<PAGE> 1
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, 1998
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 incorporation (I.R.S. Employer
or organization) Identification No.)
450 WEST 33rd STREET
NEW YORK, NY
(Address of principal executive offices)
10001
(Zip Code)
212-716-6600
(Registrant's telephone number, including area code)
N/A
(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, 1998, was 22,379,127.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,769 $ 12,584
Marketable securities 90,150
Trade accounts receivable (net of allowances of $15,732 in 1998
and $3,989 in 1997) 101,083 43,025
Due from affiliates 4,282 5,561
Inventory - net 43,850 6,234
Prepaid expenses and other current assets 28,853 7,881
Deferred income taxes 19,429 3,016
--------- ---------
Total current assets 203,266 168,451
Property, plant, and equipment - net 83,944 31,020
Goodwill (net of accumulated amortization of $5,749 in 1998
and $1,289 in 1997) 410,491 22,229
Deferred income taxes 1,760 1,384
Other assets 6,472 1,709
--------- ---------
Total assets $ 705,933 $ 224,793
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 56,536 $ 27,264
Current portion of long-term debt and obligations under capital leases 2,077 2,303
Due to affiliates 130 923
Other current liabilities 14,114 6,793
--------- ---------
Total current liabilities 72,857 37,283
Long-term debt 201,946 812
Obligations under capital leases 4,162 2,011
Other liabilities 5,332 1,190
--------- ---------
Total liabilities 284,297 41,296
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock (par value $0.01; 10,000,000 shares authorized; no shares
issued and outstanding)
Common stock (par value $0.01; shares authorized: 150,000,000 in 1998 and
40,000,000 in 1997; shares issued and outstanding: 22,379,127 in 1998
and 17,836,383 in 1997) 224 178
Additional paid-in capital 385,269 159,627
Accumulated other comprehensive income 17 (31)
Retained earnings 36,126 23,723
--------- ---------
Total stockholders' equity 421,636 183,497
--------- ---------
Total liabilities and stockholders' equity $ 705,933 $ 224,793
========= =========
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 3
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 265,439 $ 131,488 $ 124,876 $ 50,416
Cost of revenues 167,710 84,653 79,034 31,782
--------- --------- --------- ---------
Gross profit 97,729 46,835 45,842 18,634
Selling, general, and
administrative expenses 67,773 29,164 35,175 11,041
Restructuring charge 5,300
--------- --------- --------- ---------
Operating income 24,656 17,671 10,667 7,593
Interest expense (4,648) (921) (3,420) (413)
Interest income 1,813 345 82 328
Other income (expense) - net 832 (459) 134 (513)
--------- --------- --------- ---------
Income before provision for
income taxes 22,653 16,636 7,463 6,995
Provision for income taxes 10,250 6,613 3,832 2,853
--------- --------- --------- ---------
Net income 12,403 10,023 3,631 4,142
Other comprehensive income 48 4 1 4
--------- --------- --------- ---------
Comprehensive income $ 12,451 $ 10,027 $ 3,632 $ 4,146
========= ========= ========= =========
Earnings per common share:
Basic $ 0.62 $ 0.68 $ 0.16 $ 0.27
Diluted $ 0.60 $ 0.64 $ 0.16 $ 0.25
Weighted average number of common shares:
Basic 19,957 14,691 22,335 15,370
Diluted 20,823 15,644 23,117 16,445
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 4
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,403 $ 10,023
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 12,921 4,533
Deferred taxes (386) (395)
Restructuring charge 5,300
Other (846) 392
Changes in Operating Assets and Liabilities, net of effects of acquisitions:
Trade accounts receivable (23,373) (13,634)
Due from/to affiliates 486 (1,859)
Inventory (7,786) (1,101)
Other assets (3,190) (2,155)
Accounts payable and accrued expenses (8,816) 3,112
Other liabilities (4,482) (1,049)
--------- ---------
Net cash used in operating activities (17,769) (2,133)
--------- ---------
Cash flows from investing activities:
Investment in available-for-sale securities (178,433) (135,808)
Proceeds from sale of available-for-sale securities 283,779 36,499
Proceeds from maturities of held-to-maturity securities 1,600
Property, plant, and equipment expenditures (24,640) (7,642)
Entities purchased, net of cash acquired (253,816) (5,561)
Other investing activities (4,468) 12
--------- ---------
Net cash used in investing activities (177,578) (110,900)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 121,700
Proceeds from sale/leaseback transactions 5,215 2,897
Repayment of notes and capital lease obligations (16,107) (3,628)
Borrowings (repayments) under credit lines 199,400 (5,628)
Repayment of Applied Printing Note (1,600)
Proceeds from exercise of stock options 24 5,444
--------- ---------
Net cash provided by financing activities 188,532 119,185
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,815) 6,152
Cash and cash equivalents at beginning of period 12,584 2,567
--------- ---------
Cash and cash equivalents at end of period $ 5,769 $ 8,719
========= =========
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 5
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars except share and per-share amounts)
<TABLE>
<CAPTION>
For the nine months ended September 30, 1998
--------------------------------------------
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Earnings
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 178 $159,627 $ (31) $ 23,723
Issuance of 68,103 common shares in
Flying Color Graphics acquisition at
$48.46 per share 1 3,299
Issuance of 4,427,290 common shares in
Devon merger at $50 per share 44 221,320
Issuance of 45,351 common shares in
Agile Enterprise, Inc. merger at
$22.05 per share 1 999
Issuance of 2,000 common shares upon
exercise of stock options 24
Other comprehensive income 48
Net income 12,403
-------- -------- -------- --------
Balance at September 30, 1998 $ 224 $385,269 $ 17 $ 36,126
======== ======== ======== ========
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 6
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Applied Graphics Technologies, Inc. and its subsidiaries (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 consolidated financial statements contained in the
Company's 1997 Form 10-K. 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 May 27, 1998, the Company obtained stockholder approval to increase the
number of authorized shares of its common stock to 150,000,000 shares from
40,000,000 shares.
Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform to the 1998 presentation.
2. ACQUISITIONS
In January 1998, the Company acquired the operations of Flying Color
Graphics, Inc. ("Flying Color"), a prepress company with five facilities
throughout the midwest, for approximately $18.4 million in cash from working
capital, 68,103 shares of the Company's common stock valued at approximately
$3.3 million, and the assumption of certain liabilities.
In May 1998, the Company, through a wholly-owned subsidiary, merged with
Devon Group, Inc. ("Devon"), a digital prepress and publishing company. The
Company paid $30 per share in cash and distributed 0.6 share of the Company's
common stock in exchange for each outstanding share of Devon common stock. The
total consideration paid was $452.7 million including transaction costs. To fund
the cash portion of the merger consideration, the Company used approximately
$86.4 million in cash from working capital, including cash acquired from Devon,
and borrowed $135.0 million under its lines of credit.
In May 1998, the Company acquired the operations of Tint Masters, Inc., a
prepress company with a facility in New Jersey, for approximately $2.8 million
in cash from working capital.
In June 1998, the Company acquired the stock of Color Control, Inc.
("CCI"), a prepress company with operations in Redmond, WA, for approximately
$23.4 million in cash plus the assumption of certain liabilities, including
approximately $11.9 million of long-term debt that was paid in full by the
Company at closing. The Company funded the acquisition of CCI, including the
repayment of long-term debt, with approximately $35.0 million in borrowings
under its lines of credit.
In September 1998, the Company, through a wholly-owned subsidiary, merged
with Agile Enterprise, Inc., a software development company located in Nashua,
NH. The merger consideration was comprised of 45,351 shares of the Company's
common stock valued at $1.0 million, approximately $0.8 million in cash, and the
assumption of certain liabilities, including approximately $0.9 million of
long-term debt that was paid in full by the Company at closing. The Company
funded the cash portion of the merger consideration, including the repayment of
long-term debt, with borrowings under its lines of credit. In addition, the
Company may be obligated to make payments and issue shares of its common stock
as additional consideration based upon the future financial performance of
Agile.
The acquisitions discussed above were accounted for using the purchase
method of accounting. Accordingly, the assets and liabilities have been recorded
at their estimated fair values at the date of the respective acquisitions,
subject to adjustments based on the completion of appraisals and other analyses.
The Company does not expect such adjustments to be material. The excess of the
purchase price over the fair value of assets acquired was approximately $390.3
million, which is being amortized over periods ranging from 20 to 40 years. The
results of
<PAGE> 7
operations of these acquisitions have been included in the Consolidated
Statements of Income subsequent to the respective dates of acquisition.
The following unaudited pro forma information (in thousands of dollars)
combines the results of operations of the Company and the acquisitions for the
nine months ended September 30, 1998 and 1997, calculated as if the acquisitions
had occurred on January 1, 1997. The pro forma information has been prepared for
comparative purposes only and does not purport to be indicative of the results
of operations that would have occurred had the acquisitions been consummated at
the beginning of 1997 or of results that may occur in the future.
<TABLE>
<CAPTION>
For the nine months ended September 30,
1998 1997
---- ----
<S> <C> <C>
Total revenues $361,988 $342,432
Income before provision for income taxes $ 21,598 $ 28,462
Net income $ 11,760 $ 14,372
Earnings per common share:
Basic $ 0.52 $ 0.71
Diluted $ 0.50 $ 0.70
</TABLE>
3. ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting of Comprehensive Income," in January 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. Other comprehensive income and accumulated other comprehensive
income as of and for the three and nine months ended September 30, 1998, are
comprised of unrealized holding gains and losses on available-for-sale
securities and unrealized gains and losses from foreign currency translation
adjustments. There were no items of other comprehensive income as of and for the
three and nine months ended September 30, 1997.
