<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1996
_____________
Commission File Number 0-28208
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
13-3864004
(I.R.S. Employer Identification No.)
28 WEST 23RD STREET
NEW YORK, NY
(Address of principal executive offices)
10010
(Zip Code)
212-929-4111
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ____________ No X
-------------
The number of shares of Common Stock, $0.01 par value, outstanding as of May 30,
1996: 13,810,000
----------
1
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<PAGE>
On April 16, 1996, Applied Printing transferred, assigned and conveyed
to the Company substantially all of the assets relating to the prepress, digital
imaging services and related businesses (the "Predecessor Group") of Applied
Printing. Also on April 16, 1996, the Company's registration statement on Form
S-1 under the Securities Act of 1933, as amended, relating to the initial public
offering (the "Offering") of the Common Stock, was declared effective. The
Offering closed on April 22, 1996. Accordingly, because the Company had no
operations for the three months ended March 31, 1996 on a stand alone basis,
this Quarterly Report on Form 10-Q reflects financial information of the
Predecessor Group for the quarters ended March 31, 1996 and 1995 and reflects
the financial position of the Company as of March 31, 1996 prior to the transfer
of the assets from Applied Printing. As of March 31, 1996, the Company had not
commenced operations; accordingly, no statement of operations and cash flows is
presented for the three months ended March 31, 1996.
The Company was formed to acquire substantially all of the assets
relating to the prepress, digital imaging services and related businesses of
specific divisions of the Predecessor Group subject to the assumption by the
Company of certain specified liabilities relating to the Predecessor Group in
exchange for 9,309,000 shares of the Company's Common Stock, and assumption of
$21.0 million of indebtedness owed by Applied Printing to its primary
institutional lender and payment of a $16.0 million note to Applied Printing.
Upon the closing of the Offering, the Company received net offering
proceeds of approximately $47.2 million. Of these proceeds, $21.0 million was
used to repay the assumed institutional indebtedness. In addition, $16.0 million
of these proceeds has been invested in short-term interest-bearing investments
which collateralize a standby letter of credit which, in turn, collateralizes
payment of the note payable to Applied Printing. The remaining proceeds will
be used for working capital, capital expenditures and other general corporate
purposes.
2
<PAGE>
<TABLE>
<CAPTION>
Part I - Financial Information
------------------------------
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEET
Asset
January 2, 1996 March 31, 1996
--------------- --------------
(Unaudited)
<S> <C> <C>
Cash................................................................................ $ 100 $ 100
============ ============
Shareholder's Equity
Preferred stock; no par value, 10,000,000 shares authorized, none issued
and outstanding................................................................... $ - $ -
Common stock; par value $.01, 40,000,000 authorized shares, 100 issued
and outstanding................................................................... 1 1
Paid in capital..................................................................... 99 99
------------ ------------
Total shareholder's equity........................................................ $ 100 $ 100
============ ============
</TABLE>
See the accompanying notes to balance sheet.
3
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO BALANCE SHEET
(in thousands, except share amounts)
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Applied Graphics Technologies, Inc. (the "Company") was incorporated
in Delaware on December 12, 1995. Applied Printing Technologies, L.P. and its
subsidiaries ("Applied Printing") were issued 100 shares of Common Stock and
became the Company's sole shareholder.
On April 16, 1996, the Company's registration statement on Form S-1
under the Securities Act of 1933, as amended, relating to the initial public
offering (the "Offering") of the Company's Common Stock, was declared effective
(See Note 2 below). The Offering closed on April 22, 1996. Accordingly, because
the Company had no operations for the three months ended March 31, 1996 on a
stand alone basis, no statement of operations and cash flows is presented for
the period ended March 31, 1996.
The Company was formed to acquire substantially all the assets
relating to the prepress, digital imaging services and related businesses of
specific divisions of Applied Printing (collectively, the "Predecessor Group")
subject to the assumption by the Company of certain specified liabilities
relating to the Predecessor Group in exchange for 9,309,900 shares of the
Company's Common Stock and $37,000 of additional consideration ("Additional
Consideration"), as defined below. On April 16, 1996, Applied Printing
transferred, assigned and conveyed to the Company substantially all of the
assets of the Predecessor Group.
The Additional Consideration consisted of (i) the assumption by the
Company on April 16, 1996, (See Note 2 below), of the principal amount of
collateralized senior indebtedness to Applied Printing's primary institutional
lender (the "Institutional Senior Indebtedness") of $21,000, and (ii) the
issuance of a promissory note by the Company to Applied Printing (the "Applied
Printing Note") of $16,000. Ninety percent of the principal of the Applied
Printing Note plus accrued interest is payable five months following the closing
of the Offering, and the remaining 10% of principal plus accrued interest is
payable February 1, 1997. The Applied Printing Note is collateralized by a
letter of credit obtained by the Company.
The accompanying interim unaudited balance sheet has been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included with the balance
sheet prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. Management
believes, however, that all adjustments and eliminations, consisting only of
normal recurring adjustments necessary to present fairly the financial position
of the Company as of March 31, 1996 have been included. The interim balance
sheet and notes thereto should be read in conjunction with the prospectus of
Applied Graphics Technologies, Inc. dated April 16, 1996.
4
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO BALANCE SHEET
(in thousands, except share amounts)
(unaudited)
2. INITIAL PUBLIC OFFERING:
The Company received net offering proceeds of approximately $47,170
from the Offering. Of these proceeds, $21,000 was used to repay the
Institutional Senior Indebtedness to Applied Printing's primary institutional
lender which had been assumed by the Company in connection with its formation.
In addition, $16,000 of these proceeds has been invested in short term interest-
bearing investments which collateralize a standby letter of credit which, in
turn, collateralizes payment of the Applied Printing Note payable to Applied
Printing. The remaining proceeds will be used for working capital, capital
expenditures and other general corporate purposes.
5
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31, Pro Forma
----------------------------------------------------------------
1995 1996 March 31, 1996
----------------------------------------------------------------
Assets (unaudited) (unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents ..................................... $ 666 $ - $ -
Accounts receivable (net of allowance of $ 1,431, 1,572 and
$ 1,572 respectively) ........................................ 19,476 22,031 22,031
Due from affiliates ........................................... 1,841 633 633
Inventory ..................................................... 3,582 3,321 3,321
Prepaid expenses .............................................. 1,925 1,432 1,432
Other current assets .......................................... 1,125 568 568
------------- ---------------- -------------
Total current assets ......................................... 28,615 27,985 27,985
------------- ---------------- -------------
Property, plant and equipment, net .............................. 13,741 14,436 14,436
Other assets .................................................... 2,453 3,549 3,549
------------- ---------------- -------------
Total assets .............................................. $ 44,809 $ 45,970 $ 45,970
============= ================= ==============
Liabilities and Owners' Deficit
Current liabilities:
Bank overdraft................................................. $ - $ 1,690 $ 1,690
Intercompany borrowings ....................................... 30,181 31,422 -
Assumed debt and Applied Printing Note ........................ - - 37,000
Notes payable ................................................. 711 677 677
Accounts payable and accrued expenses ......................... 20,096 21,967 21,967
Capital leases ................................................ 1,576 1,365 1,365
Other current liabilities ..................................... 1,125 4,422 4,422
------------- ---------------- -------------
Total current liabilities .................................... 53,689 61,543 67,121
------------- ---------------- -------------
Notes payable ................................................... 853 768 768
Obligations under capital leases ................................ 2,415 2,754 2,754
Other non-current liabilities ................................... 7,233 6,318 6,318
------------- ---------------- -------------
Total liabilities ............................................ 64,190 71,383 76,961
------------- ---------------- -------------
Commitments and contingencies
Owners' deficit ................................................. (19,381) (25,413) (30,991)
------------- ---------------- -------------
Total liabilities and owners' deficit ..................... $ 44,809 $ 45,970 $ 45,970
============= ================ =============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
6
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
COMBINED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
--------------------------------------------------
1995 1996
--------------------------------------------------
<S> <C> <C>
Net sales .......................................................... $ 30,140 $ 30,598
Cost of sales ...................................................... 22,526 22,329
------------------- ------------------------
Gross profit ..................................................... 7,614 8,269
Selling expenses ................................................... 4,295 3,679
General and administrative expenses ................................ 2,413 2,145
Corporate allocations .............................................. 1,426 1,232
------------------- ------------------------
Total operating expenses ......................................... 8,134 7,056
------------------- ------------------------
Operating (loss) income........................................... (520) 1,213
Interest expense ................................................... 724 904
Other (income) expense, net ........................................ (280) 163
------------------- ------------------------
Net (loss) income ................................................ $ (964) $ 146
==================== ========================
Pro Forma Net Income Data:
Income before taxes, as reported ................................... $ 146
Pro forma income taxes ............................................. 29
------------------------
Pro forma net income............................................... $ 117
========================
Pro forma net income per share .................................... $ 0.01
========================
Shares used in computing pro forma net income per share ........... 9,774,833
========================
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
7
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
COMBINED STATEMENTS OF CHANGES IN OWNERS' DEFICIT
(in thousands)
(unaudited)
Balance, December 31, 1995 .............................. $(19,381)
Net income ..................................... 146
Distribution ................................... (6,178)
--------
Balance, March 31, 1996 ................................. (25,413)
Pro forma adjustment ........................... (5,578)
--------
Balance, March 31, 1996 (pro forma) ..................... $(30,991)
========
The accompanying notes are an integral part of the combined financial
statements.
