<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 June 30, 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 X No
--------------- -------------
The number of shares of Common Stock, $0.01 par value, outstanding as of
August 12, 1996: 13,810,000
----------
1
- --------------------------------------------------------------------------------
<PAGE>
Part I - Financial Information
------------------------------
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Predecessor
December 31, June 30,
------------------------
1995 1996
------------------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 567 $ 4,846
Short-term investments................................ 99 16,344
Accounts receivable (net of allowance of $ 1,431 and
$ 1,226, respectively)............................... 19,476 21,982
Due from affiliates................................... 1,841 1,661
Inventory............................................. 3,582 3,347
Prepaid expenses...................................... 1,925 1,553
Other current assets.................................. 1,125 789
--------- ---------
Total current assets................................. 28,615 50,522
--------- ---------
Property, plant and equipment, net..................... 13,741 15,217
Other assets........................................... 2,453 1,742
--------- ---------
Total assets......................................... $ 44,809 $ 67,481
========= =========
Liabilities and Owner's Deficit / Shareholders' Equity
Current liabilities:
Intercompany borrowings.............................. $ 30,181 $ -
Accounts payable and accrued expenses................ 20,096 17,988
Applied Printing Note................................. - 16,000
Notes payable......................................... 711 683
Capital leases........................................ 1,576 1,366
Other current liabilities............................. 1,125 2,657
--------- ---------
Total current liabilities............................ 53,689 38,694
--------- ---------
Notes payable.......................................... 853 683
Obligations under capital leases....................... 2,415 2,075
Other non-current liabilities.......................... 7,233 5,042
--------- ---------
Total liabilities.................................... 64,190 46,494
--------- ---------
Commitments and contingencies
Owner's Deficit and Shareholders' Equity
Preferred stock; no par value, 10,000,000 shares
authorized, none issued and outstanding................ $ - $ -
Common stock; par value $.01, 40,000,000 shares
authorized, 13,810,000 issued and outstanding.......... - 138
Additional paid in capital............................. - 18,670
Retained earnings...................................... - 2,179
Owner's deficit........................................ (19,381) -
--------- ---------
Total liabilities and owner's deficit/shareholders'
equity. $ 44,809 $ 67,481
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (Note 2)
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1995 1996 1995 1996
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales............................ $ 29,711 $ 30,988 $ 59,851 $ 61,586
Cost of sales........................ 21,461 21,636 43,987 43,965
------------ ----------- ----------- -----------
Gross profit........................ 8,250 9,352 15,864 17,621
Selling expenses..................... 3,899 4,076 8,197 7,755
General & administrative expenses.... 4,425 3,179 8,261 6,556
------------ ----------- ----------- -----------
Total operating expenses............ 8,324 7,255 16,458 14,311
------------ ----------- ----------- -----------
Operating (loss) income............. (74) 2,097 (594) 3,310
Interest expense..................... 802 439 1,526 1,343
Other (income), net.................. (958) (438) (1,238) (275)
------------ ----------- ----------- -----------
Income (loss) before
income tax provision........... 82 2,096 (882) 2,242
Income tax provision - 63 - 63
------------ ----------- ----------- -----------
Net income (loss) $ 82 $ 2,033 $ (882) $ 2,179
============ =========== =========== ===========
Pro Forma Net Income Data:
Income before taxes ................. $ 2,096 $ 2,242
Pro forma income taxes............... 63 92
----------- -----------
Pro forma net income................. $ 2,033 $ 2,150
=========== ===========
Pro forma net income per share....... $ 0.15 $ 0.19
=========== ===========
Shares used in computing pro forma
net income per share................ 13,074,718 11,424,775
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN OWNER'S DEFICIT AND STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Additional
Preferred Common paid in Retained Owner's Total
stock stock capital earnings deficit equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 $ - $ - $ - $ - $(19,381) $(19,381)
Add (deduct):
Net income 2,179 2,179
Common stock issued:
Common stock offering 138 46,521 46,659
Distributions ( 8,470) ( 8,470)
Conveyance (27,851) 27,851 -
------------------------------------------------------------------------
Balance - June 30, 1996 $ - $ 138 $ 18,670 $ 2,179 $ - $ 20,987