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998 and
is effective for financial statements for fiscal years beginning after December
15, 1998. This statement establishes standards for capitalizing and expensing
costs incurred in connection with internal use software and applies to costs
incurred subsequent to adoption of SOP 98-1. The Company does not expect the
adoption of SOP 98-1 to have a material adverse effect on its financial position
or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
is effective for fiscal quarters beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that entities recognize derivative
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for the
change in fair value of a derivative instrument will depend on the intended use
of the instrument. The adoption of SFAS No. 133 will require the Company to
reflect the fair value of its interest rate swap agreements on its Consolidated
Balance Sheet. The offsetting gain or loss at the time of adoption of SFAS No.
133 will be accounted for as a cumulative effect of a change in accounting
principle in accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes." The cumulative gain or loss at the time of adoption of
SFAS No. 133 and future gains and losses resulting from the change in fair value
of the swap agreements will be reflected in cumulative comprehensive income as a
separate component of stockholders' equity to the extent the swaps qualify as
cash flow hedges. To the extent the swaps do not qualify as cash flow hedges,
such gains and losses will be reflected in net income. The Company is unable to
quantify the potential impact of the adoption of SFAS No. 133 on its financial
position and results of operations.
<PAGE> 8
4. INVENTORY
The components of inventory (in thousands of dollars) were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------- -------
<S> <C> <C>
Finished goods $ 1,907
Work-in-process 36,885 $ 2,721
Raw materials 5,058 3,513
------- -------
Total $43,850 $ 6,234
======= =======
</TABLE>
5. RESTRUCTURING
During the second quarter of 1998, the Company commenced a plan to
restructure its operations to achieve certain operating efficiencies associated
with the growth of its prepress operations, primarily resulting from the merger
with Devon and the acquisition of Color Control as well as other recent
acquisitions. The Company's restructuring plan, which was approved by management
with requisite authority, includes the termination of certain employees and the
closing of facilities in Carlstadt, NJ, and Chicago, IL, with the work
historically performed at these facilities being integrated into its other
metropolitan New York and Midwest facilities, respectively. In addition, the
restructuring plan includes the termination of certain employees and the
consolidation of facilities by moving work currently performed in certain of its
West Coast facilities, with the objective of closing one of its California
facilities. The Company does not anticipate any adverse effect on its future
results of operations from such facility closings since all work currently
performed will continue at other locations. The results of operations for the
second quarter of 1998 included a charge of $5.3 million for this restructuring,
comprised primarily of severance and benefits for employees to be terminated,
facility closure costs, and assets no longer utilized as a result of the
restructuring. Of the total restructuring charge, approximately $1.0 million
represents severance for approximately 100 employees to be terminated,
principally prepress production workers and administrative support staff.
As of September 30, 1998, approximately $2.1 million was included in Other
Current Liabilities in the Consolidated Balance Sheet for the future costs of
the restructuring. During the third quarter of 1998, approximately $1.1 million
was charged against the restructuring reserve, of which $0.3 million represented
severance for 31 employees and the remainder represented the write off of assets
no longer utilized. The Company expects to complete this restructuring plan by
June 1999. The Company intends to continue to pursue other operating
efficiencies and synergies and as a result it may incur additional
restructuring charges in the future.
6. LONG TERM DEBT
On May 27, 1998 (the "Closing Date"), the Company entered into a credit
agreement (the "Credit Agreement") to be used to finance the Devon merger, to
provide working capital for the Company, and to finance certain future
acquisitions. In July 1998, the Company increased the borrowing capacity under
the Credit Agreement to $300 million, comprised of a $195 million revolving line
of credit (the "Revolver") and a $105 million acquisition line of credit (the
"Acquisition Line"). The Acquisition Line and the Revolver have terms that
extend through March 2003 and May 2003, respectively. Interest rates on funds
borrowed under the Revolver and the Acquisition Line vary from the prime rate in
effect at the time of the borrowing to LIBOR plus a fixed factor determined
based on the Company's EBITDA (as defined in the Credit Agreement). At September
30, 1998, $199.4 million was outstanding under the Credit Agreement, of which
$162.5 million was outstanding under the Revolver and $36.9 million was
outstanding under the Acquisition Line. The average variable rate on borrowings
under the Credit Agreement during the 1998 period was 7.04%. Under the terms of
the Credit Agreement, the Company must comply with certain covenants related to
total funded debt to EBITDA ratios, interest coverage ratios, and minimum net
worth. At September 30, 1998, the Company was in compliance with all covenants.
The Company is prohibited from paying dividends under the terms of the Credit
Agreement.
<PAGE> 9
Under the terms of the Credit Agreement, the Company was obligated to enter
into hedge arrangements within 180 days of the Closing Date for a minimum of two
years covering at least 30% of the amount borrowed on the Closing Date. In
August 1998, the Company entered into three interest rate swap agreements, two
of which expire in August 2003 (the "2003 Swaps") and one of which expires in
August 2001 (the "2001 Swap") (collectively, the "Swaps"). Under the 2003 Swaps
and the 2001 Swap, the Company will pay a fixed rate of 5.798% and 5.69%,
respectively, per annum on a quarterly basis and be paid a floating rate based
on the three month LIBOR rate in effect at the beginning of each quarterly
payment period. The notional amounts of the 2003 Swaps are $35 million and $15
million and the notional amount of the 2001 Swap is $25 million. The Swaps are
being accounted for as hedges against the variable interest rate component of
the Credit Agreement. All or a portion of the swaps will no longer be hedges and
therefore will expose the Company to market risk to the extent the borrowings
under the Credit Agreement fall below the combined notional amounts of the Swaps
or the Credit Agreement is not extended beyond its current term to at least
cover the term of the 2003 Swaps. The counterparties to the Swaps are major
financial institutions. The Company believes the credit risk associated with
nonperformance will not be significant.
7. STOCK OPTIONS
In May 1998, the Company's stockholders approved the 1998 Incentive
Compensation Plan. During the 1998 period, the Company issued 2,086,500 options
with exercise prices ranging from $42.00 to $55.75. In September 1998, the
Company also cancelled 2,250,500 options with exercise prices ranging from
$34.00 to $55.75 and issued new option grants for 2,250,000 shares with an
exercise price of $22.50. Of the 1998 option grants, 90,000 were granted to
non-employee members of the Board of Directors, of which 40,000 vest immediately
and 50,000 vest over a two-year period. The remaining options granted in 1998
were granted to employees and vest over a period of five years.
8. EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," in December 1997. SFAS No. 128
requires the presentation of both basic and diluted earnings per share as
opposed to primary and fully diluted earnings per share, which were required
under the previous standard, Accounting Principles Board Opinion No. 15. In
accordance with the provisions of SFAS No. 128, prior period earnings per share
data has been restated.
Basic earnings per share of common stock are computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings per share of common stock are computed by giving
effect to all dilutive potential shares. There were no reconciling items to net
income to arrive at income available to common stockholders for the three and
nine months ended September 30, 1998 and 1997.
9. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with related
parties during the three and nine months ended September 30, 1998 and 1997 (in
thousands of dollars) were as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Affiliate sales $18,948 $10,665 $ 4,367 $ 4,337
Affiliate purchases $ 4,746 $ 3,125 $ 1,380 $ 835
Administrative charges $ 719 $ 798 $ 205 $ 267
</TABLE>
Administrative charges include charges for certain legal and computer
services provided by affiliates and for rent incurred for leases with
affiliates.
<PAGE> 10
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes for the nine months ended September
30, 1998 and 1997 (in thousands of dollars) were as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Interest paid $3,899 $ 928
Income taxes paid $9,828 $4,757
</TABLE>
Noncash investing and financing activities for the nine months ended
September 30, 1998 and 1997 (in thousands of dollars) were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Reduction of goodwill from amortization of excess
tax deductible goodwill $ 85 $ 113
Write-off of fixed assets no longer utilized against
restructuring reserve $ 446
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
Acquisitions:
Fair value of assets acquired $ 564,266 $ 13,119
Cash paid (266,798) (5,699)
Fair value of common stock and warrants issued (225,665) (330)
--------- ---------
Liabilities assumed $ 71,803 $ 7,090
========= =========
</TABLE>
<PAGE> 11
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
facilities management contracts; the growth of the market for advanced digital
imaging services; the ability to enter into acquisitions; the rate and level of
capital expenditures; the rate and level of business from significant customers;
the ability to obtain additional credit or financing sources; or the ability
to attain year 2000 compliance for various systems, equipment, and software.
RESULTS OF OPERATIONS
Nine months ended September 30, 1998, compared with 1997
Revenues in the first nine months of 1998 were $134.0 million higher than
in the comparable period in 1997. This increase resulted from $18.4 million of
revenue from additional business generated internally and $115.6 million of
revenue from operations acquired subsequent to September 30, 1997. Revenues
generated in the traditional prepress business increased during the 1998 period
by $92.8 million due to the operations of the prepress business of Devon Group,
Inc. ("Devon"), which was merged with a wholly-owned subsidiary of the Company
on May 27, 1998, and other operations acquired subsequent to the 1997 period,
including the prepress operations of Flying Color Graphics, Inc. ("Flying
Color"), and Color Control, Inc. ("Color Control"), which were acquired in
January 1998 and June 1998, respectively, and an overall increase in business at
various facilities. Revenues during the 1998 period also increased by $37.1
million from the addition of the operations of the publishing business of Devon,
$5.2 million from the broadcast media distribution business from operations that
have been acquired since the 1997 period and internally generated growth, $1.5
million from revenues generated from facilities management contracts, and $1.4
million from the digital business. These increases were partially offset by the
receipt of a nonrefundable payment of $2.0 million from one of the Company's
major suppliers during the 1997 period with no corresponding receipt during the
1998 period and a $2.0 million reduction in revenue from a facilities management
contract that was renegotiated in connection with a customer bankruptcy in 1997.
