Exhibit 99.3
Applied Graphics, Inc.
Financial Statements
Nine Months Ended July 31, 2006 and 2005
Contents
| | |
Financial Statements | | |
Balance Sheets | | 1 |
Statements of Operations | | 2 |
Statements of Cash Flows | | 3 |
Notes to Financial Statements | | 4 |
Applied Graphics, Inc.
Balance Sheets
| | | | | | |
| | | October 31,
2005 | | July 31, 2006 |
| | | | | (Unaudited) |
Assets | | | | | | |
Current assets: | | | | | | |
Cash | | $ | — | | $ | 44,543 |
Accounts receivable, net of allowance for doubtful accounts of $30,000 | | | 4,590,156 | | | 4,592,338 |
Inventory | | | 592,095 | | | 753,386 |
Employee advances | | | 127,310 | | | 125,724 |
Prepaid expenses | | | 84,424 | | | 105,760 |
Deferred tax asset | | | 123,990 | | | 127,780 |
| | | | | | |
Total current assets | | | 5,517,975 | | | 5,749,531 |
Property and equipment, net | | | 359,495 | | | 313,699 |
Other assets: | | | | | | |
Employee advances | | | 112,500 | | | 84,375 |
Deposits | | | 45,378 | | | 47,368 |
Cash surrender value of life insurance | | | 647,615 | | | 688,568 |
Goodwill | | | 220,961 | | | 220,961 |
| | | | | | |
| | | 1,026,454 | | | 1,041,272 |
| | | | | | |
Total assets | | $ | 6,903,924 | | $ | 7,104,502 |
| | | | | | |
Liabilities and stockholders’ equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable—trade | | $ | 1,243,625 | | $ | 1,012,876 |
Line of credit | | | 2,100,858 | | | 2,444,470 |
Customer deposits | | | 43,862 | | | 155,768 |
Income taxes payable | | | 14,790 | | | 111,181 |
Current portion of capital lease obligations | | | 12,961 | | | 12,961 |
Accrued expenses | | | 1,542,154 | | | 1,242,535 |
| | | | | | |
Total current liabilities | | | 4,958,250 | | | 4,979,791 |
Capital lease obligations, less current portion | | | 13,715 | | | 4,528 |
Deferred tax liability | | | 71,250 | | | 55,040 |
Commitments and contingencies | | | 225,000 | | | 225,000 |
Notes payable – related party | | | 150,000 | | | — |
| | | | | | |
Total liabilities | | | 5,418,215 | | | 5,264,359 |
Stockholders’ equity: | | | | | | |
Class A, common stock, $1 par value, 4,000 units authorized, 3,795 shares issued and outstanding | | | 3,795 | | | 3,795 |
Additional paid-in capital | | | 265,412 | | | 265,412 |
Retained earnings | | | 1,216,502 | | | 1,570,936 |
| | | | | | |
Total stockholders’ equity | | | 1,485,709 | | | 1,840,143 |
| | | | | | |
Total liabilities and stockholders’ equity | | $ | 6,903,924 | | $ | 7,104,502 |
| | | | | | |
See accompanying notes to financial statements.
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Applied Graphics, Inc.
Statements of Operations
| | | | | | | | |
| | | Nine months Ended July 31, | |
| | | 2005 | | | 2006 | |
| | | (Unaudited) | |
Revenue | | $ | 21,873,528 | | | $ | 24,394,436 | |
Cost of goods sold | | | 14,144,129 | | | | 15,777,894 | |
| | | | | | | | |
Gross profit | | | 7,729,399 | | | | 8,616,542 | |
Operating expenses: | | | | | | | | |
Selling, general, and administrative expenses | | | 7,225,675 | | | | 7,808,590 | |
Depreciation | | | 106,200 | | | | 99,566 | |
| | | | | | | | |
Income from operations | | | 397,524 | | | | 708,386 | |
Other income (expense): | | | | | | | | |
Other income | | | 9,987 | | | | 58,474 | |
Loss on disposal of property and equipment | | | — | | | | (41,839 | ) |
Interest expense | | | (116,098 | ) | | | (138,839 | ) |
| | | | | | | | |
Total other expense | | | (106,111 | ) | | | (122,204 | ) |
| | | | | | | | |
Income before taxes | | | 291,413 | | | | 586,182 | |
Income tax expense | | | (90,000 | ) | | | (231,748 | ) |
| | | | | | | | |
Net income | | $ | 201,413 | | | $ | 354,434 | |
| | | | | | | | |
See accompanying notes to financial statements.
