UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to_____
Commission File Number 0-28208
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3864004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 the registrant's common stock outstanding as of
October 31, 1997, was 17,819,383.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEETS
(Unaudited)
(In thousands of dollars, except share amounts)
September 30, December 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 8,719 $ 2,567
Marketable securities ............................. 99,419 1,600
Trade accounts receivable (net of
allowances of $738 in 1997 and $472 in 1996) .... 45,248 29,584
Due from affiliates ................................ 2,556
Inventory .......................................... 6,013 4,639
Deferred income taxes .............................. 958 705
Prepaid expenses and other current assets .......... 7,946 2,485
------- -------
Total current assets ..................... 170,859 41,580
Property, plant, and equipment - net ............... 25,388 20,544
Goodwill ........................................... 12,501 7,121
Deferred income taxes .............................. 1,899 1,644
Other assets ....................................... 1,987 1,258
------- -------
Total assets ............................. $212,634 $72,147
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $23,665 $19,630
Applied Printing Note .............................. 1,600
Current portion of long-term debt .................. 267 507
Current portion of obligations under
capital leases .................................. 945 1,354
Due to affiliates .................................. 1,051 354
Other current liabilities .......................... 2,100 2,407
------- -------
Total current liabilities ................ 28,028 25,852
Long-term debt ..................................... 1,164 6,005
Obligations under capital leases ................... 1,246 1,265
Other liabilities .................................. 2,687 3,142
------- -------
Total liabilities ........................ 33,125 36,264
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock (no par value,
10,000,000 shares authorized; no shares
issued and outstanding)
Common stock (par value $0.01; 40,000,000
shares authorized; shares issued and
outstanding: 17,819,383 in 1997 and 14,349,683
in 1996) ....................................... 178 143
Additional paid-in capital ......................... 159,148 25,584
Unrealized investment gain ......................... 4
Retained earnings .................................. 20,179 10,156
------- -------
Total stockholders' equity ...................... 179,509 35,883
------- -------
Total liabilities and stockholders' equity ...... $212,634 $72,147
======= =======
See Notes to Interim Financial Statements
<PAGE>
<TABLE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share amounts)
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 131,488 $ 96,763 $ 50,416 $ 35,177
Cost of revenues ............................................... 84,653 67,600 31,782 23,635
-------- -------- -------- --------
Gross profit ................................................... 46,835 29,163 18,634 11,542
Selling, general, and
administrative expenses .................................... 29,164 21,564 11,041 7,253
-------- -------- -------- --------
Operating income ............................................... 17,671 7,599 7,593 4,289
Interest expense ............................................... (921) (1,688) (413) (345)
Interest income ................................................ 345 458 328 227
Other income (expense) - net ................................... (459) 89 (513) 45
-------- -------- -------- --------
Income before provision for
income taxes ............................................... 16,636 6,458 6,995 4,216
Provision for income taxes ..................................... 6,613 274 2,853 211
-------- -------- -------- --------
Net income ..................................................... $ 10,023 $ 6,184 $ 4,142 $ 4,005
======== ======== ======== ========
Earnings per common share (pro forma for the nine month
period in 1996):
Primary ................................................... $ 0.64 $ 0.51 $ 0.25 $ 0.29
Fully Diluted ............................................. $ 0.63 $ 0.51 $ 0.25 $ 0.29
Weighted average number of
common shares (pro forma for the nine month
period in 1996):
Primary .................................................... 15,645 12,226 16,448 13,810
Fully Diluted .............................................. 15,941 12,226 16,555 13,810
Pro Forma Net Income Data:
Income before provision
for income taxes, as reported ................................ $ 6,458
