SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
229 West 28th Street, New York, New York 10001
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(Address of Principal Executive Offices)
(212) 244-7820
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(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:
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State the number of shares outstanding of each of the Issuer's classes of
common stock, as of June 30, 1999:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 5,493,002
Transitional Small Business Disclosure Format (check one):
Yes: No: X
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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 May 31, 1999 (unaudited)
and August 31, 1998 (audited)......................................2
CONSOLIDATED INCOME STATEMENTS
For the Three Months and Nine
Months Ended May 31, 1999 and
May 31, 1998 (unaudited)...........................................3
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
May 31, 1999 and May 31, 1998
(unaudited)........................................................4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (unaudited).............................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................12
General............................................................12
Results of Operations..............................................12
Liquidity, Capital Resources and Other Matters.....................16
Year 2000 Compliance...............................................18
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 5. Other Information.............................................21
Item 6. Exhibits and Reports on Form 8-K..............................22
SIGNATURES...................................................................24
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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UNIDIGITAL INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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MAY 31, AUGUST 31,
1999 1998
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 321,000 $ 287,000
Accounts receivable (less allowance for doubtful
accounts of $877,000 and $581,000 at
May 31, 1999 and August 31, 1998, respectively).............. 25,530,000 16,917,000
Deferred financing costs, net.................................. 2,910,000 1,013,000
Prepaid expenses............................................... 5,423,000 2,727,000
Other current assets........................................... 3,035,000 3,360,000
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Total current assets....................................... 37,219,000 24,304,000
Property and equipment, net....................................... 20,188,000 14,591,000
Intangible assets, net............................................ 61,361,000 28,107,000
Other assets...................................................... 803,000 313,000
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Total assets............................................... $ 119,571,000 $ 67,315,000
============== =============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses.......................... $ 8,606,000 $ 8,571,000
Current portion of capital lease obligations................... 3,329,000 1,935,000
Current portion of long-term debt.............................. 550,000 3,610,000
Income taxes payable........................................... 1,650,000 887,000
Deferred income taxes.......................................... -- 249,000
Loans and notes payable to stockholders........................ 592,000 155,000
-------------- -------------
Total current liabilities.................................. 14,727,000 15,407,000
Capital lease obligations, net of current portion................. 5,684,000 2,830,000
Long-term debt, net of current portion............................ 72,432,000 33,978,000
Deferred income taxes............................................. 833,000 500,000
Loans and notes payable to stockholders, net of current portion... 207,000 207,000
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Total liabilities.......................................... 93,883,000 52,922,000
STOCKHOLDERS' EQUITY
Preferred stock -- authorized 10,000,000 shares at
May 31, 1999 and 5,000,000 shares at August 31, 1998,
respectively, $.01 par value each; none issued
or outstanding............................... -- --
Common stock -- authorized 25,000,000 shares at
May 31, 1999 and 10,000,000 shares at August 31, 1998,
respectively, $.01 par value each; 5,493,002 and 3,902,634
shares issued and outstanding at May 31, 1999 and
August 31, 1998, respectively.................................. 55,000 39,000
Additional paid-in capital........................................ 20,209,000 9,865,000
Retained earnings................................................. 5,724,000 4,374,000
Cumulative foreign translation adjustment......................... (300,000) 115,000
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Total stockholders' equity................................. 25,688,000 14,393,000
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Total liabilities and stockholders' equity................. $ 119,571,000 $ 67,315,000
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UNIDIGITAL INC. AND SUBSIDIARIES
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CONSOLIDATED INCOME STATEMENTS
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(UNAUDITED)
THREE MONTHS ENDED, NINE MONTHS ENDED,
------------------------------- ------------------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Net sales......................... $ 21,787,000 $ 13,995,000 $ 56,165,000 $32,845,000
------------ ------------ ------------ -----------
EXPENSES
Cost of sales..................... 10,663,000 7,693,000 27,980,000 17,598,000
Selling, general and administrative
expenses........................ 7,468,000 4,204,000 19,906,000 10,943,000
Expenses incurred due to
restructuring................... -- 247,000 287,000 247,000
------------ ------------ ------------ -----------
Total operating expenses.......... 18,131,000 12,144,000 48,173,000 28,788,000
------------ ------------ ------------ -----------
Income from operations............ 3,656,000 1,851,000 7,992,000 4,057,000
Interest expense.................. 1,786,000 840,000 4,587,000 1,388,000
Interest expense - deferred
financing costs................. 140,000 220,000 331,000 696,000
Interest and other expenses
(income)........................ 110,000 41,000 (77,000) 127,000
------------ ------------ ------------- -----------
Income before income taxes........ 1,620,000 750,000 3,151,000 1,846,000