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Applied Graphics, Inc
Statements of Cash Flows
| | | | | | | | |
| | | Nine months Ended July 31, | |
| | | 2005 | | | 2006 | |
| | | (Unaudited) | |
Cash flows from operating activities | | | | | | | | |
Net income | | $ | 201,413 | | | $ | 354,434 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation | | | 106,200 | | | | 99,566 | |
Loss on disposal of property and equipment | | | — | | | | 41,839 | |
Change in assets: | | | | | | | | |
Accounts receivable | | | 90,154 | | | | (2,182 | ) |
Inventory | | | (226,852 | ) | | | (161,291 | ) |
Employee advances | | | 62,233 | | | | 29,711 | |
Prepaid expenses and other | | | (216,008 | ) | | | (68,069 | ) |
Change in liabilities: | | | | | | | | |
Accounts payable | | | (123,949 | ) | | | (508,061 | ) |
Accrued expenses and other | | | (13,194 | ) | | | 169,780 | |
| | | | | | | | |
Net cash used in operating activities | | | (120,003 | ) | | | (44,273 | ) |
Cash flows from investing activities | | | | | | | | |
Purchases of property and equipment | | | (108,852 | ) | | | (95,609 | ) |
Cash flows from financing activities | | | | | | | | |
Net line of credit borrowings | | | 269,313 | | | | 343,612 | |
Payments on capital lease obligations | | | (15,458 | ) | | | (9,187 | ) |
Payments of notes payable – related party | | | (25,000 | ) | | | (150,000 | ) |
| | | | | | | | |
Net cash provided by financing activities | | | 228,855 | | | | 184,425 | |
| | | | | | | | |
Change in cash and cash equivalents | | | — | | | | 44,543 | |
Cash and cash equivalents, beginning of period | | | — | | | | — | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | — | | | $ | 44,543 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | | |
Cash paid during the year for taxes | | $ | 190,320 | | | $ | 157,339 | |
Cash paid during the year for interest | | $ | 116,098 | | | $ | 138,839 | |
See accompanying notes to financial statements.
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Applied Graphics, Inc.
Notes to Financial Statements
July 31, 2006 and 2005
1. Description of the Business
Applied Graphics, Inc. (the Company) consists of eleven business locations, which provide business forms, products, custom printing and specialty promotional items to businesses and individuals. The Company analyzes, competitively bids, procures, manages and executes production programs on behalf of clients and serves as a complete outsource for the back-end execution of all their marketing efforts.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures 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.
Revenue Recognition
Revenue is recognized when the product is shipped from a third party to the customer, which is the time that title transfers. In accordance with EITF Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, we recognize revenue on a gross basis, as opposed to a net basis similar to a commission arrangement, because we bear the risks and benefits associated with revenue-generated activities by: (1) acting as a principal in the transaction; (2) establishing prices; (3) being responsible for fulfillment of the order; (4) taking the risk of loss for collection, delivery and returns; and (5) marketing our products, among other things.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms. Invoices require payment within 30 to 60 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Customer account balances with invoices dated over 90 days old are considered delinquent. Interest is not accrued on outstanding balances.
