SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1999
Commission File No. 1-14126
UNIDIGITAL INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3856672
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
229 West 28th Street, New York, New York 10001
----------------------------------------------
(Address of Principal Executive Offices)
(212) 244-7820
---------------------------
(Issuer's Telephone Number,
Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes: X No:
------ ------
State the number of shares outstanding of each of the Issuer's classes of
common stock, as of March 31, 1999:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 5,297,248
Transitional Small Business Disclosure Format:
Yes: No: X
------ ------
UNIDIGITAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements...........................................1
CONSOLIDATED BALANCE SHEETS
as at February 28, 1999 (unaudited)
and August 31, 1998 (audited)......................................2
CONSOLIDATED INCOME STATEMENTS
For the Three Months and Six Months Ended
February 28, 1999 and February 28, 1998
(unaudited)........................................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
February 28, 1999 and February 28, 1998
(unaudited)........................................................4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited).............................................5
Item 2. Management's Discussion of Financial Condition and
Results of Operation...........................................12
General........................................................12
Results of Operations..........................................12
Liquidity, Capital Resources and Other Matters.................15
Item 3. Quantitative and Qualitative Disclosure
About Market Risk..............................................19
PART II OTHER INFORMATION
Item 1. Legal Proceedings..............................................20
Item 2. Changes in Securities and Use of Proceeds......................20
Item 3. Default Upon Senior Securities.................................21
Item 4. Submission of Matters to a Vote of Security Holders............21
Item 5. Other Information..............................................22
Item 6. Exhibits and Reports on Form 8-K...............................22
SIGNATURES...................................................................23
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-1-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
FEBRUARY 28, AUGUST 31,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 453,000 $ 287,000
Accounts receivable (less allowance for doubtful
accounts of $723,000 and $581,000 at
February 28, 1999 and August 31, 1998, respectively)......... 24,396,000 16,917,000
Deferred financing costs, net.................................. 2,528,000 1,013,000
Prepaid expenses............................................... 5,490,000 2,727,000
Other current assets........................................... 2,880,000 3,360,000
------------- -------------
Total current assets....................................... 35,747,000 24,304,000
Property and equipment, net....................................... 16,926,000 14,591,000
Intangible assets, net............................................ 58,283,000 28,107,000
Other assets...................................................... 755,000 313,000
------------- -------------
Total assets............................................... $ 111,711,000 $ 67,315,000
============= =============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses.......................... $ 10,130,000 $ 8,571,000
Current portion of capital lease obligations................... 2,418,000 1,935,000
Current portion of long-term debt.............................. 65,000,000 3,610,000
Income taxes payable........................................... 1,790,000 887,000
Deferred income taxes.......................................... 26,000 249,000
Loans and notes payable to stockholders........................ 437,000 155,000
------------- -------------
Total current liabilities.................................. 79,801,000 15,407,000
Capital lease obligations, net of current portion................. 4,757,000 2,830,000
Long-term debt, net of current portion............................ 2,005,000 33,978,000
Deferred income taxes............................................. 807,000 500,000
Loans and notes payable to stockholders, net of current portion... 208,000 207,000
------------- -------------
Total liabilities.......................................... 87,578,000 52,922,000
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock -- authorized 5,000,000 shares,
$.01 par value each; none issued or outstanding................ -- --
Common stock -- authorized 10,000,000 shares,
$.01 par value each; 5,247,248 and 3,902,643 shares
issued and outstanding at February 28, 1999 and
August 31, 1998, respectively.................................. 52,000 39,000
Additional paid-in capital........................................ 19,069,000 9,865,000
Retained earnings................................................. 5,197,000 4,374,000
Cumulative foreign translation adjustment......................... (185,000) 115,000
------------- -------------
Total stockholders' equity................................. 24,133,000 14,393,000
------------- -------------
Total liabilities and stockholders' equity................. $ 111,711,000 $ 67,315,000
============= =============
The Notes to Consolidated Financial Statements are made a part hereof.
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UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
CONSOLIDATED INCOME STATEMENTS
------------------------------
(UNAUDITED)
THREE MONTHS ENDED, SIX MONTHS ENDED,
---------------------------- ------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Net sales................................... $ 18,445,000 $ 9,556,000 $34,356,000 $19,256,000
------------ ----------- ----------- -----------
EXPENSES
Cost of sales............................... 8,587,000 5,275,000 17,310,000 10,300,000
Selling, general and
administrative expenses ................. 7,185,000 3,333,000 12,574,000 6,747,000
Restructuring expenses...................... -- -- 196,000 --
----------- ----------- ----------- -----------
Total operating expenses.................... 15,772,000 8,608,000 30,080,000 17,047,000
----------- ----------- ----------- -----------
Income from operations...................... 2,673,000 948,000 4,276,000 2,209,000
Interest expense............................ (1,634,000) (366,000) (2,801,000) (749,000)
Interest expense - deferred financing costs. (135,000) (138,000) (191,000) (276,000)
Interest and other expenses................. (48,000) (125,000) 222,000 (86,000)
------------ ------------ ----------- ------------
Income before income taxes.................. 856,000 319,000 1,506,000 1,098,000
Provision for income taxes.................. 402,000 127,000 682,000 400,000
----------- ----------- ----------- -----------
Net income..................................... $ 454,000 $ 192,000 $ 824,000 $ 698,000
=========== =========== =========== ===========
Net income per share available to
common stockholders:
Basic....................................... $ 0.09 $ 0.06 $ 0.16 $ 0.22
=========== =========== =========== ===========
Diluted..................................... $ 0.08 $ 0.06 $ 0.16 $ 0.20
=========== =========== =========== ===========
Shares used to compute net income per share:
Basic....................................... 5,247,248 3,246,301 5,024,420 3,244,797
=========== =========== =========== ===========
Diluted..................................... 5,381,070 3,380,891 5,124,166 3,436,008
=========== =========== =========== ===========
The Notes to Consolidated Financial Statements are made a part hereof.