Provision for income taxes........ 566,000 307,000 1,259,000 704,000
------------ ------------ ------------ -----------
Net income before extraordinary
item............................ 1,054,000 443,000 1,892,000 1,142,000
Extraordinary item-loss on early
retirement of debt (net of income
tax benefit of $460,000 at May 31,
1999 and $137,000 at May 31, 1998,
respectively)................... 542,000 143,000 542,000 143,000
------------ ------------ ------------ -----------
Net income........................... $ 512,000 $ 300,000 $ 1,350,000 $ 999,000
============ ============ ============ ===========
Basic earnings (loss) per common share:
Earnings before extraordinary
item............................ $ 0.20 $ 0.12 $ 0.37 $ 0.34
Extraordinary item................ (0.10) (0.04) (0.11) (0.04)
------------ ------------ ------------ -----------
Net income........................ $ 0.10 $ 0.08 $ 0.26 $ 0.30
============ ============ ============ ===========
Diluted earnings (loss) per common
share:
Earnings before extraordinary
item............................ $ 0.19 $ 0.11 $ 0.36 $ 0.31
Extraordinary item................ (0.10) (0.04) (0.10) (0.04)
------------ ------------ ------------ -----------
Net income........................ $ 0.09 $ 0.07 $ 0.26 $ 0.27
============ ============ ============ ===========
Shares used to compute net income
per share:
Basic............................. 5,367,975 3,724,459 5,140,197 3,403,721
============ ============ ============ ===========
Diluted........................... 5,461,352 4,036,427 5,242,682 3,640,752
============ ============ ============ ===========
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UNIDIGITAL INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
NINE MONTHS ENDED,
MAY 31, MAY 31,
1999 1998
---- ----
OPERATING ACTIVITIES
Net income......................................................... $ 1,350,000 $ 999,000
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization............................... 5,447,000 2,684,000
Provision for deferred income taxes......................... 89,000 91,000
Provision for bad debts..................................... 315,000 32,000
Gain on sale of assets...................................... (191,000) --
Extraordinary item.......................................... 1,002,000 --
Changes in assets and liabilities:
Accounts receivable......................................... (5,258,000) (3,272,000)
Prepaid expenses and other current assets................... (480,000) (3,494,000)
Other assets................................................ (324,000) (91,000)
Accounts payable and accrued expenses....................... (4,711,000) 776,000
Income taxes payable........................................ 376,000 317,000
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Net cash used in operating activities.............................. (2,385,000) (1,958,000)
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INVESTING ACTIVITIES
Proceeds of sale of fixed assets................................... 945,000 --
Additions to property and equipment................................ (1,032,000) (837,000)
Business acquisitions.............................................. (27,259,000) (21,245,000)
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Net cash used in investing activities.............................. (27,346,000) (22,082,000)
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FINANCING ACTIVITIES
Net proceeds from bank borrowings.................................. 90,350,000 22,386,000
Payments of capital lease obligations.............................. (2,091,000) (1,422,000)
Payments of long-term debt......................................... (58,413,000) --
Stockholder loans.................................................. (173,000) --
Common stock issued................................................ 92,000 20,000
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Net cash provided by financing activities.......................... 29,765,000 20,984,000
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Effect of foreign exchange rates on cash........................... -- 15,000
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Net increase (decrease) in cash and cash equivalents............... 34,000 (3,041,000)
Cash and cash equivalents at beginning of period................... 287,000 3,203,000
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Cash and cash equivalents at end of period......................... $ 321,000 $ 162,000
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SUPPLEMENTAL DISCLOSURES
Interest paid...................................................... $ 4,423,000 $ 407,000
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Income taxes paid.................................................. $ 438,000 $ 159,000
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Noncash transactions:
Equipment acquired under capital lease obligations................. $ 4,344,000 $ 1,310,000
============ ===========
Value of warrants issued - business acquisitions................... $ 931,000 $ --
============ ===========
Value of warrants - additional financing........................... $ 308,000 $ --
============ ===========
Business acquisitions (net of liabilities of $8,682,000)........... $ 2,939,000 $ --
============ ===========
Stock issued for business acquisitions............................. $ 9,029,000 $ --
============ ===========
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UNIDIGITAL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(unaudited)
NOTE A - BASIS OF PRESENTATION:
The information presented for May 31, 1999, and for the three-month and the
nine-month periods ended May 31, 1999 and May 31, 1998, is unaudited, but, in
the opinion of the management 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 May 31, 1999, the results of their operations
for the three-month and the nine-month periods ended May 31, 1999 and May 31,
1998 and their cash flows for the nine-month periods ended May 31, 1999 and May
31, 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 media services company that provides large and grand
format digital image solutions combined with a full suite of digital "premedia"
(previously referred to as prepress) services to advertising agencies,
retailers, publishers, graphic design firms, consumer product companies,
government agencies, individual graphic artists and marketing and communications
firms in both the United States and the United Kingdom. In the third quarter of
fiscal 1999, the Company began delivering its services through two principal
business divisions. The Media Solutions division creates and produces large and
grand format images for out-of-home advertising and develops new media concepts.