Pro forma provision for income taxes ............................. 303
-------
Pro forma net income ............................................. $ 6,155
=======
Pro forma earnings per common share:
Primary ..................................................... $ 0.50
Fully Diluted ............................................... $ 0.50
Pro forma weighted average number of common shares:
Primary ..................................................... 12,226
Fully Diluted ............................................... 12,226
See Notes to Interim Financial Statements
</TABLE>
<PAGE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
For the Nine Months Ended
September 30,
---------------------------
------------- ------------
1997 1996
------------- ------------
Cash flows from operating activities:
Net income ......................................... $ 10,023 $ 6,184
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization ................ 4,533 2,088
Deferred taxes ............................... (395)
Other ........................................ 392 474
Management of Changes in Operating Assets and
Liabilities, net of effects of acquisitions:
Trade accounts receivable .................... (13,634) (7,463)
Due from/to affiliates ....................... (1,859) 995
Inventory .................................... (1,101) (176)
Other assets ................................. (2,155) 1,388
Accounts payable and accrued expenses ........ 3,112 (4,000)
Other liabilities ............................ (1,049) (415)
--------- ---------
Net cash used in operating activities .............. (2,133) (925)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of
available-for-sale securities ............... 36,499
Proceeds from maturities of
held-to-maturity securities ................. 1,600
Investments in available-for-sale securities . (135,808)
Investments in held-to-maturity securities ... (1,600)
Property, plant, and equipment expenditures .. (7,642) (9,269)
Entities purchased, net of cash acquired ..... (5,561)
Other investing activities ................... 12 537
--------- ---------
Net cash used in investing activities .............. (110,900) (10,332)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock ........... 121,700 46,326
Borrowings (repayments) under revolving
credit line - net ........................... (5,628) 3,300
Proceeds from sale/leaseback transactions .... 2,897 1,717
Repayment of Applied Printing Note ........... (1,600) (14,400)
Repayment of notes and capital
lease obligations .......................... (3,628) (1,929)
Proceeds from exercise of stock options ...... 5,444
Repayment of intercompany borrowings - net ... (18,000)
Distributions to Applied Printing - net ...... (5,108)
--------- ---------
Net cash provided by financing activities .......... 119,185 11,906
--------- ---------
Net increase in cash and cash equivalents .......... 6,152 649
Cash and cash equivalents at beginning of period ... 2,567 567
--------- ---------
Cash and cash equivalents at end of period ......... $ 8,719 $ 1,216
========= =========
See Notes to Interim Financial Statements
<PAGE>
<TABLE>
APPLIED GRAPHICS TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars except share and per-share amounts)
For the nine months ended September 30, 1997
<CAPTION>
Additional Unrealized
Common Paid-in Investment Retained
Stock Capital Gain Earnings
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 ............. $ 143 $ 25,584 $ 10,156
Issuance of 3,000,000 common
shares in a public offering ............ 30 121,670
Warrants granted to
purchase common shares 330
Issuance of 469,700 common
shares upon exercise of stock options .. 5 5,439
Income tax benefit associated with
exercise of stock options ........... 6,125
Unrealized gain on investments in
available-for-sale securities ...... $ 4
Net Income ............................ 10,023
-------- --------- --------- ---------
Balance at September 30, 1997 ......... $ 178 $ 159,148 $ 4 $ 20,179
======== ========= ========= =========
</TABLE>
See Notes to Interim Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Applied
Graphics Technologies, Inc. (the "Company"), which have been prepared in
accordance with the instructions to Form 10-Q and, therefore, do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles, should be read in conjunction with the notes to
financial statements contained in the Company's 1996 Form 10-K, as amended. In
the opinion of the management of the Company, all adjustments (consisting
primarily of normal recurring accruals) necessary for a fair presentation have
been included in the financial statements. The operating results of any quarter
are not necessarily indicative of results for any future period.
