EXHIBIT 99.2
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
Balance Sheets as of December 31, 2004 and
2003, the related consolidated statements of
operations and cash flows for the year ended
December 31, 2004 and the periods October 10,
2003 through December 31, 2003, and June 2,
2003 through October 9, 2003 and the consolidated
statements of stockholders' equity for the year
ended December 31, 2004 and the period June 2,
2003 through December 31, 2003.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Seven Worldwide Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Seven
Worldwide Holdings, Inc. (formerly known as KAGT Holdings, Inc.) and
subsidiaries (the "Company") as of December 31, 2004 and 2003, the related
consolidated statements of operations and cash flows for the year ended December
31, 2004, the period June 2, 2003 through October 9, 2003 and the period October
10, 2003 through December 31, 2003, and the consolidated statements of
stockholders' equity for the year ended December 31, 2004, and the period June
2, 2003 through December 31, 2003. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes consideration of
internal controls and financial reporting as a basis of designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003 and the results of its operations and its cash flows for the
year ended December 31, 2004 and the periods June 2, 2003 through October 9,
2003 and October 10, 2003 through December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 22 to the consolidated financial statements, the
Company was acquired by Schawk, Inc. on January 31, 2005.
/s/ Deloitte & Touche LLP
April 4, 2005
New York, New York
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per-share amounts)
December 31
------------------------
2004 2003
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,437 $ 4,024
Trade accounts receivable (net of allowances of $4,930 and $4,587) 85,693 80,450
Due from affiliates 28 170
Inventories 17,844 14,968
Prepaid expenses 4,305 3,499
Deferred income taxes 3,775 6,437
Other current assets 1,241 590
Assets of discontinued operations 17,228
-------- --------
Total current assets 117,323 127,366
Property, plant, and equipment - net 45,650 57,300
Goodwill 15,798 9,739
Other intangible assets - net 42,907 46,860
Other assets 4,311 5,920
-------- --------
Total assets $225,989 $247,185
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,842 $ 12,639
Accrued expenses 43,195 50,053
Current portion of long-term debt and capital lease obligations 47,323 11,174
Due to affiliates 232
Other current liabilities 23,862 17,461
Liabilities of discontinued operations 3,334
-------- --------
Total current liabilities 134,222 94,893
Long-term debt 13 47,831
Capital lease obligations 25 32
Deferred income taxes 24,968 22,395
Other liabilities 19,000 22,992
-------- --------
Total liabilities 178,228 188,143
-------- --------
Commitments and contingencies
Stockholders' Equity
Common stock ($0.01 par value, 80,000,000 shares authorized; 58,350,000
shares issued and outstanding) 584 584
Additional paid-in capital 57,879 57,766
Accumulated other comprehensive loss (185) (280)
Retained earnings (accumulated deficit) (10,517) 972
-------- --------
Total stockholders' equity 47,761 59,042
-------- --------
Total liabilities and stockholders' equity $225,989 $247,185
======== ========
See Notes to Consolidated Financial Statements
2
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
January 1, 2004 October 10, 2003 June 2, 2003
through through through
December 31, 2004 December 31, 2003 October 9, 2003
------------------- ------------------- -----------------
Revenues, net $369,944 $88,622 $72,873
Cost of revenues 254,993 57,236 47,501
-------- ------- -------
Gross profit 114,951 31,386 25,372
Selling, general, and administrative expenses 108,665 28,575 22,837
Amortization of intangibles 4,953 1,232 806
Impairment charges 33
Loss (gain) on disposal of property and equipment (36) 133 (116)
-------- ------- -------
Operating income 1,336 1,446 1,845
Interest expense (8,414) (2,210) (1,622)
Interest income 131 45 63
Other income (expense) (2,487) 406 130
-------- ------- -------
Income (loss) from continuing operations before
provision for income taxes and minority interest (9,434) (313) 416
Provision (benefit) for income taxes 638 (126) 159
-------- ------- -------
Income (loss) from continuing operations
before minority interest (10,072) (187) 257
Minority interest (255)
-------- ------- -------
Income (loss) from continuing operations (10,072) (187) 2
Income from discontinued operations (including
loss on disposal of $641 in 2004) 1,510 1,170 747
Income tax provision on discontinued operations 2,927 466 294
-------- ------- -------
Income (loss) from discontinued operations (1,417) 704 453
-------- ------- -------
Net income (loss) (11,489) 517 455
Other comprehensive income (loss) 95 (112) (168)
-------- ------- -------
Comprehensive income (loss) $(11,394) $ 405 $ 287
======== ======= =======
See Notes to Consolidated Financial Statements
3
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
January 1, 2004 October 10, 2003 June 2, 2003
through through through
December 31, 2004 December 31, 2003 October 9, 2003
------------------ ------------------- -----------------
Cash flows from operating activities:
Net income (loss) $(11,489) $ 517 $ 455
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Loss (income) from discontinued operations 1,417 (704) (453)
Depreciation and amortization 17,406 4,659 3,177
Deferred income taxes 912 (154) 179
Loss (gain) on disposal of property and equipment (36) 133 (116)
Provision for bad debts 1,325 350 554
Non cash impairment charges 33
Deferred financing fees and other 1,783 382 284
Changes in operating assets and liabilities, net of
effects of acquisition:
Trade accounts receivable (5,482) 239 (5,141)
Due from/to affiliates (90) 89 35
Inventories (2,704) 5,242 (1,008)
Other assets (2,425) 755 1,058
Accounts payable and accrued expenses 674 (1,060) 6,147
Other liabilities (5,454) (6,191) 38
Net cash provided by operating activities of
discontinued operations 3,455 1,261 664
-------- -------- --------
Net cash provided by (used in) operating activities (675) 5,518 5,873
-------- -------- --------
Cash flows from investing activities:
Property, plant, and equipment expenditures (9,983) (2,072) (1,163)
Proceeds from sale of property and equipment 132 87 23
Proceeds from the sale of business - net 13,504
Net cash used in investing activities of discontinued
operations (23) (94)
Acquisition of Seven Worldwide, Inc., net of cash
acquired (1,238) (46,794)
-------- -------- --------
Net cash provided by (used) in investing activities 3,630 (3,317) (47,934)
-------- -------- --------
Cash flows from financing activities:
Repayments of term loans (20,533) (1,100) (366)
Borrowings (repayments) under revolving credit line - net 9,989 (13,619) 421
Borrowings (repayments) of notes and capital lease
obligations (1,137) 16 (27)
Proceeds from the sale/leaseback of buildings - net 8,963
Issuance of common stock 5,000 53,350
-------- -------- --------
Net cash provided by (used in) financing activities (2,718) (9,703) 53,378
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 237 (7,502) 11,317
Effect of exchange rate changes on cash and cash
equivalents 176 146 63
Cash and cash equivalents at beginning of period 4,024 11,380 -
-------- -------- --------
Cash and cash equivalents at end of period $ 4,437 $ 4,024 $ 11,380
======== ======== ========
See Notes to Consolidated Financial Statements
4
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of dollars)
Accumulated Retained
Additional Other Earnings
Common Paid-in- Comprehensive (accumulated
Stock Capital Loss deficit) Total
-------- ------------ --------------- -------------- ----------
Balance at June 2, 2003 $ - $ - $ - $ - $ -
Issuance of common stock 584 57,766 58,350
Unrealized loss from foreign currency
translation adjustments (280) (280)
Net income 972 972
---- -------- ----- -------- --------
Balance at December 31, 2003 584 57,766 (280) 972 59,042
Unrealized gain from foreign currency
translation adjustments 95 95
Compensation cost of vested stock
options issued to non-employees 113 113
Net loss (11,489) (11,489)
---- -------- ----- -------- --------
Balance at December 31, 2004 $584 $ 57,879 $(185) $(10,517) $ 47,761
==== ======== ====== ======== ========
See Notes to Consolidated Financial Statements
5
SEVEN WORLDWIDE HOLDINGS, INC.
(formerly known as KAGT Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per-share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
Seven Worldwide Holdings, Inc. ("the Company"), an affiliate of funds
managed by Kohlberg & Company, LLC ("Kohlberg"), was incorporated in Delaware on
June 2, 2003. On August 4, 2003, the Company, through a wholly owned subsidiary,
completed a tender offer through which it acquired approximately 66% of the
outstanding common stock of Seven Worldwide, Inc. ("Seven"), formerly known as
Applied Graphics Technologies, Inc. On October 10, 2003, the Company acquired
the remaining outstanding common stock of Seven through a shareholder-approved
merger, at which time the Company's wholly owned subsidiary was merged into
Seven with Seven emerging as the surviving entity. The assets and liabilities of
Seven were adjusted as of the date of each transaction to reflect the Company's
portion of their fair values. Accordingly, the accompanying consolidated
financial statements reflect the financial position, results of operations, and
cash flows of the Company as of December 31, 2003, and for the periods June 2,
2003 through October 9, 2003, and October 10, 2003 through December 31, 2003. On
January 31, 2005, the Company changed its name to Seven Worldwide Holdings, Inc.
from KAGT Holdings, Inc.
Seven provides digital media asset management services across all forms
of media, including print, broadcast, and the Internet and is a leading
application service provider for the on-line management of brands. Seven offers
a variety of digital imaging and related services to major corporations, which
include magazine and newspaper publishers, advertisers and their agencies,
entertainment companies, catalogers, retailers, and consumer goods and packaging
companies. From locations across the United States, the United Kingdom, and
Australia, Seven supplies a complete range of services that are tailored to
provide solutions for specific customer needs, with a focus on improving and
standardizing the management and delivery of visual communications for clients
on a local, national, and international basis. Additionally, Seven provides a
wide range of advertising and marketing-related creative services for customers,
primarily in retailing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and all of its subsidiaries. All
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all cash
balances and highly liquid investments having original maturities at the date of
purchase of three months or less.
INVENTORIES: Raw materials are valued at the lower of cost (cost being
determined on a weighted average basis) or market. Work-in-process, consisting
of labor, materials, and overhead on partially completed projects, is recorded
at the lower of cost or net realizable value. The Company periodically evaluates
the realizibility of inventories and adjusts the carrying value as necessary.
PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment is
stated at cost, less accumulated depreciation. Depreciation is computed
principally on the straight-line method over the following estimated useful
lives:
Machinery and equipment 3 to 10 years
Buildings and improvements 10 to 30 years
Furniture and fixtures 3 to 5 years
Licenses and software 1 to 10 years
Leasehold improvements and amounts recorded under capital leases are
amortized on the straight-line method over the shorter of the term of the
respective lease or their estimated useful lives, which generally range from 3
to 10 years.
6
Improvements to property, plant and equipment are capitalized while
maintenance and repairs are expensed as incurred.
LONG-LIVED ASSETS: The recoverability of long-lived assets, including
amortizable intangibles, is evaluated by comparing their carrying value to the
expected future undiscounted cash flows to be generated from such assets when
events or circumstances indicate that an impairment may have occurred.
Management also reevaluates the periods of amortization of long lived assets to
determine whether events and circumstances warrant revised useful lives. If an
impairment has occurred, the carrying value of the long-lived asset is adjusted
to an amount equal to the discounted cash flows associated with the asset.
GOODWILL AND OTHER INTANGIBLES: Acquired goodwill and intangible assets
with indefinite useful lives are not amortized, but instead are subject to an
annual impairment test in the fourth quarter (and in interim periods if certain
events occur indicating that the carrying value of goodwill and/or indefinite
lived intangibles may be impaired). If the carrying amount of the goodwill
exceeds its fair value, the Company will recognize an impairment loss in an
amount equal to that excess. Intangible assets with finite useful lives are
amortized over their useful lives.
REVENUE RECOGNITION: Revenues for all services except digital archiving
services are recognized at the time projects are shipped or transmitted to the
customer, when persuasive evidence of an arrangement exists, when the price is
fixed and determinable and when collectibility is reasonably assured. Revenues
for digital archiving services are recognized on a per-image basis as items are
prepared and scanned.
INCOME TAXES: Income taxes are accounted for using the asset and
liability approach. Deferred taxes reflect the tax consequences in future years
of differences between financial reporting and tax bases of assets and
liabilities recorded in the Company's financial statements. A valuation
allowance is required to offset any net deferred tax assets if, based on
available evidence, it is more likely than not that some or all of the deferred
tax asset will not be realized. Foreign subsidiaries are taxed according to
regulations existing in the countries in which they do business. Provision has
not been made for United States income taxes on distributions that may be
received from foreign subsidiaries, which are considered to be permanently
invested overseas.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign
operations are translated from the functional currency into United States
dollars using the exchange rate at the balance sheet date. Revenues and expenses
of foreign operations are translated from the functional currency into United
States dollars using the average exchange rate for the period. Adjustments
resulting from the translation into United States dollars are included as a
component of "Other comprehensive income (loss)".
ESTIMATES: The preparation of these financials 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. Significant accounting estimates used in the
preparation of the Company's consolidated financial statements include the
allowance for doubtful accounts, the carrying value of goodwill and intangible
assets, the useful lives of property, plant and equipment, certain accruals, the
fair value of equity securities underlying stock based compensation and the
valuation allowance on income taxes. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company determines the
estimated fair values of financial instruments by using available market
information and appropriate valuation methodologies.