The Premedia Services division provides digital premedia, including retouching
and short-run digital printing services.
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UNIDIGITAL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(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
May 31, 1999, respectively, for balance sheet accounts) and average exchange
rates ((pound)1.00 = $1.61 and $1.68 for the three month periods ended May 31,
1999 and May 31, 1998, respectively, and $1.64 and $1.68 for the nine month
periods ended May 31, 1999 and May 31, 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, NINE MONTHS ENDED,
---------------------------------- ----------------------------------
MAY 31, MAY 31,
1999 1998 1999 1998
---- ---- ---- ----
Numerator for basic and diluted earnings per
share-net income available for common
stockholders............................... $ 512,000 $ 300,000 $ 1,350,000 $ 999,000
=========== =========== ============ ===========
Denominator:
Denominator for basic earnings per share-
Weighted average shares.................... 5,367,975 3,724,459 5,140,197 3,403,721
Effect of dilutive securities:
Stock options.............................. 21,880 109,555 17,483 64,896
Warrants................................... 71,497 202,413 85,002 172,135
----------- ----------- ------------ -----------
Denominator for diluted earnings per
share-adjusted weighted-average shares and
assumed conversions........................ 5,461,352 4,036,427 5,242,682 3,640,752
=========== =========== ============ ===========
The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
THREE MONTHS ENDED, NINE MONTHS ENDED,
--------------------------------------------------------------------------------
MAY 31, MAY 31,
1999 1998 1999 1998
--------------------------------------------------------------------------------
Stock options.................................. 564,999 11,000 564,999 11,000
Warrants....................................... 342,000 25,000 342,000 117,000
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UNIDIGITAL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
NOTE C - AMENDMENT TO CERTIFICATE OF INCORPORATION:
On May 14, 1999, the Company filed an amendment to its Certificate of
Incorporation increasing the Company's authorized shares of Common Stock from
10,000,000 to 25,000,000 and the Company's authorized shares of Preferred Stock
from 5,000,000 to 10,000,000.
NOTE D - STOCK OPTION PLANS:
Pursuant to the 1997 Equity Incentive Plan, as amended, the Company granted
options to purchase an aggregate of 241,650 shares of its Common Stock during
the three months ended May 31, 1999. All options were granted at their fair
market value.
NOTE E - LONG-TERM DEBT:
Long-term debt consists of the following:
FACILITY
AMOUNT AMOUNT OUTSTANDING
----------------------------------------
MAY 31, MAY 31, AUGUST 31,
1999 1999 1998
------------------------------------------------------------
Revolving line of credit; interest at the Prime Rate or
at the Eurodollar Rate, as defined, plus an Applicable
Margin, as defined, ranging from 1.0% to 3.25%........... $ 65,000,000 $ 60,850,000 $ --
Credit facility in the United Kingdom interest at the
bank's overdraft rate plus 2.75%; facility amount is
(pound)150,000 ($240,000)............................... 240,000 165,000 --
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
(pound)450,000 ($720,000) renewable April 30, 1999;
facility amount is approximately (pound)2,650,000
($4,248,000)............................................ -- -- 2,135,000
Term loan, matures in March 2003; payable in sixteen
quarterly installments ranging from $960,000 to
$1,920,000 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%................................................. -- -- 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%............................... -- -- 8,435,000
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 --
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UNIDIGITAL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
FACILITY
AMOUNT AMOUNT OUTSTANDING
----------------------------------------
MAY 31, MAY 31, AUGUST 31,
1999 1999 1998
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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%........................ -- -- 75,000
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.................................. -- 499,000 618,000
Treasury loan facility in United Kingdom; matures in
July 2001, payable in monthly installment of $19,000
plus interest of LIBOR, as defined, plus the Banks
Margin of 2.4%.......................................... -- -- 651,000
Note payable, payable in monthly installments of
approximately $1,000 including interest at 10.35%....... -- 10,000 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%........................................ -- 458,000 646,000
-----------------------------------------------------------
72,982,000 37,588,000
Less current portion 550,000 3,610,000
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72,432,000 $33,978,000
===========================================================
On May 12, 1999, the Company terminated its existing financing facilities
and entered into a new borrowing arrangement consisting of a $65,000,000
revolving line of credit facility. The revolving line of credit facility may be
increased to $80,000,000 in the event the Company raises subordinated debt with
net proceeds of at least $20,000,000. The borrowings are guaranteed by the
Company's subsidiaries and the Company pledged all of its equity interests in
its United States subsidiaries and 65% of its equity interests in its United
Kingdom subsidiaries as collateral for such credit facility. Interest under such
credit facility is, at the Company's option, at the Prime Rate or at the
Eurodollar Rate, as defined, plus an Applicable Margin, as defined, ranging from
1.0% to 3.25% depending on the Company's consolidated debt to earnings ratio and
the type of loan. As of May 31, 1999, the Company had an outstanding balance of
$60,850,000 under the revolving credit facility.