On April 16, 1996 (the "Initial Offering Date"), the Company's Registration
Statement on Form S-1 under the Securities Act of 1933, as amended, relating to
the initial public offering (the "Initial Offering") of the Company's Common
Stock, was declared effective. Upon the Initial Offering being declared
effective, the Company acquired substantially all of the assets and certain
related liabilities relating to the prepress, digital imaging services, and
related businesses (collectively, the "Prepress Business") of Applied Printing
Technologies, L.P. ("Applied Printing"), an entity beneficially owned by the
Chairman of the Board of Directors of the Company and the Chief Executive
Officer of the Company. The Prepress Business was acquired in exchange for
9,309,900 shares of the Company's Common Stock and $37.0 million of additional
consideration comprised of (i) the assumption by the Company of the principal
amount of collateralized senior indebtedness to Applied Printing's primary
institutional lender (the "Institutional Senior Indebtedness") of $21.0 million
and (ii) the issuance of a promissory note by the Company to Applied Printing
(the "Applied Printing Note") of $16.0 million. The Company received net
proceeds of $46.1 million from the Initial Offering, of which $21.0 million was
used to repay Institutional Senior Indebtedness and $16.0 million was used to
invest in short-term investments to support a standby letter of credit that
collateralized the Applied Printing Note.
The acquisition of the Prepress Business was accounted for in a manner
similar to a pooling of interests. Accordingly, the financial statements of the
Company reflect the combined results of operations of the Prepress Business
through the Initial Offering Date and the results of the Company thereafter. The
statement of operations and the statement of cash flows covering periods through
the Initial Offering Date have been prepared by combining the results of
operations and cash flows of the specific divisions that comprised the Prepress
Business. Prior to the Initial Offering Date, these divisions operated as
separate business units and maintained their own books and records. Through the
Initial Offering Date, Applied Printing managed the cash and financing
requirements of all of its divisions centrally and, as such, the interest
expense and related intercompany borrowing up until that date represents an
allocation of Applied Printing's interest expense and the related debt.
Additionally, prior to the Initial Offering Date, Applied Printing and other
related parties had provided certain corporate, general, and administrative
services to the Prepress Business including general management, treasury,
financial reporting, and legal services. Accordingly, the financial statements
prior to the Initial Offering Date include an allocation of expenses for such
services. The results of operations and cash flows for the nine month period
ended September 30, 1996, may have differed had the Company operated as an
independent entity during the entire period.
In May 1997, the Company completed the purchase of certain assets of Star
Graphic Arts Co., Inc., a prepress company. In June 1997, the Company acquired
certain assets of Digital Imagination, Inc., a digital events photography
business, and also acquired certain rights from a former joint venture partner.
In July 1997, the Company acquired all of the assets of MBA Graphics, Inc.
("MBA"), a provider of prepress production, direct mailing, and brokered
commercial printing services. In September 1997, the Company acquired certain
assets of the broadcast media distribution business of Winkler Video Associates,
Inc. For such acquisitions, the Company paid an aggregate of $5.7 million from
amounts borrowed under its line of credit, assumed $7.1 million of liabilities,
and granted warrants to purchase a minimum of 19,000 shares of its Common Stock
with an approximate value of $0.3 million. In addition, the Company may be
obligated to make payments or issue shares of Common Stock as additional
consideration for certain of the acquisitions. Such additional consideration
will be determined based upon the future financial performance of the acquired
operations. These acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities acquired have been recorded
at their estimated fair values at the dates of acquisition. The excess of the
purchase price over the fair value of the net assets acquired was $5.5 million
and has been recorded as goodwill. The effects on revenues, income before
provision for income taxes, net income, and earnings per common share from these
acquisitions, either individually or in the aggregate, are not material.
On September 3, 1997, the Company's Registration Statement on Form S-3 under
the Securities Act of 1933, as amended, relating to an offering of the Company's
Common Stock (the "Offering"), was declared effective. As part of the Offering,
the Company sold 3,000,000 shares of Common Stock, generating proceeds, net of
underwriters' discount and transaction expenses, of $121.7 million. Also as part
of the Offering, an additional 3,900,000 shares were sold by certain
stockholders of the Company, of which 3,650,000 shares were sold by Applied
Printing.
Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform with the 1997 presentation.
2. ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was issued in February 1997 and is effective for interim and annual
periods ending after December 15, 1997. This statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share," establishes
standards for computing and presenting earnings per share and will require the
restatement of all prior-period earnings per share data. The implementation of
SFAS No. 128 will not have a material impact on the Company's earnings per share
data.