EMPLOYEE STOCK OPTIONS: The Company accounts for stock-based employee
compensation based on the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." The Company applies the additional disclosure
requirement relating to stock-based employee compensation, including the pro
forma effects had the Company accounted for stock-based employee compensation
based on the fair value of stock options granted, in accordance with Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure". The pro forma effects of employee stock
based compensation are as follows:
7
January 1, 2004,
through
December 31, 2004
-----------------
Net loss as reported $(11,489)
Stock-based employee compensation expense, net of tax, included in net income
(loss) as reported -
Stock-based employee compensation expense, net of tax, under fair value method (336)
--------
Pro forma net loss $(11,825)
========
The Company did not issue any stock-based compensation to employees during the
periods ending October 9, 2003 and December 31, 2003. The pro forma calculation
includes 1,257,955 options, which were vested at December 31, 2004. No
performance-based shares were included as it is not probable that the
performance goals will be attained (see Note 15).
RECENTLY ISSUED ACCOUNTING STANDARDS: On November 24, 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 151, "Inventory Costs - an amendment of ARB
No. 43, Chapter 4". This standard clarifies the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and waste material
(spoilage). Such abnormal expenses must be recognized in the period in which
they are incurred. In addition, SFAS No. 151 requires the allocation of fixed
production overhead to inventory based on the normal capacity of the production
facilities. Unallocated overhead must be recognized as an expense in the period
in which it is incurred. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not expect
the adoption of SFAS No. 151 to have a material impact on its financial
condition or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
This standard is a revision of SFAS No. 123; "Accounting for Stock-Based
Compensation", and supersedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and its related implementation
guidance. SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values and is effective January 1, 2006. The
Company does not expect the adoption of SFAS No. 123R to have a material impact
on its financial condition or results of operations. The Company's Equity
Incentive Plan was terminated on January 31, 2005 concurrent with the
acquisition of the Company by Schawk, Inc. (the "Schawk Acquisition") (see Note
22).
In December 2004, the FASB issued SFAS No. 153 "Exchange of Nonmonetary
Assets, an amendment of APB Opinion No. 29 (SFAS 153)". SFAS No. 153 amends
prior guidance to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of SFAS No. 153
are effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005 and shall be applied prospectively. SFAS No. 153
is not expected to have a material impact on the Company's consolidated
financial statements subsequent to the date of adoption.
3. DISCONTINUED OPERATIONS
On June 10, 2004, the Company sold its broadcast media distribution
services business. Proceeds from the sale were approximately $14,145, of which
$7,900 was used to repay term loans outstanding under the Company's credit
facility. The Company incurred fees of approximately $641 related to the
disposition of this business, of which $500 was paid to Kohlberg.
The accompanying consolidated financial statements reflect the net
assets and results of operations of the broadcast media distribution services
business as a discontinued operation. The results of operations of the broadcast
media distribution services business for the year ended December 31, 2004, for
the period October 10, 2003 through
8
December 31, 2003, and for the period June 2, 2003 through October 9, 2003, are
presented as discontinued operations in the accompanying consolidated statements
of operations as follows:
January 1, October 10, June 2,
2004 2003 2003
through through through
December 31, December 31, October 9,
2004 2003 2003
------------ ------------ ----------
Revenues $9,554 $5,176 $4,204
====== ====== ======
Income from operations before income taxes $2,151 $1,170 $ 747
====== ====== ======
The carrying amounts of the major classes of assets and liabilities included in
the assets and liabilities of discontinued operations in the consolidated
balance sheet at December 31, 2003 were as follows:
Current assets $ 6,438
Other non-current assets 1,790
Goodwill and other intangible assets 9,000
-------
Assets of discontinued operations $17,228
=======
Current liabilities $ 1,605
Deferred income taxes 1,729
-------
Liabilities of discontinued operations $ 3,334
=======
Approximately $5,200 of goodwill resulting from the acquisition of Seven (see
Note 4) was allocated to the broadcast media distribution services business.
4. TENDER OFFER AND RECAPITALIZATION
On August 4, 2003, the Company (through a wholly owned subsidiary)
acquired 6,081,145 shares or 66% of the outstanding common stock of Seven for
$0.85 per share through a tender offer. In connection with the closing of the
tender offer, Seven completed a restructuring and extinguishment of its then
existing credit facility. The tender offer and the extinguishment of the then
existing credit facility were part of an overall recapitalization in which Seven
also redeemed all of its outstanding subordinated notes and all of the
outstanding preference shares of a subsidiary of Seven. The recapitalization was
funded by an initial $44,000 capital contribution from Kohlberg and
approximately $72,500 of debt under a new credit facility entered into by Seven
with a new lender group. In 2003, the Company also received additional capital
contributions from Kohlberg and other investors of $9,350.
On October 10, 2003, the Company acquired the remaining outstanding
shares of common stock of Seven through a shareholder-approved merger at which
time the Company's wholly owned subsidiary was merged into Seven with Seven
emerging as the surviving entity. The total consideration paid by the Company
for all of Seven's outstanding shares of common stock was approximately $7,600,
of which $6,400 was paid for shares validly tendered. The remaining $1,200 was
due to shareholders who did not tender their shares in the tender offer and who
asserted appraisal rights in connection with the merger. This matter was settled
in February 2005 (see Note 17). The Company incurred fees related to the
acquisition of approximately $3,200.
The acquisition of Seven was accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities were recorded at their
estimated fair values by the Company on the dates of the transactions. The final
fair values recorded by the Company for the acquisition reflect the combined
results of recording the Company's portion of the fair value acquired on the
respective transaction dates and the Company's estimated costs for exiting
certain activities and terminating certain employees that were contemplated at
the acquisition date, as follows:
9
Current assets $142,111
Property, plant, and equipment 59,480
Goodwill 15,798
Other intangible assets 49,224
Other non-current assets 1,634
--------
Total assets acquired 268,247
--------
Current liabilities 170,737
Long-term debt 48,899
Other non-current liabilities 41,011
--------
Total liabilities acquired 260,647
--------
Fair value of net assets acquired $ 7,600
========
The other intangible assets recorded by the Company consisted entirely
of long-term customer contracts and related relationships, and are being
amortized over a useful life of ten years. Neither the goodwill nor the other
intangible assets recorded by the Company are deductible for income tax
purposes.
During 2004, management of the Company completed its assessment of
which activities of Seven to exit and implemented and completed its plan to exit
such activities. The Company exited its commercial printing business and its
prepress publication business located in New Jersey. The Company also closed
several production facilities in the United States and the United Kingdom and
terminated 90 employees.
The components of the costs associated with the exit plan were as
follows:
Employee termination costs $3,478
Facility closure costs 2,529
Impairment of leasehold improvements 472
------
$6,479
======
The remaining liability for future payments and the amounts charged
against the exit activity liability during the year ended December 31, 2004,
were as follows:
Employee Facility
termination costs closure costs
----------------- -------------
Balance at June 2, 2003 $ - $ -
Additions to liability 1,709 276
Payments (275)
------- ------
Balance at December 31, 2003 1,434 276
------- ------
Additions to liability 1,612 2,339
Payments (1,773) (626)
Adjustments 157 (86)
------- ------
Balance at December 31, 2004 $ 1,430 $1,903
======= ======
Approximately $2,218 of the total exit liability is included as a
component of other current liabilities and $1,115 is included as a component of
other liabilities in the accompanying consolidated balance sheet at December 31,
2004.
All costs associated with these actions taken by the Company were
included in the fair value of liabilities as part of the cost of the acquisition
of Seven.
10
5. OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
January 1, October 10, June 2,
2004 2003 2003
through through through
December 31, December 31, October 9,
2004 2003 2003
------------ ------------ ----------
Foreign currency transaction gains $ 321 $415 $161
Adjustments to pre-acquisition liabilities 2,668
Litigation settlements, including legal fees (see Note 17) (5,296)
Other (180) (9) (31)
------- ---- ----
Other income (expense) $(2,487) $406 $130
======= ==== ====
Adjustments to pre-acquisition liabilities are primarily attributable to changes
in estimates relating to the Company's ability to sublet certain vacant
properties.
6. INVENTORIES
The components of inventories at December 31 were as follows:
2004 2003
--------- ---------
Work-in-process $16,557 $13,805
Raw materials 1,287 1,163
------- -------
Total $17,844 $14,968
======= =======
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the
following:
2004 2003
--------- ---------
Land $ 8,219 $12,522
Machinery and equipment 16,438 13,175
Buildings and improvements 17,294 20,866
Furniture and fixtures 3,114 2,465
Licenses and software 14,605 9,961
Construction in progress 1,590 1,827
------- -------
Total 61,260 60,816
Less accumulated depreciation and amortization (15,610) (3,516)
------- -------
Net $45,650 $57,300
======= =======
Accumulated depreciation and amortization includes amortization of
assets acquired under capital leases. Assets acquired under capital leases are
not significant at December 31, 2004 and 2003.
The Company sold and leased back two production facilities during the
year ended December 31, 2004. Net proceeds from the sale of these facilities
totaled approximately $8,963, of which approximately $8,393 was used to repay a
term loan under the Company's credit facility. No gain or loss was recognized on
the sale of either facility
11
in the statement of operations in 2004, as the proceeds from the sale of each
facility approximated their final respective fair values recorded upon the
acquisition of Seven.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 31, 2004 and 2003, consisted entirely of the
goodwill associated with the acquisition of Seven (see Note 4).
The changes in the carrying amount of goodwill during the year ended
December 31, 2004 were as follows:
Balance at January 1, 2004 $ 9,739
Costs associated with exit activities (see Note 4) 4,494
Settlement of pre-acquisition contingency 2,783
Adjustment to fair value of buildings (741)
Adjustment to income tax valuation allowance (477)
-------
Balance at December 31, 2004 $15,798
=======
The pre-acquisition contingency relates to a dispute over payments that
Seven owed on certain leased equipment. A judgment was rendered against Seven in
2004 that required Seven to pay all remaining amounts due under the lease, plus
interest and the lessor's legal fees.
The Company's intangible assets subject to amortization consist
entirely of long-term customer contracts and related relationships. As of the
dates of the acquisitions of the common shares of Seven, the Company recorded
the fair value of all material customer contracts and related relationships.
During 2004, the Company paid $1,000 to a customer as consideration to enter
into a long-term contract. Customer contracts and related relationships are
amortized on a straight-line basis over a useful life of ten years, or the life
of the underlying contract, whichever is less. The gross carrying amount and
accumulated amortization of intangible assets subject to amortization at
December 31 were as follows:
2004 2003
-------- --------
Customer contracts and related relationships $49,897 $48,897
Accumulated amortization (6,990) (2,037)
------- -------
Other intangible assets, net $42,907 $46,860
======= =======
Amortization expense associated with intangible assets subject to
amortization was $4,953 for the year ended December 31, 2004, $1,232 for the
period October 10, 2003 through December 31, 2003, and $806 for the period June
2, 2003 through October 9, 2003. Estimated amortization expense is $5,077 per
year for each of the next five years.
9. ACCRUED EXPENSES
Accrued expenses at December 31 consisted of the following:
2004 2003
------- -------
Salaries and benefits $15,350 $16,763
Accrued commissions 3,873 3,731
Accrued customer rebates 2,298 2,737
Accrued interest 430 497
Accrued trade payables 9,084 8,384
Taxes payable 7,127 10,731
Other operating accruals 5,033 7,210
------- -------
Total $43,195 $50,053
======= =======
12
10. LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
2004 2003
------- -------
Variable rate term loans $ $43,133
Variable rate line of credit 4,666
Other 13 32
--- -------
Total $13 $47,831
=== =======
On August 4, 2003, in connection with the tender offer and the
recapitalization (see Note 4), Seven settled all amounts outstanding under its
then existing credit facility, which totaled $176,097, and entered into a Loan
and Security Agreement with new lenders (as amended, the "Loan Agreement"). The
Loan Agreement provided for two term loans totaling $22,000 and $27,000 ("Term
Loan A" and "Term Loan B," respectively) and a revolving credit line with a
maximum availability of $58,000, of which a maximum of $10,000 is available to
be borrowed by Seven Worldwide Limited, a wholly-owned subsidiary of the Company
located in the United Kingdom. The amounts available under the revolving credit
lines in the United States and the United Kingdom are each subject to a
borrowing limitation based on receivables. Borrowings in the United States under
the Loan Agreement are secured by all of the domestic receivables, inventory,
and real and personal property of the Company and certain of its subsidiaries,
and borrowings in the United Kingdom are secured by the receivables, inventory,
and real and personal property in the United Kingdom and in the United States.
Fees of approximately $5,100 were incurred in 2003 in connection with the Loan
Agreement, which were deferred and are being amortized as a component of
interest expense over the remaining term of the Loan Agreement using the
effective interest method. Amortization of deferred financing fees was $1,670,
$382, and $284 for the year ended December 31, 2004, the period October 10, 2003
through December 31, 2003 and the period June 2, 2003 through October 9, 2003,
respectively.
The interest rates on funds borrowed under the revolving credit lines
of the Loan Agreement vary from either LIBOR or the prime rate in effect at the
time of the borrowing, plus a factor. The interest rates on Term Loan A and Term
Loan B are the prime rate plus 2.00% and 8.25%, respectively. The Company paid
approximately $208, $47, and $30 in unused commitment fees relating to the
revolving credit line during the year ended December 31, 2004, the period
October 10, 2003 through December 31, 2003 and the period June 2, 2003 through
October 9, 2003, respectively.
