<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, 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 October
31, 1999, was 22,474,772.
<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>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,373 $ 20,909
Trade accounts receivable (net of allowances of $17,361 in 1999
and $15,823 in 1998) 150,907 93,552
Due from affiliates 7,962 6,561
Inventory 50,035 34,807
Income tax receivable 14,936
Prepaid expenses 16,164 4,991
Other current assets 23,903 9,485
Deferred income taxes 22,254 21,423
-------- --------
Total current assets 284,598 206,664
Property, plant, and equipment - net 122,659 83,262
Goodwill and other intangible assets (net of accumulated
amortization of $19,227 in 1999 and $8,546 in 1998) 533,515 414,508
Other assets 7,026 8,109
-------- --------
Total assets $947,798 $712,543
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 95,160 $ 56,961
Current portion of long-term debt and
obligations under capital leases 2,609 3,247
Due to affiliates 1,155 1,513
Other current liabilities 25,019 20,442
-------- --------
Total current liabilities 123,943 82,163
Long-term debt 311,993 203,830
Subordinated notes 30,133
Obligations under capital leases 4,646 3,475
Other liabilities 22,897 5,677
-------- --------
Total liabilities 493,612 295,145
-------- --------
Commitments and contingencies
Minority interest - Redeemable Preference
Shares issued by subsidiary 33,425
--------
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: 22,474,772 in 1999 and 22,379,127
in 1998) 225 224
Additional paid-in capital 386,533 385,279
Accumulated other comprehensive income 613 (4)
Retained earnings 33,390 31,899
-------- --------
Total stockholders' equity 420,761 417,398
-------- --------
Total liabilities and stockholders' equity $947,798 $712,543
======== ========
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 3
Applied Graphics Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $ 444,303 $ 265,439 $ 179,917 $ 124,876
Cost of revenues 290,207 171,347 114,690 81,267
--------- --------- --------- ---------
Gross profit 154,096 94,092 65,227 43,609
--------- --------- --------- ---------
Selling, general, and
administrative expenses 118,416 59,666 48,777 30,148
Amortization of intangibles 10,130 4,470 3,938 2,794
Restructuring charge 1,865 5,300 1,865
--------- --------- --------- ---------
Total operating expenses 130,411 69,436 54,580 32,942
--------- --------- --------- ---------
Operating income 23,685 24,656 10,647 10,667
Interest expense (15,475) (4,648) (7,731) (3,420)
Interest income 394 1,813 202 82
Other income - net 1,146 832 875 134
--------- --------- --------- ---------
Income before provision for
income taxes and minority interest 9,750 22,653 3,993 7,463
Provision for income taxes 6,825 10,250 3,946 3,832
--------- --------- --------- ---------
Income before minority interest 2,925 12,403 47 3,631
Minority interest (1,434) (868)
--------- --------- --------- ---------
Net income (loss) 1,491 12,403 (821) 3,631
Other comprehensive income 617 48 483 1
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,108 $ 12,451 $ (338) $ 3,632
========= ========= ========= =========
Earnings (loss) per common share:
Basic $ 0.07 $ 0.62 $ (0.04) $ 0.16
Diluted $ 0.07 $ 0.60 $ (0.04) $ 0.16
Weighted average number of common shares:
Basic 22,422 19,957 22,475 22,335
Diluted 22,424 20,823 22,475 23,117
</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,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,491 $ 12,403
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 28,294 12,921
Deferred taxes 287 (386)
Restructuring charge 1,055 1,352
Other 5,572 (846)
Changes in Operating Assets and Liabilities, net of effects of acquisitions:
Trade accounts receivable (23,136) (23,373)
Due from/to affiliates (1,759) 486
Inventory (8,574) (7,786)
Other assets 16,087 (3,190)
Accounts payable and accrued expenses (2,162) (8,816)
Other liabilities (2,840) (534)
--------- ---------
Net cash provided by (used in) operating activities 14,315 (17,769)
--------- ---------
Cash flows from investing activities:
Investment in available-for-sale securities (178,433)
Proceeds from sale of available-for-sale securities 283,779
Property, plant, and equipment expenditures (21,569) (24,640)
Proceeds from sale of property, plant, and equipment 1,153
Entities purchased, net of cash acquired (105,432) (253,816)
Other investing activities (5,135) (4,468)
--------- ---------
Net cash used in investing activities (130,983) (177,578)
--------- ---------
Cash flows from financing activities:
Proceeds from sale/leaseback transactions 2,250 5,215
Repayment of notes and capital lease obligations (1,788) (16,107)
Borrowings under credit lines 107,589 199,400
Proceeds from exercise of stock options 960 24
--------- ---------
Net cash provided by financing activities 109,011 188,532
--------- ---------
Net decrease in cash and cash equivalents (7,657) (6,815)
Effect of exchange rate changes on cash and cash equivalents 121
Cash and cash equivalents at beginning of period 20,909 12,584
--------- ---------
Cash and cash equivalents at end of period $ 13,373 $ 5,769
========= =========
</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 nine months ended September 30, 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
Exercise of stock options 1 959
Fair value of stock options issued to
non-employee 55
Other comprehensive income 617
Net income 1,491
------------- ------------- ------------- -------------
Balance at September 30, 1999 $ 225 $ 386,533 $ 613 $ 33,390
============= ============= ============= =============
</TABLE>
See Notes to Interim Consolidated Financial Statements
<PAGE> 6
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per-share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited 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.