The gross profit percentage in the first nine months of 1998 was 36.8% as
compared to 35.6% in the 1997 period. Gross profit increased $50.9 million in
the first nine months of 1998 as a result of the additional revenues for the
period as discussed above and increased business in higher margin work,
including that from recently acquired operations.
Selling, general, and administrative expenses in the first nine months of
1998 were $38.6 million higher than in the first nine months of 1997, and as a
percent of revenue increased to 25.5% in the 1998 period from 22.2% in the 1997
period. Such expenses grew at a greater rate than revenue due primarily to
higher costs incurred at recently acquired operations that have not been fully
integrated, additional expenses incurred from the Company's expansion of its
sales force in the latter half of 1997 to better market its services, and the
amortization of goodwill associated with operations acquired since the 1997
period.
During the second quarter of 1998, the Company commenced a plan to
restructure its operations to achieve certain operating efficiencies associated
with the growth of its prepress business, primarily resulting from the merger
with Devon and the acquisition of Color Control as well as other recent
acquisitions. The Company's restructuring plan, which was approved by management
with the requisite authority, includes the termination of certain employees and
the closing of facilities in Carlstadt, NJ, and Chicago, IL, with the work
historically performed at these facilities being integrated into its other
metropolitan New York and Midwest facilities, respectively. In addition, the
restructuring plan includes the termination of certain employees and the
consolidation
<PAGE> 12
of facilities by moving work currently performed in certain of its West Coast
facilities, with the objective of closing one of its California facilities. The
results of operations for the first nine months of 1998 include a charge of $5.3
million, or $0.14 per diluted share, for this restructuring, comprised primarily
of severance and benefits for employees to be terminated, facility closure
costs, and assets no longer utilized as a result of the restructuring.
Interest expense for the first nine months of 1998 was $3.7 million higher
than during the 1997 period due primarily to the interest on borrowings to
finance the Devon merger and the Color Control acquisition. Three interest rate
swap agreements entered into by the Company during the 1998 period resulted in
an immaterial amount of additional interest expense in such period.
Interest income for the first nine months of 1998 was $1.5 million higher
than in the 1997 period due to the investment of proceeds from an offering of
the Company's common stock in September 1997.
The effective rate of the provision for income taxes in the 1998 period
was higher than the statutory rate due primarily to the permanent item related
to the nondeductible goodwill associated with the Devon merger and the Color
Control acquisition.
Revenues from business transacted with affiliates for the nine months
ended September 30, 1998 and 1997, totaled $18.9 million and $10.7 million,
respectively, representing 7.1% and 8.1%, respectively, of the Company's
revenues.
Three months ended September 30, 1998, compared with 1997
Revenues in the third quarter of 1998 were $74.5 million higher than in
the comparable period in 1997. This increase resulted principally from revenue
from operations acquired subsequent to the third quarter of 1997. Revenues
generated in the traditional prepress business increased $48.9 million resulting
from the operations of the prepress business of Devon in addition to other
operations acquired subsequent to the 1997 period, including the prepress
operations of Flying Color and Color Control. Revenues during the 1998 period
also increased by $28.0 million from the operations of the publishing business
of Devon and $1.5 million from the broadcast media distribution business
primarily from operations that have been acquired since the 1997 period. These
increases were partially offset by a $2.5 million reduction in revenue from the
digital business and a $1.4 million reduction in revenue from facilities
management contracts primarily resulting from a contract that was renegotiated
in connection with a customer bankruptcy in 1997.
The gross profit percentage in the third quarter of 1998 was 36.7% as
compared to 37.0% in the 1997 period. Gross profit increased $27.2 million in
the third quarter of 1998 as a result of the additional revenues for the period
as discussed above.
Selling, general, and administrative expenses in the third quarter of 1998
were $24.1 million higher than in the third quarter of 1997, and as a percent of
revenue increased to 28.2% in the 1998 period from 21.9% in the 1997 period.
Such expenses grew at a greater rate than revenue due primarily to higher costs
incurred at recently acquired operations that have not been fully integrated,
additional expenses incurred from the Company's expansion of its sales force in
the latter half of 1997 to better market its services, and the amortization of
goodwill associated with operations acquired since the 1997 period.
Interest expense for the third quarter of 1998 was $3.0 million higher
than during the 1997 period due primarily to the interest on borrowings to
finance the Devon merger and the Color Control acquisition. Three interest rate
swap agreements entered into by the Company during the 1998 period resulted in
an immaterial amount of additional interest expense in such period.
The effective rate of the provision for income taxes in the 1998 period
was higher than the statutory rate due primarily to the permanent item related
to the nondeductible goodwill associated with the Devon merger and the Color
Control acquisition.
<PAGE> 13
Revenues from business transacted with affiliates for the three months
ended September 30, 1998 and 1997, totaled $4.4 million and $4.3 million,
respectively, representing 3.5% and 8.6%, respectively, of the Company's
revenues.
FINANCIAL CONDITION
In May 1998, the Company entered into a Credit Agreement (the "Credit
Agreement") to be used to finance the Devon merger, to provide working capital
for the Company, and to finance certain future acquisitions. In July 1998, the
Company increased the borrowing capacity under the Credit Agreement to $300
million, comprised of a $195 million revolving line of credit (the "Revolver")
and a $105 million acquisition line of credit (the "Acquisition Line"). The
Acquisition Line and the Revolver have terms that extend through March 2003 and
May 2003, respectively.
In August 1998, the Company entered into three interest rate swap
agreements, two of which expire in August 2003 (the "2003 Swaps") and one of
which expires in August 2001 (the "2001 Swap"). Under the 2003 Swaps and the
2001 Swap, the Company will pay a fixed rate of 5.798% and 5.69%, respectively,
per annum on a quarterly basis and be paid a floating rate based on the three
month LIBOR rate in effect at the beginning of each quarterly payment period.
The notional amounts of the 2003 Swaps are $35 million and $15 million, and the
notional amount of the 2001 Swap is $25 million.
During the first nine months of 1998, the Company borrowed a total of
$199.4 million under the Credit Agreement. To finance the Devon merger, the
Company borrowed approximately $135.0 million, paid approximately $86.4 million
in cash from working capital, including amounts acquired from Devon, and issued
4,427,290 shares of the Company's common stock valued at approximately $221.4
million. To finance the acquisition of Color Control in June 1998, the Company
borrowed approximately $35.0 million. In addition, to finance the acquisition of
the operations of Flying Color in January 1998, the Company paid approximately
$18.4 million in cash from working capital and issued 68,103 shares of the
Company's common stock valued at approximately $3.3 million.
During the nine months ended September 30, 1998, the Company entered into
five sale and leaseback arrangements that generated proceeds of $5.2 million and
are accounted for as either operating or capital leases. Such arrangements
resulted in immaterial gains, which have been deferred and are being recognized
as a credit against either future amortization of the leased assets or rental
expense.
Cash flows from operating activities during the first nine months of 1998
decreased by $15.6 million as compared to the comparable period in 1997 due
primarily to increased accounts receivable balances and inventory levels as well
as decreased accrued expense balances from the timing of vendor payments. In
addition to the amounts expended for the acquisitions described above, during
the first nine months of 1998 the Company invested $24.6 million in new
equipment and repaid $16.1 million of debt and capital lease obligations,
including obligations assumed in acquisitions, with the cash generated from
operations, the proceeds from sale and leaseback arrangements, and the use of
investments in marketable securities.
The Company expects to spend approximately $15.0 million over the course
of the next twelve months for capital improvements, essentially all of which is
for modernization and growth. The Company intends to finance a substantial
portion of these expenditures under operating or capital leases, sale and
leaseback arrangements, or with working capital.
Marketable securities as of September 30, 1998, decreased $90.2 million
from December 31, 1997, due to the use of funds for acquisitions, primarily the
Devon merger and the acquisition of Flying Color. Long-term debt increased
$201.1 million due primarily to borrowings to finance acquisitions, principally
the Devon merger and the acquisition of Color Control. In addition, all other
major asset and liability categories increased significantly due to acquisitions
during the 1998 period.
<PAGE> 14
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998 and
is effective for financial statements for fiscal years beginning after December
15, 1998. This statement establishes standards for capitalizing and expensing
costs incurred in connection with internal use software and applies to costs
incurred subsequent to adoption of SOP 98-1. The Company does not expect the
adoption of SOP 98-1 to have a material adverse effect on its financial position
or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
is effective for fiscal quarters beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires that entities recognize derivative
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for the
change in fair value of a derivative instrument will depend on the intended use
of the instrument. The adoption of SFAS No. 133 will require the Company to
reflect the fair value of its three interest rate swap agreements on its
Consolidated Balance Sheet. The offsetting gain or loss at the time of adoption
of SFAS No. 133 will be accounted for as a cumulative effect of a change in
accounting principle in accordance with Accounting Principles Board Opinion No.