-3-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
SIX MONTHS ENDED,
-------------------------------
FEBRUARY 28, FEBRUARY 28,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income......................................................... $ 824,000 $ 698,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization............................... 3,509,000 1,632,000
Provision for deferred income taxes......................... 57,000 19,000
Provision for bad debts..................................... 233,000 (9,000)
Gain on sale of assets...................................... (313,000) --
Changes in assets and liabilities:
Accounts receivable......................................... (3,585,000) (2,338,000)
Prepaid expenses and other current assets................... (2,199,000) (959,000)
Other assets................................................ (282,000) 71,000
Accounts payable and accrued expenses....................... (2,383,000) (49,000)
Income taxes payable........................................ 485,000 340,000
----------- -----------
Net cash used in operating activities.............................. (3,654,000) (595,000)
------------ ------------
INVESTING ACTIVITIES
Proceeds of sale of fixed assets................................... 941,000 --
Additions to property and equipment................................ (711,000) (599,000)
Business acquisitions.............................................. (24,789,000) --
----------- -----------
Net cash used in investing activities.............................. (24,559,000) (599,000)
------------ ------------
FINANCING ACTIVITIES
Net proceeds from bank borrowings.................................. 29,751,000 857,000
Payments of capital lease obligations.............................. (1,157,000) (933,000)
Payments of long-term debt......................................... (208,000) --
Stockholder loans.................................................. (50,000) --
Common stock issued................................................ 92,000 1,000
----------- -----------
Net cash provided by (used in) financing activities................ 28,428,000 (75,000)
----------- ------------
Effect of foreign exchange rates on cash........................... (49,000) 12,000
------------ -----------
Net increase (decrease) in cash and cash equivalents............... 166,000 (1,257,000)
Cash and cash equivalents at beginning of period................... 287,000 3,202,000
----------- -----------
Cash and cash equivalents at end of period......................... $ 453,000 $ 1,945,000
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid...................................................... $ 3,385,000 $ 370,000
=========== ===========
Income taxes paid.................................................. $ 192,000 $ 115,000
=========== ===========
Noncash transactions:
Equipment acquired under capital lease obligations................. $ 2,597,000 $ 407,000
=========== ===========
Value of warrants issued-business acquisitions..................... $ 931,000 $ 100,000
=========== ===========
Value of warrants-additional financing (revised)................... $ 308,000 $ --
=========== ===========
Business acquisitions (net of liabilities of $5,010,000)........... $ 2,466,000 $ --
=========== ===========
Stock issued for business acquisitions............................. $ 7,886,000 $ --
=========== ===========
The Notes to Consolidated Financial Statements are made a part hereof.
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UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
NOTE A - BASIS OF PRESENTATION:
The information presented for February 28, 1999, and for the three-month
and the six-month periods ended February 28, 1999 and February 28, 1998, is
unaudited, but, in the opinion of Unidigital Inc., its wholly-owned subsidiaries
and its and their subsidiaries, affiliated companies and predecessors
(collectively, the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for the fair presentation of the
Company's financial position as of February 28, 1999 and the results of their
operations and their cash flows for the three-month and the six-month periods
ended February 28, 1999 and February 28, 1998.
The consolidated financial statements included herein have been prepared by
the Company in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
Company's audited financial statements for the year ended August 31, 1998, which
were included as part of the Company's Annual Report on Form 10-KSB.
The consolidated financial statements include the accounts of Unidigital
Inc. and its direct and indirect subsidiaries. All significant intercompany
balances have been eliminated.
Interim results are not necessarily indicative of results that may be
expected for the full fiscal year.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS:
The Company is a leading service business within the graphic arts industry
that provides imaging, reproduction and integrated media solution services to
advertising agencies, retailers, corporations, marketing/communications firms,
publishers, government agencies and financial institutions in the New York City,
Boston, San Francisco and London markets. Through active cross-selling among its
three divisions, Unison, KWIK and Elements (collectively, the "Unidigital
Enterprise"), the Company provides imaging, reproductive and integrated media
solutions to each of the large format, digital prepress and digital printing
segments of the industry. Cross-selling among the Unidigital Enterprise offers a
total solution for customers, which the Company believes creates a distinct
advantage over competitors within the marketplace.
-5-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
FOREIGN CURRENCY TRANSLATION:
The portion of the Company's financial statements relating to the Company's
United Kingdom operations are translated into United States Dollars using
period-end exchange rates ((pound)1.00 = $1.67 at August 31, 1998 and $1.60 at
February 28, 1999, respectively, for balance sheets accounts) and average
exchange rates ((pound)1.00 = $1.66 for the year ended August 31, 1998; and
$1.66 and $1.69 for the three months ended February 28, 1999 and February 28,
1998, respectively; and $1.66 and $1.69 for the six months ended February 28,
1999 and February 28, 1998, respectively for income statement accounts). The
translation difference is reflected as a separate component of stockholders'
equity.
EARNINGS PER SHARE:
The following table sets forth the computation of basic and dilutive
earnings per share:
THREE MONTHS ENDED, SIX MONTHS ENDED,
---------------------------------- ----------------------------------
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
---- ---- ---- ----
Numerator for basic and diluted earnings per
share-net income available for common
stockholders............................... $ 454,000 $ 192,000 $ 824,000 $ 698,000
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share-
weighted average shares.................... 5,247,248 3,246,301 5,024,420 3,244,797
Effect of dilutive securities:
Stock options.............................. 17,180 15,909 11,534 32,674
Warrants................................... 116,642 118,681 88,212 158,537
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares and
assumed conversions........................ 5,381,070 3,380,891 5,124,166 3,436,008
=========== =========== =========== ===========
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
THREE MONTHS ENDED, SIX MONTHS ENDED,
--------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
--------------------------------------------------------------------------------
Stock Options................................. 559,798 178,917 559,798 132,918
Warrants...................................... 342,000 117,000 342,000 117,000
-6-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
NOTE C - STOCK OPTION PLANS:
On January 4, 1999, the Company granted options to purchase 2,500 shares of
its Common Stock to each of David Wachsman and Harvey Silverman, at an exercise
price of $5.00 per share.
On January 12, 1999, the Company granted options to purchase 75,000 shares
of its Common Stock to Larry Wooddell, Senior Vice President, Corporate
Development of the Company, at an exercise price of $4.00 per share.