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997 and is
effective for periods ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure by
superseding and consolidating previously issued accounting standards. The
financial statements of the Company are prepared in accordance with the
requirements of SFAS No. 129.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued in June
1997 and is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way public
companies report information about operating segments in annual and interim
financial statements. The Company believes its current reporting systems will
enable it to comply with the implementation of SFAS No. 131.
3. MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified its investments in marketable securities at September 30,
1997, as "available for sale" and has recorded them at fair market value.
Marketable securities at December 31, 1996, were classified as "held to
maturity" and were recorded at amortized cost. Marketable securities at
September 30, 1997, and December 31, 1996 (expressed in thousands of dollars),
consisted of the following:
<PAGE>
September 30, 1997 December 31, 1996
--------------------- -------------------
Market Amortized Market Amortized
Value Cost Value Cost
-------- --------- -------- ---------
Debt issued by municipalities
and their subdivisions:
Maturing within 1 year ........ $13,500 $13,500
Maturing after 15 years ....... 5,000 5,000
Corporate debt securities maturing
within 1 year ................. 66,918 66,914
U.S. Government Treasury fund .... 14,001 14,001
U.S. Government Securities ....... $ 1,600 $ 1,600
------- ------- ------- -------
Total ............................ $99,419 $99,415 $ 1,600 $ 1,600
======= ======= ======= =======
At September 30, 1997, and December 31, 1996, all securities were available for
current operations and are therefore classified in the Balance Sheets as current
assets. Unrealized holding gains and losses on available-for-sale securities,
which were not material at September 30, 1997, are reflected as a separate
component of Stockholders' Equity. Proceeds from sales of available-for-sale
securities during both the nine and three month periods ended September 30,
1997, totaled $36.5 million and resulted in no realized gain or loss. Realized
gains and losses are determined based on a specific identification basis.
4. INVENTORY
The components of inventory (in thousands of dollars) were as follows:
September 30, December 31,
1997 1996
Work-in-process .............................. $3,712 $2,596
Raw materials ................................ 2,301 2,043
------ ------
Total ........................................ $6,013 $4,639
====== ======
5. INCOME TAXES
The Prepress Business was treated as a partnership for Federal and state
income tax purposes prior to the Initial Offering Date and was not subject to
tax. Concurrently with the acquisition of the Prepress Business, the Company
recorded the applicable deferred tax assets related to the differences between
financial statement and tax basis of the assets and liabilities of the Prepress
Business. These deferred tax assets were entirely offset by a valuation
allowance. A provision for income taxes is included in the Company's Statement
of Operations only for the periods subsequent to the Initial Offering Date. The
effective rate of the provision for income taxes in 1996 was lower than would
ordinarily be expected due primarily to the reversal of both Federal and state
deferred tax asset valuation allowances.
6. EARNINGS PER SHARE
Earnings per share of common stock are computed by dividing net income by
the weighted average of the number of shares of common stock and common stock
equivalents, where dilutive, outstanding. For the nine month period in 1996,
earnings per share of common stock represent a pro forma calculation and include
the number of shares of common stock issued and issuable to Applied Printing
prior to the Initial Offering Date.