20, "Accounting Changes." The cumulative gain or loss at the time of adoption of
SFAS No. 133 and future gains and losses resulting from the change in fair value
of the swap agreements will be reflected in cumulative comprehensive income as a
separate component of stockholders' equity to the extent the swaps qualify as
cash flow hedges. To the extent the swaps do not qualify as cash flow hedges,
such gains and losses will be reflected in net income. The Company is unable to
quantify the potential impact of the adoption of SFAS No. 133 on its financial
position and results of operations.
The Company believes that the cash flow from operations, borrowings under
the Credit Agreement, and its potential ability to obtain funding from other
financing sources will be sufficient to fund its cash needs for the foreseeable
future.
YEAR 2000 COMPLIANCE
Many computer systems and applications use a two-digit field to designate
a year rather than a four-digit field. This can result in these systems and
applications recognizing the use of "00" as either the year 1900 or some other
year as opposed to the year 2000 ("Y2K"). Such failure to recognize the correct
year could result in system failures and miscalculations that could adversely
impact the ability of a company to do business (the "Y2K Issue").
The Company has commenced a review of the Y2K Issue and has separated its
review into five categories. These categories are (i) internally developed
software and information technology ("IT") systems for sale or internal use,
(ii) IT systems and software associated with the Company's prepress and other
manufacturing processes, (iii) financial and other administrative IT systems,
(iv) non-IT systems, and (v) customer and vendor IT systems.
Internally Developed Software and IT Systems: The Company's Digital Link
software is used in its prepress manufacturing process and also provides a
source of revenue for the Company through the sale of software licenses and
systems that incorporate the Digital Link software. The Company has performed a
preliminary review and testing of the Digital Link software with respect to Y2K
compliance. The Company believes that all of the internally-developed components
of Digital Link are Y2K compliant. The operating system on which Digital Link
runs is Y2K compliant. The database that Digital Link utilizes is not currently
Y2K compliant, however, the vendor has indicated that it plans to make the
necessary modifications to make the database Y2K compliant. In the event this
vendor is unable to achieve Y2K compliance, the Company's contingency plan is to
migrate to a new Y2K-compliant database and provide the necessary upgrades to
its existing customers. The Company intends to perform additional intensive
testing of the Digital Link software and to complete its review of such software
by the end of the first quarter of 1999. In the event any Y2K Issue is
discovered during the testing period, the Company believes that any such issue
can be resolved by replacing the non-compliant components with Y2K-compliant
components or through programming modifications. The Company has not reviewed
whether the equipment on which Digital Link runs at customer locations or other
customer systems with which Digital Link operates is Y2K compliant. Failure of
the Company's customers to achieve Y2K compliance on such equipment and systems
<PAGE> 15
could result in the loss of future revenue to the Company.
Manufacturing Processes: The Company is in the process of reviewing its
historic prepress manufacturing processes and the equipment and software used in
such processes. The Company's prepress manufacturing process is heavily
dependent on Macintosh systems, which are Y2K compliant. The Company has either
received certificates from certain of its vendors regarding Y2K compliance or is
relying on certificates posted to websites by vendors indicating the state of
Y2K readiness of such vendors. All vendors reviewed to date have indicated that
they are either Y2K compliant or have commenced action necessary to become Y2K
compliant. The Company has also been installing Y2K compliant equipment and
software as older, non-compliant items are retired. The Company is in the
process of reviewing the Y2K compliance of the prepress manufacturing processes
at operations acquired since the middle of 1997. Based on reviews performed at
these operations prior to acquisition, as well as the fact that the acquired
operations use equipment and systems common with the Company's historic
operations, the Company has no reason to believe that such manufacturing
processes are not Y2K compliant. The Company is in the process of confirming
that the reviews performed at these acquired operations meet the same standard
the Company established for its historic operations and intends to complete its
review by the end of the first quarter of 1999. The Company has no reason to
believe that its reviews will reveal any significant Y2K Issues. Furthermore,
the Company believes, based on its review to date, that any non-compliant
equipment or systems can be replaced with those that are Y2K compliant.
The Company is not responsible for the printing of customers' material,
except for certain limited print work done in its Los Angeles facility and other
print work subcontracted to an affiliate. However, the Company makes use of
direct-to-plate delivery to certain printers selected by the customer. The
Company's ability to continue to use direct-to-plate delivery may be contingent
on the printer's equipment being Y2K compliant. The Company is currently
reviewing the Y2K compliance status of such printers. Certain of these printers
use equipment supplied by the Company that is Y2K compliant. In the event that a
printer's equipment is not Y2K compliant and is unable to accept direct-to-plate
delivery, the Company could deliver film to such printer. However, irrespective
of how the Company delivers its product to the printer, the ability of the
printer to deliver the finished product to the customer is contingent on the
printer's manufacturing process not being adversely impacted by the Y2K Issue.
The Company's business could be adversely impacted if printers' manufacturing
processes are not Y2K compliant, and therefore unable to produce finished
product, or if customers, as a result, order fewer prepress services or delay
orders until an alternative printer whose manufacturing process is Y2K compliant
is located.
The Company has commenced a review of the publishing manufacturing process
acquired in the Devon merger. Based on the review of such process performed
prior to acquisition, the Company believes that the primary systems are Y2K
compliant. The Company is in the process of identifying any systems that are
non-compliant and has initiated an effort to make the necessary programming
changes during 1999.
The Company has not yet reviewed Y2K Issues involving the broadcast media
distribution manufacturing process. The Company plans to commence such a review
during the first quarter of 1999. The Company does not anticipate any Y2K Issues
associated with this manufacturing process because such process is neither date
nor time dependent. There can be no assurance, however, that the review to be
performed by the Company will not uncover non-Y2K compliant equipment and
systems. Failure to attain Y2K compliance on such non-compliant equipment and
systems, if any, may have an adverse effect on the Company's results of
operations in the broadcast media distribution business.
Financial and Other Administrative IT Systems: The Company is currently
replacing the various modules that comprise its financial and administrative
systems that are not Y2K compliant. The Company implemented new Y2K-compliant
versions of both its general ledger and accounts payable systems during the
third quarter of 1998 at all of its operations, except at those operations
acquired as part of the acquisition of Color Control and the merger with Devon.
The Company plans to implement the remaining modules by the end of the second
quarter of 1999. The Company does not anticipate any delays in the
implementation of these financial and administrative systems. The Company plans
to complete the implementation of the various financial and administrative
modules at Color Control and the
<PAGE> 16
prepress operations at Devon by the end of the third quarter of 1999. The
Company is also replacing the financial and administrative systems used in the
publishing business with different Y2K-compliant systems than those being
installed at all other operations. The Company expects such systems to be
implemented by the end of the second quarter of 1999.
The Company also plans to replace its job costing and billing systems at
those locations that have non-Y2K compliant systems. The Company is currently in
the process of selecting a vendor to use for its job costing system. Certain
operations currently use job costing systems that are Y2K compliant. Failure to
implement a new system at those locations using a non-Y2K compliant system may
adversely impact the Company's ability to properly bill a customer for the
actual work performed on specific jobs and to properly manage costs at these
locations. In the event the Company cannot implement a Y2K-compliant job costing
system at these locations, the Company plans to rely on processes that are not
electronically integrated to provide the necessary information. Although certain
operations currently have Y2K-compliant billing systems, the Company is planning
on implementing an enterprise-wide billing solution as part of the
implementation of a Y2K-compliant job costing system. In the event the Company
is unable to implement such billing system, the Company plans to implement the
Y2K-compliant billing module it purchased as part of the above referenced
financial and administrative systems so that the Company does not experience a
break or delay in its ability to invoice customers.
Non-IT Systems: The Company has not reviewed its non-IT systems, which
would involve an assessment of the myriad of day-to-day functions that may be
controlled or enhanced by some type of microprocessor. There can be no assurance
that there will not be a disruption in the Company's ability to do business
because of a Y2K problem encountered with one of these systems.
Customer and Vendor IT Systems: The Company has not reviewed customer and
vendor systems or solicited responses from such customers and vendors other than
that in connection with the Company's review of its prepress manufacturing
processes. Non-Y2K compliant customer systems may inhibit the ability of
customers to process and pay the Company's invoices or to continue to provide
business to the Company. Non-Y2K compliant vendor systems may inhibit the
ability of vendors to provide the goods and services necessary for the Company
to continue to perform its business. Although the Company would seek to receive
such goods and services from those vendors who can provide them without
interruption caused by Y2K Issues, there can be no assurance that the Company
will be able to locate vendors that can provide the goods and services in a
timely manner and at a similar cost.
The Company will fund the costs of attaining Y2K compliance through
working capital or borrowings under the Credit Agreement. The Company is unable
at this time to estimate the costs of attaining Y2K compliance or the potential
impact of Y2K Issues on its future results of operations. The Company has not
deferred and does not intend to defer any systems related projects due to the
work necessary to achieve Y2K compliance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
<PAGE> 17
PART II. - OTHER INFORMATION
Item 2. Changes in Securities
In January 1998, the Registrant acquired certain assets of Flying Color
Graphics, Inc. ("Flying Color"), a prepress company. In September 1998,
the Registrant merged Agile Enterprise, Inc. ("Agile"), a software
development company, into a wholly-owned subsidiary. As part of the
consideration for these transactions, the Company issued 68,103 and 45,351
shares of its common stock to the former owners of Flying Color and Agile,
respectively. The sale and issuance of such securities by the Registrant
were effected in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
Item 5. Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934 (the "Exchange Act"),
stockholders of the Company are hereby notified that any stockholder
proposal not included in the proxy materials disseminated by the
management of the Company for the 1999 annual meeting in accordance with
Rule 14a-8 under the Exchange Act will be considered untimely for the
purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice thereof
is received after March 16, 1999. Management proxies will be authorized to
exercise discretionary voting authority with respect to any shareholder
proposal not included in such proxy materials for the Company's annual
meeting unless (a) the Company receives notice of such proposal by the
date set forth above, and (b) the conditions set forth in Rule
14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Asset Purchase Agreement by and among Applied
Graphics Technologies, Inc., and Flying Color
Graphics, Inc. and its Shareholders dated
January 16, 1998 (Incorporated by reference to
Exhibit No. 2.1 forming part of the Registrant's
Report on Form 8-K (File No. 0-28208) filed with
the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, on
January 30, 1998).
