<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997.
REGISTRATION NO. 333-32121
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
APPLIED GRAPHICS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C> <C>
DELAWARE 7336 13-3864004
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INSTITUTIONAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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<S> <C>
28 WEST 23RD STREET, 11TH FLOOR MARTIN D. KRALL, ESQ.
NEW YORK, NEW YORK 10010 450 WEST 33RD STREET
(212) 929-4111 NEW YORK, NEW YORK 10001
(ADDRESS, INCLUDING ZIP CODE, AND (212) 210-6345
TELEPHONE NUMBER, INCLUDING AREA CODE, (NAME, ADDRESS, INCLUDING ZIP CODE, AND
OF PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
PRINCIPAL PLACE OF BUSINESS) AGENT FOR SERVICE)
</TABLE>
Copy to:
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THOMAS H. MCCORMICK, ESQ. JULIE M. ALLEN, ESQ.
SHAW, PITTMAN, POTTS & TROWBRIDGE O'SULLIVAN GRAEV & KARABELL, LLP
2300 N STREET, N.W. 30 ROCKEFELLER PLAZA
WASHINGTON, D.C. 20037 NEW YORK, NEW YORK 10112
(202) 663-8000 (212) 408-2400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
-------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS (SUBJECT TO COMPLETION)
DATED AUGUST 29, 1997
5,000,000 SHARES
[APPLIED GRAPHICS LOGO]
COMMON STOCK
------------------------------
Of the 5,000,000 shares of Common Stock offered hereby, 3,000,000 are being
offered by Applied Graphics Technologies, Inc. ("AGT" or the "Company") and
2,000,000 are being offered by selling stockholders (the "Selling
Stockholders"). Applied Printing Technologies, L.P., one of the Selling
Stockholders, is offering 1,750,000 of the shares offered by the Selling
Stockholders. See "Selling Stockholders." The Company will not receive any of
the proceeds of the sale of shares by the Selling Stockholders. The Common Stock
is quoted on the Nasdaq National Market under the symbol "AGTX." On August 18,
1997, the last reported sale price of the Common Stock, as reported on the
Nasdaq National Market, was $38.00 per share. See "Price Range of Common Stock."
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
Total (3)....................... $ $ $ $
================================================================================================
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $700,000.
(3) Applied Printing Technologies, L. P. has granted the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase an aggregate of
up to 750,000 additional shares of Common Stock at the Price to Public, less
Underwriting Discounts and Commissions, to cover over-allotments, if any. If
all such additional shares are purchased, the per share Price to Public, per
share Underwriting Discounts and Commissions and total Proceeds to Selling
Stockholders will be $ , $ and $ , respectively.
See "Underwriting."
------------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York, on or about August , 1997.
------------------------------
COWEN & COMPANY
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1997
<PAGE> 3
[GRAPHICS]
AGT'S BUSINESSES
[The following appears in column format. Each column begins with an image.
Headings are printed in color. The page background is black. The text in the
columns is printed in white.]
[image of computer mouse]
DIGITAL PREPRESS SERVICES
AGT provides high-end digital prepress and advanced digital imaging
services to suit clients' needs -- and transmits, over diverse communications
systems, including a satellite transmission system, print-ready product to
locations worldwide from its network of regional facilities throughout the U.S.
[image of computer discs]
OUTSOURCED FACILITIES MANAGEMENT SERVICES
AGT offers its clients a 100 percent outsourced solution to their digital
prepress, imaging and archiving needs -- providing its leading-edge technology,
skilled personnel and comprehensive services on-site at the customer's own
location.
[image of CD]
ADVANCED DIGITAL IMAGING SERVICES
AGT utilizes its flagship product, the Digital Link System, to capture and
store millions of images in digital format. The images can be archived and later
retrieved and repurposed for use in print, in websites and in other electronic
media applications.
[image of optic fibers]
BROADCAST MEDIA DISTRIBUTION SERVICES
AGT's broadcast media and distribution services handle volume reproduction
and distribution of TV commercials in analog format and radio commercials in
both analog and digital format.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET AND MAY
IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. Unless otherwise provided, references to
"the Company" or to Applied Graphics Technologies, Inc. prior to April 16, 1996,
refer to the prepress, digital imaging services and related businesses acquired
by the Company from Applied Printing Technologies, L.P. ("Applied Printing").
THE COMPANY
Applied Graphics Technologies, Inc. (the "Company") is a leading
independent provider of digital prepress services to magazine publishers,
advertising agencies, entertainment companies, automobile manufacturers and
retailers. "Digital prepress services" are services which digitally combine
text, pictures and graphics into page layout format. The Company's largest
customers in each of these categories include McGraw-Hill, Newsweek and Conde
Nast; The InterPublic Group of Companies and Grey Advertising; The Walt Disney
Company and Time Warner; General Motors; and Sears Roebuck & Company and
Bloomingdale's. The Company provides its services on an outsourcing basis either
in the Company's own facilities or on-site 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.
As a leader in the prepress industry, the Company provides its customers
with comprehensive content management and distribution services for print and
electronic media. The Company's strategy is to leverage its experience and
customer relationships to become the leading provider of comprehensive digital
image management and broadcast distribution services in the United States.
Toward this goal, in December 1996, the Company acquired the assets of SpotLink,
Inc. (the "SpotLink Acquisition"), a subsidiary of Western International Media
Corporation which is owned by The InterPublic Group of Companies. Through the
SpotLink Acquisition, the Company began to provide volume duplication and
distribution of radio and television advertisements, a service known as "dub &
ship," to broadcast stations. With the expansion into the dub & ship business,
the Company increased its service offerings to existing customers, including The
Walt Disney Company and General Motors. The Company believes it can further
increase its dub & ship business by leveraging other customer relationships.
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 which allows the Company to offer
customers the ability to capture, edit, store, archive, retrieve and distribute
their content in a digital environment.
The Company continues to grow, in part, by offering its prepress customers
additional services. By building a repository of a customer's digital content,
the customer is easily able to retrieve and repurpose images and send them
electronically, resulting in cost efficiencies by saving the labor and materials
required for rescanning. In addition, the quality of the customer's images is
preserved when they are used, stored and
3
<PAGE> 5
distributed in digital form. Currently, most of the Company's customers have
their digital content distributed for print. However, the Company plans to offer
distribution services to its current customers and to new customers for radio
and television broadcast media in the future, allowing its customers to manage
their content through a single, comprehensive digital database.
Since its initial public offering in April 1996 (the "Initial Offering"),
the Company has established 10 additional on-site facilities, resulting in a
total of 14 on-site facilities, four of which provide services to other
customers as capacity allows. As of July 15, 1997, the Company had a network of
20 principal facilities, including the four dual-purpose on-site facilities,
located in metropolitan areas to provide localized services to its customers,
many of which have offices nationwide. The Company has recently acquired a
digital photography business, a dub & ship business and two prepress businesses,
each of which was previously unaffiliated with the Company. One of the prepress
businesses acquired by the Company is MBA Graphics, Inc. ("MBA"), the primary
provider of prepress services for The Home Depot, Inc. (the "Home Depot"). As a
result of this acquisition, the Company gained four new facilities. The Company
expects to open three additional regional facilities by the end of 1998 to
service Home Depot's expansion. See "Business -- Recent Developments." In
February 1997, the Company established a Magazine Ad Management Division to
provide digital advertising storage management and electronic transmission
services to magazine publishers, advertising agencies and printers nationwide
using the Digital Link System. The Company provides these services to Time, Inc.
for seven of its magazines and to U.S. News & World Report, L.P. under
multi-year agreements.
The Company's customers include the New York Daily News and U.S. News &
World Report, publications beneficially owned by Mortimer B. Zuckerman, Chairman
of the Board of Directors of the Company, and Fred Drasner, Chairman and Chief
Executive Officer and a director of the Company.
The Company's principal executive offices are located at 28 West 23rd
Street, 11th floor, New York, New York 10010, and its telephone number is (212)
929-4111.
THE OFFERING
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Common Stock offered:
By the Company...................................... 3,000,000 shares
By the Selling Stockholders......................... 2,000,000 shares
Common Stock to be outstanding after the Offering..... 17,355,683 shares(1)
Use of proceeds....................................... To fund potential acquisitions, to repay
debt, for working capital and for general
corporate purposes.
Nasdaq National Market symbol......................... AGTX
</TABLE>
- ---------------
(1) Does not include 2,496,000 shares of Common Stock reserved for issuance upon
the exercise of stock options granted by the Company under its stock option
plans, and up to a maximum of 62,500 shares of Common Stock reserved for
issuance upon the exercise of warrants issued and issuable in connection
with a completed acquisition.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The following summary historical financial data and as adjusted balance
sheet data should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Prospectus.
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<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................. $115,986 $117,802 $132,725 $61,586 $81,072
Gross profit.............................. $ 30,689 $ 31,506 $ 40,483 $17,621 $28,201
Reorganization charges.................... $ 6,668 $ 3,060 -- -- --
Income (loss) before provision for income
taxes................................... $ (8,757) $ (7,812) $ 10,820 $ 2,242 $ 9,641
Net income (loss)......................... $ (8,757) $ (7,812) $ 9,955(1) $ 2,179 $ 5,881
Earnings per common share:
Primary................................. $ 0.78 $ 0.19(2) $ 0.39
Fully diluted........................... $ 0.74(1) $ 0.19(2) $ 0.38
</TABLE>
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<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL AS ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Total assets...................................................... $86,155 $178,250
Long-term obligations:
Long-term debt.................................................. $16,482 $ 977
Obligations under capital leases................................ 921 921
------- -------
Total................................................... $17,403 $ 1,898
======= =======
Stockholders' equity.............................................. $42,214 $149,814
</TABLE>
- ---------------
(1) On a fully taxed basis, assuming the 1997 effective tax rate of 39%, net
income and fully diluted earnings per share for the year ended December 31,
1996, would have been approximately $6.6 million and $0.49, respectively.
(2) Pro forma calculation using the number of shares of Common Stock issued and
issuable to Applied Printing prior to April 16, 1996.
(3) As adjusted amounts assume the sale of 3,000,000 shares of Common Stock
offered by the Company hereby and the receipt of the net proceeds therefrom
and repayment of certain debt. Net proceeds assume a per-share price of
$38.00 (the closing price on August 18, 1997) and estimated expenses of the
Offering (excluding the underwriting discounts and commissions) of
approximately $0.7 million. See "Use of Proceeds."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
STATEMENTS CONTAINED IN THIS PROSPECTUS OR IN ANY DOCUMENT INCORPORATED OR
DEEMED TO BE INCORPORATED BY REFERENCE HEREIN THAT RELATE TO THE COMPANY'S
BELIEFS OR EXPECTATIONS AS TO FUTURE EVENTS RELATING TO, AMONG OTHER THINGS, 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 NEW AGREEMENT WITH GENERAL MOTORS;
THE SECURING OF ADDITIONAL, OR 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; THE SUCCESSFUL ENTRY INTO THE EVENT-DRIVEN AND RETAIL
DIGITAL PHOTOGRAPHY MARKETS; THE ACCEPTANCE OF THE COMPANY'S DIGITAL PHOTOGRAPHY
PRODUCT LINE; THE CROSS-SELLING OF THE COMPANY'S SERVICES; OBTAINING
EFFICIENCIES FROM COMBINING CERTAIN FACILITIES; THE RATE AND LEVEL OF CAPITAL
EXPENDITURES; THE ABILITY TO IDENTIFY AND CONSUMMATE SUITABLE ACQUISITIONS; AND
THE SECURING OF ADDITIONAL CREDIT OR FINANCING VEHICLES ARE NOT STATEMENTS OF
HISTORICAL FACT AND ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
SECTION 21E OF THE EXCHANGE ACT AND ARE SUBJECT TO THE "SAFE HARBOR" CREATED
THEREBY. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UPON WHICH SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE WITHIN THE BOUNDS OF ITS
KNOWLEDGE OF ITS BUSINESS AND OPERATIONS, IT CAN GIVE NO ASSURANCE THAT THE
ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT. REFERENCE TO SECTIONS IN THIS
PROSPECTUS WHICH CONTAIN FORWARD-LOOKING STATEMENTS AND IMPORTANT FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY AND ADVERSELY FROM THE COMPANY'S
EXPECTATIONS AND BELIEFS ARE SET OUT UNDER "RISK FACTORS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE
FACTORS SHOULD BE CAREFULLY CONSIDERED BY POTENTIAL INVESTORS.
5
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be carefully considered in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby.
COMPETITION
The Company competes with other providers of prepress and digital imaging
services, with commercial printers that also provide prepress services and with
businesses that perform prepress services in-house. The market for prepress
services is highly fragmented, with several national and many regional
participants. The Company faces, and will continue to face, competition in its
prepress business from many sources, including national and large regional
printing companies, some of which have greater financial, marketing and other
resources. In addition, local and regional firms specializing in particular
industry segments compete on the basis of specialized knowledge of such
segments. Competition from businesses that perform prepress services in-house
has increased as technologies have advanced. Competition for prepress services
based on price is intense. In addition, commercial printers frequently "bundle"
the cost of prepress services with the printing cost or substantially discount
separate prepress services.
The Company is also subject to competition in its digital imaging services
business from technologically sophisticated systems integrators. Management
anticipates that such competition will intensify in the future. There can be no
assurance that competitors will not introduce products or services that achieve
greater market acceptance than, or are technologically superior to, the
Company's digital imaging services offerings. Competitors and future competitors
have or may have more extensive digital imaging services capabilities, more
extensive experience and greater financial, marketing and other resources than
the Company.
In the dub & ship business, the Company competes with many local and/or
regional suppliers as well as certain other suppliers that provide these
services on a national basis. 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.
No assurance can be given that the Company will be able to continue to
compete successfully or that competitive pressures will not adversely affect the
Company's business, financial condition and results of operations. See
"Business -- Competition."
DEPENDENCE ON KEY CUSTOMERS
The Company's twenty largest nonaffiliated customers accounted for
approximately 53.8% of the Company's revenues in 1996. In 1996, approximately
8.5% of the Company's total revenues came from U.S. News & World Report, L.P.
and the Daily News, L.P., which are beneficially owned by Mortimer B. Zuckerman,
Chairman of the Board of Directors of the Company, and Fred Drasner, Chairman
and Chief Executive Officer and a director of the Company. Revenues from many of
the Company's large customers are an aggregation of revenues for services
provided by the Company to different groups or publications within each such
customer. The Company believes that the primary business decision on the
selection of suppliers is made at the individual group and publication level,
although there is no assurance that such a decision would not be made at a
higher level and be applied across several groups and publications. While the
Company seeks to build long-term customer relationships, revenues from any
particular customer can fluctuate from period to period due to such customer's
purchasing patterns. 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 and results of operations.
In addition, a deterioration in the financial condition, change in control or
dissolution or bankruptcy of any of the Company's principal customers could
expose the Company to the possibility of large accounts receivable write-offs,
which would have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
6
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LIMITED NUMBER OF MULTI-YEAR CONTRACTS AND ARRANGEMENTS WITH PREPRESS CUSTOMERS
In 1996, approximately 8.5% of the Company's total revenues came from
multi-year contracts with U.S. News & World Report, L.P. and Daily News, L.P.,
companies beneficially owned by Messrs. Zuckerman and Drasner, and an additional
28.4% of the Company's revenues were under multi-year contracts or arrangements
with nonaffiliated customers. Under certain of these contracts, the customer may
terminate the arrangement prior to the scheduled expiration of the contract. In
addition, as is customary in the prepress industry, the Company generally
performs prepress services based upon a customer's request for which the Company
is paid on a per-job basis according to a previously negotiated price. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
GROWTH THROUGH ACQUISITIONS; MANAGEMENT OF GROWTH
The Company plans to use a significant portion of the proceeds of the
Offering to further expand its business through acquisitions. Although the
Company has no current or pending arrangements, agreements or understandings
with respect to any material acquisitions, the Company evaluates acquisition
opportunities on an ongoing basis. There can be no assurance that the Company
will successfully identify, complete or integrate additional acquisitions or
that any acquisitions will perform as expected or will contribute significant
revenues or profits to the Company. In addition, the Company may pursue and
consummate acquisitions that are dilutive to stockholders if it believes that
such acquisitions are in the best interests of the Company. Additionally, in the
future, the Company may face increased competition for acquisition
opportunities, which may inhibit the Company's ability to consummate
acquisitions on terms favorable to the Company.
Any acquired companies may provide services that, although complementary,
differ from the existing services offered by the Company. There can be no
assurance that the anticipated benefits of these acquisitions will be achieved.
Moreover, the Company has had limited experience in making acquisitions. Thus,
the Company has not yet demonstrated the long-term ability to successfully
manage an acquired business. There can be no assurance that the Company will be
able to manage successfully the new service areas of the Company, the employees
of such service areas or the customer base supported by such service areas.
The ability of the Company to manage growth through acquisitions and its
own internal growth depends on its ability to maintain the high quality of
services that it provides to customers; to successfully integrate the different
services that it provides; to recruit, motivate and retain qualified personnel;
and to train existing sales representatives or recruit new sales representatives
to cross-sell different services or products. There can be no assurance that the
Company will be able to manage its expanding operations effectively or that it
will be able to maintain its growth. A failure to successfully manage its
expanding operations or to maintain its growth would have a material adverse
effect on the Company's results of operations and financial condition.
POTENTIAL OBSTACLES TO MARKETING STRATEGIES
The Company performs prepress and other digital imaging services on an
outsourcing basis. It continues to solicit new customers that currently perform
these services in-house. The Company could face potential obstacles to this
marketing strategy. Some potential customers believe that outsourcing their
internally performed functions might require them to relinquish some elements of
their control of the prepress process and could cause temporary dislocations
among in-house staff. There is no assurance that customers will accept the
changes that outsourcing requires in exchange for the benefits. Although the
Company has been successful in winning new customers despite such changes and
believes that customers find outsourcing services to be beneficial, there is no
assurance that target customers will make similar decisions to outsource their
prepress and digital imaging services. The Company focuses on large, full
service users seeking to reduce costs by selecting a single source provider.
Consolidation of work divided among multiple prepress providers into a single
provider requires a change in a customer's contracting practices. There is no
assurance that customers will accept such changes.
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RAPID TECHNOLOGICAL CHANGE
The Company's services and the equipment that it employs in delivering its
services are subject to rapid technological change and rapid obsolescence.
Accordingly, the Company's ability to grow will depend upon its ability to keep
pace with technological advances on a continuing basis and to integrate
available technologies with customer needs in a commercially appropriate manner.
The Company's business may be adversely affected if the Company is unable to
keep pace with relevant changes or if the technologies that it adopts do not
receive widespread market acceptance.
IMPLEMENTATION OF NEW TECHNOLOGY
The Company's broadcast media distribution services currently provide
distribution of video commercials to television stations in analog format and
distribution of audio commercials to radio stations in analog or digital format.
The technology to distribute video in digital format is evolving. The
technological standards that will be accepted by the marketplace for such a
distribution service may still change. There is no assurance that the technology
will involve the same or will be similar to technology then used by the Company.
The financial investment to participate in the distribution of video commercials
and programming may be greater than anticipated by the Company. To participate
in the digital video distribution business, the Company will need to establish a
distribution network not currently in place. There is no assurance that the
Company will be able to establish such a network successfully.
DEPENDENCE ON KEY PERSONNEL; POTENTIAL TIME CONFLICTS
The Company's success depends to a large extent upon the contributions of a
small number of senior managers, including Fred Drasner, Chairman and Chief
Executive Officer and a director of the Company. Mr. Drasner is also Chief
Executive Officer of Daily News, L.P. and Co-Publisher of the New York Daily
News, Chief Executive Officer of U.S. News & World Report, L.P., Chairman and
Chief Executive Officer of Applied Printing, Vice-Chairman and Chief Executive
Officer of The Atlantic Monthly Company and a director of Snyder Communications,
Inc. Mr. Drasner is very active in the Company's management; his activities
include, but are not limited to, establishing the strategic direction of the
Company, evaluating potential acquisitions and reviewing major business
decisions. However, Mr. Drasner is not committed to spending a particular amount
of time at the Company nor is he able to devote his full time and resources to
the Company and it is expected that he will spend less than a majority of his
time in managing the Company's activities. There can be no assurance that Mr.
Drasner's inability to devote his full time to the Company will not adversely
affect its business.
In addition, the Company is dependent on other members of its senior
management team and sales and marketing personnel, including the senior managers
of the Company's Digital Imaging Services Division ("DISD"). Other than with Mr.
Drasner and Martin D. Krall, Executive Vice President, Chief Legal Officer,
Secretary and a director of the Company, the Company has entered into employment
agreements with each of its executive officers, including the senior managers of
DISD. All of the executive officers with employment agreements are full-time
employees of the Company. The Company also relies on its technical staff who
specialize in prepress production and whose artistic and technical experience
are not easily duplicated. Competition for management, sales, marketing and
technical personnel is intense and no assurance can be given that the Company
will be able to attract and retain such personnel. The failure to attract and
retain management, sales, marketing and technical personnel could have a
material adverse effect on the Company's anticipated growth, revenues and
results of operations. See "Management."
POTENTIAL CONFLICTS OF INTEREST
From time to time, Messrs. Zuckerman and Drasner may experience conflicts
of interest in their management of the Company. Some of these conflicts may
arise from their interests in Applied Printing, U.S. News & World Report, L.P.
and Daily News, L.P. (collectively, the "Affiliated Businesses"). Such conflicts
may arise from their overseeing of business decisions relating to the Company
and the Affiliated Businesses and could include such matters related to the
allocation of management time and services between the
8
<PAGE> 10
Company and an Affiliated Business and decisions regarding the amount or
frequency of use of the Company's services by an Affiliated Business. Other
conflicts may also arise. For example, the Company could be viewed as having a
disincentive to seek more favorable pricing arrangements from a competing vendor
as a result of Mr. Zuckerman's outstanding loan from an affiliate of Kodak, a
current vendor to the Company. See "-- Prepayment of Rebates; Potential Conflict
in Vendor Selection." Mr. Zuckerman, in his capacity as Chairman of the Board,
and Mr. Drasner, in his capacity as Chief Executive Officer, participate in and
have ultimate authority to approve major business decisions including those in
which they have a potential conflict of interest. To date, the Company has not
required the approval of the Independent Directors for material transactions
which may involve potential conflicts of interest. The Company believes that any
such conflicts have been resolved in the Company's best interests. In the
future, the Company intends to have its Independent Directors approve all
material transactions which may involve a potential conflict of interest. See
"Management -- Potential Conflicts of Interest."
CONCENTRATION OF SHARE OWNERSHIP AND CONTROL OF THE COMPANY BY PRINCIPAL
STOCKHOLDER
Applied Printing will own approximately 39.7% of the outstanding Common
Stock of the Company following the completion of the Offering (approximately
35.3% if the Underwriters' over-allotment option is exercised in full). Mortimer
B. Zuckerman, Chairman of the Board of Directors of the Company, and Fred
Drasner, Chairman and Chief Executive Officer and a director of the Company,
beneficially own all of the limited partnership interests of Applied Printing,
and Mr. Zuckerman owns all of the capital stock of the corporate general partner
of Applied Printing. Consequently, Applied Printing directly, and Mr. Zuckerman
indirectly, will be able to exercise substantial influence over the outcome of
all matters submitted to a vote of the Company's stockholders, including
election of the members of the Board of Directors, amendment of the Certificate
of Incorporation and consummation of a merger, sale of substantially all of the
Company's assets or other significant corporate transactions. See "Selling
Stockholders."
POTENTIAL CHANGE OF CONTROL
Applied Printing is selling 1,750,000 shares of Common Stock (2,500,000
shares if the Underwriters' over-allotment option is exercised in full) in the
Offering. The Company does not believe that the sale of Common Stock by Applied
Printing in the Offering constitutes a change of control of the Company because
Applied Printing will continue to hold a substantial percentage of the
outstanding shares of the Company's Common Stock, the principals of Applied
Printing, Messrs. Zuckerman and Drasner, will continue to serve on the board of
directors, no other stockholder will own a significant percentage of the shares
of the Company's Common Stock, and the Company's board of directors and current
management will remain intact. Although the Company is not currently aware of
any current intention of Applied Printing to sell additional shares of Common
Stock, Applied Printing has demand and "piggyback" registration rights with
respect to its shares of Common Stock and may sell additional shares of Common
Stock in the future. See "Shares Eligible for Future Sale -- Registration
Rights." Such sales by Applied Printing may constitute a change of control of
the Company in the future, depending on the composition of the Company's board
of directors, executive officers and beneficial ownership of its capital stock
at such time.