NOTE D - LONG-TERM DEBT:
Long-term debt consists of the following:
FACILITY
AMOUNT AMOUNT OUTSTANDING
FEBRUARY 28, FEBRUARY 28, AUGUST 31,
1999 1999 1998
------------------------------------------------
Credit facilities in the United Kingdom; interest at either the bank's
overdraft rate plus 2% or 2.5%, including a temporary facility of
approximately 450,000 (pound) ($720,000) renewable April 30, 1999;
facility amount is approximately(pound)2,650,000 ($4,248,000) $4,248,000 $2,394,000 $2,135,000
Term loan, matures in March 2003; payable in sixteen quarterly
installments ranging from $960,000 to $1,920,000, commencing in June
1999, with a balloon payment of $8,960,000 in March 2003, plus
interest at the Base Rate or at the Eurodollar Rate, as defined,
plus an Applicable Margin, as defined, ranging from 0.75% to 3.0% 32,000,000 32,000,000 25,000,000
Revolving line of credit; matures in March 2003, interest at the Base
Rate or at the Eurodollar Rate, as defined, plus an Applicable
Margin, as defined, ranging from 0.75% to 3.0% 15,000,000 14,935,000 8,435,000
Acquisition line of credit; matures in March 2003, payable in eleven
quarterly installments of 5.0% of the outstanding balance in March
2000 commencing in June 000 and one installment of 45.0% of the
outstanding balance in March 2000, plus interest at the Base Rate or
at the Eurodollar Rate, as defined, plus an Applicable Margin, as
defined, ranging from 0.75% to 3.0% 5,000,000 5,000,000
Subordinated loan matures in March 2004; base interest of 12 1/2%;
plus 0.25% the first day after the first anniversary of the Note;
plus 0.25% following the last day of each 90 day period until payment
in full 10,000,000 10,000,000
Installment note due seller of Elements (SF); payable in eight
quarterly installments of $11,600, including interest at 6.0% -- 11,000
Installment note due seller of Unison (MA); matures in January 1999,
payable in two annual installments of $75,000 including interest at
8.0% 75,000 75,000
-7-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
Notes payable for certain equipment, maturing on dates between
October, 1998 and September, 2003, payable in monthly installments of
$22,000 until October 1998 and $14,000 thereafter, including interest
at 8.54% and 8.4%, respectively. 530,000 618,000
Treasury loan facility in United Kingdom; matures in July 2001,
payable in monthly installments of $19,000 plus interest of LIBOR,
as defined, plus the Banks Margin of 2.4% 517,000 651,000
Note payable, payable in monthly installments of approximately $1000
including interest at 10.35% 12,000 17,000
Investment fee due May 2001, senior subordinated note 1,000,000 --
Installment note due seller of Kwik International; matures in April
2001, payable in thirty-six monthly installments of approximately
$21,000 including interest at 5.7% 542,000 646,000
----------------- ---------------
67,005,000 37,588,000
Less current portion 65,000,000 3,610,000
----------------- ---------------
$ 2,005,000 $ 33,978,000
================= ===============
During the first quarter of fiscal 1999 the Company amended its existing
bank financing facilities with Canadian Imperial Bank of Commerce ("CIBC"). As a
result, the Company has credit facilities with CIBC in the aggregate amount of
$52,000,000, consisting of a: (i) $32,000,000 term loan; (ii) $15,000,000
revolving line of credit facility which is available for working capital
purposes; and (iii) $5,000,000 credit facility which is available for corporate
acquisition purposes. Such credit facilities are guaranteed by the Company's
United States subsidiaries, including subsidiaries currently owned and
subsequently acquired. In addition, the Company pledged all of its equity
interests in its United States subsidiaries, including subsidiaries currently
owned and subsequently acquired, and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit facilities is, at the Company's option, at the Base
Rate or at the Eurodollar Rate, as defined, plus an Applicable Margin, as
defined, ranging from 0.75% to 3.0% depending on the Company's consolidated debt
to earnings ratio and the type of loan. As of February 28, 1999, the Company had
an outstanding balance of $32,000,000 under the term loan, $14,935,000 under the
revolving credit facility and $5,000,000 under the acquisition loan.
The credit facilities contain covenants which require the Company to
maintain certain earnings and debt to earnings ratio requirements based on the
combined operations of the Company and its subsidiaries. The Company's agreement
with CIBC restricts the Company's ability to pay dividends. The credit
facilities are secured by a first priority lien on all of the assets of the
Company and its subsidiaries.
The Company has not met a financial covenant under its credit facilities
with CIBC and has requested a waiver of such covenant from CIBC. At February 28,
1999, the credit facilities have been classified as a short-term liability until
such waiver is obtained. The Company believes that CIBC will grant such waiver,
however, there can be no assurance that such waiver will be obtained.
-8-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
In addition, the Company has received a commitment from other lenders to
replace the existing CIBC credit facilities. Such commitment is initially for
$65,000,000 of senior debt with a potential increase to $100,000,000 of senior
and subordinated debt. There can be no assurance, however, that such new
financing agreements will be consummated by the Company.
In November 1998, the Company borrowed a principal amount of $10,000,000
pursuant to a subordinated unsecured loan (the "Subordinated Loan"). The
Subordinated Loan matures on March 31, 2004 and bears interest at a rate per
annum equal to the sum of (i) 12.50% plus (ii) an additional percentage amount
equal to 0.25% commencing on November 30, 1999 and increasing by 0.25% following
the last day of each 90-day period thereafter. Until November 30, 1999, at the
option of the lender, interest is payable in additional notes, Common Stock of
the Company or warrants to purchase Common Stock of the Company. Thereafter,
interest is payable in either additional notes or cash, depending on certain
coverage ratios and, in the case of cash interest payments, the approval of the
Bank. The Company will incur an additional premium of 5.0% on any prepayments of
the Subordinated Loan made prior to November 30, 1999. Such additional premium
will be reduced by 100 basis points on December 1, 1999 and shall be reduced by
such amount on each December 1st thereafter until December 1, 2003. In
connection with the Subordinated Loan, the Company issued ten-year warrants to
the lender to purchase 440,000 shares of the Company's Common Stock at an
exercise price not to exceed $5.00 per share. In the event the Company has not
paid the loan in full by November 30, 1999 (subject to extension in certain
instances), the Company will issue ten-year warrants to the lender to purchase
an additional 200,000 shares of the Company's Common Stock at an exercise price
not to exceed $5.00 per share. In the event the Subordinated Loan has not been
paid in full by May 31, 2001, the exercise price of such warrants shall be
reduced by $1.00 per share and, on each anniversary of such date, such exercise
price shall be reduced by an additional $1.00 per share. In addition, subject to
certain limitations, the Company granted registration rights, including "demand"
registration rights, to such lender.