2.2 Agreement and Plan of Merger, dated as of
February 13, 1998, by and among Devon Group,
Inc., Applied Graphics Technologies, Inc., and
AGT Acquisition Corp. (Incorporated by reference
to Exhibit No. 2.2 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, 1997).
3.1(a) First Restated 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).
3.1(b) Certificate of Amendment of First Restated
Certificate of Incorporation (Incorporated by
reference to Exhibit No. 3.1(b) 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
June 30, 1998).
<PAGE> 18
3.2(a) 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).
3.2(b) Amendment to Amended and Restated By-Laws of
Applied Graphics Technologies, Inc.
(Incorporated by reference to Exhibit No. 3.3
forming part of the Registrant's Registration
Statement on Form S-4 (File No. 333-51135) 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 Registrant's
Report on Form 10-K/A (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).
10.4(a)* Second Amendment to Loan and Purchase Agreement
dated April 19, 1996 (Incorporated by reference
to Exhibit No. 10.4(a) forming part of the
Registrant's Report on Form 10-K/A (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).
10.4(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).
<PAGE> 19
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)(i) 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(a)(ii) Employment Agreement Extension dated March 23,
1998, between the Company and Diane Romano
(Incorporated by reference to Exhibit No. 10.6
(a)(ii) forming part of the Registrant's
Registration Statement on Form S-4 (File No.
333-51135) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended).
10.6(b)(i) 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(b)(ii) Employment Agreement Extension dated March 23,
1998, between the Company and Georgia L. McCabe
(Incorporated by reference to Exhibit No. 10.6
(b)(ii) forming part of the Registrant's
Registration Statement on Form S-4 (File No.
333-51135) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended).
10.6(d)(i) 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(d)(ii) Employment Agreement Extension dated March 23,
1998, between the Company and Scott Brownstein
(Incorporated by reference to Exhibit No. 10.6
(d)(ii) forming part of the Registrant's
Registration Statement on Form S-4 (File No.
333-51135) 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).
<PAGE> 20
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).
10.6(e)(iii) Employment Agreement Extension dated March 23,
1998, between the Company and Louis Salamone,
Jr. (Incorporated by reference to Exhibit No.
10.6(e)(iii) forming part of the Registrant's
Registration Statement on Form S-4 (File No.
333-51135) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended).
10.6(f) Employment Agreement, effective as of July 21,
1998, between the Company and Jonathan C.
Swindle.
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).
10.8(a) Applied Graphics Technologies, Inc., 1998
Incentive Compensation Plan (Incorporated by
reference to Exhibit E of the Proxy Statement/
Prospectus forming part of the Registrant's
Registration Statement on Form S-4 (File No.
333-51135) filed with the Securities and
Exchange Commission under the Securities Act of
1933, as amended).
10.8(b) First Amendment to the Applied Graphics
Technologies, Inc., 1998 Incentive Compensation
Plan. (Incorporated by reference to Exhibit No.
10.8(b) forming part of 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 June 30, 1998).
10.9(a) Credit Agreement, dated as of May 27, 1998,
among Applied Graphics Technologies, Inc., Other
Institutional Lenders as Initial Lenders, Fleet
Bank, N.A., First Union National Bank, and
BankBoston, N.A. (Incorporated by reference to
Exhibit 4.1 of the Registrant's Report on Form
8-K (File No. 0-28208) filed with the Securities
and Exchange Commission under the Securities
Exchange Act of 1934, as amended, on June 10,
1998).
10.9(b) Amendment No. 1, dated as of July 31, 1998, to
the Credit Agreement among Applied Graphics
Technologies, Inc., Other Institutional Lenders
as Initial Lenders, Fleet Bank, N.A., First
Union National Bank, and BankBoston, N.A.
(Incorporated by reference to Exhibit No.
10.9(b) forming part of 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 June 30, 1998).
<PAGE> 21
10.9(c) Amendment No. 2, dated as of September 15, 1998,
to the Credit Agreement among Applied Graphics
Technologies, Inc., Other Institutional Lenders
as Initial Lenders, Fleet Bank, N.A., First
Union National Bank, and Bank Boston, N.A.
27 Financial Data Schedule (EDGAR filing only).
* Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
(b) The Registrant filed the following reports on Form 8-K during the quarter
ended September 30, 1998:
None.
<PAGE> 22
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/ Martin D. Krall
Date: November 16, 1998 ____________________________________________
Martin D. Krall
Executive Vice President,
Chief Legal Officer, and Secretary
(Duly authorized officer)
/s/ Louis Salamone, Jr.
Date: November 16, 1998 ____________________________________________
Louis Salamone, Jr.
Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
<PAGE> 23
EXHIBIT INDEX
-------------
10.6(f) Employment Agreement, effective as of July 21,
1998, between the Company and Jonathan C.
Swindle.
10.9(c) Amendment No. 2, dated as of September 15, 1998,
to the Credit Agreement among Applied Graphics
Technologies, Inc., Other Institutional Lenders
as Initial Lenders, Fleet Bank, N.A., First
Union National Bank, and Bank Boston, N.A.
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.6(f)
EMPLOYMENT AGREEMENT
This Agreement, effective as of June 29, 1998, is entered into by and
between Applied Graphics Technologies, Inc., a Delaware corporation ("AGT"), and
Jonathan C. Swindle, (hereinafter referred to as "Swindle" or the "Employee") an
individual residing at 5400 Muncaster Mill Road, Rockville, Maryland 20855-1823.
In consideration of the mutual covenants set forth herein, the parties agree as
follows:
1. Employment Term. Subject to the further terms and conditions of this
Agreement, AGT employs Employee as Senior Vice President Administration for the
period beginning July 21, 1998 and ending on July 20, 2000 (the "Term").
2. Compensation.
(a) AGT will pay Employee a salary at the rate of $225,000 per annum.
(b) With respect to each of AGT's fiscal years, Employee shall be
eligible for a cash bonus in an amount, if any, to be determined in the sole
discretion of AGT.
(c) The salary and bonus referred to in subparagraphs (a) - (b) above
represent all of Employee's cash compensation, and accordingly, Employee shall
not be entitled to any overtime, weekend or holiday compensation.
(d) Employee shall receive those insurance, retirement and other
benefits generally provided to AGT's other senior executives of similar rank and
tenure from time to time.
(e) Employee shall be reimbursed for all reasonable travel and
entertainment expenses incurred in the furtherance of AGT's business, upon
submission by Employee of reasonable documentation in accordance with AGT's
policies as are in effect from time to time. The foregoing shall include all
reasonable expenses for accommodations and local travel while working in New
York City, unless said accommodations and local travel are provided by AGT.
3. Duties. During the Term, Employee agrees to fulfill the duties of Senior Vice
President Administration of AGT. Employee shall report to the Chief Executive
Officer of AGT, and shall
<PAGE> 2
devote all of his business efforts to the performance of his duties as Senior
Vice President Administration, and shall do so to the best of his abilities. It
is expected that Employee will work in New York City an average of three (3)
days per week.
4. Vacation. Employee shall be entitled to four (4) weeks vacation during each
year of the Term, to be taken consistent with AGT's policies as are in effect
from time to time.
5. Termination.
(a) This Agreement shall terminate prior to the expiration hereof in
the event of Employee's death, permanent disability, or discharge for cause.
"Cause" shall mean (i) indictment for, conviction of or pleas of guilty or nolo
contendre to any felony or business-related misdemeanor; (ii) theft, fraud or
embezzlement; (iii) excessive absenteeism not related to illness; (iv) the
intentional failure to perform assigned duties; (v) an act of gross neglect or
gross misconduct; (vi) a material breach of any of the provisions of this
Agreement; (vii) the commission of any other action with the intent to harm or
injure AGT, its parents, subsidiaries or affiliates; or (viii) habitual drug or
alcohol abuse. In the event that AGT terminates Employee for Cause, Employee
shall be entitled to compensation earned up to the date of termination, but no
other compensation, and AGT reserves the right to seek appropriate relief for
whatever damage may have resulted from that "Cause". "Permanent disability"
shall mean a physical or mental illness, disability or disfigurement which
renders Employee incapable of performing his normal services hereunder for a
continuous period of 8 weeks, or an aggregate of 16 weeks during any 52 week
period. In the event Employee is disabled for less than such 8 or 16 weeks,
respectively, Employee shall nonetheless be entitled to full compensation during
such period. In the event of Employee's permanent disability or death, Employee
shall be entitled to receive his salary and benefits pursuant to Paragraph 2
herein until the effective date of his termination, and the Company shall have
no further obligation to the Employee pursuant to this Agreement.