PREPAYMENT OF REBATES; POTENTIAL CONFLICT IN VENDOR SELECTION
The Company is a major purchaser of graphic art supplies which it uses in
its business. Because of the dollar volume of products it purchases, the Company
has been in a position to enter into arrangements with vendors pursuant to which
the vendors pay rebates and, in some instances, prepay to the Company a rebate
based upon a specified dollar volume of products purchased by the Company over a
given time period. The Company is entitled to retain the prepaid amount in full
if it purchases the stated volume over the required period of time and would be
obligated to repay all or a portion of the amount depending on the difference
between the stated volume and the volume actually purchased. In 1995, the
Company received prepaid rebates aggregating approximately $3.5 million,
approximately $0.8 million of which was earned with respect to volumes purchased
in 1995 and approximately $2.7 million of which is earnable based on purchases
to be made from 1997 through 2000. The Company earned rebates in 1995 in
addition to the prepaid rebates
9
<PAGE> 11
received. The prepaid rebate is carried as a liability on the Company's balance
sheet, and during the period 1997 through 2000, $3.8 million will be deducted
from rebates earned by the Company. Minimum purchase obligations have been
satisfied to date, and the Company expects, through its normal purchasing
requirements, to purchase the amounts necessary to earn rebates with respect to
the period 1997 through 2000 in excess of the amount to be deducted by the
vendor. The Company received prepaid rebates in March 1996 aggregating
approximately $0.9 million, all of which was earned in 1996.
In connection with a vendor arrangement with Kodak to purchase such
products entered into in 1992, an affiliate of such vendor made a personal loan
to Mr. Zuckerman of $15.0 million, which proceeds were used in connection with
Applied Printing's business. Applied Printing is beneficially owned by Messrs.
Zuckerman and Drasner and is a stockholder of the Company. The Company did not
receive any of the proceeds from the loan. The loan will continue to be
outstanding following the Offering and bears interest at the lender's commercial
paper rate. If the Company and Applied Printing do not jointly satisfy the
cumulative minimum purchase obligations specified in the agreement, and such
failure is not due to technological changes or technological or customer
requirements, Mr. Zuckerman must prepay the loan, which otherwise matures on
December 31, 1998. These minimum obligations have been satisfied to date, and
the Company expects, through its and Applied Printing's normal purchasing
requirements to continue to exceed such minimum obligation through December 31,
1998. In connection with this loan, Mr. Zuckerman has also guaranteed repayment
of the prepaid rebate under the agreement to the extent such prepaid rebate is
not earned. The Company believes that the terms of its purchases of the products
covered by such agreement are no less favorable to the Company than those that
could be obtained from another vendor. However, the Company could be viewed as
having a disincentive to seek more favorable pricing arrangements in the future
from a competing vendor as a result of Mr. Zuckerman's outstanding loan, which,
in the opinion of management, is the only risk to the Company associated with
the loan.
In addition, there is no assurance that the Company will be able to
negotiate similar arrangements in the future on the same terms, if at all. The
inability of the Company to negotiate a prepaid rebate in the future would
temporarily require greater working capital since the rebate would then be paid
over the period to which it related.
DIGITAL IMAGING SERVICES DEPENDENT ON EMERGING MARKET FOR NEW MEDIA
As part of its business objectives, the Company plans to continue to expand
its digital imaging services, including the scope of its services, to customers
delivering digitized content through new forms of electronic distribution such
as the World Wide Web, e-mail, proprietary on-line services and CD-ROM. The
market for digitized content and delivery through new electronic distribution
channels has only recently begun to develop. There can be no assurance that
demand for digital imaging and communication through new media will continue to
grow. The use of new media in delivering digitized customer content,
particularly by those who have historically relied on traditional means of
delivering their content, such as print, generally requires the acceptance of a
new way of conducting business and exchanging information. Although the Company
has had success in marketing its new services to businesses utilizing the new
media, there is no assurance that the Company will continue to be successful
across a broad customer base and that the revenues derived from such new markets
will exceed the Company's costs in serving them. See "Business -- Strategy."
LIMITED PROPRIETARY RIGHTS
The Company seeks to protect its proprietary software and know-how through
copyright and trade secret laws and contractual restrictions on disclosure.
Despite such measures, it may be possible for unauthorized third parties to copy
aspects of the Company's software and processes or to obtain and use information
that the Company regards as proprietary. In addition, no assurance can be given
that protective measures taken by the Company will be sufficient to preclude
competitors from developing competing or similar software or processes.
10
<PAGE> 12
The Company licenses from Kodak the right to decode images in the Photo CD
format used in conjunction with the Company's Digital Link System. This license
is perpetual, and a royalty has been prepaid, but Kodak could terminate the
license on 60 days' notice if the Company fails to treat the license
confidentially or otherwise breaches the license agreement. If the license
agreement is terminated, the Company would be required to replace such
technology with an alternative technology. Alternative technologies are
currently available. The loss of such license, however, would not have a
material adverse effect on the Company's results of operations or financial
condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate in the future as a result of a variety of factors, including
timing of the completion of particular jobs, material reduction or cancellation
of major projects or the loss of a major customer, timing of new business,
timing of the hiring or loss of personnel, differences in the sales cycle
between prepress and digital imaging services, sensitivity to general economic
conditions and the health of the publishing and advertising industries, the
relative mix of different types of work with differing margins, customers'
purchasing patterns, changes in the pricing strategies of the Company and other
costs relating to the expansion of operations. Many of these factors are outside
of the Company's control. Because of the high fixed-cost nature of the Company's
business, the Company may not be able to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall, which would adversely affect
operating results. For the foregoing reasons, the Company believes that
period-to-period comparisons of its financial results should not be relied upon
as an indication of future performance. In addition, the results of any
quarterly period are not indicative of results to be expected for a full fiscal
year. It is possible that, in certain future quarters, the Company's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of the Common Stock would likely be materially
adversely affected.
MANAGEMENT'S DISCRETION REGARDING USE OF PROCEEDS
The net proceeds of the Offering will be used to fund potential
acquisitions, to repay debt, for working capital and for general corporate
purposes. The determination of the use of proceeds for such purposes is subject
to the discretion of management. See "Use of Proceeds."
SUSCEPTIBILITY TO CHANGE IN ECONOMIC CONDITIONS
The Company's revenues and results of operations are subject to
fluctuations based upon the economic conditions of the United States in general,
and the economic conditions of the publishing and advertising industries in
particular. If there were to be a general economic downturn or a recession in
the United States or one specifically affecting the publishing or advertising
industries, the Company would expect that business enterprises, including its
customers and potential customers, will substantially and immediately reduce
both their prepress budgets and their expenditures on other digital services. In
the event of such an economic downturn, there can be no assurance that the
Company's business, operating results and financial condition would not be
materially and adversely affected.
POTENTIAL STOCK PRICE VOLATILITY
The trading price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results or other
factors. Announcements concerning developments in the prepress, digital imaging,
dub & ship or related industries, results of the Company's operations and stock
market conditions generally could have a significant impact on the market price
of the Common Stock. In addition, stock prices for many companies fluctuate
widely for reasons that may be unrelated to those companies' results of
operations. These fluctuations, as well as general economic, political and
market conditions, may have a material adverse effect on the market price of the
Common Stock.
11
<PAGE> 13
PROVISIONS WITH POTENTIAL ANTITAKEOVER EFFECTS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, which prevent certain Delaware corporations, including
those whose securities are listed on the Nasdaq National Market, from engaging,
under certain circumstances, in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
"interested stockholder." A Delaware corporation may "opt out" of the law with
an express provision in its original certificate of incorporation or an
amendment either to its certificate of incorporation or to its bylaws approved
by a majority of the outstanding voting shares. The Company has not opted out of
the law, which may inhibit a third party "interested stockholder" from
commencing a "business combination."
In addition, the Company's Certificate of Incorporation and Bylaws contain
provisions that may have the effect of discouraging certain transactions
involving an actual or threatened change in control of the Company. The Bylaws
provide that a stockholder must own twenty-five percent of the Common Stock to
be permitted to call a special meeting of the stockholders. The Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. In addition, the Company's Certificate of Incorporation grants to the
Board of Directors the authority to issue up to 10,000,000 shares of Preferred
Stock in one or more series and to fix the powers, preferences and rights of
each such series without stockholder approval. The ability to issue such
Preferred Stock could have the effect of diluting the purchasers of the Common
Stock offered hereby, discouraging unsolicited acquisition proposals or making
it more difficult for a third party to commence such an acquisition.
DIVIDEND POLICY
The Company does not anticipate declaring or paying cash dividends on the
Common Stock in the foreseeable future. The Company's ability to pay cash
dividends is limited by the terms of its existing credit facility. See "Price
Range of Common Stock and Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a significant number of shares of Common Stock in the public
market following the Offering, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock and such sales could
materially impair the Company's ability to raise capital through the future
offering of equity securities. All of the 5,000,000 shares offered hereby
(5,750,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely transferable without restriction or registration under the
Securities Act. Upon completion of the Offering, the Company will have
17,355,683 shares of Common Stock outstanding and will have increased the number
of shares that will be freely transferable without restriction (the "public
float") from 5,181,000 shares to 10,181,000 shares (10,931,000 shares if the
Underwriters' over-allotment option is exercised in full). The remaining
7,174,683 shares outstanding (or 6,424,683 shares if the Underwriters'
over-allotment option is exercised in full) will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act and are held by
Applied Printing and The InterPublic Group of Companies. Of such shares, the
6,885,000 shares held by Applied Printing (or 6,135,000 shares if the
Underwriters' over-allotment option is exercised in full) will be eligible for
resale subject to the volume limitations of Rule 144 or pursuant to the exercise
of demand registration rights, and 289,683 shares held by The InterPublic Group
of Companies will be eligible for resale subject to the volume limitations under
Rule 144 beginning December 3, 1997. See "Shares Eligible for Future Sale."
Up to 2,496,000 additional shares of Common Stock may be purchased by
certain employees and directors of the Company pursuant to the exercise of
options (the "Options") granted under the Company's 1996 Stock Option Plan and
the Non-Employee Directors Nonqualified Stock Option Plan, of which 531,200 were
vested as of July 15, 1997. The shares of Common Stock issuable upon exercise of
the Options are freely tradable under a registration statement on Form S-8 filed
in April 1997.
In June 1997, in connection with the acquisition of the assets of Digital
Imagination, Inc. ("Digital Imagination"), a digital events photography
business, the Company granted warrants to purchase 19,000 shares of Common Stock
to a former stockholder of Digital Imagination, of which warrants to purchase
10,000
12
<PAGE> 14
shares of Common Stock have been issued. The total number of shares of Common
Stock underlying the warrants to be issued may increase to a maximum of 62,500
should the digital events photography division reach certain specified revenue
targets. The warrants to purchase 10,000 shares of Common Stock are exercisable
for a period of three years following June 6, 1999. The remaining warrants to
purchase 9,000 shares of Common Stock (or such greater number as may be issued)
are exercisable within one or two years after the date of each grant. The
exercise price for each of the warrants is $39.25, the fair market value of the
Company's Common Stock at June 6, 1997.
The Company, Messrs. Zuckerman and Drasner, Applied Printing (with respect
to unsold shares of Common Stock) and The InterPublic Group of Companies (with
respect to unsold shares of Common Stock) have agreed that, for a period of 90
days after the date of this Prospectus (the "lock-up period"), they will not,
without the prior written consent of Cowen and Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock. In the case of the
Company, this agreement is subject to exceptions for the grant of options and
issuance of shares pursuant to the Company's stock option plans and in
connection with acquisitions. Upon the expiration of the lock-up period, the
6,885,000 shares of Common Stock (or 6,135,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full) held by Applied
Printing will be eligible for sale in the public market pursuant to Applied
Printing's demand registration rights or within the volume restrictions of Rule
144, and the 289,683 shares held by The InterPublic Group of Companies will be
eligible for sale in the public market within the volume restrictions of Rule
144 beginning December 3, 1997.
In connection with the acquisition of the assets of MBA in July 1997, the
Company paid an initial payment in cash and agreed to pay additional payments
(the "Additional Payment") based on certain target earnings of MBA during the
remainder of 1997 and calendar years 1998 and 1999. The Company may elect to pay
the Additional Payment in a combination of cash and Common Stock, or entirely in
Common Stock. A maximum of 109,000 shares of Common Stock may be issued as the
Additional Payment. Should the Company choose to pay entirely in Common Stock,
the recipients of the Common Stock have certain demand registration rights,
subject to certain limitations, for three years beginning April 30, 1998.
13
<PAGE> 15
COMPANY HISTORY
For more than 25 years, the Company, through Applied Printing and its
predecessors, was a leading independent prepress service provider and in 1988,
became engaged in commercial printing. In addition, since 1994, Applied Printing
has been involved in the business of providing advanced digital imaging
services. During 1995, the management of Applied Printing concluded that, due to
technological changes, its prepress and digital imaging services businesses
presented distinctly different business opportunities from commercial printing
and that the prepress and digital imaging businesses would be best developed if
they were operated as a new, independent legal entity.
Accordingly, in preparation for the Initial Offering, the Company was
incorporated in Delaware in December 1995 and Applied Printing separated its
prepress and digital imaging and related businesses (the "transferred
businesses") into a single, separately identifiable division as of January 1,
1996. Upon the Initial Offering, the assets relating to the transferred
businesses, other than limited prepress assets contained in and needed to
support Applied Printing's continuing commercial printing business, were
transferred, assigned and conveyed by Applied Printing to the Company.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 3,000,000
shares of Common Stock offered hereby, based on an assumed public offering price
of $38.00 per share and after deducting the underwriting discounts and
commissions and the estimated offering expenses, are estimated to be
approximately $107.6 million. The Company intends to use the net proceeds to
repay borrowings under its existing line of credit, which is a $25 million
variable rate facility. As of August 18, 1997, $18.8 million was outstanding
under the Company's line of credit, which matures in May 2000, of which $10.0
million currently bears interest at a rate of 7.25% and $8.8 million currently
bears interest at a rate of 7.75%. Such borrowings were used for working capital
purposes, the purchase of the Los Angeles facility and certain acquisitions. The
Company intends to use the balance of the proceeds to fund potential
acquisitions, for working capital and for general corporate purposes. See "Risk
Factors -- Management's Discretion Regarding Use of Proceeds." Although the
Company has no current or pending arrangements, agreements or understandings
with respect to any material acquisitions, the Company evaluates acquisition
opportunities on an ongoing basis. The Company is making an offering at this
time because it believes it may be advantageous in negotiating the terms of
future acquisitions to have the flexibility to offer cash for all or a portion
of the acquisition price without having to obtain acquisition financing or to
raise proceeds through a common stock offering at that time. The Company will
not receive any of the proceeds of the sale of shares by the Selling
Stockholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock began trading on the Nasdaq National Market
("Nasdaq") on April 17, 1996 under the symbol "AGTX." The following table sets
forth the range of high and low per-share closing sale prices for the Common
Stock as reported on the Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
------------------------------------------------------------------ ----- -----
<S> <C> <C>
1996
Second Quarter (from April 17, 1996)............................ $16 5/8 $13 3/8
Third Quarter................................................... 16 10 1/2
Fourth Quarter.................................................. 29 1/8 14 3/4
1997
First Quarter................................................... 35 3/8 25 1/8
Second Quarter.................................................. 39 3/4 28 3/8
Third Quarter (through August 18, 1997)......................... 39 3/4 36 1/4
</TABLE>
On August 18, 1997, the last reported sale price of the Common Stock as
reported on the Nasdaq was $38.00 per share.
No dividends have been paid since the date of the Company's initial public
offering. The Company currently intends to retain any future earnings for use in
the operation of its business and does not anticipate paying dividends on the
Common Stock in the foreseeable future. The Company's ability to pay cash
dividends is limited by the terms of its existing credit facility.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth, as of June 30, 1997, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale by the Company of 3,000,000 shares of Common
Stock offered hereby at an assumed public offering price of $38.00 per share and
the receipt of the estimated net proceeds therefrom, assuming estimated offering
expenses (excluding the underwriting discounts and commissions) of the Offering
of $0.7 million. See "Use of Proceeds." The information set forth in the table
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS OF DOLLARS
EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
Cash and cash equivalents........................................... $ 2,039 $ 94,134
======= ========
Current obligations:
Current portion of long-term debt.............................. $ 435 $ 435
Current portion of obligations under capital leases............ 1,018 1,018
------- --------
Total current obligations.................................... $ 1,453 $ 1,453
======= ========
Long-term obligations:
Long-term debt................................................. $16,482 $ 977
Obligations under capital leases............................... 921 921
------- --------
Total long-term obligations.................................. 17,403 1,898
------- --------
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares authorized,
none issued and outstanding actual and as adjusted............
Common stock $.01 par value; 40,000,000 shares authorized;
14,355,683 shares issued and outstanding actual; 17,355,683
shares issued and outstanding as adjusted..................... 144 174
Additional paid-in capital..................................... 26,033 133,603
Retained earnings.............................................. 16,037 16,037
------- --------
Total stockholders' equity................................... 42,214 149,814
------- --------
Total capitalization...................................... $59,617 $151,712
======= ========
</TABLE>
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<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data of the Company as of December 31, 1995 and 1996
and for the years ended December 31, 1994, 1995 and 1996, are derived from the
audited financial statements which, together with the notes thereto, are
included elsewhere is this Prospectus. The selected financial data as of
December 31, 1992, 1993 and 1994, and for the years ended December 31, 1992 and
1993 are derived from unaudited financial statements of the Company which, in
the opinion of management, reflect all adjustments (consisting primarily of
normal recurring accruals) necessary for a fair presentation of the financial
position as of such dates and results of operations for such periods. The
selected data as of June 30, 1997 and for the six months ended June 30, 1996 and
1997 are unaudited and reflect all adjustments (consisting primarily of normal
recurring accruals) necessary for a presentation of such information. The
operating results for the quarter are not necessarily indicative of results for
any future period. The following financial data should be read in conjunction
with the financial statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Prospectus. No dividends have been paid on the Company's Common Stock.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- -------------------
1992 1993 1994(1) 1995(1) 1996 1996 1997
------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.................. $80,753 $103,973 $115,986 $117,802 $132,725 $61,586 $81,072
Income (loss) before
provision for income
taxes................... $ 866 $ 798 $ (8,757) $ (7,812) $ 10,820 $ 2,242 $ 9,641
Net income (loss)......... $ 866 $ 798 $ (8,757) $ (7,812) $ 9,955(2) $ 2,179 $ 5,881
Earnings per common share:
Primary................. $ 0.78 $ 0.19(3) $ 0.39
Fully diluted........... $ 0.74(2) $ 0.19(3) $ 0.38
</TABLE>
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 30,
----------------------------------------------------------- -------
1992 1993 1994 1995 1996 1997
------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............. $46,633 $ 57,506 $ 53,859 $ 44,809 $ 72,147 $86,155
Long-term obligations:
Long-term debt.......... $ 2,615 $ 3,821 $ 2,394 $ 853 $ 6,005 $16,482
Obligations under
capital leases....... 3,874 4,056 3,017 2,415 1,265 921
------- ------- ------- ------- ------- -------
Total........... $ 6,489 $ 7,877 $ 5,411 $ 3,268 $ 7,270 $17,403
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Amounts for 1994 and 1995 include reorganization charges of $6,668 and
$3,060, respectively (see Note 19 to the financial statements).
(2) On a fully taxed basis, assuming the 1997 effective tax rate of 39%, net
income and fully diluted earnings per share for the year ended December 31,
1996, would have been approximately $6.6 million and $0.49, respectively.
(3) Pro forma calculation using the number of shares of Common Stock issued and
issuable to Applied Printing prior to April 16, 1996.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997, Compared with 1996
Revenues in the first six months of 1997 were $19.5 million or 31.6% higher
than in the comparable period in 1996. This increase was primarily due to $7.1
million of revenues generated from the operations of additional on-site
facilities management contracts during the 1997 period that were in effect for
none or only a portion of the 1996 period, $3.3 million of revenues from the
SpotLink division whose dub & ship operations were acquired in December 1996,
increased revenues of $1.6 million in the digital imaging services division from
equipment sales and archiving services, $6.8 million of additional revenue
generated in certain divisions of the traditional prepress business, primarily
from increased business at the Carlstadt, NJ facility and a New York City
facility, and receipt of a nonrefundable payment of $2.0 million related to an
agreement with one of the Company's major suppliers. These revenue increases
were slightly offset by a decrease in revenues of $1.3 million at the Los
Angeles and Burbank facilities as a result of combining these operations as
discussed below.
In March 1997, the Company signed a contract to be the primary provider of
digital prepress production services and distribution and storage of radio and
television commercials for General Motors. Under this long-term contract, which
initially runs through August 2000 and is renewable for an additional two years
at General Motors' option, the Company will consolidate all activities relating
to the use of General Motors' visual content, including photographic images and
audio and video commercials. The Company expects to begin providing significant
services under this contract in the second half of 1997.
The gross profit percentage in the first six months of 1997 was 34.8% as
compared to 28.6% in the 1996 period. Gross profit increased $10.6 million or
60.0% in the first six months of 1997 as a result of the additional revenues for
the period as discussed above and from reduced costs resulting from more
favorable pricing negotiated with certain suppliers. This increase was partially
offset by the lower gross profit at the Los Angeles and Burbank facilities
resulting from decreased traditional prepress business along with expenses
incurred and inefficiencies encountered during the transition period to combine
the Burbank facility into the Los Angeles facility. The Company expects that
combining these two facilities will provide greater capacity and more efficient
operating results in the future.
Selling, general, and administrative expenses in the first six months of
1997 were $3.8 million higher than in the first six months of 1996, but as a
percent of revenue decreased to 22.4% in the 1997 period from 23.2% in the 1996
period. This improvement is primarily due to 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 partially offset by additional corporate expenses incurred
related to being a publicly-traded company and from expanded business at certain
operations as well as expenses incurred to combine the operations of the Los
Angeles and Burbank facilities.
Interest expense in the first six months of 1997 was $0.8 million less than
in the 1996 period primarily due to the repayment of debt in April 1996 with the
proceeds from the Initial Offering.
The prepress, digital imaging services and related businesses of Applied
Printing (collectively, the "Prepress Business") were treated as a partnership
for Federal and state income tax purposes prior to the Initial Offering and was
not subject to tax. Concurrently with the acquisition of the Prepress Business,
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 Statements of Operations only for the periods subsequent to the
Initial Offering. Had the Company been subject to income taxes prior to the
Initial Offering, the provision for income taxes, net income, and earnings per
share for the six months ended June 30, 1996, would have been $92,000,
$2,150,000, and $0.19, respectively. There would have been no change to the
provision for income taxes for the three months ended June 30, 1996. The
effective rate of the
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<PAGE> 19
provision for income taxes in 1996 was lower than would ordinarily be expected
due primarily to the reversal of both Federal and state deferred tax asset
valuation allowances.
In addition to its ongoing relationship with Applied Printing, the Company
also transacts business with 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 and the Chief Executive Officer of the Company. Sales
to related parties for the six months ended June 30, 1997 and 1996, totaled $6.3
million and $5.5 million, respectively.
Three Months Ended June 30, 1997, Compared with 1996
Revenues in the second quarter of 1997 were $10.3 million or 33.3% higher
than in the comparable period in 1996. This increase was primarily due to $4.3
million of additional revenues generated from the operations of on-site
facilities management contracts principally related to contracts that were in
effect for none or only a portion of the 1996 period, $1.7 million of revenues
from the SpotLink division whose dub & ship operations were acquired in December
1996, increased revenues of $1.0 million in the digital imaging services
division from archiving services, and $3.3 million of additional revenue
generated in certain divisions of the traditional prepress business, primarily
from increased business at the Carlstadt, NJ facility and a New York City
facility and from additional revenues at the San Francisco metropolitan area
facility resulting from a nonmaterial acquisition.
