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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 0-28208
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3864004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28 WEST 23RD STREET
NEW YORK, NY
(Address of principal executive offices)
10010
(Zip Code)
212-929-4111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by non-affiliates
as of February 28, 1998 was $763,864,610.
The number of shares of the registrant's Common Stock outstanding as of February
28, 1998, was 17,904,486 shares.
The following documents are hereby incorporated by reference into this Form
10-K:
(1) Portions of the 1998 Proxy Statement/Prospectus included as part of
the Registrant's Registration Statement on Form S-4 to be filed with
the Securities and Exchange Commission (Part III).
TABLE OF CONTENTS
PAGE
ITEM PART I
1. Business 1
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
Executive Officers of the Company 9
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 11
6. Selected Financial Data 11
7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
39
PART III
10. Directors and Executive Officers of the Registrant 40
11. Executive Compensation 40
12. Security Ownership of Certain Beneficial Owners
and Management 40
13. Certain Relationships and Related Transactions 40
PART IV
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 41
Signatures 44
PART I
Certain statements made in this Annual Report on Form 10-K are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: the trend toward electronic distribution of content; the
efficiency of competitors or customers of the Company; the trend toward
outsourcing ancillary functions; the rate of expansion of services under the
agreement with General Motors; the securing of additional, or the renewal of
existing, on-site arrangements; the expansion of on-line distribution services;
the growth of the market for advanced digital imaging services; the Company's
expansion into broadcast media distribution services; generating additional
business from on-site customers; the successful entry into the event-driven and
retail digital photography markets; market acceptance of the Company's digital
photography product line; the rate of expansion of the Company's sales force;
cross-selling the Company's services; the rate of opening additional facilities;
the rate and level of capital expenditures; and the securing of additional
credit facilities.
Item 1. BUSINESS.
General
Applied Graphics Technologies, Inc. (the "Company") is an independent
provider of digital prepress services to magazine publishers, advertising
agencies, entertainment companies, automobile manufacturers, and retailers. The
Company's largest customers in each of these categories include McGraw-Hill,
Newsweek and Conde Nast; The InterPublic Group of Companies and Team One
Advertising; The Walt Disney Company and Time Warner; General Motors; The Home
Depot and Sears Roebuck & Company. The Company provides its services on an
outsourcing basis either in the Company's own facilities or onsite at the
customer's location, emphasizing its ability to provide a full range of services
more effectively and economically than its customers could internally. In 1994,
the Company began to provide advanced digital imaging services to meet the
evolving needs of its customers. Digital archiving and distribution services are
now being provided to customers including General Motors, Time Warner's Time
Picture Collection, CBS, ABC, Citibank, the American Society of Media
Photographers and the United States Holocaust Memorial Museum.
The scope of the Company's services and the range of customers that can
make use of these services have expanded with the emergence of electronic
distribution channels and the ability to create digital archives. "Prepress
services" combine text with black and white and full-color pictures and graphics
into page layout format, and have traditionally been used to prepare content for
reproduction in print. A similar process is required to digitize information for
electronic distribution, such as on the World Wide Web and for CD-ROM.
Publishers, advertising agencies, entertainment companies and others are
increasingly exploiting these new distribution channels for marketing and
promotion, for targeting individual or groups of customers or for reselling
their graphic images in a cost-effective manner.
The Company uses its Digital Link System and other commercially available
systems to provide digital imaging services. The Digital Link System uses an
integrated suite of software applications that allows the Company to offer
customers the ability to capture, edit, store, archive, retrieve, and distribute
their content in a digital environment.
Technological advances in desktop publishing and graphics software have
heightened differences between image-intensive "full service" users of prepress
services and other customers with less demanding needs, whose paramount concern
is price. The Company believes that its primary customers, which are full
service users, are recognizing production complexities, the increasing use of
color and the need to remain abreast of technological developments and,
accordingly, are increasingly relying on outsourced digital prepress and digital
imaging services. The Company intends to continue to expand its base of
traditional prepress service users by emphasizing its ability to provide a full
range of high quality digital prepress and digital imaging services.
In December 1996, the Company acquired the assets of SpotLink, Inc.
("SpotLink"), a subsidiary of Western International Media Corporation
("Western"), which is owned by The InterPublic Group of Companies. In September
1997, the Company acquired the broadcast media distribution business of Winkler
Video Associates, Inc. ("Winkler"). Through the SpotLink and Winkler
acquisitions, the Company provides volume duplication and distribution of radio
and television advertisements, a service known as "dub and ship," to broadcast
stations. With the expansion into the broadcast media distribution business, the
Company increased its service offerings to existing customers, including The
Walt Disney Company and General Motors.
The Company currently maintains a network of twenty-three principal digital
prepress facilities located in metropolitan areas to provide localized services
to its customers, many of which have offices nationwide. Additionally, the
Company provides its on-site services at eighteen customer locations, often
under multi-year contracts. The Company believes that performing its services
on-site strengthens its relationship with its customers and broadens their
demand for the range and volume of the Company's services. Four of these on-site
service locations also perform services for other customers.
The Company was incorporated in Delaware on December 12, 1995. On April
16, 1996, upon the Company's Registration Statement on Form S-1 under the
Securities Act of 1933 being declared effective, the Company acquired
substantially all of the assets and certain related liabilities relating to the
prepress, digital imaging services, and related businesses of Applied Printing
Technologies, L.P. ("Applied Printing").
Services
The Company provides a full range of digital prepress, outsourced
facilities management, advanced digital imaging, and broadcast media
distribution services.
Digital Prepress Services. Digital prepress services are necessary to
combine text with black and white and full-color picture and graphic content
into page format for publication in print and distribution on the World Wide
Web, e-mail, proprietary on-line services, and CD-ROM. In general, the prepress
services provided by the Company begin with scanning the customer's content into
digital format. Scanning separates color content into component colors and
converts them into colors used in the printing process - cyan, magenta, yellow,
and black. Once the image is separated, two file formats of the image are
produced - high resolution for final output and low resolution for customer
design and/or layout. The low resolution file is sent to the customer on-line or
on a computer disk, and the customer can position the low resolution file into
its page on its own desktop system and size and crop the image as desired.
Simultaneously, the Company personnel compare the "separated" image on the high
resolution file to the original picture and use specialized computer software to
refine the colors and to make enhancements to the image as the customer
requests. Throughout this process, the Company works closely with the creative
and artistic directors of the customer. Often, multiple iterations of the image
are exchanged by the Company and the customer before the final, high resolution
image is set in the page. The Company personnel then replace the low resolution
image and perform certain technical processes (such as masking and trapping) to
enhance the quality of the final product. The page is then output to four
separate color files (film or transmission) that when processed will generate
four pieces of film used to create four printing plates per page. The image is
generated in print by the cumulative effect of the plates. Similarly, content to
be distributed on-line is output to three colors (red, green, and blue) which is
converted from the final high resolution file. In performing prepress services,
the Company frequently uses the Digital Link System, which performs several
prepress functions efficiently. See "- Technology."
Capitalizing on these services, the Company established a Magazine Ad
Management Division and Newspaper Ad Management Division to provide
comprehensive digital prepress and print content management services to
magazines and newspapers. The Magazine Ad Management Division provides digital
advertising storage management and electronic transmission services to magazine
publishers, advertising agencies, and printers nationwide using the Digital Link
System. The Company has a multi-year agreement with Time, Inc., to provide a
variety of digital ad management services to People, Time, Sports Illustrated,
Entertainment Weekly, Fortune, and Life and also has a multi-year agreement with
U.S. News & World Report, L.P., to provide such services. The Newspaper Ad
Management Division provides services to the New York Daily News and the Newark
(New Jersey) Star-Ledger, including electronic design, digital advertising
composition, and transmission of display advertising.
During 1997, the Company acquired the operations of several prepress
companies, including all of the assets of MBA Graphics, Inc. ("MBA"), an
unaffiliated provider of prepress production, direct mailing, and brokered
commercial printing services primarily to The Home Depot at its four facilities.
Pursuant to the acquisition agreement with MBA, the Company may be required to
make additional payments, in a combination of cash and the Company's common
stock, based upon MBA's financial performance for calendar years 1997, 1998, and
1999. The Company also acquired certain assets of Star Graphic Arts Co., Inc.,
an unaffiliated prepress company in Northern California, and all of the assets
of Vancor Color, Inc. ("Vancor"), an unaffiliated provider of prepress services
in Southern California. Pursuant to the acquisition agreement with Vancor, the
Company may be required to make additional payments to Vancor in shares of the
Company's common stock based upon Vancor's financial performance for the
calendar years ended December 31, 1997, 1998, and 1999.
Outsourced Facilities Management Services. In response to demands of
certain customers, the Company performs services at a customer's location rather
than at one of the Company's facilities. In addition, the Company may perform
services at a primary customer's location for other customers as capacity
allows. Contracts with customers for on-site work are often for three years or
more and for a base amount of services, although the Company believes its
on-site presence generates additional business in the form of digital imaging
services and more prepress work from that customer. If the primary customer's
work flow is high, or if there is an equipment failure at that location, the
Company augments on-site staff and equipment by working on the primary
customer's projects at the Company's other facilities. The Company's on-site
services vary according to the customer's needs. For some publications, such as
Newsweek, US. News & World Report, and BusinessWeek, the Company is responsible
for operating, maintaining, and staffing the on-site prepress equipment and for
performing all prepress services for editorial content. Performing work on-site
permits the Company to better understand its customers' preferences and workflow
demands. On-site work also reduces the time needed to approve or discuss
revisions with the customer and to deliver the final product to the customer.
These advantages enable the Company to be more responsive and to increase the
level and type of service it provides. For example, when performing prepress
work on-site, the Company has the ability to introduce the customer to its
archiving and other digital imaging services.
Advanced Digital Imaging Services. The Company's Digital Imaging Services
Division ("DISD") commenced work on the Digital Link System in 1995 as a project
for the New York Daily News to assist the newspaper with its demanding prepress
and related image storage and retrieval functions. Using integrated equipment
and proprietary software, the Digital Link System offers a cost-effective,
easy-to-use method to store, manipulate, repurpose, and distribute digital
images. The open architecture of the Digital Link System enables the Company to
tailor the system to each customer's digital imaging needs. The Company uses the
Digital Link System to provide advanced digital imaging services, such as
archiving and online distribution to both traditional prepress and new groups of
customers. These customers are increasingly looking to distribute their content
digitally through traditional media channels and to exploit new distribution
methods, such as the World Wide Web, e-mail, proprietary on-line services, and
CD-ROM, all of which use digitized content.
The Company uses its Digital Link System to create digital archives of
photographic prints, slides, film, and other images. Archiving images provides
the customer with an organized, easily accessible digital format in which its
images can be retrieved, distributed, substituted, and re-edited. Because the
archived images are in digital form, they may be reused without having to be
rescanned, thereby saving time and money, and are in a format suitable for print
or on-line distribution. The Company's archiving services are tailored to each
customer by evaluating the content and the customer's needs and provided to the
customer as an open system archive. Once the images are digitized, the Company
customizes a database that allows the customer to quickly access images using
keywords, text searches, or bar-codes. The archive may be created at the
customer's location or the Company's facilities depending on the size of the
library. The Company's archiving services are provided under long term
contracts, are typically related to millions of images, and are usually priced
on a per image basis according to the Company's evaluation of the customer's
images and the scope of services to be provided.
The Company has developed a family of digital photography systems,
including a digital portrait system and a portable digital events system. These
systems integrate a suite of proprietary Digital Link software applications with
specialized hardware and are based on an open architecture that supports the
leading digital cameras and printers. The Company recently consummated the
acquisition of two digital events photography businesses and now provides
complete digital event photography services at various locations, including
sporting events, stadiums, and resorts. To date the Company has not derived
significant revenues from these services.
Broadcast Media Distribution Services. Through the SpotLink and Winkler
acquisitions, the Company entered the broadcast media distribution business in
which the Company receives a master copy of a commercial on video or audiotape,
duplicates the tape, and ships the copies via air freight to radio and
television stations for rebroadcast. As part of the SpotLink acquisition, the
Company entered into a multi-year contract under which Western is obligated to
direct all of its broadcast media distribution business to the Company. The
Company has agreed to provide broadcast media distribution services to General
Motors under its contract to act as General Motors' digital content manager.