8
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
----------------------------------------
1995 1996
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ (964) $ 146
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization ................................ 1,270 1,168
Amortization of goodwill ..................................... 63 30
Amortization of deferred charges ............................. 333 149
Provision for losses on accounts receivable .................. 88 68
Gain on insurance settlement ................................. (347) (18)
Loss on sale/disposal of fixed assets ........................ 64 104
Change in assets/liabilities:
(Increase) decrease in accounts receivable ...................... 1,059 (2,623)
(Increase) decrease in inventory ................................ (657) 261
(Increase) decrease in other current assets and
prepaid expenses ............................................. 2,109 826
(Increase) decrease in other assets ............................. (12) (1,126)
Increase (decrease) in other current and non-current liabilities. (235) 2,233
Increase (decrease) in due from/to affiliates ................... 421 4,099
Increase (decrease) in accounts payable and accrued expenses .... 3,408 1,871
-------------- -------------------
Net cash provided by operating activities .................... 6,600 7,188
-------------- -------------------
Cash flow from investing activities:
Acquisitions of equipment ....................................... (919) (1,650)
Proceeds from the sale of fixed assets .......................... - 291
Net proceeds received from insurance claims ..................... (3) 243
-------------- -------------------
Net cash (used in) investing activities ...................... (922) (1,116)
-------------- -------------------
Cash flow from financing activities:
Proceeds from bank overdraft..................................... - 1,690
Proceeds from sale leaseback transactions ....................... 427 -
Principal payments on notes and capital lease obligations ....... (1,384) (600)
Increase (decrease) in intercompany borrowings, net ............. (2,065) (1,650)
Net contributions (distributions) from/to Applied Printing ...... (1,179) (6,178)
-------------- -------------------
Net cash (used in) financing activities ...................... (4,201) (6,738)
-------------- -------------------
Net (decrease) increase in cash and cash equivalents ................. 1,477 (666)
Cash and cash equivalents at beginning of period ..................... 90 666
-------------- -------------------
Cash and cash equivalents at end of period ........................... $ 1,567 $ -
============== ===================
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
9
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The Predecessor Group to Applied Graphics Technologies, Inc. includes
specific divisions of Applied Printing Technologies, L.P., ("Applied Printing")
and comprises Applied Printing's prepress, digital imaging services and related
businesses (collectively the "Predecessor Group"). The Predecessor Group is an
independent provider of digital prepress services to magazine publishers,
advertising agencies, entertainment companies and catalog retailers. In
addition, the Predecessor Group provides advanced digital imaging services such
as digital archiving and distribution services.
On April 16, 1996, Applied Printing transferred, assigned and conveyed
to Applied Graphics Technologies, Inc. (the "Company") substantially all of the
assets relating to the Predecessor Group. Also on April 16, 1996, the Company's
registration statement on Form S-1 under the Securities Act of 1933, as amended,
relating to the initial public offering (the "Offering") of the Company's common
stock, was declared effective (See Note 8). The Offering closed on April 22,
1996. Accordingly, because the Company had no operations during the three months
ended March 31, 1996 on a stand alone basis, the financial statements include
the combined statements of operations and cash flows of the Predecessor Group
for the three months ended March 31, 1996 and 1995.
The accompanying combined financial statements of the Predecessor
Group have been prepared by combining the assets, liabilities, results of
operations and cash flows of the specific divisions that comprise the
Predecessor Group. Historically, these specific divisions have operated as
separate business units and maintained their own books and records. As Applied
Printing manages the cash and financing requirements of all of its divisions
centrally, the interest expense, and related intercompany borrowing, represent
an allocation of Applied Printing's interest expense and the related debt. As
discussed in Note 5, this allocation of debt is presented as an intercompany
borrowing. Additionally, Applied Printing and other related parties have
historically provided certain corporate, general and administrative services to
the Predecessor Group including general management, treasury, financial
reporting, and legal services. Accordingly, the financial statements include an
allocation of expenses for such services. The combined financial position and
combined results of operations of the Predecessor Group may differ from results
that may have been achieved had the Predecessor Group operated as an independent
entity. Additionally, future expenses incurred as an independent entity may not
be comparable to the historical levels.
All transactions between divisions included in the combined financial
statements have been eliminated.
The combined financial statements have been prepared by the management
of the Predecessor Group in accordance with the accounting policies as included
in the Predecessor Group's combined financial statements included in the
Company's registration statement (No. 333-00478) on Form S-1 filed under the
Securities Act of 1933 and should be read in conjunction with the Notes to the
combined financial statements of the Predecessor Group appearing therein. In the
opinion of the management of Predecessor Group, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation have been
included in the combined financial statements. The statements are based in part
on approximations and have not been audited by independent accountants. The
annual financial statements will be audited by independent accountants. The
results of operations for the three months ended March 31, 1996, are not
necessarily indicative of the results to be expected for the entire fiscal year.
10
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENT
(in thousands, except share and per share amounts)
(unaudited)
2. PRO FORMA INCOME TAXES:
The Predecessor Group is not a legal entity which is subject to tax.
It is part of Applied Printing which is treated as a partnership for federal
and state income tax reporting purposes. Federal and certain state taxable
income of the partnership flow through and are taxable to the partners.
The Predecessor Group's status terminated immediately prior to the
completion of the Offering. The accompanying statement of operations for the
three months ended March 31, 1996 reflects a provision for income taxes on an
unaudited pro forma basis as if the Predecessor Group had been a C Corporation,
subject to applicable federal and state income taxes.
Pro forma income for income tax purposes differs from amounts reported
in the financial statements principally due to the inclusion for tax purposes of
nondeductible expenses, reserves recorded for financial reporting purposes that
are currently disallowed for tax, and certain accrued expenses.
3. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share, as reflected on the combined statement
of operations has been determined based on the methodology outlined below.
However, once the Offering becomes effective, the number of shares utilized in
determining net income per share will be based on the weighted average number of
shares outstanding and, accordingly, will exclude the number of common shares
(464,833 as of March 31, 1996) that the Predecessor Group would have needed to
issue in order to fund the distribution referred to below ($5,578 as of March
31, 1996).
Pro forma net income per share is computed using pro forma net income
and is based on the total of (a) the number of shares of common stock issued in
the formation of the Company (9,310,000, which is inclusive of 100 shares issued
in connection with the initial incorporation) and (b) the number of common
shares (464,833 as of March 31, 1996) that the Predecessor Group would have
needed to issue at the initial offering price ($12.00 per share) to fund the
distribution of $5,578 to Applied Printing. The distribution of $5,578
represents the incremental difference between the debt assumed and the Applied
Printing Note (aggregating $37,000) and the intercompany borrowing amount
($31,422 as of March 31, 1996), as discussed in Note 5 of the combined financial
statements.
