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 September 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, $0.01 par value,
outstanding as of November 11, 1996: 13,810,000
<PAGE>
Part I - Financial Information
------------------------------
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEETS
($ in thousands, except share amounts)
(unaudited)
Predecessor
December 31, September 30,
-----------------------------
1995 1996
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 567 $ 1,216
Short-term investments 99 1,698
Accounts receivable (net of allowance of
$1,431 and $889, respectively) 19,476 26,877
Due from affiliates 1,841 846
Inventory 3,582 3,438
Prepaid expenses 1,925 1,227
Other current assets 1,125 939
-------- --------
Total current assets 28,615 36,241
Property, plant and equipment, net 13,741 18,015
Other assets 2,453 1,636
-------- --------
Total assets $ 44,809 $ 55,892
======== ========
LIABILITIES AND OWNER'S (DEFICIT) /
SHAREHOLDERS' EQUITY
Current liabilities:
Intercompany borrowings $ 30,181 $ --
Accounts payable and accrued expenses 20,096 16,096
Applied Printing Note -- 1,600
Notes payable 711 691
Capital leases 1,576 1,220
Other current liabilities 1,125 1,818
-------- --------
Total current liabilities 53,689 21,425
======== ========
Revolving bank line -- 3,300
Notes payable 853 594
Obligations under capital leases 2,415 1,729
Other non-current liabilities 7,233 4,642
-------- --------
Total liabilities 64,190 31,690
-------- --------
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, -- 138
13,810,000 issued and outstanding
Additional paid in capital -- 17,880
Retained earnings -- 6,184
Owner's deficit (19,381) --
-------- --------
Total owner's (deficit) /
shareholders' equity (19,381) 24,202
-------- --------
Total liabilities and owner's $ 44,809 $ 55,892
(deficit) / shareholders' equity ======== ========
The accompanying notes are an integral part of the financial
statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS (Note 2)
($ in thousands, except share and per share amounts)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1995 1996 1995 1996
------------------- -------------------
Net sales $ 29,638 $ 35,177 $ 89,489 $ 96,763
Cost of sales 21,608 23,635 65,595 67,600
------- ------- ------- -------
Gross profit 8,030 11,542 23,894 29,163
Selling expenses 3,990 4,033 12,187 11,788
General and
administrative
expenses 4,303 3,220 12,564 9,776
Reorganization charge 3,060 -- 3,060 --
------- ------- ------- -------
Total operating
expenses 11,353 7,253 27,811 21,564
------- ------- ------- -------
Operating income
(loss) (3,323) 4,289 (3,917) 7,599
Interest (expense) (761) (345) (2,287) (1,688)
Other Income
(expense), net (843) 272 395 547
------- ------- ------- -------
Income (loss) before
income tax provision (4,927) 4,216 (5,809) 6,458
Income tax provision -- 211 -- 274
------- ------- ------- -------
Net income (loss) $ (4,927) $ 4,005 $(5,809) $ 6,184
======= ======= ======= =======
Net income per share $ .29
======
Weighted average common
shares outstanding 13,810,000
==========
Pro Forma Net Income Data:
Income before taxes, as reported $ 6,458
Pro forma income taxes 303
------
Pro forma net income $ 6,155
======
Pro forma net income per share $ .50
======
Shares used in computing
pro forma net income per share 12,225,654
==========
The accompanying notes are an integral part of the financial
statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN OWNER'S (DEFICIT) AND SHAREHOLDERS'
EQUITY
($ in thousands)
(unaudited)
Additional
Common Paid-in Retained Owner's Total
Stock Capital Earnings Deficit Equity
----------------------------------------------------
Balance-December 31, 1995 $ $ $ $ (19,381) $ (19,381)
Add (deduct):
Net income 6,184 6,184
Common stock issued 138 46,188 46,326
Distributions (8,927) (8,927)
Conveyance (28,308) 28,308
----------------------------------------------------
Balance-September 30, 1996 $ 138 $ 17,880 $ 6,184 $ -- $ 24,202
----------------------------------------------------
The accompanying notes are an integral part of the financial statements
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (Note 2)
($ in thousands)
(unaudited)
For the Nine Months Ended
September 30,
-------------------------
1995 1996
-------------------------
Cash flows from operating activities:
Net income (loss) $ (5,809) $ 6,184
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 4,185 3,571
Amortization of deferred charges 525 (1,483)
Provision for bad debts 563 62
Provision for sales adjustments 150 320
Gain on insurance settlement (1,807) (18)
Loss on disposal of fixed assets 151 110
Reorganization charges 3,060 --