Assets and liabilities of foreign operations are translated from the
functional currency into United States dollars using the exchange rate at the
balance sheet date. Revenues and expenses of foreign operations are translated
from the functional currency into United States dollars using the average
exchange rate for the period. Adjustments resulting from the translation into
United States dollars are included in other comprehensive income.
Certain prior-period amounts in the accompanying financial statements have
been reclassified to conform with the 1999 presentation.
2. 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.
On May 21, 1999, the Company's offer was declared unconditional in all respects
and Wace came under the control of the Company at that time. The total cash
consideration, based on the total number of Wace's ordinary shares outstanding
and stock options with an exercise price below 90 pence, is pound
sterling73,599, or approximately $118,965, excluding transaction costs. As of
September 30, 1999, approximately 89.2% of the total potential shares had been
tendered, for which the Company paid $106,354. At September 30, 1999, the
remaining purchase consideration of approximately $12,611 is included in "Other
noncurrent liabilities" in the accompanying Consolidated Balance Sheet since
this obligation will be funded by the Company's existing long-term credit
facilities. The Company entered into an amended and restated credit agreement
with its lending institutions to finance the acquisition (see Note 5). The
Company also offered to acquire Wace's preferred securities through an exchange
for subordinated notes issued by the Company (See Note 6).
The acquisition was 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 acquisition, 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 $129,525, which is being amortized over a
35-year period. The results of operations of Wace have been included in the
Consolidated Statements of Operations since the date of acquisition.
The following unaudited pro forma information combines the results of
operations of the Company, Wace, and acquisitions consummated in 1998 for the
nine months ended September 30, 1999 and 1998, calculated as if the acquisitions
had occurred on January 1, 1998. 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 1998 or of results that may occur in the future.
<PAGE> 7
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Total revenues $ 513,143 $ 506,376
Income (loss) before provision for income taxes and minority interest $ (711) $ 3,064
Net income (loss) $ (5,555) $ (3,014)
Loss per common share:
Basic $ (0.25) $ (0.13)
Diluted $ (0.25) $ (0.13)
</TABLE>
3. RESTRUCTURING
During 1998, the Company commenced two separate plans to restructure
certain of its operations (the "1998 Second Quarter Plan" and the "1998 Fourth
Quarter Plan", respectively). As part of the 1998 Second Quarter Plan, the
Company intended to 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. The Company has
experienced delays in renovating the Carlstadt facility, which has caused the
transfer of work and the closing of facilities to be delayed. In addition, as
part of the 1998 Second Quarter Plan, 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 1998 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 1998 Fourth Quarter Plan, the
Company is closing several facilities in Illinois and terminating employees on a
Company-wide basis. The work performed at each of the Illinois facilities to be
closed will be performed at the Company's other Midwest facilities.
In connection with the acquisition of Wace, the Company commenced a plan in
the third quarter of 1999 to consolidate certain of its West Coast operations
(the "1999 Third Quarter Plan"). As part of the 1999 Third Quarter Plan, the
Company has closed the Los Angeles facility previously operated by Wace and
intends to move Wace's San Francisco operation to a more suitable facility. A
portion of the work currently performed in the Company's Foster City facility
will be transferred to the new San Francisco facility and the remaining
operation will be moved to a smaller Foster City facility.
Also in connection with the Wace acquisition, the Company commenced action
in the fourth quarter to consolidate certain of its New York metropolitan area
operations (the "1999 Fourth Quarter Plan"). As part of the 1999 Fourth Quarter
Plan, the Company transferred all of the work performed at one of its New York
City facilities to Wace's Varick Street operation. Also as part of the 1999
Fourth Quarter Plan, the Company is considering certain transfers of work among
its various metropolitan New York area operations. The final decisions made
regarding the consolidation of these facilities in connection with the 1999
Fourth Quarter Plan may have an impact on finalizing the 1998 Second Quarter
Plan.
The results of operations for the periods ended September 30, 1999, include
a charge of $1,865 for the 1999 Third Quarter Plan, comprised of $98 for
severance and benefits for approximately 37 employees, $712 for facility closure
costs (e.g., rent, utilities, maintenance costs, etc.), and $1,055 for the
write-off of assets no longer utilized and abandoned as a result of the
restructuring. The Company did not incur a charge related to the Fourth Quarter
Plan since the plan was not finalized and approved by September 30, 1999. The
Company will incur such a charge in the fourth quarter of 1999.
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 both the 1998 Second Quarter Plan and the 1998
Fourth Quarter Plan by December 31, 1999. The completion of the 1998 Second
Quarter Plan is dependent on finalizing the 1999 Fourth Quarter Plan. The
Company expects to complete the 1999 Third Quarter Plan by June 2000.
<PAGE> 8
As of September 30, 1999, approximately $189, $2,492, and $975 was included
in "Other current liabilities" in the accompanying Consolidated Balance Sheet
for the future costs of the 1998 Second Quarter Plan, the 1998 Fourth Quarter
Plan, and the 1999 Third Quarter Plan, respectively. During the first nine
months of 1999, approximately $1,316 was charged against the 1998 Second Quarter
Plan's restructuring reserve, $344 was charged against the 1998 Fourth Quarter
Plan's restructuring reserve, and $890 was charged against the 1999 Third
Quarter Plan's restructuring reserve. The charges against the 1998 Second
Quarter Plan's restructuring reserve were comprised of $395 for severance for 68
employees, $501 for facility closure costs, and $420 related to the write-off of
assets no longer utilized and abandoned as a result of the restructuring. The
charges against the 1998 Fourth Quarter Plan's restructuring reserve were
comprised of $222 for severance for 47 employees and $122 for facility closure
costs. The charges against the 1999 Third Quarter Plan's restructuring reserve
were comprised of $64 for severance for 27 employees, $130 for facility closure
costs, and $696 related to the write-off of assets no longer utilized and
abandoned as a result of the restructuring. As of September 30, 1999, no
expenditures had been made relating to the 1999 Fourth Quarter Plan.
