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RNS Number:7148I
Applied Graphics Technologies Inc
17 August 2001
PART 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 June 30, 2001
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 1-16431
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 July
31, 2001, was 9,067,565.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars, except per-share amounts)
June December
30, 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 34,357 $ 6,406
Marketable securities 1,677
Trade accounts receivable (net of
allowances of $5,814 in 2001
and $5,100 in 2000) 87,712 100,394
Due from affiliates 5,113 5,084
Inventory 20,472 21,842
Prepaid expenses 6,658 7,248
Deferred income taxes 12,933 18,618
Other current assets 5,509 4,905
Net assets held for sale 37,567
Net current assets of discontinued 44,790
operations
Total current assets 210,321 210,964
Property, plant, and equipment - net 60,802 63,789
Goodwill and other intangible assets (net of
accumulated amortization
of $38,103 in 2001 and $31,325 in 2000) 418,590 424,031
Deferred income taxes 1,557
Other assets 22,476 23,449
Total assets $ 713,746 $ 722,233
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 61,713 $ 87,344
Current portion of long-term debt and 1,469 18,204
obligations under capital leases
Due to affiliates 708 1,115
Other current liabilities 21,853 21,626
Total current liabilities 85,743 128,289
Long-term debt 258,259 204,080
Subordinated notes 26,122 27,745
Obligations under capital leases 1,154 1,540
Deferred income taxes 3,896
Other liabilities 12,438 11,395
Total liabilities 383,716 376,945
Commitments and contingencies
Minority interest - Redeemable Preference 37,426 36,584
Shares issued by subsidiary
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: 9,067,565 in 91 90
2001 and 9,033,603 in 2000)
Additional paid-in capital 389,459 388,704
Accumulated other comprehensive income (313) 522
(loss)
Retained deficit (96,633) (80,612)
Total stockholders' equity 292,604 308,704
Total liabilities and $ 713,746 $ 722,233
stockholders' equity
See Notes to Interim Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per-share amounts)
For the Six Months Ended For the Three Months
Ended
June 30, June 30,
2001 2000 2001 2000
Revenues $ 234,829 $ 291,342 $ 118,060 $ 147,023
Cost of 163,962 193,894 82,126 96,607
revenues
Gross profit 70,867 97,448 35,934 50,416
Selling,
general, and 69,979 81,741 34,449 40,855
administrative
expenses
Amortization 6,778 6,744 3,389 3,381
of intangibles
Loss (gain) on 1,976 (47) 1,948 (272)
disposal of
property and
equipment
Restructuring 1,167 611 1,167 611
charges
Impairment 97,766 1,241 97,766 1,241
charges
Total 177,666 90,290 138,719 45,816
operating
expenses
Operating (106,799) 7,158 (102,785) 4,600
income (loss)
Interest (11,749) (13,194) (5,760) (5,991)
expense
Interest 337 433 134 231
income
Other income 2,170 (154) 768 48
(expense) - net
Loss from (116,041) (5,757) (107,643) (1,112)
continuing
operations
before provision
for income
taxes and
minority
interest
Provision (2,480) 2,068 (2,123) (69)
(benefit) for
income taxes
Loss from (113,561) (7,825) (105,520) (1,043)
continuing
operations
before minority
interest
Minority (1,186) (1,296) (586) (633)
interest
Loss from (114,747) (9,121) (106,106) (1,676)
continuing
operations
Income (loss) 98,726 (98,383) 98,726 (96,909)
from
discontinued
operations
Net loss (16,021) (107,504) (7,380) (98,585)
Other (835) (1,952) (400) (1,192)
comprehensive
loss
Comprehensive $ (16,856) $ (109,456) $ (7,780) $ (99,777)
loss
Basic loss per
common share:
Loss from $ (12.66) $ (1.01) $ (11.70) $ (0.19)
continuing
operations
Income (loss) 10.89 (10.87) 10.89 (10.71)
from
discontinued
operations
Total $ (1.77) $ (11.88) $ (0.81) $ (10.90)
Diluted loss
per common
share:
Loss from $ (12.66) $ (1.01) $ (11.70) $ (0.19)
continuing
operations
Income (loss) 10.89 (10.87) 10.89 (10.71)
from
discontinued
operations
Total $ (1.77) $ (11.88) $ (0.81) $ (10.90)
Weighted
average number
of common
shares:
Basic 9,068 9,046 9,068 9,046
Diluted 9,068 9,046 9,068 9,046
See Notes to Interim Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
For the Six Months
Ended
June 30,
2001 2000
Cash flows from operating activities:
Net loss $ (16,021) $ (107,504)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 17,563 19,578
Deferred taxes (3,757) 462
Loss (gain) on disposal of property and 1,976 (272)
equipment
Provision for bad debts 1,360 854
Impairment charges 97,766 1,241
Loss (income) from discontinued (98,726) 98,383
operations
Other (17) 173