Related Services
At its facility in Los Angeles, California, the Company provides printing
services performed principally for entertainment customers, such as The Walt
Disney Company. The Company prints movie posters, CD covers, video covers, and
promotional materials. Revenues from these printing services represented less
than 10% of the Company's revenues in 1997. The Company also licenses software
and sells hardware related to the Digital Link System.
Technology
The Company aggressively implements technological advances in order to
improve and expand its prepress and advanced digital imaging and digital imaging
related services. This commitment is demonstrated by its Digital Link System and
its internal communications and satellite transmission capabilities.
The Digital Link System. The Digital Link System is a suite of proprietary
software applications that integrates a wide variety of digital imaging
hardware. Operating over large area networks, including the World Wide Web, this
networked set of applications is used to capture, edit, store, archive,
retrieve, and distribute large numbers of digital assets, including images,
video, and audio. Its features include zooming, enlarging, side-by-side
comparison, sorting, categorizing, and text annotations, as well as a variety of
image optimization tools including cropping and retouching. Images that are
archived using the system may be easily retrieved through text and key word
searches, manipulated by computer, and distributed through both conventional
print as well as electronic distribution channels that require digitized
content. To date, this system has been used predominantly to process graphic
images, although it also is capable of capturing, storing, and retrieving audio
and video files.
The Digital Link System uses software to integrate a variety of different
image capture devices such as digital cameras, drum and flatbed scanners, wire
services, and other suitable high capacity storage devices. Optional software
from the Company's suite of applications may be added to suit each customer's
image management needs. For example, a customer may add a Photo CD Gateway,
which interfaces with a scanner to capture images. A customer may also select
the Digital Link Photo Editor that categorizes, reviews, and selects images
stored in the Digital Link System. The Digital Link System includes customized
software that permits the system to interface with virtually any equipment the
customer may already have, such as a proprietary or "closed" prepress system or
existing desktop systems. The software used in the Digital Link System was
created by a team headed by Scott A. Brownstein, Executive Vice President,
Digital Imaging Services Division of the Company. Mr. Brownstein played a major
role in the development of many of the technologies used in Kodak's patented
Photo CD system.
The Digital Link System enhances the delivery of prepress services. For
example, the system enables a user to quickly and easily retrieve an image, and
then enlarge, reposition, and retouch the image as if using stand-alone prepress
computer equipment.
Communications Networks. Many of the Company's facilities are connected by
a data network system that enables the Company to allocate prepress work among
its facilities for timely completion. The Company has also established
communications links among its facilities and customer sites at which the
Company is providing services. Additionally, the Company uses a satellite system
to deliver final prepress work in digital form to eleven printing plants of
eight unaffiliated printing companies. The Company leases transmission time on
three frequencies on a year-round basis and has installed satellite transmitting
equipment at its facilities and receiving equipment at the printing sites. This
system was established originally to assist magazine publishers in meeting their
demanding production cycles but has been expanded to include transmissions for
other publications. The connection to multiple printing sites allows these
publications to be printed at several locations in order to meet distribution
schedules. The Company personnel working at the printing plants on this network
produce the film required to create printing plates and receive digital data
used to drive computer to plate equipment. In addition, the Company personnel
coordinate and calibrate the receiving equipment in an effort to ensure
consistency in the final product among the various printing sites.
Customers
The Company's customer base encompasses a wide variety of enterprises and
organizations, including leading publishers, advertising agencies, entertainment
companies, automobile manufacturers, and catalog and other businesses focused on
quality print and graphic images and the distribution of advertising content. In
1997, the Interpublic Group of Companies produced approximately $19.1 million in
revenues, or 10.3%, of the Company's total revenues, through its various
advertising agencies, including the work provided to the broadcast media
distribution business under the multi-year contract associated with the
acquisition of SpotLink. The Company's twenty largest nonaffiliated customers
accounted for approximately 53.4% of the Company's revenues in 1997. Revenues
from many of the Company's large customers, however, are an aggregation of
revenues for services provided by the Company to different groups or
publications within a customer. For example, the Company provides services to
twelve divisions of The Walt Disney Company, each of which plays a major role in
the selection of a prepress vendor. In 1997, approximately 9.1% of the Company's
total revenues came from business with affiliates. Such affiliates include U.S.
News & World Report, L.P., Daily News, L.P., and Applied Printing, companies
beneficially owned by Mr. Mortimer B. Zuckerman, the Chairman of the Board of
Directors of the Company, and Mr. Fred Drasner, Chairman, Chief Executive
Officer, and a director of the Company, as well as with Snyder Communications,
Inc., of which both Messrs. Zuckerman and Drasner are members of the Board of
Directors and in the aggregate own approximately 13% of the outstanding common
stock. An additional 34.8% of the Company's revenues were under multi-year
contracts or arrangements with nonaffiliated customers. As is customary in the
prepress industry, in most cases there is no contractual arrangement that would
prevent prepress customers from selecting a competitor of the Company to perform
some or all of their prepress work.
Sales and Marketing
To date, the Company has relied primarily on its senior officers, general
managers and regional sales organizations to market its prepress and digital
imaging services. Because they have conducted business together over several
years, personnel at each facility have established strong working relationships
with particular customer industries that are prevalent around its location. For
instance, personnel at the Los Angeles facilities have strong relationships with
the entertainment industry, at the Detroit facility with the automotive
industry, and at the New York facilities with the publishing industry. These
relationships also extend to advertising agencies that perform work for these
customers. This specialization within certain industries developed over the
Company's years of service performing prepress work.
The Company continues to expand its sales force to focus on on-site and
outsourcing arrangements for customers currently performing all or a portion of
their prepress work in-house. Because such a decision to outsource is made at a
level higher than prepress vendor selection decisions, the Company believes that
a separate sales force is more conducive to obtaining such business.
The Company is also is in the process of expanding its sales force to
market digital imaging services to traditional and new groups of customers.
Prior to the latter half of 1996, such services have been marketed only by
several senior officers of the Company. The Company is also expanding the sales
force of its SpotLink division. The Company believes its long-term agreement
with Western, the largest media buyer in the U.S., under which Western will
direct its "dub & ship" business to the Company, creates a significant sales
opportunity. Additionally, the Company's sales force has begun cross-selling the
broad range of its services.
Vendor Arrangements
The Company is a major purchaser of certain types of products. Because of
the dollar amount of the products it purchases, the Company has been in a
position to enter into arrangements with vendors pursuant to which the vendors
pay rebates to the Company based upon a specified dollar volume of products
purchased by the Company over a given time period.
Competition
Prepress services are performed primarily by three types of businesses:
(i) independent providers that typically do not also offer commercial printing
services as a principal part of their overall business, (ii) commercial printers
that provide prepress and other image management services as an adjunct to their
printing businesses, and (iii) customers that perform certain services
themselves using available desktop publishing technologies. The industry
currently is extremely fragmented and serviced by a large number of regional and
local businesses and few national enterprises. Commercial printers providing
prepress services generally compete on the basis of the convenience of "one-stop
shopping" for prepress and printing services, and on the basis of price by
bundling the cost of prepress services with the printing cost or by
substantially discounting the separate prepress services. A customer might
prefer services by a printer where price is the primary consideration and
quality of and control over the artistic process are not key concerns.
Independent providers, such as the Company, generally are able to offer a higher
level of specialization, customization, and individualized service and also
provide customers with the flexibility to select the printer of their choice,
thus giving the customer greater leverage in negotiating for printing services.
A customer would look to perform its own prepress services internally if the
customer believed that control over the process was advantageous and quality of
the product was not paramount. Customers typically provide for themselves only a
portion of the prepress services they need, augmenting their own capabilities,
as needed, with third-party services usually from independent prepress
providers.
The Company competes for prepress work on the basis of quality of service,
price of service, and the ability to satisfy demanding customers. The Company
believes that not every prepress provider can meet the demands of the types of
customers served by the Company. Among this smaller group, the Company competes
primarily based on historical reliability of service and on price. The Company
believes it maintains competitive prices by efficiently implementing new
technologies in its digital imaging and prepress businesses. Additionally, the
Company believes that it is able to maintain competitive prices by coordinating
its customers' in-house capabilities with its own equipment, thereby minimizing
redundant processes and lowering customer costs. In addition, the Company
competes for prepress work based on its ability to provide other digital imaging
services. For example, the Company provides digital archiving services for
prepress customers at a lower cost than if purchased on a stand-alone basis
because of the Company's ability to efficiently integrate the prepress and
archiving processes.
Independent prepress providers typically provide services based upon a
customer's request for which the provider is paid on a per-job basis. In most
cases, there is no contractual arrangement that would prevent a customer from
changing prepress providers on a per-project basis except for the Company's
typical on-site arrangement for which a multi-year contract is obtained.
In the publication area, the Company competes with numerous regional
prepress companies, such as Spectragraphics in the New York area, TSI Graphics
in St. Louis, and NEC in Tennessee. The Company competes nationally for
publication business with American Color. Additionally, the Company competes
with large commercial printers, such as R. R. Donnelley & Sons, Co., World Color
Press, Inc., and Quad/Graphics, Inc. These commercial printers typically offer
major price incentives through multi-year contracts for publications to do both
their printing and prepress work at that printer's facilities. The Company's
primary national competitor for advertising agency business is Wace, U.S.A.,
headquartered in Chicago, and a number of smaller regional prepress companies.
The Company competes with many vendors in providing advanced digital imaging
services, including Wace, U.S.A. and R. R. Donnelley & Sons, Co.
In the area of digital imaging and archiving, the Company competes with a
small number of software-development companies marketing products to manage
image databases. The Company believes, however, that the breadth of service
(i.e., associated scanning and output options) provided by the Company through
its Digital Link System surpasses that of these other products. For example,
Cascade and SRA are competing database software products; however, in both
cases, the Company has secured ancillary business (e.g., scanning services and
archiving) with enterprises using these competing products. T-l is a production
and archiving alternative developed specifically for the newspaper market, and
is in direct competition with the Company's Digital Link System for customers in
the newspaper-publishing industry. The Company believes that its
fully-integrated system offers greater flexibility than its competitors'
systems, which are primarily stand-alone databases.
In the area of retail photography and events imaging, competition to the
Company's offerings is mainly in the form of small software shops offering
digital solutions, such as EPS, Castleworks, and ANSI. The Company believes that
its ability to effectively market its products and support its installations
surpasses the ability of its competitors. Various larger companies, such as
Polaroid and Kodak, compete with the Company as equipment vendors and offer more
fully equipped systems that utilize hardware components manufactured by their
respective parent companies, unlike the Company's offerings for retail
photography and events imaging, which are modular and capable of integrating
equipment (e.g., digital cameras and dye-sublimation printers) from virtually
any leading manufacturer.
In the broadcast media distribution business, the Company competes with
many local and/or regional suppliers as well as national suppliers, such as
Vyvx, Inc., a subsidiary of The Williams Companies, Inc., Digital Generation
Systems, Inc., and VDI Media. These services are typically provided on a per-job
basis. The Company generally has no contractual arrangements that would prevent
a customer from changing providers. The Company believes competition is based on
quality of duplication, speed, and reliability of distribution as well as price.
Employees
As of December 31, 1997, the Company had approximately 1,757 full-time
employees, approximately 608 of whom are salaried employees and approximately
1,149 of whom are hourly employees. Approximately 144 of the Company's employees
at two facilities, one each in Chicago and Los Angeles, primarily in the area of
production, are covered by two collective bargaining agreements with the Graphic
Communications International Union that expire August 31, 1999, and December 31,
1999, respectively. The Company has never experienced a work stoppage and
believes that its relationships with its employees, both unionized and
nonunionized, are satisfactory.
Intellectual Property
The Company has a copyright in the software comprising the Digital Link(R)
System. Copyrights do not preclude competitors from developing comparable
software. The Company does not currently have any patents. The Company owns the
registered trademarks "Applied Graphics Technologies," "Digital Link," "AGT,"
and other marks used in its business.
Recent Developments
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163.8 million, $209.5 million, and $29.1 million, respectively. Under
the terms of the agreement, which is subject to regulatory approval and the
approval of the Company's and Devon's stockholders, the Company will pay $30 per
share in cash and distribute 0.6 share of the Company's common stock in exchange
for each outstanding share of Devon common stock. The total consideration to be
paid is estimated to be $450 million including transaction costs. To fund the
cash portion of the merger consideration, estimated to be approximately $230
million including the transaction costs, the Company has a fully-underwritten
commitment from a commercial bank that would increase its borrowing capacity to
$250 million. This commitment expires on June 15, 1998. The Company is also
contemplating other financing alternatives to fund all or part of the cash
portion of the merger consideration.