(b) AGT shall be entitled to terminate this Agreement at any time
during the Term without Cause (as defined above). However, in the event AGT
exercises its rights under this Paragraph 5(b), (i) any unvested stock options
which have been granted to Employee shall immediately vest and must be exercised
within 90 days and (ii) AGT shall continue to pay
<PAGE> 3
Employee's salary and benefits under Paragraph 2(a) for the shorter of (A) the
remainder of the Term or (B) six months; provided however that Employee shall
make a good faith effort to find other employment and any amounts due under this
clause (ii) shall be offset by any compensation (including without limitation
benefits) earned or received by Employee from other persons or entities with
respect to any services performed by him during the remainder of said Term.
(c) Amounts payable to Employee pursuant to this Paragraph 5 shall be
paid in accordance with AGT's usual payroll practices.
6. Noncompetition, Nonsolicitation and Confidentiality. As a material inducement
to AGT to employ him, Employee agrees to execute the Noncompetition,
Nonsolicitation and Confidentiality Agreement attached hereto as Exhibit A, the
terms of which are incorporated herein by reference.
7. Absence of Restrictions. Employee represents and warrants that he is not a
party to any agreement or contract pursuant to which there is any restriction or
limitation upon him entering into this Agreement or performing the duties called
for by this Agreement.
8. Options. Swindle shall be granted options to purchase 100,000 shares of AGT's
common stock at the fair market value on the date of grant. Such options shall
vest over a 5 year period and will be subject to such other terms and conditions
as are established by the Compensation Committee of the Board of Directors.
9. Notices. All notices, consents and other communications required or permitted
to be given hereunder shall be in writing and delivered personally or sent by
certified or registered mail, postage prepaid, as follows:
(a) if to Employee, to: Jonathan C. Swindle, 5400 Muncaster Mill Road,
Rockville, Maryland 20855-1823.
(b) if to AGT, to: Fred Drasner, 450 West 33rd Street, New York, NY
10001, with a
<PAGE> 4
copy to Martin D. Krall at the same address.
Any notice so given shall be deemed received when delivered personally,
or, if mailed, three days after it is deposited, postage prepaid, by certified
mail, in the United States mail. Either party may change the address to which
notices are to be sent by giving written notice of such change of address to the
other party in the manner herein provided for giving notice.
10. General.
(a) Any controversy or claim arising out of or relating to this
Agreement, or any breach thereof, shall be subject to resolution in the state or
federal courts in New York and shall be governed by and construed and enforced
in accordance with the laws of the State of New York applicable to agreements
made and to be performed entirely in New York without giving effect to
principles of conflicts of laws thereof.
(b) The section headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
(c) This Agreement sets forth the entire agreement and understanding of
the parties hereto concerning the subject matter hereof, and supersedes all
prior agreements, arrangements and understandings between the parties hereto.
(d) AGT may assign its rights and obligations under this Agreement to
any successor thereto or to any corporation or other entity controlled, or under
common control with AGT or any of its affiliates. This Agreement is personal to
Employee, and neither this Agreement nor any of Employee's rights or obligations
hereunder may be assigned, pledged or encumbered by him, without the prior
written approval of AGT.
(e) This Agreement may be amended, modified, superseded or canceled,
and the terms or covenants hereof may be waived, only by a written instrument
executed by both parties hereto, or, in the case of a waiver, by the party
waiving compliance. The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect the right at a
later time to enforce the same. No waiver by either party of the breach of
<PAGE> 5
any term or covenant contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach or a waiver of the breach of
any other term or covenant in this Agreement.
(f) In the event that any one or more of the provisions of this
Agreement shall be determined to be invalid or unenforceable in any respect, the
validity and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
(g) This Agreement may be executed in counterparts, each of which shall
be deemed to be an original but all of which together shall be deemed to be one
and the same instrument.
(h) Except with regard to Employee's obligations under the
Noncompetition, Nonsolicitation and Confidentiality Agreement attached hereto as
Exhibit A, this Agreement shall be of no further force and effect and AGT shall
have no further obligations hereunder after the expiration or termination of
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
shown above.
Applied Graphics Technologies, Inc.
By: /s/ Fred Drasner
-----------------------------
/s/ Jonathan C. Swindle
---------------------------------
Jonathan C. Swindle
<PAGE> 6
EXHIBIT A
Noncompetition, Nonsolicitation
and Confidentiality Agreement
In consideration for the agreement of Applied Graphics Technologies, Inc.,
("AGT") to employ Jonathan C. Swindle ("Employee") as Senior Vice President
Administration, Employee hereby agrees as follows:
1. In this Agreement, the term AGT includes Applied Graphics Technologies, Inc.,
as well as all of its parents, subsidiaries and affiliates, including, but not
limited to, U.S. News & World Report, Applied Printing Technologies, Inc., Daily
News and The Atlantic Monthly.
2. Employee acknowledges that he will be furnished, or may otherwise receive or
have access to, private information which relates to AGT's past, present or
anticipated customer lists or other compilations for marketing or development,
or which relates to administrative, management, financial, marketing, sales or
manufacturing activities of AGT and that such information is not easily
accessible from public sources. All such information, including any materials or
documents containing such information, shall be considered by AGT and Employee
as proprietary and confidential ("Proprietary Information").
3. Both during and forever after the term of this Agreement, Employee agrees to
preserve and protect the confidentiality of the Proprietary Information and all
physical forms thereof, whether disclosed to him before this Agreement is signed
or afterward. In addition, Employee shall not (i) disclose or disseminate the
Proprietary Information to any third party, including employees of AGT, without
a need to know, (ii) remove Proprietary Information from AGT's premises without
valid business purpose, or (iii) use Proprietary Information for his own benefit
or for the benefit of any third party.
4. Employee acknowledges and agrees that all Proprietary Information used or
generated during the course of working for AGT is the property of AGT. Employee
agrees to deliver to AGT all documents and other tangibles (including diskettes
and other storage media) containing Proprietary Information, including all
copies of such documents or tangibles, immediately upon notice of the
termination of his employment with AGT.
<PAGE> 7
5. While working for AGT and for one year following termination of his
employment from AGT for any reason, Employee will not attempt, either directly
or indirectly, to solicit, induce, entice or attempt to influence any employee
of AGT to leave AGT's employ or directly or indirectly hire or cause any other
entity to hire any person who has been an AGT employee in the 12 months
preceding the contact.
6. Noncompetition
a. Employee acknowledges that his agreement to forego competition with
AGT was a material inducement to AGT to employ him. Employee also acknowledges
that he will acquire much Proprietary Information concerning AGT's financial
status, current and future marketing and advertising strategies, pricing, and
other confidential information as the result of his employment and that such
information is not easily accessible from other sources. Employee further
acknowledges that the businesses in which AGT engages, including but not limited
to pre-press and digital archiving are very competitive; that competition by him
those businesses during his employment, or after his employment terminates,
would severely injure AGT; and that his agreements herein are demonstrably
necessary to protect those legitimate interests.
b. During the term of his employment with AGT, Employee (i) will devote
all his professional and business time and effort to and give undivided loyalty
to AGT and (ii) will not engage in any way whatsoever, directly or indirectly,
in any business that is competitive with AGT, nor directly or indirectly solicit
or in any other manner work for or assist any business which is competitive with
AGT.
c. During the term of this Agreement and for the term of any period for
which this Agreement is extended (except if this Agreement is terminated
pursuant to Paragraph 5b), for a period of six months after the termination of
Employee's employment Employee shall not, whether alone or in association with
any other person, directly or indirectly (i) engage in any business in the
Specified Areas that is competitive with any aspect of the business that is
being conducted or planned by AGT at the time Employee's employment with AGT
terminates; or (ii) have any interest or association (including, without
limitation, as a shareholder, partner, director, officer, employee, consultant,
sales representative, supplier, distributor, agent or lender) in or with any
person engaged in a business in the Specified Areas that Employee is prohibited
from engaging in pursuant to clause (i) above; provided however, that the
foregoing shall not prohibit Employee from owning securities of any publicly
traded company that is engaged in any such business as long as Employee does not
own at any time 5% or more of any class of the equity securities of such
company.
For purposes of the foregoing, the "Specified Areas" means each state in which
AGT makes any sales or performs any services during the 12 month period
preceding the date on which Employee's employment with AGT terminates.
<PAGE> 8
d. If any provision of this Agreement is determined by a court to be
overly broad thereby making the provision unenforceable, Employee agrees that
such court shall substitute a reasonable, judicially enforceable limitation in
place of the invalid part of the provision and that as so modified the provision
shall be as fully enforceable as if set forth herein in the modified form. If it
is not possible to restate the provision in a valid or legal manner, then that
invalid or illegal portion shall be deemed not a part of the Agreement and the
remaining provisions shall remain in full force and effect.
7. Employee acknowledges and agrees that:
a. (i) his contractual obligations under paragraphs 3, 4, 5, and 6 have
a unique and very substantial value to AGT, (ii) he has sufficient assets and
other skills to provide a reasonable livelihood for himself while such
paragraphs are in force, and (iii) he is subject to immediate dismissal by AGT
for any breach of those provisions and that such dismissal shall not relieve him
from his continuing obligations under this Agreement or from the imposition by a
court of any judicial remedies, such as money damages or equitable enforcement
of those provisions.
b. the terms and provisions of this Agreement are applicable to all
information and materials developed for, received from or any advice provided
to, AGT prior to or after the signing of this Agreement; and
c. the termination of his employment with AGT for any reason, shall not
relieve him from complying with the undertakings and agreements contained
herein, which call for performance prior or subsequent to the termination date,
including, but not limited to those undertakings and agreements set forth in
paragraphs 3, 4, 5 and 6.
d. in the event of his breach of any of the undertakings or agreements
set forth in paragraphs 3, 4, 5, and 6 of this Agreement, AGT shall have the
right to obtain an injunction or decree of specific performance from any court
of competent jurisdiction to restrain him from violating such undertakings or
agreements or to compel him to perform such undertakings or agreements. Nothing
herein contained shall in any way limit or exclude any and all other rights
granted by law or equity to AGT.