The warrants issued in connection with the Subordinated Loan, which were
deemed to have a value of approximately $308,000, have been recorded as deferred
financing costs, and are being amortized on a straight-line basis over
approximately five years.
The Company's credit facility with its London bank provides for combined
lines of credit of (pound)2,650,000 (approximately $4,248,000) for working
capital for its United Kingdom operations. Such credit facility was increased
from (pound)1,400,000 (approximately $2,308,000) on May 13, 1998. These lines of
credit renewed annually and bear interest at 2.0% or 2.5% over the bank's Base
Rate, as defined. In addition, the Company is required to pay a service charge
equal to 0.2% of invoice value. These lines of credit contain covenants which
require the Company's United Kingdom subsidiaries to maintain a minimum net
worth of (pound)500,000, limit borrowings up to specified amounts of accounts
receivable aged 120 days or less and are guaranteed by the Company for the
principal amount of up to (pound)500,000. Amounts outstanding are collateralized
by substantially all of the Company's United Kingdom assets. As of February 28,
1999, the Company had an outstanding balance of (pound)1,494,000 (approximately
$2,394,000) under its United Kingdom credit facility.
In connection with its acquisition of certain of the assets (the "Five Star
Acquisition") of Five Star Finishers, Ltd., a United Kingdom corporation ("Five
Star"), the Company entered into a three-year term loan of (pound)400,000
(approximately $660,000) with its London bank. Such term
-9-
loan bears interest at 2.4% over the bank's Base Rate, as defined, and contains
covenants which require the Company to maintain certain debt to earnings ratios
and Net Tangible Assets, as defined, and limits borrowings to 75% of Net
Tangible Assets. The Company's obligations under the term loan are guaranteed by
its United Kingdom subsidiaries. As of February 28, 1999, the Company had an
outstanding balance of (pound)322,000 (approximately $517,000) under the term
loan.
NOTE E - PRO FORMA FINANCIAL INFORMATION:
The following supplemental pro forma information is presented as if the
Company had completed the Kwik Acquisition, the Mega Art Acquisition, the Zazula
Acquisition and the SuperGraphics Acquisition (each as hereinafter defined) as
of September 1, 1998 and 1997, respectively:
SIX MONTHS ENDED,
---------------------------------
FEBRUARY 28,
1999 1999
---------------------------------
Net sales............................... $ 37,523,000 $28,225,000
Income from operations.................. 4,332,000 3,845,000
Net income.............................. 427,000 1,846,000
Net income per share - basic............ 0.08 0.40
Net income per share - diluted.......... 0.08 0.37
NOTE F - SUBSEQUENT EVENTS:
On April 7, 1999, the Company, through its wholly-owned subsidiary Unison
(NY), Inc., a Delaware corporation ("Unison (NY)"), consummated the acquisition
(the "X+C Acquisition") of substantially all of the assets of Peter X(+C)
Limited, a New York corporation ("X+C"), located in New York City. The purchase
price included an initial cash payment of $70,000 and the issuance of 40,000
shares of restricted Common Stock of the Company to the sole shareholder of X+C.
In addition, the purchase price includes a deferred cash payment of $100,000
payable on April 1, 2000, and an earn-out payment of up to $1,000,000 in cash or
in some combination of cash and restricted Common Stock of the Company in the
event X+C achieves certain financial performance objectives.
On March 31, 1999, the Chapter 7 Trustee (the "Trustee") for Cardinal
Communications Group, Inc. ("Cardinal") filed an adversary proceeding against
the Company in Cardinal's Chapter 7 bankruptcy proceeding pending in the United
States Bankruptcy Court for the Southern District of New York. The Trustee is
seeking recovery of funds alleged to be the property of the bankruptcy estate
under various bankruptcy code provisions. In addition, the Trustee is seeking a
-10-
declaratory judgment regarding the bankruptcy estate's entitlement to a portion
of the proceeds from the sale of real property acquired by the Company pursuant
to that certain Asset Purchase Agreement dated as of August 2, 1996 (the
"Cardinal Purchase Agreement"). The Company believes that the bankruptcy estate
is not entitled to any additional monies under the Cardinal Purchase Agreement.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
GENERAL
The Company is a leading provider of imaging, reproduction and integrated
media solution services to advertising agencies, retailers, corporations,
marketing/communications firms, publishers, government agencies and financial
institutions in the New York City, Boston, San Francisco and London markets.
Through active cross-selling among the Unidigital Enterprise, the Company
provides imaging, reproductive and integrated media solutions to each of the
large format, digital prepress and digital printing segments of the industry.
Cross-selling among the Unidigital Enterprise offers a total media solution for
customers, which the Company believes, creates a distinct advantage over
competitors within the marketplace.
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission (the "SEC"), or press
releases or oral statements made by or with the approval of an authorized
executive officer of the Company. These forward-looking statements, such as
statements regarding anticipated future revenues, capital expenditures, Year
2000 compliance and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
to: (i) economic conditions, including economic conditions related to the
digital print industry; (ii) the availability of equipment from the Company's
vendors at current prices and levels; (iii) the intense competition in the
markets for the Company's products and services; (iv) the Company's ability to
integrate acquired companies and businesses in a cost-effective manner; (v) the
Company's ability to effectively implement its branding strategy; (vi) the
Company's ability to obtain additional financing at favorable rates; and (vii)
the Company's ability to develop, market, provide, and achieve market acceptance
of new service offerings to new and existing clients.
RESULTS OF OPERATIONS
The consolidated financial information includes both the Company's United
States operations and its United Kingdom operations. On March 25, 1998 the
Company acquired substantially all of the assets of Kwik International, Ltd.