In January 1998, the Company acquired all of the assets of Flying Color
Graphics, Inc. ("Flying Color") in exchange for $18.9 million, 68,103 shares of
the Company's common stock, and the assumption of certain liabilities. Flying
Color was an unaffiliated provider of prepress services to various retailers,
including Spiegel, with 1997 revenues of approximately $18.7 million. Flying
Color operates five facilities located throughout the Midwest.
Item 2. PROPERTIES
The Company leases its corporate headquarters in New York City and operates
twenty-three principal digital prepress facilities at the locations indicated
below. Four of these facilities are on-site facilities that also provide
services to other customers as capacity allows.
New York City Northern New Jersey
(3 facilities) (3 facilities)
Atlanta, Georgia Central Illinois
(3 facilities)
Boulder, Colorado Rochester, New York
Chicago, Illinois San Diego, California
(2 facilities)
San Francisco, California
Detroit, Michigan metropolitan area
(2 facilities) (2 facilities)
Los Angeles, California Washington, D.C.
metropolitan area
(2 facilities) Indianapolis, Indiana
The Company also provides on-site services at fourteen other customer
locations in New York City, New Jersey, Connecticut, California, and Illinois.
At these on-site facilities, services are performed for a single customer. In
addition, the Company maintains broadcast media distribution centers in New York
City, Los Angeles, and Wilmington, Ohio, and operates digital photography
businesses at two customer locations in Florida. Except for one of the Los
Angeles and two of the Central Illinois prepress facilities, which are owned by
the Company, the prepress and broadcast media distribution facilities are
operated under leases that expire in 1998 through 2002. The Company believes
that its facilities are adequate to meet its needs.
Item 3. LEGAL PROCEEDINGS.
The Company is not subject to any material litigation, nor to the Company's
knowledge is any material litigation currently threatened against the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The following table lists the executive officers of the Company. Officers
are appointed by the Board of Directors and serve at the discretion of the Board
Name Age Position
Fred Drasner.......... 55 Chairman and Chief Executive Officer, Director
Melvin A. Ettinger.... 57 Vice Chairman and Chief Operating Officer, Director
Diane Romano.......... 47 President
Scott A. Brownstein... 49 Executive Vice President, Digital Imaging Services
Division
Martin D. Krall....... 57 Executive Vice President, Chief Legal Officer and
Secretary, Director
Louis Salamone, Jr.... 51 Senior Vice President and Chief Financial Officer
Georgia L. McCabe..... 43 Senior Vice President, Digital Imaging Services
Division
Fred Drasner, Chairman and Chief Executive Officer and a director of the
Company, has been the Chief Executive Officer of Daily News, L.P. and
Co-Publisher of the New York Daily News since 1993, the Chief Executive Officer
of U.S. News & World Report, L.P. since 1985, and President of U.S. News & World
Report, L.P. from 1985 to February 1997, the Chairman and Chief Executive
Officer of Applied Printing since 1986, and the Vice-Chairman and Chief
Executive Officer of The Atlantic Monthly Company since 1986. Mr. Drasner also
was senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in
April 1996. Mr. Drasner also serves as a Director of Snyder Communications, Inc.
Melvin A. Ettinger, Vice Chairman, Chief Operating Officer and a director
of the Company, joined the Company in April 1996. From January 1994 to March
1996, he served as President and Chief Executive Officer of Xerox Graphic
Systems, which conducts research and development of products to replace film. He
also served as Senior Vice President of Sun Chemical Corporation and President
and Chief Executive Officer of its subsidiary, Polychrome Corporation, a
supplier of lithographic plates, from 1990 to 1994.
Diane Romano, President of the Company, served as Executive Vice President
of Applied Printing from 1993 to 1995 where she had overall responsibility for
prepress and digital imaging services, sales, operations and technical
developments. Ms. Romano served as Senior Vice President of the Publication and
Catalog Division of Applied Printing from 1988 to 1993.
Scott A. Brownstein, Executive Vice President, Digital Imaging Services
Division, was the Senior Vice President and General Manger of DISD from 1993 to
1995 where he was responsible for developing, manufacturing and marketing the
Company's digital imaging services. Prior to joining the Company, Mr. Brownstein
served from 1988 to 1993 as Manager of Advanced Development CD Imaging Division
at the Eastman Kodak Company, where he was responsible for the design,
development and implementation of Kodak's Photo CD technology and end user
technology for Photo CD.
Martin D. Krall, Executive Vice President, Chief Legal Officer, Secretary
and a director of the Company, has been since January 1995 Executive Vice
President and the Chief Legal Officer of the Daily News, L.P., Applied Printing,
The Atlantic Monthly Company, and U.S. News & World Report, L.P. Prior to 1995,
Mr. Krall was a partner in the law firm of Shaw, Pittman, Potts & Trowbridge
where he was a member of the Management Committee from 1978 to 1994, and the
Vice-Chairman of such Committee from 1991 to 1994. From 1995, Mr. Krall also was
senior counsel to Shaw, Pittman, Potts & Trowbridge until his resignation in
April 1996.
Louis Salamone, Jr., Senior Vice President and Chief Financial Officer of
the Company, joined the Company in 1996. He previously served as Vice President
and Chief Financial Officer of Nextel Communications, Inc., a provider of
wireless communications services, from September 1994 through May 1996. He was a
partner in Deloitte & Touche LLP, an international accounting and consulting
firm, from June 1980 through September 1994.
Georgia L. McCabe, Senior Vice President, Digital Imaging Services
Division, was the Senior Vice President, Marketing and Business Development of
DISD at the Company from 1993 to 1995 where she was responsible for developing
the overall business and marketing strategies for the division. Prior to joining
the Company, Ms. McCabe served from 1991 to 1993 as Worldwide Director of
Marketing, Commercial CD Imaging at the Eastman Kodak Company, where she was
responsible for developing and implementing corporate strategies for marketing
Photo CD products.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company commenced trading on April 17, 1996, the
date of its initial public offering. The Company's common stock is traded on the
Nasdaq National Market. The following table sets forth the high and low sales
price for each full quarterly period during which the common stock was traded.
1997 1996
-------------------- -------------------
High Low High Low
--------- ---------- --------- ---------
First quarter 35 3/8 25 1/8
Second quarter 39 3/4 28 3/8
Third quarter 57 7/8 36 1/4 16 10 1/2
Fourth quarter 61 1/4 43 3/4 29 1/8 14 3/4
As of March 20, 1998, there were 3,309 holders of record of the Company's
common stock. No dividends have been paid since the date of the initial public
offering. The Company currently intends to retain any future earnings for use in
the operation of its business for the foreseeable future. There is no
restriction on the payment of dividends under the Company's revolving credit
facility other than obtaining approval of the financial institution.
Item 6. SELECTED FINANCIAL DATA.
The following financial data was prepared in accordance with the basis of
presentation discussed in Note 1 to the financial statements. No dividends have
been paid on the Company's common stock.
December 31, 1997(b) 1996 1995 (a) 1994 (a) 1993
- -------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(In thousands of dollars, except per-share
amounts)
Revenues $184,993 $132,725 $117,802 $115,986 $103,973
Income (loss) before provision for income taxes 22,707 10,820 (7,812) (8,757) 798
Net income (loss) 13,567 9,955 (7,812) (8,757) 798
Earnings per common share (c):
Basic 0.88 0.79
Diluted 0.83 0.77
Total assets 224,793 72,147 44,809 53,859 57,506
Long-term obligations:
Long-term debt 812 6,005 853 2,394 3,821
Obligations under capital lease 2,011 1,265 2,415 3,017 4,056
----------- ----------- ----------- ----------- -----------
Total $ 2,823 $ 7,270 $ 3,268 $ 5,411 $ 7,877
=========== =========== =========== =========== ===========
(a) Amounts for 1995 and 1994 include reorganization charges of $3,060 and
$6,668, respectively (see Note 21 to the financial statements).
(b) Amounts in 1997 include a charge of $2,487 related to the Chapter 11
bankruptcy filing of one of the Company's on-site facilities management
customers, Nobody Beats the Wiz.
(c) Amounts in 1996 have been restated in accordance with Statement of
Financial Accounting Standards No. 128,"Earnings per Share."
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OFOPERATIONS
On April 16, 1996 (the "Initial Offering Date"), the Company commenced the
initial public offering (the "Initial Offering") of its common stock. Concurrent
with the Initial Offering, the Company acquired substantially all of the assets
and certain liabilities relating to the prepress, digital imaging services, and
related businesses of Applied Printing (collectively, the "Prepress Business").
The acquisition of the Prepress Business has been accounted for in a manner
similar to a pooling of interests. Accordingly, the financial statements of the
Company reflect the combined results of operations of the Prepress Business
through the Initial Offering Date and the results of the Company thereafter.
On September 3, 1997, the Company's Registration Statement on Form S-3
under the Securities Act of 1933, as amended, relating to an offering of the
Company's common stock (the "Offering"), was declared effective. As part of the
Offering, the Company sold 3,000,000 shares of common stock, generating
proceeds, net of underwriters' discount and transaction expenses, of
$121,700,000. Also as part of the Offering, an additional 3,900,000 shares were
sold by certain stockholders of the Company, of which 3,650,000 shares were sold
by Applied Printing.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto.
Results of Operations
Year Ended December 31, 1997, Compared with 1996
Revenues in 1997 increased $52,268,000 or 39.4% over 1996. This increase was
primarily due to $13,102,000 of revenues generated from the operations of
additional on-site facilities management contracts during 1997 that were in
effect for none or only a portion of 1996, $8,675,000 of increased revenues from
broadcast media distribution operations that have been acquired since 1996,
increased revenues of $6,016,000 in the digital imaging services division from
equipment and software license sales, archiving services, and digital
photography operations, $22,475,000 of additional revenues from the traditional
prepress business, and receipt of a nonrefundable payment of $2,000,000 related
to an agreement with one of the Company's major suppliers. Traditional prepress
revenues increased primarily from an overall increase in business at various
facilities, the results of MBA Graphics, Inc. ("MBA"), whose operations were
acquired in July 1997, increased business at the Foster City facility resulting
from the acquisition of the operations of Star Graphics Arts Co., Inc. ("Star
Graphics"), in May 1997, and additional revenue generated at the Detroit
facility as a result of the contract entered into with General Motors to provide
prepress services. The revenues from the contract with General Motors have not
been received at the pace originally anticipated. The Company has assigned a
senior executive to oversee this arrangement and plans certain capital
expenditures to further expand this business.
The gross profit percentage in 1997 was 35.1% as compared to 30.5% in 1996.
Gross profit increased $24,492,000 or 60.5% in 1997 as a result of the
additional revenues for the period as discussed above, increased business in
higher margin work, and the reduction of costs due to favorable pricing
negotiated with certain suppliers.
Selling, general, and administrative expenses in 1997 were $11,625,000
higher than in 1996 and as a percent of revenue increased slightly to 21.7% in
1997 from 21.5% in 1996. Although improvements were achieved from the increase
in revenues discussed above and increased business from on-site facilities
management contracts, which require less sales support than the traditional
prepress business, such improvements were offset by additional corporate
expenses incurred related to being a publicly-traded company, additional
expenses incurred as part of the Company's expansion and development of a
national sales force to better market its services, and expanded business at
certain operations.
In 1997, the Company incurred a charge of $2,487,000 primarily for
uncolledtable receivables related to the Chapter 11 bankruptcy filing of one of
its on-site facilities management customers, Nobody Beats the Wiz.
Interest expense in 1997 was $799,000 less than in 1996 primarily due to the
repayment of debt in April 1996 with the proceeds from the Initial Offering and
the repayment of borrowings under the Company's line of credit in September 1997
with the proceeds from the Offering. Interest income in 1997 was $1,227,000
higher than in 1996 due to investment earnings on the proceeds of the Offering.
The effective rate of the provision for income taxes increased in 1997 due
to the lower than would be expected rate in 1996 as a result of a reversal of
$4,070,000 of deferred tax asset valuation allowances in 1996 as compared to the
reversal of $881,000 of deferred tax asset valuation allowances in 1997.