<PAGE>
7. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with related
parties (in thousands of dollars) were as follows:
Nine months Three months
ended September 30, ended September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
Affiliate sales ................ $10,665 $ 8,172 $ 4,337 $ 2,291
Affiliate purchases ............ $ 3,125 $ 2,197 $ 835 $ 774
Administrative charges ......... $ 798 $ 1,907 $ 267 $ 169
Administrative charges include charges for certain legal and computer
services provided by affiliates and for rent incurred for leases with
affiliates. Administrative charges incurred for the nine months ended September
30, 1996, also include $1.5 million of costs allocated from Applied Printing for
general management, treasury, financial reporting, and legal services. Such
administrative charges are included in selling and administrative expenses in
the Statements of Operations.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes for the nine months ended September
30, 1997 and 1996 (in thousands of dollars), were as follows:
1997 1996
---- ----
Interest paid $ 928 $ 754
Income taxes paid $ 4,757 $ 765
Noncash investing and financing activities for the nine months ended
September 30, 1997 and 1996 (in thousands of dollars), were as follows:
1997 1996
-------- --------
Notes payable issued in connection
with an acquisition .............................. $ 488
Increase in additional paid-in
capital from income tax benefit
associated with exercise of stock options ........ $ 6,125
Reduction of goodwill from amortization
of excess tax deductible goodwill ................ $ 113
Conversion of intercompany borrowing into
Applied Printing Note ............................ $ 16,000
Distribution to Applied Printing in the
form of increased intercompany borrowing ......... $ 3,819
Common stock issued in exchange for the
Prepress Business ................................ $ 93
Acquisitions:
Fair value of assets acquired ..................... $ 13,119
Cash paid ......................................... (5,699)
Value of stock warrants issued .................... (330)
--------
Liabilities assumed ............................... $ 7,090
========
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking" statements (within the meaning of the Private Securities
Litigation Reform Act of 1995). Such statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance, or
achievements of the Company to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, the
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: the securing of additional, or the renewal of existing,
on-site arrangements; the rate of expansion of services under the new agreement
with General Motors; an expansion of services provided by the digital division;
obtaining efficiencies from combining certain facilities; the rate and level of
capital expenditures; the ability to identify and consummate suitable
acquisitions; or obtaining additional credit or financing sources.
On April 16, 1996 (the "Initial Offering Date"), the Company commenced the
initial public offering (the "Initial Offering") of its Common Stock. Concurrent
with the Initial Offering, the Company acquired substantially all of the assets
and certain liabilities relating to the prepress, digital imaging services, and
related businesses of Applied Printing Technologies, L.P. ("Applied Printing")
(collectively, the "Prepress Business"). The acquisition of the Prepress
Business has been accounted for in a manner similar to a pooling of interests.
Accordingly, the financial statements of the Company reflect the combined
results of operations of the Prepress Business through the Initial Offering Date
and the results of the Company thereafter.
On September 3, 1997, the Company's Registration Statement on Form S-3 under
the Securities Act of 1933, as amended, relating to an offering of the Company's
Common Stock (the "Offering"), was declared effective. As part of the Offering,
the Company sold 3,000,000 shares of Common Stock, generating proceeds, net of
underwriters' discount and transaction expenses, of $121.7 million. Also as part
of the Offering, an additional 3,900,000 shares were sold by certain
stockholders of the Company, of which 3,650,000 shares were sold by Applied
Printing.
Results of Operations
Nine months ended September 30, 1997, compared with 1996
Revenues in the first nine months of 1997 were $34.7 million or 35.9% higher
than in the comparable period in 1996. This increase was primarily due to $10.4
million of revenues generated from the operations of additional on-site
facilities management contracts during the 1997 period that were in effect for
none or only a portion of the 1996 period, $5.6 million of revenues from
broadcast media distribution operations that have been acquired since the 1996
period, increased revenues of $3.6 million in the digital imaging services
division from equipment sales, archiving services, and digital photography
operations, $13.1 million of additional traditional prepress business, and
receipt of a nonrefundable payment of $2.0 million related to an agreement with
one of the Company's major suppliers. Traditional prepress revenues increased
primarily from the results of MBA Graphics, Inc. ("MBA"), whose operations were
acquired in July 1997, increased business at the Foster City facility resulting
from the acquisition of the operations of Star Graphics Arts Co., Inc. ("Star
Graphics"), in May 1997, additional revenue generated at the Detroit facility as
a result of the new contract entered into with General Motors, and an overall
increase in business at the Carlstadt, NJ, facility, and a New York City
facility.