-8-
UNIDIGITAL INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
The following table shows the required future repayments under the
Company's revolving credit facility:
AMOUNT (IF PRIOR TO AMOUNT (IF AFTER
REVOLVING CREDIT REVOLVING CREDIT
FACILITY INCREASE) FACILITY INCREASE)
-----------------------------------------------
Fiscal years ending:
1999 $ -- $ --
2000 -- --
2001 1,250,000 1,250,000
2002 5,000,000 6,250,000
2003 7,500,000 11,250,000
Thereafter 47,100,000 42,100,000
---------------------------------------------
60,850,000 60,850,000
=============================================
The credit facility contains covenants that 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 credit facility is secured
by a first priority lien on all of the assets of the Company and its
subsidiaries and restricts the Company's ability to pay certain dividends
without the bank's prior written consent.
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
senior lender. 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
-9-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
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.
NOTE F - ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION:
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 April 22, 1999, the Company, through Unison (NY), consummated the
acquisition (the "Progress Acquisition") of substantially all of the assets of
Progress Graphics, Inc., a New Jersey corporation ("Progress"), located in
Jersey City, New Jersey. The purchase price included the issuance of 86,059
shares ($500,000) of restricted Common Stock of the Company to the sole
shareholder of Progress. In addition, the purchase price includes earn-out
payments in cash, restricted Common Stock of the Company or some combination
thereof in the event Progress attains revenues in excess of $3,000,000 in any of
the first three years following the closing.
On April 30, 1999, the Company, through Elements (UK) Limited, a United
Kingdom corporation ("Elements (UK)"), consummated the acquisition (the
"Interface Acquisition") of all the issued and outstanding shares of capital
stock of Interface Graphics Limited, a company registered in Scotland
("Interface"), located in Edinburgh, Scotland. The initial aggregate purchase
price was (pound)425,000 which included the issuance of 49,695 shares
(approximately (pound)132,000 or $218,000) of restricted Common Stock of the
Company to the shareholders of Interface. In addition, the purchase price
includes deferred cash payments of (pound)20,000 payable on each of January 31,
2000 and January 31, 2001, and earn-out payments of up to (pound)55,000 per year
in the event Interface achieves certain financial performance objectives in any
of the first two years following the closing.
All of the foregoing 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.
-10-
UNIDIGITAL INC. AND SUBSIDIARIES
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(unaudited)
The following supplemental pro forma information is presented as if the
Company had completed the Kwik Acquisition, the Mega Art Acquisition, the Zazula
Acquisition, the SuperGraphics Acquisition (each as hereinafter defined in Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations), the X+C Acquisition, the Progress Acquisition and the Interface
Acquisition, as of September 1, 1998 and 1997, respectively:
NINE MONTHS ENDED MAY 31,
---------------------------------------
1999 1998
---------------------------------------
Net sales............................. 62,655,000 54,238,000
Income from operations................ 7,160,000 5,318,000
Net income............................ 106,000 1,581,000
Net income per share - basic.......... $0.02 $0.29
Net income per share - diluted........ $0.02 $0.27
NOTE G - LEGAL PROCEEDINGS:
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 "Bankruptcy
Court"). In June 1999, the Company and the Trustee amicably resolved the dispute
on the following items: the Company shall pay to the bankruptcy estate the sum
of $150,000 in full and final satisfaction of any and all claims of the
bankruptcy estate against the Company. The Trustee shall dismiss the adversary
proceeding with prejudice and waive any and all claims against the Company under
the bankruptcy code and that certain Asset Purchase Agreement dated as of August
2, 1996 between the Company and Cardinal (the "Cardinal Purchase Agreement"),
including, without limitation, any and all claims to the proceeds from the sale
of the real estate acquired by the Company pursuant to the Cardinal Purchase
Agreement (the "Real Estate"). The settlement is subject to the approval of the
Bankruptcy Court.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is a media services company that provides large and grand
format digital image solutions combined with a full suite of digital "premedia"
(previously referred to as prepress) services to advertising agencies,
retailers, publishers, graphic design firms, consumer product companies,
government agencies, individual graphic artists and marketing and communications
firms in both the United States and the United Kingdom. In the Third Quarter of
Fiscal 1999 (as defined below), the Company began delivering its services
through two principal business divisions. The Media Solutions division creates
and produces large and grand format images for out-of-home advertising and
develops new media concepts. The Premedia Services division provides digital
premedia, including retouching and short-run digital printing services.
