RNS Number:8062E
Applied Graphics Technologies Inc
6 June 2001
PART 2
8. SEGMENT INFORMATION
Segment information relating to results of operations for the three months
ended March 31, 2001 and 2000, was as follows:
2001 2000
Revenue:
Content Management Services $ 109,046 $ 131,040
Other operating segments 7,723 13,279
Total $ 116,769 $ 144,319
Operating Income (Loss):
Content Management Services $ 6,680 $ 11,755
Other operating segments (450) 1,996
Total 6,230 13,751
Other business activities (6,894) (7,744)
Amortization of intangibles (3,389) (3,363)
Loss on disposal of property and equipment (28) (225)
Interest expense (5,922) (7,064)
Interest income 203 202
Other income (expense) 1,402 (202)
Consolidated loss before provision for income $ (8,398) $ (4,645)
taxes and minority interest
Segment information relating to the Company's assets as of March 31, 2001, was
as follows:
Total Assets:
Content Management Services $ 610,250
Other operating segments 29,556
Other business activities 26,262
Discontinued operations - net 38,873
Total $ 704,941
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 ability of the
Company to maintain compliance with the financial covenant requirements under
the 1999 Credit Agreement (as defined herein) or to obtain waivers from its
lending institutions in the event such compliance is not maintained; the
advertising market continuing to soften; the timing of completion and the
success of the Company's various restructuring plans and integration efforts;
the ability to consummate the sale of certain properties and non-core
businesses, including the publishing business; the rate and level of capital
expenditures; and the adequacy of the Company's credit facilities and cash
flows to fund cash needs.
The accompanying financial statements for the three months ended March 31,
2000, have been restated to reflect the Company's publishing business as a
discontinued operation. The following discussion and analysis (in thousands of
dollars) should be read in conjunction with the Company's Interim Consolidated
Financial Statements and notes thereto.
Results of Operations
Three months ended March 31, 2001, compared with 2000
Revenues in the first quarter of 2001 were $27,550 lower than in the
comparable period in 2000. Revenues in the 2001 period decreased by $21,994
from content management services, $4,505 from digital services, and $1,051
from broadcast media distribution services. Decreased revenues from content
management services primarily resulted from the softening advertising market,
which adversely impacted the Company's Midwest prepress and creative services
operations as well as from the anticipated reduction in revenues associated
with the sale of the Company's photographic laboratory business and the
closing of its Atlanta prepress facility, both of which occurred subsequent to
the 2000 period. Decreased revenues from digital services primarily resulted
from the sale of the Company's digital portrait systems business in December
2000. Decreased revenues from broadcast media distribution services primarily
resulted from the softening advertising market and from price reductions made
under a long-term contract with a significant customer.
Gross profit decreased $12,099 in the first quarter of 2001 as a result of the
decrease in revenues for the period as discussed above. The gross profit
percentage in the first quarter of 2001 was 29.9% as compared to 32.6% in the
2000 period. This decrease in the gross profit percentage primarily resulted
from reduced margins at the Company's Midwest prepress and creative services
operations as a result of the decrease in revenues discussed above, which
resulted in lower absorption of fixed manufacturing costs, as well as from
reduced margins from broadcast media distribution services as a result of the
price reductions given to a significant customer and reduced margins from
digital services due to the sale of the digital portrait systems business in
December 2000, which had higher margins than the Company's other digital
operations. Such decreases were partially offset by an increase in margins
resulting from the sale of the photographic laboratory business in April 2000,
which had lower margins than the Company's other content management
operations.
Selling, general, and administrative expenses in the first quarter of 2001
were $5,356 lower than in the 2000 period, but as a percent of revenue
increased to 30.4% in the 2001 period from 28.3% in the 2000 period. Selling,
general, and administrative expenses in 2001 and 2000 include charges of $419
and $911, respectively, for nonrestructuring-related employee termination
costs.
Interest expense in the first quarter of 2001 was $1,214 lower than in the
2000 period due primarily to reduced borrowings outstanding under the
Company's primary credit facility (the "1999 Credit Agreement") as well as an
overall reduction in interest rates throughout the 2001 period.
The Company recorded an income tax benefit of $357 in the first quarter of
2001. The benefit recognized was at a lower rate than the statutory rate due
primarily to additional Federal taxes on foreign earnings and the projected
annual permanent items related to nondeductible goodwill and the nondeductible
portion of meals and entertainment expenses.
Revenues from business transacted with affiliates for the three months ended
March 31, 2001 and 2000, totaled $2,708 and $2,759, respectively, representing
2.3% and 1.9%, respectively, of the Company's revenues.
Financial Condition
During the first three months of 2001, the Company repaid $363 of notes and
capital lease obligations, made contingent payments related to acquisitions of
$3,297, and invested $4,364 in facility construction and new equipment. Such
amounts were primarily generated from borrowings under the Company's credit
facilities and cash from operating activities.
Cash flows from operating activities of continuing operations during the first
three months of 2001 decreased by $12,190 as compared to the comparable period
in 2000 due primarily to the timing of vendor payments, the receipt of income
tax refunds in the 2000 period with no such refunds received in 2001, and a
decrease in cash from operating income.