The gross profit percentage in the first nine months of 1997 was 35.6% as
compared to 30.1% in the 1996 period. Gross profit increased $17.7 million or
60.6% in the first nine months of 1997 as a result of the additional revenues
for the period as discussed above and the reduction of costs due to favorable
pricing negotiated with certain suppliers.
Selling, general, and administrative expenses in the first nine months of
1997 were $7.6 million higher than in the first nine months of 1996, but as a
percent of revenue decreased slightly to 22.2% in the 1997 period from 22.3% in
the 1996 period. Improvements were achieved primarily from the increase in
revenues discussed above and increased business from on-site facilities
management contracts, which require less sales support than the traditional
prepress business. Such improvements were offset by additional corporate
expenses incurred related to being a publicly-traded company, additional
expenses incurred as part of the Company's expansion and development of a
national sales force to better market its services, and from expanded business
at certain operations.
Interest expense in the first nine months of 1997 was $0.8 million less than
in the 1996 period primarily due to the repayment of debt in April 1996 with the
proceeds from the Initial Offering and the repayment of borrowings under the
line of credit in September 1997 with the proceeds from the Offering.
The effective rate of the provision for income taxes in 1996 was lower than
would ordinarily be expected due primarily to the reversal of both Federal and
state deferred tax asset valuation allowances.
Three months ended September 30, 1997, compared with 1996
Revenues in the third quarter of 1997 were $15.2 million or 43.3% higher
than in the comparable period in 1996. This increase was primarily due to $3.5
million of additional revenues generated from the operations of on-site
facilities management contracts principally related to contracts that were in
effect for none or only a portion of the 1996 period, $2.3 million of revenues
from the broadcast media distribution operations that have been acquired
subsequent to the 1996 period, increased revenues of $1.9 million in the digital
imaging services division from archiving services and digital photography
operations, and $7.5 million of additional revenue generated in the traditional
prepress business. Traditional prepress revenues increased primarily from the
results of MBA, whose operations were acquired in July 1997, increased business
at the Foster City facility resulting from the acquisition of the operations of
Star Graphics in May 1997, incremental revenue generated at the Detroit facility
as a result of the new contract entered into with General Motors, and an overall
increase in business at the Carlstadt, NJ, facility, and a New York City
facility.
The gross profit percentage in the third quarter of 1997 was 37.0% as
compared to 32.8% in the 1996 period. Gross profit increased $7.1 million or
61.4% in the third quarter of 1997 as a result of the additional revenues for
the period as discussed above, including revenues from higher margin operations,
and from reduced costs resulting from more favorable pricing negotiated with
certain suppliers.
Selling, general, and administrative expenses in the third quarter of 1997
were $3.8 million higher than in the third quarter of 1996, and as a percent of
revenue increased slightly to 21.9% in the 1997 period from 20.6% in the 1996
period. This is primarily due to additional corporate expenses incurred related
to being a publicly-traded company, additional expenses incurred as part of the
Company's expansion and development of a national sales force to better market
its services, and from expanded business at certain operations.
The effective rate of the provision for income taxes in 1996 was lower than
would ordinarily be expected due primarily to the reversal of both Federal and
state deferred tax asset valuation allowances.
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was issued in February 1997 and is effective for interim and annual
periods ending after December 15, 1997. This statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share," establishes
standards for computing and presenting earnings per share and will require the
restatement of all prior-period earnings per share data. The implementation of
SFAS No. 128 will not have a material impact on the Company's earnings per share
data.
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure," was issued in February 1997 and is
effective for periods ending after December 15, 1997. This statement establishes
standards for disclosing information about an entity's capital structure by
superseding and consolidating previously issued accounting standards. The
financial statements of the Company are prepared in accordance with the
requirements of SFAS No. 129.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued in June
1997 and is effective for financial statements for periods beginning after
December 15, 1997. This statement establishes standards for the way public
companies report information about operating segments in annual and interim
financial statements. The Company believes its current reporting systems will
enable it to comply with the implementation of SFAS No. 131.