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, 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 media services
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. On September 2, 1998, the Company consummated the
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Mega Art Acquisition (the "Mega Art Acquisition") resulting in the expansion of
its wide format, digital premedia and printing services. On October 30, 1998,
the Company consummated the Zazula Acquisition (the "Zazula Acquisition")
resulting in the expansion of its retouching and premedia 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. During the Third Quarter of Fiscal 1999,
the Company consummated the X+C Acquisition, the Progress Acquisition and the
Interface Acquisition. Such acquisitions have further enhanced the Company's
creative and technical capabilities, broadened its client base within the
high-end digital premedia market and expanded the Company's premedia services
into the music industry and into the United Kingdom market. All of the foregoing
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 MAY 31, 1999 AND MAY 31, 1998
NET SALES. Net sales for the three months ended May 31, 1999 ("Third
Quarter of Fiscal 1999") increased by 56%, or $7,792,000, to $21,787,000 from
$13,995,000 for the three months ended May 31, 1998 ("Third Quarter of Fiscal
1998"). Net sales for the Company's United States operations increased by 81%,
or $7,775,000, from $9,612,000 in the Third Quarter of Fiscal 1998 to
$17,387,000 in the Third Quarter of Fiscal 1999. This increase was attributable
primarily to an increase in net sales resulting from the Mega Art Acquisition,
the Zazula Acquisition and the SuperGraphics Acquisition, a full three months of
net sales resulting from the Kwik Acquisition and, to a lesser extent, an
increase in net sales in the Company's other United States subsidiaries and net
sales resulting from the X+C Acquisition. Net sales for the Company's United
Kingdom operations increased slightly by $17,000 from $4,383,000 in the Third
Quarter of Fiscal 1998 to $4,400,000 in the Third Quarter of Fiscal 1999. This
increase was attributable primarily to an increase in net sales relating to the
large format and digital print businesses offset in part by a market-driven
downturn in the financial printing industry in the United Kingdom.
COST OF SALES. Cost of sales for the Third Quarter of Fiscal 1999 increased
by 39%, or $2,970,000, to $10,663,000 from $7,693,000 for the Third Quarter of
Fiscal 1998. As a percentage of net sales, cost of sales decreased as a
percentage of net sales from 55% for the Third Quarter of Fiscal 1998 to 49% for
the Third Quarter of Fiscal 1999. Cost of sales for the Company's United States
operations decreased slightly as a percentage of net sales from 51% for the
Third Quarter of Fiscal 1998 to 50% for the Third 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 Kingdom operations
decreased as a percentage of net sales from 63% for the Third Quarter of Fiscal
1998 to 43% for the Third Quarter of Fiscal 1999. Such decrease was attributable
primarily to the change in product mix to include less financial and traditional
printing services as well as the renegotiation of certain of the Company's
vendor contracts resulting in reduced supply costs to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased by 78%, or $3,264,000, from
$4,204,000 for the Third Quarter of Fiscal 1998 to $7,468,000 for the Third
Quarter of Fiscal 1999. Such increase was attributable
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primarily to the increased level of operations and costs associated with the
Company's acquisitions and the hiring of additional management and
administrative personnel. As a percentage of net sales, SG&A increased from 30%
for the Third Quarter of Fiscal 1998 to 34% for the Third Quarter of Fiscal
1999. SG&A increased as a percentage of net sales as a result of increased
salary expenses.
RESTRUCTURING EXPENSES. In connection with the Kwik Acquisition, the
Company consolidated its New York operations. As a result of such consolidation,
the Company incurred restructuring expenses of $247,000 in the Third Quarter of
Fiscal 1998.
INCOME FROM OPERATIONS. Income from operations for the Third Quarter of
Fiscal 1999 increased by 98%, or $1,805,000, to $3,656,000 from $1,851,000 for
the Third Quarter of Fiscal 1998. Of this amount, $2,381,000 was contributed by
the Company's United States operations and $1,275,000 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 Third Quarter of Fiscal
1999 increased by 85%, or $935,000, to $2,036,000 from $1,101,000 for the Third
Quarter of Fiscal 1998. This increase resulted from increased borrowings under
the Company's credit facilities and capital leases assumed by the Company as
part of the Company's acquisitions.
INCOME TAXES. Income taxes for the Third Quarter of Fiscal 1999 increased
by 84%, or $259,000, to $566,000 from $307,000 for the Third Quarter of Fiscal
1998.
EXTRAORDINARY ITEM. In connection with the prepayment of $4,000,000 of
loans from private investors, the Company recorded an extraordinary loss of
$143,000, net of income tax benefit of $137,000 related to the write-off of
deferred financing costs in the Third Quarter of Fiscal 1998. In connection with
the refinancing of senior debt, the Company recorded an extraordinary loss of
$542,000, net of income tax benefit of $460,000 related to the write-off of
deferred financing costs in the Third Quarter of Fiscal 1999.