(the "Kwik Acquisition"). As a result of such acquisition the Company has
expanded its color separation and large format printing services in the New York
and surrounding area. In July 1998, the Company consummated the Five Star
Acquisition in the United Kingdom. On September 2, 1998, the Company consummated
the Mega Art Acquisition (the "Mega Art Acquisition") resulting in the expansion
of its wide format,
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digital prepress and printing services. On October 30, 1998, the Company
consummated the Zazula Acquisition (the "Zazula Acquisition") resulting in the
expansion of its retouching and prepress services, primarily to advertising
agencies. On November 30, 1998, the Company completed the SuperGraphics
Acquisition (the "SuperGraphics Acquisition") resulting in the expansion of its
large format services. Such acquisitions have been accounted for under the
purchase method of accounting and, therefore, results of operations from such
acquisitions are included in the Company's consolidated financial statements
from the date of the respective acquisition.
THREE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
----------------------------------------------------------
NET SALES. Net sales for the three months ended February 28, 1999 ("Second
Quarter of Fiscal 1999") increased by 93%, or $8,889,000, to $18,445,000 from
$9,556,000 for the three months ended February 28, 1998 ("Second Quarter of
Fiscal 1998"). Net sales for the Company's United States operations increased by
185%, or $9,883,000, from $5,346,000 in the Second Quarter of Fiscal 1998 to
$15,229,000 in the Second Quarter of Fiscal 1999. This increase was attributable
primarily to an increase in net sales resulting from the Kwik Acquisition, the
Mega Art Acquisition, the Zazula Acquisition and the SuperGraphics Acquisition
and, to a lesser extent, an increase in net sales in the Company's other United
States subsidiaries. Net sales for the Company's United Kingdom operations
decreased by 24%, or $994,000, from $4,210,000 in the Second Quarter of Fiscal
1998 to $3,216,000 in the Second Quarter of Fiscal 1999. This decrease was
attributable primarily to a market-driven downturn in the financial printing
industry in the United Kingdom.
COST OF SALES. Cost of sales for the Second Quarter of Fiscal 1999
increased by 63% or $3,312,000, to $8,587,000 from $5,275,000 for the Second
Quarter of Fiscal 1998. As a percentage of net sales, cost of sales decreased as
a percentage of net sales from 55% for the Second Quarter of Fiscal 1998 to 47%
for the Second Quarter of Fiscal 1999. Such decrease was attributable primarily
to the change in product mix to include more large format services. Cost of
sales for the Company's United States operations increased as a percentage of
net sales from 49% for the Second Quarter of Fiscal 1998 to 44% for the Second
Quarter of Fiscal 1999. Such increase was attributable primarily to increased
costs incurred in connection with the Company's preparation for expansion of its
large format and digital print businesses. Cost of sales for the Company's
United Kingdom operations decreased as a percentage of net sales from 63% for
the Second Quarter of Fiscal 1998 to 56% for the Second Quarter of Fiscal 1999.
Such decrease was attributable primarily to the change in product mix to include
less digital print services as well as the reduced operations at the Company's
financial printing facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased 116%, or $3,852,000, from $3,333,000
for the Second Quarter of Fiscal 1998 to $7,185,000 for the Second Quarter of
Fiscal 1999. Such increase was attributable primarily to the increased level of
operations which resulted from the Kwik Acquisition, the Mega Art Acquisition,
the Zazula Acquisition and the SuperGraphics Acquisition and the hiring of
additional management and administrative personnel and costs associated with the
Company's acquisitions. As a percentage of net sales, SG&A increased from 35%
for the Second Quarter of
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Fiscal 1998 to 39% for the Second Quarter of Fiscal 1999. SG&A increased a
percentage of net sales as a result of increased salary expenses.
INCOME FROM OPERATIONS. Income from operations for the Second Quarter of
Fiscal 1999 increased by 182%, or $1,725,000, to $2,673,000 from $948,000 for
the Second Quarter of Fiscal 1998. Of this amount, $2,537,000 was contributed by
the Company's United States operations and $136,000 by the Company's United
Kingdom operations. This increase resulted from higher net sales offset in part
by higher operating costs associated with such net sales.
NET INTEREST EXPENSE. Net interest expense for the Second Quarter of Fiscal
1999 increased by 189%, or $1,188,000, to $1,817,000 from $629,000 for the
Second Quarter of Fiscal 1998. This increase resulted from increased borrowings
under the Company's credit facilities primarily relating to the Company's
acquisitions.
INCOME TAXES. Income taxes for the Second Quarter of Fiscal 1999 increased
by 217%, or $275,000, to $402,000 from $127,000 for the Second Quarter of Fiscal
1998.
NET INCOME. As a result of the factors described above, net income for the
Second Quarter of Fiscal 1999 increased by 136%, or $262,000, to $454,000 as
compared to net income of $192,000 for the Second Quarter of Fiscal 1998.
SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 28, 1998
--------------------------------------------------------
NET SALES. Net sales for the six months ended February 28, 1999 increased
by 78%, or $15,100,000, to $34,356,000 from $19,256,000 for the six months ended
February 28, 1998. Net sales for the Company's United States operations
increased by 173%, or $17,454,000, from $10,110,000 in the six months ended
February 28, 1998 to $27,564,000 in the six months ended February 28, 1999. This
increase was attributable primarily to an increase in net sales resulting from
the Kwik Acquisition and the Mega Art Acquisition and, to a lesser extent, the
Zazula Acquisition, the SuperGraphics Acquisition and an increase in net sales
in the Company's other United States subsidiaries. Net sales for the Company's
United Kingdom operations decreased by 26%, or $2,354,000, from $9,146,000 in
the six months ended February 28, 1998 to $6,792,000 in the six months ended
February 28, 1999. This decrease was attributable primarily to a market-driven
downturn in the financial printing industry in the United Kingdom.