In addition to its ongoing relationship with Applied Printing, the Company
also transacts business with other affiliates, including the Daily News, L.P.
and U.S. News & World Report, L.P., both of which are beneficially owned by the
Chairman of the Board of Directors of the Company (the "Chairman") and the Chief
Executive Officer of the Company (the "CEO"), as well as with Snyder
Communications, Inc., a provider of outsourced marketing services, of which both
the Chairman and the CEO are members of the Board of Directors and in the
aggregate own approximately 13% of the outstanding common stock. Sales to
related parties for the years ended December 31, 1997, 1996, and 1995, totaled
$16,845,000, $11,610,000, and $7,901,000, respectively, representing 9.1%, 8.8%,
and 6.7%, respectively, of the Company's revenues.
Year Ended December 31, 1996, Compared with 1995
Revenues in 1996 were $14,923,000 higher than in 1995 primarily due to
increased digital imaging services, additional on-site facilities management
contracts, and revenue from the ad management business that commenced in 1996.
Additional gross profit of $8,977,000 in 1996 resulted from the additional
revenues for the year as well as from an increase in the higher margin digital
business and improved gross profit in the traditional prepress business as a
result of the Company shedding low margin business and implementing more cost
effective production workflows in certain of its facilities. These improvements
resulted in an increase in the gross profit percentage to 30.5% in 1996 as
compared to 26.7% in 1995.
Selling, general, and administrative expenses decreased $4,975,000 in 1996
and represented 21.5% of revenue as compared to 28.5% in 1995. This decrease was
principally the result of non-recurring charges incurred in 1995 relating to
closed facilities and the reversal of certain bad debt and state sales tax
reserves no longer required in 1996. The sales tax reserve was established for
potential exposure with respect to an issue that was not raised by the
governmental authority within the statute of limitations period, which expired
in 1996. The reduction in the bad debt reserve reflects the results of an
improved collection effort in 1996. These decreases were partially offset by
increased costs associated with the new on-site facilities management contracts
and the ad management business. Selling, general, and administrative expenses in
1996 include $1,534,000 of costs allocated from related parties. Prior to the
Initial Offering, Applied Printing and other related parties provided general
management, treasury, financial reporting, and legal services. These expenses
were allocated to the Prepress Business on the basis of either specific
identification or an allocation methodology that management believes to be
reasonable.
Operating income in 1996 was $17,012,000 higher than in 1995 primarily due
to the improvements discussed above and the effects of a reorganization charge
of $3,060,000 incurred in 1995 with no corresponding charge incurred in 1996.
Interest expense in 1996 was $1,499,000 less than in 1995 primarily due
to the repayment of debt with the proceeds from the Initial Offering.
Prior to the Initial Offering, the Prepress Business was treated as a
partnership for Federal and state income tax purposes and was not subject to
income tax. A provision for income taxes is included for 1996 only for the
results of operations subsequent to the Initial Offering Date.
Liquidity and Capital Resources
In September 1997, the Company received $121,700,000 in proceeds, net of
underwriters' discount and transaction expenses, from the Offering. Of such
proceeds, approximately $22,700,000 were used to repay the amount then
outstanding under the Company's revolving line of credit. The remaining proceeds
of approximately $99,000,000 were invested in marketable securities. The Company
plans to use a significant portion of the proceeds from the Offering to further
expand its business through acquisitions. During the remainder of 1997, the
Company used approximately $5,100,000 of the proceeds for acquisitions. Although
the Company continues to evaluate acquisition opportunities on an ongoing basis,
there is no assurance that the Company will successfully complete additional
acquisitions. See below for a discussion of acquisitions completed and pending
in 1998. The Company also received $5,641,000 from the exercise of 486,700 stock
options in 1997.
During 1997, the Company repaid the remaining $1,600,000 of the Applied
Printing Note with the proceeds from the maturity of marketable securities. In
1997, the Company entered into several sale and leaseback arrangements that
generated proceeds of $3,469,000. Such arrangements resulted in immaterial gains
that have been deferred and are being recognized as credits against future
rental expense. In November 1997, the Company renegotiated its existing
revolving line of credit, increasing its borrowing capacity to an aggregate of
$60,000,000, consisting of a $35,000,000 revolving line of credit (the
"Revolver") and a $25,000,000 acquisition line of credit (the "Acquisition
Line"). The amount available to be borrowed under the Revolver may be limited by
outstanding eligible receivables. Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized primarily by receivables and inventory.
The Revolver and the Acquisition Line have repayment terms that run through
November 13, 2000, and December 1, 2003, respectively. Interest rates on funds
borrowed under the Revolver and the Acquisition Line vary from the lower of
prime less 1.00% or LIBOR plus 0.50%, to the greater of prime plus 0.125% or
LIBOR plus 1.375%. Under the terms of these facilities, the Company must comply
with certain covenants related to earnings, funded debt ratios, and fixed charge
coverage ratios. At December 31, 1997, the Company was in compliance with all
covenants. There are no borrowings currently outstanding under either of these
facilities.
Cash flows from operating activities during 1997 increased by $2,173,000 as
compared to 1996 due primarily to cash generated from additional income and the
timing of vendor payments offset by increased accounts receivable resulting from
additional business, increased rebates due from certain suppliers, and
additional tax payments. In addition to the cash generated and used as part of
the capital transactions described above, during 1997 the Company invested
$15,232,000 in equipment, including $1,235,000 financed with a capital lease
obligation, paid $10,533,000 related to acquisitions, and repaid $4,805,000 of
debt and lease obligations with the proceeds from the Offering, the sale and
leaseback transactions, and the exercise of stock options.
Working capital increased $115,440,000 during 1997 primarily from the
proceeds from the Offering, increased receivables, including amounts due from
affiliates, resulting from additional business at existing facilities, and from
acquired operations. The Company also recorded a tax benefit in the amount of
$6,407,000 associated with the exercise of stock options that reduced the cash
requirement for taxes in 1997. Long-term debt decreased $5,193,000 due primarily
to the repayment of amounts previously borrowed under the line of credit with a
portion of the proceeds from the Offering.
The Company expects to expend approximately $16,800,000 over the course of
the next twelve months for capital improvements, essentially all of which is for
modernization and growth, including a $3,200,000 capital investment to further
expand the General Motors business, a $5,000,000 investment in new information
systems, and $1,400,000 for expansion to handle additional business from The
Home Depot. The Company intends to finance a substantial portion of these
expenditures under operating leases, sale and leaseback arrangements, or with
working capital, including the proceeds from the Offering.
The investment in new information systems referred to above, which includes
replacing and upgrading the Company's internal financial and operational
systems, will result in such systems being Year 2000 compliant. The Company
expects to have these new systems implemented by the second quarter of 1999. In
addition, the Company has performed a review of its production systems and,
based on this review, believes that such systems are Year 2000 compliant. Some
of the Company's suppliers and customers may face Year 2000 issues. The Company
has not fully evaluated the impact of Year 2000 issues with respect to its
customers and suppliers.
In January 1998, the Company acquired Flying Color Graphics, Inc., a
prepress company with five facilities throughout the midwest, for approximately
$22,000,000. The purchase price was paid for with approximately $18,900,000 in
cash from the Company's working capital and 68,103 shares of the Company's
common stock.
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163,751,000, $209,522,000, and $29,063,000, respectively. Under the
terms of the agreement, which is subject to regulatory approval and the approval
of the Company's and Devon's stockholders, the Company will pay $30 per share in
cash and distribute 0.6 share of the Company's common stock in exchange for each
outstanding share of Devon common stock. The total consideration to be paid is
estimated to be $450,000,000 including transaction costs. To fund the cash
portion of the merger consideration, estimated to be $230,000,000 including the
transaction costs, the Company has a commitment from a commercial bank that
would increase its borrowing capacity to $250,000,000. This commitment expires
on June 15, 1998. The Company is also contemplating other financing alternatives
to fund all or part of the cash portion of the merger consideration.
The Company believes that the cash flow from operations, proceeds from the
Offering, its revolving credit facility, and its potential ability to obtain
funding from other financing sources will be sufficient to fund its cash needs
for the foreseeable future.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued in June
1997 and is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way public
companies report information about operating segments in annual and interim
financial statements. The Company believes its current reporting systems will
enable it to comply with the implementation of SFAS No. 131.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. This statement establishes standards for
recognizing revenue on software transactions and supersedes Statement of
Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of
Position was issued in February 1998 that, if issued, would postpone certain
provisions of SOP 97-2 for one year. The Company does not expect the
implementation of SOP 97-2 or the proposed SOP, if issued, to have a material
effect on its results of operations.
The Company does not believe that inflation has had a material impact on its
business.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Applied Graphics Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Applied Graphics
Technologies, Inc. and subsidiaries ("the Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and owners' deficit, and cash flows for the years then ended. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996 and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/
DELOITTE & TOUCHE LLP
March 23, 1998
New York, New York
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of the Predecessor Group:
We have audited the accompanying combined statements of operations,
cash flows and changes in owners' equity (deficit) of the Predecessor Group to
Applied Graphics Technologies, Inc. for the year ended December 31, 1995. These
financial statements are the responsibility of the Predecessor Group's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined results of operations and
cash flows of the Predecessor Group for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/
Coopers & Lybrand L.L.P.