NET INCOME. As a result of the factors described above, net income for the
Third Quarter of Fiscal 1999 increased by 71%, or $212,000, to $512,000 as
compared to a net income of $300,000 for the Third Quarter of Fiscal 1998.
NINE MONTHS ENDED MAY 31, 1999 AND MAY 31, 1998
-----------------------------------------------
NET SALES. Net sales for the nine months ended May 31, 1999 increased by
71%, or $23,220,000, to $56,165,000 from $32,845,000 for the nine months ended
May 31, 1998. Net sales for the Company's United States operations increased by
128%, or $25,239,000, from $19,712,000 in the nine months ended May 31, 1998 to
$44,951,000 in the nine months ended May 31, 1999. This increase was
attributable primarily to an increase in net sales resulting from the Mega Art
Acquisition, the Zazula Acquisition and the SuperGraphics Acquisition, a full
nine months of net sales resulting from the Kwik Acquisition and, to a lesser
extent, an increase in net sales in the Company's other United States
subsidiaries and net sales resulting from the X+C Acquisition. Net sales for the
Company's United Kingdom operations decreased by 15%, or
-14-
$1,919,000, from $13,133,000 in the nine months ended May 31, 1998 to
$11,214,000 in the nine months ended May 31, 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 nine months ended May 31, 1999
increased by 59%, or $10,382,000, to $27,980,000 from $17,598,000 for the nine
months ended May 31, 1998. As a percentage of net sales, cost of sales decreased
from 54% for the nine months ended May 31, 1998 to 50% for the nine months ended
May 31, 1999. Cost of sales for the Company's United States operations remained
constant as a percentage of net sales at 49% for the nine months ended May 31,
1998 and May 31, 1999. Cost of sales for the Company's United Kingdom operations
decreased as a percentage of net sales from 61% for the nine months ended May
31, 1998 to 52% for the nine months ended May 31, 1999. Such decrease was
attributable primarily to the change in product mix to include less financial
and traditional printing services as well as the renegotiation of certain of the
Company's vendor contracts resulting in reduced supply costs to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased by 82%, or
$8,963,000, from $10,943,000 for the nine months ended May 31, 1998 to
$19,906,000 for the nine months ended May 31, 1999. Such increase was
attributable primarily to the increased level of operations and costs associated
with the Company's acquisitions and the hiring of additional management and
administrative personnel. As a percentage of net sales, SG&A increased from 33%
for the nine months ended May 31, 1998 to 35% for the nine months ended May 31,
1999. SG&A increased as a percentage of net sales as a result of increased
salary expenses.
RESTRUCTURING EXPENSES. In connection with the Kwik Acquisition, the
Company consolidated its New York operations. As a result of such consolidation,
the Company incurred restructuring expenses of $247,000 in the nine months ended
May 31, 1998 and $287,000 in the nine months ended May 31, 1999.
INCOME FROM OPERATIONS. Income from operations for the nine months ended
May 31, 1999 increased by 97%, or $3,935,000, to $7,992,000 from $4,057,000 for
the nine months ended May 31, 1998. Of this amount, $6,408,000 was contributed
by the Company's United States operations and $1,584,000 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 nine months ended May
31, 1999 increased by 119%, or $2,630,000, to $4,841,000 from $2,211,000 for the
nine months ended May 31, 1998. This increase resulted from increased borrowings
under the Company's credit facilities and capital leases assumed by the Company
as part of the Company's acquisitions.
INCOME TAXES. Income taxes for the nine months ended May 31, 1999 increased
by 79%, or $555,000, to $1,259,000 from $704,000 for the nine months ended May
31, 1998.
EXTRAORDINARY ITEM. In connection with the prepayment of $4,000,000 of
loans from private investors, the Company recorded an extraordinary loss of
$143,000, net of income tax
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benefit of $137,000 related to the write-off of deferred financing costs in the
nine months ended May 31, 1998. In connection with the refinancing of senior
debt, the Company recorded an extraordinary loss of $542,000, net of income tax
benefit of $460,000 related to the write-off of deferred financing costs in the
nine months ended May 31, 1999.
NET INCOME. As a result of the factors described above, net income for the
nine months ended May 31, 1999 increased by 35%, or $351,000, to $1,350,000 as
compared to a net income of $999,000 for the nine months ended May 31, 1998.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
CASH FLOW. Net cash used in operations was $2,385,000 for the first nine
months of fiscal 1999 and $1,958,000 for the first nine months of fiscal 1998.
Net cash used in investing activities for the acquisition of property and
equipment was $1,032,000 for the first nine months of fiscal 1999 and $837,000
for the first nine months of fiscal 1998. For the first nine months of fiscal
1999 and fiscal 1998, the Company acquired equipment under capital leases of
$4,344,000 and $1,310,000, respectively, and made payments under capital leases
of $2,091,000 and $1,422,000, respectively. Net bank borrowings provided funds
of $31,937,000 and $22,386,000 for the first nine months of fiscal 1999 and
fiscal 1998, respectively.