------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (Note 2)
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------
1995 1996
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................... $ (882) $ 2,179
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization .............................. 2,507 2,319
Amortization of goodwill.................................... 63 59
Amortization of deferred charges ........................... 433 312
Provision for losses on accounts receivable................. 229 32
Gain on insurance settlement.... (1,347) (18)
Loss on sale/disposal of fixed assets....................... 127 110
Change in assets/liabilities:
(Increase) decrease in accounts receivable.................... 2,370 (2,538)
(Increase) decrease in inventory.............................. (720) 235
Decrease in other current assets and prepaid expenses......... 2,536 483
(Increase) decrease in other assets .......................... (253) 651
Decrease) in other current and non-current liabilities........ (1,416) (970)
Increase in due from/to affiliates............................ 1,987 180
Increase (decrease) in accounts payable and accrued expenses.. 3,127 (2,108)
----------- --------------
Net cash provided by operating activities................. 8,761 926
----------- --------------
Cash flow from investing activities:
Investment in short-term instruments......................... (16,244)
Acquisitions of equipment.................................... (1,941) (3,591)
Proceeds from the sale of fixed assets....................... 856 294
Net proceeds received from insurance claims.................. 1,357 243
----------- --------------
Net cash provided by (used in) investing activities.......... 272 (19,298)
----------- --------------
Cash flow from financing activities:
Proceeds received from the sale of stock...................... - 46,659
Proceeds from bank overdraft.................................. - 1,690
Repayment of bank overdraft................................... - (1,690)
Proceeds from sale leaseback transactions..................... 558 -
Principal payments on notes and capital lease obligations..... (3,025) (1,355)
Increase (decrease) in intercompany borrowings, net........... (2,076) (18,000)
Net contributions from (distributions to) Applied Printing.... (2,332) (4,653)
----------- --------------
Net cash (used in) provided by financing activities......... (6,875) 22,651
----------- --------------
Net increase in cash and cash equivalents....................... 2,158 4,279
Cash and cash equivalents at beginning of period................ 90 567
----------- --------------
Cash and cash equivalents at end of period...................... $ 2,248 $ 4,846
=========== ==============
Supplemental Disclosures of Cash Flow Information:
Distribution to Applied Printing in the form of
increased intercompany borrowing ....................... 3,817
Conversion of intercompany borrowing to
Applied Printing Note payable........................... 16,000
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per 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.
The Company is an independent provider of digital prepress services to
magazine publishers, advertising agencies, entertainment companies and catalog
retailers. In addition, the Company provides advanced digital imaging services
such as digital archiving and distribution services.
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 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 initial
public offering (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.
On April 16, 1996, the Company's Registration Statement on Form S-1
under the Securities Act of 1933, as amended, relating to the Offering of the
Company's Common Stock, was declared effective. The Offering closed on
April 22, 1996. Accordingly, the financial statements of Applied Graphics
Technologies, Inc. in this Quarterly Report on Form 10-Q reflect the combined
results of operations of the Predecessor Group through April 16, 1996 (the
effective date of the Offering) and the results of the Company from April 17,
1996 through June 30, 1996 and have been accounted for in a manner similar to a
pooling of interests (See Note 2).
6
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
The accompanying combined financial statements of the Predecessor
Group through April 16, 1996 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.
Through the effective date, Applied Printing managed the cash and financing
requirements of all of its divisions centrally, as such, the interest expense
and related intercompany borrowing represent an allocation of Applied
Printing's interest expense and the related debt. As discussed in Note 7, this
allocation of debt is presented as an intercompany borrowing. Additionally,
Applied Printing and other related parties had historically provided certain
corporate, general and administrative services to the 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.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. All transactions between
divisions included in the combined financial statements have been eliminated.
