UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 15, 1999
--------------------------------
MASTER GRAPHICS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 0--24411 62-1694322
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
6075 Poplar Avenue, Suite 401, Memphis, Tennessee 38119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (901)685-2020
-----------------------------
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
EXPLANATORY NOTE
The Registrant's Current Report on Form 8-K filed March 29, 1999 with
regard to the acquisition of Columbia Graphics Corporation, is hereby amended to
include the financial statements and pro forma financial information required
pursuant to Item 7 of Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information And Exhibits.
(a) Financial Statements of Businesses Acquired.
The financial statements required to be filed pursuant to Item 7(a)
are included on pages F-1 through F-11 of this report.
(b) Pro Forma Financial Information.
The pro forma financial information required to be filed pursuant
to Item 7(b) is included on pages F-12 through F-18 of this report.
-1-
Columbia Graphics Corporation
Financial Statements and
Independent Auditor's Report
December 31, 1998
CONTENTS
===============================================================================
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance Sheet F-3 - F-4
Statement of Income and Retained Earnings F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7 - F-11
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Columbia Graphics Corporation
We have audited the accompanying balance sheet of Columbia Graphics Corporation
as of December 31, 1998 and the related statements of income and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Columbia Graphics Corporation
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER, COOPER & CO., LTD.
/s/ Miller, Cooper & Co., Ltd.
- ------------------------------
Certified Public Accountants
Northbrook, Illinois
February 26, 1999
F-2
Columbia Graphics Corporation
BALANCE SHEET
December 31, 1998
-----------------
================================================================================
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 52,461
Accounts receivable, less allowance for doubtful accounts
of $128,775 5,333,079
Inventory 1,211,333
Prepaid expenses and other assets 72,677
-----------
Total current assets 6,669,550
-----------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $7,509,543 4,254,062
-----------
OTHER ASSETS 221,369
-----------
$11,144,981
===========
The accompanying notes are an integral part of this statement.
F-3
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES
Note payable - bank $ 1,865,000
Current maturities of long-term debt 699,976
Accounts payable, trade 1,369,828
Accrued expenses
Salaries and commissions 826,239
Real estate taxes 142,502
Other accrued liabilities 90,030
Customer deposits 340,310
-----------
Total current liabilities 5,333,885
-----------
LONG-TERM DEBT, net of current maturities 4,130,421
-----------
STOCKHOLDER'S EQUITY
Common stock, no par value; authorized 1,000,000 shares;
issued and outstanding 1,000 shares 18,000
Retained earnings 1,662,675
-----------
1,680,675
-----------
$11,144,981
===========
F-4
Columbia Graphics Corporation
STATEMENT OF INCOME AND RETAINED EARNINGS
Year ended December 31, 1998
----------------------------
================================================================================
Net sales $28,458,058
Cost of sales 21,068,725
-----------
Gross profit 7,389,333
-----------
General, administrative and selling expenses 5,681,149
-----------
Operating income 1,708,184
-----------
Other income (expense)
Miscellaneous income 168,566
Interest expense (325,928)
-----------
(157,362)
-----------
NET INCOME 1,550,822
Retained earnings, beginning of year 744,353
Dividends to stockholder (632,500)
-----------
Retained earnings, end of year $ 1,662,675
===========
The accompanying notes are an integral part of this statement.
F-5
Columbia Graphics Corporation
STATEMENT OF CASH FLOWS
Year ended December 31, 1998
----------------------------
================================================================================
Cash flows from operating activities
Net income $ 1,550,822
Adjustments to reconcile net income to net cash
provided by operating activities
Bad debts 15,000
Depreciation 753,294
Amortization 15,132
(Increase) decrease in assets
Accounts receivable (1,143,540)
Inventory 3,743
Prepaid expenses and other assets 299
Increase (decrease) in liabilities
Accounts payable, trade (200,589)
Accrued expenses 170,886
Customer deposits 80,431
-----------
Net cash provided by operating activities 1,245,478
-----------
Cash flows from investing activities
Purchase of property and equipment (500,893)
-----------
Net cash used in investing activities (500,893)
-----------
Cash flows from financing activities
Proceeds from note payable - bank 344,000
Payment of long-term debt (500,000)
Dividends to stockholder (632,500)
-----------
Net cash used in financing activities (788,500)
-----------
NET DECREASE IN CASH (43,915)
Cash and cash equivalents, beginning of year 96,376
-----------
Cash and cash equivalents, end of year $ 52,461
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash paid during the year for interest $ 325,928
===========
Purchase of equipment, long-term financed $ 2,230,397
===========
The accompanying notes are an integral part of this statement.