Initial borrowings on August 4, 2003, under the Loan Agreement totaled
$72,469, all of which was borrowed in the United States. In September 2003,
Seven Worldwide Limited borrowed $4,666 under the revolving credit line of the
Loan Agreement. In May 2004, the Company repaid approximately $7,900 of Term
Loan A with proceeds from the sale of its broadcast media distribution services
business (see Note 3). The Company also repaid approximately $8,393 of Term Loan
A with proceeds from the sale of two production facilities during 2004 (see Note
7). The borrowings of Seven Worldwide Limited were made in United States
dollars, and therefore exposed the Company to transaction gains and losses based
on fluctuations in the exchange rate. For the year ended December 31, 2004, the
period October 10, 2003 through December 31, 2003, and for the period June 2,
2003 through October 9, 2003, the Company recognized exchange gains of $333,
$457 and $161, respectively. These exchange gains are included as a component of
other income (expense) for the respective periods in the consolidated statements
of operations.
Under the terms of the Loan Agreement, the Company must comply with
certain quarterly covenants related to minimum EBITDA (as defined in the Loan
Agreement), fixed charge ratios, and leverage ratios, and with an annual
covenant related to capital spending. The Company was not in compliance with the
EBITDA and fixed charge ratio covenants at December 31, 2004, which constituted
an event of default under the terms of the Loan Agreement. As such, $27,000
outstanding under Term Loan B and $4,666 outstanding under the revolving line of
credit in the United Kingdom have been classified as a current portion of
long-term debt in the consolidated balance sheet at December 31, 2004. On
January 31, 2005, all amounts outstanding under the Loan Agreement were repaid
in connection with the Schawk Acquisition (see Note 22).
At December 31, 2004, $47,310 was outstanding under the Loan Agreement,
of which $15,644 was outstanding under the revolving credit line in the United
States, $4,666 was outstanding under the revolving credit line in the
13
United Kingdom, and $27,000 was outstanding under Term Loan B. Term Loan A was
paid in full during 2004. The Company also had approximately $1,114 in open
letters of credit outstanding at December 31, 2004. The amount outstanding under
the revolving credit line in the United States is classified as a current
portion of long-term debt in the consolidated balance sheets at December 31,
2004 and 2003, due to the Loan Agreement containing a subjective acceleration
clause and the lenders' ability to access and control cash receipts. No such
control over cash receipts exists in the United Kingdom, and therefore the
amount outstanding under the revolving line of credit in the United Kingdom is
classified as long-term debt in the consolidated balance sheet at December 31,
2003. The amount outstanding under the revolving line of credit in the United
Kingdom matures in August, 2008 and the amount outstanding under Term Loan B
matures in August, 2007. The average annual variable rate on borrowings under
the Loan Agreement for the year ended December 31, 2004, the period October 10,
2003, through December 31, 2003, and for the period June 2, 2003 through October
9, 2003, was 10.2%, 8.7% and 8.7%, respectively. The Company is prohibited from
paying dividends under the terms of the Loan Agreement.
The principal payments on debt are due as follows:
2005 $47,315
2006 5
2007 5
2008 3
-------
Total 47,328
Less current portion 47,315
-------
Total long-term debt $ 13
=======
11. LEASES
The Company leases certain buildings, property and equipment used in
its operations under agreements that are classified as both capital and
operating leases. Such agreements generally include provisions for
inflation-based rate adjustments and, in the case of leases for buildings and
office space, payments of certain operating expenses and property taxes.
Future minimum rental payments required under capital leases and
operating leases that have initial or remaining noncancelable lease terms in
excess of one year are as follows:
Capital Operating
Leases Leases
------- ---------
2005 $ 10 $13,106
2006 26 11,269
2007 8,088
2008 6,726
2009 5,985
Later years 19,850
---- -------
Total minimum lease payments 36 $65,024
=======
Less imputed interest (3)
----
Present value of minimum lease payments 33
Less current portion (8)
----
Long-term obligation under capital leases $ 25
====
Total rental expense under operating leases, which includes amounts
paid to related parties (see Note 13), amounted to $14,672 for the year ended
December 31, 2004, $3,692 for the period October 10, 2003 through December 31,
2003, and $2,507 for the period June 2, 2003 through October 9, 2003.
14
12. INCOME TAXES
The components of the provision (benefit) for income taxes were as
follows:
January 1, 2004 October 10, 2003, June 2, 2003
through through through
December 31, 2004 December 31, 2003 October 9, 2003
----------------- ----------------- ---------------
CURRENT:
Federal $ (418) $ 62 $(25)
State 481 298 5
Foreign (337) (332) 1
------ ----- ----
Total current (274) 28 (19)
------ ----- ----
DEFERRED:
Federal (148) (379) 142
State 1,008 225 36
Foreign 52
------ ----- ----
Total deferred 912 (154) 178
------ ----- ----
------ ----- ----
Total provision (benefit) for income taxes $ 638 $(126) $159
====== ===== ====
The difference between the Company's effective income tax rate and the
statutory rate in 2004 was due primarily to a valuation allowance established
against net operating loss carry forwards and the tax effect of a litigation
settlement recorded in 2004 (see Note 17), which is not deductible for income
tax purposes.
The components of the net deferred tax liability at December 31 were as
follows:
2004 2003
-------- --------
Deferred tax assets:
Accounts receivable $ 1,106 $ 909
Accrued expenses 4,344 6,522
Other liabilities 6,400 9,432
Capital loss carry forward and other credits 10,743 10,936
Net operating loss carry forward 7,501 2,002
-------- --------
Total deferred tax assets 30,094 29,801
-------- --------
Deferred tax liabilities:
Prepaid expenses (552) (506)
Property, plant, and equipment (7,464) (6,853)
Goodwill and other intangibles (18,505) (20,722)
-------- --------
Total deferred tax liabilities (26,521) (28,081)
-------- --------
Net deferred tax asset before valuation allowance 3,573 1,720
Valuation allowance on deferred tax assets (24,766) (17,678)
-------- --------
Net deferred tax liability $(21,193) $(15,958)
======== ========
15
The Company has a net operating loss carry forward of $21,433 at December 31,
2004, of which $6,020 expires in 2022, $1,828 expires in 2023 and $13,585
expires in 2024. The Company also has a capital loss carry forward of $32,420
and other credits of $1,017 in foreign jurisdictions at December 31, 2004 which
may be carried forward indefinitely. As a result of the change in control
associated with the Company's acquisition of Seven and the potential limitations
placed on future deductions resulting there from, the Company does not believe
that it is more likely than not that the benefit associated with the net
operating loss and other deferred tax assets will be entirely realized in future
periods. In addition, based on its projections, the Company does not believe
that it is more likely than not that the benefit associated with the deferred
tax assets in foreign jurisdictions will be entirely realized in future periods.
Accordingly, the Company established a valuation allowance for these items in
the amount of $22,300 and $17,608 at December 31, 2004 and 2003, respectively.
Such amounts were included as a component of the cost associated with the
acquisition of Seven. During the year ended December 31, 2004 and the period
October 10, 2003 through December 31, 2003, the Company established an
additional valuation allowance of $2,396 and $70, respectively that was included
as part of the provision for income taxes in each period.
13. RELATED PARTY TRANSACTIONS
At December 31, 2004, Fred Drasner was the Chairman of the Board of
Directors of Seven. Through September 30, 2004, Mr. Drasner was also President
and Chief Executive Officer of Applied Printing Technologies, L.P. ("Applied
Printing"). The Company conducted business with Applied Printing and other
companies of which Mr. Drasner was an executive officer, including Daily News,
L.P. (the "Daily News") and U.S. News & World Report, L.P. ("U.S. News"). In
addition, the Company conducted business with Nancy's Specialty Foods, Inc., one
of Kohlberg's portfolio companies. The Company did not guarantee any
arrangements on behalf of its affiliates and has not entered into any
transactions with affiliates outside of the normal course of business other than
those disclosed.
DUE TO/FROM AFFILIATES - Affiliates owed the Company $28 and $170 at
December 31, 2004 and 2003, representing trade receivables. The Company owed
affiliates $232 at December 31, 2003, representing trade payables.
AFFILIATE SALES AND PURCHASES - The Company provides services to the
Daily News pursuant to a written agreement that expires in December 2005. The
Company also occasionally provides services to and purchases services from
related parties in addition to those services covered by this agreement. Sales
to and purchases from related parties were as follows:
January 1, 2004 October 10, 2003 June 2, 2003
through through through
December 31, 2004 December 31, 2003 October 9, 2003
----------------- ----------------- ---------------
Affiliate sales $1,708 $555 $306
Affiliate purchases $ 987 $ 27 $ 50
Sales to affiliates represented 0.5%, 0.6% and 0.4% of the Company's
revenues for the year ended December 31, 2004, the period October 10, 2003
through December 31, 2003, and the period June 2, 2003 through October 9, 2003,
respectively.
SHARED SERVICES - The Company received certain legal, computer, and
administrative services from the Daily News and U.S. News pursuant to an
agreement that was terminated in May 2004. The charges incurred for such
services totaled $403, $284 and $213 for the year ended December 31, 2004, the
period October 10, 2003 through December 31, 2003, and the period June 2, 2003
through October 9, 2003, respectively.
LEASES - The Company incurred charges with U.S. News of $313, $107 and
$70 for the year ended December 31, 2004, the period October 10, 2003 through
December 31, 2003, and for the period June 2, 2003 through October 9, 2003,
respectively, for space leased from U.S. News at its corporate headquarters in
New York City. The Company leased a production facility in New York City from
the Daily News for the period October 10, 2003 through December 31, 2003, and
the period June 2, 2003 through October 9, 2003, for which charges of $19 were
incurred in each period. This lease expired in December 2003 and was not
renewed.
16
MANAGEMENT FEE - The Company paid management fees to Kohlberg of $515,
$122, and $94 for the year ended December 31, 2004, the period October 10, 2003
through December 31, 2003, and for the period June 2, 2003 through October 9,
2003, respectively, which are included as a component of selling, general and
administrative expenses in the consolidated statements of operations. The
Company also paid $500 to Kohlberg related to the disposition of its broadcast
media distribution services business (see Note 3).
14. RETIREMENT PLANS
The Company has a defined contribution plan in which eligible employees
who have attained 21 years of age may contribute on both a pretax and after-tax
basis. Company contributions vest ratably over each of the first five years of
service. Company contributions to the plan were $2,412, $ 572 and $ 367 for the
year ended December 31, 2004, the period October 10, 2003 through December 31,
2003, and the period June 2, 2003 through October 9, 2003, respectively.
The Company also contributed to various multi-employer benefit plans
that cover employees pursuant to collective bargaining agreements. The total
contributions to multi-employer plans charged to operations for the year ended
December 31, 2004, the period October 10, 2003 through December 31, 2003, and
the period June 2, 2003 through October 9, 2003, were $501, $139 and $76,
respectively.
15. STOCK OPTIONS
On March 31, 2004, the Board of Directors of the Company adopted the
2004 Equity Incentive Plan. The plan provides for the grants of options to
purchase common stock of the Company to persons who, in the opinion of the Board
of Directors, are in a position to make a significant contribution to the
success of the Company. Options awarded under the plan may vest based upon the
passage of time or may vest based upon the attainment of performance goals
determined by the Board of Directors. A maximum of 15,000,000 shares may be
issued under the plan, of which 4,500,000 shares are allocated to options which
time-vest and 10,500,000 shares are allocated to options which vest based upon
the attainment of certain EBITDA levels over a three year period and the
attainment of a specified revenue target in 2006. In 2004, a total of 3,773,866
time-vested options were granted and a total of 9,149,033 performance-based
options were granted, all with an exercise price of $1.00 per share. In addition
450,000 stock options were granted to non-employees at an exercise price of
$1.00 per share. Options granted under the plan generally vest over three years
and are exercisable for ten years from the date of grant. The options granted to
non-employees were fully vested and exercisable on their respective grant dates.
Information relating to activity under the 2004 Equity Incentive Plan
is summarized in the following table.
Weighted Weighted
Number of Average Average Grant
Shares Exercise Price Date Fair Value
--------- -------------- ---------------
Options outstanding at January 1, 2004 -
Options granted 13,372,899 $1.00 $0.25
----------
Options outstanding at December 31, 2004 13,372,899
==========
Options exercisable at December 31, 2004 1,707,955
==========
The Company accounted for the issuance of stock options to employees
and non-employee directors using the intrinsic value method in accordance with
the provisions of APB No. 25. The intrinsic value of an option is equal to the
difference between the market price of the common stock on the measurement date
and the exercise price of the option. There was no compensation cost recognized
by the Company for the year ended December 31, 2004 on the time-vested options
granted to employees and non-employee directors as the exercise price equaled or
exceeded the fair value of the underlying common stock of the Company at the
grant date. The fair value of the common stock was determined by the Board of
Directors of the Company. The performance-based options are subject to variable
accounting. No compensation expense was recognized in 2004, as it was not
considered probable that the performance objectives would be attained.
17
The Company accounted for the issuance of stock options to
non-employees, other than directors, in accordance with the provisions of SFAS
No. 123, which requires the cost of a transaction to be measured at the date of
grant based on the fair value of the options granted. SFAS No. 123 also provides
for an alternative measurement of compensation cost based on the fair value of
the options granted to employees and non-employee directors. 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. For the year ended December 31,
2004, the Company incurred $113 of compensation expense related to non-employee
option grants.
The following weighted average assumptions were used in calculating the
fair value of options granted by the Company during 2004:
Risk-free interest rate 4.18%
Expected life 7.0 years
Expected volatility 0
Expected dividend yield 0%
As a result of the Schawk Acquisition (see Note 22), 8,277,444 of the
time-vested and performance-based stock options outstanding on January 31, 2005
became vested and immediately exercisable.
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 its cash balances and cash equivalents with
high credit quality financial institutions.