The Company intends to pursue other operating efficiencies and synergies
and, as a result, may incur additional restructuring charges for such plans.
4. INVENTORY
The components of inventory were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 6,395 $ 5,068
Work-in-process 37,938 25,012
Raw materials 5,702 4,727
------- -------
Total $50,035 $34,807
======= =======
</TABLE>
5. LONG TERM DEBT
In March 1999, the Company entered into an amended and restated credit
agreement (the "1999 Credit Agreement") to finance the Wace acquisition. The
1999 Credit Agreement replaces the credit agreement entered into in May 1998
(the "1998 Credit Agreement") and is secured by certain inventory, receivables,
and equipment. On June 4, 1999 (the "Initial Funding Date"), the Company
borrowed $296,000, the proceeds of which were used to pay off existing
borrowings under the 1998 Credit Agreement and to finance the Wace acquisition.
The total borrowing capacity under the 1999 Credit Agreement is a maximum of
$350 million, comprised of a $100 million revolving line of credit (the
"Revolver") and three term loans totaling $250 million (the "Term Loans"). The
Revolver extends through June 2005. The Term Loans are comprised of tranches of
$125,000, $75,000, and $50,000 that have terms extending through June 2005, June
2006, and June 2007, respectively. Interest rates on funds borrowed under the
1999 Credit Agreement vary from either LIBOR or the prime rate in effect at the
time of the borrowing, plus a factor based on annual pro forma EBITDA (as
defined in the 1999 Credit Agreement). At September 30, 1999, $308,939 was
outstanding under the 1999 Credit Agreement, of which $58,939 was outstanding
under the Revolver and $250,000 was outstanding under the Term Loans. The
average variable rate on borrowings under both the 1999 Credit Agreement and the
1998 Credit Agreement for the nine months ended September 30, 1999, was 7.7%.
Under the terms of the 1999 Credit Agreement, the Company must comply with
certain covenants related to leverage ratios, interest coverage ratios, fixed
charge coverage ratios, minimum net worth, and capital spending. At September
30, 1999, the Company was in compliance with all covenants. In addition, under
the terms of the 1999 Credit Agreement, the Company is obligated to enter into
hedge arrangements within 180 days of the Initial Funding Date for a minimum of
two years covering at least 30% of the amount borrowed on the Initial Funding
Date. The Company's previously existing swap arrangements, which continue to be
accounted for as hedges against the variable interest rate component of the 1999
Credit Agreement, cover approximately 25% of the amount borrowed on the Initial
Funding Date. The Company is prohibited from paying dividends on its capital
stock under the terms of the 1999 Credit Agreement.
<PAGE> 9
6. SUBORDINATED NOTES
At May 21, 1999, Wace had pound sterling39,164, or approximately $62,733,
of 8% Cumulative Convertible Redeemable Preference Shares (the "Preference
Shares") outstanding. The Preference Shares carry the right to a fixed
cumulative preferential dividend of 8% and are redeemable on July 31, 2005.
On July 5, 1999, the Company offered each holder of the Preference Shares
the right to exchange such Preference Shares, at an equivalent nominal rate, for
subordinated notes issued by the Company (the "Subordinated Notes"). At
September 30, 1999, pound sterling18,297, or approximately $30,133, of the
Preference Shares, which accrued dividends through July 31, 1999, had been
exchanged for Subordinated Notes. The Subordinated Notes, which bear interest at
a fixed rate of 10% annually commencing on August 1, 1999, and mature on October
31, 2005, are subject to redemption by the Company at any time after July 31,
2000. The initial redemption premium is 4% and decreases in 0.5% increments
every six months until July 31, 2005, at which time the Subordinated Notes are
redeemable at par. The Subordinated Notes are listed on the London Stock
Exchange.
The Company recorded dividends of $1,434 and $868 on the Preference Shares
for the nine month and three month periods ended September 30, 1999,
respectively, which are reflected as "Minority interest" in the Consolidated
Statements of Operations. The Company accrued interest expense of $495 on the
Subordinated Notes for the periods ended September 30, 1999.
7. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with related
parties during the nine and three months ended September 30, 1999 and 1998, were
as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Affiliate sales $ 9,504 $18,948 $ 3,044 $ 4,367
Affiliate purchases $ 2,781 $ 4,746 $ 529 $ 1,380
Administrative charges $ 1,275 $ 719 $ 443 $ 205
</TABLE>
Administrative charges include charges for certain legal and computer
services provided by affiliates and for rent incurred for leases with
affiliates.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Payments of interest and income taxes for the nine months ended September
30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest paid $14,226 $ 3,899
Income taxes paid $ 2,353 $ 9,828
</TABLE>
<PAGE> 10
Noncash investing and financing activities for the nine months ended
September 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Reduction of goodwill from amortization of excess tax
deductible goodwill $ 77 $ 85
Write off of building against capital lease obligation
upon lease termination $ 273
Write off of fixed assets no longer utilized and
abandoned against restructuring reserve $ 446
Common stock issued as additional consideration for
1997 acquisition $ 240
Fair value of stock options issued to non-employee $ 55
Exchange of Preference Shares for Subordinated Notes $ 30,133
Acquisitions:
Fair value of assets acquired $ 243,634 $ 564,266
Cash paid (110,381) (266,798)
Fair value of common stock issued (12,611) (225,665)
--------- ---------
Liabilities assumed $ 120,642 $ 71,803
========= =========
</TABLE>
9. SEGMENT INFORMATION
Segment information relating to results of operations for the nine and
three months ended September 30, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, Three months ended September 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Content Management Services $ 348,120 $ 206,423 $ 141,993 $ 90,391
Publishing 68,503 37,064 28,773 28,711
Other operating segments 27,680 21,952 9,151 5,774
--------- ---------- --------- ---------
$ 444,303 $ 265,439 $ 179,917 $ 124,876
========= ========= ========= =========
Operating Income:
Content Management Services $ 42,526 $ 33,028 $ 16,529 $ 12,711
Publishing 5,813 6,602 4,458 4,300
Other operating segments 4,927 1,572 1,873 (127)
--------- --------- --------- ---------
Total 53,266 41,202 22,860 16,884
Other business activities (17,962) (6,966) (6,574) (3,423)
Amortization of intangibles (10,130) (4,470) (3,938) (2,794)
Interest expense (15,099) (4,458) (7,567) (3,420)
Interest income 394 1,813 202 82
Other income 1,146 832 875 134
Restructuring charge (1,865) (5,300) (1,865)
--------- --------- --------- ---------
Consolidated income before
provision for income taxes
and minority interest $ 9,750 $ 22,653 $ 3,993 $ 7,463
========= ========= ========= =========
</TABLE>
<PAGE> 11
Segment information relating to the Company's assets as of September 30,
1999, was as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Total Assets:
Content Management Services $709,044
Publishing 157,095
Other operating segments 34,485
Other business activities 47,174
--------
Total $947,798
========
</TABLE>
10. SUBSEQUENT EVENT
In October 1999, the Company signed an agreement to sell the photolab
business acquired as part of the Wace acquisition. The sales price will be
between $11,000 and $12,000. The transaction is subject to customary closing
conditions and is expected to be completed during the first quarter of 2000.
<PAGE> 12
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 timing of completion and the success of the various
restructuring plans; the rate and level of capital expenditures; the adequacy of
the Company's lines of credit and cash flows to fund cash needs; the ability to
sell certain properties and non-core businesses; successful integration of the
Wace operations; the success of the integration and restructuring efforts in
generating additional operating cash flows and EBITDA; the ability to maintain
compliance with covenants under the 1999 Credit Agreement; economic conditions
that adversely impact the Company's customers; and the ability to obtain Y2K
compliance for various systems, equipment, and software or execute contingency
plans.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED WITH 1998
Revenues in the first nine months of 1999 were $178,864,000 higher than in
the comparable period in 1998. The increase in revenues of $187,597,000 from
facilities operated for none or only a portion of the 1998 period was comprised
primarily of $80,469,000 in revenues from Wace Group Plc ("Wace"),
$95,996,000 in revenues from Devon Group, Inc. ("Devon"), and $11,132,000 in
revenues from other acquired operations for the comparable 1999 period not
operated in 1998. The acquisition of Wace and the merger with Devon were
consummated on May 21, 1999, and May 27, 1998, respectively. This increase in
revenues from acquired operations was offset by a decrease in revenues of
$8,733,000 at facilities operated during the comparable 1998 period. This
decrease at existing facilities was caused primarily by the loss of certain
customers and reduced business from other customers, principally those in the
entertainment industry.
Revenues increased by $141,698,000 from content management services,
$31,440,000 from publishing operations, $3,706,000 from broadcast media
distribution services, and $2,020,000 from digital services. Increased revenues
from content management services resulted from revenues of $156,220,000
associated with acquired operations, primarily the content management businesses
acquired in the merger with Devon and the acquisitions of Wace and Color
Control, Inc. ("Color Control"), partially offset by a decrease in revenues of
$14,522,000 at the Company's prepress facilities operated in the 1998 period.
Revenues from the publishing group increased as a result of operating the
publishing business acquired as part of the Devon merger for the full period in
1999. Increased broadcast media distribution services revenues resulted from
internally generated growth. Increased revenues from digital services primarily
resulted from the operations of Agile Enterprises, Inc., which was acquired
subsequent to the 1998 period.
Gross profit increased $60,004,000 in the first nine months of 1999 as a
result of the additional revenues for the period as discussed above. The gross
profit percentage in the first nine months of 1999 was 34.7% as compared to
35.4% in the 1998 period. This decrease in the gross profit percentage resulted
from reduced margins at traditional prepress facilities as a result of the
decrease in revenues discussed above, which resulted in lower absorption of
fixed manufacturing costs and the need to accept lower margin work. This
decrease was partially offset by the work in higher gross profit operations,
primarily the publishing group, which was acquired during the 1998 period, and
the broadcast media distribution business, which benefited from better pricing
and internal expansion that reduced reliance on outside services.
Selling, general, and administrative expenses in the first nine months of
1999 were $58,750,000 higher than in the 1998 period, and as a percent of
revenue increased to 26.7% in the 1999 period from 22.5% in the 1998 period.
Such expenses grew at a greater rate than revenue due primarily to higher costs
incurred at the Wace operations that have not been fully integrated and costs
incurred in the publishing group that was acquired during the 1998 period,
which business incurs selling, general, and administrative costs at a much
higher rate than the Company's other operations.