8. No act or failure to act by AGT will waive any right contained herein. Any
waiver by AGT must be in writing and signed by the Chairman of AGT to be
effective.
9. In the event that any provision of this Agreement conflicts with the law
under which this Agreement is to be construed or if any such provision is held
invalid by a court or other authority with jurisdiction over the parties to this
Agreement, such provision shall be deemed to be restated to reflect as nearly as
possible the original intentions of the parties in accordance with applicable
law, and the remainder of this Agreement shall remain in full force and effect.
If it is not possible to restate the
<PAGE> 9
provision in a valid or legal manner, then that invalid or illegal portion shall
be deemed not a part of the Agreement and the remaining provisions shall remain
in full force and effect.
10. This Agreement shall be construed according to its terms and not strictly
for or against either party.
11. This Agreement shall be governed by the laws of the State of New York
without regard to its conflicts of laws provisions.
12. All remedies provided herein are cumulative and in addition to all other
remedies which may be available at law or in equity.
13. This Agreement shall be binding on both parties successors, heirs and
assigns.
Employee: Applied Graphics Technologies, Inc.:
/s/Jonathan C. Swindle /s/ Fred Drasner
- ---------------------------- ----------------------------
Jonathan C. Swindle By: Fred Drasner
Title: CEO
June 29, 1998
- ---------------------------- ----------------------------
Date Date
<PAGE> 1
Exhibit 10.9(c)
EXECUTION COPY
AMENDMENT NO. 2 TO
CREDIT AGREEMENT
THIS AMENDMENT NO. 2 (this "Amendment"), dated as of September 15,
1998, to the CREDIT AGREEMENT (as defined below), is entered into among APPLIED
GRAPHICS TECHNOLOGIES, INC., a Delaware corporation (the "Borrower"), the banks,
financial institutions and other institutional lenders that are parties to the
Credit Agreement (each called a "Lender" and collectively called the "Lenders"),
FIRST UNION NATIONAL BANK ("First Union"), as Syndication Agent, BANKBOSTON,
N.A.("BankBoston"), as Documentation Agent, FLEET BANK, N.A., as a Lender,
Initial Issuing Bank, Swing Line Bank and Administrative Agent ("Fleet" and, in
its capacity solely as administrative agent, the "Administrative Agent"), and
each of the Guarantors (as defined herein).
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders, First Union, BankBoston and Fleet
are parties to that certain Credit Agreement dated as of May 27, 1998, as
amended by that certain Amendment No. 1 to Credit Agreement dated as of July 31,
1998, among the Borrower, the Lenders, First Union, BankBoston and Fleet (the
"Credit Agreement");
WHEREAS, (i) Portal Publications, Ltd., The Winn Art Group, Inc., Black
Dot Graphics, Inc., Orent GraphicArts, Inc., Typo-Graphics, Inc., Ambrosi &
Associates, Inc., West Coast Creative, Inc., ABD Group, Inc., Meridian Retail,
Inc., Taproot Interactive, Inc., Proof Positive/Farrowlyne Associates, Inc., and
One 2 One Inc. (the "Devon Subsidiary Guarantors") executed and delivered in
favor of the Lender Parties, Fleet, as Initial Issuing Bank, Swing Line Bank and
Administrative Agent, and Hedge Banks (collectively, the "Guaranteed Parties") a
guaranty dated as of May 27, 1998 (the "Devon Guaranty") and (ii) Devon Group,
Inc. (formerly known as AGT Acquisition Corp.), AmuseMatte Corp., Miramar
Equipment, Inc., Color Control, Inc., AGT Acquisition Corp. II and Applied
Systems Services, Inc. (collectively, the "AGT Subsidiary Guarantors") executed
and delivered in favor of the Guaranteed Parties a guaranty dated as of May 27,
1998, as supplemented from time to time (the "AGT Guaranty" and, together with
the Devon Guaranty, the "Guaranties"). The AGT Subsidiary Guarantors and the
Devon Subsidiary Guarantors are hereinafter collectively referred to as the
"Guarantors";
WHEREAS, the Borrower and Lenders desire to amend the Credit Agreement
in order to permit the repurchase by the Borrower of up to $20,000,000 of its
common stock and to provide for certain related changes under the Credit
Agreement;
WHEREAS, in connection with the changes to the Credit Agreement
contemplated by this Amendment, the Guarantors desire to confirm and reaffirm
each of the Guaranties; and
WHEREAS, terms not otherwise defined herein shall have the respective
meanings ascribed thereto in the Credit Agreement,
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, and of the loans or other extensions of credit now or hereafter made
to, or for the benefit of, the Borrower by the Lenders, the parties hereto agree
as follows:
SECTION 1 AMENDMENTS TO CREDIT AGREEMENT.
1.01 AMENDMENTS TO SECTION 1.01.
<PAGE> 2
A. Section 1.01 of the Credit Agreement is hereby amended by
adding the following definition in alphabetical order in such Section 1.01:
""Repurchased Shares" has the meaning specified in Section
5.02(g)(iv)."
B. The definition of "Equity Issuance" is hereby amended by
adding the following sentence at the end of such definition:
"Any sale or other disposition of the Repurchased Shares,
other than any sale as contemplated in the proviso in the
immediately preceding sentence, shall be deemed to be an
Equity Issuance."
1.02 AMENDMENT TO SECTION 2.06(b). Section 2.06(b) of the Credit
Agreement is hereby amended by adding the following sentence at the end of such
Section 2.06(b):
"Notwithstanding anything to the contrary contained in this
Section 2.06(b) and in Section 2.06(c), with respect to any
Equity Issuance involving the Repurchased Shares, the Borrower
shall, within two (2) Business Days after receipt by the
Borrower or any of its Subsidiaries of the Net Cash Proceeds
from such Equity Issuance, prepay or repay, as the case may be
(without premium or penalty), the then outstanding Revolving
Credit Advances in an amount equal to one hundred percent
(100%) of such Net Cash Proceeds."
1.03 AMENDMENT TO SECTION 5.02(g). Section 5.02(g) of the Credit
Agreement is hereby amended by deleting such Section 5.02(g) in its entirety and
replacing it with the following:
"(g) Dividends, Etc. Declare or pay any dividends,
purchase, redeem, retire, defease or otherwise acquire for
value any of its capital stock or any warrants, rights or
options to acquire such capital stock, now or hereafter
outstanding, return any capital to its stockholders as such or
make any distribution to its stockholders, except:
(i) the Borrower may declare and pay
dividends and make distributions payable solely in common
stock or preferred stock of the Borrower;
(ii) a Subsidiary of the Borrower may
declare and pay dividends and make distributions to the
Borrower or to another Loan Party;
(iii) for issuances of stock or other equity
interests expressly permitted by Section 5.02(q); and
(iv) the Borrower may from time to time
repurchase its common stock for purchase price(s) in the
aggregate not to exceed $20,000,000 to the Revolving Credit
Termination Date (the "Repurchased Shares")."
1.04 AMENDMENT TO SECTION 5.02(q). Section 5.02(q) of the Credit
Agreement is hereby amended by deleting such Section 5.02(q) in its entirety and
replacing it with the following:
"(q) Issuance of Stock. Except as otherwise
specifically permitted in this Agreement, the Borrower will
not, and will not permit any of its Subsidiaries to, directly
or indirectly, issue, sell, assign, pledge or otherwise
<PAGE> 3
encumber or dispose of any shares of capital stock of the
Borrower or any Subsidiary of the Borrower, except:
(A) to the Borrower or any of its
Subsidiaries;
(B) to qualify any director of the Borrower
or any of its Subsidiaries if required by applicable
law;
(C) for issuances or sales of capital stock
or other equity interests of the Borrower;
(D) in connection with the Borrower's or any
of its Subsidiaries' stock purchase, stock option or
similar incentive plans, or any exercise pursuant
thereto, for the benefit of the Borrower's or any of
its Subsidiaries' directors, management, employees
and other eligible participants;
(E) for issuances of capital stock of the
Borrower to any Person as consideration paid in
connection with any Permitted Acquisition;
(F) as required to be issued in connection
with the acquisition of the business of Digital
Imagination Inc.; or
(G) that the Borrower may sell or otherwise
dispose of any of the Repurchased Shares."
SECTION 2 REPRESENTATIONS AND WARRANTIES.
The Borrower hereby represents and warrants that:
2.01 NO DEFAULT. There exists no Default or Event of Default under the
Credit Agreement as of the date hereof.
2.02 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. Each of the
representations and warranties contained in the Credit Agreement is true and
correct in all material respects on, and as though made as of, the date hereof
(except for any representation or warranty which by its terms is made on or as
of a specified date, in which case such representation or warranty shall be
true, correct and complete in all material respects only as of such specified
date).
2.03 CORPORATE POWER, ETC. The Borrower and each of the Guarantors (i)
has all requisite corporate power and authority to execute and deliver this
Amendment and to consummate the transactions contemplated hereby and thereby and
(ii) has taken all action, corporate or otherwise, necessary to authorize the
execution and delivery of this Amendment and the consummation of the
transactions contemplated hereby and thereby.