The Company provides credit to customers on an uncollateralized basis
after evaluating customer creditworthiness. These customers are not concentrated
in any specific geographic region, but are concentrated in the publishing,
advertising agency, entertainment, and retailing businesses. The Company's five
largest nonaffiliated customers provided approximately 29% of its revenues for
the year ended December 31, 2004. In addition, amounts due from these customers
represented approximately 29% of trade accounts receivable at December 31, 2004.
Sales to one customer accounted for approximately 12% of consolidated revenues
for the year ended December 31, 2004 and 12% of trade accounts receivable at
December 31, 2004.
Any termination or significant disruption of the relationships with
principal customers could have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
17. COMMITMENTS AND CONTINGENT LIABILITIES
In October 2003, certain former shareholders of Seven ("the dissenting
shareholders") filed a petition asserting appraisal rights in connection with
the merger of Seven and a wholly owned subsidiary of the Company, claiming that
the merger consideration was inadequate and unfair. In February 2005, the
Company settled this matter and paid the dissenting shareholders $3.30 per share
or a total of $5,668 in exchange for the dismissal of the appraisal action and
the full release of all claims. The Company has recorded approximately $1,460 as
a component of the cost associated with the acquisition of Seven, which
represented the merger consideration of $0.85 per share multiplied by the number
of dissenting shares. The amount is included as a component of "Other current
liabilities" in the consolidated balance sheet at December 31, 2004. The
difference between the amount included as a component of the cost associated
with the acquisition and the settlement amount, or $4,208, was recorded as a
charge to operations in December 2004 and is included as a component of "Other
income (expense)" in the consolidated statement of operations and as a component
of "Other current liabilities" on the consolidated balance sheet at December 31,
2004. The Company also incurred legal fees of approximately $1,040 related to
this matter that were also recorded as a charge to operations during 2004 and
included as a component of "Other income (expense)".
The Company is also 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
the
18
Company's management, after review with counsel, the ultimate resolution of
these other matters will not have a material effect on the Company's
consolidated financial statements.
18. GUARANTEES
In connection with the sale of certain assets and businesses previously
owned by the Company, the Company agreed to indemnify the purchasers of such
assets and businesses for breaches of certain standard representations and
warranties, including tax and environmental matters, for specified periods of
time. In the event any such indemnification obligation was to be triggered, the
Company may be liable to the extent that the damages incurred by the purchaser
exceed certain thresholds contained in the sale agreements. There is no limit on
the Company's maximum exposure for these matters. There have been no claims for
indemnification made to date.
The Company subleases certain leased properties and equipment no longer
used by the Company. Under certain of these subleases, the sublessee remits
payment directly to the landlord or lessor, although the Company remains the
primary obligor for the lease payments. If any of these third parties ceased to
remit payment directly to the landlord or lessor, the Company would be liable to
make such payments. At December 31, 2004, the maximum potential amount for which
the Company can be held liable is approximately $3,200. The Company has recorded
a liability of approximately $1,000 related to these subleases, which represents
the difference between the amounts guaranteed by the Company and the estimated
sublease income and is included as part of "Other current liabilities" in the
consolidated balance sheet at December 31, 2004.
19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes were as follows:
January 1, 2004 October 10, 2003 June 2, 2003
through through through
December 31, 2004 December 31, 2003 October 9, 2003
----------------- ----------------- ---------------
Interest paid $5,677 $1,603 $998
Income taxes paid - net of refunds $2,237 $ 419 $800
For the year ended December 31, 2004, the Company incurred non-cash
compensation expense of $113 related to vested stock options issued to
non-employees.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined
by the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could have
realized in a current market exchange.
The carrying amount and estimated fair values of financial instruments
at December 31, are summarized as follows:
2004 2003
----------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------ ----------- ----------
ASSETS:
Cash and cash equivalents $ 4,437 $ 4,437 $ 4,024 $ 4,024
Non-trade accounts receivable $ 1,242 $ 1,242 $ 590 $ 590
LIABILITIES:
Debt $47,328 $47,326 $58,814 $58,758
Obligations under capital leases $ 33 $ 29 $ 223 $ 208
19
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.
NON-TRADE ACCOUNTS RECEIVABLE - the carrying amount of non-trade
accounts receivable, which is included in other currents assets in the
consolidated balance sheets at December 31, 2004 and 2003, is a reasonable
approximation of fair value as these amounts are expected to mature in the short
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 is able to obtain funds under its credit facility. The
carrying amount of the amount outstanding under the Company's credit facility 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, was estimated by discounting the
future streams of payments using the rate at which the Company is able to obtain
funds under its credit facility.
21. COMPREHENSIVE INCOME
Comprehensive income includes all changes to equity that are not the
result of transactions with shareholders and is comprised of net income and
other comprehensive income. No income tax effect is reported for unrealized
gains and losses from foreign currency translation adjustments since they relate
to indefinite investments in foreign subsidiaries. The "Other comprehensive
income (loss)" included in the consolidated statements of operations for all
periods presented consisted entirely of foreign currency translation
adjustments. The after-tax components of "Accumulated other comprehensive loss"
in the consolidated balance sheets at December 31, 2004 and 2003, consisted
entirely of foreign currency translation adjustments.
22. SUBSEQUENT EVENT
On January 31, 2005, Schawk acquired all of the outstanding common
stock of the Company. Pursuant to a stock purchase agreement dated December 20,
2004, Schawk paid the Company's stockholders consideration of $122,400 in cash
and 4,000,000 shares of Schawk's Class A common stock, par value $0.008 per
share. The total cash consideration was reduced by the amount required to pay
the Loan Agreement in full and $10,000, which was placed in escrow to secure the
payment to Schawk of certain indemnification obligations of the Company's
stockholders as set forth in the stock purchase agreement.
20
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.) Balance Sheets as of
October 9, 2003, and December 31, 2002, the related consolidated statements
of operations and cash flows for the period January 1, 2003, through
October 9, 2003, and the year ended December 31, 2002, and the consolidated
statements of stockholders' deficit for the period January 1, 2003, through
October 9, 2003, and the year ended December 31, 2002
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Seven Worldwide, Inc.
New York, NY
We have audited the accompanying consolidated balance sheets of Seven
Worldwide, Inc. (formerly known as Applied Graphics Technologies, Inc.) and
subsidiaries (the "Company") as of October 9, 2003 and December 31, 2002, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for the period January 1, 2003 to October 9, 2003 and the year ended
December 31, 2002. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit includes consideration of
internal controls and financial reporting as a basis of designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of October 9,
2003 and December 31, 2002, and the results of its operations and its cash flows
for the period January 1, 2003 to October 9, 2003 and the year ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 4 to the consolidated financial statements, on
January 1, 2002, the Company adopted the non-amortization and impairment
provisions for goodwill.
As discussed in Note 5 to the consolidated financial statements, on
June 10, 2004, the Company sold its broadcast media distribution services
business. This business has been presented as a discontinued operation in the
consolidated financial statements.
/s/ Deloitte & Touche LLP
March 26, 2004 (April 4, 2005 as to the effects of presenting discontinued
operations described in Note 5)
New York, New York
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per-share amounts)
October 9, 2003 December 31, 2002
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,932 $ 4,721
Trade accounts receivable (net of allowances
of $4,400 in 2003 and $7,633 in 2002) 80,020 82,404
Due from affiliates 3,536 405
Inventory 20,067 16,192
Prepaid expenses 10,296 4,609
Deferred income taxes 7,828 13,796
Other current assets 793 2,830
Assets of discontinued operations 12,567
--------- ---------
Total current assets 144,039 124,957
Property, plant, and equipment - net 49,718 54,440
Other intangible assets - net 791 542
Other assets 597 7,086
Assets of discontinued operations 15,144
--------- --------
Total assets $ 195,145 $ 202,169
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 12,682 $ 14,624
Accrued expenses 45,315 55,640
Current portion of long-term debt and
obligations under capital leases 24,840 14,041
Due to affiliates 46,840 442
Other current liabilities 12,941 22,685
Liabilities of discontinued operations 1,724
--------- ---------
Total current liabilities 144,342 107,432
Long-term debt 48,899 150,008
Subordinated notes 29,894
Obligations under capital leases 49 204
Deferred income taxes 5,571 2,075
Other liabilities 21,685 20,260
Liabilities of discontinued operations 1,613
--------- ---------
Total liabilities 220,546 311,486
--------- ---------
Commitments and contingencies
Minority interest - Redeemable Preference
Shares issued by subsidiary 42,045
---------
Stockholders' Deficit:
Preferred stock (no par value, 10,000,000
shares authorized; no shares outstanding)
Common stock ($0.01 par value, 150,000,000
shares authorized; 9,147,565 shares
issued and outstanding) 92 92
Additional paid-in capital 427,981 390,768
Accumulated other comprehensive loss (704) (653)
Retained deficit (452,770) (541,569)
--------- ---------
Total stockholders' deficit (25,401) (151,362)
--------- ---------
Total liabilities and stockholders' deficit $ 195,145 $ 202,169
========= =========
See Notes to Consolidated Financial Statements
2
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars)
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
Revenues $289,030 $ 401,815
Cost of revenues 189,022 263,354
-------- ---------
Gross profit 100,008 138,461
Selling, general, and administrative expenses 86,862 120,271
Amortization of intangibles 173 132
Loss (gain) on disposal of property and equipment (111) 153
Gain on debt extinguishments (98,548)
Restructuring charges 2,975 3,359
Impairment of goodwill 71,576
Other impairment charges 683
-------- ---------
Operating income (loss) 108,657 (57,713)
Interest expense (13,268) (19,025)
Interest income 214 399
Other income (expense) - net 420 (1,155)
-------- ---------
Income (loss) from continuing operations
before provision for income taxes
and minority interest 96,023 (77,494)
Provision (benefit) for income taxes 10,044 (1,436)
-------- ---------
Income (loss) from continuing operations
before minority interest 85,979 (76,058)
Minority interest (1,548) (2,476)
-------- ---------
Income (loss) from continuing operations 84,431 (78,534)
Income (loss) from discontinued operations
(including gain (loss) on disposal
of $1,534 and ($6,943), respectively) 4,999 (9,438)
Income tax provision on discontinued operations 631 1,674
-------- ---------
Income (loss) from discontinued operations 4,368 (11,112)
Cumulative effect of change in accounting principle (321,311)
Net income (loss) 88,799 (410,957)
Other comprehensive loss (51) (414)
-------- ---------
Comprehensive income (loss) $ 88,748 $(411,371)
======== =========
See Notes to Consolidated Financial Statements
3
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 88,799 $(410,957)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Loss (income) from discontinued operations (4,368) 11,112
Depreciation and amortization 11,078 16,265
Deferred taxes 9,111 1,698
Non-cash impairment charges 72,259
Loss (gain) on disposal of property and equipment (111) 153
Provision for bad debts (190) (340)
Cumulative effect of change in accounting principle 321,311
Gain on debt extinguishments (98,548)
Other 1,030 3,969
Changes in operating assets and liabilities:
Trade accounts receivable 3,040 2,895
Due from/to affiliates (2,481) 2,786
Inventory (3,593) (1,547)
Other assets 6,368 1,111
Accounts payable and accrued expenses (10,786) 7,378
Other liabilities (6,553) (4,646)
Net cash provided by operating activities of
discontinued operations 5,724 3,881
-------- ---------
Net cash provided by (used in) operating activities (1,480) 27,328
-------- ---------
Cash flows from investing activities:
Property, plant, and equipment expenditures (6,877) (11,055)
Proceeds from sale of property and equipment 475 458
Proceeds from sale of a business 33,502
Other (720)
Net cash used in investing activities
of discontinued operations (315) (961)
-------- ---------
Net cash provided by (used in) investing activities (6,717) 21,224
-------- ---------
Cash flows from financing activities:
Repayments of term loans (13,892) (44,187)
Borrowings (repayments) under revolving
credit line - net 27,830 (1,609)
Repayment in full of borrowings under former
credit facility (97,700)
Proceeds from initial borrowings under new
credit facility 72,500
Loans from KAGT Acquisition Corp. 45,750
Redemption of subordinated notes (7,572)
Redemption of preference shares of a subsidiary (6,380)
Repayments of notes and capital lease obligations (403) (1,052)
Payment of debt financing fees (7,789) (1,671)
Net cash used in financing activities of
discontinued operations (314)
-------- ---------
Net cash provided by (used in) financing activities 12,344 (48,833)
-------- ---------
Net increase (decrease) in cash and cash equivalents 4,147 (281)
Effect of exchange rate changes on cash and cash equivalents 64 59
Cash and cash equivalents at beginning of period 4,721 4,943
-------- ---------
Cash and cash equivalents at end of period $ 8,932 $ 4,721
======== =========
See Notes to Consolidated Financial Statements
4
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands of dollars)
Accumulated
Additional Other
Common Paid-in- Comprehensive Retained
Stock Capital Loss Deficit
------- ----------- --------------- --------
Balance at January 1, 2002 $91 $389,464 $(239) $(130,612)
Issuance of 80,000 common shares as additional consideration
in connection with prior period acquisition 1 719
Fair value of warrants issued to banks 574
Compensation cost of vested stock options issued to
non-employees 11
Reclassification adjustment for losses realized in net loss 255
Unrealized loss from foreign currency translation adjustments (669)
Net loss (410,957)
--- -------- ----- ----------
Balance at December 31, 2002 92 390,768 (653) (541,569)
Book value of preference shares of a subsidiary in excess of
amount paid on redemption 37,208
Compensation cost of vested stock options issued to
non-employees 5
Reclassification adjustment for losses realized in net income 19
Reclassification of cumulative effect of change in accounting
principle 2
Unrealized loss from foreign currency translation adjustments (72)
Net income 88,799
--- -------- ----- ----------
Balance at October 9, 2003 $92 $427,981 $(704) $ (452,770)
=== ======== ===== ==========
See Notes to Consolidated Financial Statements
5
SEVEN WORLDWIDE, INC.