Increase (Decrease) from change in:
Accounts receivable 3,285 (7,463)
Due from affiliates (192) 995
Inventory (417) (176)
Other current assets, prepaid
expenses and other assets 1,966 1,388
Accounts Payable and other current
and non-current liabilities 2,798 (4,415)
------- -------
Net cash provided by (used in) operating
activities 8,458 (925)
------- -------
Cash provided by (used in) investing
activities:
Investment in short-term instruments -- (1,600)
Acquisition of building and equipment (1,271) (9,269)
Proceeds from the sale of fixed assets -- 294
Net proceeds from insurance claims (228) 243
------- --------
Net cash (used in) investing activities (1,499) (10,332)
------- --------
Cash provided by (used in) financing
activities:
Proceeds received from the sale of
common stock -- 46,326
Proceeds from bank overdraft -- 1,690
Repayment of bank overdraft -- (1,690)
Proceeds from sale/leaseback transactions 558 1,717
Principal payment on Applied Printing Note -- (14,400)
Principal payments on notes and
capital lease obligations (4,009) (1,929)
Increase in bank borrowings -- 3,300
Decrease in intercompany borrowings,net (3,008) (18,000)
Net distributions to Applied Printing (473) (5,108)
------- -------
Net cash (used in) provided by financing activities (6,932) 11,906
------- -------
Net increase in cash and cash equivalents 27 649
Cash and cash equivalents at beginning of period 90 567
------- -------
Cash and cash equivalents at end of period $ 117 $ 1,216
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Taxes $ 53 $ 765
Interest $ 2,287 $ 754
Distribution to Applied Printing in the form of
increased intercompany borrowing $ -- $ 3,817
Conversion of intercompany borrowing to
Applied Printing Note payable $ -- $ 16,000
The accompanying notes are an integral part of the financial
statements
<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") is an
independent provider of digital prepress services to magazine
publishers, advertising agencies, entertainment companies and
catalog retailers. In addition, the Company provides outsourced,
on-site prepress and related services for third parties and
advanced digital imaging services, such as digital archiving and
distribution services.
The Company was incorporated in Delaware on December 12,
1995. On that date, 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 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. As per the terms of the note, ninety percent of the
principal of the Applied Printing Note ($14,400) plus accrued
interest was paid on September 13, 1996. The remaining principal
($1,600) 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 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
September 30, 1996 and have been accounted for in a manner
similar to a pooling of interests (See Note 2).
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.
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
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 combined financial statements have been prepared by the
management of the Company in accordance with the accounting
policies disclosed in the Company's combined financial statements
included in the Company's Registration Statement 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 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 nine months ended September 30,
1996, are not necessarily indicative of the results to be
expected for the entire fiscal year.
2. STATEMENT OF OPERATIONS PRESENTATION:
The combined 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) and the results of the Company from April 17, 1996
through September 30, 1996 and have been accounted for in a
manner similar to a pooling of interests. The operations for the
three months ended September 30, 1996 represent actual results of
the Company.
Selected statement of operations data for the nine months ended
September 30, 1996 are as follows:
--------Nine Months Ended September 30, 1996---------
January 1- April 17- Nine Months Ended
April 16, 1996 Sept. 30, 1996 Sept. 30, 1996
(Predecessor Group) (the Company) (Pro Forma)
-------------------- ---------------- -------------
Net sales $ 35,276 $ 61,487 $ 96,763
Gross profit 9,372 19,791 29,163
Operating income 1,060 6,539 7,599
Income (loss) before pro
forma income taxes (202) 6,660 6,458
Pro forma income taxes 29 274 303
Pro forma net income (loss) (231) 6,386 6,155
Pro forma net income
(loss) per share (0.02) -- --
Net income per share -- 0.46 0.50
Shares used in calculating
net income per share and
pro forma net income
(loss) per share 9,752,889 13,810,000 12,225,654
<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 September 30, 1996.
