<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 March 31, 1999
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)
(Former name, former address and former fiscal year,
if changed since last report)
N/A
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 April
30, 1999, was 22,394,772.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars, except per-share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,343 $ 20,909
Trade accounts receivable (net of allowances of $15,002 in 1999
and $15,823 in 1998) 82,650 93,552
Due from affiliates 7,310 6,561
Inventory 38,270 34,807
Income tax receivable 2,155 14,936
Prepaid expenses and other current assets 15,887 14,476
Deferred income taxes 21,785 21,423
--------- ---------
Total current assets 174,400 206,664
Property, plant, and equipment - net 83,849 83,262
Goodwill and other intangible assets (net of accumulated amortization
of $11,071 in 1999 and $8,546 in 1998) 412,451 414,508
Deferred income taxes 694 1,060
Other assets 6,917 7,049
--------- ---------
Total assets $ 678,311 $ 712,543
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 51,339 $ 56,961
Current portion of long-term debt and obligations under capital leases 1,927 3,247
Due to affiliates 1,798 1,513
Other current liabilities 17,658 20,442
--------- ---------
Total current liabilities 72,722 82,163
Long-term debt 178,802 203,830
Obligations under capital leases 3,593 3,475
Other liabilities 5,368 5,677
--------- ---------
Total liabilities 260,485 295,145
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock (no par value, 10,000,000 shares authorized; no
shares outstanding)
Common stock ($0.01 par value, 150,000,000 shares authorized;
shares issued and outstanding: 22,394,772 in 1999 and 22,379,127
in 1998) 224 224
Additional paid-in capital 385,519 385,279
Accumulated other comprehensive income (191) (4)
Retained earnings 32,274 31,899
--------- ---------
Total stockholders' equity 417,826 417,398
--------- ---------
Total liabilities and stockholders' equity $ 678,311 $ 712,543
========= =========
</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 Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 112,034 $ 59,655
Cost of revenues 74,523 39,040
--------- ---------
Gross profit 37,511 20,615
--------- ---------
Selling, general, and
administrative expenses 30,584 11,665
Amortization of intangibles 2,948 431
--------- ---------
Total operating expenses 33,532 12,096
--------- ---------
Operating income 3,979 8,519
Interest expense (3,390) (136)
Interest income 44 1,051
Other income - net 117 12
--------- ---------
Income before provision for
income taxes 750 9,446
Provision for income taxes 375 3,873
--------- ---------
Net income 375 5,573
Other comprehensive income (loss) (187) 27
--------- ---------
Comprehensive income $ 188 $ 5,600
========= =========
Earnings per common share:
Basic $ 0.02 $ 0.31
Diluted $ 0.02 $ 0.30
Weighted average number of common shares:
Basic 22,395 17,929
Diluted 22,395 18,861
</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 Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 375 $ 5,573
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 7,546 2,361
Deferred taxes (3) 412
Other 1,272 (703)
Changes in Operating Assets and Liabilities, net of effects of acquisitions:
Trade accounts receivable 10,347 (2,481)
Due from/to affiliates (464) 50
Inventory (2,854) (653)
Other assets 10,803 2,673
Accounts payable and accrued expenses (6,314) 1,635
Other liabilities (2,658) (3,040)
--------- ---------
Net cash provided by operating activities 18,050 5,827
--------- ---------
Cash flows from investing activities:
Investment in available-for-sale securities (99,714)
Proceeds from sale of available-for-sale securities 118,830
Property, plant, and equipment expenditures (6,806) (6,403)
Entities purchased, net of cash acquired (628) (18,257)
Other (112)
--------- ---------
Net cash used in investing activities (7,546) (5,544)
--------- ---------
Cash flows from financing activities:
Proceeds from sale/leaseback transactions 1,283 1,122
Repayment of notes and capital lease obligations (203) (1,644)
Repayments under revolving credit line - net (26,150)
--------- ---------
Net cash used in financing activities (25,070) (522)
--------- ---------
Net decrease in cash and cash equivalents (14,566) (239)
Cash and cash equivalents at beginning of period 20,909 12,584
--------- ---------
Cash and cash equivalents at end of period $ 6,343 $ 12,345
========= =========
</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 amounts)
<TABLE>
<CAPTION>
For the three months ended March 31, 1999
Accumulated
Additional other
paid-in comprehensive Retained
Common stock capital income earnings
------------ ------- ------ --------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 224 $ 385,279 $ (4) $ 31,899
Issuance of 15,645 common shares as
additional consideration in connection
with a 1997 acquisition 240
Other comprehensive income (loss) (187)
Net income 375
----- --------- ---------- ---------
Balance at March 31, 1999 $ 224 $ 385,519 $ (191) $ 32,274
===== ========= ========== =========
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 6
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)
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 1998 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.
Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform with the 1999 presentation.
2. RESTRUCTURING
During 1998, the Company commenced two separate plans to restructure its
operations (the "Second Quarter Plan" and the "Fourth Quarter Plan",
respectively). As part of the Second Quarter Plan, the Company will close two
facilities in New Jersey and make the necessary modifications to its Carlstadt,
NJ, facility to accommodate the transfer of work performed at those locations to
the Carlstadt facility. In addition, the Company vacated a portion of one of its
Chicago, IL, facilities and transferred a portion of the work performed at that
facility to its other Chicago metropolitan area facilities. Also as part of the
Second Quarter Plan, the Company terminated certain employees and consolidated
the work performed in its West Coast facilities, resulting in the closure of one
such facility. As part of the Fourth Quarter Plan, the Company plans to close
several facilities in Illinois and terminate employees on a Company-wide basis.
The work performed at each of the facilities to be closed will be performed at
the Company's other Midwest facilities.
The Company does not anticipate any material adverse effect on its future
results of operations from the facility closings since all work performed at
such locations has been and will be transferred to other facilities. The
employees terminated and to be terminated under the restructuring plans are
principally production workers, sales people, and administrative support staff.
The Company expects to complete the Second Quarter Plan and the Fourth Quarter
Plan by June 1999 and December 1999, respectively.
As of March 31, 1999, approximately $986 and $2,743 was included in "Other
current liabilities" in the accompanying Consolidated Balance Sheet for the
future costs of the Second Quarter Plan and the Fourth Quarter Plan,
respectively. During the first three months of 1999, approximately $518 was
charged against the Second Quarter Plan's restructuring reserve and $94 was
charged against the Fourth Quarter Plan's restructuring reserve. The charges
against the Second Quarter Plan's restructuring reserve were comprised of $248
for severance for 37 employees, $126 for facility closure costs, and $144
related to assets no longer utilized as a result of the restructuring. The
charges against the Fourth Quarter Plan's restructuring reserve were comprised
of $84 for severance for 21 employees and $10 for facility closure costs.
<PAGE> 7
3. INVENTORY
The components of inventory were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished Goods $ 7,478 $ 5,068
Work-in-process 24,556 25,012
Raw materials 6,236 4,727
-------- --------
Total $ 38,270 $ 34,807 $
======== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with related
parties during the three months ended March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Affiliate sales $ 2,742 $ 7,544
Affiliate purchases $ 811 $ 1,685
Administrative charges $ 322 $ 295
</TABLE>
Administrative charges include charges for certain legal and computer
services provided by affiliates and for rent incurred for leases with
affiliates.
5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes for the three months ended March 31,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest paid $ 4,111 $ 91
Income taxes paid $ 144 $ 294
</TABLE>
Noncash investing and financing activities for the three months ended March
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Reduction of goodwill from amortization of excess tax
deductible goodwill $ 2 $ 39
Acquisitions:
Fair value of assets acquired $ 2,290 $ 23,656
Cash paid (1,331) (18,257)
Fair value of common stock issued (3,300)
-------- --------
Liabilities assumed $ 959 $ 2,099
======== ========
</TABLE>
<PAGE> 8
6. SEGMENT INFORMATION
Segment information relating to results of operations for the three months
ended March 31, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue:
Content Management Services $ 85,405 $ 50,465
Publishing 18,089
Other operating segments 8,540 9,190
--------- ---------
Total $ 112,034 $ 59,655
========= =========
Operating Income:
Content Management Services $ 10,889 $ 8,906
Publishing (116)
Other operating segments 1,041 1,121
--------- ---------
Total 11,814 10,027
Other business activities (5,001) (1,160)
Amortization of intangibles (2,948) (431)
Interest expense (3,276) (53)
Interest income 44 1,051
Other income 117 12
--------- ---------
Consolidated Income before Provision for Income Taxes $ 750 $ 9,446
========= =========
</TABLE>
Segment information relating to the Company's assets as of March 31, 1999,
was as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Total Assets:
Content Management Services $469,059
Publishing 125,953
Other operating segments 32,886
Other business activities 50,413
--------
Total $678,311
========
</TABLE>
7. PENDING ACQUISITION
On March 25, 1999, the Company tendered an offer to purchase all of the
outstanding ordinary shares of Wace Group Plc ("Wace") for 90 pence per share
for total cash consideration of approximately $117,800. The Company has also
announced that after consummation of the transaction, it intends to make an
offer to acquire Wace's 8% Cumulative Convertible Redeemable Preference Shares
(the "Preference Shares") redeemable in 2005. The Company currently intends to
issue subordinated notes in exchange for the Preference Shares. Such current
intention may change depending on financial market conditions and other factors.