The gross profit percentage in the second quarter of 1997 was 36.9% as
compared to 30.2% in the 1996 period. Gross profit increased $5.9 million or
63.2% in the second quarter of 1997 as a result of the additional revenues for
the period as discussed above and from reduced costs resulting from more
favorable pricing negotiated with certain suppliers.
Selling, general, and administrative expenses in the second quarter of 1997
were $2.3 million higher than in the second quarter of 1996, but as a percent of
revenue decreased slightly to 23.0% in the 1997 period from 23.4% in the 1996
period. This improvement is primarily due to 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 partially offset by additional corporate expenses incurred
related to being a publicly-traded company and from expanded business at certain
operations.
The effective rate of the provision for income taxes in 1996 was lower than
would ordinarily be expected due primarily to the reversal of both Federal and
state deferred tax asset valuation allowances.
Sales to related parties for the three months ended June 30, 1997 and 1996,
totaled $2.7 million and $2.5 million, respectively.
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", was issued in February 1997 and is effective for interim and annual
periods ending after December 15, 1997. This statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", establishes
standards for computing and presenting earnings per share and will require the
restatement of all prior-period earnings per share data. The implementation of
SFAS No. 128 will not have a material impact on the Company's earnings per share
data.
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure", was issued in February 1997 and is
effective for periods ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure by
superseding and consolidating previously issued accounting standards. The
financial statements of the Company are prepared in accordance with the
requirements of SFAS No. 129.
Year Ended December 31, 1996, Compared with 1995
Revenues in 1996 were $14.9 million 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.
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<PAGE> 20
Additional gross profit of $9.0 million 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 expenses in 1996 were $0.6 million lower than in 1995, resulting in
a decrease in the amount as a percent of revenue to 11.7% in 1996 from 13.7% in
1995. This improvement is primarily due to a reduction in costs associated with
the reorganization efforts and increased business from on-site facilities
management contracts and digital imaging services, which require less sales
support than the traditional prepress business.
General and administrative expenses decreased $4.3 million in 1996 and
represented 9.8% of revenue as compared to 14.7% 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. General and administrative expenses in 1996
include $1.5 million 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 $17.0 million higher than in 1995 primarily
due to the improvements discussed above and the effects of a reorganization
charge of $3.0 million incurred in 1995 with no corresponding charge incurred in
1996.
Interest expense in 1996 was $1.5 million less than in 1995 primarily due
to the repayment of debt with the proceeds from the Initial Offering.
Other income in 1996 was primarily comprised of investment income.
A provision for income taxes is included for 1996 only for the results of
operations subsequent to the Initial Offering. See Note 11 to the financial
statements for a reconciliation of the statutory Federal income tax rate to the
Company's effective rate in 1996.
Sales to related parties for the years ended December 31, 1996, 1995, and
1994 totaled $11.6 million, $7.9 million, and $7.3 million, respectively.
Year Ended December 31, 1995, Compared with 1994
Revenue in 1995 increased by $1.8 million as compared to 1994 primarily as
a result of increased advertising agency business, increased sales at the Los
Angeles division and a shift of advertising agency prepress work from Applied
Printing's printing division to the Company's metropolitan New York facilities.
Revenue increased, to a lesser extent, from an increase in prepress and digital
archiving sales to U.S. News & World Report, L.P. and the Daily News, L.P.
Revenue increases in 1995 were mostly offset by a decrease in revenue at the
Chicago facility and one of the New York facilities. Growth in revenue also was
temporarily disrupted in the fourth quarter of 1995 by the relocation of one of
the Los Angeles facilities and the consolidation of one of the Company's New
York City facilities into other New York metropolitan area facilities.
Gross profit as a percentage of revenue increased in 1995 to 26.7% from
26.5% in 1994. This increase was the net result of improving efficiencies at the
Company's two largest facilities and improved work flow coordination of certain
of the Company's customer on-site business with its own facilities, partially
offset by the relocations during 1995 of the San Francisco and Los Angeles
facilities, and a decrease in revenues at the Chicago facility and one of its
New York facilities.
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<PAGE> 21
Selling expenses increased slightly in 1995 to 13.7% from 13.6% of revenue
in 1994 due to the higher selling costs related to increased sales in
advertising agency business. Selling expenses for prepress services are
significantly affected by the mix of work. Prepress services for advertising
agencies and entertainment companies tend to have higher sales commissions and
related selling costs compared to prepress services for publishing companies.
General and administrative expenses in 1995 increased $1.0 million to 14.7%
from 14.1% of revenue in 1994 primarily due to the increased expenses relating
to digital imaging services and New York advertising agency business and from an
increase in costs allocated from Applied Printing. General and administrative
expenses in 1995 include $6.6 million of such costs.
Interest expense, which increased $0.5 million in 1995, represents interest
on equipment notes and leases of the Prepress Business and an allocation of
Applied Printing's interest expense. The increase in interest expense during the
year is primarily due to an increase in total debt of Applied Printing to fund
acquisitions, capital expenditures and operations as well as an increase in
interest rates in 1995.
The Company sustained damage to two of its New York City facilities in
1995. Insurance proceeds of approximately $4.2 million, offset by related costs,
resulted in a non-recurring gain of $2.0 million, which is included in Other
income. These gains were offset by other non-operating expenses totaling $1.3
million, resulting in Other income of $0.6 million for the period.
LIQUIDITY AND CAPITAL RESOURCES
Upon the issuance of the Company's common stock in the Initial Offering,
the Company received net proceeds of $46.1 million. Of these proceeds, $21.0
million was used to repay secured senior indebtedness to Applied Printing's
primary institutional lender that had been assumed by the Company in connection
with the acquisition of the Prepress Business. A portion of this repayment
represented a repayment of intercompany borrowings and a portion represented a
distribution to Applied Printing. In addition, $16.0 million of these proceeds
was invested in short-term interest-bearing investments which supported a
standby letter of credit that, in turn, collateralized payment of a $16.0
million promissory note (the "Applied Printing Note") payable to Applied
Printing. The Applied Printing Note was executed in connection with the
acquisition of the Prepress Business and was fully repaid by February 1997. The
remaining proceeds were used for working capital, capital expenditures,
repayment of all intercompany borrowings except for the Applied Printing Note,
and other general corporate purposes.
Prior to the Initial Offering, the Company had historically financed its
operations and capital expenditures with cash generated by operations, through
intercompany borrowings, and from prepaid vendor rebates (see Note 13 to the
financial statements). Subsequent to the Initial Offering, the Company has
financed its operations and capital expenditures with cash generated from
operations, proceeds from the Initial Offering, sale and leaseback arrangements,
and borrowings under a revolving credit facility. During 1996 and the first six
months of 1997, the Company received a total of $6.2 million in proceeds from
sale and leaseback arrangements relating to previously acquired equipment. In
addition, the Company obtained a $10.0 million revolving credit facility during
1996 and, in May 1997, renegotiated its terms. The revised line of credit is a
$25 million variable rate facility with a term that runs through May 2000. Under
the revised facility, interest on funds borrowed is either prime less 0.75% or
LIBOR plus 1.50%. As of June 30, 1997, $15.5 million were borrowed under this
line of credit. The proceeds from the revolving credit facility were primarily
used to purchase and improve a new facility for the operations in Los Angeles,
invest in new equipment, finance nonmaterial acquisitions, and fund working
capital needs. The Company is also pursuing additional credit facilities. The
Company is currently negotiating additional equipment leasing facilities with
various financing sources. There is no assurance that any specific amount of
such financing will be consummated.
Cash flows from operating activities decreased by $3.5 million in 1996 as
compared to 1995 primarily due to the increase of accounts receivable
attributable to increased revenues and the paydown of accounts payable and other
liabilities. Cash flows used in investing activities increased by $14.5 million
in 1996 primarily due to the investment in a new facility in Los Angeles,
including the purchase of the building, and additional
20
<PAGE> 22
equipment purchases associated with the additional on-site facilities management
contracts and the new ad management business.
Working capital increased $40.8 million during 1996 principally as a result
of the repayment of short-term intercompany borrowings with the proceeds of the
Initial Offering and the increase in accounts receivable.
Cash flows from operating activities during the first six months of 1997
decreased by $7.4 million as compared to the comparable period in 1996 due
primarily to increased accounts receivable resulting from additional business
and increased inventory levels associated with timing of purchases from
suppliers. In addition to funding such working capital needs, during the first
six months of 1997 the Company invested $3.9 million in equipment, paid $1.2
million related to nonmaterial acquisitions, and repaid $0.7 million of debt and
lease obligations with the proceeds from two sale and leaseback transactions and
additional borrowings under its line of credit.
Working capital increased $12.3 million during the first six months of 1997
primarily from increased receivables, including amounts due from affiliates,
resulting from additional business at existing facilities and from acquired
operations, including SpotLink and other nonmaterial acquisitions. The increase
in working capital was also partially attributable to an increase in amounts for
rebates due from suppliers. Goodwill increased $3.2 million due primarily to
several nonmaterial acquisitions during the first six months of 1997. Long-term
debt increased $10.5 million due primarily to additional borrowings under the
Company's revised line of credit.
At June 30, 1997, capital commitments, which the Company expects to expend
over the course of the next eighteen months, amounted to approximately $14.8
million, essentially all of which is for modernization and growth, including an
$8.8 million capital investment the Company expects to make in connection with
the General Motors contract. The Company also expects to open three additional
facilities by the end of 1998 to accommodate the expansion of Home Depot at an
estimated aggregate cost of approximately $1.8 million. 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 Company believes that the proceeds from the Offering, cash flow from
operations, 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.
The Company does not believe that inflation has had a material impact on
its business.
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<PAGE> 23
ADDITIONAL FINANCIAL INFORMATION
Percentage of Revenues Information
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain items reflected in the Company's statements
of operations.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 75.5 73.3 73.5 73.3 69.5 71.4 65.2
----- ----- ----- ----- ----- ----- -----
Gross profit...................... 24.5 26.7 26.5 26.7 30.5 28.6 34.8
----- ----- ----- ----- ----- ----- -----
Selling, general, and
administrative expenses......... 23.8 26.4 27.7 28.4 21.5 23.2 22.4
Reorganization charge............. -- -- 5.8 2.6 -- -- --
----- ----- ----- ----- ----- ----- -----
Total operating expenses.......... 23.8 26.4 33.5 31.1 21.5 23.2 22.4
----- ----- ----- ----- ----- ----- -----
Operating income (loss)........... 0.7 0.3 (7.0) (4.3) 9.0 5.4 12.4
Interest expense.................. (1.9) (1.7) (2.4) (2.8) (1.4) (2.2) (0.6)
Other income (expense) -- net..... 1.1 0.0 1.8 0.5 0.5 0.4 0.1
Minority interest................. 1.2 2.2 -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Income (loss) before provision for
income taxes.................... 1.1 0.8 (7.6) (6.6) 8.2 3.6 11.9
Provision for income taxes........ -- -- -- -- 0.7 0.1 4.6
----- ----- ----- ----- ----- ----- -----
Net income (loss)................. 1.1% 0.8% (7.6)% (6.6)% 7.5% 3.5% 7.3%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Quarterly Results of Operations
The Company's quarterly results of operations have fluctuated in the past
and may continue to do so in the future depending upon a variety of factors,
including timing of the completion of particular jobs, material reduction or
cancellation of major projects or the loss of a major customer, timing of new
business, timing of the hiring or loss of personnel, differences in the sales
cycle between prepress and digital imaging services, sensitivity to general
economic conditions and the health of the publishing and advertising industries,
the relative mix of different types of work with differing margins, customers'
purchasing patterns, changes in pricing strategies of the Company and other
costs relating to the expansion of operations. See "Risk Factors -- Fluctuations
in Quarterly Operating Results."
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last six quarters. The Company believes
that this information includes all necessary adjustments (consisting primarily
of normal recurring adjustments) necessary for a fair presentation of such
quarterly information included elsewhere herein. The operating results of any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
JUNE SEPT. DEC. MAR. JUNE
MAR. 31, 30, 30, 31, 31, 30,
1996 1996 1996 1996 1997 1997
-------- ------- -------- ------- ------- -------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 30,598 $30,988 $ 35,177 $35,962 $39,761 $41,311
Gross profit................... $ 8,269 $ 9,352 $ 11,542 $11,320 $12,940 $15,261
Income before provision for
income taxes................. $ 146 $ 2,096 $ 4,216 $ 4,362 $ 4,259 $ 5,382
Net income..................... $ 146 $ 2,033 $ 4,005 $ 3,771 $ 2,598 $ 3,283
Earnings per common share:
Primary...................... $ 0.01 $ 0.16 $ 0.29 $ 0.26 $ 0.17 $ 0.21
Fully diluted................ $ 0.01 $ 0.16 $ 0.29 $ 0.25 $ 0.17 $ 0.21
</TABLE>
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<PAGE> 24
BUSINESS
The Company is a leading 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 Grey Advertising; The Walt Disney Company and
Time Warner; General Motors; and Sears Roebuck & Company and Bloomingdale's. 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. Based on 1996 revenues, each of the customers
identified above represented less than 3% of the Company's revenues, except for
The InterPublic Group of Companies, The Walt Disney Company and Time Warner,
each of which represented between 6% and 9.5% of the Company's 1996 revenues,
and McGraw-Hill and Conde Nast, each of which represented between 3% and 6% of
the Company's 1996 revenues.
As a leader in the prepress industry, the Company provides its customers
with comprehensive content management and distribution services for print and
electronic media. The Company's strategy is to leverage its experience and
customer relationships to become the leading provider of comprehensive digital
image management and broadcast distribution services in the United States.
Toward this goal, in December 1996, the Company acquired the assets of SpotLink,
Inc., a subsidiary of Western International Media Corporation, which is owned by
The InterPublic Group of Companies. Through the SpotLink Acquisition, the
Company began to provide volume duplication and distribution of radio and
television advertisements, a service known as "dub & ship," to broadcast
stations. With the expansion into the dub & ship business, the Company increased
its service offerings to existing customers, including The Walt Disney Company
and General Motors. The Company believes it can further increase its dub & ship
business by leveraging other customer relationships.
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 which allows the Company to offer
customers the ability to capture, edit, store, archive, retrieve and distribute
their content in a digital environment.
The Company continues to grow, in part, by offering its prepress customers
additional services. By building a repository of a customer's digital content,
the customer is easily able to retrieve and repurpose images and send them
electronically, resulting in cost efficiencies by saving the labor and materials
required for rescanning. In addition, the quality of the customer's images is
preserved when they are used, stored and distributed in digital form. Currently,
most of the Company's customers have their digital content distributed for
print. However, the Company plans to offer distribution services to its current
customers and to new customers for radio and television broadcast media in the
future, allowing its customers to manage their content through a single,
comprehensive digital database.
Since the Initial Offering in April 1996, the Company has established 10
additional on-site facilities, resulting in a total of 14 on-site facilities,
four of which provide services to other customers as capacity allows. As of July
15, 1997, the Company had a network of 20 principal facilities, including the
four dual-purpose on-
23
<PAGE> 25
site facilities, located in metropolitan areas to provide localized services to
its customers, many of which have offices nationwide. The Company has recently
acquired a digital photography business, a dub & ship business and two prepress
businesses. One of the prepress businesses acquired by the Company is MBA the
primary provider of prepress services for Home Depot. As a result of this
acquisition, the Company gained four new facilities, and expects to open three
additional regional facilities by the end of 1998 to service Home Depot's
expansion. Although the Company has no current arrangements, agreements or
understandings with respect to any material acquisitions, the Company evaluates
acquisition opportunities on an ongoing basis. See "Risk Factors -- Growth
Through Acquisitions; Management of Growth," "Business -- Strategy" and
"Business -- Recent Developments." In February 1997, the Company established a
Magazine Ad Management Division to provide digital advertising, storage
management and electronic transmission services to magazine publishers,
advertising agencies and printers nationwide using the Digital Link System. The
Company provides these services to Time, Inc. for seven of its magazines and to
U.S. News & World Report, L.P. under multi-year agreements.
STRATEGY
The Company's strategy is to become the leading provider of comprehensive
digital image management and broadcast distribution services in the United
States. To implement this strategy, the Company intends to continue to expand
its outsourcing capabilities as well as its on-site and digital services, to
leverage its experience and customer relationships to expand its services for
the advertising and broadcast media industries and to make acquisitions which
expand and complement its strengths.
Capitalize on Outsourcing Trend. The Company is continuing to capitalize
on its outsourcing capabilities and the challenges faced by customers who
perform prepress work in-house. The Company believes that when customers perform
prepress work in-house they are exposed to economic inefficiencies of
overstaffing, redundant equipment, obsolete technology and limited trained
technical and production staff. In addition, as competition intensifies,
companies are increasingly outsourcing ancillary functions, such as prepress and
digital imaging work, and concentrating on their core businesses.
Leverage On-Site Services. The Company is continuing to expand its
opportunities to perform services at its customers' locations because it
believes that performing work on-site strengthens its relationship with its
customers and facilitates an increase in the range and volume of services
provided. On-site services give the customer better management of the prepress
process by reducing internal inefficiencies and the costs of interaction with
off-site production personnel. In 1996, the Company added 10 on-site facilities,
including facilities at Conde Nast, Columbia House and Moore Graphic Services, a
division of Moore Corporation, Ltd. The Company's on-site services are tightly
integrated with the customer's workflow demands to yield maximum responsiveness
and efficiency. Typically, contracts with customers for on-site work are for
three years or more and for a base amount of services. In the Company's
experience, however, its presence on-site generates additional business in the
form of digital imaging services and more prepress work from that customer.
Where appropriate, the Company is able to service other customers at the primary
customer's on-site facility when the primary customer's work flow is low,
permitting higher overall utilization of equipment, staff and space.
Expand Revenues From Digital Imaging Services. The ability to create
digital archives and the growth of digitally based media in print, audio and
eventually video are forcing businesses to develop digitized data in order to
remain competitive. These services also apply for emerging media, such as the
World Wide Web, e-mail, proprietary on-line services and CD-ROM. The Company
believes that the market for digital imaging services is continuing to grow as
image owners seek to digitally archive their content in order to repurpose
images efficiently in print and to distribute their content through new
electronic media.
The Company uses its Digital Link System to provide digital archiving
services to customers seeking a cost-effective method of maintaining image
libraries and to facilitate reuse and resale of images. The Company believes
that its archiving capabilities will continue to attract image-intensive
businesses that may also require traditional prepress services, thereby
obtaining future additional prepress work relating to the archived images.
24
<PAGE> 26
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 digital portrait system is being
beta-tested in the photographic studio departments in five stores of three
national retailers. The Company consummated the acquisition of a digital events
photography business and now provides complete digital event photography
services at various locations, including golf courses, sporting events, stadiums
and resorts. Although to date the Company has not derived significant revenues
from these services, the Company believes that this acquisition will position it
to capture a share of the market revenues as conventional photographic processes
transition from analog to digital format.
Expand Broadcast Media Opportunity. The Company believes that its recent
entry into the dub & ship business through the SpotLink Acquisition provides an
opportunity to expand its services to the broadcast industry, and to combine its
dub & ship capabilities with its digital image management services. As dub &
ship services continue to transition from conventional, physical delivery to
electronic delivery, the Company believes that its technological experience and
its relationships in the advertising and broadcast media industries will enable
it to capitalize on the trend to deliver broadcast advertising electronically.
Growth Through Acquisitions. The Company is expanding by selectively
acquiring other prepress companies with desirable customer bases to which it can
offer additional services such as comprehensive digital image management and
broadcast distribution services. The Company believes that traditional prepress
businesses will continue to consolidate as prepress providers are faced with
heightened demands for systems integration capability, a specialized workforce,
nationwide service and capital to invest in the latest, most cost-effective
equipment. The Company also continues to seek selective acquisitions outside of
the traditional prepress industry to expand its digital imaging and broadcast
media business. Although the Company has no current or pending arrangements,
agreements or understandings with respect to any material acquisitions, the
Company evaluates acquisition opportunities on an ongoing basis.
SERVICES
The Company provides a full range of digital prepress, outsourced
facilities management, advanced digital imaging and radio and television
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. Prior to recent
developments in digital technologies, certain parts of the prepress process were
performed manually. Technological advancements have eliminated several steps in
the prepress process providing customers with additional creative time while
still meeting production schedules.
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, 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. 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
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<PAGE> 27
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, Life and Money 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.
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 its facilities. In addition, it performs 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, U.S. 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
understand better 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 advanced digital imaging
services were developed by DISD, established in 1993 upon hiring 18 people from
Eastman Kodak Company's Commercial Imaging Photo CD division. DISD commenced
work on the Digital Link System 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 on-line
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
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<PAGE> 28
services to be provided. For example, since commencing its archiving services
for Time Warner's Time Picture Collection, the Company has archived an average
of 15,000 images per month for this customer.
Radio and Television Broadcast Distribution Services. Through the SpotLink
Acquisition, the Company entered the dub & ship 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 International Media Corporation, a
subsidiary of The InterPublic Group of Companies, is obligated to direct all of
its dub & ship business to the Company. The Company believes that its entry into
the dub & ship business will allow it to expand its distribution services in the
broadcast media area. The Company expects to use the Digital Link System in
providing distribution services to radio and television stations. 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 Company
believes that the Digital Link System will enhance its ability to capture dub &
ship business as the industry transitions from analog to digital technology. The
Company has also agreed to provide dub & ship 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 1996. The Company has made a limited
number of sales of the Digital Link System, primarily to newspapers.
RECENT DEVELOPMENTS
In July 1997, the Company acquired all of the assets of MBA in exchange for
$2.6 million and Common Stock, the number of shares of which will be determined
based upon MBA's financial performance for calendar years 1997, 1998 and 1999.
MBA was an unaffiliated provider of prepress production, direct mailing and
brokered commercial printing services to various retailers, with 1996 revenues
of approximately $5.5 million. A substantial portion of MBA's revenues was
derived from work performed for Home Depot. This work is currently provided from
four of the Company's facilities. The Company expects to open three additional
regional facilities by the end of 1998 to service Home Depot's expansion. Also,
in May 1997, the Company acquired certain assets of Star Graphic Arts Co., Inc.,
an unaffiliated prepress company in Northern California, for approximately
$868,000 and the assumption of $252,000 of accrued expenses.
In June 1997, the Company established an alliance with Cascade Systems,
Inc. ("Cascade"), a software and systems integration company, whereby Cascade
will provide marketing, sales and distribution of the Digital Link System to
newspapers in North and South America and the United Kingdom. The Company will
offer Cascade's products as part of its total prepress and digital content
management services.
In March 1997, the Company announced the debut of its digital photography
system including a digital portrait system and a portable digital events system.
The system integrates a suite of the Company's proprietary Digital Link software
applications with specialized hardware. In June 1997, the Company purchased
assets of Digital Imagination, an unaffiliated events photography business,
which provides digital event photography services to retail customers at golf
courses, sporting events, stadiums and resorts. In this transaction, the Company
paid approximately $268,000, assumed $1,998,000 of liabilities comprised of
$1,445,000 of accounts payable and accrued expenses, $475,000 of notes payable
to financial institutions and $78,000 of obligations under capital leases and
issued warrants to acquire Common Stock. See "Shares Eligible for Future Sale."
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.
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The Digital Link System. The Digital Link System is a suite of proprietary
software applications, which 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 which categorizes, reviews and selects images
stored in the Digital Link System. The Digital Link System includes customized
software which permits the system to interface with virtually any equipment the
customer may already have, such as a proprietary or a "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. Each of the Company's facilities is connected by
a data network system which 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 11 printing plants of seven
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 Newsweek, U.S. News & World Report
and BusinessWeek in meeting their demanding production cycles but has been
expanded to include transmissions for other publications. These include Aviation
Week and Engineering News Record, which are McGraw-Hill publications, various
Conde Nast publications on an as-needed basis and special editions of Time
Warner publications. The connection to multiple printing sites allows these
publications to be printed at several locations in order to meet distribution
schedules. 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, Company personnel
coordinate and calibrate the receiving equipment in an effort to ensure
consistency in the final product among the various printing sites.