Amortization expense for intangible assets increased by $5,660,000 in the
first nine months of 1999 due primarily to the goodwill associated with
acquisitions consummated during and subsequent to the 1998 period.
<PAGE> 13
During 1998, the Company commenced two separate plans to restructure
certain of its operations (the "1998 Second Quarter Plan" and the "1998 Fourth
Quarter Plan", respectively). The results of operations in the 1998 period
include a charge of $5,300,000 related to the Second Quarter Plan. As part of
the Second Quarter Plan, the Company intended to 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. The Company has experienced delays in renovating the Carlstadt
facility, which has caused the transfer of work and the closing of facilities to
be delayed. In addition, as part of the 1998 Second Quarter Plan, 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 1998 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
1998 Fourth Quarter Plan, the Company is closing several facilities in Illinois
and terminating employees on a Company-wide basis. The work performed at each of
the Illinois facilities to be closed will be performed at the Company's other
Midwest facilities.
In connection with the acquisition of Wace, the Company commenced a plan in
the third quarter of 1999 to consolidate certain of its West Coast operations
(the "1999 Third Quarter Plan"). The results of operations in the 1999 period
include a charge of $1,865,000 related to the 1999 Third Quarter Plan. As part
of the 1999 Third Quarter Plan, the Company has closed the Los Angeles facility
previously operated by Wace and intends to move Wace's San Francisco operation
to a more suitable facility. A portion of the work currently performed in the
Company's Foster City facility will be transferred to the new San Francisco
facility and the remaining operation will be moved to a smaller Foster City
location.
Also in connection with the Wace acquisition, the Company commenced action
in the fourth quarter to consolidate certain of its New York metropolitan area
operations (the "1999 Fourth Quarter Plan"). As part of the 1999 Fourth Quarter
Plan, the Company transferred all of the work performed at one of its New York
City facilities to Wace's Varick Street operation. Also as part of the 1999
Fourth Quarter Plan, the Company is considering certain transfers of work among
its various metropolitan New York area operations. The final decisions made
regarding the consolidation of these facilities in connection with the 1999
Fourth Quarter Plan may have an impact on finalizing the 1998 Second Quarter
Plan. The Company did not incur a charge related to the 1999 Fourth Quarter Plan
since the plan was not finalized and approved by September 30, 1999. The Company
will incur such a charge in the fourth quarter of 1999.
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 both the 1998 Second Quarter Plan and the 1998
Fourth Quarter Plan by December 31, 1999. The completion of 1998 Second Quarter
Plan is dependent on finalizing the 1999 Fourth Quarter Plan. The Company
expects to complete the 1999 Third Quarter Plan by June 2000.
Interest expense in the first nine months of 1999 was $10,827,000 higher
than in the 1998 period due primarily to the interest on borrowings to finance
acquisitions.
Interest income for the first nine months of 1999 was $1,419,000 lower than
during the 1998 period due to the sale of marketable securities to fund certain
mergers and acquisitions in 1998.
Other income in the 1999 period was primarily comprised of a gain of
$1,000,000 on the sale of an internet domain name.
The effective rate of the provision for income taxes of 70.0% in the first
nine months 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 the Wace acquisition and the nondeductible portion of meals and
entertainment expenses.
Revenues from business transacted with affiliates for the nine months ended
September 30, 1999 and 1998, totaled $9,504,000 and $18,948,000, respectively,
representing 2.1% and 7.1%, respectively, of the Company's revenues.
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED WITH 1998
Revenues in the third quarter of 1999 were $55,041,000 higher than in the
comparable period in 1998. The increase was comprised of $53,038,000 from
facilities operated for no part of the 1998 period, primarily the $51,814,000 in
revenues from Wace, and increased revenues of $2,003,000 at facilities operated
during the comparable 1998 period.
Revenues increased by $51,603,000 from content management services,
$864,000 from broadcast media distribution services, $2,513,000 from digital
services, and $61,000 from publishing operations. Increased revenues from
content management services resulted from revenues of $52,658,000 associated
with acquired operations, primarily the content management businesses associated
with the Wace acquisition, partially offset by a decrease in revenues of
$1,055,000 at the Company's prepress facilities operated in the 1998 period.
Increased broadcast media distribution services revenues resulted from
internally generated growth. Increased revenues from digital services resulted
from additional systems sales.
Gross profit increased $21,618,000 in the third quarter of 1999 as a result
of the additional revenues for the period as discussed above. The gross profit
percentage in the third quarter of 1999 was 36.3% as compared to 34.9% in the
1998 period. This increase in the gross profit percentage resulted from improved
gross profit margins in the broadcast media distribution business, which
benefited from better pricing and internal expansion that reduced reliance on
outside services, and from certain operations acquired as part of Wace, which
attained higher gross profit margins than the Company's other traditional
prepress facilities.
Selling, general, and administrative expenses in the third quarter of 1999
were $18,629,000 higher than in the 1998 period, and as a percent of revenue
increased to 27.1% in the 1999 period from 24.1% in the 1998 period. Such
expenses grew at a greater rate than revenue due primarily to higher costs
incurred at the Wace operations that have not been fully integrated.
Amortization expense for intangible assets increased by $1,144,000 in the
third quarter of 1999 due primarily to the goodwill associated with acquisitions
consummated subsequent to the 1998 period.
The results of operations in the third quarter of 1999 include a
restructuring charge of $1,865,000 related to the 1999 Third Quarter Plan (see
Management's Discussion and Analysis for the nine month period).