(formerly known as Applied Graphics Technologies, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per-share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
Seven Worldwide, Inc., and its subsidiaries ("the Company") primarily
provide digital media asset management services. Through its various divisions
and significant operations, the Company provides digital media asset management
services across all forms of media, including print, broadcast, and the Internet
and is a leading application service provider for the on-line management of
brands. The Company offers a variety of digital imaging and related services to
major corporations, which include magazine and newspaper publishers, advertisers
and their agencies, entertainment companies, catalogers, retailers, and consumer
goods and packaging companies. From locations across the United States, the
United Kingdom, and Australia, the Company supplies a complete range of services
that are tailored to provide solutions for specific customer needs, with a focus
on improving and standardizing the management and delivery of visual
communications for clients on a local, national, and international basis.
Additionally, the Company provides a wide range of advertising and
marketing-related creative services for customers, primarily in retailing. On
October 12, 2004, the Company changed its name from Applied Graphics
Technologies, Inc. to Seven Worldwide, Inc.
On October 10, 2003, KAGT Acquisition Corp. ("KAGT"), a wholly-owned
subsidiary of KAGT Holdings, Inc. ("Holdings"), an affiliate of funds managed by
Kohlberg & Company, LLC ("Kohlberg"), completed an acquisition of all of the
outstanding common stock of the Company. Concurrent with the completion of the
acquisition, KAGT was merged into the Company and the Company ceased to exist
for accounting purposes. Accordingly, the accompanying consolidated financial
statements reflect the financial position, results of operations, and cash flows
of the Company as of October 9, 2003, and December 31, 2002, and for the period
January 1, 2003, through October 9, 2003, and the year ended December 31, 2002.
Certain prior-period amounts in the accompanying financial statements
have been reclassified to conform to the 2003 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and all of its subsidiaries (the
"Consolidated Financial Statements"). All intercompany accounts and transactions
have been eliminated in the Consolidated Financial Statements.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include all cash
balances and highly liquid investments having original maturities of three
months or less.
INVENTORY: Raw materials are valued at the lower of cost (cost being
determined on a weighted average basis) or market. Work-in-process, consisting
of labor, materials, and overhead on partially completed projects, is recorded
at the lower of cost or 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 following estimated useful lives:
Machinery and equipment 3 to 10 years
Buildings and improvements 10 to 30 years
Furniture and fixtures 3 to 5 years
Licenses and software 1 to 10 years
Leasehold improvements and amounts recorded under capital leases are
amortized on the straight-line method over the shorter of the terms of the
leases or their estimated useful lives, which generally range from 3 to 10
years.
6
LONG-LIVED ASSETS: The recoverability of long-lived assets is evaluated
by comparing their carrying value to the expected future undiscounted cash flows
to be generated from such assets when events or circumstances indicate that an
impairment may have occurred. If an impairment has occurred, the carrying value
of the long-lived asset is adjusted to an amount equal to the discounted cash
flows associated with the asset.
GOODWILL AND OTHER INTANGIBLES: On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, acquired goodwill and other intangible
assets with indefinite useful lives are no longer amortized over an estimated
useful life, but instead are subject to an annual impairment test (see Note 4 to
the Consolidated Financial Statements). Intangible assets with finite useful
lives continue to be amortized over their useful lives. The impairment of
goodwill upon the adoption of SFAS No. 142 was reported as a cumulative effect
of a change in accounting principle.
REVENUE RECOGNITION: Revenues from all services except digital
archiving services are recognized at the time projects are shipped or
transmitted to the customer. Revenues for digital archiving services are
recognized on a per-image basis as items are prepared and scanned.
INCOME TAXES: Income taxes are accounted for under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Foreign subsidiaries are taxed according to regulations existing
in the countries in which they do business. Provision has not been made for
United States income taxes on distributions that may be received from foreign
subsidiaries, which are considered to be permanently invested overseas.
FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign
operations are translated from the functional currency into United States
dollars using the exchange rate at the balance sheet date. Revenues and expenses
of foreign operations are translated from the functional currency into United
States dollars using the average exchange rate for the period. Adjustments
resulting from the translation into United States dollars are included as a
component of "Other comprehensive loss."
DERIVATIVE FINANCIAL INSTRUMENTS: The Company accounted for its
interest rate swap agreements in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted. Accordingly,
the fair value of the interest rate swaps were recorded as an asset or liability
in the Consolidated Balance Sheets, with the change in fair value reflected as a
component of interest expense or other comprehensive loss depending on the
intended use of the swaps.
EMPLOYEE STOCK OPTIONS: The Company accounted for stock-based employee
compensation based on the intrinsic value of stock options granted in accordance
with the provisions of Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." Information relating to stock-based
employee compensation, including the pro forma effects had the Company accounted
for stock-based employee compensation based on the fair value of stock options
granted in accordance with Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," is as follows:
January 1, 2003, January 1, 2002,
through through
October 9, December 31,
2003 2002
---------------- ---------------
Net income (loss) as reported $88,799 $(410,957)
Stock-based employee compensation
expense, net of tax, included
in net income (loss) as reported - -
Stock-based employee compensation
expense, net of tax, under
fair value method (739) (1,884)
------- ---------
Pro forma net income (loss) $88,060 $(412,841)
======= =========
7
ESTIMATES: The preparation of these financials 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS: Financial Accounting Standards
Board Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued in November 2002. FIN 45 elaborates on certain disclosure
requirements and clarifies certain recognition criteria related to guarantees.
The disclosure requirements of FIN 45 were effective for periods ending after
December 15, 2002, and the recognition criteria of FIN 45 were effective for
guarantees issued or modified after December 31, 2002. The Company adopted the
recognition criteria of FIN 45 on January 1, 2003. The adoption of FIN 45 did
not have a material impact on the Company's financial condition or results of
operations.
3. TENDER OFFER AND RECAPITALIZATION
On August 4, 2003, KAGT acquired 6,081,145 shares or 66% of the
Company's outstanding common stock, through a tender offer. In connection with
the closing of the tender offer, the Company completed a restructuring and
extinguishment of its then existing credit facility. The tender offer and the
extinguishment of the then existing credit facility were part of an overall
recapitalization in which the Company also redeemed all of its outstanding
subordinated notes and all of the outstanding preference shares of a subsidiary.
The overall recapitalization was funded with $44,400 of subordinated
debt from KAGT and approximately $72,500 of debt under a new credit facility
entered into by the Company with a new lender group. Of the total funding,
approximately $97,700 was used to fully repay $176,097 of borrowings outstanding
under the Company's old credit facility at the closing of the tender offer,
approximately $9,100 was paid to fully redeem the outstanding subordinated
notes, including accrued interest, and approximately $6,400 was paid to fully
redeem the outstanding preference shares of a subsidiary. The remaining funding
of $3,700 was used to pay fees and expenses of the transaction, including bank
fees. Additional fees totaling approximately $5,500, including approximately
$3,000 paid to Kohlberg, were deferred at the time of the closing of the tender
offer and were paid from borrowings under the Company's new credit facility. On
October 10, 2003, KAGT completed the acquisition of the remaining outstanding
common stock of the Company through a shareholder-approved merger.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's intangible assets not subject to amortization under SFAS
No. 142 consisted entirely of goodwill. Upon the initial application of SFAS No.
142 on January 1, 2002, the Company incurred an impairment charge of $321,952
relating to its goodwill. The fair value of each reporting unit was determined
based on applying a multiple to each reporting unit's earnings before interest,
taxes, depreciation, and amortization. The Company reported the impairment
charge, net of a tax benefit of $641, as a cumulative effect of a change in
accounting principle.
At December 31, 2002, the Company incurred an additional impairment
charge of $70,136 relating to its goodwill. The methodology used for this
impairment charge was the same as that used upon the initial adoption of SFAS
No. 142. The multiples used to determine the fair value of each reporting unit
at December 31, 2002, were lower than those used upon the initial adoption of
SFAS No. 142 due to a decline in market conditions of the Company's industry and
the overall economy.
In the second quarter of 2002, the Company made a contingent payment
totaling $1,440 consisting of $720 in cash and 80,000 shares of common stock as
additional consideration for the acquisition of one of its digital services
businesses. In June 2002, the Company recognized a charge for the impairment of
goodwill for this $1,440 of additional consideration based on the estimated fair
value of this business. The impairment charge was determined using the same
methodology as that used upon the adoption of SFAS No. 142. The Company reviewed
the value of the goodwill associated with this business due to having incurred
an impairment charge in a prior year related to this business.
8
The changes in the carrying amount of goodwill were as follows:
January 1, 2002,
through
December 31, 2002
-----------------
Balance at beginning of period $ 397,088
Impairment losses (393,528)
Contingent purchase price 1,440
Reversal of tax contingency (5,000)
----------
Balance at end of period $ -
=========
The Company's intangible assets subject to amortization under SFAS No.
142 consisted entirely of contract acquisition costs, which represented
consideration paid by the Company to enter into certain long-term contracts.
Contract acquisition costs were amortized on a straight-line basis over the life
of the underlying contract, which generally did not exceed five years. The gross
carrying amount and accumulated amortization of intangible assets subject to
amortization were as follows:
October 9, December 31,
2003 2002
---------- -----------
Gross carrying amount $1,706 $1,280
Accumulated amortization (915) (738)
------ ------
Net carrying amount $ 791 $ 542
====== ======
The Company incurred an impairment charge of $150 during the third
quarter of 2002 for the write off of the unamortized balance of contract
acquisition costs related to a customer contract with an affiliate that was
terminated prior to its expiration. Such charge is included as a component of
"Other impairment charges" in the Consolidated Statement of Operations.
Amortization expense associated with intangible assets subject to
amortization was $177 for the period January 1, 2003, through October 9, 2003,
and $129 for the year ended December 31, 2002. The estimated amortization
expense for the remainder of 2003 and for the remaining terms of the respective
contracts is as follows:
2003 $ 79
2004 $317
2005 $288
2006 $107
9
5. DISCONTINUED OPERATIONS AND SALE OF BUSINESSES
On June 10, 2004, the Company sold its broadcast media distribution
services business. Net proceeds from the sale were approximately $14,145, of
which $7,900 was used to repay term loans outstanding under the Company's credit
facility. The Company incurred fees of approximately $641 related to the
disposition of this business, of which $500 was paid to Kohlberg. The Company
recognized an impairment charge of $8,217 relating to goodwill associated with
the broadcast media distribution services business during the year ended
December 31, 2002, which is included as a component of "Income (loss) from
discontinued operations" in the Consolidated Statement of Operations.
On April 10, 2002, the Company sold its publishing business. Net
proceeds from the sale were approximately $33,500, of which $31,500 were used to
repay term loans outstanding under the Company's credit facility and $2,000 were
originally held in escrow under the terms of the sale to satisfy any claims
related to contractual warranties. The Company received $500 from the escrow in
November 2002, and received the remaining $1,534, including interest earned, in
April 2003. Additionally, the Company recognized $1,534 of income from
discontinued operations in 2003 from the reversal of liabilities originally
established to cover such contingencies.
In connection with the Company's adoption of a plan approved by its
Board of Directors in June 2000 to sell the publishing business, the results of
operations of this business were reported as a discontinued operation in the
Company's financial statements in 2000, and included an estimated loss on
disposal of $98,280. In April 2002, the Company recognized an additional loss on
disposal of the publishing business of $6,943, subject to the settlement of
outstanding contingencies. This additional loss on disposal is included as a
component of "Income (loss) from discontinued operations" in the Consolidated
Statement of Operations.
The accompanying financial statements of the Company have been
presented to reflect the operations of the broadcast media distribution services
business and the publishing business as discontinued operations. The results of
operations of the broadcast media distribution services business and the
publishing business are presented as discontinued operations in the accompanying
Consolidated Statements of Operations as follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
Revenues $17,707 $44,124
======= =======
Income (loss) from operations
before income taxes $ 3,465 $(2,495)
======= =======
The carrying amounts of the major classes of assets and liabilities
included in the assets and liabilities of discontinued operations in the
consolidated balance sheets at October 9, 2003 and December 31, 2002 were as
follows:
October 9, 2003 December 31, 2002
--------------- -----------------
Current assets $ 6,271 $ 7,696
Other non-current assets 2,005 2,490
Other intangible assets 664 822
Deferred income taxes 3,627 4,136
------- ------
Assets of discontinued operations $12,567 $15,144
======= =======
Current liabilities $ 1,724 $ 1,613
======= =======
10
The results of operations of the publishing business include an
allocation of interest expense of $580 for the year ended December 31, 2002. The
allocated interest expense consisted solely of the interest expense on the
Company's borrowings under its credit facility, which represented the interest
expense not directly attributable to the Company's other operations. Interest
expense was allocated based on the ratio of the net assets of the discontinued
operation to the sum of the consolidated net assets of the Company and the
outstanding borrowings under the Company's credit facility.
6. RESTRUCTURING
The Company initiated a plan during the second quarter of 2003 (the
"2003 Second Quarter Plan") to close its Rochester, New York, facility and move
its operations to existing facilities in New York City and Nashua, New
Hampshire. The Company initiated a plan during the third quarter of 2002 (the
"2002 Third Quarter Plan") to consolidate its Grand Rapids, Michigan, and Battle
Creek, Michigan, operations into a new facility in Battle Creek, and to
consolidate its Dallas, Texas, operation into less space at its existing
location.