COMPETITION
Prepress services are performed primarily by three types of businesses: (i)
independent providers which 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 which 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
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<PAGE> 30
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. The Company has obtained,
however, several multi-year contracts, and intends to continue to compete for
additional such contracts. Pursuant to these contracts, the Company typically
provides most, if not all, of the required staff and equipment.
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 multiple 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-1 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
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imaging, which are modular and capable of integrating equipment (e.g., digital
cameras and dye-sublimation printers) from virtually any leading manufacturer.
In the dub & ship 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.
To the extent that the Company extends its business into the electronic
distribution of advertising content to television and radio stations, the
Company would expect to compete with companies in related communications and
distribution markets which could offer similar products and services, such as
Vyvx, Inc., Digital Generation Systems, Inc. and Digital Courier International
Corporation.
FACILITIES
The Company maintains its corporate headquarters in New York City and
operates 17 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.
<TABLE>
<S> <C>
New York City Los Angeles metropolitan
(3 facilities) area
Atlanta, Georgia (2 facilities)
Boulder, Colorado Northern New Jersey
Chicago, Illinois (3 facilities)
(2 facilities) Rochester, New York
Detroit, Michigan San Francisco metropolitan
(2 facilities) area
Washington, D.C.
</TABLE>
The Company also provides on-site services at 10 other customer locations
in New York City, New Jersey, Connecticut, and California. 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.
INTELLECTUAL PROPERTY
The Company has a copyright in the software comprising the Digital Link
System. Copyrights do not preclude competitors from developing comparable
software. The Company does not have any patents. The Company owns the registered
trademarks "Applied Graphics Technologies," "Digital Link," "AGT" and other
marks used in its business.
EMPLOYEES
As of July 15, 1997, the Company had approximately 1,370 full-time
employees, approximately 570 of whom are salaried employees and approximately
800 of whom are hourly employees. Approximately 130 of the Company's employees
at the Chicago and Los Angeles facilities, primarily in the area of production,
are covered by two collective bargaining agreements with the Graphic
Communications International Union which 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.
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
Mortimer B. Zuckerman(1).................. 60 Chairman of the Board of Directors
Fred Drasner.............................. 54 Chairman and Chief Executive Officer, Director
Melvin A. Ettinger........................ 56 Vice Chairman, Chief Operating Officer and Director
Diane Romano.............................. 47 President
Scott A. Brownstein....................... 48 Executive Vice President, Digital Imaging Services
Division
Martin D. Krall........................... 56 Executive Vice President, Chief Legal Officer,
Secretary and Director
Louis Salamone, Jr. ...................... 50 Senior Vice President, Chief Financial Officer
Georgia L. McCabe......................... 43 Senior Vice President, Digital Imaging Services
Division
John R. Harris(1)......................... 48 Director
Edward H. Linde(2)........................ 56 Director
Howard Stringer(1)(2)..................... 55 Director
Linda J. Wachner(1)(2).................... 51 Director
</TABLE>
- ---------------
(1) A member of the Compensation Committee.
(2) A member of the Audit Committee.
Mortimer B. Zuckerman, Chairman of the Board of Directors, is the Chairman
of the Board of Directors of Boston Properties, Inc., which he co-founded in
1970. He has been the Chairman of U.S. News & World Report, L.P. and
Editor-in-Chief of U.S. News & World Report since 1985, Chairman of Daily News,
L.P. and Co-Publisher of the New York Daily News since 1993 and Chairman of The
Atlantic Monthly Company since 1980. Mr. Zuckerman also serves as a director of
Snyder Communications, Inc.
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, 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
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 Manager of DISD from 1993 to
1995 where he was responsible for developing and marketing the Company's digital
imaging services. Prior to joining the Company, Mr. Brownstein served from 1987
to 1993 as Manager of Advanced Development for Worldwide Electronic Imaging
Systems, Consumer
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<PAGE> 33
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 Director of Worldwide
Commercial Photo CD at the Eastman Kodak Company, where she was responsible for
developing and implementing corporate strategies for marketing Photo CD
products. From 1988 to 1991, Ms. McCabe served as the Director of Worldwide
Marketing Strategy and Business Development for the Integration and System
Products Division at Eastman Kodak Company, where she was responsible for
marketing strategies and programs for the division.
John R. Harris, a director of the Company, has been a Corporate Vice
President of the Corporate Marketing and Strategy Group at Electronic Data
Systems, Corp. ("EDS") since 1996. From 1989 to 1996, he served as Vice
President of the Communications Industry Group at EDS, where he was responsible
for four business units directed toward wireline, wireless, media and
interactive services markets.
Edward H. Linde, a director of the Company, is the President, Chief
Executive Officer and a director of Boston Properties, Inc., which he co-founded
in 1970. Mr. Linde also serves as the Chairman of the Massachusetts Government
Land Bank.
Howard Stringer, a director of the Company, became President of Sony
Corporation of America in July 1997. From 1995 to June 1997, Mr. Stringer was
the Chairman and Chief Executive Officer of Tele-TV, a joint venture among
NYNEX, Pacific Telesis and Bell Atlantic to provide home video delivery through
telephone lines. Before joining Tele-TV, Mr. Stringer was President of the
CBS/Broadcast Group from 1988 to 1995 where he oversaw all broadcast operations,
including news, sports, entertainment, and network-owned stations.
Linda J. Wachner, a director of the Company, has been a director, President
and Chief Executive Officer of The Warnaco Group, Inc. since 1987 and the
Chairman of the Board since August 1991. Ms. Wachner also serves as a director
of the Travelers Group Inc. and as the Chairman and Chief Executive Officer of
Authentic Fitness Corporation.
POTENTIAL CONFLICTS OF INTEREST
From time to time, Messrs. Zuckerman and Drasner may experience conflicts
of interest in their management of the Company. Some of these conflicts may
arise from the allocation of management time and services between the Company
and an Affiliated Business and decisions regarding the amount or frequency of
use of the Company's services by an Affiliated Business. The Company believes
that any such conflicts have to date been resolved in the Company's best
interests. For example, the Company provides prepress, graphic and digital
imaging services to the Affiliated Businesses on terms the Company believes to
be no less favorable than those under which it provides similar services to
unaffiliated businesses. The Company also has entered into shared services
agreements with two of the Affiliated Businesses for certain legal and data
processing
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<PAGE> 34
services. The Company believes that the allocation of expenses for the covered
services is fair, is less than the cost of providing all of these services
internally and is comparable to the cost of obtaining these services from
unaffiliated parties.
Other conflicts may also arise. For example, Mr. Zuckerman received a
personal loan from an affiliate of Kodak, a vendor to the Company. Under the
terms of the arrangement, if the Company and Applied Printing do not jointly
satisfy the cumulative minimum purchasing obligations specified in the agreement
with the vendor, and such failure is not due to technological changes or
technological or customer requirements, Mr. Zuckerman must prepay the loan. The
Company believes that the terms of its purchases of graphic art supplies, the
products covered by the agreement, are no less favorable to the Company than
those that could be obtained from another vendor. However, the Company could be
viewed as having a disincentive to seek more favorable pricing arrangements in
the future from a competing vendor as a result of Mr. Zuckerman's outstanding
loan. See "Risk Factors -- Prepayment of Rebates; Potential Conflict in Vendor
Selection."
Mr. Zuckerman, in his capacity as Chairman of the Board, and Mr. Drasner,
in his capacity as Chief Executive Officer, participate in and have ultimate
authority to approve major business decisions, including those which they may
have a potential conflict of interest. To date, the Company has not required the
approval of the Independent Directors for material transactions which may
involve potential conflicts of interest. In the future, the Company intends to
have its Independent Directors approve all material transactions which may
involve a potential conflict of interest.
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<PAGE> 35
SELLING STOCKHOLDERS
The Selling Stockholders, which are Applied Printing, a limited partnership
beneficially owned by Mortimer B. Zuckerman and Fred Drasner, and The
InterPublic Group of Companies, are offering an aggregate of 2,000,000 shares of
Common Stock pursuant to the exercise of piggyback registration rights. The
following table sets forth certain information, as of August 15, 1997, and as
adjusted to reflect the sale of Common Stock offered hereby, regarding the
beneficial ownership of Common Stock by the Selling Stockholders.
<TABLE>
<CAPTION>
STOCK BENEFICIALLY
OWNED OWNERSHIP AFTER
PRIOR TO OFFERING NUMBER OF OFFERING
---------------------- SHARES ----------------------
NUMBER OF OFFERED NUMBER OF
NAME OF SELLING STOCKHOLDER SHARES PERCENT(1) HEREBY SHARES PERCENT(1)
- ------------------------------------------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Applied Printing(2)........................ 8,635,000 60.2% 1,750,000 6,885,000 39.7%(3)
The InterPublic Group of Companies......... 539,683(4) 3.8% 250,000 289,683 1.7%
</TABLE>
- ---------------
(1) Percentage ownership of Common Stock is based on 14,355,683 shares of Common
Stock outstanding on the date of this Prospectus and 17,355,683 shares
outstanding immediately following the Offering.
(2) Applied Printing is a limited partnership in which Mr. Drasner is a minority
limited partner and Mr. Zuckerman beneficially owns the remaining limited
partnership interests, and Mr. Zuckerman is the sole stockholder of the
corporate general partner and a corporate limited partner. Messrs. Zuckerman
and Drasner comprise the board of directors of the corporate general partner
of Applied Printing and have voting authority with respect to the Common
Stock held by Applied Printing. Mr. Zuckerman is the sole stockholder of the
corporate general partner and therefore can change at any time the members
of the board of directors of that entity. Consequently, Mr. Zuckerman
indirectly will be able to exercise significant influence over the outcome
of all matters submitted to a vote of the Company's stockholders, including
election of the members of the Board of Directors, amendment of the
Certificate of Incorporation and consummation of a merger, sale of
substantially all of the Company's assets or other significant corporate
transactions.
(3) Applied Printing has granted to the Underwriters an option, exercisable
within 30 days from the date of this Prospectus, to purchase up to an
aggregate of 750,000 shares of Common Stock to cover overallotments, if any.
If the overallotment option is exercised in full, Applied Printing will own
approximately 35.3% (6,135,000 shares) of the Common Stock.
(4) These shares were acquired in connection with the SpotLink Acquisition and
registered in the name of SpotLink, Inc., an indirect subsidiary of The
InterPublic Group of Companies. Under the terms of the SpotLink Acquisition,
The InterPublic Group of Companies has exercised piggyback registration
rights with respect to 250,000 of such shares. The InterPublic Group of
Companies has been a customer of the Company for more than three years.
34
<PAGE> 36
CERTAIN STOCK OWNERSHIP INFORMATION
The following table sets forth certain Common Stock ownership information
of executive officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
OPTIONS OPTIONS
NAME(1) POSITION GRANTED(2) VESTED(3)
- --------------------------------------- ------------------------------ --------- -----------------
<S> <C> <C> <C>
Melvin A. Ettinger..................... Vice Chairman, Chief Operating 200,000 40,000
Officer
Diane Romano........................... President 225,000 45,000
Scott A. Brownstein.................... Executive Vice President, 225,000 45,000
Digital Imaging Services
Division
Martin D. Krall........................ Executive Vice President, 100,000 20,000
Chief Legal Officer and
Secretary
Louis Salamone, Jr..................... Senior Vice President, Chief 125,000 25,000
Financial Officer
Georgia L. McCabe...................... Senior Vice President, Digital 140,000 28,000
Imaging Services Division
</TABLE>
- ---------------
(1) No named executive officer of the Company owns any of the outstanding Common
Stock.
(2) Options expire ten years after grant. Options vest in annual installments,
typically 20% per year.
(3) No other options that have been granted to the named employees will vest
prior to April 12, 1998.
The Company has also granted Options to acquire 1,361,000 shares of Common
Stock to employees other than the officers identified above, of which 258,200
are vested.
35
<PAGE> 37
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
All of the 5,000,000 shares sold in the Offering (5,750,000 if the
Underwriters' over-allotment option is exercised in full) will be eligible for
sale in the public market without restriction under the Securities Act, except
that any shares purchased by an "affiliate" of the Company (as that term is
defined in Rule 144 adopted under the Securities Act) will be subject to the
resale limitations of Rule 144. Upon completion of the Offering, there will be
17,355,683 outstanding shares of Common Stock and the public float will be
increased from 5,181,000 shares to 10,181,000 (10,931,000 shares if the
Underwriters' over-allotment option is exercised in full). The remaining
7,174,683 shares outstanding (or 6,424,683 shares if the Underwriters' over-
allotment option is exercised in full) will be "restricted securities" within
the meaning of Rule 144. Such restricted securities may not be sold except in
compliance with the requirements of the Securities Act or pursuant to an
exemption from such registration requirement, and are held by Applied Printing
and The InterPublic Group of Companies.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) to whom the Rule is applicable, including an
affiliate, who has beneficially owned shares for at least a one-year period (as
computed under Rule 144) is entitled to sell within any three-month period the
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock (approximately 173,557 shares after
giving effect to the Offering) and (ii) the reported average weekly trading
volume of the then outstanding shares of Common Stock during the four calendar
weeks immediately preceding the date on which the notice of sale is filed with
the Securities and Exchange Commission. Sales under Rule 144 also are subject to
certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately preceding a sale, and who has
beneficially owned shares for at least a two-year period (as computed under Rule
144), would be entitled to sell such shares under Rule 144(k) without regard to
the volume limitation and other conditions described above.
Up to 2,496,000 additional shares of Common Stock may be purchased by
certain employees and directors of the Company pursuant to the exercise of
Options granted under the Company's 1996 Stock Option Plan and the Non-Employee
Directors Nonqualified Stock Option Plan, of which 531,200 were vested as of
July 15, 1997. The shares of Common Stock issuable upon exercise of the Options
are freely tradable under a registration statement on Form S-8 filed in April
1997.
In connection with the acquisition of Digital Imagination, the Company
granted warrants to purchase 19,000 shares of Common Stock to a former
stockholder of Digital Imagination, of which warrants to acquire 10,000 shares
of Common Stock have been issued. The total number of shares of Common Stock
underlying the warrants to be issued may increase to a maximum of 62,500 in the
event that the digital events photography division attain certain specified
revenue targets. The warrants to acquire 10,000 shares of Common Stock are
exercisable for a period of three years following June 6, 1999. The remaining
warrants to acquire 9,000 shares of Common Stock (or such greater number as may
be issued) are exercisable within one or two years after the date of grant. The
exercise price for each of the warrants is $39.25, the fair market value of the
Company's Common Stock at June 6, 1997.
The Company, Messrs. Zuckerman and Drasner, Applied Printing (with respect
to unsold shares of Common Stock) and The InterPublic Group of Companies (with
respect to unsold shares of Common Stock) have agreed that, for a period of 90
days after the date of this Prospectus (the "lock-up period"), they will not,
without the prior written consent of Cowen and Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock. In the case of the
Company, this agreement is subject to exceptions for the grant of options and
issuance of shares pursuant to the Company's stock option plans and in
connection with acquisitions. Upon the expiration of the lock-up period, the
6,885,000 shares of Common Stock (or 6,135,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full) held by Applied
Printing will be eligible for sale in the public market pursuant to Applied
Printing's demand registration rights,
36
<PAGE> 38
described below, or within the volume and other restrictions of Rule 144 and the
289,683 shares held by The InterPublic Group of Companies will be eligible for
sale in the public market within the volume restrictions of Rule 144 beginning
December 3, 1997.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices of the Common Stock and the Company's ability to raise
capital in the future through the sale of additional securities. See "Risk
Factors -- Shares Eligible For Future Sale."
REGISTRATION RIGHTS
The Company has granted certain demand and "piggyback" registration rights
(the "Registration Rights") in connection with the Common Stock that is held by
certain of its current stockholders, including the holders of Common Stock
issued in connection with the SpotLink Acquisition, subject to certain
conditions and limitations. The InterPublic Group of Companies, which received
Common Stock in the SpotLink Acquisition, and Applied Printing are selling
250,000 and 1,750,000 shares of Common Stock, respectively, in this Offering as
a result of the exercise of piggyback registration rights. Following completion
of the Offering, 7,174,683 shares of Common Stock, or 41.3% of the total number
of shares of Common Stock outstanding, will be entitled to the benefits of the
Registration Rights.
Applied Printing has registration rights for the Common Stock that it held
at the time of the Initial Offering of the Company (the "Applied Printing
Shares"). Applied Printing, any Applied Printing partner to which Common Stock
is distributed and any person to which such stock is pledged as collateral for a
loan, may register all or any portion of the Applied Printing Shares and have
such shares included in any registration by the Company of shares of Common
Stock or other securities substantially similar to the Common Stock, except
that, in the case of a "demand" registration, the Company is not obligated to
file any registration statement initiated by any such holder within six months
of the effective date of certain other registration statements filed by the
Company or with respect to the Applied Printing Shares having less than a $5.0
million aggregate offering price. Demand registration rights may be exercised a
maximum of five times. The Applied Printing Registration Rights are transferable
in connection with any private sale of the Applied Printing Shares.
Subject to certain restrictions, the holders of Common Stock issued in
connection with the SpotLink Acquisition (the "SpotLink Shares") may have such
shares included in any registration by the Company of shares of Common Stock or
other securities substantially similar to the Common Stock for a period of three
years following the date of the last issuance of shares in connection with the
SpotLink Acquisition. The Registration Rights of the SpotLink Shares are not
transferable, unless such transfer is to a member of the SpotLink selling group
or an affiliate of the selling group, as defined in the Asset Purchase Agreement
by and among the Company, The InterPublic Group of Companies, Western
International Media Corporation and SpotLink, Inc., dated December 3, 1996.
In connection with the acquisition of the assets of MBA in July 1997, the
Company paid an initial payment in cash and agreed to pay the Additional Payment
based on certain target earnings of MBA during the remainder of 1997 and
calendar years 1998 and 1999. The Company may elect to pay the Additional
Payment in a combination of cash and Common Stock, or entirely in Common Stock.
A maximum of 109,000 shares of Common Stock may be issued as the Additional
Payment. Should the Company choose to pay entirely in Common Stock, the
recipients of the Common Stock shall have certain demand registration rights,
subject to certain limitations, for three years beginning April 30, 1998.
The Company will bear all expenses incident to its registration obligations
upon exercise of the Registration Rights, except that it will not bear any
underwriting discounts or commissions or transfer taxes relating to registration
of the registrable shares.
37
<PAGE> 39
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Cowen & Company, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Montgomery Securities (the "Representatives"), have severally
agreed to purchase from the Company the following respective number of shares of
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------------------------------------------------------- -------------------
<S> <C>
Cowen & Company............................................
Bear, Stearns & Co. Inc. ..................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.........
Montgomery Securities......................................
---------
Total................................................. 5,000,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain brokers and
dealers. After the shares of Common Stock are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the Representatives. The Underwriters are obligated to take and pay for all of
the shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any are taken.
Applied Printing has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 750,000
additional shares at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the above table
bears to 5,000,000, and the Company will be obligated, pursuant to the option,
to sell such shares to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of Common
Stock offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 5,000,000 shares are being
offered.
The Company, Messrs. Zuckerman and Drasner, Applied Printing (with respect
to unsold shares of Common Stock) and The InterPublic Group of Companies (with
respect to unsold shares of Common Stock) have agreed that, for a period of 90
days after the date of this Prospectus (the "lock-up period"), they will not,
without the prior written consent of Cowen and Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock. In the case of the
Company, this agreement is subject to exceptions for the grant of options and
issuance of shares pursuant to the Company's stock option plans and in
connection with acquisitions. Upon the expiration of the lock-up period,
6,885,000 shares of Common Stock (or 6,135,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full) currently outstanding
will be eligible for sale in the public market.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the Offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Stock for
their own
38
<PAGE> 40
account. In addition, to cover overallotments or to stabilize the price of the
Common Stock, the Underwriters may bid for, and purchase, shares of the Common
Stock in the open market. The Underwriters may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Common Stock in the
Offering, if the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short positions, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of the
Common Stock in market making transactions and impose penalty bids. These
activities may stabilize or maintain the market price of the Common Stock above
market levels that may otherwise prevail. The Underwriters are not required to
engage in these activities and may end any of these activities at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C., a
partnership including professional corporations. O'Sullivan Graev & Karabell,
LLP, New York, New York, has acted as counsel for the Underwriters in connection
with the Offering.
EXPERTS
The financial statements as of December 31, 1996, and for the year then
ended included and incorporated by reference in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is included and incorporated by reference herein, and have been so
included and incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The combined balance sheet of the Predecessor Group to Applied Graphics
Technologies, Inc. as of December 31, 1995 and the combined results of
operations, owner's deficit and cash flows for each of the two years in the
period ended December 31, 1995, included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company (File
No. 0-28208) with the Securities and Exchange Commission are incorporated herein
by reference: (a) the Company's Annual Report on Form 10-K and Form 10-K/A for
the fiscal year ended December 31, 1996; (b) the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997; (c) the Company's Quarterly
Report on Form 10-Q and Form 10-Q/A for the quarter ended June 30, 1997; (d) the
Company's Proxy Statement for the Annual Meeting of Stockholders held on May 19,
1997; and (e) the description of the Company's Common Stock which is contained
in its Registration Statement on Form 8-A filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), on April 16, 1996, including any
amendments or reports filed for the purpose of updating such description.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the Offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such reports and
documents. Any statement contained in a document incorporated by reference
herein shall be deemed modified or superseded for purposes of this Prospectus to
the extent that a statement contained or incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all of such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to Corporate Secretary,
39
<PAGE> 41
Applied Graphics Technologies, Inc., at the Company's principal executive
offices located at 28 West 23rd Street, 11th floor, New York, New York 10010,
telephone number (212) 929-4111.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission ("SEC"),
Washington, D.C. 20549, a Registration Statement on Form S-3, including
amendments and exhibits thereto (the "Registration Statement"), under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the SEC. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being deemed to be qualified in its entirety by such reference. The
Registration Statement, including all exhibits and schedules thereto, may be
inspected without charge at the principal office of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and at Seven World Trade Center, Suite 1300, New York, New York
10048, and copies of all or any part thereof may be obtained from such offices
upon the payment of prescribed fees. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, which file
electronically with the SEC.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
filed by the Company with the SEC may be inspected at the offices listed above
as well as on the SEC Web site.
40
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Report of Independent Accountants..................................................... F-3
Balance Sheets........................................................................ F-4
Statements of Operations.............................................................. F-5
Statements of Cash Flows.............................................................. F-6
Statements of Stockholders' Equity and Owners' Equity/(Deficit)....................... F-7
Notes to Financial Statements......................................................... F-8
Interim Financial Statements (Unaudited).............................................. F-21
Notes to Interim Financial Statements (Unaudited)..................................... F-24
</TABLE>
F-1
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Applied Graphics Technologies, Inc.