Stock options issued but not exercised have not been used in
the computation of primary earnings per share because they have
no material dilutive effect.
4. INITIAL PUBLIC OFFERING:
The Company received net offering proceeds of approximately
$46,188 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 was invested in short term interest-bearing
investments which collateralize a standby letter of credit which,
in turn, collateralizes payment of the Applied Printing Note.
The Company repaid $14,400 of the Applied Printing Note on
September 13, 1996 (see Note 1). The remaining proceeds of the
offering are being used for working capital, capital expenditures
and other general corporate purposes.
5. INCOME TAXES:
The accompanying statement of operations for the nine months
ended September 30, 1996 presents a pro forma income tax expense
on an unaudited pro forma basis as if the Predecessor Group had
been a C Corporation, subject to applicable federal and state
income taxes through April 16, 1996 and actual income tax expense
relating to the Company's results of operations from April 17,
1996 through September 30, 1996.
In determining income tax expense and pro forma income tax
expense, the Company has included the tax effect of temporary
differences which will reverse in the future. For purposes of
the income tax calculations, deferred tax benefits have been
recognized to the extent of current taxes payable. The remaining
tax benefits have been offset by a valuation allowance since,
based on the Predecessor Group's history of losses, it is assumed
more likely than not that such benefits may not be realizable.
Such assumption will be evaluated in the future by the Company.
Income tax expense and pro forma income tax expense for the
quarter and nine months ended September 30, 1996, respectively,
are lower than that which is customary due primarily to the tax
effect of restructuring charges recognized by the Predecessor
Group in prior years, which are deductible by the Company in 1996
and a release of a portion of the valuation allowance established
at the time the Company was formed. The reduction is partially
offset by the tax effect of certain items that are not deductible
for income tax purposes.
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
($ in thousands, except share and per share amounts)
(unaudited)
6. INVENTORY:
The components of inventory are as follows:
December 31, 1995 September 30, 1996
----------------- ------------------
Work-in-Process $ 2,518 $ 2,620
Raw Materials 1,064 818
-------- --------
$ 3,582 $ 3,438
======== ========
7. INTERCOMPANY BORROWINGS:
The Predecessor Group had been financed principally through
debt from Applied Printing. Historically, Applied Printing had
financed all of 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 September 30, 1996,
respectively.
The interest expense allocated to the Predecessor Group is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------- -------- ------ ------
Interest expense $ 515 $ -- $ 1,754 $ 944
===== ===== ===== =====
Weighted average
annual interest rate 10.0% -- 10.0% 10.8%
===== ===== ====== ======
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
($ in thousands, except share amounts)
(unaudited)
8. REVOLVING BANK LINE:
On August 22, 1996, the Company obtained a $10,000 revolving
two year credit facility collateralized by the Company's accounts
receivable. The interest rate on funds borrowed is the prime
lending rate, however, at its option, the Company may borrow at
LIBOR plus 2.25%. LIBOR borrowings may have maturities of 30,
90, or 180 days. The credit facility requires compliance with
certain financial loan covenants related to tangible net worth,
ratio of debt to tangible net worth and debt service coverage
ratio. At September 30, 1996, the Company was in compliance with
all financial covenants.
At September 30, 1996, no borrowings were made under the
LIBOR provision. At September 30, 1996, the unused portion of
the revolver was $6,700.
9. RELATED PARTY TRANSACTIONS:
The following is a summary of transactions between the
Company and related parties:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1996 1995 1996
------------------ -----------------
Sales to related parties $ 2,085 $ 2,921 $ 5,623 $ 8,172
====== ====== ====== ======
Purchases from related parties $ 48 $ 774 $ 371 $ 2,197
====== ====== ====== ======
Corporate allocations $ 1,608 $ -- $ 4,718 $ --
====== ====== ====== ======
Rent $ 49 $ 106 $ 147 $ 416
====== ====== ====== ======
10. 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.
<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 September 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.