Additionally, the pro forma balance sheet information as of March 31,
1996 has been adjusted for the pro forma effect of the additional obligation of
$5,578.
11
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
4. INVENTORY:
The components of inventory are as follows:
December 31, March 31,
1995 1996
---- ----
Work-in-Process............ $2,518 $2,589
Raw Materials.............. 1,064 732
------ ------
$3,582 $3,321
====== ======
5. INTERCOMPANY BORROWINGS:
The Predecessor Group has been financed principally through debt from
Applied Printing. Historically, Applied Printing has financed all its
operations, including those of the Predecessor Group, with Institutional Senior
Indebtedness, borrowings from the Daily News, L.P. and borrowings from the
majority limited partner (collectively "Borrowings").
The accompanying combined financial statements include an allocation
of Applied Printing's interest expense and related Borrowings. Applied
Printing's interest expense related to the Borrowings has been allocated to the
Predecessor Group based on the ratio of net assets of the Predecessor Group,
before an allocation of intercompany debt, to the sum of the total consolidated
net assets of Applied Printing plus the Applied Printing debt that is not
directly attributable to specific divisions within Applied Printing. The
intercompany borrowing amounts reflected in the accompanying combined financial
statements represent derived amounts which have been computed by applying
Applied Printing's weighted average interest rate to the allocated interest
expense, calculated using the methodology discussed above. Intercompany
borrowings are $30,181 and $31,422 as of December 31, 1995 and March 31, 1996,
respectively. The interest expense allocated to the Predecessor Group is as
follows:
Three months ended
March 31,
---------------------------
1995 1996
---- ----
Interest expense ................... $ 539 $ 770
======= ========
Weighted average interest rate...... 8.88% 9.80%
======= ========
On March 31, 1996, Applied Printing's primary institutional lender had
a collateral interest in the Predecessor Group's assets. As discussed more fully
in Note 8, this lender's collateral interest in the Predecessor Group was
released in conjunction with the repayment of $21,000 of Institutional Senior
Indebtedness with proceeds from the Offering (See Note 8).
12
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
6. RELATED PARTY TRANSACTIONS:
The following is a summary of transactions between the Predecessor Group
and related parties:
Three Months Ended
March 31,
-------------------
1995 1996
-------------------
Sales to related parties........ $1,780 $3,020
====== ======
Purchases from related parties.. $ 203 $ 492
====== ======
Corporate allocations........... $1,426 $1,232
====== ======
7. COMMITMENTS AND CONTINGENT LIABILITIES:
The Predecessor Group is subject to certain legal proceedings and
claims arising in connection with its business. It is management's opinion that
the ultimate resolution of the aforementioned claims will not have a material
effect on the Predecessor Group's financial position, annual results of
operations or cash flows.
Applied Printing and its corporate general partner are defendants in
litigation arising out of Applied Printing's business. Applied Printing does
not believe that any of such litigation will have a material adverse effect on
its business. The Predecessor Group is not a defendant in any of such
litigation, and does not believe there is a sustainable basis for the
Predecessor Group to be named as a defendant in any of such litigation. If the
Predecessor Group were to be named or held responsible in connection with any of
such litigation, the Predecessor Group is indemnified by Applied Printing under
the terms of the conveyance agreement between Applied Printing and the
Predecessor Group.
13
<PAGE>
PREDECESSOR GROUP to APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
8. INITIAL PUBLIC OFFERING
The Offering closed on April 22, 1996 and the Company received net
offering proceeds of approximately $47,170. Of these proceeds, 21,000 was used
to repay the Institutional Senior Indebtedness to Applied Printing's primary
institutional lender which had been assumed by the Company in connection with
its formation. In addition, $16,000 of these proceeds has been invested in
short-term interest-bearing investments which collateralize a standby letter of
credit which, in turn, collateralizes payment of the Applied Printing Note
payable to Applied Printing. The Applied Printing Note also was executed in
connection with the formation of the Company. The remaining proceeds will be
used for working capital, capital expenditures and other general corporate
purposes.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW.
On April 16, 1996, Applied Printing Technologies, L.P. ("Applied
Printing") transferred, assigned and conveyed to Applied Graphics Technologies,
Inc. (the "Company") substantially all of the assets relating to the prepress,
digital imaging services and related businesses (the "Predecessor Group") of
Applied Printing. Also on April 16, 1996, the Company's registration statement
on Form S-1 under the Securities Act of 1933, as amended, relating to the
initial public offering (the "Offering") of the Company's common stock, was
declared effective. The Offering closed on April 22, 1996. Accordingly, because
the Company had no operations for the three months ended March 31, 1996 on a
stand alone basis, this Quarterly Report on Form 10-Q reflects financial
information of the Predecessor Group for the quarters ended March 31, 1996 and
1995.
Prior to the Offering, various expenses, such as interest expense on
Applied Printing's debt not directly attributable to specific divisions within
Applied Printing and corporate expenses relating to services provided by Applied
Printing to the Predecessor Group such as, general management, treasury,
financial reporting and legal services, were allocated among the Predecessor
Group and the other divisions of Applied Printing. Corporate allocations were
based upon specific identification of expenses attributable to the Predecessor
Group, where practicable, and otherwise on a reasonable method for allocating
such costs, such as on a percentage of sales basis. The Predecessor Group's
interest expense consists of interest on equipment notes and leases of the
Predecessor Group and an allocation of Applied Printing's interest expense based
on the ratio of net assets of the Predecessor Group to the sum of the total
consolidated net assets of Applied Printing plus the Applied Printing debt that
was not directly attributable to specific divisions within Applied Printing.
Management believes the most appropriate methodology for allocating the
interest expenses, and related debt, required to finance Predecessor Group's
business is this net asset methodology. Applied Printing manages the cash and
financing requirements of all its divisions centrally and accordingly,
associating cash flow with specific divisions is not practicable. The interest
expense, and related intercompany borrowings, represent an allocation of Applied
Printing's interest expense and the related debt. The resulting intercompany
borrowings are believed to be representative of the external funding required
for the Predecessor Group to finance acquisitions, investment in technology and
all other capital expenditures and the operations of its business.
During the fourth quarter of 1994 and the third quarter of 1995, the
Predecessor Group reorganized its operations. The reorganizations were the
result of the operational impact of acquisitions made during the previous three
years and technological changes within the industry. These efforts resulted in
the geographical consolidation of several operations during 1994 and 1995
designed to gain operational and administrative efficiencies.
As a partnership, Applied Printing was not subject to federal and
certain state income taxes. The Company, as a corporation, is required to pay
federal, state and local income taxes at the applicable rates. Because the
Predecessor Group is part of Applied Printing, which is treated as a partnership
for income tax reporting purposes, the income tax expense for the quarterly
periods presented has been calculated on a pro forma basis as if the Predecessor
Group was a separate taxable entity.
RESULTS OF OPERATIONS
During the first quarter of 1996, the Predecessor Group continued its
effort on expanding the number of on-site arrangements with customers and on
increasing sales of digital imaging services. These efforts resulted in two
additional on-site arrangements to provide prepress services that began in April
and May 1996, increased sales in the first quarter of 1996 at the Company's
digital division and at one of the New York on-site locations. The Company
believes that on-site services give the customer better management of the
prepress process while allowing the Company to reduce costs by minimizing
internal inefficiencies and the costs of interaction with off-site production
personnel. On-site services and digital imaging services tend to have higher
gross profit margins than off-site prepress or related printing services, if
any. In addition, on-site and digital imaging services tend to have lower sales
commissions and related selling costs than other prepress services, particularly
prepress services for advertising agencies and entertainment companies.
15
<PAGE>
For the quarter ended March 31, 1996, net sales were $30.6 million, an
increase of approximately $460,000 or 1.5% over the corresponding period in
1995. This increase was primarily due to increased sales in the first quarter of
1996 at the Company's digital division and at one of the New York on-site
locations.