We have audited the accompanying balance sheet of Applied Graphics Technologies,
Inc. (a majority-owned subsidiary of Applied Printing Technologies L.P.) (the
"Company") as of December 31, 1996, and the related statements of operations,
stockholders' equity and owner's equity (deficit), and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 12, 1997
New York, New York
F-2
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of the Predecessor Group:
We have audited the accompanying combined balance sheet of the Predecessor
Group to Applied Graphics Technologies, Inc. as of December 31, 1995, and the
related combined statements of operations, cash flows and changes in owners'
equity (deficit) for each of the two years in the period 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 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, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Predecessor Group as of December 31, 1995 and the combined results of their
operations and cash flows for each of the two years in the period ended December
31, 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 8, 1996
F-3
<PAGE> 45
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,567 $ 666
Marketable securities at cost.............................................. 1,600
Accounts receivable -- trade (net of allowances of $472 in 1996
and $1,431 in 1995)...................................................... 29,584 19,476
Due from affiliates........................................................ 1,841
Inventory.................................................................. 4,639 3,582
Prepaid expenses and other current assets.................................. 2,485 3,050
Deferred income taxes...................................................... 705
------- --------
Total current assets................................................ 41,580 28,615
Property, plant and equipment, net........................................... 20,544 13,741
Goodwill (net of amortization of $552 in 1996 and $405 in 1995).............. 7,121 551
Deferred income taxes........................................................ 1,644
Other assets................................................................. 1,258 1,902
------- --------
Total assets........................................................ $72,147 $ 44,809
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY/OWNERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses...................................... $19,630 $ 20,096
Applied Printing Note...................................................... 1,600
Current portion of long-term debt.......................................... 507 711
Current portion of obligations under capital leases........................ 1,354 1,576
Intercompany borrowings.................................................... 30,181
Due to affiliates.......................................................... 354
Other current liabilities.................................................. 2,407 1,125
------- --------
Total current liabilities........................................... 25,852 53,689
Long-term debt............................................................... 6,005 853
Obligations under capital leases............................................. 1,265 2,415
Other liabilities............................................................ 3,142 7,233
------- --------
Total liabilities................................................... 36,264 64,190
------- --------
Commitments and contingencies
Stockholders' Equity/Owners' Deficit:
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: 14,349,683)............................................. 143
Additional paid-in capital................................................. 25,584
Retained earnings.......................................................... 10,156
Owners' deficit............................................................ (19,381)
------- --------
Total stockholders' equity/owners' deficit............................... 35,883 (19,381)
------- --------
Total liabilities and stockholders' equity/owners' deficit.......... $72,147 $ 44,809
======= ========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 46
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................................... $132,725 $117,802 $115,986
Cost of revenues............................................... 92,242 86,296 85,297
-------- -------- --------
Gross profit................................................... 40,483 31,506 30,689
-------- -------- --------
Selling expenses............................................... 15,486 16,156 15,746
General and administrative expenses............................ 13,068 17,373 16,341
Reorganization charge.......................................... 3,060 6,668
-------- -------- --------
Total operating expenses.................................. 28,554 36,589 38,755
-------- -------- --------
Operating income (loss)........................................ 11,929 (5,083) (8,066)
Interest expense............................................... (1,833) (3,332) (2,807)
Other income, net.............................................. 724 603 2,116
-------- -------- --------
Income (loss) before provision for income taxes................ 10,820 (7,812) (8,757)
Provision for income taxes..................................... 865
-------- -------- --------
Net income (loss).............................................. $ 9,955 $ (7,812) $ (8,757)
======== ======== ========
Earnings per common share:
Primary...................................................... $ 0.78
Fully diluted................................................ $ 0.74
Weighted average number of common shares:
Primary...................................................... 12,797
Fully diluted................................................ 13,506
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:
Primary...................................................... $ 0.78 $ (0.80)
Fully diluted................................................ $ 0.74 $ (0.80)
Pro forma weighted average number of common shares:
Primary...................................................... 12,797 9,930
Fully diluted................................................ 13,506 9,930
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 47
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ 9,955 $(7,812) $(8,757)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization.............................. 4,932 5,359 7,405
Deferred taxes............................................. (2,349)
Gain on insurance settlement............................... (18) (2,023) (1,908)
Reorganization charges..................................... 3,060 6,668
Other...................................................... (40) 1,012 747
Management of Changes in Operating Assets and Liabilities,
net of effects of acquisitions:
Accounts receivable........................................ (11,442) 3,772 (2,550)
Due from affiliates........................................ 1,917 (981) 2,110
Inventory.................................................. (937) (422) (426)
Other assets............................................... 2,452 1,401 (148)
Accounts payable and accrued expenses...................... (413) 1,387 2,513
Other liabilities.......................................... (2,591) 204 (275)
-------- ------- -------
Net cash provided by operating activities.................... 1,466 4,957 5,379
-------- ------- -------
Cash flows from investing activities:
Investment in marketable securities........................ (1,600)
Property, plant and equipment expenditures................. (14,851) (3,455) (4,296)
Proceeds from the sale of fixed assets..................... 1,099 1,483
Net proceeds from insurance claims......................... 243 1,782 1,189
Entities purchased, net of cash acquired................... 350 (69) (1,000)
-------- ------- -------
Net cash used in investing activities........................ (14,759) (259) (4,107)
-------- ------- -------
Cash flows from financing activities:
Proceeds received from the sale of common stock............ 46,103
Borrowings under revolving credit line..................... 5,628
Proceeds from sale/leaseback transactions.................. 4,093 558 945
Repayment of Applied Printing Note......................... (14,400)
Repayment of notes and capital lease obligations........... (2,662) (4,020) (4,875)
Increase in (repayments of) intercompany borrowings, net... (18,000) 3,789 10,367
Net distributions to Applied Printing...................... (5,568) (4,449) (8,422)
-------- ------- -------
Net cash provided by (used in) financing activities.......... 15,194 (4,122) (1,985)
-------- ------- -------
Net increase (decrease) in cash and cash equivalents......... 1,901 576 (713)
Cash and cash equivalents at beginning of year............... 666 90 803
-------- ------- -------
Cash and cash equivalents at end of year..................... $ 2,567 $ 666 $ 90
======== ======= =======
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 48
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND OWNERS' EQUITY/(DEFICIT)
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL OWNERS'
COMMON PAID-IN- RETAINED EQUITY/
STOCK CAPITAL EARNINGS (DEFICIT)
------ ---------- -------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994........................ $ 10,059
Net loss for the year............................. (8,757)
Distribution for the year......................... (8,422)
-------
Balance at December 31, 1994...................... (7,120)
Net loss for the year............................. (7,812)
Distribution for the year......................... (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) for the period.................. $ 10,156 (201)
Distribution for the year......................... (9,387)
Conveyance........................................ (28,969) 28,969
---- ------- ------- -------
Balance at December 31, 1996...................... $143 $ 25,584 $ 10,156 $ 0
==== ======= ======= =======
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 49
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Applied Graphics Technologies, Inc. (the "Company") is a provider of
digital prepress services to magazine publishers, advertising agencies,
entertainment companies 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 commencing in December 1996, 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 "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 "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 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, 1996, Applied Printing
owned approximately 60% of the Company's outstanding common stock.
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 April 16, 1996, and the results of the Company from April 17, 1996,
through December 31, 1996. The financial statements through the Offering Date
have been prepared by combining the assets, liabilities, results of operations
and cash flows of the specific divisions that comprise the Prepress Business.
Historically, these specific divisions have operated as separate business units
and maintained their own books and records. Through the effective date, Applied
Printing managed the cash and financing requirements of all of its divisions
centrally; as such, the interest expense, and related intercompany borrowing,
represent an allocation of Applied Printing's interest expense and the related
debt. As discussed in Note 9, this allocation of debt is presented as an
intercompany borrowing. Additionally, Applied Printing and other related parties
had historically 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 financial position and
combined results of operations of the Prepress Business may differ from results
that may have been achieved had the Prepress Business operated as an independent
entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents: Cash equivalents include highly liquid investments with
a maturity of less than three months at the time of acquisition.
Marketable Securities: Marketable securities consist of United States
government obligations that mature in January 1997. These securities support a
letter of credit that collateralizes the Applied Printing Note. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
F-8
<PAGE> 50
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain Investments in Debt and Equity Securities", these securities have been
classified as held to maturity and are recorded at amortized cost, which
approximates fair value due to their short-term maturity.
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 and materials 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 scanned.
Goodwill: Goodwill is being amortized on the straight-line method over
periods ranging from 7 to 20 years. The Company continually evaluates the
carrying value of goodwill by comparing it to the undiscounted expected future
cash flows to be generated. Goodwill is written off when there has been a loss
of value.
Income taxes: The Prepress Business was treated as a partnership for
Federal and state income tax purposes prior to the Offering Date and was not
subject to tax. A provision for income taxes is included in the Company's
Statement of Operations only for the period subsequent to the Offering Date.
Earnings per Share of Common Stock: Earnings per share of common stock are
computed by dividing net income by the weighted average of the number of shares
of common stock and common stock equivalents, where dilutive, outstanding.
Long-lived assets: In accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", the Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable.
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 1996 presentation.
3. ACQUISITION
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 acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets and liabilities of SpotLink 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 was $6,716 and has been
recorded as goodwill, which is being amortized on the straight-line method over
20 years. The results of operations of SpotLink have been included in the
Statement of Operations since the date of the acquisition.
F-9
<PAGE> 51
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma information combines the results of
operations of the Company and SpotLink for the years ended December 31, 1996 and
1995, calculated as if the acquisition had occurred on January 1, 1995. 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 acquisition been consummated at the beginning of 1996 and 1995 or of
results which may occur in the future.
<TABLE>
<CAPTION>
UNAUDITED 1996 1995
-------------------------------------------------------------- -------- ---------
<S> <C> <C>
Total revenues................................................ $139,867 $ 123,765
Income (loss) before provision for income taxes............... $ 10,614 $ (7,216)
Net income.................................................... $ 9,933 $ (7,216)
Earnings per common share:
Primary..................................................... $ 0.78
Fully diluted............................................... $ 0.74
</TABLE>
4. INVENTORY
The components of inventory at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Work-in-Process................................................... $2,596 $ 2,518
Raw Materials..................................................... 2,043 1,064
------ ------
Total............................................................. $4,639 $ 3,582
====== ======
</TABLE>
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Machinery and equipment.......................................... $23,422 $19,279
Leasehold improvements........................................... 4,643 4,212
Buildings and improvements....................................... 11,050 4,768
Computer software................................................ 1,651 1,163
Furniture and fixtures........................................... 1,531 1,448
Construction in progress......................................... 203 538
------- -------
Total............................................................ 42,500 31,408
Less accumulated depreciation and amortization................... 21,956 17,667
------- -------
Net.............................................................. $20,544 $13,741
======= =======
</TABLE>
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, 1996, 1995, and 1994 were
$4,785, $5,106, and $5,997, respectively.
F-10
<PAGE> 52
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accounts payable................................................. $ 7,694 $ 9,513
Salaries and benefits............................................ 4,329 4,499
Income taxes..................................................... 2,449
Commissions...................................................... 1,374 1,153
Other............................................................ 3,784 4,931
------- -------
Total............................................................ $19,630 $20,096
======= =======
</TABLE>
7. 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 $295 during the 1996
period.
8. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
3.62% -- 8% notes payable due 1997 through 2000..................... $ 377 $853
Variable rate revolving credit line due 1998........................ 5,628
------ ----
Total............................................................... $6,005 $853
====== ====
</TABLE>
In August 1996 the Company obtained a $10,000 revolving credit facility
that is collateralized by the Company's trade receivables. The credit facility
is a two-year variable-rate facility with a major financial institution. Under
the terms of the facility, the Company must comply with certain covenants
related to tangible net worth, ratio of debt to tangible net worth, and debt
service coverage ratio. At December 31, 1996, the Company was in compliance with
all covenants. Interest on funds borrowed is the prime lending rate, which at
December 31, 1996, was 8.25%. The Company also has the option to borrow at LIBOR
plus 2.25%. Borrowings under this LIBOR provision may have maturities of 30, 90,
or 180 days. At December 31, 1996, there were no outstanding borrowings under
the LIBOR provision. The average variable rate on this revolving credit facility
during the period in 1996 was 8.25%. As of December 31, 1996, under the most
restrictive covenant of the revolving credit facility, approximately $10,000
were available for the payment of dividends.
Principal payments on the long-term debt are as follows:
<TABLE>
<S> <C>
1997........................................................................ $ 507
1998........................................................................ 5,781
1999........................................................................ 166
2000........................................................................ 58
------
Total....................................................................... 6,512
Less current portion........................................................ 507
------
Total long-term debt........................................................ $6,005
======
</TABLE>
F-11
<PAGE> 53
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INTERCOMPANY BORROWINGS
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
13), and borrowings from the majority limited partner (collectively,
"Borrowings").
Prior to the 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 reflected in the financial statements represent
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 31, 1995, were 10.8%
and 8.9%, respectively. The Company incurred interest charges of $944, $2,683,
and $1,992 for the period ended April 16, 1996, and the years ended December 31,
1995 and 1994, respectively.
10. 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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1997............................................................. $ 1,537 $ 7,904
1998............................................................. 783 3,825
1999............................................................. 595 3,242
2000............................................................. 1,782
2001............................................................. 1,152
Later years...................................................... 5,057
------ -------
Total minimum lease payments..................................... 2,915 $22,962
=======
Less amount representing interest................................ 296
------
Present value of minimum lease payments.......................... 2,619
Less current portion........................................ 1,354
------
Long-term obligation under capital leases........................ $ 1,265
======
</TABLE>
F-12
<PAGE> 54
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Assets recorded under capital leases are included in property, plant and
equipment as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Buildings........................................................ $ 4,768 $ 4,768
Machinery and equipment.......................................... 11,431 11,172
------- -------
Total............................................................ 16,199 15,940
Less accumulated depreciation.................................... 8,660 7,609
------- -------
Net.............................................................. $ 7,539 $ 8,331
======= =======
</TABLE>
Total rental expense under operating leases amounted to $7,578, $12,106,
and $9,241 for the years ended December 31, 1996, 1995, and 1994, respectively.
In 1996, the Company entered into sale and leaseback arrangements that are
recorded as operating leases. The gain from these sale and leaseback
arrangements has been deferred and is being recognized in income as a credit
against future rental expenses. At December 31, 1996, the remaining balance of
the deferred gain totaling $233 is included in "Other Liabilities" in the
accompanying Balance Sheets.
11. 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 the asset and liability 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 Offering Date and was not subject to tax. At
the date of the 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 Statement of Operations only for the period subsequent
to the Offering Date. The components of the provision for income taxes were as
follows:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Current:
Federal.................................................................... $ 2,287
State...................................................................... 927
-------
Total current.............................................................. 3,214
-------
Deferred:
Federal.................................................................... (2,349)
-------
Total provision for income taxes........................................... $ 865
=======
</TABLE>
F-13
<PAGE> 55
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes varied from the Federal statutory income tax
rate due to the following:
<TABLE>
<CAPTION>
1996
------
<S> <C>
Taxes at statutory rate..................................................... $3,679
State income taxes, net of Federal tax benefit.............................. 612
Change in valuation allowance for Federal deferred tax assets............... (3,870)
Meals and entertainment expenses............................................ 252
Other -- net................................................................ 192
-------
Provision for income taxes.................................................. $ 865
=======
Statutory rate.............................................................. 34%
Effective rate.............................................................. 8%
</TABLE>
The components of the net deferred tax asset at December 31, 1996, and
April 16, 1996, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 16,
1996 1996
------------ ---------
<S> <C> <C>
Deferred tax assets:
Obligations under capital leases............................ $ 639 $ 734
Property, plant, and equipment.............................. 679 220
Accrued expenses............................................ 1,414 2,092
Other liabilities........................................... 300 1,615
Other assets................................................ 198 290
------ ------
Total deferred tax assets................................... 3,230 4,951
Valuation allowance......................................... (881) (4,951)
------ ------
Net deferred tax asset...................................... $2,349 $ 0
====== ======
</TABLE>
There were no deferred tax liabilities at December 31, 1996, and April 16,
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 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
during 1996 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 deferred tax assets will be
realized in the future and therefore has not established a valuation allowance
for Federal deferred tax assets at December 31, 1996. Based on the uncertainty
associated with the ability to utilize state benefits, the Company believes it
is not more likely than not that these benefits will be realized in the future
and therefore has established a valuation allowance.
12. STOCK OPTIONS
In 1996, the Board of Directors and stockholders approved a Stock Option
Plan. Under such plan, options are granted to key employees of the Company to
purchase common stock of the Company. Options granted under the 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. On the date of the Offering, 2,375,000 options were granted
with an exercise price of $12.00 per share. Additional grants were made in 1996
for 14,000 shares and 40,000 shares with an exercise price of $16.63 and $15.25,
respectively.
F-14
<PAGE> 56
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Also in 1996, the Board of Directors approved a Non-employee Directors'
Nonqualified Stock Option Plan. Under such plan, options are granted to members
of the Board of Directors who are not employees of the Company. Options granted
under the plan become exercisable over a two year period and have a term of ten
years. On the date of the Offering, 100,000 options were granted with an
exercise price of $12.00. The 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.
During 1996, 35,000 and 3,000 options with an exercise price of $12.00 and
$16.63, respectively, were forfeited and became available for future issuance.
The weighted average exercise price of options outstanding at the end of the
year, options granted during the year, and options forfeited during the year was
$12.07, $12.07, and $12.37, respectively. No options were exercisable as of
December 31, 1996, and none expired or were exercised during 1996.
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
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
and the following assumptions: a risk-free interest rate of 6.75%; an expected
life of 6 years; expected volatility of 53.94%; and no expected dividends. The
weighted-average fair value of the options issued by the Company in 1996 was
$17,985. Had the Company elected to account for the issuance of stock options
under SFAS No. 123, the compensation cost would have been $2,511 for the year
ended December 31, 1996. The pro forma net income, primary earnings per share,
and fully diluted earnings per share for the year ended December 31, 1996,
calculated as if the Company had elected to account for the issuance of stock
options under SFAS No. 123, were $8,298, $0.66, and $0.63, respectively.
13. 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. The Company also
utilizes the travel-related services of ZWA, Inc., which is owned by the
Chairman.
Due to/from affiliates -- Affiliates owed the Company $46 and $1,841 at
December 31, 1996 and 1995, respectively. The Company owed affiliates $400 at
December 31, 1996.
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
F-15
<PAGE> 57
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Affiliate sales............................... $11,610 $ 7,901 $ 7,301
Affiliate purchases........................... $ 3,097 $ 421 $ 710
</TABLE>
Allocated costs -- Prior to the 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, $6,645, and $6,128 for the period ended
April 16, 1996, and for the years ended December 31, 1995 and 1994,
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 $303, $150, and $198 for the
years ended December 31, 1996, 1995, and 1994, respectively. In 1995 and 1994,
the shared costs are included as part of the allocated costs.
Technology development agreement -- Under an arrangement with the Daily
News, the Company is reimbursed for the costs incurred in the development of
certain digital technologies. Such reimbursements totaled $100, $1,184, and
$1,956 in the years ended December 31, 1996, 1995, and 1994, respectively.
Leases -- The Company leases office space in Washington, D.C. from U.S.
News. The charges incurred for the lease were $293, $281, and $281 for the years
ended December 31, 1996, 1995, and 1994, respectively. In addition, the Company
leases office space in New York City from Applied Printing and incurred charges
of $289 for the year ended December 31, 1996. The Company also leases a facility
from the Daily News and incurred charges of $53 for the year ended December 31,
1996.
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 1997 and 1998. If the Company does not earn the
full amount of the prepaid rebate in 1997 and 1998, it would be required to
repay the difference to the vendor along with interest accrued since 1995. The
Chairman is a guarantor of the Company's contingent repayment obligation. The
Company also received prepaid rebates in March 1996 aggregating approximately
$900, all of which was earned in 1996.
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. If the Company and Applied Printing do not
jointly satisfy the cumulative minimum purchase obligations specified in the
agreement, the Chairman must repay the loan balance in full at that time. These
minimum purchase obligations have been satisfied to date, and the Company
expects, through its normal purchasing requirements, to continue to exceed such
minimum obligation through December 31, 1998. 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.
F-16
<PAGE> 58
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. 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 pretax
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, 1996, 1995, and 1994.
15. 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 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 of 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.
16. 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 company, and catalog retailing
businesses. The Company's five largest customers, excluding related parties,
comprise 35%, 37%, and 34% of sales for the years ended December 31, 1996, 1995,
and 1994, respectively. In addition, amounts due from these customers represent
29% and 31% of trade accounts receivable as of December 31, 1996 and 1995,
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.
17. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest paid (net of amounts capitalized)........ $702 $905 $815
Income taxes paid................................. $766
</TABLE>
F-17
<PAGE> 59
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Noncash investing and financing activities were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ---- -------
<S> <C> <C> <C>
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
Acquisition of property, plant, and equipment in exchange
for obligations under capital leases................... $480 $ 562
Acquisition of property, plant, and equipment in exchange
for notes payable...................................... $ 1,088
Additions to goodwill for contingent purchase price
adjustments............................................ $ 69 $ 108
Acquisitions:
Fair value of assets acquired............................ $ 8,600 $ 1,020
Cash paid................................................ (1,000)
Value of common stock issued............................. (8,500)
------- -------
Liabilities assumed...................................... $ 100 $ 20
======= =======
</TABLE>
18. 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, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents................ $2,567 $2,567 $ 666 $ 666
Marketable securities.................... $1,600 $1,600
Other assets............................. $1,470 $1,470 $1,125 $1,125
LIABILITIES:
Applied Printing Note.................... $1,600 $1,600
Long-term debt........................... $6,512 $6,400 $1,564 $1,335
Obligations under capital leases......... $2,619 $2,557 $3,991 $3,281
</TABLE>
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 -- due to the short-term maturity of the investments,
the carrying amount is a reasonable approximation of fair value.
Other assets -- the carrying amount of non-trade accounts receivables is a
reasonable approximation of fair value.
F-18
<PAGE> 60
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
19. RESTRUCTURING CHARGES
During 1994 and 1995, the Company restructured its operations in response
to the operational impact of acquisitions and the technological changes within
the industry. As part of the restructuring, the Company consolidated several
operations during 1994 and 1995 in an effort to gain operational and
administrative efficiencies. The Statements of Operations include restructuring
charges of $3,060 and $6,668 for the years ended December 31, 1995 and 1994,
respectively. 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
remaining balance of the restructuring liability as of December 31, 1996, was
$409, which the Company expects to be paid during 1997.
20. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Prior to the date of the Offering, the Company was treated as a partnership
for Federal and state income tax purposes and was not subject to tax. Had the
Company been treated as a C Corporation for the periods prior to the date of the
offering, the provision for income taxes, net income, and earnings per common
share for the year ended December 31, 1996, would have been as follows:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Provision for income taxes............................................... $ 785
Net income............................................................... $10,035
Earnings per common share:
Primary................................................................ $ 0.78
Fully diluted.......................................................... $ 0.74
</TABLE>
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales..................................... $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:
Primary..................................... $ 0.01 $ 0.16 $ 0.29 $ 0.26
Fully Diluted............................... $ 0.01 $ 0.16 $ 0.29 $ 0.25
</TABLE>
F-19
<PAGE> 61
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net sales..................................... $30,140 $29,711 $ 29,638 $28,313
Gross profit.................................. $ 7,614 $ 8,250 $ 8,030 $ 7,612
Net income (loss)............................. $ (964) $ 82 $ (4,927) $(2,003)
</TABLE>
F-20
<PAGE> 62
INTERIM FINANCIAL STATEMENTS
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 2,039 $ 2,567
Marketable securities at cost........................................ 1,600
Trade accounts receivable (net of allowances of $526 in 1997 and $472
in 1996)........................................................... 34,824 29,584
Due from affiliates.................................................. 3,837
Inventory............................................................ 6,194 4,639
Deferred income taxes................................................ 811 705
Prepaid expenses and other current assets............................ 4,077 2,485
------- -------
Total current assets....................................... 51,782 41,580
Property, plant, and equipment -- net................................ 20,274 20,544
Goodwill............................................................. 10,364 7,121
Deferred income taxes................................................ 2,023 1,644
Other assets......................................................... 1,712 1,258
------- -------
Total assets............................................... $86,155 $ 72,147
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................ $19,328 $ 19,630
Applied Printing Note................................................ 1,600
Current portion of long-term debt.................................... 435 507
Current portion of obligations under capital leases.................. 1,018 1,354
Due to affiliates.................................................... 893 354
Other current liabilities............................................ 2,123 2,407
------- -------
Total current liabilities.................................. 23,797 25,852
Long-term debt....................................................... 16,482 6,005
Obligations under capital leases..................................... 921 1,265
Other liabilities.................................................... 2,741 3,142
------- -------
Total liabilities.......................................... 43,941 36,264
------- -------
Commitments and contingencies........................................
Stockholders' equity:
Preferred stock (no par value, 10,000,000 shares authorized; no
shares issued and outstanding).....................................