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 nine month period
ended September 30, 1996, has been calculated on a pro forma
basis as if the Company was a separate taxable C Corporation for
the period prior to the Offering. An actual provision for income
taxes was made for the period April 17, 1996 through September
30, 1996.
<PAGE>
RESULTS OF OPERATIONS
During the third quarter and nine month period ended
September 30, 1996, the Company continued its efforts to expand
the number of on-site arrangements with customers and to increase
sales of digital imaging services. These efforts resulted in
three additional on-site services arrangements to provide
prepress services that began the third quarter of 1996, bringing
the total of on-site prepress service arrangements to fourteen,
as of September 30 1996.
For the quarter ended September 30, 1996, net sales were
$35.2 million compared to $29.6 million in the prior year
quarter, an increase of approximately $5.6 million or 18.9%. 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 sales allowances. Such items were partially offset
by a decline in the Company's business with advertising agencies.
For the nine months ended September 30, 1996, the Company
had net sales of $96.8 million compared to $89.5 million in the
same period in 1995, an increase of approximately $7.3 million or
8.1%. 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 sales allowances.
These increases were partially offset by the net decline in the
Company's business with advertising agencies.
Gross profit as a percentage of sales increased in the third
quarter of 1996 to 32.8% from 27.1% compared to the same period
in 1995. This improvement of 5.7% as a percent of sales, 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,
continued implementation of improved manufacturing processes and
benefits of operating efficiencies related to the reorganizations
in 1994 and 1995.
Gross profit as a percentage of sales increased for the nine
months ended September 30, 1996 to 30.1% from 26.7% compared to
the same period in 1995, an improvement of 3.4% as a percent of
sales. 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, continued
implementation of improved manufacturing processes and benefits
of operating efficiencies related to the reorganization efforts
mentioned above.
Selling expenses in the third quarter of 1996 represent
11.5% of net sales, a reduction of 2.0%, as a percent of sales,
over the corresponding period of 1995. The decrease is
attributable to a reduction in sales support salaries and fringe
benefits associated with the reorganization in 1995 coupled with
the increase in on-site facilities management contracts and
digital business which require fewer sales support people.
Selling expenses for the nine month period ended September
30, 1996 decreased to 12.2% as a percent of net sales from 13.6%
of net sales for the corresponding period in 1995, a decrease of
1.4%. The decrease is primarily attributable to lower sales
support costs resulting from the reorganization in 1995,
decreased sales support required for the on-site facilities
management contracts and digital imaging sales, partially offset
by an increase in commission expense relating to certain new
sales.
General and administrative expenses for the quarter ended
September 30, 1996 decreased approximately $1.1 million from the
corresponding period in 1995. This represents a decrease of 5.4%,
as a percent of sales. The primary reasons for the decrease as
compared to the 1995 quarter were a non-recurring sales tax
accrual of $525,000 recorded in the 1995 quarter, the reversal of
a portion of the accrual ($450,000) as a result of a favorable
ruling thereon in the 1996 quarter, non-recurring expenses in
1995 related to facilities closed by the third quarter of 1995,
higher expense for bad debts in 1995, and reductions in occupancy
and depreciation resulting from the reorganization efforts
mentioned above. Decreases in general and administrative
expenses were partially offset by additional payroll incurred to
support the new on-site facilities management contracts and
expanded operations at existing locations.
<PAGE>
General and administrative expenses for the nine months
ended September 30, 1996, decreased approximately $2.8 million
from the corresponding period in 1995. This represents a decrease
of 3.9% as a percent of sales. This decrease is primarily due to
the items which caused the third quarter decrease plus an amount
related to the non-recurring sales tax accrual recognized in the
nine months ended 1995, which was partially reversed ($450,000)
as a result of a favorable ruling thereon in 1996. 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 on-site facilities management contracts
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 September 30, 1996 have
been included in the general and administrative expense
classification. Subsequent to April 17, 1996, corporate expenses
are actual expenses, not allocations.
During the quarter ended September 30, 1995, charges
relating to fixed asset write-offs and non-operating expenses of
$ 1.1 million were partially offset by an insurance recovery of
$311,000, resulting in a net charge of $0.8 million to other
income (expense). The major component of other income (expense)
for the three months ended September 30, 1996, as compared to
1995, was interest earned on investments of approximately
$227,000.