Financial Condition
In September 1997, the Company received $121.7 million in proceeds, net of
underwriters' discount and transaction expenses, from the Offering. Of such
proceeds, $22.7 million were used to repay the amount then outstanding under the
Company's revolving line of credit. The remaining proceeds of approximately $99
million were invested in marketable securities. The Company plans to use a
significant portion of the proceeds from the Offering to further expand its
business through acquisitions. Although the Company continues to evaluate
acquisition opportunities on an ongoing basis, there is no assurance that the
Company will successfully complete additional acquisitions. The Company also
received $5.4 million from the exercise of 469,700 employee stock options in the
first nine months of 1997.
During the first nine months of 1997, the Company repaid the remaining $1.6
million of the Applied Printing Note with the proceeds from the maturity of
marketable securities. In the first nine months of 1997, the Company entered
into three separate sale and leaseback arrangements that generated proceeds of
$2.9 million. Such arrangements resulted in immaterial gains that have been
deferred and are being recognized in income as a credit against future rental
expense. In November 1997, the Company renegotiated its existing revolving line
of credit, increasing its borrowing capacity to an aggregate of $60 million,
consisting of a $35 million revolving line of credit (the "Revolver") and a $25
million acquisition line of credit (the "Acquisition Line"). The Revolver and
the Acquisition Line have repayment terms that run through November 13, 2000,
and December 1, 2003, respectively. Interest rates on funds borrowed under the
Revolver and the Acquisition Line vary from the lower of prime less 1.00% or
Libor plus 0.50%, to the greater of prime plus 0.125% or Libor plus 1.375%.
There are no borrowings currently outstanding under either of these facilities.
Cash flows from operating activities during the first nine months of 1997
decreased by $1.2 million as compared to the comparable period in 1996 due
primarily to increased accounts receivable resulting from additional business,
increased inventory levels associated with timing of purchases from suppliers,
and additional tax payments offset by cash generated from additional income and
the timing of vendor payments. In addition to the cash generated and used as
part of the capital transactions described above, during the first nine months
of 1997 the Company invested $7.6 million in equipment, paid $5.7 million
related to acquisitions, and repaid $3.6 million of debt and lease obligations
with the proceeds from the three sale and leaseback transactions and the
proceeds from the exercise of stock options.
Working capital increased $127.1 million during the first nine months of
1997 primarily from the proceeds from the Offering, increased receivables,
including amounts due from affiliates, resulting from additional business at
existing facilities and from acquired operations. The Company also recorded a
tax benefit in the amount of $6.1 million associated with the exercise of
employee stock options that reduced the cash requirement for taxes for the
remainder of 1997. Long-term debt decreased $4.7 million due primarily to the
repayment of amounts borrowed under the line of credit with a portion of the
proceeds of the Offering.
At September 30, 1997, capital commitments, which the Company expects to
expend over the course of the next fifteen months, amounted to approximately
$13.7 million, essentially all of which is for modernization and growth,
including a $8.2 million capital investment the Company expects to make in
connection with the General Motors contract and $1.8 million for expansion to
handle additional business from The Home Depot. The Company intends to finance a
substantial portion of these expenditures under operating leases, sale and
leaseback arrangements, or with working capital, including the proceeds from the
Offering.
The Company believes that the cash flow from operations, proceeds from the
Offering, its revolving credit facility, and its potential ability to obtain
funding from other financing sources will be sufficient to fund its cash needs
for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Certificate of Incorporation (Incorporated by reference
to Exhibit No. 3.1 forming part of the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
3.2 Amended and Restated By-Laws of Applied Graphics
Technologies, Inc. (Incorporated by reference to Exhibit
No. 3.2 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
4 Specimen Stock Certificate (Incorporated by reference to
Exhibit No. 4 forming part of Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File
No. 333-00478) filed with the Securities and Exchange
Commission under the Securities Act of 1933, as
amended).