BANK CREDIT FACILITIES. On May 12, 1999, the Company terminated its
existing financing facilities and entered into a new borrowing arrangement
consisting of a $65,000,000 revolving line of credit facility. The revolving
line of credit facility may be increased to $80,000,000 in the event the Company
raises subordinated debt with net proceeds of at least $20,000,000. The
borrowings are guaranteed by the Company's subsidiaries and the Company pledged
all of its equity interests in its United States subsidiaries and 65% of its
equity interests in its United Kingdom subsidiaries as collateral for such
credit facility. Interest under such credit facility is, at the Company's
option, at the Prime Rate or at the Eurodollar Rate, as defined, plus an
Applicable Margin, as defined, ranging from 1.0% to 3.25% depending on the
Company's consolidated debt to earnings ratio and the type of loan. As of May
31, 1999, the Company had an outstanding balance of $60,850,000 under the
revolving credit facility.
The credit facility contains covenants that 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 credit facility is secured
by a first priority lien on all of the assets of the Company and its
subsidiaries and restricts the Company's ability to pay certain dividends
without the bank's prior written consent.
In November 1998, the Company entered into 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
senior lender. The Company will incur an
-16-
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 expects that anticipated cash flow from operations and
available borrowings 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 may require additional financing to
consummate future acquisitions. There can be no assurance that the Company will
be able to secure such additional financing on terms favorable to the Company.
WORKING CAPITAL. The Company's working capital increased by $13,595,000
from $8,897,000 at August 31, 1998 to $22,492,000 at May 31, 1999.
ACQUISITIONS. 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.
On April 22, 1999, the Company, through Unison (NY), consummated the
Progress Acquisition. The purchase price included the issuance of 86,059 shares
($500,000) of restricted Common Stock of the Company to the sole shareholder of
Progress. In addition, the purchase price includes earn-out payments in cash,
restricted Common Stock of the Company or some combination thereof in the event
Progress attains revenues in excess of $3,000,000 in any of the first three
years following the closing.
On April 30, 1999, the Company, through Elements (UK), consummated the
Interface Acquisition. The initial aggregate purchase price was (pound)425,000
which included the issuance of 49,695 shares (approximately (pound)132,000 or
$218,000) of restricted Common Stock of the Company to the shareholders of
Interface. In addition, the purchase price includes deferred cash
-17-
payments of (pound)20,000 payable on each of January 31, 2000 and January 31,
2001, and earn-out payments of up to (pound)55,000 per year in the event
Interface achieves certain financial performance objectives in any of the first
two years following the closing.
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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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
Bankruptcy Court. In June 1999, the Company and the Trustee amicably resolved
the dispute on the following items: the Company shall pay to the bankruptcy
estate the sum of $150,000 in full and final satisfaction of any and all claims
of the bankruptcy estate against the Company. The Trustee shall dismiss the
adversary proceeding with prejudice and waive any and all claims against the
Company under the bankruptcy code and the Cardinal Purchase Agreement,
including, without limitation, any and all claims to the proceeds from the sale
of the Real Estate. The settlement is subject to the approval of the Bankruptcy
Court.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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.
On April 22, 1999, the Company issued 86,059 shares of restricted Common
Stock of the Company to Mario DeVita as partial consideration for the Progress
Acquisition.
On April 30, 1999, the Company issued 49,695 shares of restricted Common
Stock of the Company to the shareholders of Interface as partial consideration
for the Interface Acquisition.
Subsequent to the end of the quarter, on May 14, 1999, the Company issued
20,000 shares of restricted Common Stock of the Company to Timothy Twomey, a
former employee of the Company.
Subsequent to the end of the quarter, on July 2, 1999, the Company issued
10,000 shares of restricted Common Stock of the Company to Pablo DeJesus, an
employee of the Company.
No underwriter was employed by the Company in connection with the issuance
and sale of the securities described above. The Company believes that the
issuance and sale of the foregoing securities were exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended, as a transaction
not involving a public offering. 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
recipients of such shares. All recipients had adequate access to information
about the Company.
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ITEM 5. OTHER INFORMATION
On May 12, 1999, the Company terminated its existing financing facilities
and entered into a new borrowing arrangement consisting of a $65,000,000
revolving line of credit facility. The revolving line of credit facility may be
increased to $80,000,000 in the event the Company raises subordinated debt with
net proceeds of at least $20,000,000. The borrowings are guaranteed by the
Company's subsidiaries and the Company pledged all of its equity interests in
its United States subsidiaries and 65% of its equity interests in its United
Kingdom subsidiaries as collateral for such credit facility. Interest under such
credit facility is, at the Company's option, at the Prime Rate or at the
Eurodollar Rate, as defined, plus an Applicable Margin, as defined, ranging from
1.0% to 3.25% depending on the Company's consolidated debt to earnings ratio and
the type of loan. As of May 31, 1999, the Company had an outstanding balance of
$60,850,000 under the revolving credit facility.