New York, New York
March 8, 1996
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per-share amounts)
December 31,
----------------------
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 12,584 $ 2,567
Marketable securities .............................. 90,150 1,600
Trade accounts receivable (net of allowances
of $3,989 in 1997 and $472 in 1996) ............ 43,025 29,584
Due from affiliates ................................ 5,561
Inventory .......................................... 6,234 4,639
Prepaid expenses and other current assets .......... 7,881 2,485
Deferred income taxes .............................. 3,016 705
--------- ---------
Total current assets ........................ 168,451 41,580
Property, plant, and equipment - net .................. 31,020 20,544
Goodwill (net of amortization of $1,289 in 1997
and $552 in 1996) .................................. 22,229 7,121
Deferred income taxes ................................. 1,384 1,644
Other assets .......................................... 1,709 1,258
--------- ---------
Total assets ................................ $ 224,793 $ 72,147
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $ 27,264 $ 19,630
Applied Printing Note .............................. 1,600
Current portion of long-term debt .................. 606 507
Current portion of obligations under capital leases 1,697 1,354
Due to affiliates .................................. 923 354
Other current liabilities .......................... 6,793 2,407
--------- ---------
Total current liabilities ................... 37,283 25,852
Long-term debt ........................................ 812 6,005
Obligations under capital leases ...................... 2,011 1,265
Other liabilities ..................................... 1,190 3,142
--------- ---------
Total liabilities ........................... 41,296 36,264
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock (no par value, 10,000,000
shares authorized; no shares outstanding)
Common stock ($0.01 par value, 40,000,000
shares authorized; shares issued
and outstanding: 17,836,383 in 1997
and 14,349,683 in 1996) .......................... 178 143
Additional paid-in capital ......................... 159,627 25,584
Unrealized investment loss ......................... (31)
Retained earnings .................................. 23,723 10,156
--------- ---------
Total stockholders' equity ...................... 183,497 35,883
--------- ---------
Total liabilities and stockholders' equity ..... $ 224,793 $ 72,147
========= =========
See Notes to Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share amounts)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
Revenues ................................. $ 184,993 $ 132,725 $ 117,802
Cost of revenues ......................... 120,018 92,242 86,296
--------- --------- ---------
Gross profit ............................. 64,975 40,483 31,506
--------- --------- ---------
Selling, general, and
administrative expenses .............. 40,179 28,554 33,529
Charge for customer bankruptcy ........... 2,487
Reorganization charge .................... 3,060
--------- --------- ---------
Total operating expenses ............... 42,666 28,554 36,589
--------- --------- ---------
Operating income (loss) ................ 22,309 11,929 (5,083)
Interest expense ......................... (1,034) (1,833) (3,332)
Interest income .......................... 1,724 497
Other income (expense) - net ............. (292) 227 603
--------- --------- ---------
Income (loss) before provision
for income taxes ...................... 22,707 10,820 (7,812)
Provision for income taxes ............... 9,140 865
--------- --------- ---------
Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812)
========= ========= =========
Earnings per common share:
Basic .................................. $ 0.88 $ 0.79
Diluted ................................ $ 0.83 $ 0.77
Weighted average number of
common shares:
Basic .................................. 15,475 12,660
Diluted ................................ 16,430 12,924
Pro Forma Net Income Data:
Income (loss) before provision
for income taxes,
as reported ......................... $ 10,820 $ (7,812)
Pro forma provision for income taxes.... 785 115
--------- ---------
Pro forma net income (loss) ............ $ 10,035 $ (7,927)
========= =========
Pro forma earnings (loss) per common
share:
Basic .................................. $ 0.79 $ (0.80)
Diluted ................................ $ 0.78 $ (0.80)
Pro forma weighted average number
of common shares:
Basic .................................. 12,660 9,930
Diluted ................................ 12,924 9,930
See Notes to Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
For the years ended December 31, 1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) ........................ $ 13,567 $ 9,955 $ (7,812)
Adjustments to reconcile net income
(loss) to net cash from operating activities:
Depreciation and amortization ...... 6,222 4,932 5,359
Deferred taxes ..................... (1,591) (2,349)
Gain on insurance settlement ....... (18) (2,023)
Reorganization charge .............. 3,060
Charge for customer bankruptcy ..... 2,487
Other .............................. 644 (40) 1,012
Changes in Operating Assets and
Liabilities, net of effects of acquisitions:
Trade accounts receivable .......... (13,779) (11,442) 3,772
Due from/to affiliates ............. (4,991) 1,917 (981)
Inventory .......................... (1,285) (937) (422)
Other assets ....................... (1,042) 2,452 1,401
Accounts payable and accrued
expenses ........................ 1,139 (413) 1,387
Other liabilities .................. 2,268 (2,591) 204
--------- --------- ---------
Net cash provided by operating
activities ............................ 3,639 1,466 4,957
--------- --------- ---------
Cash flows from investing activities:
Investment in available-for-
sale securities .................. (320,553) (1,600)
Proceeds from sale of available-
for-sale securities ............. 231,072
Proceeds from maturities of held-
to-maturity securities .......... 1,600
Property, plant, and equipment
expenditures .................... (13,997) (14,851) (3,455)
Proceeds from the sale of
fixed assets .................... 12 1,099 1,483
Net proceeds from insurance
claims .......................... 243 1,782
Entities purchased, net of
cash acquired ................... (10,533) 350 (69)
--------- --------- ---------
Net cash used in investing activities .... (112,399) (14,759) (259)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common
stock ........................... 121,700 46,103
Proceeds from exercise of stock
options ......................... 5,641
Borrowings (repayments) under
revolving credit line - net ..... (5,628) 5,628
Proceeds from sale/leaseback
transactions .................... 3,469 4,093 558
Repayment of Applied Printing
Note ............................ (1,600) (14,400)
Repayment of notes and capital
lease obligations ............... (4,805) (2,662) (4,020)
Increase in (repayments of)
intercompany borrowings - net ... (18,000) 3,789
Distributions to Applied
Printing - net .................. (5,568) (4,449)
--------- --------- ---------
Net cash provided by (used in)
financing activities .................. 118,777 15,194 (4,122)
--------- --------- ---------
Net increase in cash and cash
equivalents ........................... 10,017 1,901 576
Cash and cash equivalents at
beginning of year ..................... 2,567 666 90
--------- --------- ---------
Cash and cash equivalents at
end of year ........................... $ 12,584 $ 2,567 $ 666
========= ========= =========
See Notes to Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' DEFICIT
(In thousands of dollars, except per-share amounts)
Additional Unrealized
Common Paid-in- Investment Retained Owners'
Stock Capital Loss Earnings Deficit
----------- ------------- ------------- ----------- ------------
Balance at January 1, 1995 $ (7,120)
Net loss (7,812)
Distribution (4,449)
------------
Balance at December 31, 1995 (19,381)
Issuance of 9,309,900 common shares in
exchange for assets of Prepress Business $ 93
Issuance of 4,500,000 common shares in
a public offering at $12.00 per share 45 $ 46,058
Issuance of 539,683 shares in an
acquisition at $15.75 per share 5 8,495
Net income (loss) $ 10,156 (201)
Distribution (9,387)
Conveyance (28,969) 28,969
----------- ------------- ----------- ------------
Balance at December 31, 1996 143 25,584 10,156 $ 0
============
Issuance of 3,000,000 common shares in a
public offering at $43.00 per share 30 121,670
Granting of 19,000 warrants to purchase
common shares 330
Issuance of 486,700 common shares upon
exercise of stock options 5 5,636
Income tax benefit associated with
exercise of stock options 6,407
Unrealized loss on investments in
available-for-sale securities $ (31)
Net income 13,567
----------- ------------- ------------- -----------
Balance at December 31, 1997 $ 178 $ 159,627 $ (31) $ 23,723
=========== ============= ============= ===========
See Notes to Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per-share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
Applied Graphics Technologies, Inc. and its subsidiaries (the
"Company") provide digital prepress services to magazine publishers, advertising
agencies, entertainment companies, automobile manufacturers, and catalog
retailers. In addition, the Company provides outsourced, on-site prepress and
related services to third parties and advanced digital imaging services, such as
digital archiving and distribution services and duplication and distribution
services of advertising content for the broadcast industry. The Company was
incorporated in Delaware on December 12, 1995. Applied Printing Technologies,
L.P. ("Applied Printing"), an entity beneficially owned by the Chairman of the
Board of Directors of the Company (the "Chairman") and the Chief Executive
Officer of the Company (the "CEO"), was issued 100 shares of common stock and
became the Company's sole stockholder.
On April 16, 1996 (the "Initial Offering Date"), the Company's
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
relating to the initial public offering (the "Initial Offering") of the
Company's common stock, was declared effective. Upon the offering being declared
effective, the Company acquired substantially all of the assets and certain
related liabilities relating to the prepress, digital imaging services, and
related businesses of Applied Printing (collectively, the "Prepress Business")
in exchange for 9,309,900 shares of the Company's common stock and $37,000 of
additional consideration ("Additional Consideration") comprised of (i) the
assumption by the Company of the principal amount of collateralized senior
indebtedness to Applied Printing's primary institutional lender (the
"Institutional Senior Indebtedness") of $21,000 and (ii) the issuance of a
promissory note by the Company to Applied Printing (the "Applied Printing Note")
of $16,000. The Company received net proceeds of $46,103 from the Initial
Offering, of which $21,000 was used to repay Institutional Senior Indebtedness
and $16,000 was used to invest in short-term investments to support a standby
letter of credit that collateralized the Applied Printing Note. At December 31,
1997, Applied Printing owned approximately 28% of the Company's outstanding
common stock.
The acquisition of the Prepress Business was accounted for in a manner
similar to a pooling of interests. Accordingly, the financial statements of the
Company reflect the combined results of operations of the Prepress Business
through the Initial Offering Date and the results of the Company thereafter. The
statements of operations and cash flows covering the periods through the Initial
Offering Date have been prepared by combining the results of operations and cash
flows of the specific divisions that comprised the Prepress Business. Prior to
the Initial Offering Date, these specific divisions operated as separate
business units and maintained their own books and records. Through the Initial
Offering Date, Applied Printing managed the cash and financing requirements of
all of its divisions centrally and, as such, the interest expense and related
intercompany borrowing up until that date represent an allocation of Applied
Printing's interest expense and the related debt. As discussed in Note 10, this
allocation of debt is presented as an intercompany borrowing. Additionally,
prior to the Initial Offering Date, Applied Printing and other related parties
provided certain corporate, general, and administrative services to the Prepress
Business, including general management, treasury, financial reporting, and legal
services. Accordingly, the financial statements include an allocation of
expenses for such services. The combined results of operations and cash flows
for the years ended December 31, 1996 and 1995, may have differed had the
Company operated as an independent entity during those entire periods.
On September 3, 1997, the Company's Registration Statement on Form S-3 under
the Securities Act of 1933, as amended, relating to an offering of the Company's
common stock (the "Offering"), was declared effective. As part of the Offering,
the Company sold 3,000,000 shares of common stock, generating proceeds, net of
underwriters' discount and transaction expenses, of $121,700. Also as part of
the Offering, an additional 3,900,000 shares were sold by certain stockholders
of the Company, of which 3,650,000 shares were sold by Applied Printing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The Consolidated Financial Statements include
the accounts of the Company and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated in the Consolidated Financial
Statements.
Cash and Cash Equivalents: Cash and cash equivalents include all cash
balances and highly liquid investments having original maturities of three
months or less.
Marketable Securities: The Company has classified its investments in
marketable securities at December 31, 1997, as "available for sale" and has
recorded them at fair market value. Marketable securities at December 31, 1996,
were classified as "held to maturity" and were recorded at amortized cost.
Inventory: Raw materials are valued at the lower of cost (cost being
determined on a weighted average basis) or market. Work-in-process, consisting
of labor, materials, and overhead on partially completed projects, is recorded
at cost (specific identification) but not in excess of net realizable value.
Property, Plant, and Equipment: Property, plant, and equipment is stated at
cost. Depreciation is computed principally on the straight-line method over the
estimated useful lives of the assets, which generally range from 30 years for
buildings to three years for computer software and vehicles. Leasehold
improvements and amounts recorded under capital leases are amortized on the
straight-line method over the terms of the leases or their estimated useful
lives.
Revenue recognition: Revenue is recognized at the time projects are shipped
or transmitted to the customer. Revenue for digital archiving services is
recognized on a per-image basis as items are prepared and scanned. Revenue from
the licensing of software and the sale of digital equipment is recognized upon
the later of delivery or satisfaction of significant obligations.
Goodwill: Goodwill is being amortized on the straight-line method over
periods ranging from 7 to 30 years.
Income taxes: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." The Prepress Business was treated as a partnership for Federal
and state income tax purposes prior to the Initial Offering Date and was not
subject to tax. A provision for income taxes is included in the Company's
Consolidated Statements of Operations only for the periods subsequent to the
Initial Offering Date.
Earnings per Share of Common Stock: The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," in December
1997. In accordance with the provisions of SFAS No. 128, earnings per share of
common stock for prior periods, including pro forma amounts, have been restated.
Long-lived assets: The Company evaluates the recoverability of its
long-lived assets by comparing their carrying value to the expected future cash
flows to be generated from such assets when events or circumstances indicate
that an impairment may have occured.
Recently Issued Accounting Standards: Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued in June 1997 and is effective for financial
statements for periods beginning after December 15, 1997. This statement
establishes standards for the way public companies report information about
operating segments in annual and interim financial statements. The Company
believes its current reporting systems will enable it to comply with the
implementation of SFAS No. 131.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," was issued
in October 1997 and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. This statement establishes standards for
recognizing revenue on software transactions and supersedes Statement of
Position (SOP) 91-1, "Software Revenue Recognition." A proposed Statement of
Position was issued in February 1998 that, if issued, would postpone certain
provisions of SOP 97-2 for one year. The Company does not expect the
implementation of SOP 97-2 or the proposed SOP, if issued, to have a material
effect on its results of operations.
Estimates: The preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification of Prior Years' Financial Statements: Certain prior-year
amounts in the accompanying financial statements have been reclassified to
conform with the 1997 presentation.
3. ACQUISITIONS
In May 1997, the Company completed the purchase of certain assets of Star
Graphic Arts Co., Inc., a prepress company. In June 1997, the Company acquired
certain assets of Digital Imagination, Inc. ("DI"), a digital events photography
business, and also acquired certain rights from a former joint venture partner.
In July 1997, the Company acquired all of the assets of MBA Graphics, Inc.
("MBA"), a provider of prepress production, direct mailing, and brokered
commercial printing services. In September 1997, the Company acquired certain
assets of the broadcast media distribution business of Winkler Video Associates,
Inc. In December 1997, the Company acquired the assets of another prepress
company, Vancor Color, Inc., and the stock of another digital events photography
business, Amusematte Corp. For such acquisitions, the Company paid an aggregate
of $11,024 from amounts borrowed under its line of credit and from proceeds of
the Offering, assumed $10,850 of liabilities, and granted warrants to purchase a
minimum of 19,000 shares of its common stock with an approximate value of $330.
In addition, the Company will make contingent payments in the form of cash or
shares of common stock in the amount of $3,174 as additional consideration for
certain of the acquisitions based on 1997 performance. Any additional
consideration will be determined based upon the future financial performance of
the acquired operations and will be recorded as additional purchase price at the
time the necessary conditions are satisfied. Such additional consideration may
be in the form of cash, shares of common stock, or warrants to purchase shares
of common stock.
On December 3, 1996, the Company acquired the assets of SpotLink, Inc.
("SpotLink"), a company that reproduces and distributes commercials to broadcast
and cable media, for a purchase price of approximately $8,500. The assets,
consisting primarily of duplication equipment, were acquired for 539,683 shares
of the Company's common stock.