Gross profit as a percentage of sales increased in the first quarter
of 1996 to 27.0% from 25.3% during the same period in 1995, primarily as the
result of the increase in digital imaging services and due to improving
efficiencies related to the reorganization effort in 1994 and 1995.
Selling expenses decreased approximately $616,000 or 14.3% from the
corresponding period in 1995. Selling expenses in the first quarter of 1996
represent 12.0% of net sales compared to 14.2% in the corresponding period of
1995. This decrease is attributable to lower sales support costs with respect to
on-site and digital sales coupled with reduced sales to advertising agencies and
to improved effeciencies resulting from to the reorganization in 1995.
General and administrative expenses decreased approximately $268,000
or 11.1% from the corresponding period in 1995, primarily because the 1995
quarter reflected a non-recurring sales tax accrual and because of efficiencies
related to the reorganization in 1995. Decreases in general and administrative
expenses were partially offset, however, by relocation charges incurred in
connection with completion of the consolidation of one of the Company's New York
City facilities into other New York metropolitan area facilities and additional
labor charges to support new locations and expanded operations at existing
locations.
The Predecessor Group recorded a gain of approximately $400,000
relating to insurance proceeds as the result of fire damage to one of the
Predecessor Group's New York facilities during the first quarter of 1995. That
gain was offset by other non-operating expenses resulting in other income, net
of expenses, of approximately $280,000 for the first quarter for 1995. Exclusive
of the gain relating to the fire damage, there were no significant changes in
other income and expense in the first quarter for 1996 as compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES.
Upon the closing of the Offering, the Company received net offering
proceeds of approximately $47.2 million. Of these proceeds, $21.0 million was
used to repay secured senior indebtedness (the "Institutional Senior
Indebtedness") to Applied Printing's primary institutional lender which had been
assumed by the Company in connection with its formation. In addition, $16.0
million of these proceeds has been invested in short-term interest-bearing
investments which collateralize a standby letter of credit which, in turn,
collateralizes payment of a promissory note (the "Applied Printing Note")
payable to Applied Printing. The Applied Printing Note also was executed in
connection with the formation of the Company. The remaining proceeds will be
used for working capital, capital expenditures and other general corporate
purposes.
For 1996, the Company's capital expenditure plan totals approximately
$6.5 million, essentially all of which is for new equipment. Approximately $1.6
million was spent on capital expenditures in the first quarter of 1996.
The Predecessor Group has historically financed its operations and
capital expenditures with cash generated from operations and through
intercompany borrowings from Applied Printing. Applied Printing has financed
all of its operations, including those of the Predecessor Group, with
Institutional Senior Indebtedness and borrowings from affiliates.
The Company believes that the net proceeds from the Offering, cash
flow from operations and its ability to borrow funds from third party lenders
will be sufficient to fund its cash needs for the foreseeable future. The
Company has not obtained any commitment from third party lenders.
16
<PAGE>
PART II. - OTHER INFORMATION
Items 1, 2, 3 and 4 are not applicable and have been omitted.
Item 5.
The Company appointed Louis Salamone, Jr. as Chief Financial Officer, effective
June 3, 1996. Mr. Salamone was previously Vice President and Chief Financial
Officer of Nextel Communications, Inc., a public company in the wireless
communications industry. Prior to joining Nextel Communications, Inc., from 1968
to 1994, Mr. Salamone served in various capacities at Deloitte & Touche LLP,
most recently as a Partner from 1980 to 1994.
Item 6.
(a) Exhibits.
10.1* Vendor Agreement dated January 8, 1992 (the agreement as
amended, September 18, 1995 filed as Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, as amended (File no. 333-00478) is
incorporated herein by reference), as amended, April 19, 1996.
____________________
* Confidential portions omitted and supplied separately to the
Securities and Exchange Commission.
27 Financial Data Schedules
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)
By: /s/ Fred Drasner May 31, 1996
---------------------------
Fred Drasner
Chairman and Chief Executive Officer
(Duly authorized officer)
/s/ Robert E. Heck, Jr.
_____________________________ May 31, 1996
Robert E. Heck, Jr.
Vice President and Director of Finance
(Principal Financial Officer)
17
<PAGE>
EXHIBIT 10.1
CONFIDENTIAL TREATMENT
SECOND AMENDMENT TO LOAN AND PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND PURCHASE AGREEMENT ("Second Amendment")
is entered into as of this 19th day of April, 1996, by and among
*
Applied Printing Technologies, L.P., a Delaware limited partnership with its
principal place of business at 463 Barell, Carlstadt, New Jersey 07072 ("AGT"),
Mortimer B. Zuckerman, an individual
* ("Mr. Zuckerman"), Daily News,
L.P., a Delaware limited partnership with its principal place of business at 450
West 33rd Street, New York, New York 10001, Applied Graphics Technologies, Inc.,
a Delaware corporation with its principal place of business at 28 West 23rd
Street, New York, New York 10010 ("New AGT"), and U.S. News & World Report,
L.P., a Delaware limited partnership with its principal place of business at
2400 N Street N.W., Washington, D.C. 20037 (collectively, the "Zuckerman/Drasner
Properties").
PRELIMINARY STATEMENTS
----------------------
(1) * Mr. Zuckerman and AGT are parties to a Loan and Purchase
Agreement dated as of January 8,1992 (the "Agreement") and as amended by a First
Amendment of Loan and Purchase Agreement dated as of September 18, 1995 (the
"First Amendment" and collectively with the Agreement, the "Purchase Agreement")
pursuant to which * has extended certain Loans to Mr. Zuckerman, and *
and AGT have entered into certain supply arrangements (capitalized terms not
otherwise defined shall have the meanings attributable to them in the Purchase
Agreement).
(2) AGT is proposing to transfer its pre-press and digital imaging
services business and the assets of its integrated printing business located in
Los Angeles, California to New AGT in exchange for 9,309,900 shares of common
stock in New AGT and certain additional consideration on the terms and
conditions set forth in New AGT's preliminary Prospectus, dated March 15, 1996
(the "Preliminary Prospectus") (the "Transaction").
(3) In connection with the Purchase Agreement, AGT is required to make
certain purchases of * from *
(the * Purchases") and the Zuckerman/Drasner Properties are required to
make certain purchases of * and
* .
(4) As a result of the Transaction, a substantial amount of the *
Purchases will be made by New AGT.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-2- CONFIDENTIAL TREATMENT
Section 1. Amendments to Purchase Agreement. The Purchase Agreement is
--------------------------------
amended, effective consummation of New AGT's initial public offering in the
Preliminary Prospectus (the "Effective Date"), as follows:
(a) New AGT shall become a party to the Purchase Agreement on the terms and
conditions set forth in this Second Amendment.
(b) All references in the Purchase Agreement to AGT shall be deemed to be
and hereby are amended to read "AGT and New AGT", including but not
limited to the following sections, with exceptions as set forth below;
provided, however, that nothing in the first clause in this subsection
(b) shall construed so as to conflict with or override any other
provision of this 2nd Amendment that specifically provides for different
treatment:
(1) Section 1 in the definitions of "Actual * Purchases",
"Imputed * Purchases" and "Actual * Purchases", with the
effect that New AGT's purchases shall be included in each of the
foregoing.
(2) Section 9A.
(3) Section 9B, except that with respect to Section 9B(f) (i) the
reference to "AGT" shall not be deemed a reference to "AGT and New AGT",
and (ii) the references to documents or certificates as set forth in
Section 8 shall be deemed to be a reference solely to such documents or
certificates with respect to AGT.
(4) Section 10.
(5) Section 10A.
(6) Section 11, provided that AGT and New AGT shall each be
entitled to Rebates in respect of their respective purchases in
accordance with and pursuant to the formulas set forth in the Rebate
Table.
(7) Section 12.
(8) Section 14, except that the reference to AGT and New AGT in all
requirements therein imposed on AGT shall read "AGT and New AGT shall
each...", so that each of AGT and New AGT shall separately fulfill the
requirements of Section 14 as to itself and without regard to the other
party's obligation.