Common stock (par value $0.01; 40,000,000 shares authorized; shares
issued and outstanding: 14,355,683 in 1997 and 14,349,683 in
1996).............................................................. 144 143
Additional paid-in capital........................................... 26,033 25,584
Retained earnings.................................................... 16,037 10,156
------- -------
Total stockholders' equity...................................... 42,214 35,883
------- -------
Total liabilities and stockholders' equity................. $86,155 $ 72,147
======= =======
</TABLE>
See Notes to Interim Financial Statements
F-21
<PAGE> 63
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE SIX MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues............................................ $81,072 $61,586 $41,311 $30,988
Cost of revenues.................................... 52,871 43,965 26,050 21,636
------- ------- ------- -------
Gross profit........................................ 28,201 17,621 15,261 9,352
Selling, general, and administrative expenses....... 18,123 14,311 9,521 7,255
------- ------- ------- -------
Operating income.................................... 10,078 3,310 5,740 2,097
Interest expense.................................... (508) (1,343) (298) (439)
Other income (expense) -- net....................... 71 275 (60) 438
------- ------- ------- -------
Income before provision for income taxes............ 9,641 2,242 5,382 2,096
Provision for income taxes.......................... 3,760 63 2,099 63
------- ------- ------- -------
Net income.......................................... $ 5,881 $ 2,179 $ 3,283 $ 2,033
======= ======= ======= =======
Earnings per common share (pro forma in 1996):
Primary........................................... $ 0.39 $ 0.19 $ 0.21 $ 0.16
Fully Diluted..................................... $ 0.38 $ 0.19 $ 0.21 $ 0.16
Weighted average number of common shares (pro forma
in 1996):
Primary........................................... 15,244 11,425 15,305 13,075
Fully Diluted..................................... 15,374 11,425 15,375 13,075
Pro Forma Net Income Data:
Income before provision for income taxes............ $ 2,242 $ 2,096
Pro forma provision for income taxes................ 92 63
------- -------
Pro forma net income................................ $ 2,150 $ 2,033
======= =======
Pro forma earnings per common share:
Primary........................................... $ 0.19 $ 0.16
Fully Diluted..................................... $ 0.19 $ 0.16
Pro forma weighted average number of common shares:
Primary........................................... 11,425 13,075
Fully Diluted..................................... 11,425 13,075
</TABLE>
See Notes to Interim Financial Statements
F-22
<PAGE> 64
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 5,881 $ 2,179
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization....................................... 2,962 2,690
Deferred taxes...................................................... (437)
Other............................................................... (6) 124
Management of Changes in Operating Assets and Liabilities, net of effects
of acquisitions:
Trade accounts receivable........................................... (5,234) (2,538)
Due from/to affiliates.............................................. (3,298) 180
Inventory........................................................... (1,441) 235
Other assets........................................................ (2,068) 1,134
Accounts payable and accrued expenses............................... (1,999) (2,108)
Other liabilities................................................... (830) (970)
------- -------
Net cash provided by (used in) operating activities...................... (6,470) 926
------- -------
Cash flows from investing activities:
Proceeds from the sale of marketable securities..................... 1,600
Investment in marketable securities................................. (16,244)
Property, plant, and equipment expenditures......................... (3,902) (3,591)
Entities purchased, net of cash required............................ (1,179)
Other investing activities.......................................... 12 537
------- -------
Net cash used in investing activities.................................... (3,469) (19,298)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock.................................. 46,659
Borrowings under revolving credit line.............................. 9,877
Proceeds from sale/leaseback transactions........................... 2,140
Repayment of Applied Printing Note.................................. (1,600)
Repayment of notes and capital lease obligations.................... (1,078) (1,355)
Proceeds from exercise of stock options............................. 72
Repayment of intercompany borrowings -- net......................... (18,000)
Net distributions to Applied Printing............................... (4,653)
------- -------
Net cash provided by financing activities................................ 9,411 22,651
------- -------
Net increase (decrease) in cash and cash equivalents..................... (528) 4,279
Cash and cash equivalents at beginning of period......................... 2,567 666
------- -------
Cash and cash equivalents at end of period............................... $ 2,039 $ 4,945
======= =======
</TABLE>
See Notes to Interim Financial Statements
F-23
<PAGE> 65
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Applied
Graphics Technologies, Inc. (the "Company"), which have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles, should be read in conjunction with the notes to
financial statements contained herein. In the opinion of the management of the
Company, all adjustments (consisting primarily of normal recurring accruals)
necessary for a fair presentation have been included in the financial
statements. The operating results of any quarter are not necessarily indicative
of results for any future period.
On April 16, 1996 (the "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 "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
(collectively, the "Prepress Business") of Applied Printing Technologies, L.P.
("Applied Printing"), an entity beneficially owned by the Chairman of the Board
of Directors of the Company and the Chief Executive Officer of the Company. The
Prepress Business was acquired in exchange for 9,309,900 shares of the Company's
Common Stock and $37.0 million of 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 $21.0 million and (ii) the issuance of a
promissory note by the Company to Applied Printing (the "Applied Printing Note")
of $16.0 million. The Company received net proceeds of $46.1 million from the
Offering, of which $21.0 million was used to repay Institutional Senior
Indebtedness and $16.0 million was used to invest in short-term investments to
support a standby letter of credit that collateralized the Applied Printing
Note.
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 Offering Date and the results of the Company thereafter. The
statement of operations and the statement of cash flows covering periods through
the 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 Offering Date, these divisions operated as separate business units and
maintained their own books and records. Through the 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 represents an allocation of Applied Printing's interest
expense and the related debt. Additionally, prior to the Offering Date, Applied
Printing and other related parties had provided certain corporate, general, and
administrative services to the Prepress Business including general management,
treasury, financial reporting, and legal services. Accordingly, the financial
statements prior to the Offering Date include an allocation of expenses for such
services. The results of operations and cash flows for the three months ended
March 31, 1996, may have differed had the Company operated as an independent
entity during that period.
In May 1997, the Company completed the purchase of certain assets of Star
Graphic Arts Co., Inc., a prepress company in Northern California. In June 1997,
the Company acquired certain assets of Digital Imagination, Inc., a digital
events photography business. Also in June 1997, the Company acquired certain
rights from a former joint venture partner, including the right to terminate the
original arrangement and relocate certain print operations to its Los Angeles
facility. For such acquisitions, the Company paid an aggregate of $1.2 million
from amounts borrowed under its line of credit, assumed $2.7 million of
liabilities, and granted rights to a minimum of 19,000 warrants to purchase its
Common Stock with an approximate value of $0.3 million. These acquisitions were
accounted for using the purchase method of accounting. Accordingly,
F-24
<PAGE> 66
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONCLUDED)
(UNAUDITED)
the assets and liabilities acquired have been recorded at their estimated fair
values at the dates of acquisition. The excess of the purchase price over the
fair value of the net assets acquired was $3.2 million and has been recorded as
goodwill. The effects on revenues, income before provision for income taxes, net
income, and earnings per share from these acquisitions, either individually or
in the aggregate, are not material.
Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform with the 1997 presentation.
2. ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", was issued in February 1997 and is effective for interim and annual
periods ending after December 15, 1997. This statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", establishes
standards for computing and presenting earnings per share and will require the
restatement of all prior-period earnings per share data. The implementation of
SFAS No. 128 will not have a material impact on the Company's earnings per share
data.
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure", was issued in February 1997 and is
effective for periods ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure by
superseding and consolidating previously issued accounting standards. The
financial statements of the Company are prepared in accordance with the
requirements of SFAS No. 129.
3. INVENTORY
The components of inventory (in thousands of dollars) were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Work-in-process........................................ $3,688 $2,596
Raw materials.......................................... 2,506 2,043
------ ------
Total.................................................. $6,194 $4,639
====== ======
</TABLE>
4. INCOME TAXES
The Prepress Business was treated as a partnership for Federal and state
income tax purposes prior to the Offering Date and was not subject to tax.
Concurrently with the acquisition, 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 Statement of Operations only for the periods
subsequent to the Offering Date. Had the Company been subject to income taxes
prior to the Offering Date, the provision for income taxes, net income, and
earnings per share for the six months ended June 30, 1996, would have been
$92,000, $2,150,000, and $0.19, respectively. There would have been no change to
the provision for income taxes for the three months ended June 30, 1996. The
effective rate of the provision for income taxes in 1996 was lower than would
ordinarily be expected due primarily to the reversal of both Federal and state
deferred tax asset valuation allowances.
5. EARNINGS PER SHARE
Earnings per share of common stock are computed by dividing net income by
the weighted average of the number of shares of common stock and common stock
equivalents, where dilutive, outstanding. For the 1996 period, earnings per
share of common stock represent a pro forma calculation and include the number
of shares of common stock issued and issuable to Applied Printing prior to the
Offering Date.
F-25
<PAGE> 67
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS -- (CONCLUDED)
(UNAUDITED)
6. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with related
parties (in thousands of dollars), were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
SIX MONTHS ENDED ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Affiliate sales................... $6,326 $5,502 $2,679 $2,482
Affiliate purchases............... $2,306 $1,410 $1,144 $ 919
Administrative charges............ $ 532 $1,849 $ 267 $ 547
</TABLE>
Administrative charges include charges for certain legal and computer
services provided by affiliates and for rent incurred for leases with
affiliates. Administrative charges incurred for the six and three months ended
June 30, 1996, also include $1.5 million and $0.3 million, respectively, of
costs allocated from Applied Printing for general management, treasury,
financial reporting, and legal services. Such administrative charges are
included in selling and administrative expenses in the Statements of Operations.
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes for the six months ended June 30,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Interest paid.................................................... $ 496 $ 444
Income taxes paid................................................ $ 4,044
</TABLE>
Noncash investing and financing activities for the six months ended June
30, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Notes payable issued in connection with an acquisition........... $ 488
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
Acquisitions:
Fair value of assets acquired.................................... $ 4,253
Cash paid........................................................ (1,185)
Value of stock warrants issued................................... (330)
-------
Liabilities assumed.............................................. $ 2,738
=======
</TABLE>
F-26
<PAGE> 68
=========================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY OF THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 6
Company History.......................... 14
Use of Proceeds.......................... 14
Price Range of Common Stock and Dividend
Policy................................. 14
Capitalization........................... 15
Selected Financial Data.................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 17
Business................................. 23
Management............................... 31
Selling Stockholders..................... 34
Shares Eligible for Future Sale.......... 36
Underwriting............................. 38
Legal Matters............................ 39
Experts.................................. 39
Incorporation of Certain Documents by
Reference.............................. 39
Available Information.................... 40
Index to Financial Statements............ F-1
</TABLE>
=========================================================
=========================================================
5,000,000 SHARES
[APPLIED GRAPHICS LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
COWEN & COMPANY
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1997
======================================================
<PAGE> 69
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Common Stock registered
hereby, all of which expenses, except for the Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and the Nasdaq
additional listing fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
SEC Registration Fee...................................................... $ 64,035
NASD Filing Fee........................................................... $ 21,631
Nasdaq Additional Listing Fee............................................. $ 17,500
Transfer Agent's and Registrar's Fee...................................... $ 5,000
Printing and Engraving Fees............................................... $175,000
Legal Fees and Expenses (other than Blue Sky)............................. $200,000
Accounting Fees and Expenses.............................................. $125,000
Blue Sky Fees and Expenses (including fees of counsel).................... $ 20,000
Miscellaneous............................................................. $ 71,834
--------
TOTAL........................................................... $700,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "Delaware Law") provides that a
corporation may limit the liability of each director to the corporation or its
stockholders for monetary damages except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases; and (iv) for any transaction from which the
director derives an improper personal benefit. The Certificate of Incorporation
and Bylaws provide for the elimination and limitation of the personal liability
of directors of the Company for monetary damages to the fullest extent permitted
by the Delaware Law. In addition, the Certificate of Incorporation and Bylaws
provide that if the Delaware Law is amended to authorize the further elimination
or limitation of the liability of a director, then the liability of the
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware Law, as so amended. The effect of this provision is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) through (iv) above. The provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. In addition, the Bylaws provide that the Company shall,
to the full extent permitted by the Delaware Law, as amended from time to time,
indemnify and advance expenses to each of its currently acting and former
directors, officers, employees and agents.
II-1
<PAGE> 70
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(i) Exhibits
<TABLE>
<C> <S>
1 Underwriting Agreement
5 Opinion of Shaw, Pittman, Potts and Trowbridge as to the legality of the
Common Stock being registered
23.1 Consent of Shaw, Pittman, Potts & Trowbridge (included as part of Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Coopers & Lybrand L.L.P.
*24 Power of Attorney (included on signature page)
</TABLE>
- ---------------
* Previously filed
ITEM 17. UNDERTAKINGS
(i) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(ii) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on August 29, 1997.
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)
By: /s/ FRED DRASNER
------------------------------------
Fred Drasner
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Fred Drasner, Mortimer B. Zuckerman and Martin D.
Krall, and each of them, his true and lawful attorney-in-fact and agents, with
full power of substitution and resubstitution, for and in his name, place and
stead, in any and all capacities to sign any and all amendments (including
post-effective amendments, including any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended) to this Registration Statement and any or
all other documents in connection therewith, and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission, granting unto
said authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all said attorney-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------- ---------------
<C> <S> <C>
/s/ FRED DRASNER Director, Chairman and Chief August 29, 1997
- ------------------------------------------ Executive Officer (Principal
Fred Drasner Executive Officer)
/s/ DIANE ROMANO President August 29, 1997
- ------------------------------------------
Diane Romano
/s/ MELVIN A. ETTINGER Vice Chairman, Chief Operating August 29, 1997
- ------------------------------------------ Officer and Director
Melvin A. Ettinger
/s/ LOUIS SALAMONE, JR. Senior Vice President and Chief August 29, 1997
- ------------------------------------------ Financial Officer (Principal
Louis Salamone, Jr. Financial Officer)
/s/ MARTIN D. KRALL Director, Executive Vice August 29, 1997
- ------------------------------------------ President, Chief Legal Officer
Martin D. Krall and Secretary
</TABLE>
II-3
<PAGE> 72
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------
<C> <S> <C>
/s/ MORTIMER B. ZUCKERMAN Chairman of the Board of Directors August 29, 1997
- ------------------------------------------
Mortimer B. Zuckerman*
/s/ JOHN R. HARRIS Director August 29, 1997
- ------------------------------------------
John R. Harris*
/s/ EDWARD H. LINDE Director August 29, 1997
- ------------------------------------------
Edward H. Linde*
/s/ HOWARD STRINGER Director August 29, 1997
- ------------------------------------------
Howard Stringer*
/s/ LINDA J. WACHNER Director August 29, 1997
- ------------------------------------------
Linda J. Wachner*
</TABLE>
- ------------------------
* by Martin D. Krall pursuant to power of attorney
II-4
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. NO.
- ------- ----
<C> <S> <C>
1 Underwriting Agreement
5 Opinion of Shaw, Pittman, Potts and Trowbridge as to the legality of
the Common Stock being registered
23.1 Consent of Shaw, Pittman, Potts & Trowbridge (included as part of
Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Coopers & Lybrand L.L.P.
*24 Power of Attorney (included on signature page)
</TABLE>
- ---------------
* Previously filed
II-5
<PAGE> 1
5,000,000 SHARES
APPLIED GRAPHICS TECHNOLOGIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
August , 1997
COWEN & COMPANY
BEAR, STEARNS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MONTGOMERY SECURITIES
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Dear Sirs:
1. Introductory. Applied Graphics Technologies, Inc., a Delaware
corporation (the "Company"), proposes to sell, pursuant to the terms of this
Agreement, to the several underwriters named in Schedule A hereto (the
"Underwriters," or, each, an "Underwriter"), an aggregate of 3,000,000 shares of
Common Stock, par value $.01 (the "Common Stock"), of the Company (the
"Company"). Applied Printing Technologies, L.P., a Delaware limited partnership
("APT"), proposes to sell, pursuant to the terms of this Agreement, to the
Underwriters, an aggregate of 1,750,000 shares of Common Stock. SpotLink, Inc.,
a California corporation ("SpotLink," and together with APT, the "Selling
Stockholders"), proposes to sell, pursuant to the terms of this Agreement, to
the Underwriters, an aggregate of 250,000 shares of Common Stock. The aggregate
of such 5,000,000 shares so proposed to be sold by the Company and the Selling
Stockholders is hereinafter referred to as the "Firm Stock." APT also proposes
to sell to the Underwriters, upon the terms and conditions set forth in Section
3 hereof, up to an additional 750,000 shares of Common Stock (the "Optional
Stock"). The Firm Stock and the Optional Stock are hereinafter collectively
referred to as the "Stock." Cowen & Company ("Cowen"), Bear, Stearns & Co.
("Bear Stearns"), Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Montgomery Securities ("Montgomery") are acting as representatives
of the several Underwriters and in such capacity are hereinafter referred to as
the "Representatives."
<PAGE> 2
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with,
the several Underwriters that:
(i) A registration statement on Form S-3 (File No.
333-32121), as amended by one or more pre-effective amendments thereto,
including any preeffective prospectuses included as part of the
registration statement as originally filed or as part of any amendment,
copies of which registration statement and amendment(s) have heretofore
been delivered to the Representatives, has been carefully prepared by
the Company in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed
with the Commission under the Securities Act. The term "Registration
Statement" as used in this Agreement means such registration statement,
including all financial statement schedules and exhibits, as heretofore
amended (or, if not yet effective, in the form in which it shall become
effective) and, if any post-effective amendment thereto is filed, such
registration statement as so amended, together with any information
permitted to be omitted from the registration statement when it becomes
effective pursuant to Rule 430A under the Securities Act and deemed to
be included therein as provided by said Rule 430A. The term
"Registration Statement" as used in this Agreement shall also include
any registration statement relating to the Stock that is filed and
declared effective pursuant to Rule 462(b) under the Securities Act.
The term "Prospectus" as used in this Agreement means the prospectus in
the form included in the Registration Statement (including all
information from time to time incorporated by reference therein), or,
(A) if the prospectus included in the Registration Statement omits
information in reliance on Rule 430A under the Securities Act and such
information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act, the term "Prospectus"
as used in this Agreement means the prospectus in the form included in
the Registration Statement as supplemented by the addition of the Rule
430A information contained in the prospectus filed with the Commission
pursuant to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are delivered
pursuant to Rule 434 under the Securities Act, then (i) the term
"Prospectus" as used in this Agreement means the "prospectus subject to
completion" (as such term is defined in Rule 434(g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A
information or other information contained in the form of prospectus
delivered pursuant to Rule 434(b)(2) under the Securities Act or (b)
the information contained in the term sheet described in Rule 434(b)(3)
under the Securities Act, and (ii) the date of such prospectus shall
2
<PAGE> 3
be deemed to be the date of the term sheet. The term "Preeffective
Prospectus" as used in this Agreement means the prospectus subject to
completion in the form included in the Registration Statement at the
time of the initial filing of the Registration Statement with the
Commission, and as such prospectus shall have been amended from time to
time prior to the date of the Prospectus.
(ii) The Commission has not issued or threatened to
issue any order preventing or suspending the use of any Preeffective
Prospectus, and, at its date of issue, each Preeffective Prospectus
conformed in all material respects with the requirements of the
Securities Act and did not include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and, when the Registration
Statement becomes effective and at all times subsequent thereto up to
and including the Closing Dates (as defined below), the Registration
Statement and the Prospectus and any amendments or supplements thereto
contained and will contain all material statements and information
required to be included therein by the Securities Act and conformed and
will conform in all material respects to the requirements of the
Securities Act; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, included or will
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to
information contained in or omitted from any Preeffective Prospectus or
the Registration Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any
Underwriter, directly or through you, specifically for use in the
preparation thereof; there is no franchise, lease, contract, agreement
or document required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed therein as required; and all
descriptions of any such franchises, leases, contracts, agreements or
documents contained in the Registration Statement are accurate and
complete descriptions of such documents in all material respects.
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and
except as set forth or contemplated in the Prospectus, the Company has
not incurred any material liability or obligation, direct or
contingent, or entered into any material transaction, not in the
ordinary course of
3
<PAGE> 4
business, and there has not been any material adverse change in the
condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company or any
change in the capital stock, short-term or long-term debt of the
Company.
(iv) The financial statements, together with the
related notes and schedules, set forth in the Prospectus and elsewhere
in the Registration Statement fairly present, on the basis stated in
the Registration Statement, the financial position and the results of
operations and changes in financial position of the entities shown
thereby at the respective dates or for the respective periods therein
specified. Such financial statements and related notes and schedules
have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis except as may be set forth in
the Prospectus. The selected financial and statistical data set forth
in the Prospectus under the captions "Summary Combined Financial Data",
"Unaudited Pro Forma Condensed Combined Financial Data" and "Selected
Combined Financial Data" fairly present, on the basis stated in the
Registration Statement, the information set forth therein.
(v) Deloitte & Touche LLP and Coopers & Lybrand
L.L.P., who have expressed their respective opinions on certain audited
financial statements included in the Registration Statement and the
Prospectus, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(vi) The Company has been duly organized and is
validly existing and in good standing as a corporation under the laws
of its jurisdiction of organization, with full power and authority
(corporate and other) to own or lease its properties and to conduct its
business as described in the Prospectus; the Company is in possession
of and operating in compliance with all material franchises, grants,
authorizations, licenses, permits, easements, consents, certificates
and orders required for the conduct of its business as described in the
Prospectus, all of which are valid and in full force and effect; and
the Company is duly qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where its ownership or
leasing of properties or the conduct of its business as described in
the Prospectus requires such qualification, except where the failure to
so qualify would not have a material adverse effect on the financial
condition of the Company. The Company has all requisite power and
authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and from
all public regulatory or governmental agencies and bodies to own, lease
and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and
4
<PAGE> 5
the Prospectus, except where the failure to so qualify would not have a
material adverse effect on the financial condition of the Company, and
no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome
restriction not adequately disclosed in the Registration Statement and
the Prospectus.
(vii) The Company's authorized and outstanding
capital stock is on the date hereof, and will be on the Closing Dates,
as set forth under the heading "Capitalization" in the Prospectus; the
outstanding shares of Common Stock (including on each of the Closing
Dates the outstanding shares of Stock being sold on each such Date)
conform to the description thereof in the Prospectus and have been duly
authorized and validly issued and are fully paid and nonassessable; the
outstanding shares of Common Stock (including the Stock) are duly
listed on the Nasdaq National Market and have been issued in compliance
with all federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or similar rights to
subscribe for or purchase securities. Except as disclosed in or
contemplated by the Prospectus, the Company does not have outstanding
any options or warrants to purchase, or any preemptive rights or other
rights to subscribe for or to purchase any securities or obligations
convertible into, or any contracts or commitments to issue or sell
shares of its capital stock or any such options, rights, convertible
securities or obligations, except for options granted subsequent to the
date of information provided in the Prospectus pursuant to the
Company's stock option plans. The description of the Company's stock
option plans, and the options granted or exercised thereunder, as set
forth in the Prospectus, accurately and fairly presents the information
required to be shown with respect to such plans and options.
(viii) The Stock to be issued and sold by the Company
to the Underwriters hereunder has been duly and validly authorized and,
when issued and delivered against payment therefor as provided herein,
will be duly and validly issued, fully paid and nonassessable and free
of any preemptive or similar rights and will conform to the description
thereof in the Prospectus.
(ix) Except as set forth in the Prospectus, there are
no legal or governmental proceedings pending to which the Company is a
party or of which any property of the Company is subject, which, if
determined adversely to the Company, might individually or in the
aggregate (i) prevent or adversely affect the transactions contemplated
by this Agreement, (ii) suspend the effectiveness of the Registration
Statement, (iii) prevent or suspend the use of the Preeffective
Prospectus in any jurisdiction or (iv) result in a material adverse
change in the condition
5
<PAGE> 6
(financial or otherwise), properties, business, management prospects,
net worth or results of operations of the Company; and to the best of
the Company's knowledge no such proceedings are threatened or
contemplated against the Company by governmental authorities or others.
The Company is not a party and is not subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory
body or other governmental agency or body. The description of the
Company's litigation under the heading "Business -- Legal Proceedings"
in the Prospectus is true and correct and complies with the Rules and
Regulations.
(x) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms or
provisions of or constitute a default under any indenture, mortgage,
deed of trust, note agreement or other agreement or instrument to which
the Company is a party or by which it or any of its properties is or
may be bound, the Certificate of Incorporation, By-laws or other
organizational documents of the Company, or any law, order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company, or any of its properties or will result
in the creation of a lien, except for such liens that individually and
in the aggregate would not have a material adverse effect on the
financial condition of the Company.