The Company expects to spend approximately $18,000 over the course of the next
twelve months for capital improvements, essentially all of which is for
modernization. The Company intends to finance these expenditures under
operating or capital leases, sale and leaseback arrangements, or with working
capital or borrowings under the 1999 Credit Agreement.
Under the terms of the 1999 Credit Agreement, the Company must comply with
certain financial covenants. In August 2000, the Company's lending
institutions agreed to relax such financial covenant requirements through the
quarterly fiscal period ending June 30, 2001. At March 31, 2001, the Company
was in compliance with all financial covenants. The covenant requirements
revert back to the more restrictive covenant requirements originally contained
in the 1999 Credit Agreement beginning with the quarterly fiscal period ending
September 30, 2001. As previously disclosed, the Company did not anticipate
being able to attain compliance with these more restrictive covenant
requirements. Based on its most recent projections, which have been revised to
take into account current economic and advertising market conditions, the
Company believes it may not be able to remain in compliance with the covenant
requirements currently in effect for the quarterly fiscal period ending June
30, 2001. The Company has commenced discussions with its bank group regarding
waivers of any covenant default and amendments to the financial covenant
requirements that would be required in the event of noncompliance, but there
can be no assurance that the Company will be successful in its efforts.
The Company believes that cash flows from operations, sales of certain
properties and noncore businesses, and available borrowing capacity, subject
to the Company's ability to remain in compliance or obtain a waiver in the
event of noncompliance, if any, with the financial covenants under the 1999
Credit Agreement, will provide sufficient cash flows to fund its cash needs
for the foreseeable future.
On April 10, 2001, the Company's common stock commenced trading on The
American Stock Exchange under the symbol "AGD." At such time, the Company's
common stock ceased trading on the Nasdaq National Market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's primary exposure to market risk is interest rate risk. The
Company had $222,948 outstanding under its primary credit facility at March
31, 2001. Interest rates on funds borrowed under the Company's primary credit
facility vary based on changes to the prime rate or LIBOR. The Company
partially manages its interest rate risk through four 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 four
interest rate swaps totaled $90,000 at March 31, 2001. A change in interest
rates of 1.0% would result in a change in income before taxes of $1,329 based
on the outstanding balance under the Company's primary credit facility and the
notional amounts of the interest rate swap agreements at March 31, 2001.
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).
3.1(c) Second Certificate of Amendment of First Restated Certificate of
Incorporation (Incorporated by reference to Exhibit No. 3.1(c) 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, 2000).
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).
3.2(c) Amendment to Amended and Restated By-Laws of Applied Graphics
Technologies, Inc. (Incorporated by reference to Exhibit No. 3.2(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
September 30, 2000).
4 Specimen Stock Certificate (Incorporated by reference to Exhibit 7
forming part of Registrant's Registration Statement on Form 8-A (File
No. 1-16431) filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, on April 5, 2001).
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)Employment Agreement, effective as of November 30, 2000, between the
Company and Joseph D. Vecchiolla (Incorporated by reference to Exhibit
No. 10.6(a) 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, 2000).
10.6(b)Agreement and General Release, effective June 4, 2000, between the
Company and Louis Salamone, Jr. (Incorporated by reference to Exhibit
No. 10.6 (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, 2000).
10.6 Employment Agreement, effective as of May 24, 1999, between the Company
(c)(i)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 Agreement and General Release, dated December 15, 2000, between the
(c) Company and Derek Ashley (Incorporated by reference to Exhibit No. 10.6(c)
(ii) (ii) 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, 2000).
10.6 Employment Agreement, effective as of April 1, 1996, between the Company
(d) and Scott A. Brownstein (Incorporated by reference to Exhibit No. 10.6
(i) 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 Employment Agreement Extension dated March 23, 1998, between the Company
(d) and Scott Brownstein (Incorporated by reference to Exhibit No. 10.6 (d)
(ii) (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 Separation Agreement, effective December 18, 2000, between the Company and
(d) Scott Brownstein (Incorporated by reference to Exhibit No. 10.6(d)(iii)
(iii) 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,
2000).
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).
10.8 Amendment No. 1, dated as of May 8, 2000, to the Applied Graphics
(a) Technologies, Inc., Amended and Restated 1998 Incentive Compensation Plan
(Incorporated by reference to Exhibit No. 10.8(a) 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, 2000).
10.9 Amended and Restated Credit Agreement, dated as of March 10, 1999, among
(a) Applied Graphics Technologies, Inc., Other Institutional Lenders as
Initial Lenders, and Fleet Bank, N.A. (Incorporated by reference to
Exhibit No. 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 Amendment No. 1, dated as of June 2, 1999, to the Amended and Restated
(b) 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 Amendment No. 2, dated July 28, 1999, to the Amended and Restated Credit
(c) 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(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 September 30, 1999).
10.9 Amendment No. 3, dated as of July 21, 2000, to the Amended and Restated
(d) 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(d) 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, 2000).