The acquisitions were accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities have been recorded at their estimated
fair values at the date of acquisition. The excess of the purchase price over
the fair value of the net assets acquired in 1997 and 1996 was $15,818 and
$6,716, respectively, and has been recorded as goodwill, which is being
amortized on the straight-line method over periods ranging from 20 to 30 years.
The results of operations of these acquisitions have been included in the
Consolidated Statements of Operations subsequent to the respective dates of the
acquisitions.
At the time of the acquisition of DI, the Company intended to dispose of the
portion of the business related to photography at golf courses and retain the
portion of the business that related to photography at events and fixed-based
locations. The projected cash loss for the golf course operations from the date
of acquisition through the anticipated date of disposal totaled $1,068 and is
included as part of the purchase price. During the period June 6, 1997, the date
of acquisition, through December 31, 1997, the golf course operations incurred
cash losses of approximately $800. Such losses have been excluded from the
consolidated results of operations for the year ended December 31, 1997.
The following unaudited pro forma information combines the results of
operations of the Company and the acquisitions for the years ended December 31,
1997 and 1996, calculated as if the acquisitions had occurred on January 1,
1996. The pro forma information has been prepared for comparative purposes only
and does not purport to be indicative of the results of operations that would
have occurred had the acquisitions been consummated at the beginning of 1996 or
of results which may occur in the future.
Unaudited 1997 1996
----------- -----------
Total revenues $ 199,658 $ 164,338
Income before provision for income taxes $ 22,156 $ 9,085
Net income $ 13,238 $ 9,067
Earnings per common share:
Basic $ 0.86 $ 0.72
Diluted $ 0.81 $ 0.70
4. MARKETABLE SECURITIES
The Company has classified its investments in marketable securities at
December 31, 1997, as "available for sale" and has recorded them at fair market
value. Marketable securities at December 31, 1996, were classified as "held to
maturity" and were recorded at amortized cost. Marketable securities at December
31 consisted of the following:
1997 1996
----------------------------------- -------------------------------------
Amortized Amortized
Market Value Cost Market Value Cost
----------------- -------------- ---------------- ----------------
Debt issued by municipalities
and their subdivisions:
Maturing within 1 year $ 400 $ 400
Maturing after 1 year through 5 years 1,600 1,600
Maturing after 5 years through 10 years 3,675 3,675
Maturing after 10 years 9,400 9,400
Corporate debt securities maturing within 1
year 55,341 55,372
Certificates of Deposit maturing within 1
year 4,498 4,498
Corporate Equity Fund 1,000 1,000
U.S. Government Treasury Fund 14,236 14,236
U.S. Government Securities $ 1,600 $ 1,600
----------------- -------------- ---------------- ----------------
Total $ 90,150 $ 90,181 $ 1,600 $ 1,600
================= ============== ================ ================
At December 31, 1997, all marketable securities held by the Company were
available for current operations and are therefore classified in the
Consolidated Balance Sheets as current assets. Unrealized holding gains and
losses on available-for-sale securities, which were not material at December 31,
1997, are reflected as a separate component of Stockholders' Equity. Proceeds
from sales of available-for-sale securities during the twelve month period ended
December 31, 1997, totaled $231,072 and resulted in no realized gain or loss.
Realized gains and losses are determined based on a specific identification
basis.
5. INVENTORY
The components of inventory at December 31 were as follows:
1997 1996
----------- -----------
Work-in-Process $ 2,721 $ 2,596
Raw Materials 3,513 2,043
----------- -----------
Total $ 6,234 $ 4,639
=========== ===========
6. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the following:
1997 1996
----------- -----------
Land $ 1,360 $ 1,360
Machinery and equipment 32,490 23,843
Leasehold improvements 8,423 7,019
Buildings and improvements 7,119 6,893
Computer software 2,687 1,651
Furniture and fixtures 2,165 1,531
Construction in progress 3,289 203
----------- -----------
Total 57,533 42,500
Less accumulated depreciation and amortization 26,513 21,956
---------- -----------
Net $ 31,020 $ 20,544
=========== ===========
Interest capitalized on construction of buildings and improvements
during 1996 was $130. Depreciation and amortization of property, plant, and
equipment charged to expense for the years ended December 31, 1997, 1996, and
1995, was $6,055, $4,785 and $5,106, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consisted of the
following:
1997 1996
----------- -----------
Accounts payable $ 13,098 $ 7,694
Salaries and benefits 5,207 4,329
Income taxes 54 2,449
Commissions 1,640 1,374
Other operating accruals 7,265 3,784
----------- -----------
Total $ 27,264 $ 19,630
=========== ===========
8. APPLIED PRINTING NOTE
On April 16, 1996, as part of the acquisition of the assets of the Prepress
Business, the Company issued a promissory note to Applied Printing in the amount
of $16,000. A principal payment in the amount of $14,400 was made during 1996.
The remaining balance of $1,600 was repaid in February 1997. This obligation,
which bore interest at the rate of 4.145% per annum, was collateralized by a
letter of credit. The Company incurred interest charges of $8 and $295 during
the years ended December 31, 1997 and 1996, respectively.
9. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
1997 1996
----------- -----------
8% - Prime plus 1% notes payable
due 1999 through 2002 $ 812 $ 377
Variable rate revolving credit line 5,628
----------- -----------
Total $ 812 $ 6,005
=========== ===========
At December 31, 1997, the Company had a revolving line of credit
aggregating $60,000, consisting of a $35,000 revolving line of credit (the
"Revolver") and a $25,000 acquisition line of credit (the "Acquisition Line").
The amount available to be borrowed under the Revolver may be limited by
outstanding eligible receivables. Amounts borrowed under either the Revolver or
the Acquisition Line are collateralized primarily by receivables and inventory.
The Revolver and the Acquisition Line are with a major financial institution and
have repayment terms that run through November 13, 2000, and December 1, 2003,
respectively. Interest rates on funds borrowed under the Revolver and the
Acquisition Line vary from the lower of prime less 1.00% or LIBOR plus 0.50%, to
the greater of prime plus 0.125% or LIBOR plus 1.375%. Under the terms of the
facilities, the Company must comply with certain covenants related to earnings,
funded debt ratios, and fixed charge coverage ratios. At December 31, 1997, the
Company was in compliance with all covenants and there were no outstanding
borrowings under either the Revolver or the Acquisition Line. The average
variable rate on revolving credit facility borrowings during 1997 and 1996 was
7.50% and 8.25%, respectively. There is no restriction on the payment of
dividends other than obtaining approval of the financial institution.
Principal payments on the long-term debt are as follows:
1998 $ 606
1999 399
2000 259
2001 111
2002 43
-----------
Total 1,418
Less current portion 606
-----------
Total long-term debt $ 812
===========
10. INTERCOMPANY BORROWINGS
Prior to the Initial Offering Date, the Prepress Business had been financed
principally through advances from Applied Printing. Historically, Applied
Printing had financed all of its operations, including those of the Prepress
Business, with Institutional Senior Indebtedness, borrowings from the Daily
News, L.P. (the "Daily News") (see Note 15), and borrowings from the majority
limited partner (collectively, "Borrowings").
Prior to the Initial Offering Date the financial statements include an
allocation of Applied Printing's interest expense and related Borrowings.
Applied Printing's interest expense related to the Borrowings had been allocated
to the Prepress Business based on the ratio of net assets of the Prepress
Business, before an allocation of intercompany debt, to the sum of the total
consolidated net assets of Applied Printing plus the Applied Printing debt that
is not directly attributable to specific divisions within Applied Printing. The
intercompany borrowing amounts represented derived amounts which have been
computed by applying Applied Printing's weighted average interest rate to the
allocated interest expense, calculated using the methodology discussed above.
The weighted average interest rates during the period ended April 16, 1996, and
the year ended December 1995, were 10.8% and 8.9%, respectively. The Company
incurred interest charges of $944 and $2,683 for the period ended April 16,
1996, and the year ended December 31, 1995, respectively.
11. LEASES
The Company leases certain property and equipment used in its operations
under agreements that are classified as both capital and operating leases. Such
agreements generally include provisions for inflation-based rate adjustments
and, in the case of leases for buildings and office space, payments of certain
operating expenses and property taxes.
Future minimum rental payments required under capital leases and operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
Capital Operating
Leases Leases
------------ ------------
1998 $ 1,991 $ 7,320
1999 1,061 6,396
2000 428 2,659
2001 289 1,724
2002 168 1,600
Later years 387 4,925
------------ ------------
Total minimum lease payments 4,324 $ 24,624
============
Less imputed interest 616
------------
Present value of minimum lease payments 3,708
Less current portion 1,697
------------
Long-term obligation under capital leases $ 2,011
============
Assets recorded under capital leases are included in property, plant, and
equipment as follows:
1997 1996
------------- -----------
Buildings $ 4,768 $ 4,768
Machinery and equipment 13,179 11,431
------------- -----------
Total 17,947 16,199
Less accumulated depreciation 9,766 8,660
------------- -----------
Net $ 8,181 $ 7,539
============= ===========
Total rental expense under operating leases amounted to $10,002, $7,578,
and $12,106 for the years ended December 31, 1997, 1996, and 1995, respectively.
The Company enters into sale and leaseback arrangements that are recorded as
operating leases. The gain from these sale and leaseback arrangements is
deferred and recognized as credits against future rental expenses over the terms
of the related leases. At December 31, 1997, the remaining balance of the
deferred gain totaling $377 is included in "Other liabilities", both current and
noncurrent, in the accompanying Consolidated Balance Sheets.
12. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which requires the asset and liability method of accounting for income taxes.
Under this method, deferred taxes are recognized based on the expected future
tax consequences of events that have been included in the financial statements
or tax returns by applying currently enacted statutory tax rates applicable to
future years to differences between the financial statement and tax bases of
assets and liabilities.
The Prepress Business was treated as a partnership for Federal and state
income tax purposes prior to the Initial Offering Date and was not subject to
tax. At the date of the Initial Offering, the Company recorded the applicable
deferred tax assets related to the differences between financial statement and
tax basis of the assets and liabilities of the Prepress Business. These deferred
tax assets were entirely offset by a valuation allowance. A provision for income
taxes is included in the Company's Consolidated Statements of Operations only
for the periods subsequent to the Initial Offering Date.
The components of the provision for income taxes were as follows:
1997 1996
------------ ------------
Current:
Federal $ 3,018 $ 2,287
State 1,187 927
------------ ------------
Total current 4,205 3,214
------------ ------------
Deferred:
Federal (430) (2,349)
State (1,161)
------------ ------------
Total deferred (1,591) (2,349)
------------ ------------
Tax benefits not impacting provision:
Federal 4,650
State 1,876
------------
Total tax benefits not impacting provision 6,526
------------
Total provision for income taxes $ 9,140 $ 865
============ ============
The provision for income taxes varied from the Federal statutory income tax
rate due to the following:
1997 1996
------------ ------------
Taxes at statutory rate $ 7,720 $ 3,679
State income taxes, net of
Federal tax benefit 1,256 612
Change in valuation allowance
for Federal deferred tax assets (3,870)
Permanent items 158 252
Other - net 6 192
------------ ------------
Provision for income taxes $ 9,140 $ 865
============ ============
Federal statutory rate 34.00% 34.00%
Effective rate 40.25% 8.00%
The components of the net deferred tax asset at December 31 were as
follows:
1997 1996
------------- -------------
Deferred tax assets:
Accounts receivable $ 1,978 $ 221
Property, plant, and equipment 837 679
Accrued expenses 349 1,193
Obligations under capital leases 460 639
Other liabilities 262 300
Other assets 514 198
------------- -------------
Total deferred tax assets 4,400 3,230
Valuation allowance (881)
------------- -------------
Net deferred tax asset $ 4,400 $ 2,349
============== ============
There were no deferred tax liabilities at December 31, 1997 and 1996. A
valuation allowance was established at the date of initially recording the
deferred tax assets associated with the acquisition of the Prepress Business.
Due to the Prepress Business having historically incurred losses, the valuation
allowance was deemed necessary due to the uncertainty relating to the Company's
ability to utilize these benefits in the future. During the year ended December
31, 1997, the Company reduced the valuation allowance for state deferred tax
assets by $881. During the period ended December 31, 1996, the Company reduced
the valuation allowance by $3,870 for Federal and $200 for state deferred tax
assets. Based on operating earnings subsequent to the Initial Offering Date and
the Company's expectations of future earnings from established contracts and
relationships, the Company believes that it is more likely than not that the
benefit associated with Federal and state deferred tax assets will be realized
in the future and therefore has not established a valuation allowance for
deferred tax assets at December 31, 1997.