(xi) No consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation by the Company of the transactions contemplated by this
Agreement, except as such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under the
Securities Act or the securities or "Blue Sky" laws of any jurisdiction
in connection with the purchase and distribution of the Stock by the
Underwriters.
(xii) The Company has the full corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder (including to issue, sell and deliver the Stock), and this
Agreement has been duly and validly authorized, executed and delivered
by the Company and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except to
the extent that rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or the public policy
underlying such laws.
(xiii) The Company is in all material respects in
compliance with, and conducts its business in conformity with, all
applicable federal, state, local and foreign laws, rules and
regulations or any court or governmental agency or body; to the
knowledge of the Company, otherwise than as set forth in the
Registration Statement and the Prospectus, no
6
<PAGE> 7
prospective change in any of such federal or state laws, rules or
regulations has been adopted which, when made effective, would have a
material adverse effect on the operations of the Company.
(xiv) The Company has filed all necessary federal,
state, local and foreign income, payroll, franchise and other tax
returns and has paid all taxes shown as due thereon or with respect to
any of its properties, and there is no tax deficiency that has been or,
to the knowledge of the Company, is likely to be asserted against the
Company or any of its properties or assets that would materially
adversely affect the financial position, business or operations of the
Company.
(xv) In the ordinary course of business, employees of
the Company conduct periodic reviews of the effect of Environmental
Laws (as defined below) on the business operations and properties of
the Company, in the ordinary course of which they seek to identify and
evaluate associated costs and liabilities. The Company is in compliance
with all applicable existing federal, state, local and foreign laws and
regulations relating to the protection of human health or the
environment or imposing liability or requiring standards of conduct
concerning any Hazardous Materials ("Environmental Laws"), except for
such instances of noncompliance which, either singly or in the
aggregate, would not have a material adverse effect. The term
"Hazardous Material" means (i) any "hazardous substance" as defined by
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (ii) any "hazardous waste" as defined by the
Resource Conservation and Recovery Act, as amended, (iii) any petroleum
or petroleum product, (iv) any polychlorinated biphenyl and (v) any
pollutant or contaminant or hazardous, dangerous or toxic chemical,
material, waste or substance regulated under or within the meaning of
any other Environment Law.
(xvi) Except as set forth in the Prospectus, no
person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statement or otherwise.
(xvii) Neither the Company nor any of its respective
officers, directors, partners or affiliates have taken nor will any
take, directly or indirectly, any action designed or intended to
stabilize or manipulate the price of any security of the Company, or
which caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the
price of any security of the Company.
7
<PAGE> 8
(xviii) The Company has provided you with all
financial statements of the Company since January 1, 1996 to the date
hereof that are available to the officers of the Company, including
financial statements for the months of January through [June] [July]
1997.
(xix) The Company owns or possesses all patents,
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade
secrets and rights described in the Prospectus as being owned by it or
necessary for the conduct of its business, and the Company is not aware
of any claim to the contrary or any challenge by any other person to
the rights of the Company with respect to the foregoing. The Company's
business has not, and as now conducted and as proposed to be conducted
by the Company, does not and will not, infringe or conflict with in any
material respect patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses or other intellectual property or
franchise rights of any person. Except as described in the Prospectus,
no claim has been made against the Company alleging the infringement by
the Company of any patent, trademark, service mark, tradename,
copyright, trade secret, license in or other intellectual property
right or franchise right of any person.
(xx) The Company has performed all material
obligations required to be performed by it under all contracts that
would be required by Item 601(b)(10) of Regulation S-K to be filed as
exhibits to a registration statement on Form S-1 if filed by the
Company on the date hereof. The Company is not and, to the Company's
knowledge, any other party to any such contract is not, in default
under or in breach of any such obligations. The Company has not
received any notice of such default or breach.
(xxi) The Company is not involved in any labor
dispute, nor to the Company's knowledge, is any such dispute
threatened. The Company is not aware that (A) any executive, key
employee or significant group of employees of the Company plans to
terminate employment with the Company or (B) any such executive or key
employee is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would be violated by
the present or proposed business activities of the Company. The Company
does not have nor does it expect to have any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or
other plan which is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), to which the Company makes or ever
has made a contribution and in which any employee of the Company is or
has ever been a participant. With respect to such plans, the Company is
in compliance in
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all material respects with all applicable provisions of ERISA.
(xxii) The Company has obtained the written
agreements referred to in Section 9(l) of this Agreement.
(xxiii) The Company has, and as of the Closing Dates
will have, good and marketable title to all personal property owned or
proposed to be owned by it which is material to the business of the
Company, in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such as would
not have a material adverse effect on the Company; and any real
property and buildings held under lease by the Company are, or will be
as of the Closing Dates, held by it under valid, subsisting and
enforceable leases with such exceptions as would not have a material
adverse effect on the Company, in each case except as described in the
Prospectus.
(xxiv) The Company is insured by insurers of
recognized financial responsibility against such losses and risks and
in such amounts as are customary in the businesses in which it is
engaged or proposes to engage; and the Company does not have any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company, except as described in or contemplated by
the Prospectus.
(xxv) Other than as contemplated by this Agreement,
there is no broker, finder or other party that is entitled to receive
from the Company any brokerage or finder's fee or other fee or
commission as a result of any of the transactions contemplated by this
Agreement.
(xxvi) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxvii) Except as set forth in the Prospectus, to the
Company's knowledge, neither the Company nor any officer, director,
employee, partner or agent of the Company
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<PAGE> 10
has made any payment of funds of the Company or received or retained
any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(xxviii) The Company is not an "investment company"
or an entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended.
(b) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company as to the matters covered
thereby.
3. Representations and Warranties of the Selling Stockholders. Each of
the Selling Stockholders severally, and not jointly, represents and warrants to,
and agrees with, the several Underwriters that:
(a) Such Selling Stockholder has been duly organized and is
validly existing and in good standing as a corporate or partnership entity under
the laws of its jurisdiction of organization.
(b) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, note agreement or other
agreement or instrument to which such Selling Stockholder is a party or by which
it or any of its properties is or may be bound, the certificate of limited
partnership, the agreement of limited partnership, the certificate of
incorporation, bylaws or other applicable organizational documents of such
Selling Stockholder, or any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over such Selling Stockholder,
or any of its properties or will result in the creation of a lien, except for
such liens that individually and in the aggregate would not have a material
adverse effect on the financial condition of such Selling Stockholder.
(c) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by such Selling
Stockholder of the transactions contemplated by this Agreement, except such as
may be required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or the securities or "Blue Sky" laws of any
jurisdiction in connection with the purchase and distribution of the Stock by
the Underwriters.
(d) Such Selling Stockholder has the full applicable corporate
or partnership power and authority to enter into this Agreement and to perform
its obligations hereunder and thereunder, and this Agreement has been duly and
validly
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<PAGE> 11
authorized, executed and delivered by such Selling Stockholder and is a valid
and binding obligation of such Selling Stockholder, enforceable against such
Selling Stockholder in accordance with its terms, except to the extent that
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or the public policy underlying such laws.
(e) Such Selling Stockholder has, and as of the Closing Dates
will have, valid and marketable title to the Stock to be sold by such Selling
Stockholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer.
(f) Such Selling Stockholder has, and as of the Closing Dates
will have, full right, power and authority and all approvals required by law, if
any, to sell, transfer, assign and deliver the Stock being sold by such Selling
Stockholder hereunder and each of the several Underwriters will acquire valid
and marketable title to all of the Stock being sold to the Underwriters by such
Selling Stockholder, free and clear of any lien, claim, security interest,
encumbrance, including, without limitation, any restriction on transfer.
(g) Such Selling Stockholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Representatives, a Custody
Agreement and Power of Attorney (a "Custody Agreement") appointing Mortimer B.
Zuckerman and Fred Drasner (collectively, the "Attorneys"), as the
attorney-in-fact with authority to execute and deliver this Agreement and a
Custody Agreement (a "Custody Agreement") with The Bank of New York, as
custodian (the "Custodian") on behalf of such Selling Stockholder and to take
certain other actions with respect hereto and thereto; the Custody Agreement
constitutes and valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms; and each of such Selling Stockholder's
Attorneys is authorized, to execute and deliver this Agreement, the Custody
Agreement and the certificate referred to in Section 9(j) hereof on behalf of
such Selling Stockholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Stock to be sold by such Selling
Stockholder under this Agreement and to duly endorse (in blank or otherwise) the
certificate or certificates representing such Stock or a stock power or powers
with respect thereto, to accept payment therefor, and to otherwise act on behalf
of such Selling Stockholder in connection with this Agreement.
(h) To the best knowledge of such Selling Stockholder, the
representations and warranties of the Company contained in Section 2 are true
and correct; such Selling Stockholder has reviewed and is familiar with the
Registration Statement and the Prospectus and to the best knowledge of such
Selling Stockholder neither the Prospectus nor any amendments or supplements
thereto (including any prospectus wrapper) includes any untrue statement of a
material fact or omits to state a
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<PAGE> 12
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; such Selling
Stockholder is not prompted to sell the stock to be sold by such Selling
Stockholder hereunder by any information concerning the Company or any
subsidiary of the Company which is not set forth in the Prospectus.
4. Purchase by, and Sale and Delivery to, Underwriters -- Closing
Dates. The Company and the Selling Stockholders agree to sell to the
Underwriters the Firm Stock, and on the basis of the representations,
warranties, covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase the Firm Stock from the Company and the Selling
Stockholders, the number of shares of Firm Stock to be purchased by each
Underwriter from the Company and the Selling Stockholders being set opposite its
name in Schedule A, subject to adjustment in accordance with Section 13 hereof.
The purchase price per share to be paid by the Underwriters to
the Company and the Selling Stockholders will be $ per share (the "Purchase
Price").
The Company and the Selling Stockholders will deliver their
respective portions of the Firm Stock to the Representatives for the respective
accounts of the several Underwriters (in the form of definitive certificates,
issued in such names and in such denominations as the Representatives may direct
by notice in writing to the Company given at or prior to 12:00 Noon, New York
Time, on the second full business day preceding the First Closing Date (as
defined below) or, if no such direction is received, in the names of the
respective Underwriters or in such other names as the Representatives may
designate (solely for the purpose of administrative convenience) and in such
denominations as the Representatives may determine), at the offices of
O'Sullivan Graev & Karabell, LLP, 30 Rockefeller Plaza, 41st Floor, New York,
New York 10112, against payment of the aggregate Purchase Price therefor in same
day funds to the Company and the Selling Stockholders or their respective
designees. The time and date of the delivery and closing shall be at 10:00 A.M.,
New York Time, on August __, 1997, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery are herein referred
to as the "First Closing Date". The Closing Date and the location of delivery
of, and the form of payment for, the Firm Stock may be varied by agreement
between the Company and the Representatives. The First Closing Date may be
postponed pursuant to the provisions of Section 13.
The Company and the Selling Stockholders shall make the
respective certificates for their respective portions of the Stock available to
the Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York Time, on the business day preceding the First Closing Date
at the
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<PAGE> 13
offices of Cowen & Company, Financial Square, New York, New York 10005.
It is understood that Cowen, Bear Stearns, Merrill Lynch or
Montgomery, individually and not as a Representative of the several
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Stockholders on behalf of any Underwriter or Underwriters, for
their respective portions of the Stock to be purchased by such Underwriter or
Underwriters. Any such payment by Cowen, Bear Stearns, Merrill Lynch or
Montgomery shall not relieve such Underwriter or Underwriters from any of its or
their other obligations hereunder.
The several Underwriters agree to make a public offering of
the Firm Stock at $[ ] per share as soon after the effectiveness of the
Registration Statement as in their judgment is advisable. The Representatives
shall promptly advise the Company of the making of the public offering.
For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Stock as contemplated by the
Prospectus, APT hereby grants to the Underwriters an option to purchase,
severally and not jointly, up to an aggregate of 750,000 shares of Optional
Stock. The price per share to be paid for the Optional Stock shall be the
Purchase Price. The option granted hereby may be exercised as to all or any part
of the Optional Stock at any time, and from time to time, not more than thirty
(30) days subsequent to the effective date of this Agreement. No Optional Stock
shall be sold and delivered unless the Firm Stock previously has been, or
simultaneously is, sold and delivered. The right to purchase the Optional Stock
or any portion thereof may be surrendered and terminated at any time upon notice
by the Underwriters to APT.
The option granted hereby may be exercised by the Underwriters
by giving written notice from the Representatives to APT setting forth the
number of shares of the Optional Stock to be purchased by them and the date and
time for delivery of and payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be the First Closing
Date, but not earlier) is herein called the "Option Closing Date" and shall in
no event be earlier than two (2) business days nor later than ten (10) business
days after written notice is given. (The Option Closing Date and the First
Closing Date are herein called the "Closing Dates.") Optional Stock shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Stock set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock (subject to
adjustment by the Underwriters to eliminate odd lots). Upon exercise of the
option by the Underwriters, APT agrees to sell to the Underwriters the number of
shares of Optional Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions
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<PAGE> 14
herein set forth, to purchase the number of such shares determined as aforesaid.
APT will deliver the Optional Stock to the Underwriters (in
the form of definitive certificates, issued in such names and in such
denominations as the Representatives may direct by notice in writing to APT
given at or prior to 12:00 Noon, New York Time, on the second full business day
preceding the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as the
Representatives may designate (solely for the purpose of administrative
convenience) and in such denominations as the Representatives may determine),
against payment of the aggregate Purchase Price therefor by certified or
official bank check or checks in Clearing House funds (same day funds), payable
to the order of APT all at the offices of O'Sullivan Graev & Karabell, LLP, 30
Rockefeller Plaza, 41st Floor, New York, New York 10112. The Option Closing Date
and the location of delivery of, and the form of payment for, the Optional Stock
may be varied by agreement between APT and the Representatives. The Option
Closing Date may be postponed pursuant to the provisions of Section 13.
5. Covenants and Agreements of the Company and the Selling
Stockholders.
(a) The Company covenants and agrees with the several
Underwriters that:
(i) The Company will (A) if the Company and the
Representatives have determined not to proceed pursuant to Rule 430A,
use its best efforts to cause the Registration Statement to become
effective, (B) if the Company and the Representatives have determined
to proceed pursuant to Rule 430A, use its best efforts to comply with
the provisions of and make all requisite filings with the Commission
pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (C)
if the Company and the Representatives have determined to deliver
Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use
its best efforts to comply with all the applicable provisions thereof.
The Company will advise the Representatives promptly as to the time at
which the Registration Statement becomes effective, will advise the
Representatives promptly of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose, and will use its
best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible the lifting thereof, if issued. The Company
will advise the Representatives promptly of the receipt of any comments
of the Commission or any request by the Commission for any amendment of
or supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to
the Registration Statement or supplement to the Prospectus
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<PAGE> 15
which shall not previously have been submitted to the Representatives a
reasonable time prior to the proposed filing thereof or to which the
Representatives shall reasonably object in writing or which is not in
compliance with the Securities Act and the Rules and Regulations.
(ii) The Company will prepare and file with the
Commission, promptly upon the request of the Representatives, any
amendments or supplements to the Registration Statement or the
Prospectus which in the opinion of the Representatives may be necessary
to enable the several Underwriters to continue the distribution of the
Stock and will use its best efforts to cause the same to become
effective as promptly as possible.
(iii) If at any time after the effective date of the
Registration Statement when a prospectus relating to the Stock is
required to be delivered under the Securities Act any event relating to
or affecting the Company occurs as a result of which the Prospectus or
any other prospectus as then in effect would include an untrue
statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at
any time to amend the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representatives thereof and will
prepare an amended or supplemented prospectus which will correct such
statement or omission; and in case any Underwriter is required to
deliver a prospectus relating to the Stock nine (9) months or more
after the effective date of the Registration Statement, the Company
upon the request of the Representatives and at the expense of such
Underwriter will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the Securities Act.
(iv) The Company will deliver to the Representatives,
at or before the Closing Dates, signed copies of the Registration
Statement, as originally filed with the Commission, and all amendments
thereto including all financial statements and exhibits thereto, and
will deliver to the Representatives such number of copies of the
Registration Statement, including such financial statements but without
exhibits, and all amendments thereto, as the Representatives may
reasonably request. The Company will deliver or mail to or upon the
order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Preeffective
Prospectus as the Representatives may reasonably request. The Company
will deliver or mail to or upon the order of the Representatives on the
date of the initial public offering, and thereafter from time to time
during the period when delivery of a prospectus relating to the Stock
is required under the Securities Act, as many copies of the Prospectus,
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<PAGE> 16
in final form or as thereafter amended or supplemented as the
Representatives may reasonably request; provided, however, that the
expense of the preparation and delivery of any prospectus required for
use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to
deliver such prospectus.
(v) The Company will make generally available to its
shareholders as soon as practicable, but not later than fifteen (15)
months after the effective date of the Registration Statement, an
earnings statement which will be in reasonable detail (but which need
not be audited) and which will comply with Section 11(a) of the
Securities Act, covering a period of at least twelve (12) months
beginning after the "effective date" (as defined in Rule 158 under the
Securities Act) of the Registration Statement.
(vi) The Company will cooperate with the
Representatives to enable the Stock to be registered or qualified for
offering and sale by the Underwriters and by dealers under the
securities laws of such jurisdictions as the Representatives may
designate and at the request of the Representatives will make such
applications and furnish such consents to service of process or other
documents as may be required of it as the issuer of the Stock for that
purpose; provided, however, that the Company shall not be required to
qualify to do business or to file a general consent (other than that
arising out of the offering or sale of the Stock) to service of process
in any such jurisdiction where it is not now so subject. The Company
will, from time to time, prepare and file such statements and reports
as are or may be required of it as the issuer of the Stock, to continue
such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the
Stock. The Company will advise the Representatives promptly after the
Company becomes aware of the suspension of the qualifications or
registration of (or any such exception relating to) the Common Stock of
the Company for offering, sale or trading in any jurisdiction or of any
initiation or threat of any proceeding for any such purpose, and in the
event of the issuance of any orders suspending such qualifications,
registration or exception, the Company will, with the cooperation of
the Representatives, use its best efforts to obtain the withdrawal
thereof.
(vii) The Company will furnish to its shareholders
annual reports containing financial statements certified by independent
public accountants and with quarterly summary financial information in
reasonable detail which may be unaudited. During the period of five (5)
years from the date hereof, the Company will deliver to the
Representatives and, upon request, to each of the other Underwriters,
(A) as soon as practicable after the end of each fiscal year, copies of
the Annual Report of the Company
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<PAGE> 17
containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholder's equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public accountants; (B) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report
or financial statements furnished to or filed with the Commission, the
NASD or any securities exchange; and (C) as soon as available, copies
of any report or communication (financial or otherwise) of the Company
mailed generally to holders of its Common Stock and (D) from time to
time such other information concerning the Company as you may
reasonably request. So long as the Company has active subsidiaries,
such financial statements will be on a consolidated basis to the extent
the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally. Separate financial
statements shall be furnished for all subsidiaries whose accounts are
not consolidated but which at the time are significant subsidiaries as
defined in the Rules and Regulations.
(viii) The Company will use its best efforts to list,
subject to official notice of issuance, the Stock on the Nasdaq
National Market.
(ix) The Company will maintain a transfer agent and
registrar for its Common Stock.
(x) Prior to filing its quarterly statements on Form
10-Q, the Company will have its independent auditors perform a limited
quarterly review of its quarterly numbers.
(xi) Without the prior written consent of Cowen, the
Company will not offer, sell, assign, transfer, encumber, contract to
sell, grant an option to purchase or otherwise dispose of any shares of
Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock during the 90 days following the date on
which the price of the Common Stock to be purchased by the Underwriters
is set, other than the Company's sale of Common Stock hereunder, the
Company's issuance of Common Stock upon the exercise of stock options
which are presently outstanding and described in the Prospectus, the
grant of options pursuant to stock option plans which are presently
existing and described in the Prospectus, the issuance of warrants to
purchase Common Stock for which a contractual commitment of the Company
presently exists as described in the Prospectus and the issuance of
Common Stock pursuant to the acquisition of a business or part thereof
not affiliated with the Company or APT.
(xii) The Company will apply the net proceeds from
the sale of the Stock as set forth in the description
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<PAGE> 18
under "Use of Proceeds" in the Prospectus, which description complies
in all respects with the requirements of Item 504 of Regulation S-K.
(xiii) The Company will supply you with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Stock under the
Securities Act.
(xiv) Prior to the First Closing Date and the Option
Closing Date, the Company will furnish to you, as soon as they have
been prepared, copies of any unaudited interim financial statements of
the Company for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(xv) Prior to the Closing Dates the Company will
issue no press release or other communications directly or indirectly
and hold no press conference with respect to the Company, the financial
condition, results of operation, business, prospects, assets or
liabilities of the Company, or the offering of the Stock, without your
prior written consent. For a period of twelve (12) months following the
Closing Date, the Company will use its best efforts to provide to you
copies of each press release or other public communications with
respect to the financial condition, results of operations, business,
prospects, assets or liabilities of the Company at least twenty-four
(24) hours prior to the public issuance thereof or such longer advance
period as may reasonably be practicable.
(xvi) Any action or decision with respect to the
enforcement of the Company's rights and remedies against APT, or the
defense of its obligations to APT, shall be made by a vote of a
majority of those members of the Board of Directors of the Company (the
"Independent Directors") who have no business affiliation with Mortimer
B. Zuckerman other than as directors of the Company. Except as
otherwise determined by a vote of a majority of the Independent
Directors, the Company will preserve, protect, defend and enforce, to
the full extent permitted by applicable law, all of its rights and
remedies against APT arising under or in connection with the terms of
the Amended and Restated Conveyance Agreement (the "Conveyance
Agreement") dated as of April 16, 1996, between the Company and APT.
(xvii) Without the prior written consent of a
majority of the Independent Directors, the Company will not agree to
the amendment or modification of the Conveyance Agreement or waive the
observance of any term of the Conveyance Agreement.
(b) Each of the Selling Stockholders covenants and agrees with
the several Underwriters that such Selling
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<PAGE> 19
Stockholder will not take any action, and will not permit any of its affiliates
or subsidiaries to take any action, that would prevent the Company from
observing or performing the covenants contained in paragraphs 5(a)(xvi) and
5(a)(xvii) above.
6. Payment of Expenses.
The Company will pay (directly or by reimbursement) all costs,
fees and expenses incurred in connection with or incident to the performance of
the obligations of the Company and the Selling Stockholders under this Agreement
and in connection with the transactions contemplated hereby, including but not
limited to (i) all expenses and taxes incident to the issuance (to the extent
required) and delivery of the Stock to the Representatives; (ii) all expenses
incident to the registration of the Stock under the Securities Act; (iii) the
costs of preparing stock certificates (including printing and engraving costs);
(iv) all fees and expenses of the registrar and transfer agent of the Stock; (v)
all necessary issue, transfer and other stamp taxes in connection with the
issuance (to the extent applicable) and sale of the Stock to the Underwriters;
(vi) fees and expenses of the Company's counsel and independent accountants;
(vii) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement, each
Preeffective Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, the
"Agreement Among Underwriters" between the Representatives and the Underwriters,
the Master Selected Dealers' Agreement, the Underwriters' Questionnaire and the
Blue Sky memoranda and this Agreement; (viii) all reasonable filing fees,
attorneys' fees and expenses incurred by the Company, the Selling Stockholders
or the Underwriters in connection with exemptions from the qualifying or
registering (or obtaining qualification or registration of) all or any part of
the Stock for offer and sale and determination of its eligibility for investment
under the Blue Sky or other securities laws of such jurisdictions as the
Representatives may designate; (ix) all fees and expenses paid or incurred in
connection with filings made with the NASD; and (x) all other costs and expenses
incident to the performance of the Company's and the Selling Stockholders'
obligations hereunder which are not otherwise specifically provided for in this
Section.