Interest expense in the third quarter of 1999 was $4,311,000 higher than in
the 1998 period due primarily to the interest on borrowings to finance
acquisitions.
Other income in the 1999 period was primarily comprised of a gain of
$1,000,000 on the sale of an internet domain name.
The effective rate of the provision for income taxes of 98.8% in the third
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 Wace acquisition and the nondeductible portion of meals and
entertainment expenses.
Revenues from business transacted with affiliates for the three months
ended September 30, 1999 and 1998, totaled $3,044,000 and $4,367,000,
respectively, representing 1.7% and 3.5%, respectively, of the Company's
revenues.
FINANCIAL CONDITION
In March 1999, the Company entered into an amended and restated credit
agreement (the "1999 Credit Agreement") with its lending institutions that was
conditional on consummating the Wace acquisition. On June 4, 1999 (the "Initial
Funding Date"), the Company borrowed $296,000,000, the proceeds of which were
used to pay off existing borrowings under the Company's previous credit
arrangements and to finance the Wace acquisition. The total borrowing capacity
under the 1999 Credit Agreement is a maximum of $350,000,000, comprised of a
$100,000,000 revolving credit line (the "Revolver") and three term loans
aggregating $250,000,000 (the "Term Loans"). The Revolver extends through June
2005. The Term Loans are comprised of three tranches of $125,000,000,
<PAGE> 15
$75,000,000, and $50,000,000 that have terms extending through June 2005,
June 2006, and June 2007, respectively. Interest rates on funds borrowed under
the 1999 Credit Agreement vary from either LIBOR or the prime rate in effect at
the time of the borrowing, plus a factor based on annual pro forma EBITDA
(as defined in the 1999 Credit Agreement).
Under the terms of the 1999 Credit Agreement, the Company is obligated to
enter into hedge arrangements within 180 days of the Initial Funding Date for a
minimum of two years covering at least 30% of the amount borrowed on the Initial
Funding Date. The Company's previously existing swap arrangements, which
continue to be accounted for as hedges against the variable interest rate
component of the 1999 Credit Agreement, cover approximately 25% of the amount
borrowed on the Initial Funding Date.
Under the terms of the 1999 Credit Agreement, the Company must comply with
certain covenants related to leverage ratios, interest coverage ratios, fixed
charge coverage ratios, minimum net worth, and capital spending. At September
30, 1999, the Company was in compliance with all covenants. At September 30,
1999, total senior funded debt (as defined in the 1999 Credit Agreement) was
$331,859,000. Although the Company may continue to borrow up to the maximum
capacity during the course of subsequent periods, on the last day of each
quarterly period in 1999 it must have a ratio of total senior funded debt to
annual pro forma EBITDA that does not exceed 4.25 in order to remain in
compliance with the covenants of the 1999 Credit Agreement. The Company
continues to monitor compliance with this covenant and intends to take certain
actions to ensure compliance is maintained. The Company is actively pursuing
the sale of certain of its properties and non-core businesses, including those
obtained as part of the Wace acquisition, to generate additional working
capital. In addition, the Company's ongoing integration and restructuring
efforts may result in higher EBITDA and higher operating cash flows that can be
used to pay down debt.
During the first nine months of 1999, in addition to the borrowings under
the 1999 Credit Agreement and the acquisition of Wace, the Company repaid
$1,788,000 of notes and capital lease obligations and invested $21,569,000 in
management information systems, facility construction, and new equipment. Such
amounts were primarily generated from cash balances at year end and sale and
leaseback transactions that generated proceeds of $2,250,000. The sale and
leaseback arrangements, which are accounted for as operating leases, resulted in
immaterial gains that have been deferred and are being recognized as a credit
against future rental expenses.
Cash flows from operating activities during the first nine months of 1999
increased by $32,084,000 as compared to the comparable period in 1998 due
primarily to the receipt of income tax refunds and the timing of vendor
payments.
The Company expects to spend approximately $10,000,000 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.
The Company believes that cash flows from operations, including potential
improvements in operations as a result of its various integration and
restructuring efforts, planned sales of certain properties and certain non-core
businesses, and available borrowing capacity will provide sufficient cash flows
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 been reviewing 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.
<PAGE> 16
Internally Developed Software and IT Systems: The Company's Digital Link(R)
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
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. The Company has applied and
successfully tested the vendor modifications and is in the process of
implementing the modifications at customer locations. Based on additional
testing, the Company is not aware of any other Y2K issues related to the Digital
Link software. 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 been reviewing its prepress
manufacturing processes and the equipment and software used in such processes,
including those processes and equipment used at the operations obtained as part
of the Wace acquisition. 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, most mission-critical systems have been assessed and only minor
Y2K-related issues have been identified in the prepress manufacturing processes.
As part of its plan, the Company is identifying, categorizing, and assessing all
of its manufacturing process equipment and software and is in the process of
repairing or replacing any non-compliant systems identified in its review. The
Company intends to achieve Y2K compliance by the end of the year. In the event
that certain systems are not compliant by the end of the year, the Company's
contingency plan is to use other systems within a facility that are compliant
or, if necessary, transfer portions of the work to facilities with compliant
systems. Based on its review, the Company believes that sufficient systems are
Y2K-compliant to be able to rely on the contingency plan.
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
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 intend to review the Y2K compliance status of
printers.
Based on a review of the systems used in the publishing operations acquired
in the Devon merger, the Company has not identified any significant Y2K-related
issues in mission critical systems.
