employee Director Option Plan
10.3* Employment Agreement between EagleDirect.com, inc. and Howard J. Harris
Statement regarding computation of per share earnings (included in
11.1 financial statements)
23.1* Consent of Bass, Berry & Sims PLC (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature pages)
27.1 Financial Data Schedule
- --------
* to be filed by amendment
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriter at
the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by
a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that: (i) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; (ii) for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Denver, State of
Colorado, on this the 19th day of October, 1999.
EagleDirect.com, inc.
/s/ Howard J. Harris
By: _________________________________
Howard J. Harris
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
hereby constitutes and appoints Howard J. Harris and John P. Miller, and each
of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him or her and in his or her
name, place, and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 19, 1999:
Signature Title(s)
/s/ Howard J. Harris Director, President, Chief Executive Officer,
_____________________________ Principal Accounting Officer and Principal
Howard J. Harris Financial Officer
/s/ John P. Miller Director
_____________________________
John P. Miller
/s/ George W. Bryan Director
_____________________________
George W. Bryan
/s/ Richard Gorelick Director
_____________________________
Richard Gorelick
/s/ Jack Soden Director
_____________________________
Jack Soden
II-3
INDEX TO EXHIBITS
Number Description
------ -----------
1.1* Underwriting Agreement dated as of , 1999 between
EagleDirect.com, inc. and Hoak Breedlove Wesneski & Co.
2.1* Master Separation Agreement between Master Graphics, Inc., Premier
Graphics, Inc., and EagleDirect.com, inc.
2.2* Transition Services Agreement dated October 1, 1999 between Master
Graphics, Inc. and EagleDirect.com, inc.
2.3* Tax Sharing Agreement between Master Graphics, Inc., Premier Graphics,
Inc. and EagleDirect.com, inc.
2.4* Promissory Note between EagleDirect.com,inc. and Premier Graphics, Inc.
3.1 Articles of Incorporation
3.2 Bylaws
5.1* Opinion of Bass, Berry & Sims PLC
10.1 1999 Equity Compensation Plan
10.2 1999 Non-Employee Director Option Plan
10.3* Employment Agreement between EagleDirect.com, inc. and Howard J. Harris
11.1 Statement regarding computation of per share earnings (included in
financial statements)
23.1* Consent of Bass, Berry & Sims PLC (included in Exhibit 5.1)
23.2 Consent of KPMG LLP
24.1 Power of Attorney (included on signature pages)
27.1 Financial Data Schedule
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* to be filed by amendment
II-4