7. Indemnification and Contribution.
(a) The Company and the Selling Stockholders, severally and
not jointly, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls such Underwriter within the meaning of the
Securities Act and the respective officers, directors, partners, employees,
representatives and agents of each of such Underwriter (collectively, the
"Underwriter Indemnified Parties" and, each, an "Underwriter Indemnified
Party"), against any losses, claims, damages, liabilities or expenses (including
the reasonable cost
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<PAGE> 20
of investigating and defending against any claims therefor and reasonable
counsel fees incurred in connection therewith), joint or several, which may be
based upon the Securities Act, or any other statute or at common law, on the
ground or alleged ground that any Preeffective Prospectus, the Registration
Statement or the Prospectus (or any Preeffective Prospectus, the Registration
Statement or the Prospectus as from time to time amended or supplemented)
includes or allegedly includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, unless such statement or omission was made in reliance
upon, and in conformity with, written information furnished to the Company by
any Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof; provided, however, that the indemnity and hold
harmless obligations of SpotLink shall be to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with information furnished
by SpotLink to the Company or any Underwriter, directly or through any
representative of SpotLink specifically for inclusion therein; provided further,
however, that with respect to any untrue statement or omission or alleged untrue
statement or omission made in any Preeffective Prospectus, the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter Indemnified Party from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the shares of Stock concerned
to the extent that any such loss, claim, damage, liability or expense of such
Underwriter Indemnified Party results from the fact that a copy of the
Prospectus was not sent or given to such person at or prior to the written
confirmation of the sale of such shares of Stock to such person as required by
the Securities Act and if the untrue statement or omission concerned has been
corrected in the Prospectus, unless such failure to deliver was the result of
the breach by the Company of Section 5(a)(iii) or (iv) hereof. The Company and
the Selling Stockholders will be entitled to participate at their own expense in
the defense or, if they so elect, to assume the defense of any suit brought to
enforce any such liability, but if the Company and the Selling Stockholders
elect to assume the defense, such defense shall be conducted by counsel chosen
by them. In the event the Company and the Selling Stockholders elect to assume
the defense of any such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company and the Selling Stockholders shall have specifically authorized the
retaining of such counsel or (ii) the parties to such suit include any such
Underwriter Indemnified Parties, and the Company and such Underwriter
Indemnified Parties have been advised by counsel to the Underwriters that one or
more legal defenses may be available to it or them which may not be available to
the Company and the Selling Stockholders, in which case the Company and the
Selling Stockholders shall not be entitled to assume the defense of such
20
<PAGE> 21
suit notwithstanding their obligation to bear the fees and expenses of such
counsel. In no event shall the Company and the Selling Stockholders be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel, for all Underwriter Indemnified
Parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances unless the Company and the Selling Stockholders, on the one hand,
and such Underwriter Indemnified Parties, on the other hand, have been advised
by counsel to the Underwriter Indemnified Parties that one or more factual or
legal defenses may be available to one or more of the Underwriter Indemnified
Parties which may not be available to all of the Underwriter Indemnified
Parties. The Company and the Selling Stockholders shall not be liable to
indemnify any person for any settlement of any such claim effected without the
consent of the Company and the Selling Stockholders, respectively. This
indemnity agreement is not exclusive and will be in addition to any liability
which the Company or the Selling Stockholders might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or in
equity to each Underwriter Indemnified Party.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the "Company
Indemnified Parties") and the Selling Stockholders and each person, if any, who
controls each Selling Stockholder within the meaning of the Securities Act
(collectively, the "Selling Stockholders Indemnified Parties"), against any
losses, claims, damages, liabilities or expenses (including, unless the
Underwriter or Underwriters elect to assume the defense, the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which arise out of or are
based in whole or in part upon the Securities Act, the Exchange Act or any other
federal, state, local or foreign statute or regulation, or at common law, on the
ground or alleged ground that any Preeffective Prospectus, the Registration
Statement or the Prospectus (or any Preeffective Prospectus, the Registration
Statement or the Prospectus, as from time to time amended and supplemented)
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
but only insofar as any such statement or omission was made in reliance upon,
and in conformity with, written information furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof. Such Underwriter shall be entitled to participate at
its own expense in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if such Underwriter elects
to assume the defense, such defense shall be conducted by counsel chosen by it.
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<PAGE> 22
In the event that any Underwriter elects to assume the defense of any such suit
and retain such counsel, the Company Indemnified Parties, the Selling
Stockholders Indemnified Parties and any other Underwriter or Underwriters or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them, respectively.
In no event shall the Underwriters be liable for fees and expenses of more than
one counsel (in addition to any local counsel) separate from its own counsel,
for all Company Indemnified Parties and Selling Stockholders Indemnified Parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising our of the same general allegations or
circumstances unless the Underwriters and such Company Indemnified Parties and
Selling Stockholders Indemnified Parties have been advised by counsel to the
Company Indemnified Parties and Selling Stockholders Indemnified Parties that
one or more factual or legal defenses may be available to one or more of the
Company Indemnified Parties or Selling Stockholders Indemnified Parties which
may not be available to all of the Company Indemnified Parties and Selling
Stockholders Indemnified Parties. The Underwriter against whom indemnity may be
sought shall not be liable to indemnify any person for any settlement of any
such claim effected without such Underwriter's consent. This indemnity agreement
is not exclusive and will be in addition to any liability which such Underwriter
might otherwise have and shall not limit any rights or remedies which may
otherwise be available at law or in equity to any Company Indemnified Party or
Selling Stockholders Indemnified Party.
(c) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the offering
of the Stock. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and
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<PAGE> 23
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by either of the Company or Selling Stockholders
or the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it would
not be just and equitable if contribution were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating, defending, settling or compromising any such
claim. Notwithstanding the provisions of this subsection (c), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the shares of the Stock underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. The Underwriters'
obligations to contribute are several in proportion to their respective
underwriting obligations and not joint. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(d) Each party indemnified under the provisions of Sections
7(a) or 7(b) agrees that, upon the service of a summons or other initial legal
process upon it in any action or suit instituted against it or upon its receipt
of written notification of the commencement of any investigation or inquiry of,
or proceedings against, it in respect of which indemnity may be sought on
account of any indemnity agreement contained in such sections, it will promptly
give written notice (herein called the "Notice") of such service or notification
to the party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such sections shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceedings to
which the Notice would have related to the extent such indemnifying party was
materially prejudiced by the failure to give the Notice, but the omission to
notify such indemnifying party or parties of any such service or notification
shall not relieve such indemnifying party or parties from any liability which it
or they may have to the indemnified party for contribution or otherwise than on
account of its indemnity agreement contained in Sections 7(a) or 7(b).
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<PAGE> 24
(e) In addition to their other obligations under Section 7(a)
hereof, each of the Company and the Selling Stockholders severally agree that,
as an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon (i) any statement or
omission or any alleged statement or omission or (ii) any breach or inaccuracy
in their representations and warranties, they will reimburse each Underwriter on
a quarterly basis for all legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's and the Selling Stockholders'
obligation to reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, each Underwriter shall promptly return
it to the Company and the Selling Stockholders, as the case may be, together
with interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
announced from time to time by Citibank, N.A., New York, New York (the "Prime
Rate"). Any such interim reimbursement payments which are not made to an
Underwriter within 30 days of a written request for reimbursement shall bear
interest at the Prime Rate from the date of such request. This expense
reimbursement agreement will be in addition to any other liability which the
Company and the Selling Stockholders may otherwise have.
(f) In addition to its other obligations under Section 7(b)
hereof, each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in Section 7(b) hereof which relates to information
furnished by such Underwriter to the Company hereunder, it will reimburse the
Company and the Selling Stockholders (and, to the extent applicable, each
officer, director or controlling person) on a quarterly basis for all legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company and the Selling
Stockholders (and, to the extent applicable, each officer, director or
controlling person) for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Company and the Selling Stockholders (and, to the extent
applicable, each officer, director or controlling person) shall promptly return
it to the Underwriter together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which are
not made
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<PAGE> 25
to the Company and the Selling Stockholders within thirty (30) days of a written
request for reimbursement shall bear interest at the Prime Rate from the date of
such request. This indemnity agreement will be in addition to any liability
which such Underwriter may otherwise have.
(g) No indemnifying party shall, without the prior written
consent of the indemnified parties, settle or compromise or consent to the entry
of any judgment with respect to any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever in respect of which indemnification or contribution could be
sought under this Section 7 (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(h) Notwithstanding any other provision of this Agreement, the
liability of each Selling Stockholder under the representations and warranties
contained in Section 3 hereof and under the indemnity and contribution
agreements contained in the provisions of this Section 7 shall be limited to an
amount equal to the public offering price of the shares of stock sold by such
Selling Stockholder to the Underwriters minus the amount of the underwriting
discount paid thereon to the Underwriters by such Selling Stockholder.
8. Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by them respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, the Company, the
Selling Stockholders, any of their respective officers, directors or partners or
any controlling person, and shall survive delivery of and payment for the Stock.
9. Conditions of Underwriters' Obligations. The respective obligations
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company
and the Selling Stockholders, to compliance at and as of the Closing Dates by
the Company and the Selling Stockholders with their respective covenants and
agreements herein contained and other provisions hereof to be satisfied at or
prior to the Closing Dates, and to the following additional conditions:
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<PAGE> 26
(a) The Registration Statement shall have become
effective and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of the
Company, the Selling Stockholders or the Representatives,
shall be threatened by the Commission, and any request for
additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the reasonable
satisfaction of the Representatives. Any filings of the
Prospectus, or any supplement thereto, required pursuant to
Rule 424(b) or Rule 434 of the Rules and Regulations, shall
have been made in the manner and within the time period
required by Rule 424(b) and Rule 434 of the Rules and
Regulations, as the case may be.
(b) The Representatives shall have been satisfied
that there shall not have occurred any change prior to the
Closing Dates in the condition (financial or otherwise),
properties, business, management, prospects, net worth or
results of operations of the Company, or any change in the
capital stock, short-term or long-term debt of the Company,
such that (i) the Registration Statement or the Prospectus, or
any amendment or supplement thereto, contains an untrue
statement of fact which, in the opinion of the
Representatives, is material, or omits to state a fact which,
in the opinion of the Representatives, is required to be
stated therein or is necessary to make the statements therein
not misleading, or (ii) it is impracticable in the reasonable
judgment of the Representatives to proceed with the public
offering or purchase the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no
legal or governmental action, suit or proceeding affecting the
Company which is material and adverse to the Company or which
affects or may affect the Company's ability to perform its
respective obligations under this Agreement shall have been
instituted or threatened and there shall have occurred no
material adverse development in any existing such action, suit
or proceeding.
(d) At the time of execution of this Agreement, the
Representatives shall have received from Deloitte & Touche
LLP, independent certified public accountants, a letter, dated
the date hereof, in form and substance satisfactory to the
Underwriters.
(e) The Representatives shall have received from
Deloitte & Touche LLP, independent certified public
accountants, letters, dated the Closing Dates, to the
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<PAGE> 27
effect that such accountants reaffirm, as of the Closing
Dates, and as though made on the Closing Dates, the statements
made in the letter furnished by such accountants pursuant to
paragraph (d) of this Section 9.
(f) The Representatives shall have received from
Shaw, Pittman, Potts & Trowbridge, counsel for the Company and
APT, opinions, dated the Closing Dates, in substance
reasonably satisfactory to the Representatives.
(g) The Representatives shall have received from ,
counsel for SpotLink, opinions, dated the Closing Dates, in
substance reasonably satisfactory to the Representatives.
(h) The Representatives shall have received from
O'Sullivan Graev & Karabell, LLP, counsel for the
Underwriters, an opinion dated the First Closing Date in
substance reasonably satisfactory to the Representatives.
(i) The Representatives shall have received
certificates, dated the Closing Dates, of the Chairman and
Chief Executive Officer and the chief financial or accounting
officer of the Company to the effect that:
(i) No stop order suspending the effectiveness
of the Registration Statement has been issued, and, to
the best of the knowledge of the signers, no proceedings
for that purpose have been instituted or are pending or
contemplated under the Securities Act;
(ii) Neither any Preeffective Prospectus, as of
its date, nor the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, as
of the time when the Registration Statement became
effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue
statement of a material fact or omitted to state any
material fact required to be stated therein or necessary
to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(iii) The representations and warranties of the
Company in this Agreement are true and correct at and as
of the Closing Dates, and the Company has complied with
all the agreements and performed or satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Dates; and
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<PAGE> 28
(iv) Since the respective dates as of which
information is given in the Registration Statement and
the Prospectus, and except as disclosed in or
contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a
material adverse change in the condition (financial or
otherwise), properties, business, management, prospects,
net worth or results of operations of the Company; (ii)
the business and operations conducted by the Company have
not sustained a loss by strike, fire, flood, accident or
other calamity (whether or not insured) of such a
character as to interfere materially with the conduct of
the business and operations of the Company; (iii) no
legal or governmental action, suit or proceeding is
pending or, to the Company's knowledge, threatened
against the Company which is material to the Company,
whether or not arising from transactions in the ordinary
course of business, or which may materially and adversely
affect the transactions contemplated by this Agreement;
(iv) the Company has not incurred any material liability
or obligation, direct, contingent or indirect, or entered
into a material transaction, not in the ordinary course
of business; (v) the Company has not made any change in
its capital stock (except pursuant to its stock plans),
made any material change in its short-term or funded debt
or repurchased or otherwise acquired any of the Company's
capital stock; and (vi) the Company has not declared or
paid any dividend, or made any other distribution, upon
its outstanding capital stock payable to stockholders of
record on a date prior to the Closing Date.
(j) The Representatives shall have received
certificates, dated the Closing Dates, of the Attorneys for
each Selling Stockholder to the effect that, as of each such
Closing Date, such Attorneys have not been informed that the
representations and warranties made by each Selling
Stockholder in this Agreement are not true and correct at and
as of the Closing Dates, and each Selling Stockholder has not
complied with all the agreements and not performed or
satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Dates; and
(k) The Company and the Selling Stockholders shall
have furnished to the Representatives such additional
certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Dates,
of the representations and warranties made herein by them and
as to compliance at and as of the
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<PAGE> 29
Closing Dates by them with their covenants and agreements
herein contained and other provisions hereof to be satisfied
at or prior to the Closing Dates, and as to satisfaction of
the other conditions to the obligations of the Underwriters
hereunder.
(l) The Representatives shall have received the
written agreements of the Selling Stockholders and the limited
partners and general partner of APT in the form of Exhibit I
hereto.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company and the Selling Stockholders
will furnish to the Representatives conformed copies of such opinions,
certificates, letters and other documents as the Representatives shall
reasonably request. If any of the conditions hereinabove provided for in this
Section shall not have been satisfied when and as required by this Agreement,
this Agreement may be terminated by the Representatives by notifying the Company
and the Selling Stockholders of such termination in writing or by telegram at or
prior to the Closing Dates, but the Representative shall be entitled to waive
any of such conditions.
10. Effective Date. This Agreement shall become effective immediately
as to Sections 6, 7, 8, 10, 11, 12, 14, 15, 16, 17 and 18 and, as to all other
provisions, at 11:00 a.m. New York Time on the first full business day following
the effectiveness of the Registration Statement or at such earlier time after
the Registration Statement becomes effective as the Representatives may
determine on and by notice to the Company or by release of any of the Stock for
sale to the public. For the purposes of this Section 10, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
11. Termination. This Agreement (except for the provisions of Section
6) may be terminated by the Company at any time before it becomes effective in
accordance with Section 10 by notice to the Representatives and the Selling
Stockholders and may be terminated by the Representatives at any time before it
becomes effective in accordance with Section 10 by notice to the Company and the
Selling Stockholders. In the event of any termination of this Agreement under
this or any other provision of this Agreement, there shall be no liability of
any party to this Agreement to any other party, other than as provided in
Sections 6, 7 and 12 and other than as provided in Section 13 as to the
liability of defaulting Underwriters.
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<PAGE> 30
This Agreement may be terminated after it becomes effective by
the Representatives by notice to the Company and the Selling Stockholders (i) if
at or prior to the First Closing Date or the Option Closing Date trading in
securities on the Nasdaq National Market, the New York Stock Exchange or the
American Stock Exchange shall have been suspended or minimum or maximum prices
shall have been established on any such exchange or market, or a banking
moratorium shall have been declared by New York or United States authorities;
(ii) trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market; (iii) if at or prior to the First
Closing Date or the Option Closing Date there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign power or of
any other insurrection or armed conflict involving the United States or (B) any
change in financial markets or any calamity or crisis which, in the judgment of
the Representatives, makes it impractical or inadvisable to offer or sell the
Firm Stock or Optional Stock, as applicable on the terms contemplated by the
Prospectus; (iv) if there shall have been any development or prospective
development involving particularly the business or properties or securities of
the Company or the transactions contemplated by this Agreement, which, in the
judgment of the Representatives, makes it impracticable or inadvisable to offer
or deliver the Firm Stock or the Optional Stock, as applicable on the terms
contemplated by the Prospectus; (v) if there shall be any litigation or
proceeding, pending or threatened, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Firm Stock or Optional Stock, as applicable, on the terms contemplated by the
Prospectus; or (vi) if there shall have occurred any of the events specified in
the immediately preceding clauses (i) - (v) together with any other such event
that makes it, in the judgment of the Representatives, impractical or
inadvisable to offer or deliver the Firm Stock or Optional Stock, as applicable
on the terms contemplated by the Prospectus.
12. Reimbursement of Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 11 or shall be
terminated by the Representatives under Section 9 or Section 11, the Company
will bear and pay the expenses specified in Section 6 hereof and, in addition to
its obligations pursuant to Section 7 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Stock, and
promptly upon demand the Company will pay such amounts to you as
Representatives.
13. Substitution of Underwriters. If any Underwriter or Underwriters
shall default in its or their obligations to purchase shares of Stock hereunder
and the aggregate number of
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<PAGE> 31
shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of shares
underwritten, the other Underwriters shall be obligated severally, in proportion
to their respective commitments hereunder, to purchase the shares which such
defaulting Underwriter or Underwriters agreed but failed to purchase. If any
Underwriter or Underwriters shall so default and the aggregate number of shares
with respect to which such default or defaults occur is more than ten percent
(10%) of the total number of shares underwritten and arrangements satisfactory
to the Representatives and the Company for the purchase of such shares by other
persons are not made within forty-eight (48) hours after such default, this
Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 13, (i) the
Company and the Selling Stockholders shall have the right to postpone the
Closing Dates for a period of not more than five (5) full business days in order
that the Company and the Selling Stockholders may effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or in
any other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective numbers of shares to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting Underwriter of
its liability to the Company, the Selling Stockholders or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 13 shall be without liability on the part of
any non-defaulting Underwriter, the Selling Stockholders or the Company, except
for expenses to be paid or reimbursed pursuant to Section 6 and except for the
provisions of Section 7.
14. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed
to you, as their Representatives c/o Cowen & Company at Financial Square, New
York, New York 10005 except that notices given to an Underwriter pursuant to
Section 7 hereof shall be sent to such Underwriter at the address furnished by
the Representatives, if sent to the Company or APT, shall be mailed, delivered
or telegraphed and confirmed c/o Applied Graphics Technologies, Inc. at 28 West
23rd Street, 11th Floor, New York, New York 10010 or if sent to SpotLink, shall
be mailed, delivered or telegraphed and confirmed to c/o Western International
Media Corporation, 8544 Sunset Boulevard, Los Angeles, California 90069,
Attention: President.
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<PAGE> 32
15. Successors. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company, the Selling Stockholders and
their respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
other than the persons mentioned in the preceding sentence any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the Selling
Stockholders contained in this Agreement shall also be for the benefit of the
person or persons, if any, who control any Underwriter or Underwriters within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several Underwriters shall also be for the
benefit of each director of the Company, each of its officers who has signed the
Registration Statement and the person or persons, if any, who control the
Company or the Selling Stockholders within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
16. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
17. Authority of the Representatives. In connection with this
Agreement, you will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by either of you, as a Representative, will be
binding on all the Underwriters.
18. Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
19. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement
32
<PAGE> 33
may be amended or modified, and the observance of any term of this Agreement may
be waived, only by a writing signed by the Company, the Selling Stockholders and
the Representatives.
20. Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
33
<PAGE> 34
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between us.
Very truly yours,
APPLIED GRAPHICS TECHNOLOGIES, INC.
By:_____________________________________
Name:
Title:
SELLING STOCKHOLDERS
By:_____________________________________
Mortimer B. Zuckerman
Attorney-in-Fact for Applied
Printing Technologies, L.P.
and SpotLink, Inc.
By:_____________________________________
Fred Drasner
Attorney-in-Fact for Applied
Printing Technologies, L.P.
and SpotLink, Inc.
Accepted and delivered as of
the date first above written:
COWEN & COMPANY,
Acting on its own behalf
and as Representative of the several
Underwriters referred to in the
foregoing Agreement.
By: Cowen Incorporated,
its general partner
By:______________________________
Name:
Title:
<PAGE> 35
BEAR, STEARNS & CO.
Acting on its own behalf
and as Representative of the several
Underwriters referred to in the
foregoing Agreement.
By:______________________________
Name:
Title:
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
Acting on its own behalf
and as Representative of the several
Underwriters referred to in the
foregoing Agreement.
By:______________________________
Name:
Title:
MONTGOMERY SECURITIES,
Acting on its own behalf
and as Representative of the several
Underwriters referred to in the
foregoing Agreement.
By:______________________________
Name:
Title:
<PAGE> 36
SCHEDULE A
<TABLE>
<CAPTION>
Number
of Firm
Shares
to be
Name Purchased
---- ---------
<S> <C>
Cowen & Company .......................................................... [ ]
Bear, Stearns & Co. ...................................................... [ ]
Merrill Lynch, Pierce, Fenner & Smith Incorporated. ...................... [ ]
Montgomery Securities .................................................... [ ]
</TABLE>
<PAGE> 37
EXHIBIT I
<PAGE> 1
August 29, 1997
Applied Graphics Technologies, Inc.
28 West 23rd Street
New York, NY 10010
Ladies and Gentlemen:
We have acted as counsel to Applied Graphics Technologies, Inc., a
Delaware corporation (the "Company"), and to Applied Printing Technologies, L.P.
("Applied Printing"), in connection with the registration of 5,000,000 shares
(the "Shares") of the Company's common stock, par value $.01 per share (the
"Common Stock"), consisting of 3,000,000 shares being offered by the Company
(the "Company Shares"), 2,000,000 shares being offered by certain selling
stockholders, including Applied Printing (the "Selling Stockholders' Shares"),
and 750,000 shares of Common Stock (the "Option Shares") being offered by
Applied Printing solely to cover the underwriters' over-allotment option, if
exercised, pursuant to a Registration Statement on Form S-3 under the Securities
Act of 1933, as amended (No. 333-32121) (the "Registration Statement"), and with
the proposed sale of the Shares and, if the over-allotment option is exercised,
the Option Shares, to the public through certain underwriters.
Based upon our examination of the originals or copies of such
documents, corporate records, certificates of officers of the Company and other
instruments as we have deemed necessary and upon the laws as presently in
effect, we are of the opinion that (i) the Company Shares are duly authorized,
and upon issuance and delivery in accordance with the underwriting agreement
referred to in the Registration Statement, the Company Shares will be validly
issued, fully paid and nonassessable, and (ii) the Selling Stockholders' Shares
and the Option Shares have been validly issued and are fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus that constitutes a part of the Registration
Statement.
Very truly yours,
/s/ SHAW, PITTMAN, POTTS & TROWBRIDGE
SHAW, PITTMAN, POTTS & TROWBRIDGE
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Applied Graphics Technologies, Inc.
New York, New York
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-32121 of Applied Graphics Technologies, Inc. on Form S-3 of our report
dated March 12, 1997, included in the Annual Report on Form 10-KA of Applied
Graphics Technologies, Inc. for the year ended December 31, 1996, and to the
use of our report dated March 12, 1997, appearing in the Prospectus, which is
part of this Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, NY
August 27, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of Applied Graphics
Technologies, Inc. on Form S-3 (Registration No. 333-32121) of our report
dated March 8, 1996, on our audits of the combined financial statements of the
Predecessor Group to Applied Graphics Technologies, Inc. as of December 31,
1995 and for each of the two years in the period ended December 31, 1995. We
also consent to the reference to our firm under the caption "Experts".
Coopers & Lybrand L.L.P.
New York, New York
August 27, 1997