The Company has reviewed the Y2K Issues involving the broadcast media
distribution manufacturing process and expects to make the necessary
modifications to achieve Y2K compliance at its various locations by the end of
the year. In the event all necessary modifications are not completed by the end
of the year, the Company's contingency plan is to transfer work to locations
with compliant systems.
Financial and Other Administrative IT Systems: The Company has been
replacing the various modules that comprise its financial and administrative
systems that are not Y2K compliant. The general ledger and accounts payable
modules of the Company's various systems are Y2K compliant. The accounts
receivable modules are compliant, except at certain operations acquired as part
<PAGE> 17
of the Devon merger. The Company is currently implementing the accounts
receivable module of its new financial system at these locations and expects to
be completed before the end of the year. In the event delays are encountered
and implementation of the Y2K-compliant systems is not completed, the Company's
contingency plan is to implement a stand-alone accounts receivable package that
is Y2K compliant but that is not integrated with the rest of the Company's
financial system modules.
The Company has been replacing its job costing and billing systems at those
locations that have non-Y2K compliant systems. The Company is currently in the
process of implementing a replacement system for certain operations currently
using job costing systems that are not 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 work performed on specific
jobs and to properly manage costs at these locations. The Company is currently
implementing a Y2K compliant billing system at certain locations that do not
have compliant systems. A similar system has been implemented at certain Wace
operations to replace non-compliant portions of those systems. In the event the
Company cannot implement a Y2K-compliant job costing or billing system at these
locations, the Company plans to rely on processes that are not electronically
integrated to provide the necessary information. Reliance on such
non-electronically integrated systems may result in higher administrative costs.
Non-IT Systems: The Company has been performing a cursory review 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'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 recognize the Y2K
issue and is taking the necessary steps to mitigate risks. 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 its credit facilities. 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.
There can be no assurance that the Company will not uncover additional Y2K
Issues as it proceeds with its reviews. Failure to attain Y2K compliance may
have an adverse effect on the Company's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's primary exposure to market risk is interest rate risk. The
Company had $308,939,000 outstanding under its credit facilities at September
30, 1999. Interest rates on funds borrowed under the Company's credit facilities
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 September 30, 1999. A change in interest rates of 1.0% would
result in an annual change in income before taxes of $2,339,000 based on the
outstanding balance under the Company's credit facilities and the notional
amounts of the interest rate swap agreements at September 30, 1999.
<PAGE> 18
PART II. - OTHER INFORMATION
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).
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).
<PAGE> 19
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).
10.6(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).
<PAGE> 20
10.6(c) Employment Agreement, effective as of May 24, 1999,
between the Company and Derek Ashley (Incorporated by
reference to Exhibit No. 10.6 (c) 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,
1999).
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 Exchange Act
of 1934, as amended, for the quarterly period ended
September 30, 1998).
<PAGE> 21
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 Applied Graphics Technologies, Inc., 1998 Incentive
Compensation Plan, as Amended and Restated
(Incorporated by reference to Exhibit No. 10.8
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, 1999).
10.9(a) 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 99.2 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).
10.9(b) Amendment No. 1, dated as of June 2, 1999, to the
Amended and Restated Credit Agreement among Applied
Graphics Technologies, Inc., Other Institutional
Lenders as Initial Lenders, and Fleet Bank, 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, 1999).
10.9(c) Amendment No. 2, dated July 28, 1999, to the Amended
and Restated Credit Agreement among Applied Graphics
Technologies, Inc., Other Institutional Lenders as
Initial Lenders, and Fleet Bank, N.A.
27 Financial Data Schedule (EDGAR filing only).
Note: Long-term debt instruments of the Company and its consolidated
subsidiaries under which the total amount of securities
authorized do not exceed 10% of the total assets of the Company
and its subsidiaries on a consolidated basis will be furnished to
the Commission upon request.
(b) The Registrant filed the following reports on Form 8-K during the
quarter ended September 30, 1999:
Current Report on Form 8-K/A filed on July 13, 1999, regarding the
disposition of Wace's operations in France.
Current Report on Form 8-K/A filed on August 4, 1999, amending the
Current Report on Form 8-K and the Current Report on Form 8-K/A dated
June 4, 1999, and July 13, 1999, respectively, for purposes of
providing the financial statements of Wace Group Plc and the unaudited
pro forma financial information relating to the acquisition of Wace and
the disposition of Wace's operations in France.
<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 15, 1999
Martin D. Krall
Executive Vice President,
Chief Legal Officer, and Secretary
(Duly authorized officer)
/s/ Louis Salamone, Jr.
--------------------------------
Date: November 15, 1999
Louis Salamone, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 1
Exhibit 10.9(c)
AMENDMENT NO. 2 TO CREDIT AGREEMENT
-----------------------------------
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "SECOND AMENDMENT") is
entered into this 28th day of July, 1999, among:
APPLIED GRAPHICS TECHNOLOGIES, INC., a Delaware corporation
(hereinafter referred to as the "BORROWER");
The banks, financial institutions and other institutional lenders from
time to time party to the Credit Agreement (as defined herein) (each a "LENDER"
and, collectively, the "LENDERS"); and
FLEET BANK, N.A., a national banking association, as administrative
agent for the Lenders (in such capacity, together with its successors in such
capacity, the "ADMINISTRATIVE AGENT");
RECITALS
--------
WHEREAS:
(A) The Borrower has entered into a certain Amended and Restated Credit
Agreement dated as of March 10, 1999 (as amended pursuant to a certain Amendment
No. 1 to Credit Agreement dated June 2, 1999, and as it may hereafter from time
to time be further amended, modified, supplemented, or restated, the "Credit
Agreement"); and
(B) The Borrower and the Lenders have agreed to amend the definition of
"Required Lenders" contained in the Credit Agreement as hereinafter set forth;
NOW, THEREFORE, in consideration of the agreements and provisions
contained herein, the parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used but not otherwise defined herein
shall have the meanings ascribed to such terms in the Credit Agreement.