The Company recorded an insurance recovery of approximately
$1.6 million as the result of fire and water damage to one of its
New York facilities during the nine months ended September 30,
1995. This recovery was partially offset by other non-operating
expenses resulting in other income, net being approximately $0.4
million for the nine months ended September 30, 1995. Exclusive
of the recovery relating to the fire damage, the only significant
change in other income and expense in the nine months ended
September 30, 1996, as compared to 1995 was interest earned on
investments of approximately $458,000 in 1996.
LIQUIDITY AND CAPITAL RESOURCES.
Upon the closing of the Offering, the Company received net
offering proceeds of approximately $46.2 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 was 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. In
accordance with such note, ninety percent of this note ($14.4
million) was paid on September 13, 1996. 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 (exclusive of capital expenditures
with respect to new on-site facilities management contracts),
essentially all of which is for new manufacturing equipment.
Approximately $1.7 million of these expenditures were financed
under a sale leaseback arrangement. The Company intends to
finance a substantial portion of the remaining expenditures under
operating leases or sale and leaseback arrangements. On August
22, 1996, the Company acquired for $3.5 million in cash, a
building to be used to relocate its Los Angeles facility.
Ultimately, the Company plans to obtain long term financing or
enter into a sale and lease back arrangement to finance the
acquisition of the building. Approximately $2.1 million and $5.7
million was spent on capital expenditures (exclusive of the
building) in the third quarter and nine months ended September
30, 1996, respectively.
<PAGE>
Prior to the Offering, the Company has historically financed
its operations and capital expenditures with cash generated by
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
its operations and capital expenditures with cash generated from
operations, with proceeds of the Offering, operating leases and
the revolving bank line.
In addition to the proposed financing of the Los Angeles
building mentioned above, during the third quarter of 1996, the
Company entered into a $10.0 million working capital facility and
a $2.5 million equipment leasing facility.
The Company has unused equipment leasing facilities of
approximately $6.5 million available to it from various financing
sources. Such facilities are cancelable at the financing sources
option, and funding thereof is contingent upon the financing
sources approval of the equipment to be financed. The Company is
currently negotiating additional equipment leasing facilities
with various financing sources. As of this filing, the Company
has not obtained any commitment from any financing source for the
additional equipment leasing facilities, nor is there any
assurance that any such financing will be consummated.
The Company believes that the net proceeds from the
Offering, cash flow from operations, its line of credit and its
potential ability to obtain funding from financing sources will
be sufficient to fund its cash needs for the foreseeable future.
<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:
16 Letter re Change of Certifying Accountant
dated October 4, 1996
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
_____________________________ November 13, 1996
Melvin A. Ettinger
Vice Chairman, Chief Operating Officer and Director
(Duly authorized officer)
/s/ Louis Salamone, Jr.
_____________________________ November 13, 1996
Louis Salamone, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,216
<SECURITIES> 1,698
<RECEIVABLES> 27,766
<ALLOWANCES> 889
<INVENTORY> 3,438
<CURRENT-ASSETS> 36,241
<PP&E> 39,174
<DEPRECIATION> 21,159
<TOTAL-ASSETS> 55,892
<CURRENT-LIABILITIES> 21,425
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 17,880
<TOTAL-LIABILITY-AND-EQUITY> 55,892
<SALES> 96,763
<TOTAL-REVENUES> 96,763
<CGS> 67,600
<TOTAL-COSTS> 67,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> 1,688
<INCOME-PRETAX> 6,458
<INCOME-TAX> 303 <F1>
<INCOME-CONTINUING> 6,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,155
<EPS-PRIMARY> 0.50 <F2>
<EPS-DILUTED> 0.50 <F3>
<FN>
<F1>-Income Tax - The filing entity has included the results of the
Predecessor Group prior to April 17,1996, which was not a legal entity,
subject to tax, but rather part of a partnership. As such, the income
tax amount includes a "pro forma" provision
<F2>-EPS-Primary - The EPS calculations shown are on a "pro forma" basis.
The details 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 details 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>