As of December 31, 1998, Preference Shares with an aggregate par value of
approximately $64,600 were outstanding. Wace, which is headquartered in the
United Kingdom, operates an international network of digital imaging businesses
and is a provider of prepress, color management, interactive media, and print
procurement services. As of and for the year ended December 31, 1998, Wace
reported total assets, revenues, and a loss before taxes of approximately
$136,400, $303,600, and $68,800, respectively, based on a conversion rate of
$1.65 per Great Britain Pound. To finance the offer, the Company has entered
into an amended and restated credit agreement with its lending institution that
will replace the Company's existing credit facilities and increase the Company's
borrowing capacity to $350,000 only upon consummation of the transaction.
<PAGE> 9
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 timing of completion and the success of the
Second Quarter Plan and the Fourth Quarter Plan; the rate and level of capital
expenditures; the adequacy of the Company's lines of credit and cash flows to
fund cash needs; and the ability to obtain Y2K compliance for various systems,
equipment, and software.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED WITH 1998
Revenues in the first quarter of 1999 were $52,379,000 higher than in the
comparable period in 1998. The increase in revenues of $60,726,000 from
operations acquired subsequent to the 1998 period was offset by a decrease in
revenues of $8,347,000 at operations owned in the 1998 period. Revenues
increased by $34,940,000 from content management services, $18,089,000 from
publishing operations, and $1,348,000 from broadcast media distribution
services. Increased revenues from content management services resulted from
revenues of $42,310,000 associated with acquired operations, primarily the
content management business acquired in the merger with Devon Group, Inc.
("Devon") in May 1998 and the acquisition of Color Control, Inc. ("Color
Control") in June 1998, partially offset by a decrease in revenues of $7,370,000
at the Company's prepress facilities owned in the 1998 period as a result of a
drop in sales from its existing customer base. Revenues from publishing
operations resulted from the publishing business acquired as part of the merger
with Devon. Increased broadcast media distribution services revenues resulted
from internally generated growth. These revenue increases were partially offset
by a decrease of $1,998,000 in revenues from digital services resulting from
reduced software and equipment sales.
Gross profit increased $16,896,000 in the first quarter of 1999 as a result
of the additional revenues for the period as discussed above. The gross profit
percentage in the first quarter of 1999 was 33.5% as compared to 34.6% in the
1998 period. This slight decrease in the gross profit percentage resulted from
reduced margins at certain prepress facilities as a result of the decrease in
revenues discussed above, partially offset by the work in higher margin
operations, primarily the publishing business that was acquired subsequent to
the 1998 period.
Selling, general, and administrative expenses in the first quarter of 1999
were $18,919,000 higher than in the 1998 period, and as a percent of revenue
increased to 27.3% in the 1999 period from 19.6% in the 1998 period. Such
expenses grew at a greater rate than revenue due primarily to higher costs
incurred at acquired prepress operations that have not been fully integrated and
costs incurred in the publishing business that was acquired subsequent to the
1998 period, which business incurs selling, general, and administrative costs at
a higher rate than the Company's other operations.
Amortization expense for intangible assets increased by $2,517,000 in the
first quarter of 1999 due primarily to the goodwill associated with acquisitions
consummated subsequent to the 1998 period.
During 1998, the Company commenced two separate plans to restructure its
operations (the "Second Quarter Plan" and the "Fourth Quarter Plan",
respectively). As part of the Second Quarter Plan, the Company will close two
facilities in New Jersey and make the necessary modifications to its Carlstadt,
NJ, facility to accommodate the transfer of work performed at those locations to
the Carlstadt facility. In addition, the Company vacated a portion of one of its
Chicago, IL, facilities and transferred a portion of the work performed at that
facility to its other metropolitan Chicago area facilities. Also as part of the
Second Quarter Plan, the Company terminated certain employees and consolidated
the work performed in its West Coast facilities, resulting in the closure of one
such facility. As part of the Fourth Quarter Plan, the Company plans to close
several facilities in Illinois and terminate employees on a Company-wide basis.
<PAGE> 10
The work performed at each of the facilities to be closed will be performed
at the Company's other Midwest facilities.
The Company does not anticipate any material adverse effect on its future
results of operations from the facility closings since all work performed at
such locations has been and will be transferred to other facilities. The
employees terminated and to be terminated under the restructuring plans are
principally production workers, sales people, and administrative support staff.