F-6
Columbia Graphics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
-----------------
================================================================================
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ -----------------------------------------------------------------
1. Nature of Business
------------------
The Company, which is located in Chicago, Illinois, performs commercial
printing and fulfillment services for customers located in the Chicago
Metropolitan area.
2. Cash and Cash Equivalents
-------------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be
cash equivalents.
3. Inventory
---------
Inventory, consisting of raw materials and work in process, is priced at the
lower of cost (based on the specific-identification method) or market. Work
in process costs include raw material, labor, and overhead.
4. Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is provided by the
straight-line and declining-balance methods based on estimated service lives.
Leasehold costs are depreciated over the shorter of the estimated asset life
or the lease term. Depreciation of property and equipment has been
classified as part of cost of goods sold in these financial statements.
Years of life generally used in determining annual depreciation are:
Machinery and equipment 5 - 10 years
Furniture and fixtures 3 - 7 years
Building and leasehold improvements 10 - 39 years
5. Use of Estimates
----------------
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
Columbia Graphics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
-----------------
================================================================================
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------ -----------------------------------------------------------------
(Continued)
6. Income Taxes
------------
Effective January 1, 1987, the Company elected S Corporation status under the
Internal Revenue Code. Accordingly, the Company is not subject to federal or
state income taxes.
7. Advertising
-----------
Advertising costs are expensed as incurred. Advertising expense for the year
ended December 31, 1998 amounted to approximately $2,700.
NOTE B - INVENTORY
- ------ ---------
Inventory is summarized as follows:
Paper stock $ 134,109
Work in process 1,077,224
----------
$1,211,333
==========
NOTE C - PROPERTY AND EQUIPMENT
- ------ ----------------------
A summary of the cost of major classes of property and equipment is as follows:
Machinery and equipment $ 9,504,424
Furniture and fixtures 1,260,574
Leasehold improvements
2640 Paulina building 380,416
2654 Paulina building 214,838
2600 Paulina building 403,353
-----------
$11,763,605
===========
F-8
Columbia Graphics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
-----------------
================================================================================
NOTE D - OTHER ASSETS
- ------ ------------
Other assets consist of the following at December 31:
Deposits $ 20,400
Bond issuance costs, net of accumulated amortization of
$128,394 53,329
Due from stockholder 144,973
Other assets 2,667
--------
$221,369
========
The bond issuance costs were incurred during 1992 and are being amortized over a
ten year period.
NOTE E - NOTE PAYABLE - BANK
- ------ -------------------
The note payable - bank consists of a line of credit up to $3,000,000 due to a
bank, collateralized by equipment and inventory, with interest at the prime rate
(7.75% at December 31, 1998). Amounts outstanding totalled $1,865,000 at
December 31, 1998. This agreement expires April 30, 1999.