The financial statements have been prepared by the management of the
Company in accordance with the accounting policies as included in the Company'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
Company appearing therein. In the opinion of the management of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation have been included in the 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 six months ended June 30, 1996,
are not necessarily indicative of the results to be expected for the entire
fiscal year.
7
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share amounts)
(unaudited)
2. STATEMENT OF OPERATIONS PRESENTATION:
The statement of operations of Applied Graphics Technologies, Inc. in this
Quarterly Report on Form 10-Q reflect the pro forma combined ("Pro Forma")
results of operations of the Predecessor Group through April 16, 1996 (the
effective date of the Offering) ("Predecessor") and the results of the Company
from April 17, 1996 through June 30, 1996 ("Company") and have been accounted
for in a manner similar to a pooling of interests.
Selected statement of operations data for the six and three months ended June
30, 1996:
<TABLE>
<CAPTION>
---------- Six Months Ended June 30, 1996 ----------
January 1- April 17 - Six Months Ended
April 16, 1996 June 30, 1996 June 30, 1996
(Predecessor) (Company) (Pro Forma)
------------------ -------------- ----------------
<S> <C> <C> <C>
Net sales $ 35,276 $ 26,310 $ 61,586
Gross profit 9,372 8,249 17,621
Operating income 1,060 2,250 3,310
Income (loss) before pro forma
income taxes (202) 2,444 2,242
Pro forma income taxes 29 63 92
Pro forma net income (loss) (231) 2,381 2,150
Pro forma net income (loss)
per share (0.02) 0.19
Net income per share 0.17
Shares used in calculating
net income per share and pro forma
net income (loss) per share 9,752,889 13,810,000 11,424,775
<CAPTION>
--------- Three Months Ended June 30, 1996 --------
April 1- April 17 - Three Months Ended
April 16, 1996 June 30, 1996 June 30, 1996
(Predecessor) (Company) (Pro Forma)
------------------ -------------- ----------------
<S> <C> <C> <C>
Net sales $ 4,678 $ 26,310 $ 30,988
Gross profit 1,103 8,249 9,352
Operating income (loss) (153) 2,250 2,097
Income (loss) before pro
forma income taxes (348) 2,444 2,096
Pro forma income taxes - 63 63
Pro forma net income (loss) (348) 2,381 2,033
Pro forma net income(loss)
per share ( 0.04) 0.15
Net income per share 0.17
Shares used in calculating
net income per share and pro forma
net income (loss) per share 9,628,083 13,810,000 13,074,718
</TABLE>
8
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
3. PRO FORMA NET INCOME PER SHARE
Pro forma net income per share, as reflected on the statement of
operations has been determined based on the methodology outlined below. However,
after April 16, 1996, the number of shares utilized in determining net income
per share is based on the weighted average number of shares outstanding and,
accordingly, exclude the number of common shares that the Predecessor Group
would have needed to issue in order to fund the distribution referred to below.
Pro forma net income per share is computed using pro forma net income
and is based on the weighted average 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); (b) the number of
common shares, at that balance sheet date, (464,833 for the three months ended
March 31, 1996 and 318,083 for the 16 days ended April 16, 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 and $3,817, for the three
months ended March 31, 1996 and the 16 days ended April 16, 1996, respectively,
which represent the incremental difference between the debt assumed and the
Applied Printing Note (aggregating $37,000) and the intercompany borrowing
amount ($31,422 and $33,183 as of March 31, 1996 and April 16, 1996,
respectively), as discussed in Note 7 of the financial statements; and ( c) the
4,500,000 shares issued in connection with the public offering for the period
April 17, 1996 through June 30, 1996.
4. INITIAL PUBLIC OFFERING:
The Company received net offering proceeds of approximately $46,659 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.
9
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
5. PRO FORMA INCOME TAXES:
The accompanying statement of operations for the six months ended June
30, 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 through April 16, 1996 and an actual provision
for taxes relating to the Company's results of operations from April 17, 1996
through June 30, 1996.