The Company expects to complete the Second Quarter Plan and the Fourth Quarter
Plan by June 1999 and December 1999, respectively.
Interest expense in the first quarter of 1999 was $3,254,000 higher than in
the 1998 period due primarily to the interest on borrowings to finance the Devon
merger and the Color Control acquisition.
Interest income for the first quarter of 1999 was $1,007,000 lower than
during the 1998 period due to the sale of marketable securities to fund certain
mergers and acquisitions in 1998.
The effective rate of the provision for income taxes of 50.0% in the first
quarter of 1999 was higher than the statutory rate due primarily to the
permanent items related to the nondeductible goodwill associated with the Devon
merger and other acquisitions and the nondeductible portion of meals and
entertainment expenses.
Revenues from business transacted with affiliates for the three months
ended March 31, 1999 and 1998 totaled $2,742,000 and $7,544,000, respectively,
representing 2.4%, and 12.6%, respectively, of the Company's revenues.
FINANCIAL CONDITION
During the first three months of 1999, the Company repaid $26,150,000 of
its borrowings under its lines of credit and invested $6,806,000 in
management information systems, facility construction, and new equipment. Such
amounts were primarily generated from cash from operating activities and a sale
and leaseback transaction that generated proceeds of $1,283,000. The sale and
leaseback arrangement, which is accounted for as an operating lease, resulted in
an immaterial gain that has been deferred and is being recognized as a credit
against future rental expenses.
Cash flows from operating activities during the first three months of 1999
increased by $12,223,000 as compared to the comparable period in 1998 due
primarily to the collection of trade accounts receivable and income tax refunds,
offset by decreased accrued expense balances from the timing of vendor payments.
The Company expects to spend approximately $10.0 million over the course of
the next twelve months for capital improvements and management information
systems, 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.
On March 25, 1999, the Company tendered an offer to purchase all of the
outstanding ordinary shares of Wace Group Plc ("Wace") for 90 pence per share
for total cash consideration of approximately $117,800,000. The Company has also
announced that after consummation of the transaction, it intends to make an
offer to acquire Wace's 8% Cumulative Convertible Redeemable Preference Shares
(the "Preference Shares") redeemable in 2005. The Company currently intends to
issue subordinated notes in exchange for the Preference Shares. Such current
intention may change depending on financial market conditions and other factors.
As of December 31, 1998, Preference Shares with an aggregate par value of
approximately $64,600,000 were outstanding. Wace, which is headquartered in the
United Kingdom, operates an international network of digital imaging businesses
and is a provider of prepress, color management, interactive media, and print
procurement services. As of and for the year ended December 31, 1998, Wace
reported total assets, revenues, and a loss before taxes of approximately
$136,400,000, $303,600,000, and $68,800,000, respectively, based on a conversion
rate of $1.65 per Great Britain Pound. To finance the offer, the Company has
entered into an amended and restated credit agreement with its lending
institution that will replace the Company's existing credit facilities and
increase the Company's borrowing capacity to $350,000,000 only upon consummation
of the transaction.
<PAGE> 11
The Company believes that the cash flow from operations and borrowings under
its lines of credit, including the additional borrowing capacity contingently
available as a result of the Wace acquisition, 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 content management
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 certain of its prepress manufacturing processes and also
provides a source of revenue for the Company through the sale of software
licenses and systems that incorporate Digital Link. 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 Company has obtained from the vendor the necessary
modifications to make the database Y2K compliant. By the end of the second
quarter of 1999, the Company expects to have a patch available for both internal
and third-party users of Digital Link. 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 second 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 could result in the loss of future revenue to the Company.
Manufacturing Processes: The Company has implemented a plan to review its
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 received
certificates from certain of its suppliers of manufacturing equipment and
software regarding Y2K compliance or Y2K readiness of such suppliers. All
suppliers reviewed to date have indicated that their equipment and software are
either Y2K compliant or that they have commenced action necessary to make such
equipment and software Y2K compliant. The Company has also been installing Y2K
compliant equipment and software as older, non-compliant items are retired. To
date, all mission-critical systems have been tested and no Y2K-related issues
have been identified in the prepress manufacturing processes. As part of its
plan, the Company is in the process of identifying, categorizing, and assessing
all of its manufacturing process equipment and software, which the Company
expects to complete by the end of the second quarter of 1999. The Company plans
to replace or repair any non-compliant systems identified in its review by the
middle of the third quarter of 1999. By the end of the third quarter of 1999,
the Company intends to achieve Y2K compliance or have adequate contingency plans
in place.
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 its customers. The
Company's ability to continue to use direct-to-plate delivery may be contingent
on the printers' equipment being Y2K compliant. 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
<PAGE> 12
to perform its business. 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 does not currently intend to
review the Y2K compliance status of printers.