COST OF SALES. Cost of sales for the six months ended February 28, 1999
increased by 68%, or $7,010,000, to $17,310,000 from $10,300,000 for the six
months ended February 28, 1998. As a percentage of net sales, cost of sales
decreased from 53% for the six months ended February 28, 1998 to 50% for the six
months ended February 28, 1999. Cost of sales for the Company's United States
operations increased as a percentage of net sales from 46% for the six months
ended February 28, 1998 to 49% for the six months ended February 28, 1999. Such
increase was attributable primarily to increased costs incurred in connection
with the Company's preparation for expansion of its large format and digital
print businesses. Cost of sales for the Company's United Kingdom operations
decreased as a percentage of net sales from 61% for the six months ended
February 28, 1998 to 58% for the six months ended February 28, 1999. Such
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decrease was attributable primarily to the change in product mix to include less
digital print services as well as the reduced operations at the Company's
financial printing facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased by 86%, or
$5,827,000, from $6,747,000 for the six months ended February 28, 1998 to
$12,574,000 for the six months ended February 28, 1999. Such increase was
attributable primarily to the increased level of operations which resulted from
the Kwik Acquisition and the Mega Art Acquisition, and, to a lesser extent, the
Zazula Acquisition, the SuperGraphics Acquisition and the hiring of additional
management and administrative personnel and costs associated with the Company's
acquisitions. As a percentage of net sales, SG&A increased from 35% for the six
months ended February 28, 1998 to 37% for the six months ended February 28,
1999. SG&A increased a percentage of net sales as a result of increased salary
expenses.
RESTRUCTURING EXPENSES. During the six months ended February 28, 1999, the
Company continued to consolidate its United Kingdom financial printing
operations. As a result of such consolidation, the Company incurred
restructuring expenses of $196,000.
INCOME FROM OPERATIONS. Income from operations for the six months ended
February 28, 1999 increased by 94%, or $2,067,000, to $4,276,000 from $2,209,000
for the six months ended February 28, 1998. Of this amount, $4,003,000 was
contributed by the Company's United States operations and $273,000 by the
Company's United Kingdom operations. This increase resulted from higher net
sales offset in part by higher production costs associated with such net sales
and the restructuring expenses incurred in connection with the consolidation of
the Company's United Kingdom financial printing operations.
NET INTEREST EXPENSE. Net interest expense for the six months ended
February 28, 1999 increased by 149%, or $1,659,000, to $2,770,000 from
$1,111,000 for the six months ended February 28, 1998. This increase resulted
from increased borrowings under the Company's credit facilities primarily
related to the Company's acquisitions.
INCOME TAXES. Income taxes for the six months ended February 28, 1999
increased by 71%, or $282,000, to $682,000 from $400,000 for the six months
ended February 28, 1998.
NET INCOME. As a result of the factors described above, net income for the
six months ended February 28, 1999 increased by 18%, or $126,000, to $824,000 as
compared to net income of $698,000 for the six months ended February 28, 1998.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
CASH FLOW. Net cash used in operating activities was $3,654,000 for the
first six months of fiscal 1999 and $595,000 for the first six months of fiscal
1998. Net cash used in investing activities for the acquisition of property and
equipment was $711,000 for the first six months of fiscal 1999 and $599,000 for
the first six months of Fiscal 1998. For the first six months of fiscal 1999 and
fiscal 1998, the Company acquired equipment under capital leases of $2,597,000
and $407,000, respectively, and made payments under capital leases of $1,157,000
and $933,000,
-15-
respectively. Net bank borrowings provided funds of $29,543,000 for the first
six months of fiscal 1999 and $857,000 for the first six months of fiscal 1998.
BANK CREDIT FACILITIES. The Company has borrowing arrangements with
commercial banks in both New York and London. During the First Quarter of Fiscal
1999, the Company amended its existing credit facility with CIBC in the
aggregate amount of $52,000,000, which consist of a: (i) $32,000,000 term loan;
(ii) $15,000,000 revolving line of credit facility which is available for
working capital purposes; and (iii) $5,000,000 credit facility which is
available for corporate acquisition purposes. Such borrowings are guaranteed by
the Company's United States subsidiaries, including subsidiaries currently owned
and subsequently acquired. In addition, the Company pledged all of its equity
interests in its United States subsidiaries, including subsidiaries currently
owned and subsequently acquired, and two-thirds of its equity interests in its
wholly-owned United Kingdom subsidiary as collateral for such credit facilities.
Interest under such credit facilities is, at the Company's option, at the Base
Rate or at the Eurodollar Rate, as defined, plus an Applicable Margin, as
defined, ranging from 0.75% to 3.0% depending on the Company's consolidated debt
to earnings ratio and the type of loan. As of February 28, 1999, the Company had
an outstanding balance of $32,000,000 under the term loan, and $14,935,000 under
the revolving credit facility and $5,000,000 under the acquisition loan.
The credit facilities contain covenants which require the Company to
maintain certain earnings and debt to earnings ratio requirements based on the
combined operations of the Company and its subsidiaries. The Company's agreement
with CIBC restricts the Company's ability to pay dividends. The credit
facilities are secured by a first priority lien on all of the assets of the
Company and its subsidiaries, including subsidiaries currently owned and
subsequently acquired.
In November 1998, the Company borrowed a principal amount of $10,000,000
pursuant to the Subordinated Loan. The Subordinated Loan matures on March 31,
2004 and bears interest at a rate per annum equal to the sum of (i) 12.50% plus
(ii) an additional percentage amount equal to 0.25% commencing on November 30,
1999 and increasing by 0.25% following the last day of each 90-day period
thereafter. Until November 30, 1999, at the option of the lender, interest is
payable in additional notes, Common Stock of the Company or warrants to purchase
Common Stock of the Company. Thereafter, interest is payable in either
additional notes or cash, depending on certain coverage ratios and, in the case
of cash interest payments, the approval of CIBC. The Company will incur an
additional premium of 5.0% on any prepayments of the Subordinated Loan made
prior to November 30, 1999. Such additional premium will be reduced by 100 basis
points on December 1, 1999 and shall be reduced by such amount on each December
1st thereafter until December 1, 2003. In connection with the Subordinated Loan,
the Company issued ten-year warrants to the lender to purchase 440,000 shares of
the Company's Common Stock at an exercise price not to exceed $5.00 per share.
In the event the Company has not paid the loan in full by November 30, 1999
(subject to extension in certain instances), the Company will issue ten-year
warrants to the lender to purchase an additional 200,000 shares of the Company's
Common Stock at an exercise price not to exceed $5.00 per share. In the event
the Subordinated Loan has not been paid in full by May 31, 2001, the exercise
price of such warrants shall be reduced by $1.00 per share and, on each
anniversary of such date, such exercise price
-16-
shall be reduced by an additional $1.00 per share. In addition, subject to
certain limitations, the Company granted registration rights, including "demand"
registration rights, to such lender.