(9) Section 16, except that the reference to AGT and New AGT shall
be in the disjunctive (e.g., "by AGT, New AGT, or Mr. Zuckerman").
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-3- CONFIDENTIAL TREATMENT
(10) Section 17, except that the reference to AGT and New AGT shall
be in the disjunctive (e.g., "either AGT or New AGT").
(11) Section 18, with the intent that New AGT is jointly and
severally with AGT indemnifying * in all respects set forth
therein.
(12) Section 19, with the intent that New AGT shall be one of the
"parties" which agrees to confidentiality therein.
(13) Section 20, with the intent that New AGT shall be one of the
"parties" described therein.
(14) Section 21.
(15) Section 2 of the First Amendment, except that the reference
shall read "neither Mr. Zuckerman, nor AGT nor New AGT has breached...."
(c) Section 6 is amended by adding a new subdivision (g) at the end thereof
to read in its entirety as follows:
"(g) Mandatory Prepayment. Principal of the Notes is subject to
--------------------
mandatory prepayment under certain circumstances as set forth
in the Notes."
(d) Section 9B is further amended by adding a new subdivision (g) at the end
thereof to read in its entirety as follows:
"(g) * shall have received the following documents from New AGT:
(i) a certificate executed and delivered by an officer of New
AGT (A) covering the due incorporation and continued valid
existence of New AGT under Delaware law as of the date of
delivery, and (B) containing a statement that New AGT has
taken all of the corporate action required under applicable
law to become a party to the Purchase Agreement (including
this Second Amendment) and that it constitutes a continuing,
valid, and binding obligation of New AGT in accordance with
it terms;
(ii) the financial statements for New AGT for the two most recent
fiscal years, certified by independent public accountants
without qualification, together with unaudited statements
for any completed quarter since the date of the last audited
fiscal year (the "Financial Statements") and a certificate
from an officer of New AGT stating that there has been no
material adverse changes in the financial
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-4- CONFIDENTIAL TREATMENT
condition or operations of New AGT except as set forth in
such Financial Statements; and
(iii) New AGT shall deliver an opinion of counsel to New AGT in
form reasonably satisfactory to * respecting the
matters set forth in subsection (i) above and such other
legal matters as are usual and customary at the time of
issuance of a commercial loan."
(e) Section 12 is further amended by adding the following new subsections to
the end thereof to read in their entirety as follows:
"12(i) New AGT has delivered to * a complete copy of the
Registration Statement on Form S-1, File No. 333-00478 and the
related Prospectus. AGT, New AGT and Zuckerman represent such
Registration Statement, as declared effective, does not misstate,
contain any misstatement or omit to state any material fact or
circumstance relating to the business and transactions described
therein and is to the best of their knowledge true and correct in any
material respect.
12(j) New AGT has all of the necessary corporate authorization to
enter into the Purchase Agreement and it has been duly executed and
delivered by an authorized corporate officer, and constitutes a valid
and legally binding obligation of New AGT in accordance with its
terms, except as limited by bankruptcy, insolvency or other laws
relating to the enforcement of creditors rights.
12(k) New AGT has delivered to * a copy of any and all existing
agreements between New AGT and any other * manufacturer
pursuant to which New AGT is obligated to purchase any *
that have not been previously delivered to * pursuant to the
terms of this Agreement."
(f) Section 14 is amended by adding the following new subsections to the end
thereof to read in their entirety as follows:
"(h) Securities Laws Filings. AGT shall furnish to * copies of
-----------------------
all filings under the Securities Act of 1933, as amended, and the
Securities and Exchange Act of 1934, as amended, and the
regulations promulgated thereunder (the "Federal Securities
Laws") relating to AGT's ownership or transfer of shares of the
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-5- CONFIDENTIAL TREATMENT
capital stock of New AGT acquired in the Transaction or otherwise
(including, without limitation, registration statements, Forms
144, Forms 4 and 5 and Schedule 13Ds and amendments thereto) at
the same time as such filings are first sent to the Securities
and Exchange Commission.
(i) Notices of Sale. AGT shall furnish to * true and complete
---------------
reports of the proceeds of all transfers and sales of the capital
stock of New AGT owned by it, including a statement of the
applicable brokers' commissions and a calculation of the amount
required to be prepaid under the Notes as a result of such sale
in accordance with the prepayment provisions of such Notes. AGT
shall furnish such notice within two (2) business days after
confirmation of such sale."
(g) Section 15 is amended by adding the following new subsections to the end
thereof to read in their entirety as follows:
"(h) Securities Laws Filings. Mr. Zuckerman shall furnish to *
-----------------------
copies of all filings under the Securities Act of 1933, as
amended, and the Securities and Exchange Act of 1934, as amended,
and the regulations promulgated thereunder (the "Federal
Securities Laws") relating to Mr. Zuckerman's direct or indirect,
beneficial ownership or transfer of shares of the capital stock
of New AGT acquired in the Transaction or otherwise (including,
without limitation, registration statements, Forms 144, Forms 4
and 5 and Schedule 13Ds and amendments thereto) at the same time
as such filings are first sent to the Securities and Exchange
Commission.
(i) Notices of Sale. Mr. Zuckerman shall furnish to * true and
---------------
complete reports of the proceeds of all transfers and sales of
the capital stock of New AGT owned by him, including a statement
of the applicable brokers' commissions and a calculation of the
amount required to be prepaid under the Notes as a result of such
sale in accordance with the prepayment provisions of such Notes.
Mr. Zuckerman shall furnish such notice within two (2) business
days after confirmation of such sale."
(h) Section 21 is further amended by adding a notice address for New AGT to
read in its entirety as follows:
"If to New AGT:
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-6- CONFIDENTIAL TREATMENT
Applied Graphics Technologies, Inc.
c/o Daily News
450 West 33rd Street
New York, NY 10001-2681
Attention: Martin D. Krall"
(i) Exhibit E to the Purchase Agreement is amended by replacing it in
its entirety with the amended form of Term Loan Note attached hereto
as Exhibit B.
Section 2. Consent. Each of * hereby consent to the
-------
Transaction and, solely for the purpose of Section 19 of the Purchase
Agreement, consent to the reference and disclosure of the Purchase
Agreement in the Prospectus that constitutes a part of the Registration
Statement on Form S-1 (File No. 333-000478) filed by New AGT, and to the
filing of a redacted version of the Purchase Agreement and the Second
Amendment in form acceptable to * under an order of the
Securities and Exchange Commission assuring confidential treatment through
December 31, 2000 under rule 406 promulgated under the Securities Act of
1933, as amended, as an exhibit to such Registration Statement; provided,
however, that this consent does not constitute a statement or
representation as to the accuracy or adequacy of such disclosure.
Section 3. Amendment to Notes. The Notes shall be amended as of the
------------------
Effective Date to add appropriate references to New AGT pursuant to the
amendments attached hereto as Exhibits A-1 and A-2, respectively.
Section 4. Amendment to Guaranty Agreement. All references in the
-------------------------------
Guaranty Agreement to AGT shall be deemed to be and hereby are amended to
be references to AGT and New AGT. Mr. Zuckerman shall deliver on or before
the Effective Date an executed copy of the Amended and Restated Guaranty
Agreement attached hereto as Exhibit C.
Section 5. Confirmation of Agreement. Except as expressly amended
-------------------------
herein, the Purchase Agreement is ratified and confirmed in all respects
and shall remain in full force and effect in accordance with its terms.
Section 6. Execution in Counterparts. This Second Amendment may be
-------------------------
executed in counterparts, each of which shall be deemed an original, and
all of which taken together shall constitute one and the same instrument.
Section 7. Governing Law. The interpretation and construction of this
-------------
Second Amendment of Loan and Purchase Agreement, and all matters in
connection herewith, shall be governed by the substantive laws of the State
of New York, without regard to the choice of law principles thereof.