2. AMENDMENT TO CREDIT AGREEMENT. Section 1 (Definitions) of the Credit
Agreement is hereby amended by deleting in its entirety therefrom the definition
of "Required Lenders" set forth therein and substituting the following therefor:
"'REQUIRED LENDERS' means:
(i) at all times that Fleet holds more than 30% of the
aggregate of the Term Loan Commitments and the Revolving Credit
Commitments:
(A) Lenders holding greater than 66-2/3% of the
aggregate of the Term Loan Commitments and the Revolving Credit
Commitments, or
(B) a majority in number of the Lenders (without
regard to the Dollar amount of their Commitments); and
<PAGE> 2
(ii) at all times that Fleet holds 30% or less of the
aggregate of the Term Loan Commitments and the Revolving Credit
Commitments, Lenders holding greater than 50% of the aggregate of the
Term Loan Commitments and the Revolving Credit Commitments,
provided, however, that if any Lender shall be a Defaulting Lender at
such time, there shall be excluded from the determination of Required
Lenders at such time such Lender or the aggregate Term Loan Commitment
and Revolving Credit Commitment of such Lender at such time, as
applicable."
3. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants
to the Lender Parties and the Administrative Agent that: (i) the execution,
delivery and performance by the Borrower of this Second Amendment are within its
organizational powers and have been duly authorized by all necessary corporate
action, (ii) this Second Amendment is the legal, valid and binding obligation of
the Borrower, enforceable against the Borrower in accordance with its terms and
(iii) this Second Amendment and the execution, delivery and performance by the
Borrower thereof does not: (A) contravene the terms of the Borrower's
organizational documents; (B) conflict with or result in any breach or
contravention of, or the creation of any Lien (other than Liens under the Loan
Documents) under, any document evidencing any contractual obligation to which
the Borrower is a party or any order, injunction, writ or decree to which it or
its property is subject; or (C) violate any requirement of law.
4. REFERENCE TO AND EFFECT UPON THE CREDIT AGREEMENT.
4.1 EFFECT. Except as specifically amended hereby, the Credit
Agreement and the other Loan Documents shall remain in full force and effect in
accordance with their terms and are hereby ratified and confirmed.
4.2 NO WAIVER; REFERENCES. The execution, delivery and
effectiveness of this Second Amendment shall not operate as a waiver of any
right, power or remedy of the Administrative Agent or any Lender under the
Credit Agreement, nor constitute a waiver of any provision of the Credit
Agreement, except as specifically set forth herein. Upon the effectiveness of
this Second Amendment, each reference in:
(i) the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of similar import shall mean and be a
reference to the Credit Agreement as amended hereby;
(ii) the other Loan Documents to the Credit Agreement
shall mean and be a reference to the Credit Agreement as amended hereby; and
(iii) the Loan Documents to the Loan Documents shall
be deemed to include this Second Amendment.
5. MISCELLANEOUS.
5.1 HEADINGS. Section headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purposes.
5.2 LAW. THIS SECOND AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.
5.3 SUCCESSORS. This Second Amendment shall be binding upon
the Borrower, the Lender Parties and the Administrative Agent and their
respective successors and assigns, and shall inure to the benefit of the
Borrower, the Lender Parties and the Administrative Agent and the successors and
assigns of the Lender Parties and the Administrative Agent.
24
<PAGE> 3
5.4 EXECUTION IN COUNTERPARTS. This Second Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument.
[Signature Pages to Follow]
25
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed and delivered by an officer thereunto duly authorized
on the date first written above.
APPLIED GRAPHICS TECHNOLOGIES, INC.
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
FLEET BANK, N.A., AS A BANK, AS
ADMINISTRATIVE AGENT, INITIAL ISSUING
BANK AND SWING LINE BANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
FIRST UNION NATIONAL BANK, N.A.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
[Signature Page to Amendment No. 2 to Credit Agreement]
<PAGE> 5
THE CHASE MANHATTAN BANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
THE BANK OF NEW YORK
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
SOVEREIGN BANK
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
MELLON BANK, N.A.
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
SUNTRUST BANK, ATLANTA
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
STATE STREET BANK AND TRUST
COMPANY
By:
--------------------------------------
Name:
--------------------------------------
Title:
-----------------------------------
[Signature Page to Amendment No. 2 to Credit Agreement]
<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, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,373
<SECURITIES> 0
<RECEIVABLES> 168,268
<ALLOWANCES> 17,361
<INVENTORY> 50,035
<CURRENT-ASSETS> 284,598
<PP&E> 168,616
<DEPRECIATION> 45,957
<TOTAL-ASSETS> 947,798
<CURRENT-LIABILITIES> 123,943
<BONDS> 346,772
0
0
<COMMON> 225
<OTHER-SE> 420,616
<TOTAL-LIABILITY-AND-EQUITY> 947,798
<SALES> 444,303
<TOTAL-REVENUES> 444,303
<CGS> 290,207
<TOTAL-COSTS> 290,207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,475
<INCOME-PRETAX> 9,750
<INCOME-TAX> 6,825
<INCOME-CONTINUING> 2,925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,491
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