The warrants issued in connection with the Subordinated Loan, which were
deemed to have a value of approximately $308,000, have been recorded as deferred
financing costs, and are being amortized on a straight-line basis over
approximately five years.
The Company's credit facility with its London bank provides for combined
lines of credit of (pound)2,650,000 (approximately $4,248,000) for working
capital for its United Kingdom operations. Such credit facility was increased
from (pound)1,400,000 (approximately $2,308,000) on May 13, 1998. These lines of
credit renew annually and bear interest at 2.0% or 2.5% over the bank's Base
Rate, as defined. In addition, the Company is required to pay a service charge
equal to 0.2% of invoice value. These lines of credit contain covenants which
require the Company's United Kingdom subsidiaries to maintain a minimum net
worth of (pound)500,000, limit borrowings up to specified amounts of accounts
receivable aged 120 days or less and are guaranteed by the Company for the
principal amount of up to (pound)500,000. Amounts outstanding are collateralized
by substantially all of the Company's United Kingdom assets. As of February 28,
1999, the Company had an outstanding balance of (pound)1,494,000 (approximately
$2,394,000) under its United Kingdom credit facility.
In connection with the Five Star Acquisition, the Company entered into a
three-year term loan of (pound)400,000 (approximately $660,000) with its London
bank. Such term loan bears interest at 2.4% over the bank's Base Rate, as
defined, and contains covenants which require the Company to maintain certain
debt to earnings ratios and Net Tangible Assets, as defined, and limits
borrowings to 75% of Net Tangible Assets. The Company's obligations under the
term loan are guaranteed by its United Kingdom subsidiaries. As of February 28,
1999, the Company had an outstanding balance of (pound)322,000 (approximately
$517,000) under the term loan.
The Company has not met a financial covenant under its credit facilities
with CIBC and has requested a waiver of such covenant from CIBC. At February 28,
1999, the credit facilities have been classified as a short-term liability until
such waiver is obtained. The Company believes that CIBC will grant such waiver,
however, there can be no assurance that such waiver will be obtained.
The Company expects that cash flow from operations will be sufficient to
fund its capital lease obligations, debt service payments, potential earn-outs,
capital expenditures and operations for at least 12 months. The Company has
received a commitment from other lenders to replace the existing CIBC credit
facilities. Such commitment is initially for $65,000,000 of senior debt with a
potential increase to $100,000,000 of senior and subordinated debt. There can be
no assurance, however, that such new financing arrangements will be consummated
by the Company.
WORKING CAPITAL. The Company's working capital decreased by $52,951,000
from $8,897,000 at August 31, 1998 to a working capital deficit of $44,054,000
at February 28, 1999. Such decrease is attributable to the Company's credit
facilities with CIBC being classified as a short-term liability until a waiver
from CIBC is obtained. If the Company had obtained a waiver from CIBC, the
Company's working capital at February 28, 1999 would have been $15,001,000.
ACQUISITIONS. Subsequent to the end of the quarter, on April 7, 1999, the
Company, through its wholly-owned subsidiary Unison (NY), consummated the X+C
Acquisition. The purchase price included an initial cash payment of $70,000 and
the issuance of 40,000 shares of restricted Common Stock of the Company to the
sole shareholder of X+C. In addition, the
-17-
purchase price includes a deferred cash payment of $100,000 payable on April 1,
2000, and an earn-out payment of up to $1,000,000 in cash or in some combination
of cash and restricted Common Stock of the Company in the event X+C achieves
certain financial performance objectives.
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND INTEREST RATE CHANGES.
Although the Company cannot accurately determine the precise effect thereof on
its operations, it does not believe inflation, currency fluctuations or interest
rate changes have historically had a material effect on revenues, sales or
results of operations. Inflation, currency fluctuations and changes in interest
rates have, however, at various times, had significant effects on the economies
of the United States and the United Kingdom and could adversely impact the
Company's revenues, sales and results of operations in the future. If there is a
material adverse change in the relationship between the Pound Sterling and the
United States Dollar, such change would adversely affect the results of the
Company's United Kingdom operations as reflected in the Company's financial
statements. The Company has not hedged its exposure with respect to this
currency risk, and does not expect to do so in the future, since it does not
believe that it is practicable for it to do so at a reasonable cost.
YEAR 2000 COMPLIANCE
The Company believes that it has sufficiently assessed its state of
readiness with respect to its Year 2000 compliance. The Company has developed or
is developing a program to address on a timely basis the risk that computer
applications developed, marketed, sold and delivered or used by the Company may
be unable to recognize and properly perform date-sensitive functions involving
dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The
Company does not believe that Year 2000 compliance will result in material
investments by the Company, nor does the Company anticipate that the Year 2000
Problem will have any adverse effects on the business operations or financial
performance of the Company. The Company does not believe that it has any
material exposure to the Year 2000 Problem with respect to its own information
systems. There can be no assurance, however, that the Year 2000 Problem will not
adversely affect the Company's business, operating results and financial
condition.
The Company believes that each of its products is Year 2000 compliant,
however, it has no control over whether software modification made by third
parties or the combination of its products with the software developed by third
parties and combined with the Company's products will be Year 2000 compliant.
Additionally, there can be no assurance that such potential instances of
non-compliance will not adversely affect the Company's business, operating
results and financial condition. The Company has established no reserve for
auditing its software products or for correcting Year 2000 compliance issues
with such products.
Although the Company believes its products are Year 2000 compliant, the
purchasing patterns of customers and potential customers may be affected by
issues associated with the Year 2000 Problem. As companies expend significant
resources to correct their current data storage solutions, these expenditures
may result in reduced funds to purchase products as those offered by the
Company. There can be no assurance that the Year 2000 Problem will not adversely
affect the Company's business, operating results and financial condition.
Conversely, the Year 2000
-18-
Problem may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term demand for
the Company's products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-19-
PART II
ITEM 1. LEGAL PROCEEDINGS.