[remainder of this page left intentionally blank]
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
-7- CONFIDENTIAL TREATMENT
Section 8. Effectiveness. This Second Amendment, the amendment to the
--------------
Purchase Agreement, and the amendments to the Notes and the Amended and
Restated Guaranty Agreement (the forms of which are attached hereto) shall
be effective upon the Effective Date.
WITNESS the following signatures.
* *
MORTIMER B. ZUCKERMAN DAILY NEWS, L.P.
By:
- -------------------------------- --------------------------------------------
(signature) (signature)
----------------------------------------------
(title)
U.S. NEWS & WORLD REPORT, L.P. APPLIED PRINTING TECHNOLOGIES, L.P.
By: By Appligraph, Inc. its sole general partner
- -------------------------------- --------------------------------------------
(signature)
By :
- -------------------------------- --------------------------------------------
(title) (signature)
(title)
APPLIED GRAPHICS TECHNOLOGIES, INC.
By:
- --------------------------------
(signature)
- --------------------------------
(title)
310178-02 / DOCSDC1
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A-1
FIRST AMENDMENT TO PROMISSORY NOTE
THIS FIRST AMENDMENT TO PROMISSORY NOTE (this "Amendment") is made as of
the 19th day of April, 1996 by and between * and
MORTIMER B. ZUCKERMAN ("Borrower").
This Amendment is made with reference to the following facts:
A. Borrower is indebted to Lender in the original principal sum of TWELVE
MILLION DOLLARS ($12,000,000.00), which indebtedness is evidenced by Borrower's
Promissory Note dated January 8, 1992 (the "Promissory Note").
B. The loan from Lender to Borrower evidenced by the Promissory Note was
made in connection with the Loan and Purchase Agreement dated as of January 8,
1992 (the "Agreement") among * Lender, Applied Printing
Technologies, L.P ("AGT"), Borrower, Daily News, L.P., as amended by a First
Amendment of Loan and Purchase Agreement dated as of September 18, 1995 (as
amended, the "Purchase Agreement").
C. In connection with a initial public offering of Applied Graphics
Technologies, Inc. ("New AGT"), the parties to the Purchase Agreement and New
AGT have executed a Second Amendment to the Loan and Purchase Agreement (the
"Second Amendment").
D. The Second Amendment contemplates that the Promissory Note will be
amended in the manner set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto covenant and agree as follows:
1. All references in the Promissory Note to "AGT" are hereby deemed to be
references to "AGT or New AGT", except as set forth below:
a. The reference in subparagraph (e) of the Promissory Note to "AGT" is
deemed to be a collectively reference to "AGT and New AGT".
b. The reference in subparagraph (k) of the Promissory Note to "AGT"
shall remain a reference solely to AGT.
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
2 CONFIDENTIAL TREATMENT
2. The following new paragraph is hereby added to the Promissory Note
immediately after the fourth paragraph on the first page of the
Promissory Note, to read in its entirety as follows:
*
3. A new subparagraphs (l) and (m) are hereby added to the Promissory Note
immediately after subparagraph (k) to read in their entirety as follows:
"(l) Failure to Make Prepayment. Borrower fails to make a Prepayment
--------------------------
within the time specified above.
(m) Dissolution of New AGT. New AGT is dissolved."
----------------------
4. The first two lines of the paragraph beginning on the top of page 4 of
the Promissory Note are hereby amended to read in their entirety as
follows:
"If there shall occur an Event of Default under subparagraphs (a), (b),
(c), (d), (e), (f), (k), (l) or (m) above,"
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
3 CONFIDENTIAL TREATMENT
5. All references in the Purchase Agreement or the Second Amendment to the
Promissory Note shall be deemed to refer to the Promissory Note as
hereby amended.
6. An executed copy of this Amendment shall be affixed to the Promissory
Note.
7. This Amendment may be executed in counterparts, each of which shall be
deemed an original, and all of which taken together shall constitute one
and the same instrument.
8. All of the terms, covenants and conditions of the Promissory Note shall
continue in full force and effect, as modified hereby. This Amendment is
not intended to be, and shall not constitute, a substitution or novation
of the Promissory Note.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
written above.
BORROWER:
__________________________
MORTIMER B. ZUCKERMAN
LENDER:
*
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A-2
FIRST AMENDMENT TO PROMISSORY NOTE
THIS FIRST AMENDMENT TO PROMISSORY NOTE (this "Amendment") is made as of
the 19th day of April, 1996 by and between *
and MORTIMER B. ZUCKERMAN ("Borrower").
This Amendment is made with reference to the following facts:
A. Borrower is indebted to Lender in the original principal sum of THREE
MILLION DOLLARS ($3,000,000.00), which indebtedness is evidenced by Borrower's
Promissory Note dated June 23, 1993 (the "Promissory Note").
B. The loan from Lender to Borrower evidenced by the Promissory Note was
made in connection with the Loan and Purchase Agreement dated as of January 8,
1992 (the "Agreement") among * , Lender, Applied Printing
Technologies, L.P ("AGT"), Borrower, Daily News, L.P., as amended by a First
Amendment of Loan and Purchase Agreement dated as of September 18, 1995 (as
amended, the "Purchase Agreement").
C. In connection with a initial public offering of Applied Graphics
Technologies, Inc. ("New AGT"), the parties to the Purchase Agreement and New
AGT have executed a Second Amendment to the Loan and Purchase Agreement (the
"Second Amendment").
D. The Second Amendment contemplates that the Promissory Note will be
amended in the manner set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound
hereby, the parties hereto covenant and agree as follows:
1. All references in the Promissory Note to "AGT" are hereby deemed to be
references to "AGT or New AGT", except as set forth below:
a. The reference in subparagraph (e) of the Promissory Note to "AGT" is
deemed to be a collectively reference to "AGT and New AGT".
b. The reference in subparagraph (k) of the Promissory Note to "AGT"
shall remain a reference solely to AGT.
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
2 CONFIDENTIAL TREATMENT
2. The following new paragraph is hereby added to the Promissory Note
immediately after the fourth paragraph on the first page of the
Promissory Note, to read in its entirety as follows:
*
3. A new subparagraphs (l) and (m) are hereby added to the Promissory Note
immediately after subparagraph (k) to read in their entirety as
follows:
"(l) Failure to Make Prepayment. Borrower fails to make a Prepayment
--------------------------
within the time specified above.
(m) Dissolution of New AGT. New AGT is dissolved."
----------------------
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
3 CONFIDENTIAL TREATMENT
4. The first two lines of the paragraph beginning on the top of page 4 of
the Promissory Note are hereby amended to read in their entirety as
follows:
"If there shall occur an Event of Default under subparagraphs (a),
(b), (c), (d), (e), (f), (k), (l) or (m) above,"
5. All references in the Purchase Agreement or the Second Amendment to the
Promissory Note shall be deemed to refer to the Promissory Note as
hereby amended.
6. An executed copy of this Amendment shall be affixed to the Promissory
Note.
7. This Amendment may be executed in counterparts, each of which shall be
deemed an original, and all of which taken together shall constitute one
and the same instrument.
8. All of the terms, covenants and conditions of the Promissory Note shall
continue in full force and effect, as modified hereby. This Amendment is
not intended to be, and shall not constitute, a substitution or novation
of the Promissory Note.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first
written above.
BORROWER:
__________________________
MORTIMER B. ZUCKERMAN
LENDER:
*
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT B
TERM LOAN NOTE
- --------------------------------------------------------------------------------
EXHIBIT E
UNDER LOAN AND PURCHASE AGREEMENT
AMONG
*
APPLIED GRAPHICS AND MORTIMER B. ZUCKERMAN TECHNOLOGIES, L.P.
- --------------------------------------------------------------------------------
$___,000,000 *
Dated as of _______, 199_
FOR VALUE RECEIVED, the undersigned MORTIMER B. ZUCKERMAN, an individual
* , ("Borrower"), promises to pay to the order
of * at its offices at
* the principal sum of _________ Million Dollars
($___,000,000), together with interest on the outstanding principal balance at
the close of each day from the date hereof (the "Conversion Date") until paid in
full at the Term Loan Fixed Rate (computed on the basis of a 360-day year
consisting of twelve 30 day months, and paid for the actual number of days
elapsed for which interest is due).