2.04 NO CONFLICT. Neither the execution and delivery of this Amendment
nor consummation of the transactions contemplated hereby will (i) conflict with
or result in any breach or violation of any provision of the certificate of
incorporation or by-laws of the Borrower, (ii) result in any breach or violation
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in the creation of a Lien upon
any of the properties or assets of the Borrower under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease agreement or other instrument or obligation to which the Borrower
is a party or to which any of its properties or assets are subject, (iii)
require any consent, approval, authorization or permit of, or filing with or
<PAGE> 4
notification to, any third party or any governmental, judicial, administrative
or regulatory authority of the United States of America or of any state, local
or foreign government or subdivision thereof (a "Governmental Entity") or (iv)
violate any order, writ, injunction, decree, judgment, ruling, law, statute,
rule or regulation of any Governmental Entity.
2.05 BINDING EFFECT. This Amendment has been duly executed and
delivered by the Borrower and constitutes the valid and legally binding
obligation of the Borrower enforceable in accordance with its terms, except as
such enforceability may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
relating to or affecting the enforcement of creditors' rights generally, and
(ii) the application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
SECTION 3 CONDITIONS.
The effectiveness of the amendments set forth in Section 1 of this
Amendment shall be subject to the fulfillment by the Borrower, in a manner
satisfactory to the Administrative Agent and the Lenders, of all of the
following conditions precedent set forth in this Section 3:
3.01 REPRESENTATIONS AND WARRANTIES TRUE AND CORRECT. The
representations and warranties contained herein and in each other agreement,
instrument, certificate or other writing delivered to the Administrative Agent
or any Lender pursuant hereto or to the Credit Agreement shall be correct in all
material respects on and as of the date hereof after giving effect to this
Amendment as though made on and as of such date (except for any representation
or warranty which by its terms is made on or as of a specified date, in which
case such representation or warranty shall be true, correct and complete in all
material respects only as of such specified date) except to the extent modified
hereby.
3.02 EXECUTION AND DELIVERY OF THIS AMENDMENT. Each of the parties
hereto shall have executed and delivered an original counterpart of this
Amendment to the Administrative Agent.
3.03 COMPLIANCE WITH TERMS. The Borrower and each Guarantor shall have
complied in all respects with the terms hereof and of any other agreement,
document, instrument or other writing to be delivered by the Borrower or such
Guarantor in connection herewith.
3.04 OTHER PROCEEDINGS. All proceedings in connection with the
transactions contemplated by this Amendment and all documents incidental hereto
shall be satisfactory to the Administrative Agent, the Lenders and their
respective counsel.
SECTION 4 GENERAL CONFIRMATIONS AND AMENDMENTS.
4.01 CONTINUING EFFECT. The Credit Agreement, the other Loan Documents
and the other agreements to which the Borrower or any Guarantor is a party
delivered in connection herewith or with the Credit Agreement are, and shall
continue to be, in full force and effect, and are hereby ratified and confirmed
in all respects except that on and after the date hereof (i) all references in
the Credit Agreement to "this Agreement", "hereto", "hereof", "hereunder" or
words of like import referring to the Credit Agreement shall mean the Credit
Agreement as amended hereby, (ii) all references in the Credit Agreement, the
other Loan Documents or any other agreement, instrument or document executed and
delivered in connection therewith to the "Credit Agreement", "thereto",
"thereof", "thereunder" or words of like import referring to the Credit
Agreement shall mean the Credit Agreement as amended hereby.
4.02 FURTHER AMENDMENTS; INCORPORATION BY REFERENCE. The Credit
Agreement, the other Loan Documents and all agreements, instruments and
documents executed and delivered in connection with any of the
<PAGE> 5
foregoing shall each be deemed amended hereby to the extent necessary, if any,
to give effect to the provisions of this Amendment. All of the terms and
provisions of this Amendment are hereby incorporated by reference into the
Credit Agreement as if such terms and provisions were set forth in full therein.
SECTION 5 MISCELLANEOUS.
5.01 GOVERNING LAW. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York (without giving effect to
conflicts of law principles).
5.02 SEVERABILITY. The provisions of this Amendment are severable, and
if any clause or provision shall be held invalid or unenforceable in whole or in
part in any jurisdiction, then such invalidity or unenforceability shall affect
only such clause or provision, or part thereof, in such jurisdiction and shall
not in any manner affect such clause or provision in any other jurisdiction, or
any other clause or provision in this Amendment in any jurisdiction.
5.03 COUNTERPARTS. This Amendment may be signed in any number of
counterparts with the same effect as if the signatures hereto were upon the same
instrument.
5.04 BINDING EFFECT; ASSIGNMENT. This Amendment shall be binding upon
and inure to the benefit of the Borrower, each Guarantor and their respective
successors and to the benefit of the Administrative Agent and the Lenders and
their respective successors and assigns. The rights and obligations of the
Borrower under this Amendment shall not be assigned or delegated without the
prior written consent of the Lenders.
5.05 EXPENSES. The Borrower agrees to pay the Administrative Agent upon
demand for all reasonable expenses, including reasonable fees of attorneys and
paralegals for the Administrative Agent (who may be employees of the
Administrative Agent), incurred by the Administrative Agent in connection with
the preparation, negotiation and execution of this Amendment and any document
required to be furnished herewith.
5.06 CONTINUING EFFECT. Except as specifically provided herein, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect in accordance with their respective terms.
SECTION 6 CONFIRMATION AND REAFFIRMATION OF GUARANTIES.
6.01 REAFFIRMATION AND CONFIRMATION. Each Guarantor hereby agrees that
its respective Guaranty shall remain in full force and effect and that such
Guaranty is hereby ratified and confirmed in all respects.
[Signature pages follow]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2
to be executed by their respective officers thereunto duly authorized, on the
date first above written.
APPLIED GRAPHICS TECHNOLOGIES, INC.
By: ___________________________________
Name:
Title:
PORTAL PUBLICATIONS, LTD.
THE WINN ART GROUP, INC.
BLACK DOT GRAPHICS, INC.
ORENT GRAPHICARTS, INC.
TYPO-GRAPHICS, INC.
AMBROSI & ASSOCIATES, INC.
WEST COAST CREATIVE, INC.
ABD GROUP, INC.
MERIDIAN RETAIL, INC.
TAPROOT INTERACTIVE, INC.
PROOF POSITIVE/FARROWLYNE
ASSOCIATES, INC.
ONE 2 ONE INC.
For each of the foregoing entities:
By:____________________________________
Name:
Title:
[Signature page to Amendment No. 2]
<PAGE> 7
DEVON GROUP, INC. (FORMERLY KNOWN AS AGT
ACQUISITION CORP.),
By:____________________________________
Name:
Title:
AMUSEMATTE CORP.
By:____________________________________
Name:
Title:
MIRAMAR EQUIPMENT, INC.
By:____________________________________
Name:
Title:
COLOR CONTROL, INC.
By:____________________________________
Name:
Title:
AGT ACQUISITION CORP. II
By:____________________________________
Name:
Title:
APPLIED SYSTEMS SERVICES, INC.
By:____________________________________
Name:
Title:
Signature page to Amendment No. 2]
<PAGE> 8
FLEET BANK, N.A. AS INITIAL ISSUING
BANK, SWING LINE BANK AND ADMINISTRATIVE
AGENT AND AS A LENDER
By:____________________________________
Name:
Title:
THE BANK OF NEW YORK, AS A LENDER
By:____________________________________
Name:
Title:
MELLON BANK, N.A., AS A LENDER
By:____________________________________
Name:
Title:
THE CHASE MANHATTAN BANK,
AS A LENDER
By:____________________________________
Name:
Title:
FIRST UNION NATIONAL BANK,
AS SYNDICATION AGENT AND AS A LENDER
By:____________________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY,
AS A LENDER
By:____________________________________
Name:
Title:
<PAGE> 9
KEYBANK NATIONAL ASSOCIATION,
AS A LENDER
By:____________________________________
Name:
Title:
BANKBOSTON, N.A.,
AS DOCUMENTATION AGENT AND AS A LENDER
By:____________________________________
Name:
Title:
DEUTSCHE BANK AG NEW YORK AND/OR
CAYMAN ISLANDS BRANCH, AS A LENDER
By:____________________________________
Name:
Title:
By:____________________________________
Name:
Title:
BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION,
AS A LENDER
By:____________________________________
Name:
Title:
SUNTRUST BANK, ATLANTA,
AS A LENDER
By:____________________________________
Name:
Title:
<PAGE> 10
COMERICA BANK,
AS A LENDER
By:____________________________________
Name:
Title:
EUROPEAN AMERICAN BANK,
AS A LENDER
By:____________________________________
Name:
Title:
BANK OF TOKYO-MITSUBISHI TRUST COMPANY
AS A LENDER
By:____________________________________
Name:
Title:
[Signature page to Amendment No. 2]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF THE COMPANY
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,769
<SECURITIES> 0
<RECEIVABLES> 116,815
<ALLOWANCES> 15,732
<INVENTORY> 43,850
<CURRENT-ASSETS> 203,266
<PP&E> 117,536
<DEPRECIATION> 33,592
<TOTAL-ASSETS> 705,933
<CURRENT-LIABILITIES> 72,857
<BONDS> 201,946
0
0
<COMMON> 224
<OTHER-SE> 421,412
<TOTAL-LIABILITY-AND-EQUITY> 705,933
<SALES> 265,439
<TOTAL-REVENUES> 265,439
<CGS> 167,710
<TOTAL-COSTS> 167,710
<OTHER-EXPENSES> 5,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,648
<INCOME-PRETAX> 22,653
<INCOME-TAX> 10,250
<INCOME-CONTINUING> 12,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,403
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.60
</TABLE>