In 2001, the Company initiated two separate plans to restructure
certain of its operations (the "2001 Second Quarter Plan" and the "2001 Fourth
Quarter Plan", respectively). As part of the 2001 Second Quarter Plan, the
Company consolidated certain of its operations in Chicago, Illinois, into a
single facility and relocated one of its facilities in New York City. As part of
the 2001 Fourth Quarter Plan, the Company consolidated three of its operations
in Chicago into a single facility, closed three of its New York City
metropolitan area facilities, with the work being transferred into existing
facilities in New Jersey and New York City, and closed five regional photo
studios, with the work being transferred into existing studios in Chicago and
Atlanta, Georgia. In addition, the Company closed its facility in Washington,
DC, closed two administrative offices, one in the New York City metropolitan
area and one in Chicago, and consolidated its operations in London into three
floors of its existing space.
In June 2000, the Company closed one of its facilities in Atlanta (the
"2000 Second Quarter Plan"). In 1999, the Company closed a facility in each of
New York City and Chicago, transferring the work to other facilities operated by
the Company in those cities, redistributed work among its various New York City
metropolitan area facilities, and streamlined certain operations in the United
Kingdom (the "1999 Fourth Quarter Plan"). In 1998, the Company closed several
facilities in Chicago, transferring the work to other facilities operated by the
Company in that city (the "1998 Fourth Quarter Plan").
The results of operations include restructuring charges (income) as
follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
2003 Second Quarter Plan $ 99
2002 Third Quarter Plan 7 $2,059
2001 Fourth Quarter Plan 2,868 1,481
2001 Second Quarter Plan 26
2000 Second Quarter Plan 1
1999 Fourth Quarter Plan (73)
1998 Fourth Quarter Plan (134)
------ ------
Total $2,975 $3,359
====== ======
11
The components of the restructuring charges (income) incurred in the
period January 1, 2003, through October 9, 2003, were as follows:
2003 Second 2002 Third 2001 Fourth 2000 Second
Quarter Plan Quarter Plan Quarter Plan Quarter Plan
------------- ------------ ------------ -------------
Facility closure costs $95 $ 31 $2,855 $1
Employee termination costs 3 7
Abandoned leased equipment 1 (24) 6
--- ---- ------ --
Total $99 $ 7 $2,868 $1
=== ==== ====== ==
The charge for employee termination costs related to one employee for
the 2003 Second Quarter Plan. The components of the restructuring charges
(income) incurred in 2002 were as follows:
2002 Third 2001 Fourth 2001 Second 1999 Fourth 1998 Fourth
Quarter Plan Quarter Plan Quarter Plan Quarter Plan Quarter Plan
------------ ------------ ------------ ------------ ------------
Facility closure costs $1,828 $1,355 $(5) $(60) $(134)
Employee termination costs 76 (162) 31
Abandoned leased equipment 155 288 (13)
----- ------ --- ---- -----
Total $2,059 $1,481 $26 $(73) $(134)
====== ====== === ==== =====
The charge for employee termination costs related to approximately nine
employees for the 2002 Third Quarter Plan. The Company also incurred an
impairment charge of $211 related to equipment abandoned in connection with the
2002 Third Quarter Plan. Such charge is included as a component of "Other
impairment charges" in the Consolidated Statement of Operations.
The remaining liability for future payments, and the amounts charged
against the respective restructuring liabilities in the period January 1, 2003,
through October 9, 2003, and the year ended December 31, 2002, were as follows:
2003 Second 2002 Third 2001 Fourth
Quarter Plan Quarter Plan Quarter Plan
------------ ------------ -------------
Balance at January 1, 2002 $11,994
Restructuring charge $2,059
Facility closure costs (201) (3,619)
Employee termination costs (70) (1,325)
Abandoned leased equipment (63) (361)
Adjustment to liability 1,481
----- -------
Balance at December 31, 2002 1,725 8,170
Restructuring charge $ 99
Facility closure costs (95) (442) (2,114)
Employee termination costs (3) (7) (155)
Abandoned leased equipment (1) (68) (45)
Adjustment to liability 7 2,868
---- ------ -------
Balance at October 9, 2003 $ - $1,215 $ 8,724
==== ====== =======
12
2001 Second 2000 Second 1999 Fourth 1998 Fourth
Quarter Plan Quarter Plan Quarter Plan Quarter Plan
------------- ------------ ------------ -------------
Balance at January 1, 2002 $ 594 $ 584 $ 382 $ 176
Facility closure costs (31) (175) (193) (42)
Employee termination costs (320)
Abandoned leased equipment (104)
Adjustment to liability 26 (73) (134)
----- ----- ----- ----
Balance at December 31, 2002 269 409 12 -
Facility closure costs (128)
Abandoned leased equipment (12)
Adjustment to liability 1
----- ----- ----- ----
Balance at October 9, 2003 $ 269 $ 282 $ - $ -
===== ===== ===== ====
Approximately $2,750 and $3,540 of the total restructuring liability is
included as part of "Other current liabilities" in the accompanying Consolidated
Balance Sheets at October 9, 2003, and December 31, 2002, respectively, with the
remaining liability of $7,740 and $7,045 for each period, respectively, included
as part of "Other liabilities" in the accompanying Consolidated Balance Sheets.
The number of employees paid that resulted in a reduction of the
various restructuring plans' liabilities for employee termination costs was as
follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
2003 Second Quarter Plan 1
2002 Third Quarter Plan 1 9
2001 Fourth Quarter Plan 3 98
2001 Second Quarter Plan 5
The liabilities associated with the various restructuring plans are
periodically adjusted to reflect changes in estimates originally made when the
plans were initiated. In 2003, the Company adjusted the liability associated
with the 2001 Fourth Quarter Plan to reflect additional estimated costs of its
future building lease obligations based on the inability to sublet certain
properties. In 2002, the Company adjusted the liability associated with the 2001
Fourth Quarter Plan to reflect additional estimated costs of its future building
lease and other rental obligations, partially offset by less than anticipated
employee termination costs due to the voluntary resignation of certain
employees. Also in 2002, the Company adjusted the liability associated with the
1999 Fourth Quarter Plan and the 1998 Fourth Quarter Plan to reflect favorable
settlements on certain building lease obligations.
The Company does not anticipate any material adverse effect on its
future results of operations from any of the facility closings since all work
performed at such locations has been transferred to other facilities. The
employees terminated under the restructuring plans were principally production
workers, sales people, and administrative support staff. The Company completed
the 2003 Second Quarter Plan and the 2002 Third Quarter Plan in 2003. The
Company completed the 2001 Fourth Quarter Plan during 2002. The Company
completed the 2001 Second Quarter Plan during 2001. The Company completed the
1999 Fourth Quarter Plan and the 2000 Second Quarter
13
Plan during 2000. The Company completed the 1998 Fourth Quarter Plan during
1999. The remaining liabilities for these plans at October 9, 2003, represent
future rental obligations for abandoned property.
7. OTHER IMPAIRMENT CHARGES
Impairments and other charges for the year ended December 31, 2002,
consisted of the following:
Impairment of software development projects $322
Impairment of contract acquisition costs 150
Impairment of property and equipment 211
----
Total $683
====
During 2002, the Company incurred a charge of $322 for the write off of
certain software development costs related to projects that were no longer being
pursued. In July 2002, the Company incurred a charge of $150 for the write off
of the unamortized balance of contract acquisition costs related to a customer
contract with an affiliate that was terminated prior to its expiration. The
Company also incurred a charge of $211 for the impairment of equipment abandoned
in connection with the 2002 Third Quarter Plan.
8. OTHER INCOME (EXPENSE)
Other income (expense) includes the following:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
Foreign currency transaction gains $ 118 $ 18
Adjustments and settlement of
pre-acquisition contingencies 2,059 179
Costs incurred in connection with
the tender offer and recapitalization (1,697) (730)
Litigation settlements, including
legal fees (648)
Other (60) 26
------ ------
Other income (expense) $ 420 $(1,155)
====== =======
9. INVENTORY
The components of inventory were as follows:
October 9, December 31,
2003 2002
---------- -----------
Work-in-process $18,874 $14,554
Raw materials 1,193 1,638
------- -------
Total $20,067 $16,192
======= =======
14
10. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
October 9, December 31,
2003 2002
---------- -----------
Land $ 4,675 $ 4,675
Machinery and equipment 64,454 66,723
Buildings and improvements 23,992 27,136
Furniture and fixtures 11,793 10,146
Licenses and software 20,784 18,602
Construction in progress 1,370 1,960
-------- --------
Total 127,068 129,242
Less accumulated depreciation and amortization 77,350 74,802
-------- --------
Net $ 49,718 $ 54,440
======== ========
11. ACCRUED EXPENSES
Accrued expenses consisted of the following:
October 9, December 31,
2003 2002
---------- ------------
Salaries and benefits $18,678 $21,425
Accrued commissions 3,577 3,486
Accrued customer rebates 2,819 4,391
Accrued interest 502 2,996
Other operating accruals 19,739 23,342
------- -------
Total $45,315 $55,640
======= =======
12. LONG-TERM DEBT
Long-term debt consisted of the following:
October 9, December 31,
2003 2002
---------- ------------
Variable rate term loans $44,233 $124,698
Variable rate line of credit 4,666 24,391
6.5% IDA bond due 2004 900
Other 19
------- --------
Total $48,899 $150,008
======= ========
The Company entered into a credit facility in 1999 to finance certain
acquisitions (the "1999 Credit Agreement"). Borrowings under the 1999 Credit
Agreement, which consisted of three term loans and a revolving credit line, were
secured by all of the inventory, receivables, and real and personal property of
the Company and
15
certain of its subsidiaries. Interest rates on funds borrowed under the 1999
Credit Agreement varied from either LIBOR or the prime rate in effect at the
time of the borrowing, plus a factor. The Company was also required to pay a
commitment fee of 0.5% of unused borrowings under the revolving credit line.
Commitment fees are included as a component of interest expense.
The terms of the 1999 Credit Agreement contained certain milestones in
connection with raising amounts to repay borrowings. The consummation of the
sale of the publishing business in April 2002 satisfied one such milestone and
resulted in the elimination of a previous increase in interest rates of 100
basis points that had been in effect since January 1, 2002. The Company did not
satisfy two other milestones with deadlines of February 28, 2002, and April 30,
2002. Not satisfying the first milestone resulted in a fee of $500 being paid to
the Company's lenders. Not satisfying the second milestone resulted in,
effective May 1, 2002, an increase in interest rates of 100 basis points and the
issuance of warrants with an exercise price of $0.01 to the lenders to purchase
453,377 shares of the Company's common stock. Such warrants, which became
exercisable on January 15, 2003, had a fair value of $404 on the date of
issuance. The warrants were recorded as deferred financing costs, which were
being amortized over the remaining term of the 1999 Credit Agreement and, since
the warrants were to be settled in shares of the Company's common stock, as an
increase in additional paid-in capital.
In March 2002, the Company entered into an amendment to the 1999 Credit
Agreement (the "Sixth Amendment") that extended the maturity through April 2003.
In connection with the Sixth Amendment, the Company incurred fees of $250 and
became obligated to issue additional warrants with an exercise price of $0.01 to
its lenders to purchase 453,377 shares of the Company's common stock if a
definitive agreement for an overall restructuring of the credit facility was not
reached by September 30, 2002. Such warrants, which were exercisable immediately
upon issuance in October 2002, had a fair value of $170. These warrants were
accounted for in the same manner as the warrants issued in May 2002.
In April 2003, the Company entered into an amended and restated credit
agreement (the "Amended Credit Agreement") that extended the maturity of the
credit facility through April 2004. In connection with the Amended Credit
Agreement, the Company incurred fees totaling $2,000 to be paid quarterly in
2003 and issued immediately exercisable warrants with an exercise price of $0.01
to its lenders to purchase 453,378 shares of the Company's common stock. Also as
part of the Amended Credit Agreement, the Company agreed that in addition to
scheduled principal payments, it would permanently repay $20,000 of borrowings
by December 31, 2003. Failure to repay such borrowings would not constitute an
event of default, but would result in the Company paying additional fees of
$2,000 to its lenders upon maturity of the credit facility. Additionally, under
the Amended Credit Agreement, available borrowings under the Company's revolving
credit line were reduced to $60,000 from $66,000, and the ability to borrow
funds at interest rates based on LIBOR was restricted to only those periods in
which the Company's trailing twelve-month EBITDA (as defined in the Amended
Credit Agreement) exceeded $50,000.
On August 4, 2003, in connection with the tender offer and the
recapitalization (see Note 3 to the Consolidated Financial Statements), the
Company settled all amounts outstanding under the Amended Credit Agreement,
which totaled $176,097, and entered into a Loan and Security Agreement with new
lenders (the "Loan Agreement"). The Loan Agreement provides for two term loans
totaling $22,000 and $27,000 ("Term Loan A" and "Term Loan B," respectively) and
a revolving credit line with a maximum availability of $58,000, of which a
maximum of $10,000 is available to be borrowed by Seven Worldwide Limited, a
wholly-owned subsidiary of the Company located in the United Kingdom. The
amounts available under the revolving credit lines in the United States and the
United Kingdom are each subject to a borrowing base limitation based on
receivables. Borrowings in the United States under the Loan Agreement are
secured by all of the domestic receivables, inventory, and real and personal
property of the Company and certain of its subsidiaries, and borrowings in the
United Kingdom are secured by the receivables, inventory, and real and personal
property in the United Kingdom and in the United States. The Company incurred
fees of approximately $5,100 in 2003 in connection with the Loan Agreement,
which were deferred and are being included as a component of interest expense
over the remaining term of the Loan Agreement. The interest rates on funds
borrowed under the revolving credit lines of the Loan Agreement vary from either
LIBOR or the prime rate in effect at the time of the borrowing, plus a factor.