This Promissory Note is the Term Note referred to in, and is entitled to
the benefits of, the Loan and Purchase Agreement, dated as of January 8, 1992
between Borrower, Lender, * and Applied Graphics
Technologies, L.P., as amended from time to time, to which reference is hereby
made for a statement of terms and provisions thereof and for the definition of
capitalized terms used herein and not otherwise defined. This Promissory Note
replaces and restates in their entirety the First Note signed by Borrower in the
principal amount of $12 million dated as of January 8, 1992 and the Second Note
signed by Borrower in the principal amount of $3 million dated as of June 23,
1993.
*
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
2 CONFIDENTIAL TREATMENT
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Promissory Note.
*
The occurrence of any one or more of the following events shall constitute
an event of default ("Event of Default") hereunder:
(a) Nonpayment. Borrower fails to pay any installment of principal or
----------
interest due hereunder within five days after the due date.
(b) Default in Other Obligations. Borrower, AGT or new AGT shall default
----------------------------
(i) in the payment or performance of any other liability, indebtedness, or
other obligation of Borrower to Lender or * (ii) in any payment of principal
of, or interest on, any obligation for borrowed money (other than
hereunder), including purchase money indebtedness, whether owing to Lender,
* or any other person, and such person has accelerated the maturity thereof,
or (iii) in the performance of any other term or condition contained in any
agreement under which any such obligation for borrowed money is created, so
that the holder of such obligation has accelerated the maturity thereof.
(c) Breach of Representations or Warranties. Any representation or
---------------------------------------
warranty made by Borrower, AGT or New AGT under the Loan and Purchase
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
3 CONFIDENTIAL TREATMENT
Agreement shall prove to have been false in any material respect as of the
time made or furnished, or any representation or warranty made by Borrower,
AGT or New AGT in any certificate or financial statement furnished pursuant
to the provisions of the Loan and Purchase Agreement shall prove to have
been false or misleading in any material respect as of the time made or
furnished.
(d) Breach of Covenants. Borrower shall default in the performance of
-------------------
any other covenant, condition, or provision hereof or in the Loan and
Purchase Agreement or AGT or New AGT shall default in the performance of any
covenant, condition, or provision of the Loan and Purchase Agreement
(excluding, however, the purchase requirements contained therein, a default
in which is treated separately in subparagraph (e) below) and such default
shall not be remedied within a period of twenty (20) days after Borrower or
such other defaulting party first knows (or with due diligence should know)
of the default.
(e) AGT's Breach of Purchase Requirements. AGT and New AGT fail to
-------------------------------------
make Actual * Purchases * in an amount sufficient
to cause the average amount of Actual * Purchases during each such
* to equal at least
*
(f) General Payment Failure. Borrower, AGT or New AGT is generally
-----------------------
not paying its debts as such debts become due.
(g) Voluntary Bankruptcy. Borrower, AGT or New AGT makes an assignment
--------------------
for the benefit of creditors, commences (as the debtor) any case in
bankruptcy, or commences (as the debtor) any proceeding under any other
insolvency law.
(h) Involuntary Bankruptcy. A case in bankruptcy or any proceeding
----------------------
under any insolvency law is commenced against Borrower, AGT or New AGT (as
the debtor in such case or proceeding) and a court having jurisdiction in
the premises enters an order for relief against such debtor in such case or
proceeding, or such case or proceeding is consented to by such debtor or
remains undismissed for 90 days, or such debtor consents to or admits the
material allegations against it in any such case or proceeding.
(i) Receivership. A trustee, receiver, agent or custodian (however
------------
named) is appointed or authorized to take charge of substantially all of the
property of Borrower, AGT or New AGT for the purpose of enforcing a lien
against such property for the benefit of creditors (other than pursuant to
Section 303(g) of the Bankruptcy Act).
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
4 CONFIDENTIAL TREATMENT
(j) Death or Incompetency. Borrower dies or becomes incompetent.
---------------------
(k) Dissolution of AGT or Change in Control. AGT is dissolved or sells,
---------------------------------------
transfers, conveys, leases or otherwise disposes of all or substantially all
of its assets or business to any entity not Controlled by Borrower, or any
or all of the general partners of AGT resign or are removed for cause, or
Borrower transfers all or any part of his interest in AGT (whether or not as
a result of voluntary or involuntary bankruptcy, death or incompetency)
which results in AGT not being Controlled by Borrower. An entity shall be
deemed to be Controlled by Borrower if Borrower, directly or indirectly
through wholly-owned entities, (i) owns more than 50% of the equity interest
of such entity and (ii) can direct the business decisions of such entity.
(l) Failure to Make Prepayment. Borrower fails to make a Prepayment
--------------------------
within the time specified above.
(m) Dissolution of New AGT. New AGT is dissolved.
----------------------
If there shall occur an Event of Default under subparagraphs (a), (b), (c),
(d), (e), (f),(k), (l) or (m) above, Lender shall be entitled by notice to
Borrower to declare this Promissory Note and interest accrued hereon and all
liabilities of Borrower hereunder to be forthwith due and payable; and if there
shall occur an Event of Default under subparagraphs (g), (h), (i) or (j) above,
then this Promissory Note and interest accrued hereon and all liabilities of
Borrower hereunder to Lender shall automatically become forthwith due and
payable; and in each case the same shall hereupon become due and payable without
presentment, demand, protest or notice of any kind (except as specified in this
paragraph), all of which are hereby expressly waived.
Borrower agrees to pay all reasonable costs and expenses incurred by Lender
(including reasonable attorney's fees), if any, in connection with the
enforcement or collection of this Promissory Note arising after the occurrence
of any Event of Default or any event which with notice or lapse of time would
constitute an Event of Default, unless such occurrence is cured by Borrower
within any applicable grace period or such reimbursement is not required by the
terms of any waiver granted by Lender in respect of such occurrence. The
obligations of Borrower under this paragraph shall survive the payment of this
Promissory Note.
This Promissory Note shall be deemed to be a contract under the laws of the
State of New York, and for all purposes shall be governed by and construed in
accordance with the laws thereof. Borrower agrees that any litigation relating
in any way to this Promissory Note shall, if brought by Borrower and may, if
brought by Lender, be brought in the otherwise appropriate New York State or
federal court in New York, New York.
Notwithstanding any other provision of this Promissory Note, Borrower shall
not be required to pay any amount pursuant to this Promissory Note which is in
excess of the maximum amount permitted under applicable law. It is the
intention of the parties hereto to conform strictly to any applicable usury law,
and it is agreed that if any amount contracted for, chargeable
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
5 CONFIDENTIAL TREATMENT
or receivable under this Promissory Note shall exceed the maximum amount
permitted under any such law, any such excess shall be deemed a mistake and
cancelled automatically and, if theretofore paid, shall be refunded to Borrower.
None of the terms or provisions hereof may be waived, altered, modified, or
amended except by an agreement in writing signed by Lender and Borrower. No
delay or failure on Lender's part to exercise any right under the Promissory
Note shall constitute a waiver of that right in that or any other instance. The
rights and remedies of Lender hereunder are cumulative and not exclusive of any
rights or remedies which it would otherwise have.
IN WITNESS WHEREOF, Borrower has executed this instrument as of the date
first set forth above.
_____________________________
MORTIMER B. ZUCKERMAN
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF __________)
On the __ day of ____________, 199_, before me personally came MORTIMER B.
ZUCKERMAN, to me personally known, who, being by me duly sworn did depose and
say * , and that
he is the individual who executed the above agreement.