A dispute has arisen out of the Company's acquisition of Libra City
Corporate Printing Limited ("Libra") in the United Kingdom. The Company has
withheld a portion of the earn-out payment (approximately (pound)230,000 or
$368,000) because of a potential breach of a non-competition clause and
warranties. The parties attempted to resolve the dispute outside of litigation.
However, on August 13, 1998, certain of the shareholders of Libra filed suit
against the Company in the High Court of Justice, Queen's Bench Division seeking
the balance of the earn-out payment. The Company filed a counterclaim seeking to
offset any earn-out payments that may be owed to such shareholders in addition
to any damages arising out of the alleged breach of warranties. On April 14,
1999, the Court ruled that the Company's counterclaim may proceed to trial.
Subsequent to the end of the quarter, on March 31, 1999, the Trustee for
Cardinal filed an adversary proceeding against the Company in Cardinal's Chapter
7 bankruptcy proceeding pending in the United States Bankruptcy Court for the
Southern District of New York. The Trustee is seeking recovery of funds alleged
to be the property of the bankruptcy estate under various bankruptcy code
provisions. In addition, the Trustee is seeking a declaratory judgment regarding
the bankruptcy estate's entitlement to a portion of the proceeds from the sale
of real property acquired by the Company pursuant to the Cardinal Purchase
Agreement. The Company believes that the bankruptcy estate is not entitled to
any additional monies under the Cardinal Purchase Agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Subsequent to the end of the quarter, on March 12, 1999, the Company issued
25,000 shares of restricted Common Stock of the Company to each of Shimon Azulay
and Nadav Chen, employees of Mega Art, as partial consideration for the Mega Art
Acquisition.
Subsequent to the end of the quarter, on April 7, 1999, the Company issued
40,000 shares of restricted Common Stock of the Company to Peter Ksiezopolski as
partial consideration for the X+C Acquisition.
No underwriter was employed by the Company in connection with the issuances
and sales of the securities described above. The Company believes that the
issuances and sales of all of the foregoing securities were exempt from
registration under either (i) Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), as transactions not involving a public offering, or (ii) in
the case of the shares issued to the employee, Rule 701 under the Act as a
transaction made pursuant to a written compensatory benefit plan or pursuant to
a written contract relating to compensation. No public offering was involved and
the securities were acquired for investment and not with a view to distribution.
Appropriate legends have been affixed to the stock certificates issued to the
all recipients of such shares. All recipients had adequate access to information
about the Company.
-20-
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
The Company has not met a financial covenant under its credit facilities
with CIBC and has requested a waiver of such covenant from CIBC. At February 28,
1999, the credit facilities have been classified as a short-term liability until
such waiver is obtained. The Company believes that CIBC will grant such waiver,
however, there can be no assurance that such waiver will be obtained.
In addition, the Company has received a commitment from other lenders to
replace the existing CIBC credit facilities. Such commitment is initially for
$65,000,000 of senior debt with a potential increase to $100,000,000 of senior
and subordinated debt. There can be no assurance, however, that such new
financing arrangements will be consummated by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on February 4,
1999.
There were 4,156,308 shares present at the meeting in person or by proxy.
The results of the vote taken at such meeting with respect to each nominee for
director were as follows:
NOMINEE FOR WITHHELD
------- --- --------
William E. Dye 4,145,698 10,610
Peter Saad 4,145,698 10,610
Richard J. Sirota 4,145,198 11,110
Anthony Manser 4,145,198 11,110
Harvey Silverman 4,145,198 11,110
David Wachsman 4,145,198 11,110
Also at the meeting, a vote was taken on the proposal to amend the
Certificate of Incorporation of the Company to increase the Company's authorized
shares of Common Stock from 10,000,000 to 25,000,000 and the Company's
authorized Preferred Stock from 5,000,0000 to 10,000,000. Of the 4,156,308
shares present at the meeting in person or by proxy, 3,418,513 shares were voted
in favor of such proposal, 131,980 shares were voted against such proposal, and
600 shares abstained from voting. There were also 605,215 broker non-votes with
respect to such proposal.
Also at the meeting, a vote was taken on the proposal to amend the 1997
Equity Incentive Plan to increase the number of shares of Common Stock reserved
for the issuance upon exercise of options granted under such plan from 500,000
to 1,000,000. Of the 4,156,308 shares present at the meeting in person or by
proxy, 3,151,213 shares were voted in favor of such proposal, 398,880 shares
were voted against such proposal, and 1,000 shares abstained from voting. There
were also 605,215 broker non-votes with respect to such proposal.
Finally, a vote was taken at the meeting on the proposal to ratify the
appointment of Ernst & Young LLP as the independent certified public accountants
of the Company for the fiscal year ending August 31, 1999. Of the 4,156,308
shares present at the meeting in person or by proxy, 4,147,898 shares were voted
in favor of such proposal, 800 shares were voted against such proposal, and
7,610 shares abstained from voting.
-21-
ITEM 5. OTHER INFORMATION.
On February 4, 1999, the Company's application for listing of the Company's
Common Stock on the American Stock Exchange ("AMEX") was approved. The Company's
Common Stock began trading on AMEX on February 8, 1999.
Subsequent to the end of the quarter, on April 7, 1999, the Company,
through its wholly-owned subsidiary Unison (NY), consummated the X+C
Acquisition. The purchase price included an initial cash payment of $70,000 and
the issuance of 40,000 shares of restricted Common Stock of the Company to the
sole shareholder of X+C. In addition, the purchase price includes a deferred
cash payment of $100,000 payable on April 1, 2000, and an earn-out payment of up
to $1,000,000 in cash or in some combination of cash and restricted Common Stock
of the Company in the event X+C achieves certain financial performance
objectives.
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Asset Purchase Agreement dated as of
April 7, 1999 by and among Unidigital
Inc., Unison (NY), Inc., Peter X(+C)
Limited and Peter Ksiezopolski.
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K.
On February 16, 1999, the Company filed a Current Report on Form 8-K/A
containing required financial statements and pro forma financial information
relating to the SuperGraphics Acquisition disclosed in its Current Report on
form 8-K filed on December 14, 1998.
-22-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNIDIGITAL INC.
DATE: April 19, 1999 By: /s/William E. Dye
-----------------------------
William E. Dye,
Chief Executive Officer
(Principal Executive Officer)