The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Fully reserved receivables are reviewed on a monthly basis and uncollectible accounts are written off when all reasonable collection efforts have been exhausted.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by the first-in, first-out method, and market represents the lower of replacement cost or estimated realizable value. Inventory consists primarily of finished goods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. The estimated useful lives, by asset class, are as follows:
| | |
Leasehold improvements | | 15 years |
Computer equipment | | 3 -5 years |
Furniture and fixtures | | 7 years |
Goodwill
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is tested for impairment annually, or more frequently if circumstances indicate a possible impairment may exist. The Company evaluates the recoverability of goodwill using a two-step impairment test. For goodwill impairment review purposes, the Company has one reporting unit. In the first step, the fair value for the Company is compared to its book value
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including goodwill. In the case that the fair value is less than the book value, a second step is performed which compares the implied fair value of goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values and the net fair values of the identifiable assets and liabilities. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment.
Shipping and Handling Costs
Shipping and handling costs are classified in cost of sales in the statement of operations.
Income Taxes
The Company records its income tax liability in accordance with Financial Accounting Standards Board Statement 109 (“FAS 109”), Accounting for Income Taxes. Under the provisions of FAS 109, an entity recognizes deferred tax assets and liabilities for future tax consequences of events that have been previously recognized in the Company’s financial statements or tax returns. The primary differences relate to depreciation and amortization differences, inventory capitalization and state tax deductions. Deferred tax assets are recognized for deductible temporary differences, with a valuation allowance established against the resulting assets to the extent it is more likely than not that the related tax benefit will not be realized. The measurement of deferred tax assets and liabilities is based on provisions on the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.
3. Property and Equipment
Property and equipment at July 31, 2006, consisted of the following:
| | | | |
| | | 2006 | |
Computer equipment | | $ | 461,351 | |
Leasehold improvements | | | 16,462 | |
Furniture and fixtures | | | 314,248 | |
| | | | |
| | | 792,061 | |
Less accumulated depreciation | | | (478,362 | ) |
| | | | |
| | $ | 313,699 | |
| | | | |
4. Line of Credit
During 2006, the Company entered into a $3,100,000 line of credit with a bank that matures in April 2007. Outstanding borrowings under the line of credit were $2,444,470 at July 31, 2006. Interest is payable monthly at the prime rate (8.25% at July 31, 2006). The note is collateralized by substantially all of the Company’s assets and personally guaranteed by an existing shareholder. The Company is required to comply with certain financial and nonfinancial covenants.
5. Commitments and Contingencies
Sales tax
The Company is currently undergoing a sales tax audit by a state tax authority. The Company has determined that it is probable that they will be responsible for additional sales tax and has determined an estimated amount based on a draft report issued by the sales tax auditor. As of July 31, 2006, the Company has accrued an estimated liability of $225,000.
6. Concentration of Credit Risk
The Company maintains its cash balances in various financial institutions located in the United States. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 per institution.
7. Benefit Plans
The Company sponsors a 401(k) savings plan, covering all of the Company’s employees. Employees may contribute a percentage of eligible compensation on both a before-tax basis and after-tax basis. The Company has the right to make discretionary contributions to the plan. For the nine months ended July 31, 2006, the Company had made no contributions to the plan.
8. Related-Party Transactions
The Company leases office space from a partnership which includes certain shareholders of the Company. For the nine months ended July 31, 2006, the Company paid total rent of $135,000 to the partnership.
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The Company had notes payable of $150,000 from its shareholders. The notes were due on December 31, 2006, and beared interest at 12% per annum. The notes were paid off on June 20, 2006.
9. Subsequent Events
In October 2006, the Company was sold to InnerWorkings, Inc. for an acquisition price of $7.0 million in cash paid in October 2006. The acquisition agreement provides that up to an additional $4.85 million in cash may be paid by InnerWorkings, Inc. contingent on certain future performance measures achieved by the Company. The additional cash consideration, if any, will be paid on or prior to September 30, 2008 and will be treated as additional purchase price.
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