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.
On April 22, 1999, the Company, through Unison (NY), consummated the
Progress Acquisition. The purchase price included the issuance of 86,059 shares
($500,000) of restricted Common Stock of the Company to the sole shareholder of
Progress. In addition, the purchase price includes earn-out payments in cash,
restricted Common Stock of the Company or some combination thereof in the event
Progress attains revenues in excess of $3,000,000 in any of the first three
years following the closing.
On April 30, 1999, the Company, through Elements (UK), consummated the
Interface Acquisition. The initial aggregate purchase price was (pound)425,000
which included the issuance of 49,695 shares (approximately (pound)132,000 or
$218,000) of restricted Common Stock of the Company to the shareholders of
Interface. In addition, the purchase price includes deferred cash payments of
(pound)20,000 payable on each of January 31, 2000 and January 31, 2001, and
earn-out payments of up to (pound)55,000 per year in the event Interface
achieves certain financial performance objectives in any of the first two years
following the closing.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Asset Purchase Agreement dated as of
March 26, 1999 by and among Unidigital
Inc., Unison (NY), Inc., Peter X(+C)
Limited and Peter Ksiezopolski (included
as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter
ended February 28, 1998 and incorporated
by reference herein).
10.2 Share Purchase Agreement By Way of Deed
dated December 21, 1998 by and among the
Shareholders of Interface Graphics
Limited, Elements (UK) Limited and
Interface Graphics Limited.
10.3 Asset Purchase Agreement dated as of
April 8, 1999 by and among Unidigital
Inc., Unison (NY), Inc., Progress
Graphics Inc. and Mario DeVita.
10.4 Credit Agreement dated as of May 12,
1999 among Unidigital Inc., Fleet Bank,
N.A., Bank Austria Creditanstalt
Corporate Finance, Inc. and the Banks,
Financial Institutions and Other
Institutional Lenders Named Therein.
10.5 Revolving Credit Promissory Note dated
May 12, 1999 made by Unidigital Inc. in
favor of Fleet Bank, N.A. in the
principal amount of $40,000,000,
together with Swing Line Promissory Note
dated May 12, 1999 made by Unidigital
Inc. in favor of Fleet Bank, N.A. in
the principal amount of $3,000,000.
10.6 Revolving Credit Promissory Note dated
May 12, 1999 made by Unidigital Inc. in
favor of Bank Austria Creditanstalt
Corporate Finance, Inc. in the principal
amount of $15,000,000.
10.7 Revolving Credit Promissory Note dated
May 12, 1999 made by Unidigital Inc. in
favor of Merrill Lynch Business
Financial Services Inc. in the principal
amount of $10,000,000.
10.8 General Security Agreement (Borrower)
dated May 12, 1999 by Unidigital Inc. in
favor of Fleet Bank, N.A.
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10.9 General Security Agreement (Guarantors)
dated May 12, 1999 by Unidigital
Elements (NY), Inc., Unison (NY), Inc.,
Unison (MA), Inc., Unidigital Elements
(SF), Inc., Mega Art Corp.,
SuperGraphics Holding Company, Inc. and
SuperGraphics Corporation in favor of
Fleet Bank, N.A.
10.10 Pledge and Security Agreement dated May
12, 1999 by Unidigital Inc. in favor of
Fleet Bank, N.A.
10.11 Pledge and Security Agreement
(Subsidiary) dated May 12, 1999 by
SuperGraphics Holding Company, Inc. in
favor of Fleet Bank, N.A.
10.12 Guaranty dated May 12, 1999 made by
Unidigital Inc., Unidigital Elements
(NY), Inc., Unison (NY), Inc., Unison
(MA), Inc., Unidigital Elements (SF),
Inc., Mega Art Corp., SuperGraphics
Holding Company, Inc. and SuperGraphics
Corporation in favor of Fleet Bank, N.A.
10.13 Foreign Guaranty dated May 12, 1999 made
by Elements (UK) Limited in favor of
Fleet Bank, N.A.
10.14 Trademark Collateral Assignment and
Security Agreement dated as of May 12,
1999 by and between Unidigital Inc. and
Fleet Bank, N.A.
10.15 Subsidiary Trademark Collateral
Assignment and Security Agreement dated
as of May 12, 1999 by and between Unison
(NY), Inc. and Fleet Bank, N.A.
10.16 Subsidiary Trademark Collateral
Assignment and Security Agreement dated
as of May 12, 1999 by and between
SuperGraphics Corporation and Fleet
Bank, N.A.
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
None.
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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: July 20, 1999 By: /s/William E. Dye
----------------------------
William E. Dye,
Chief Executive Officer
(Principal Executive, Financial
and Accounting Officer)
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