In determining the pro forma income tax expense, the Company has
included the tax effect of temporary differences which will reverse in the
future. For purposes of the pro forma tax calculation the deferred tax benefits
have been offset by a valuation allowance because it is considered more likely
than not that such benefits will not be realizable.
Pro forma income tax expense for the quarter and the six months ended
June 30, 1996 is lower than that which is customary due primarily to the tax
effect of restructuring charges recognized by the Predecessor in prior years,
which are deductible by the Company in 1996. The reduction is partially offset
by the tax effect of certain items that are not deductible for income tax
purposes.
6. INVENTORY:
The components of inventory are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
---- ----
<S> <C> <C>
Work-in-Process... $2,518 $2,592
Raw Materials..... 1,064 755
----- -----
$3,582 $3,347
====== ======
</TABLE>
10
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
7. INTERCOMPANY BORROWINGS:
The Predecessor Group had been financed principally through debt from
Applied Printing. Historically, Applied Printing had 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, as they relate to the
Predecessor Group, include an allocation of Applied Printing's interest expense
and related Borrowings. Applied Printing's interest expense related to the
Borrowings had been allocated to the 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, as they relate to the Predecessor
Group, 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 $0 as of December 31, 1995 and June 30, 1996, respectively. The
interest expense allocated to the Predecessor Group is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
1995 1996 1995 1996
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Interest expense................ $ 632 $ 174 $1,171 $ 944
===== ===== ====== =====
Weighted average annual
interest rate................. 10.4% 11.6% 9.6% 10.8%
===== ===== ====== =====
</TABLE>
11
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share amounts)
(unaudited)
8. RELATED PARTY TRANSACTIONS:
The following is a summary of transactions between the Company and
related parties:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30 June 30
---------------- ---------------
1995 1996 1995 1996
---------------- ---------------
<S> <C> <C> <C> <C>
Sales to related parties... $1,758 $2,482 $3,538 $5,502
====== ====== ====== ======
Purchases from related
parties................... $ 120 $ 919 $ 323 $1,410
====== ====== ====== ======
Corporate allocations...... $1,684 $ 302 $3,110 $1,534
====== ====== ====== ======
</TABLE>
9. COMMITMENTS AND CONTINGENT LIABILITIES:
The Company 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
Company's financial position, annual results of operations or cash flows.
12
<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, the
financial statements of Applied Graphics Technologies, Inc. in this Quarterly
Report on Form 10-Q reflect the combined results of operations of the
Predecessor Group through April 16, 1996 (the effective date of the Offering)
and the results of the Company from April 17, 1996 through June 30, 1996 and
have been accounted for in a manner similar to a pooling of interests.
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 managed the cash and financing
requirements of all its divisions centrally and accordingly, associating cash
flow with specific divisions is not practicable. Prior to April 17, 1996, 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 have been 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.
13
<PAGE>
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 was part of Applied Printing, which is a partnership for
income tax reporting purposes, income tax expense for the quarter and six month
period ended June 30, 1996, respectively, has been calculated on a pro forma
basis as if the Company was a separate taxable C corporation for the periods
prior to the Offering. An actual provision for income taxes was made for the
period April 17, 1996 through June 30, 1996.
RESULTS OF OPERATIONS
During the second quarter and six month period ended June 30, 1996,
the Company continued its efforts to expand the number of on-site service
arrangements with customers and to increase sales of digital imaging services.
These efforts resulted in two additional on-site service arrangements to provide
prepress services that began the second quarter of 1996, and three new on-site
prepress service arrangements which are scheduled to begin in the third quarter
of 1996.
Additionally, during the second quarter of 1996, the Company formed a
new business unit, the Newspaper Ad Management Division ("Ad Management
Division"), to provide digital ad composition and electronic transmission
services to newspapers. The first customers are the New York Daily News, an
affiliate, and the Newark Star Ledger. This division generated approximately
$250,000 of net revenue for the quarter and year to date.