10.9 Amendment No. 4, dated as of August 11, 2000, to the Amended and Restated
(e) 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(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 June 30, 2000).
10.10 Consulting Agreement, dated as of March 1, 2001, by and between the
Company and Knollwood Associates, LLC.
b. The Registrant did not file any reports on Form 8-K during the quarter
ended March 31, 2001.
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/ Fred Drasner
Date: May 14, 2001
Fred Drasner
Chairman
(Principal Executive officer)
/s/ Joseph D. Vecchiolla
Date: May 14, 2001
Joseph D. Vecchiolla
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
Exhibit 10.10
CONSULTING AGREEMENT
AGREEMENT made as of the 1st of March, 2001 by and
BETWEEN
a. Knollwood Associates, LLC whose principal place of business is located at
470 Knollwood Road, Ridgewood, New Jersey 07450, hereinafter referred to
as the "Consultant," and
b. Applied Graphics Technologies, Inc., whose principal place of business is
located at 450 West 33rd Street, New York, NY 10001, hereinafter referred
to as the "Company."
WHEREAS, since January 1, 2001 the Company has engaged Consultant to cause
John Dreyer, in addition to the services provided by him as a Director of the
Company, to perform the consulting services detailed in Appendix A attached
hereto, and the Company wishes to continue to retain the services of
Consultant; and
WHEREAS, on February 27, 2001, the Compensation Committee of the Board of
Directors of the Company authorized the Company to enter into an agreement
with Consultant for the provision of such consulting services on the following
terms; and
WHEREAS, Consultant desires to continue to consult with the Chairman, CFO, COO
and senior management of the Company, and to provide such consulting services;
NOW, THEREFORE, it is agreed as follows:
1. Term
This Agreement shall continue in effect until terminated for any reason by
either party on thirty (30) days prior written notice to the other party.
2. Services
During the term, in addition to the services provided by John Dreyer as a
Director of the Company, Consultant agrees to cause John Dreyer to
perform, at such times and places as the Company shall reasonably request,
the consulting services set forth on Appendix A. Consultant shall have no
authority to bind the Company, its officers or any other members of the
Company in any transactions or communications nor shall Consultant make
claim to do so.
3. Confidentiality
The Consultant shall not, during the continuance of this Agreement or
after the termination thereof, disclose any of the secrets, confidential
information or any financial information relating to the Company. Unless
specifically stated herein, the performance of services by the Consultant
for the Company shall not preclude the Consultant from working for any
other Company or entity.
4. Compensation
a. In consideration of the services to be provided by the Consultant
hereunder, commencing April 1, 2001, the Company shall pay the Consultant
$12,500 per month in arrears. In addition, in consideration for the
services rendered by the Consultant from January 1, 2001 to March 31,
2001, the Consultant shall receive a lump sum payment of $37,500.
b. In further consideration of the services to be provided hereunder, on
February 28, 2001, the Company granted John Dreyer options to purchase
50,000 shares of the Company's common stock at an exercise price of $3.50
per share. The options shall vest over a two-year period commencing
February 28, 2001, and shall vest in 24 equal monthly installments.
Vesting shall continue for so long as the Agreement remains in effect and
shall immediately cease upon termination of this Agreement. All other
terms of the options shall be determined in accordance with the terms of
the stock option agreement entered into between the Company and Mr.
Dreyer.
c. The Company shall reimburse the Consultant per diem for any reasonable
out-of-pocket expenses incurred by the Consultant pursuant to the terms of
this Agreement. The Consultant shall submit itemized statements of
services performed and expenses incurred during any particular month by
the fifth (5th) day of the next succeeding month.
5. Liability
With regard to the services to be performed by the Consultant pursuant to
the terms of this Agreement, the Consultant shall not be liable to the
Company, or to anyone who may claim any right due to any relationship with
the Company, for any acts or omissions in the performance of services on
the part of Consultant, except when said acts or omissions of the
Consultant are due to willful misconduct or gross negligence. The Company
shall hold the Consultant free and harmless from any obligations, costs,
claims, judgements, attorneys' fees, and attachments arising from or
growing out of the services rendered to the Company pursuant to the terms
of this Agreement or in any way connected with the rendering of services,
including any costs and/or reasonable attorneys' fees related to the
defense of any claim or action, other than those claims arising out of
Consultant's gross negligence or willful misconduct in connection with the
performance of the services hereunder.
6. Independent Contractor; Benefits
The Consultant shall perform all services hereunder as an independent
contractor and not as an employee or agent of the Company. The Consultant
shall not be entitled to any benefits, coverages or privileges, including,
without limitation, social security, unemployment, medical or pension
benefits, made available to employees of the Company.
IN WITNESS WHEREOF, the parties have hereunto executed this Agreement as of
the 1st day of March, 2001.
APPLIED GRAPHICS TECHNOLOGIES, INC. KNOLLWOOD ASSOCIATES, LLC
By: /s/ Martin D. Krall By: /s/ John Dreyer
Martin D. Krall John Dreyer
APPENDIX A
CONSULTANT SERVICES
* Major Account Sales and Strategic Selling
* Such other matters as the Company may reasonably request
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