______________________________
Notary Public
My Commission Expires:
______________________________
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT C
AMENDED AND RESTATED GUARANTY AGREEMENT
---------------------------------------
April __, 1996
*
Gentlemen:
For value received and in order to induce * with
its principal place of business *
to provide a prebate ("Prebate") to Applied Graphics Technologies, L.P., k/k/a/
Applied Printing Technologies, L.P. with its principal place of business at 463
Barell, Carlstadt, New Jersey 07072 ("AGT"), and to execute the Second Amendment
of Loan and Purchase Agreement of even date herewith among
* AGT, Mortimer B. Zuckerman ("Guarantor"), Daily
News, L.P, Applied Graphics Technologies, Inc. ("New AGT"), and U.S. News &
World Report, L.P. (the "Second Amendment"), Guarantor, an individual
* hereby, absolutely and unconditionally, guarantees
unto * its successors and assigns, the payment of the Prebate, with
applicable interest, to * pursuant to and under the First Amendment of
Loan and Purchase Agreement dated September 18, 1995 between * AGT and
Guarantor, as amended from time to time (including but not limited to as amended
by the Second Amendment), and including any extensions and renewals thereof or
part thereof, together with interest, fees, charges, expenses and costs of
collection (collectively, the "Liabilities").
* may without notice or demand of any kind grant any extensions of time
to or make any compromise with or release and discharge AGT or New AGT, or any
other party or parties liable with AGT or New AGT upon any instrument,
indebtedness or obligation, or any other guarantor thereof, and * may
release or omit to collect or enforce or may compromise any collateral security
held by it without regard to any demands or requests by Guarantor and without
thereby releasing Guarantor hereunder or incurring any liability to Guarantor.
* may without notice or demand of any kind realize on and apply any
collateral held by * whether or not deposited by Guarantor, to such
obligation or obligations as * may elect, whether guaranteed hereby or
not, without regard to any rights of Guarantor in respect to the application
thereof. All sums at any time to the credit of the Guarantor and any property
of the Guarantor in * possession shall be deemed held by * as
security for any and all of Guarantor's obligations hereunder.
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
2 CONFIDENTIAL TREATMENT
If AGT or New AGT fail to pay all or any part of the Liabilities when due,
whether by acceleration or otherwise, Guarantor, immediately upon written demand
of * will pay to * all Liabilities then due and unpaid by AGT or
New AGT as if such Liabilities constituted direct and primary obligations of
Guarantor.
This instrument shall be deemed to be a continuing guaranty of payment and
not of collectability and shall remain in full force and effect until full
performance and payment of the Liabilities, or until written notice is received
by * from Guarantor that Guarantor desires to be relieved of further or
future liability hereunder, such notice shall not, however, affect Guarantor's
liability for Liabilities then existing, whether absolute or contingent, or
subsequent changes in interest rate, renewals or extensions thereof. Notice by
Guarantor shall in no way affect or terminate the obligations of any other
guarantors as to then existing or future Liabilities. Guarantor's liability
hereunder is in no way conditional or contingent upon any attempt to collect
from AGT or New AGT or realize upon any collateral security for the Liabilities.
Guarantor shall have no right of subrogation, reimbursement or indemnity
whatsoever and no right of recourse to or with respect to any assets or property
of AGT or New AGT or to any collateral for the Liabilities, unless and until all
the Liabilities have been paid and performed in full.
Guarantor represents and warrants that the execution, delivery and
performance hereof and of any term, covenant or condition herein provided for
are within his power and are not in conflict with any indenture, contract or
agreement to which Guarantor is a party or by which Guarantor is bound, or with
any statute, rule regulation, decree, judgment or order binding upon Guarantor.
Guarantor covenants that from the date hereof until all obligations owing
to * hereunder have been paid fully, Guarantor shall furnish to *
annually, promptly and as soon as available, but in no event more than 90 days
after the end of each calendar year, financial statements at the end of and for
such calendar year and, promptly after * request, such other financial
information as * may from time to time reasonably request.
Books and records showing the account and amounts outstanding between *
on the one hand and AGT and New AGT on the other shall be admissible in evidence
in any action or proceedings and shall constitute prima facie proof thereof.
Guarantor expressly waives any rights to notice of acceptance from * or
to any other notice or demand upon Guarantor or to any other actions or
conditions prior to * reliance upon or enforcement of this Guaranty.
* may take or refrain from taking any of the actions authorized under this
Guaranty without notice of any kind to Guarantor.
This Guaranty shall be enforceable as to all of the Liabilities despite any
discharge of AGT or New AGT in bankruptcy and despite adjustment of all or any
part of the Liabilities in insolvency proceedings or pursuant to some other
compromise with creditors.
If claim is ever made upon * for repayment or recovery of any amount
or amounts received by * in payment or on account of any of the
Liabilities, and * repays all or part of said amount by reason of (a) any
judgment, decree or order of any court or administrative
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
3 CONFIDENTIAL TREATMENT
body, or (b) any settlement or compromise of any such claim effected by
* with any such claimant (including AGT or New AGT), then and
in such event Guarantor agrees that any such judgment, decree, order,
settlement, or compromise shall be binding upon Guarantor, notwithstanding any
termination hereof or the cancellation of any such Liabilities, and Guarantor
shall be and remain liable hereunder for the amounts so repaid or recovered to
the same extent as if such amount had never originally been received by * .
Guarantor's liability hereunder is in addition to and independent of any
other liabilities such Guarantor has incurred or assumed, or may hereafter incur
or assume, by way of endorsement, separate guaranty agreement, or in any other
manner, with respect to all or any part of the Liabilities guaranteed hereby.
This Guaranty does not supersede or limit any such other liabilities of
Guarantor, and * rights and remedies under and pursuant to this
Guaranty and any such other liabilities are cumulative and may be exercised
singly or concurrently.
This instrument shall be binding upon Guarantor, and any heirs, personal
representatives or successors and assigns, and shall inure to *
benefit. This instrument contains the entire agreement between parties hereto
and cannot be changed orally. No failure by * to exercise any right
hereunder shall be deemed a waiver thereof, nor shall any single or partial
exercise by * of any right hereunder preclude any other or further
exercise thereof, and no waiver by * of any right hereunder shall operate
as a waiver of any other right.
This Guaranty shall be governed by the laws of the State of New York. Any
provision of this Guaranty which found to be prohibited by law will be
ineffective to the extent to such prohibition without invalidating the remaining
provisions.
IN WITNESS WHEREOF, Guarantor has executed this instrument as of the date
first set forth above.
__________________________
Mortimer B. Zuckerman
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<PAGE>
4 CONFIDENTIAL TREATMENT
STATE OF NEW YORK )
) ss:
COUNTY OF ______________)
On this ___ day of April, 1996, before me personally appeared Mortimer B.
Zuckerman who, being by me duly sworn did depose and say
* and that he is the individual who executed the
foregoing agreement.
____________________________
Notary Public
My Commission Expires:
____________________________
* Text deleted pursuant to an application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934 and filed separately with the
Securities and Exchange Commission.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q, QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 23,603
<ALLOWANCES> 1,572
<INVENTORY> 3,321
<CURRENT-ASSETS> 27,985
<PP&E> 33,501
<DEPRECIATION> 19,065
<TOTAL-ASSETS> 45,970
<CURRENT-LIABILITIES> 61,543
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (25,413)
<TOTAL-LIABILITY-AND-EQUITY> 45,970
<SALES> 30,598
<TOTAL-REVENUES> 30,598
<CGS> 22,329
<TOTAL-COSTS> 22,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 904
<INCOME-PRETAX> 146
<INCOME-TAX> 29
<INCOME-CONTINUING> 117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
- ----------
1. Income Tax - As the Predecessor Group (the filing entity) is not a legal
entity which is subject to tax, but rather part of a partnership, the
income tax amount is a "pro forma" provision as if the filing entity had
been a C Corporation subject to taxes.
2. EPS-Primary - The EPS calculations shown are solely on a "pro forma"
basis. The detail of this calculation are described more fully in the 10-Q
as filed. The reader should use this information in conjunction with all
disclosures in the 10-Q as filed.
3. EPS-Diluted - The EPS calculations shown are solely on a "pro forma"
basis. The detail of this calculation are described more fully in the 10-Q
as filed. The reader use this information in conjunction with all
disclosures in the 10-Q as filed.
</FN>
</TABLE>