For the quarter ended June 30, 1996, net sales were $31.0 million
compared to $29.7 million in the prior year quarter, an increase of
approximately $1.3 million or 4.3%. The 1996 quarterly increase was primarily
due to increased sales at the Company's digital division, the effect of new on-
site facilities management contracts, new ad management sales and a reduction in
the amount of sales allowances. Such items were partially offset by a decline in
the Company's business with advertising agencies.
14
<PAGE>
For the six months ended June 30, 1996, the Company had net sales of
$61.6 million compared to $59.9 million in the same period in 1995, an increase
of approximately $1.7 million or 2.8%. The 1996 increase was primarily due to
increased sales at the Company's digital division, the effect of the new on-site
facilities management contracts and the Company's new Ad Management Division
sales and a reduction in the amount of sales allowances. These increases were
partially offset by the net decline in business with advertising agencies.
Gross profit as a percentage of sales increased in the second quarter
of 1996 to 30.2% from 27.8% compared to the same period in 1995. This
improvement of 2.4% is primarily the result of the increase in sales of higher
margin digital imaging services, the introduction of additional on-site
facilities management contracts and ad management services and continued
benefits of operating efficiencies related to the reorganizations in 1994 and
1995.
Gross profit as a percentage of sales increased for the six months
ended June 30, 1996 to 28.6% from 26.5% compared to the same period in 1995, an
improvement of 2.1%. The improvement in gross profit is primarily the result of
the increase in digital imaging services, the continued introduction of
additional on-site facilities management contracts and ad management services
which generate higher margins than the Company's historical business and
continued benefits of operating efficiencies related to the reorganization
efforts mentioned above.
Selling expenses for the quarter ended June 30, 1996 increased
$177,000 or 4.5% from the corresponding period in 1995. Selling expenses in the
second quarter of 1996 represent 13.1% of net sales which is consistent with the
corresponding period of 1995. The overall increase is primarily attributable to
an increase in commission expense resulting from increased sales in the quarter
partially offset by lower sales support costs with respect to on-site facility
management contracts and digital imaging sales and improved efficiencies
resulting from to the reorganization in 1995.
Selling expenses for the six month period ended June 30, 1996
decreased $442,000 or 5.4% from the corresponding period in 1995 and represents
12.6% of net sales compared to 13.7% for the corresponding period of 1995. The
decrease is primarily attributable to lower sales support costs resulting from
to the reorganization in 1995, decreased sales support required for the on-site
facility management contracts and digital imaging sales offset by an increase in
commission expense resulting from such increased sales.
15
<PAGE>
General and administrative expenses for the quarter ended June 30,
1996 decreased approximately $1.2 million or 28.2% from the corresponding period
in 1995. The primary reasons for the decrease as compared to the 1995 quarter
were a non-recurring sales tax accrual in 1995, expenses in 1995 related to
facilities closed by the third quarter of 1995, higher expenses for bad debts in
1995, reductions in occupancy and depreciation resulting from the reorginization
efforts mentioned above and a cost reimbursement in 1996 for a digital imaging
development project. Decreases in general and administrative expenses were
partially offset by additional payroll incurred to support new locations and
expanded operations at existing locations.
General and administrative expenses for the six months ended June 30,
1996 decreased approximately $1.7 million or 20.6% from the corresponding period
in 1995. This decrease is primarily due to the items which caused the second
quarter decrease plus the amount of the non-recurring sales tax accrual
recognized in the first quarter of 1995. Decreases in general and administrative
expenses were partially offset 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 payroll to
support new locations and expanded operations at existing locations.
The corporate allocations noted in the overview section for the
periods through April 16, 1996 and actual corporate expenses for the period
April 17, 1996 through June 30, 1996 have been included in the general and
administrative expense classification. These allocations and actual expenses are
not deemed to have a significant change between periods reported.