13. STOCK OPTIONS
In 1996, the Board of Directors and stockholders approved a Stock Option
Plan (the "Employee Plan") and a Non-employee Directors' Nonqualified Stock
Option Plan (the "Directors' Plan"). Under the Employee Plan, options are
granted to key employees of the Company to purchase common stock of the Company.
Options granted under the Employee Plan, which have a term of ten years, become
exercisable over a five year period in varying amounts, but in no event less
than 5% or more than 25% in any year for any individual optionee. Under the
Directors' Plan, options are granted to members of the Board of Directors who
are not employees of the Company. Options initially granted under the Directors'
Plan become exercisable over a two year period and have a term of ten years. The
Directors' Plan also provides for an additional 5,000 options to be granted to
non-employee directors on each subsequent anniversary date of having first
become a member of the Board of Directors. Such future option grants will have
an exercise price equal to the fair market value of the common stock on the date
of grant and are fully vested at grant. The two plans call for a combined
maximum of 4,200,000 shares of the Company's common stock to be available for
issuance upon exercise of options. At December 31, 1997, 1,504,100 shares were
reserved for the issuance of stock options.
Information relating to activity in the Company's stock option plans is
summarized as follows:
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
-------------- ----------------- ---------------
Options granted on Initial
Offering Date 2,475,000 $12.00 $17,489
Additional options granted 54,000 $15.61 $ 496
Options forfeited (38,000) $12.37
--------------
Options outstanding at
December 31, 1996
(none exercisable) 2,491,000 $12.07
Options granted 255,500 $45.15 $ 6,858
Options exercised (486,700) $12.03
Options forfeited (50,600) $12.79
--------------
Options outstanding at
December 31, 1997 2,209,200 $15.89
==============
Options exercisable at
December 31, 1997 72,500 $18.29
==============
Information relating to options outstanding at December 31, 1997, is
summarized as follows:
Outstanding Exercisable
--------------------------------------- -----------------------
Range of Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Prices Options Exercise Price Remaining Life Options Exercise Price
- --------------- --------- -------------- -------------- ------- --------------
$12.00 - $16.63 1,953,700 $12.07 8.29 52,500 $12.31
$34.00 - $39.25 60,000 $37.50 9.38 20,000 $34.00
$47.50 195,500 $47.50 9.83 0
The Company accounts for the issuance of stock options under the provisions
of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," which requires compensation cost to be measured at the
date of grant based on the intrinsic value of the options granted. The intrinsic
value of an option is equal to the difference between the market price of the
common stock on the date of grant and the exercise price of the option. There
was no compensation cost recognized by the Company on the options granted in
1997 and 1996.
In 1995, Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," was issued. SFAS No. 123 provides for
an alternative measurement of compensation cost based on the fair value of the
options granted. The fair value of an option is based on the intrinsic value as
well as the time value of the option. The fair value of stock options granted
was estimated on the grant dates using the Black-Scholes option-pricing model.
The following weighted average assumptions were used in calculating the fair
value of options granted:
1997 1996
--------- ---------
Risk-free interest rate 6.20% 6.75%
Expected life 6 years 6 years
Expected volatility 0.5606 0.5394
Expected dividend yield 0% 0%
Had the Company elected to account for the issuance of stock options under
SFAS No. 123, the compensation cost would have been $3,957 and $2,511 for the
years ended December 31, 1997 and 1996, respectively. The pro forma net income
and earnings per share for the years ended December 31, 1997 and 1996,
calculated as if the Company had elected to account for the issuance of stock
options under SFAS No. 123, were as follows:
1997 1996
------- -------
Net Income $11,203 $ 8,298
Basic Earnings per Share $ 0.72 $ 0.66
Diluted Earnings per Share $ 0.70 $ 0.66
14. EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," in December 1997. SFAS No. 128
requires the presentation of both basic and diluted earnings per share as
opposed to primary and fully diluted earnings per share, which were required
under the previous standard, Accounting Principles Board Opinion No. 15. In
accordance with the provisions of SFAS No. 128, prior period earnings per share
data has been restated.
Basic earnings per share of common stock are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per share of common stock are computed by giving
effect to all dilutive potential shares. There were no reconciling items to net
income to arrive at income available to common stockholders for the years ended
December 31, 1997, 1996, and 1995. The number of common shares used in the
computation of basic and diluted earnings per share for the years ended December
31, 1997, 1996, and 1995, including pro forma computations, are summarized as
follows:
1997 1996 1995
-------------- -------------- -------------
Basic:
Weighted average shares
outstanding 15,475,000 12,660,000 9,930,000
Effect of Dilutive Securities:
Stock options and warrants 946,000 264,000
Contingently issuable
common shares 9,000
-------------- -------------- -------------
Diluted:
Weighted average shares
outstanding 16,430,000 12,924,000 9,930,000
============== ============== =============
15. RELATED PARTY TRANSACTIONS
In addition to the business it transacts with Applied Printing, the Company
also does business and shares services with entities beneficially owned by the
Chairman and the CEO, including the Daily News and U.S. News & World Report,
L.P. ("U.S. News"), and occasionally utilizes an aircraft owned by ZWA, Inc., an
entity owned by the Chairman. The Company also does business with Snyder
Communications, Inc. and its subsidiaries, a provider of outsourced marketing
services, of which both the Chairman and the CEO are members of the Board of
Directors and in the aggregate own approximately 13% of the outstanding common
stock.
Due to/from affiliates - Affiliates owed the Company $5,561 and $46 at
December 31, 1997 and 1996, respectively, representing trade receivables. The
Company owed affiliates $923 and $400 at December 31, 1997 and 1996,
respectively.
Affiliate sales and purchases - The Company has entered into Production
Services Agreements with U.S. News and the Daily News pursuant to which it will
provide prepress services. The agreement with U.S. News, which expires on
December 31, 2000, is renewable annually thereafter by mutual agreement of the
parties. The agreement with the Daily News commenced in October 1995 and is
renewable annually by mutual agreement of the parties. In 1995, the Company
entered into a two-year agreement to digitize the entire library of photographs
of an affiliate. In addition, the Company occasionally provides services to and
purchases services from related parties that are negotiated on an arms-length
basis. Sales to and purchases from related parties for the years ended December
31, 1997, 1996, and 1995, were as follows:
1997 1996 1995
------------ ------------ ------------
Affiliate sales $ 16,845 $ 11,610 $ 7,901
Affiliate purchases $ 4,683 $ 3,097 $ 421
Sales to affiliates represented 9.1%, 8.8%, and 6.7% of the Company's
revenues for the years ended December 31, 1997, 1996, and 1995, respectively.
Allocated costs - Prior to the Initial Offering Date, Applied Printing and
other related parties provided to the Company certain administrative services
that included cash management, financial reporting, legal, and other similar
services. The costs allocated to the Company were based on either specific
identification of expenses attributable to the Prepress Business, where
practicable, or an allocation of the total costs incurred. For such services,
the Company incurred charges of $1,534 and $6,645 for the period ended April 16,
1996, and for the year ended December 31, 1995, respectively.
In the opinion of management, such allocated costs have been made on a basis
that is considered to be reasonable; however, these costs are not necessarily
indicative of the total costs that the Company would have incurred had it
operated on a stand-alone basis.
Shared costs - Pursuant to shared services agreements, the Company receives
certain legal and computer services from the Daily News and U.S. News. For such
services, the Company incurred charges of $308, $303, and $150 for the years
ended December 31, 1997, 1996, and 1995, respectively. In 1995, the shared costs
are included as part of the allocated costs.
Technology development agreement - Under an arrangement with the Daily News,
the Company was reimbursed for the costs incurred in the development of certain
digital technologies. Such reimbursements totaled $100 and $1,184 in the years
ended December 31, 1996, and 1995, respectively. There was no reimbursement in
the year ended December 31, 1997.
Leases - The Company leases office space in Washington, D.C. from U.S. News.
The charges incurred for the lease were $301, $293, and $281 for the years ended
December 31, 1997, 1996, and 1995, respectively. In addition, the Company leases
office space in New York City from Applied Printing and incurred charges of $385
and $289 for the years ended December 31, 1997 and 1996, respectively. The
Company also leases a facility from the Daily News and incurred charges of $72
and $53 for the years ended December 31, 1997 and 1996, respectively.
Vendor Agreement - The Company is a party to an agreement originally
entered into in January 1992 by Applied Printing with a vendor and its
affiliate. Pursuant to such agreement, the Company and Applied Printing are
obligated to purchase a specified cumulative annual minimum amount of the
vendor's products provided that the prices are market competitive and that the
products meet technological and customer specifications. The Company receives a
significant rebate from the vendor that varies based on the volume of products
purchased. In addition, in 1995, the vendor prepaid to the Company $2,745 of the
rebate expected to be earned in future periods. If the Company does not earn the
full amount of the prepaid rebate in future periods, it would be required to
repay the difference to the vendor along with interest accrued since 1995. At
December 31, 1997, "Other current liabilities" in the Company's Consolidated
Balance Sheet include approximately $2,917 related to prepaid rebates, of which
approximately $2,621 represents an amount expected to be applied to this
obligation based on purchases made during 1997. Such amount to be applied is
also included as part of the total rebate receivable from the vendor included in
"Other current assets" in the Consolidated Balance Sheet at December 31, 1997.
The Chairman is a guarantor of the Company's contingent repayment obligation.
In connection with the agreement, the vendor's affiliate loaned $15,000 to
the Chairman. The loan, which matures on December 31, 1998, bears interest at
the lender's commercial paper rate. The Company believes that the terms for its
purchases of the products covered by this agreement are no less favorable to the
Company than those that could be obtained from another vendor.
16. RETIREMENT PLANS
The Company has a defined contribution plan in which employees are eligible
to participate upon the completion of six months of service and the attainment
of 21 years of age. Participants can contribute into the plan on both a pre-tax
and after-tax basis. In addition, the Company can make discretionary
contributions into the plan. Participants vest 100% in the Company's
discretionary contribution upon the completion of five years of service. The
Company did not make any discretionary contributions for the years ended
December 31, 1997, 1996, and 1995.
17. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is contingently liable as a result of transactions arising in
the ordinary course of business and is involved in certain legal proceedings in
which damages and other remedies are sought. In the opinion of Company
management, after review with counsel, the ultimate resolution of these matters
will not have a material effect on the Company's Consolidated Financial
Statements.
Applied Printing and its corporate general partner are defendants in
litigation arising out of Applied Printing's business. The Company is not a
defendant in any such litigation, and does not believe there is a sustainable
basis for the Company to be named as a defendant in any of such litigation. If
the Company were to be named or held responsible in connection with any of such
litigation, the Company is indemnified by Applied Printing.
18. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents and trade receivables.
The Company maintains cash balances and cash equivalents with high credit
quality financial institutions and limits the amount of credit exposure to any
one financial institution.
The Company provides credit to customers on an uncollateralized basis after
evaluating customer credit worthiness. The Company's customers are not
concentrated in any specific geographic region, but are concentrated in the
publishing, advertising agency, entertainment, and catalog retailing businesses.
The Company's largest customer, a group of commonly owned advertising agencies,
accounted for approximately $19,120, or 10.3%, of revenues for the year ended
December 31, 1997. The Company's five largest customers, excluding related
parties, comprise 33%, 35%, and 37% of revenues for the years ended December 31,
1997, 1996, and 1995, respectively. In addition, amounts due from these
customers represent 26% and 29% of trade accounts receivable as of December 31,
1997 and 1996, respectively. Any termination or significant disruption of the
Company's relationships with any of its principal customers could have a
material adverse effect on the Company's business, financial condition, results
of operations, and cash flows.