NOTE F - LONG-TERM DEBT
- ------ --------------
Long-term debt consists of the following:
Industrial Revenue Bond, collateralized by equipment and
accounts receivable, matures June 1, 2003, principal
repayments of $500,000 annually through 2002 and
$600,000 in 2003, variable interest rate, based on market
rates for tax exempt bonds, 4.05% at December 31, 1998. $2,600,000
Note payable, collateralized by equipment, six principal
payments of $14,625, followed by seventy-eight payments
of $32,133, followed by a final payment on August 1, 2005,
interest at 7.841%. 2,230,397
----------
4,830,397
Less current maturities 699,976
----------
4,130,421
==========
F-9
Columbia Graphics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
-----------------
================================================================================
NOTE F - LONG-TERM DEBT (Continued)
- ------ --------------
The Industrial Revenue Bond outstanding at December 31, 1998 is supported by a
letter of credit issued by a bank. This bond contains covenants regarding
certain financial statement amounts, ratios and activities of the Company. At
December 31, 1998, the Company was in compliance with or obtained waivers for
all such covenants. Interest expense for the year ended December 31, 1998,
aggregated $325,928. The following is a schedule of maturities of long-term
debt:
Year ending
December 31,
------------
1999 $ 699,976
2000 734,699
2001 753,779
2002 774,410
2003 896,718
Thereafter 970,815
----------
$4,830,397
==========
NOTE G - LEASE AGREEMENTS AND RELATED PARTY TRANSACTIONS
- ------ -----------------------------------------------
The Company is obligated under lease agreements with related parties covering
the business property it occupies. The lessor of the business property is
controlled by a relative of the Company's stockholder. The Company is also
obligated under an equipment lease with the stockholder in addition to other
operating equipment leases. The agreements expire at various dates through
November 30, 2003. The Company is also required to pay real estate taxes,
insurance and maintenance costs on the leased assets; these expenses aggregated
$309,316 for the year ended December 31, 1998. Total rent expense under
operating leases was $589,834 in 1998.
The minimum basic rental commitment under the above-described leases for periods
succeeding December 31, 1998 follows:
1999 $180,161
2000 135,730
2001 118,615
2002 7,599
2003 7,450
--------
$449,555
========
F-10
Columbia Graphics Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
-----------------
================================================================================
NOTE H - CONCENTRATION OF CREDIT RISK - CASH
- ------ -----------------------------------
The Company maintains its cash balances in one financial institution located in
Illinois. Accounts at the institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances at December 31, 1998
totalled approximately $99,000.
NOTE I - DEFINED CONTRIBUTION PLAN
- ------ -------------------------
The company sponsors a defined contribution 401(k) plan which covers
substantially all of its employees. The Company's contributions to the plan are
discretionary. The contribution for 1998 totalled $56,938.
NOTE J - DUE FROM STOCKHOLDER
- ------ --------------------
This amount represents advances to the stockholder of the Company with interest
at 5% and is repayable upon demand. Amounts due aggregated $144,973 as of
December 31, 1998. No interest was earned during 1998. The note was paid in
full in February, 1999.
NOTE K - SALE
- ------ ----
On March 15, 1999, all of the Company's outstanding shares were purchased by
Premier Graphics, Inc., a wholly owned subsidiary of Master Graphics, Inc.
F-11
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheet of the Company
as of December 31, 1998 gives effect to the acquisition in 1999 of Columbia
Graphics Corporation ("Columbia") and the related financing thereof as if such
transaction had occurred on December 31, 1998.
The unaudited pro forma condensed consolidated statement of operations of
the Company for the year ended December 31, 1998, gives effect to the
acquisition of Columbia as if such transaction had occurred on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements
presented herein do not purport to represent what the Company's financial
position or results of operations would have been had such transaction in fact
occurred on such dates or to project the Company's results of operations for any
future period. The unaudited pro forma condensed consolidated financial
statements should be read in conjunction with the historical financial
statements of the Company and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the Company's Annual Report on
Form 10-K, as amended, for the fiscal ended December 31, 1998.