The Company recorded a gain of approximately $1.0 million relating to
insurance proceeds as the result of fire and water damage to one of its New York
facilities during the quarter ended June 30, 1995. That gain was offset by other
non-operating expenses resulting in other income, net of expenses, of
approximately $0.9 million for the three months ended June 30, 1995. Exclusive
of the gain relating to the fire damage, the only significant change in other
income and expense in the three months ended June 30, 1996 as compared to 1995
was interest earned on investments of approximately $230,000.
The Company recorded a gain of approximately $1.4 million relating to
insurance proceeds as the result of fire and water damage to one of its New York
facilities during the first half of 1995. That gain was offset by other non-
operating expenses resulting in other income, net of expenses, of approximately
$1.2 million for the six months ended June 30, 1995. Exclusive of the gain
relating to the fire damage, the only significant change in other income and
expense in the six months ended June 30, 1996 as compared to 1995 was interest
earned on investments of approximately $230,000 in 1996.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
Upon the closing of the Offering, the Company received net offering
proceeds of approximately $46.6 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 $16.0 million promissory note (the "Applied Printing
Note") payable to Applied Printing. The Applied Printing Note 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 manufacturing equipment.
Additionally, the Company is in the process of acquiring for $3.5 million a
building in connection with the relocation of its Los Angeles facility. The
Company plans to fund such acquisition with long term financing or through a
sale and lease back arrangement. Approximately $2.0 million and $3.6 million was
spent on capital expenditures in the second quarter and six months ended June
30, 1996, respectively.
The Company has historically financed its operations and capital
expenditures with cash generated from operations and through intercompany
borrowings from Applied Printing. On April 22, 1996, the Company paid off all
intercompany borrowings except for the Applied Printing Note mentioned above.
Since April 22, 1996, the Company has financed all of its operations and capital
expenditures with cash generated from operations and with proceeds of
the Offering.
In addition to the financing with respect to the Los Angeles building
mentioned above, the Company is currently in the late stages of negotiation with
certain financial institutions to obtain a $10.0 million working capital
facility and a $3.0 million equipment financing facility. As of this filing,
the Company has not obtained any commitment from such financing sources, nor is
there any assurance that any such financing will be consumated.
The Company believes that the net proceeds from the Offering, cash
flow from operations and its potential ability to borrow funds from financing
sources will be sufficient to fund its cash needs for the foreseeable future.
17
<PAGE>
PART II. - OTHER INFORMATION
Items 1, 2, 3,4 and 5 are not applicable and have been omitted.
Item 6.
(a) Exhibits.
27 Financial Data Schedule
(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/ Melvin A. Ettinger August 12, 1996
---------------------------
Melvin A. Ettinger
Vice Chairman, Chief Operating Officer and Director
(Duly authorized officer)
/s/ Louis Salamone, Jr.
- ----------------------------- August 12, 1996
Louis Salamone, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
18
<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 ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,846
<SECURITIES> 16,344
<RECEIVABLES> 23,208
<ALLOWANCES> 1,226
<INVENTORY> 3,347
<CURRENT-ASSETS> 50,522
<PP&E> 35,377
<DEPRECIATION> 20,160
<TOTAL-ASSETS> 67,481
<CURRENT-LIABILITIES> 38,694
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 20,849
<TOTAL-LIABILITY-AND-EQUITY> 67,481
<SALES> 61,586
<TOTAL-REVENUES> 61,586
<CGS> 43,965
<TOTAL-COSTS> 43,965
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 1,343
<INCOME-PRETAX> 2,242
<INCOME-TAX> 92<F1>
<INCOME-CONTINUING> 2,150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,150
<EPS-PRIMARY> 0.19<F2>
<EPS-DILUTED> 0.19<F3>
<FN>
<F1> Income Tax - The filing entity has included the results of the
Predecessor Group prior to April 17,1996, which is not a legal entity,
subject to tax, but rather part of a partnership. As such, the income
tax amount is a "pro forma" provision.
<F2> EPS-Primary - The EPS calculations shown are 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.
<F3> EPS-Diluted - The EPS calculations shown are 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.
</FN>
</TABLE>