19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes were as follows:
1997 1996 1995
---------- ---------- ----------
Interest paid (net of
amounts capitalized) ............... $1,138 $702 $905
Income taxes paid ..................... $4,847 $766
Noncash investing and financing activities were as follows:
1997 1996 1995
---------- ---------- ----------
Notes payable issued in
connection with an acquisition ..... $ 488
Increase in additional paid-in
capital from income tax
benefit associated with
exercise of stock options .......... $ 6,407
Reduction of goodwill from
amortization of excess tax
deductible goodwill ................ $ 119
Acquisition of property,
plant, and equipment
in exchange for obligations
under capital leases ............... $ 1,235 $ 480
Additions to goodwill for
contingent purchase
price adjustments .................. $ 3,174 $ 69
Conversion of intercompany
borrowing into
Applied Printing Note .............. $16,000
Distribution to Applied
Printing in the form of
increased intercompany borrowing ... $ 3,819
Common stock issued in exchange
for the Prepress Business .......... $ 93
Common stock issued for acquisition ... $ 8,500
Acquisitions:
Fair value of assets acquired ......... $22,204 $ 8,600
Cash paid ............................. (11,024)
Fair value of common stock and
warrants issued .................... (330) (8,500)
---------- ----------
Liabilities assumed ................... $10,850 $ 100
========== ==========
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
The carrying amount and estimated fair values of financial instruments
at December 31 are summarized as follows:
1997 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents .... $12,584 $12,584 $2,567 $2,567
Marketable securities ........ $90,150 $90,150 $1,600 $1,600
Other assets ................. $ 5,995 $ 5,995 $1,470 $1,470
Liabilities:
Applied Printing Note ........ $1,600 $1,600
Long-term debt ............... $ 1,418 $ 1,263 $6,512 $6,400
Obligations under
capital leases ............ $ 3,708 $ 3,629 $2,619 $2,557
The following methods and assumptions were used to estimate the fair value
of financial instruments presented above:
Cash and cash equivalents - the carrying amount is a reasonable
approximation of fair value.
Marketable securities - the fair value of marketable securities is based on
quoted market prices or dealer quotes.
Other assets - the carrying amount of non-trade accounts receivables is a
reasonable approximation of fair value.
Applied Printing Note - due to the short-term nature of the obligation, the
carrying amount is a reasonable approximation of fair value.
Long-term debt - the fair value of notes payable, including the current
portion, is estimated by discounting the future streams of payments using the
rate at which the Company can currently obtain funds under its revolving credit
line. The carrying amount of the revolving credit line is a reasonable
approximation of fair value since it is a variable-rate obligation.
Obligations under capital leases - the fair value of obligations under
capital leases, including the current portion, is estimated by discounting the
future streams of payments using the rate at which the Company can currently
obtain funds under its revolving credit line.
21. REORGANIZATION CHARGES
During 1995, the Company reorganized its operations in response to the
operational impact of acquisitions and the technological changes within the
industry. As part of the reorganization, the Company consolidated several
operations during 1995 in an effort to gain operational and administrative
efficiencies. The Consolidated Statements of Operations include reorganization
charges of $3,060 for the year ended December 31, 1995. Such charges were
comprised primarily of the write off of assets, including leasehold improvements
that are no longer utilized in the Company's business, and contractual lease
obligations for facilities and equipment that provide no further benefit to the
Company. The Company utilized a discount rate of 10% to determine the present
value of the contractual lease payments. The balance of the reorganization
liability, which was fully paid by December 31, 1997, was $409 as of December
31, 1996.
22. SUBSEQUENT EVENTS
In January 1998, the Company acquired Flying Color Graphics, Inc., a
prepress company with five facilities throughout the midwest, for approximately
$22,000. The purchase price was paid for with approximately $18,900 in cash from
the Company's working capital and 68,103 shares of the Company's common stock.
In February 1998, the Company entered into a definitive agreement to merge
Devon Group, Inc. ("Devon"), a digital prepress and publishing company, into a
newly-formed, wholly-owned subsidiary of the Company. As of and for the fiscal
year ended March 31, 1997, Devon had total assets, revenues, and operating
income of $163,751, $209,522, and $29,063, respectively. Under the terms of the
agreement, which is subject to regulatory approval and the approval of the
Company's and Devon's stockholders, the Company will pay $30 per share in cash
and distribute 0.6 shares of the Company's common stock in exchange for each
outstanding share of Devon common stock. The total consideration to be paid is
estimated to be $450,000 including transaction costs. To fund the cash portion
of the merger consideration, estimated to be $230,000 including the transaction
costs, the Company has a commitment from a commercial bank that would increase
its borrowing capacity to $250,000. This commitment expires on June 15, 1998.
The Company is seeking stockholder approval at the Special Meeting in lieu
of Annual Meeting relating to the merger with Devon to increase the number of
authorized shares of its common stock from 40,000,000 shares to 150,000,000
shares.
23. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Prior to the Initial Offering Date, the Company was treated as a partnership
for Federal and state income tax purposes and was not subject to tax. The Pro
Forma Net Income Data in the Consolidated Statements of Operations presents what
the provision for income taxes, net income, and earnings per common share for
the years ended December 31, 1996 and 1995, would have been had the Company been
treated as a C Corporation for the periods prior to the Initial Offering Date.
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1997 Quarter Ended March 31 June 30 September 30 December 31(1)
------- ------- ----------- -----------
(In thousands of dollars,
except per-share amounts)
Revenues ....................... $39,761 $41,311 $50,416 $53,505
Gross profit ................... $12,940 $15,261 $18,634 $18,140
Income before provision for
income taxes ................. $ 4,259 $ 5,382 $ 6,995 $ 6,071
Net income ..................... $ 2,598 $ 3,283 $ 4,142 $ 3,544
Earnings per common share:
Basic ........................ $ 0.18 $ 0.23 $ 0.27 $ 0.20
Diluted ...................... $ 0.17 $ 0.21 $ 0.25 $ 0.19
1996 Quarter Ended March 31 June 30 September 3 December 31
------- ------- ----------- -----------
(In thousands of dollars,
except per-share amounts)
Revenues ....................... $30,598 $30,988 $35,177 $35,962
Gross profit ................... $ 8,269 $ 9,352 $11,542 $11,320
Income before provision for
income taxes ................. $ 146 $ 2,096 $ 4,216 $ 4,362
Net income ..................... $ 146 $ 2,033 $ 4,005 $ 3,771
Earnings per common share:
Basic ........................ $ 0.01 $ 0.16 $ 0.29 $ 0.27
Diluted ...................... $ 0.01 $ 0.15 $ 0.29 $ 0.26
(1) Includes a pretax charge of $2,487 related to the Chapter 11 bankruptcy
filing of one of the Company's on-site facilities management customers,
Nobody Beats the Wiz.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The information required by this item was previously reported on the
Company's Form 8-K filed with the Securities and Exchange Commission on October
4, 1996.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors. - The information with respect to directors required by
this item is incorporated herein by reference to the 1998 Proxy
Statement/Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities
and Exchange Commission by April 30, 1998.
(b) Executive Officers. - The information with respect to officers
required by this item is included at the end of Part I of this
document under the heading Executive Officers of the Company.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference to
the 1998 Proxy Statement/ Prospectus included as part of the Company's
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission by April 30, 1998.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Listed below are the documents filed as a part of this report:
1. Financial Statements and the Independent Auditors'
Reports:
Independent Auditors' Reports.
Consolidated Balance Sheets.
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity and
Owners' Deficit for the Years Ended December 31,
1997, 1996, and 1995.
Notes to Financial Statements.
2. Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts for
the year ended December 31, 1997.
3. Exhibits:
2.1 Asset Purchase Agreement by and among Applied Graphics
Technologies, Inc., and Flying Color Graphics, Inc. and
its Shareholders dated January 16, 1998 (Incorporated by
reference to Exhibit No. 2.1 forming part of the
Registrant's Report on Form 8-K (File No. 0-28208) filed
with the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, on January
30, 1998).
2.2 Agreement and Plan of Merger, dated as of February 13,
1998, by and among Devon Group, Inc., Applied Graphics
Technologies, Inc., and AGT Acquisition Corp.
3.1 Certificate of Incorporation (Incorporated by reference
to Exhibit No. 3.1 forming part of the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
3.2 Amended and Restated By-Laws of Applied Graphics
Technologies, Inc. (Incorporated by reference to Exhibit
No. 3.2 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
4 Specimen Stock Certificate (Incorporated by reference to
Exhibit No. 4 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
10.2 Applied Graphics Technologies, Inc. 1996 Stock Option
Plan (Incorporated by reference to Exhibit No. 10.2
forming part of Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
10.3 Applied Graphics Technologies, Inc. Non-Employee
Directors Nonqualified Stock Option Plan (Incorporated
by reference to Exhibit No. 10.3 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.4* Loan and Purchase Agreement, dated January 8, 1992, as
amended (Incorporated by reference to Exhibit No. 10.4
forming part of Registrant's Report on Form 10-K/A (File
No. 0-28208) filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as
amended, for the fiscal year ended December 31, 1996).
10.4(a)* Second Amendment to Loan and Purchase Agreement dated
April 19, 1996 (Incorporated by reference to Exhibit No.
10.4(a) forming part of the Registrant's Report on Form
10-K/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the fiscal year ended December 31,
1996).
10.4(b)* Third Amendment to Loan and Purchase Agreement dated
June 30, 1997. (Incorporated by reference to Exhibit No.
10.4(b) forming part of the Registrant's Report on Form
10-Q/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended June
30, 1997).
10.5 Agreement, dated May 1, 1979, between WAMM Associates
and Publisher Phototype International, L.P., as amended
(Incorporated by reference to Exhibit No. 10.5 forming
part of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(a) Employment Agreement, effective as of April 1, 1996,
between the Company and Diane Romano (Incorporated by
reference to Exhibit No. 10.6 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
10.6(b) Employment Agreement, effective as of April 1, 1996,
between the Company and Georgia L. McCabe (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(c) Employment Agreement, effective as of March 13, 1996,
between the Company and Melvin A. Ettinger (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(d) Employment Agreement, effective as of April 1, 1996,
between the Company and Scott A. Brownstein
(Incorporated by reference to Exhibit No. 10.6 forming
part of Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(e)(i) Employment Agreement, effective as of June 1, 1996,
between the Company and Louis Salamone, Jr.
(Incorporated by reference to Exhibit No. 10.6(e)
forming part of the Registrant's Report on Form 10-Q
(File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended March
31, 1997).
10.6(e)(ii) Noncompetition, Nonsolicitation, and Confidentiality
Agreement, effective as of June 1, 1996, between the
Company and Louis Salamone, Jr. (Incorporated by
reference to Exhibit No. 10.6(e) forming part of the
Registrant's Report on Form 10-K (File No. 0-28208)
filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, for the
fiscal year ended December 31, 1996).
10.7 Form of Registration Rights Agreement (Incorporated by
reference to Exhibit No. 10.7 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
16 Letter regarding Change in Certifying Accountant
(Incorporated by reference to the Registrant's Report on
Form 8-K (File No. 0-28208) filed with the Securities
and Exchange Commission under the Securities Exchange
Act of 1934, as amended, on October 4, 1996).
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P
27.1 Financial Data Schedule (EDGAR filing only).
27.2 Restated Financial Data Schedule - 1996 Restatements
(EDGAR Filing only).
27.3 Restated Financial Data Schedule - 1997 Restatements
(EDGAR Filing only).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
(b) The Registrant did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)
By: /s/ Fred Drasner
_____________________________ March 27, 1998
Fred Drasner
Director, Chairman, and Chief Executive Officer
(Duly authorized officer)
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 27, 1998.
Signature
Title
/s/ Fred Drasner Director, Chairman, and Chief Executive Officer
Fred Drasner (Principal Executive Officer)
/s/ Melvin A. Ettinger Vice Chairman, Chief Operating Officer, and Director
Melvin A. Ettinger
/s/ Diane Romano President
Diane Romano
/s/ Louis Salamone, Jr. Senior Vice President and Chief Financial Officer
Louis Salamone, Jr. (Principal Financial and Accounting Officer)
/s/ Martin D. Krall Executive Vice President, Chief Legal Officer,
Martin D. Krall Secretary and Director
/s/ Mortimer B. Zuckerman Chairman of the Board of Directors
Mortimer B. Zuckerman
/s/ John R. Harris Director
John R. Harris
/s/ Edward H. Linde Director
Edward H. Linde
/s/ Howard Stringer Director
Howard Stringer
/s/ Linda J. Wachner Director
Linda J. Wachner
APPLIED GRAPHICS TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the year ended December 31, 1997
(In thousands)
Additions
------------------------------------
Balance at
beginning Charged to costs Charged to other Balance at
Description of period and expenses accounts (1) Deductions (2) end of period
- -------------------------------- -------------- ------------------ ------------------ ---------------- ---------------
Allowances deducted in the
balance sheetfrom assets
to which they apply:
Allowance for doubtful accounts $ 472 $ 3,990 $ 308 $ (781) $ 3,989
(1) Represents allowances for doubtful accounts recorded in connection with acquisitions.
(2) Represents uncollectible accounts written off.