F-12
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 1998
(in thousands)
Pro Forma Pro Forma
COMPANY COLUMBIA ADJUSTMENTS CONSOLIDATED
--------------- --------------- --------------- ---------------
Current assets:
Cash and cash equivalents $ 13,525 $ 52 $ -- $ 13,577
Trade accounts receivable, net 38,529 5,333 -- 43,862
Inventories 8,095 1,211 -- 9,306
Deferred income taxes 1,057 -- -- 1,057
Prepaid expenses and other
current assets 4,012 74 -- 4,086
--------------- --------------- --------------- ---------------
Total current assets 65,218 6,670 -- 71,888
Property, plant and equipment, net 75,251 4,254 1,582 81,087
Goodwill, net 64,469 -- 8,542 73,011
Deferred loan costs, net 1,352 -- -- 1,352
Due from shareholder 64 -- -- 64
Other 1,522 221 -- 1,743
--------------- --------------- --------------- ---------------
$ 207,876 $ 11,145 $ 10,124 $ 229,145
=============== =============== =============== ===============
Current liabilities:
Current installments of long-term debt $ 924 $ 2,565 $ 25 $ 3,514
Accounts payable 10,829 1,370 -- 12,199
Accrued expenses 5,540 1,399 -- 6,939
Total current liabilities 17,293 5,334 25 22,652
--------------- --------------- --------------- ---------------
Long-term debt, net of current installments 144,223 4,130 11,780 160,133
Deferred income tax 7,554 -- -- 7,554
Other liabilities 1,177 -- -- 1,177
--------------- --------------- --------------- ---------------
Total liabilities 170,247 9,464 11,805 191,516
Redeemable preferred stock 1,437 -- -- 1,437
Stockholders' equity (deficit) 36,192 1,681 (1,681) 36,192
--------------- --------------- --------------- ---------------
$ 207,876 $ 11,145 $ 10,124 $ 229,145
=============== =============== =============== ===============
F-13
MASTER GRAPHICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
(in thousands, except per share data)
Pro Forma Pro Forma
Company Columbia Adjustments Consolidated
--------------- --------------- --------------- ---------------
Net revenue $ 163,277 $ 28,458 -- $ 191,735
Cost of revenues 121,340 21,069 $ (36) 142,373
--------------- --------------- --------------- ---------------
Gross profit 41,937 7,389 36 49,362
Selling, general, and administrative expenses 26,876 5,681 -- 32,557
Amortization of goodwill 1,007 -- 224 1,231
--------------- --------------- --------------- ---------------
Operating income (loss) 14,054 1,708 (188) 15,574
--------------- --------------- --------------- ---------------
Other income (expense):
Interest income 250 -- -- 250
Interest expense (9,723) (326) (1,102) (11,151)
Deferred loan cost amortization (548) -- -- (548)
Other, net 568 169 -- 737
--------------- --------------- --------------- ---------------
Total other income (expense) (9,453) (157) (1,102) (10,712)
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes 4,601 1,551 (1,290) 4,862
Income tax expense 628 -- 112 740
--------------- --------------- --------------- ---------------
Net earnings (loss) before
extraordinary items $ 3,973 $ 1,551 $ (1,402) $ 4,122
=============== =============== =============== ===============
Net earnings per common share:
Basic $ .62 $ .64
=============== ===============
Diluted $ .60 $ .62
=============== ===============
F-14
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet
presents the pro forma consolidated financial position of Master Graphics, Inc.
and subsidiary (the Company) giving effect to the acquisition of Columbia
Graphics Corporation (Columbia) in March 1999 and the financing thereof as if
such transaction had occurred on December 31, 1998.
The accompanying unaudited pro forma condensed consolidated statement of
operations presents the pro forma consolidated results of operations of the
Company giving effect to the acquisition of Columbia, as if such transaction had
occurred on January 1, 1998.
The pro forma condensed consolidated balance sheet has been derived from the
historical balance sheets of the Company and Columbia as of December 31, 1998;
the pro forma condensed consolidated statement of operations for the year ended
December 31, 1998 has been derived from the historical 1998 statements of
operations of the Company and Columbia.
The acquisition has been accounted for in the pro forma condensed consolidated
financial statements using the purchase method of accounting. The total purchase
cost has been allocated to the assets and liabilities acquired based upon their
estimated fair values on the effective date of the acquisition. Such allocation
is based on studies, not all of which have been finalized. Accordingly, the
effect of the allocation of the purchase cost on the pro forma balance sheet,
and the related effect on pro forma results of operations, is preliminary. The
final values assigned may differ from those set forth herein; however, it is not
expected that the final allocation of purchase costs will differ materially from
those set forth herein.