The interest rates on Term Loan A and Term Loan B are the prime rate plus 2.00%
and 8.25%, respectively.
Initial borrowings under the Loan Agreement on August 4, 2003, totaled
$72,469, all of which was borrowed in the United States. In September 2003,
Seven Worldwide Limited borrowed $4,666 under the revolving credit line of the
Loan Agreement. The borrowings of Seven Worldwide Limited were made in United
States dollars, and
16
therefore exposed the Company to transaction gains and losses based on
fluctuations in the exchange rate. For the period January 1, 2003, through
October 9, 2003, the Company recognized an exchange gain of $161, which is
included as a component of "Other income (expense)" in the Consolidated
Statement of Operations.
The amounts outstanding under the Amended Credit Agreement on
August 4, 2003, were settled for approximately $99,000, which resulted in a gain
of approximately $77,000. Such gain is included as a component of "Gain on debt
extinguishments" in the Consolidated Statement of Operations for the period
January 1, 2003, through October 9, 2003. The funding for the settlement of the
outstanding balances under the Amended Credit Agreement was provided partially
from the amounts borrowed under the Loan Agreement on August 4, 2003, and
partially from the amounts received from KAGT in connection with the
recapitalization (see Note 3 to the Consolidated Financial Statements).
Under the terms of the Loan Agreement, the Company must comply with
certain quarterly covenants related to minimum EBITDA (as defined in the Loan
Agreement), fixed charge ratios, and leverage ratios, and with an annual
covenant related to capital spending. In December 2003, the Loan Agreement was
amended to change certain definitions, including the definition of EBITDA, and
to modify all of the quarterly financial covenant requirements to be less
restrictive than previously required. Based on current projections, the Company
believes it would be able to remain in compliance with the covenant requirements
through 2004, although there can be no assurance that such compliance would be
maintained.
At October 9, 2003, $72,573 was outstanding under the Loan Agreement,
of which $19,274 was outstanding under the revolving credit line in the United
States, $4,666 was outstanding under the revolving credit line in the United
Kingdom, and $48,633 was outstanding under the term loans. The amount
outstanding under the revolving credit line in the United States is classified
as a current portion of long-term debt in the Consolidated Balance Sheet at
October 9, 2003, due to the Loan Agreement containing a subjective acceleration
clause and the lenders' ability to access and control the cash receipts. No such
control over cash receipts exists in the United Kingdom, and therefore the
amounts outstanding under the revolving line of credit in the United Kingdom is
classified as long-term debt in the Consolidated Balance Sheet at October 9,
2003. The average annual variable rate on borrowings under the Company's credit
facilities for the period January 1, 2003, through October 9, 2003, and for the
year ended December 31, 2002, was approximately 7% for each period. The Company
is prohibited from paying dividends under the terms of the Loan Agreement.
The principal payments on debt for the remainder of 2003 and for each
of the next five years are due as follows:
2003 $14,744
2004 10,974
2005 4,400
2006 4,400
2007 31,399
2008 7,599
------
Total 73,516
Less current portion 24,617
------
Total long-term debt $48,899
=======
13. DERIVATIVES
The Company was party to two interest rate swap agreements with an
aggregate notional amount of $50,000 that were due to expire in August 2003.
Under the interest rate swaps agreements, the Company paid a fixed rate of
5.798% per annum on a quarterly basis and was paid a floating rate based on the
three-month LIBOR rate in effect at the beginning of each quarterly payment
period.
The interest rate swap agreements did not qualify for hedge accounting
under SFAS No. 133, and therefore all changes in fair value of the interest rate
swap agreements were included as a component of interest expense. The fair
17
value of the Company's interest rate swap agreements was a net loss of $1,403 at
December 31, 2002. In connection with the restructuring of its credit facility
and settlement of amounts outstanding under the Amended Credit Agreement, the
Company terminated the two interest rate swap agreements in July 2003 and paid
$576, which approximated the accrued interest through maturity. Such payment to
terminate the interest rate swap agreements was included as a component of
interest expense. The Company recognized as a component of interest expense a
non-cash benefit of $1,367 and $396 for the period January 1, 2003 through
October 9, 2003, and for the year ended December 31, 2002, respectively, which
consisted of the following:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- ----------------
Change in fair market value of
swaps not designated as hedges $(1,403) $(832)
Reclassification of loss in
"Accumulated other comprehensive loss" 33 397
Reclassification of cumulative effect
recorded upon adoption of SFAS No. 133 3 39
------- -----
Total benefit $(1,367) $(396)
======= =====
14. SUBORDINATED NOTES AND MINORITY INTEREST
At the time of the acquisition by the Company of Wace Group Limited
("Wace") in 1999, Wace had (pound)39,164, or approximately $62,733, of 8%
Cumulative Convertible Redeemable Preference Shares (the "Preference Shares")
outstanding. The Preference Shares carried the right to a fixed cumulative
preferential dividend of 8% and were redeemable on July 31, 2005, subject to the
availability of distributable reserves. On July 5, 1999, the Company offered
each holder of the Preference Shares the right to exchange such Preference
Shares, at an equivalent nominal rate, for subordinated notes issued by the
Company (the "Subordinated Notes"). As of December 31, 2002, (pound)18,574, or
approximately $29,894, of the Preference Shares had been exchanged for
Subordinated Notes. The Subordinated Notes, which bore interest at a fixed
annual rate of 10% and matured on October 31, 2005, were subject to redemption
by the Company at any time after July 31, 2000. The initial redemption premium
was 4% and decreased in 0.5% increments every six months until July 31, 2005, at
which time the Subordinated Notes were redeemable at par. The Subordinated Notes
were listed on the London Stock Exchange.
The Company recorded dividends of $1,548 and $2,476 on the Preference
Shares for the period January 1, 2003, through October 9, 2003, and the year
ended December 31, 2002, respectively, which are reflected as "Minority
interest" in the Consolidated Statements of Operations. Due to the lack of
distributable reserves in Wace, the Company was prohibited from making, and did
not make, a dividend payment on the Preference Shares since July 1999. Accrued
dividends totaling $9,064 are included as part of "Minority Interest" in the
Consolidated Balance Sheet at December 31, 2002. The Company incurred interest
expense of $1,778 and $2,791 on the Subordinated Notes for the period January 1,
2003, through October 9, 2003, and the year ended December 31, 2002,
respectively.
As part of its overall effort to restructure its debt, the Company
initiated a tender offer in July 2002 to acquire all of the outstanding
Subordinated Notes for an aggregate purchase price of $3,000. The tender offer
did not succeed and lapsed on August 27, 2002, with none of the tendered
Subordinated Notes being accepted by the Company for payment. Consequently, the
semi-annual interest payment on the Subordinated Notes, which was due on July
31, 2002, but was not paid by the Company while the tender offer remained open,
was paid on August 30, 2002. Such failure to pay the interest on its initial due
date did not constitute an event of default since payment was made by the
expiration of a 30-day grace period. In connection with the lapsed tender offer,
the Company incurred expenses of $297 that are included as a component of "Other
income (expense)" in the Consolidated Statement of Operations for the year ended
December 31, 2002.
In connection with discussions regarding an overall recapitalization, the
Company did not pay the semi-annual interest payment on the Subordinated Notes
due on January 31, 2003, until February 28, 2003. Such failure to pay
18
the interest on its initial due date did not constitute an event of default
since payment was made by the expiration of a 30-day grace period. On August 4,
2003, in connection with the tender offer and recapitalization (see Note 3 to
the Consolidated Financial Statements), the Company settled all amounts
outstanding for the Preference Shares and the Subordinated Notes. The Company
settled the outstanding Subordinated Notes, which totaled approximately $29,900,
for approximately $8,300, including fees. The resulting gain on extinguishment
of approximately $21,600 is included as a component of "Gain on debt
extinguishments" in the Consolidated Statement of Operations for the period
January 1, 2003, through October 9, 2003. The Company settled the outstanding
Preference Shares, which totaled approximately $43,588 including accrued
dividends, for approximately $6,380, and reflected the book value in excess of
amounts paid as additional paid-in capital.
15. LEASES
The Company leased 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 for the remainder of 2003 and for each of the next five years
that have initial or remaining noncancelable lease terms in excess of one year
are as follows:
Capital Operating
Leases Leases
------- ---------
2003 $ 58 $ 3,692
2004 198 12,586
2005 25 11,325
2006 9 8,863
2007 5,022
2008 4,365
Later years 12,354
---- -------
Total minimum lease payments 290 $58,207
=======
Less imputed interest 18
----
Present value of minimum lease payments 272
Less current portion 223
----
Long-term obligation under capital leases $ 49
====
Assets recorded under capital leases are included in property, plant,
and equipment as follows:
October 9, December 31,
2003 2002
---------- ------------
Machinery and equipment $4,017 $4,038
Less accumulated depreciation 3,907 3,543
------- ------
Net $ 110 $ 495
======= ======
Total rental expense under operating leases amounted to $12,069 and
$17,932 for the period January 1, 2003, through October 9, 2003, and the year
ended December 31, 2002, respectively.
19
16. INCOME TAXES
The components of the provision (benefit) for income taxes were as
follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- -----------------
CURRENT:
Federal $ 843 $(4,704)
State (18) (52)
Foreign 108 1,622
------- -------
Total current 933 (3,134)
------- -------
DEFERRED:
Federal 5,591 74
State 6,145 1,330
Foreign (2,625) 294
------- -------
Total deferred 9,111 1,698
------- -------
Total provision (benefit)
for income taxes $10,044 $(1,436)
======= =======
The components of the net deferred tax asset were as follows:
October 9, 2003 December 31, 2002
--------------- -----------------
Deferred tax assets:
Accounts receivable $ 1,146 $ 1,805
Inventory 39
Property, plant, and equipment 2,834
Other assets 1,367 9,612
Other liabilities 10,334 15,280
Net operating loss carryforward 2,002 10,651
------- -------
Total deferred tax assets 14,849 40,221
------- -------
Deferred tax liabilities:
Prepaid expenses 1,652 634
Property, plant, and equipment 4,047
Accrued expenses 4,596 10,327
------- -------
Total deferred tax liabilities 10,295 10,961
------- -------
Net deferred tax asset before
valuation allowance 4,554 29,260
Valuation allowance on
deferred tax assets 2,297 17,539
------- -------
Net deferred tax asset $ 2,257 $11,721
======= =======
Based on its projections, the Company does not believe that it is more
likely than not that the benefit associated with the deferred tax assets in
foreign jurisdictions will be entirely realized in future periods. Accordingly,
the Company established a valuation allowance in the amount of $2,297 at October
9, 2003. At December 31, 2002, the Company established a valuation allowance in
the amount of $17,539, of which $15,829 was included as part of the cumulative
effect of a change in accounting principle and $1,710 was included as part of
the results of discontinued operations in the Consolidated Statement of
Operations for the year ended December 31, 2002. The benefit
20
associated with the Company's deferred tax assets at December 31, 2002, became
fully realizable as a result of the gain on debt extinguishments, and therefore
the valuation allowance was reversed. The net benefit of $15,242 resulting from
the change in valuation allowance for deferred tax assets was included as a
component of the provision for income taxes for the period January 1, 2003,
through October 9, 2003. The Company has a net operating loss carryforward of
$4,655 at October 9, 2003, all of which expires in 2022.
17. STOCK OPTIONS
The Company granted stock options under plans adopted in 1996 (the
"1996 Plans") and a plan adopted in 1998 (the "1998 Plan"). Under the 1996
Plans, options to purchase common stock of the Company were granted to key
employees of the Company and its affiliates. Options granted to employees under
the 1996 Plans had a term of ten years and initially became 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. In May 2000, all outstanding
employee option grants under the 1996 Plans were amended to provide for ratable
vesting over the five-year period. Also under the 1996 Plans, options were
granted to members of the Board of Directors who were not employees. Under the
1996 Plans, newly appointed non-employee directors were granted 10,000 options
that vested ratably over a two-year period, and on each anniversary of their
appointment were granted an additional 2,000 options that were fully vested on
the grant date. All options granted to non-employee directors under the 1996
Plans had an exercise price equal to the fair market value on the grant date and
had a term of ten years. The 1996 Plans provided for a maximum of 1,680,000
shares of the Company's common stock to be available for issuance upon exercise
of options.
As of the adoption of the 1998 Plan, no further grants were made under
the 1996 Plans. The 1998 Plan allowed for the granting of options to purchase
common stock of the Company to employees of the Company and its affiliates,
non-employee directors, and independent contractors. Options were granted under
the 1998 Plan to members of the Board of Directors who were not employees of the
Company or any of its affiliates in the same manner as under the provisions of
the 1996 Plans. Options granted under the 1998 Plan had a term of ten years
unless a shorter term was established at the date of grant. Initially, options
granted under the 1998 Plan vested over a five-year period and, unless an
alternative vesting schedule was established in individual award agreements,
vested 20% on the first anniversary of the grant date, 5% on each of the second
through fourth anniversaries of the grant date, and 65% on the fifth anniversary
of the grant date. In May 2000, the 1998 Plan was amended to change the standard
vesting schedule on future grants to be ratable over a five-year period unless
an alternative vesting schedule was established in individual award agreements.
In addition, in May 2000, all outstanding grants under the 1998 Plan were
amended to provide for ratable vesting over a five-year period. The 1998 Plan
provided for a maximum of 2,800,000 shares of the Company's common stock to be
available for issuance upon exercise of options.