The Company has commenced a review of the systems used in the publishing
operations acquired in the Devon merger. Based on this review, the Company has
identified systems that are not Y2K compliant. The Company has initiated an
effort to make the necessary modifications and expects to achieve Y2K compliance
during the fourth quarter of 1999.
The Company is currently reviewing the Y2K Issues involving the broadcast
media distribution manufacturing process. The Company has identified
non-compliant systems at both its Wilmington, OH, and New York City facilities.
The Company is currently making the necessary modifications to achieve Y2K
compliance at its New York City facility and intends to install this modified
system at its Wilmington, OH, facility. There can be no assurance that the
review being performed by the Company will not uncover additional 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 third
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 prepress operations at Devon during the fourth
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 third 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 does not intend to review all of 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. The Company
intends to review selective critical non-IT systems and make the necessary
modifications, if any, to attain Y2K compliance during the third quarter of
1999. The Company's contingency plan for non-IT systems that are not reviewed is
to develop alternative workflows for any non-IT system that fails to function
properly due to the Y2K Issue. There can be no assurance, however, 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 is continuing its review of
customers' and vendors' systems by soliciting responses to questionnaires sent
to such customers and vendors. All responses received to date by the Company
have indicated that the responding vendor or customer does not have any Y2K
Issues that will adversely impact the Company. 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.
<PAGE> 13
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 its lines of credit. 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.
The Company's primary exposure to market risk is interest rate risk. The
Company had $175,200,000 outstanding under its lines of credit at March 31,
1999. Interest rates on funds borrowed under the Company's lines of credit vary
based on changes to the prime rate or LIBOR. The Company partially manages its
interest rate risk through three interest rate swap agreements under which the
Company pays a fixed rate and is paid a floating rate based on the three month
LIBOR rate. The notional amounts of the three interest rate swaps totaled
$75,000,000 at March 31, 1999. A change in interest rates of 1.0% would result
in a change in income before taxes of $1,000,000 based on the outstanding
balance under the Company's lines of credit and the notional amounts of the
interest rate swap agreements at March 31, 1999.
<PAGE> 14
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In February 1999, the Company issued 15,645 shares of its common stock
as additional contingent consideration to the former stockholders of
Amusematte Corp., which the Company acquired in December 1997. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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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 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).
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).
</TABLE>
<PAGE> 15
<TABLE>
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<S> <C>
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).
10.5 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).
</TABLE>
<PAGE> 16
<TABLE>
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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).
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 (Incorporated by reference to
Exhibit No. 10.6(f) 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
Act of 1934, as amended, for the quarterly
period ended September 30, 1998).
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).
</TABLE>
<PAGE> 17
<TABLE>
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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).
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. (Incorporated
by reference to Exhibit No. 10.9(c) 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 Act of 1934, as amended, for
the quarterly period ended September 30,
1998).
27 Financial Data Schedule (EDGAR filing
only).
99 Amended and Restated Credit Agreement dated
as of March 10, 1999, among Applied
Graphics Technologies, Inc., Other
Institutional Lenders as Initial Lenders,
and Fleet Bank, N.A. (Incorporated by
reference to Exhibit No. 99.2 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 March 22, 1999).
</TABLE>
- -----------------------------
(b) The Registrant filed the following reports on Form 8-K during the
quarter ended March 31, 1999:
Form 8-K filed on March 22, 1999, regarding the offer to purchase
all of the outstanding ordinary shares of Wace Group Plc.
<PAGE> 18
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: May 14, 1999
----------------------------------
Martin D. Krall
Executive Vice President,
Chief Legal Officer, and Secretary
(Duly authorized officer)
/s/ Louis Salamone, Jr.
Date: May 14, 1999
----------------------------------
Louis Salamone, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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<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 THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,343
<SECURITIES> 0
<RECEIVABLES> 97,652
<ALLOWANCES> 15,002
<INVENTORY> 38,270
<CURRENT-ASSETS> 174,400
<PP&E> 123,920
<DEPRECIATION> 40,071
<TOTAL-ASSETS> 678,311
<CURRENT-LIABILITIES> 72,722
<BONDS> 182,395
0
0
<COMMON> 224
<OTHER-SE> 417,602
<TOTAL-LIABILITY-AND-EQUITY> 678,311
<SALES> 112,034
<TOTAL-REVENUES> 112,034
<CGS> 74,523
<TOTAL-COSTS> 74,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,390
<INCOME-PRETAX> 750
<INCOME-TAX> 375
<INCOME-CONTINUING> 375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