The pro forma data presented herein do not purport to represent what the
Company's financial position or results of operations would have been had the
acquisition of Columbia in fact occurred on such dates or to project the
Company's results of operations for any future period.
F-15
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisition and Related Financing
The total purchase price of the Columbia acquisition was $18.5 million,
including the refinancing of Columbia's debt of $6.7 million. The purchase
was financed by a $18.5 million draw on the Company's senior credit
facility, with interest rates at an average of 7.75%.
The purchase price has been allocated as follows:
Net purchase price $ 11,805
Current assets 6,670
Other assets 221
Property, plant and equipment 5,836
-------------------
12,727
-------------------
Current liabilities, excluding
debt 2,769
Refinanced debt 6,695
-------------------
9,464
-------------------
Net assets 3,263
-------------------
Allocated to goodwill $ 8,542
===================
3. Pro Forma Acquisition Adjustments -- Statement of Operations
(a) To record the net increase in depreciation expense related to (1)
adjustments to the basis in the fixed assets acquired as a result of
applying purchase accounting, and (2) conforming changes in estimated
useful lives and depreciation methods.
(b) To record an adjustment to rent expense for equipment previously leased by
the acquired company which was purchased in the acquisition.
(c) To record the amortization of goodwill arising as a result of applying
purchase accounting to the acquisition over a 40-year estimated life, net
of goodwill amortization previously recorded by the acquired company.
(d) To record additional interest expense arising from the financing of the
acquisition, including senior debt at an average rate of 7.75%.
(e) To record income tax expense related to incremental earnings at a rate of
43% on a pro forma basis.
F-16
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the pro forma statement of operations
adjustments necessary to reflect the Columbia acquisition and financing thereof
as if it had occurred on January 1, 1998:
In thousands
Pro Forma
Year ended December 31, 1998 (A) (B) (C) (D) (E) Adjustment
---------------------------- -------- -------- -------- -------- -------- -------------
Cost of sales 64 (100) -- -- -- (36)
Interest expense -- -- -- (1,102) -- (1,102)
Amortization of goodwill -- -- 224 -- -- 224
Income tax expense -- -- -- -- 112 112
4. Pro Forma Earnings Per Share
Basic earnings per share ("EPS") are computed by dividing net earnings less
the preferred stock dividend requirement and discount accretion by the weighted-
average number of common shares outstanding (4,000,000 in 1998 prior to the
initial offering of the Company's common stock in June 1998 (the Initial
Offering)); plus 3,400,000 shares issued by the Company in the Initial Offering
in June 1998; plus 266,664 shares issued to a warrant holder in April, 1998
(200,000 shares of which were sold in the Initial Offering), and plus 213,333
shares issued in connection with the Company's acquisition of Golden Rule
Printing in September 1998.
Diluted EPS are computed assuming the conversion or exercise of dilutive
potential equity instruments. In the calculation of pro forma Diluted EPS,
conversion of the Series A Preferred Stock is not assumed because of its
antidilutive effect. Exercise of the option effect of the deferred compensation
contracts is not assumed in the pro forma calculation because the effect would
have been antidilutive. Exercise of employee stock options is not assumed
because the effect, using the treasury stock method, would have been
antidilutive.
F-17
MASTER GRAPHICS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the numerator and denominator of EPS calculations follows:
(in thousands,
except share
and per share
amounts)
----------------------
Net earnings $ 4,122
Less preferred stock dividend requirement (84)
Less accretion of preferred stock discount (87)
----------------------
Net earnings available for common shareholders $ 3,951
======================
Basic--Average shares outstanding 6,130,117
======================
Basic EPS $ .64
======================
Diluted:
Average shares outstanding 6,130,117
Assumed exercise of lender warrant 237,223
----------------------
6,367,340
======================
Diluted EPS $ .62
======================
F-18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MASTER GRAPHICS, INC.
Date: May 27, 1999 By: /s/ Lance T. Fair
--------------------------
Lance T. Fair
Chief Financial Officer