10.2 Applied Graphics Technologies, Inc. 1996 Stock Option
Plan (Incorporated by reference to Exhibit No. 10.2
forming part of Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
10.3 Applied Graphics Technologies, Inc. Non-Employee
Directors Nonqualified Stock Option Plan (Incorporated
by reference to Exhibit No. 10.3 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.4* Loan and Purchase Agreement, dated January 8, 1992, as
amended (Incorporated by reference to Exhibit No. 10.4
forming part of Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00478)
filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended).
10.4(a)* Second Amendment to Loan and Purchase Agreement dated
April 19, 1996 (Incorporated by reference to Exhibit No.
10.1 forming part of the Registrant's Report on Form
10-Q/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended March
31, 1996).
10.4(b)* Third Amendment to Loan and Purchase Agreement dated
June 30, 1997 (Incorporated by reference to Exhibit No.
10.4(b) forming part of the Registrant's Report on Form
10-Q/A (File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended June
30, 1997).
10.5 Agreement, dated May 1, 1979, between WAMM Associates
and Publisher Phototype International, L.P., as amended
(Incorporated by reference to Exhibit No. 10.5 forming
part of Amendment No. 1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(a) Employment Agreement, effective as of April 1, 1996,
between the Company and Diane Romano (Incorporated by
reference to Exhibit No. 10.6 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
10.6(b) Employment Agreement, effective as of April 1, 1996,
between the Company and Georgia L. McCabe (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(c) Employment Agreement, effective as of March 13, 1996,
between the Company and Melvin A. Ettinger (Incorporated
by reference to Exhibit No. 10.6 forming part of
Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(d) Employment Agreement, effective as of April 1, 1996,
between the Company and Scott A. Brownstein
(Incorporated by reference to Exhibit No. 10.6 forming
part of Amendment No. 3 to the Registrant's Registration
Statement on Form S-1 (File No. 333-00478) filed with
the Securities and Exchange Commission under the
Securities Act of 1933, as amended).
10.6(e)(i) Employment Agreement, effective as of June 1, 1996,
between the Company and Louis Salamone, Jr.
(Incorporated by reference to Exhibit No. 10.6(e)
forming part of the Registrant's Report on Form 10-Q
(File No. 0-28208) filed with the Securities and
Exchange Commission under the Securities Exchange Act of
1934, as amended, for the quarterly period ended March
31, 1997).
10.6(e)(ii) Noncompetition, Nonsolicitation, and Confidentiality
Agreement, effective as of June 1, 1996, between the
Company and Louis Salamone, Jr. (Incorporated by
reference to Exhibit No. 10.6(e) forming part of the
Registrant's Report on Form 10-K (File No. 0-28208)
filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, for the
fiscal year ended December 31, 1996).
10.7 Form of Registration Rights Agreement (Incorporated by
reference to Exhibit No. 10.7 forming part of Amendment
No. 3 to the Registrant's Registration Statement on Form
S-1 (File No. 333-00478) filed with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended).
27 Financial Data Schedule (EDGAR filing only).
- ---------------------------------------
* Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
(b) The Registrant did not file any reports on Form 8-K during the quarter
ended September 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIED GRAPHICS TECHNOLOGIES, INC.
(Registrant)
By: /s/ Melvin A. Ettinger
Date: November 13, 1997
- ------------------------
Melvin A. Ettinger
Vice Chairman, Chief Operating Officer and Director
(Duly authorized officer)
/s/ Louis Salamone, Jr.
Date: November 13, 1997
- ------------------------
Louis Salamone, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the balance
sheet and statement of operations of the company as of and for six months ended
June 30, 1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0001006030
<NAME> APPLIED GRAPHICS TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 8,719
<SECURITIES> 99,419
<RECEIVABLES> 45,986
<ALLOWANCES> 738
<INVENTORY> 6,013
<CURRENT-ASSETS> 170,859
<PP&E> 52,338
<DEPRECIATION> 26,950
<TOTAL-ASSETS> 212,634
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<BONDS> 2,410
0
0
<COMMON> 178
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<TOTAL-LIABILITY-AND-EQUITY> 212,634
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