In connection with the tender offer (see Note 3 to the Consolidated
Financial Statements), the Company repurchased 923,000 in-the-money stock
options held by employees and non-employee directors for approximately $400. The
amount paid to repurchase the in-the-money stock options, which was the
difference between the price paid per share in connection with the tender offer
and the exercise price of each such stock option, is included as a component of
"Other income (expense)" in the Consolidated Statement of Operations for the
period January 1, 2003, through October 9, 2003. All other stock options were
cancelled without further payment.
21
Information relating to activity in the Company's stock option plans is
summarized in the following table. All option grants included in the following
table had exercise prices equal to market price.
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
----------- -------------- ----------
Options outstanding at January 1, 2002 2,639,633 $23.23
Options granted 948,000 $ 0.42 $0.37
Options forfeited (565,200) $31.16
----------
Options outstanding at December 31, 2002 3,022,433 $14.59
Options repurchased (923,000) $ 0.41
Options forfeited (53,400) $16.88
Options cancelled (2,046,033) $20.93
----------
Options outstanding at October 9, 2003 -
==========
Options exercisable at December 31, 2002 1,706,627 $21.00
==========
The Company accounted for the issuance of stock options to employees
and non-employee directors in accordance with the provisions of APB No. 25,
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 for the period January 1, 2003, through October 9,
2003, and the year ended December 31, 2002, on the options granted to employees
and non-employee directors.
The Company accounted for the issuance of stock options to
non-employees, other than directors, in accordance with the provisions of SFAS
No. 123, which requires the cost of a transaction to be measured at the date of
grant based on the fair value of the options granted. SFAS No. 123 also provides
for an alternative measurement of compensation cost based on the fair value of
the options granted to employees and non-employee directors. 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. For the period January 1, 2003,
through October 9, 2003, and the year ended December 31, 2002, the Company
incurred $5 and $11, respectively, of compensation expense related to all
non-employee option grants.
The following weighted average assumptions were used in calculating the
fair value of options granted by the Company during 2002:
Risk-free interest rate 3.64%
Expected life 7.0 years
Expected volatility 1.1393
Expected dividend yield 0%
18. RELATED PARTY TRANSACTIONS
Fred Drasner, Chairman of the Board of Directors of the Company and
Chief Executive Officer until August 4, 2003, was President and Chief Executive
Officer of Applied Printing Technologies, L.P. ("Applied Printing") until
September 30, 2004, an entity beneficially owned by Mortimer B. Zuckerman, who
was a director of the Company until August 4, 2003. Prior to August 4, 2003,
Applied Printing owned approximately 22.0% of the Company's outstanding common
stock. The Company conducted business with Applied Printing and other affiliates
beneficially owned by both Mr. Drasner and Mr. Zuckerman, including Daily News,
L.P. (the "Daily News") and U.S. News & World Report, L.P. ("U.S. News").
Subsequent to August 4, 2003, Applied Printing, Daily News, and U.S. News
continued to be affiliates of the Company due to Mr. Drasner's position as
Chairman of the Company. In addition, the Company conducted business with
Nancy's Specialty Foods, Inc., one of Kohlberg's portfolio companies and
22
therefore an affiliate subsequent to August 4, 2003. The Company did not
guarantee any arrangements on behalf of its affiliates and has not entered into
any transactions with affiliates outside of the normal course of business other
than those disclosed.
DUE TO/FROM AFFILIATES - Affiliates owed the Company $3,536 and $405 at
October 9, 2003, and December 31, 2002, respectively. The amount affiliates owed
the Company at October 9, 2003, includes $3,231 due from KAGT for payments made
by the Company related to the tender offer (see Note 3 to the Consolidated
Financial Statements). The remaining balance owed by affiliates at October 9,
2003, and the entire balance owed by affiliates at December 31, 2002, represent
trade receivables. The Company owed affiliates $46,840 and $442 at October 9,
2003, and December 31, 2002, respectively. The amount owed affiliates at October
9, 2003, includes the $44,400 of subordinated debt from KAGT borrowed in
connection with the overall recapitalization (see Note 3 to the Consolidated
Financial Statements) plus accrued interest of $814, as well as an additional
loan of $1,350 from KAGT. The subordinated debt bears interest at 10% per annum
and had an original maturity date of August 4, 2004. Both the subordinated debt,
including accrued interest, and the loan were cancelled in connection with the
merger of the Company with KAGT on October 10, 2003. The remaining balance owed
to affiliates at October 9, 2003, and the entire balance owed to affiliates at
December 31, 2002, represent trade payables and amounts due for shared services.
AFFILIATE SALES AND PURCHASES - The Company provided services to U.S.
News, the Daily News, and Applied Printing pursuant to written agreements. The
agreement with Applied Printing was terminated in July 2002. The agreement with
U.S. News expired on December 31, 2000, however, the Company continued to
provide services to U.S. News on the same terms through February 2002, at which
time the arrangement was terminated. The agreement with the Daily News was
renewable annually by mutual agreement of the parties, and in May 2003 the
Company entered into a new agreement with the Daily News that expires in
December 2005. The Company also occasionally provided services to and purchased
services from related parties in addition to those services covered by these
agreements. Sales to and purchases from related parties were as follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
----------------- -----------------
Affiliate sales $1,829 $4,974
Affiliate purchases $ 344 $ 423
Sales to affiliates represented 0.6% and 1.2% of the Company's revenues
for the period January 1, 2003, through October 9, 2003, and the year ended
December 31, 2002, respectively.
SHARED SERVICES - The Company received certain legal, computer, and
administrative services from the Daily News and U.S. News. The charges incurred
for such services totaled $947 and $970 for the period January 1, 2003, through
October 9, 2003, and the year ended December 31, 2002, respectively.
LEASES - The Company leased office space in Washington, D.C., from U.S.
News for which it incurred charges of $47 for the year ended December 31, 2002.
The lease for this space was terminated in February 2002 in connection with the
termination of the agreement with U.S. News to provide services. The Company
leased a facility in New York City from the Daily News for the period January 1,
2003, through October 9, 2003, and the year ended December 31, 2002, for which
charges were incurred of $96 and $104, respectively. The Company incurred
charges with U.S. News of $313 and $390 for the period January 1, 2003, through
October 9, 2003, and for the year ended December 31, 2002, respectively, for
leasing additional space used at its corporate headquarters in New York City.
19. RETIREMENT PLANS
The Company had a defined contribution plan in which eligible employees
who have attained 21 years of age may contribute on both a pretax and after-tax
basis. Company contributions vest ratably over each of the first five
23
years of service. Company contributions to the plan were $1,887 and $2,692 for
the period January 1, 2003, through October 9, 2003, and the year ended December
31, 2002, respectively.
The Company also contributed to various multi-employer benefit plans that
cover employees pursuant to collective bargaining agreements. The total
contributions to multi-employer plans charged to operations for the period
January 1, 2003, through October 9, 2003, and the year ended December 31, 2002,
were $373 and $553, respectively.
20. CONCENTRATION OF CREDIT RISK
Other than interest rate swap agreements (see Note 13 to the
Consolidated Financial Statements), financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents and trade receivables. The Company maintained cash balances and cash
equivalents with high credit quality financial institutions.
The Company provided credit to customers on an uncollateralized basis
after evaluating customer creditworthiness. These customers are not concentrated
in any specific geographic region, but are concentrated in the publishing,
advertising agency, entertainment, and retailing businesses. The Company's five
largest nonaffiliated customers provided approximately 33% of consolidated
revenues. In addition, amounts due from these customers represented
approximately 31% of trade accounts receivable. The Company had sales to two
customers that accounted for approximately 22% of the Company's consolidated
revenues for the period January 1, 2003, through October 9, 2003.
Any termination or significant disruption of the relationships with
principal customers could have a material adverse effect on the Company's
business, financial condition, results of operations, and cash flows.
21. COMMITMENTS AND CONTINGENT LIABILITIES
The Company was contingently liable as a result of transactions arising
in the ordinary course of business and was involved in certain legal proceedings
in which damages and other remedies were sought. In the opinion of the Company's
management, after review with counsel, the ultimate resolution of these other
matters will not have a material effect on the Company's Consolidated Financial
Statements.
22. GUARANTEES
In connection with the sales of certain assets and businesses
previously owned by the Company, the Company agreed to indemnify the purchasers
of such assets and businesses for breaches of certain standard representations
and warranties, including tax and environmental matters for specified periods of
time. In the event any such indemnification obligation was to be triggered, the
Company may be liable to the extent that the damages incurred by the purchaser
exceed certain thresholds contained in the sale agreements. There is no limit on
the Company's maximum exposure for these matters. The Company had recorded a
liability of $1,500 related to such potential contingencies on the sale of its
publishing business, which was included as part of "Other current liabilities"
in the Consolidated Balance Sheet at December 31, 2002. At the time of the sale
of its publishing business, the Company established an escrow fund for such
contingencies, which had a balance of $1,500 at December 31, 2002. In April
2003, the Company reversed the liability related to such contingencies upon
receipt of the remaining escrow fund (see Note 5 to the Consolidated Financial
Statements). The Company continues to be liable for any potential indemnities
related to the sales of these businesses.
The Company subleases certain leased properties and equipment no longer
used by the Company. Under certain of these subleases, the sublessee remits
payment directly to the landlord or lessor, although the Company remains the
primary obligor for the lease payments. If any of these third parties ceased to
remit payment directly to the landlord or lessor, the Company would be liable to
make such payments. At December 31, 2002, the maximum potential amount for which
the Company could have been held liable was approximately $4,900. At October 9,
2003, the maximum potential amount for which the Company could have been liable
was approximately $4,300. The Company
24
recorded a liability of approximately $2,000 and $1,000, respectively, related
to these subleases, which is included as part of "Other current liabilities" in
the Consolidated Balance Sheets at October 9, 2003, and December 31, 2002,
respectively.
23. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes were as follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
---------------- ------------------
Interest paid $14,416 $18,160
Income taxes paid (refunded) - net $ 1,579 $(4,993)
Noncash investing and financing activities were as follows:
January 1, 2003, January 1, 2002,
through through
October 9, 2003 December 31, 2002
------------------ -----------------
Book value of preference shares of
a subsidiary in excess of
amount paid on redemption $37,208
Vesting of stock options issued to
non-employees $ 5 $ 11
Common stock issued as additional
consideration for prior
period acquisitions $ 720
Warrants issued to banks $ 574
Reduction of goodwill from reversal
of tax contingency related to
prior period acquisition $5,000
24. 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 have
realized in a current market exchange.
25
The carrying amount and estimated fair values of financial instruments
are summarized as follows:
October 9, December 31,
2003 2002
---------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ------------- ------------ -------------
ASSETS:
Cash and cash equivalents $ 8,932 $ 8,932 $ 4,721 $ 4,721
Other current assets $ 599 $ 599 $ 1,166 $ 1,166
LIABILITIES:
Debt $73,516 $73,464 $163,640 $163,629
Obligations under capital leases $ 272 $ 242 $ 613 $ 600
Subordinated notes $ 29,894 $ 5,231
Minority interest $ 42,045 $ 27,361
Interest rate swap agreements $ 1,403 $ 1,403
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.
OTHER CURRENT ASSETS - the carrying amount of non-trade accounts
receivable is a reasonable approximation of fair value.
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 was able to obtain funds under its credit facilities. The
carrying amount of the amounts outstanding under the Company's credit facilities
is a reasonable approximation of fair value since they were variable-rate
obligations.
SUBORDINATED NOTES - the fair value of the Subordinated Notes at
December 31, 2002, was estimated based on quoted market prices.
MINORITY INTEREST - the fair value of the Preference Shares at December
31, 2002, was estimated by discounting the future stream of payments using the
rate at which the Company was able to obtain funds under its credit facility.
OBLIGATIONS UNDER CAPITAL LEASES - the fair value of obligations under
capital leases, including the current portion, was estimated by discounting the
future streams of payments using the rate at which the Company was able to
obtain funds under its credit facilities.
INTEREST RATE SWAP AGREEMENTS - the fair value of the interest rate
swap agreements was the estimated amount the Company would have to pay to
terminate the agreements.
25. COMPREHENSIVE INCOME
Comprehensive income includes all changes to equity that are not the
result of transactions with shareholders and is comprised of net income and
other comprehensive income. No income tax effect is reported for unrealized
gains and losses from foreign currency translation adjustments since they relate
to indefinite investments in foreign subsidiaries. The components of "Other
comprehensive loss" in the Consolidated Statements of Operations, including
related tax effects, were as follows:
26
Pretax After tax
amount Tax effect amount
--------- ---------- ---------
January 1, 2003, through October 9, 2003
- ----------------------------------------
Foreign currency translation adjustments $ (72) $ - $ (72)
Reclassification adjustment for swap transactions
realized in net income 36 (15) 21
----- ----- -----
Total other comprehensive loss $ (36) $ (15) $ (51)
===== ===== =====
January 1, 2002, through December 31, 2002
- ------------------------------------------
Foreign currency translation adjustments $(669) $ - $(669)
Reclassification adjustment for swap transactions
realized in net income 436 (181) 255
----- ----- -----
Total other comprehensive loss $(233) $(181) $(414)
===== ===== =====
The after-tax components of "Accumulated other comprehensive loss" in
the Consolidated Balance Sheets were as follows:
October 9, December 31,
2003 2002
----------- ------------
Foreign currency translation adjustments $(704) $(632)
Derivative and hedging activities (21)
----- -----
Total accumulated other comprehensive loss $(704) $(653)
===== =====
27