Changes in Operating Assets and Liabilities,
net of effects of acquisitions
and dispositions:
Trade accounts receivable 9,326 2,569
Due from/to affiliates (436) (482)
Inventory 1,126 (3,536)
Other assets (517) 4,844
Accounts payable and accrued expenses (15,949) (8,756)
Other liabilities 2,580 (962)
Net cash provided by operating activities 6,425 8,577
of discontinued operations
Net cash provided by operating activities 2,699 15,169
Cash flows from investing activities:
Property, plant, and equipment (9,218) (9,978)
expenditures
Software expenditures (585) (1,113)
Proceeds from sale of available-for-sale 1,675
securities
Proceeds from sale of property and 14,039
equipment
Proceeds from sale of a business 11,693
Other (3,313) (4,217)
Net cash used in investing activities of (351) (706)
discontinued operations
Net cash provided by (used in) investing (11,792) 9,718
activities
Cash flows from financing activities:
Repayments of notes and capital lease (752) (1,450)
obligations
Repayments of term loans (6,240) (33,397)
Borrowings (repayments) under revolving 44,045 (4,125)
credit line - net
Net cash used in financing activities of (51) (87)
discontinued operations
Net cash provided by (used in) financing 37,002 (39,059)
activities
Net increase (decrease) in cash and cash 27,909 (14,172)
equivalents
Effect of exchange rate changes on cash and 42 (435)
cash equivalents
Cash and cash equivalents at beginning of 6,406 23,218
period
Cash and cash equivalents at end of period $ 34,357 $ 8,611
See Notes to Interim Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands of dollars)
For the six months ended June 30, 2001
Common Additional Accumulated Retained
stock paid-in other deficit
capital comprehensive
income (loss)
Balance at $ 90 $ 388,704 $ 522 $ (80,612)
January 1, 2001
Issuance of 1 719
33,962 common
shares as
additional
consideration in
connection with
prior period
acquisition
Compensation 36
cost of stock
options issued
to non-employees
Cumulative (15)
effect of change
in accounting
principle
Effective (742)
portion of
change in fair
value of
interest rate
swap agreements
Unrealized gain 414
from foreign
currency
translation
adjustments
Reclassification (492)
adjustment for
losses
realized in
net income
Net loss (16,021)
Balance at June $ 91 $ 389,459 $(313) $ (96,633)
30, 2001
See Notes to Interim Consolidated Financial Statements
APPLIED GRAPHICS TECHNOLOGIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Applied Graphics Technologies, Inc. and its subsidiaries (the "Company"),
which have been prepared in accordance with the instructions to Form 10-Q and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles, should be read in
conjunction with the notes to consolidated financial statements contained in
the Company's 2000 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.
All references to the number of shares and per-share amounts in the
Consolidated Statement of Operations for the six and three months ended June
30, 2000, have been adjusted to reflect the two-for-five reverse stock split
effected on December 5, 2000. Certain prior-period amounts in the
accompanying financial statements have been reclassified to conform with the
2001 presentation.
2. DISCONTINUED OPERATIONS AND NET ASSETS HELD FOR SALE
In connection with the Company's adoption of a plan in June 2000 to sell its
publishing business, the results of operations of that business were reflected
as a discontinued operation in the Company's financial statements. At such
time, the Company solicited bids and entered into negotiations with a
potential buyer. Such negotiations ceased after the Company believed it was
no longer in its best interest to pursue the proposed transaction. The
Company continued to pursue its plan to sell the publishing business, and in
2001 it retained a new investment banking firm and distributed an updated
offering memorandum. The Company has received non-binding indications of
interest from several parties, certain of which have commenced due diligence.
However, as of June 30, 2001, one year from the measurement date, the Company
had not reached definitive terms with a potential buyer. Accordingly, the net
assets of the publishing business previously reported as a discontinued
operation were reclassified as "Net assets held for sale" in the Company's
Consolidated Balance Sheet at June 30, 2001.
The results of operations of the publishing business for the six and three
months ended June 30, 2001 and 2000, and the estimated loss on disposal and
the subsequent reversal of the loss on disposal, are presented as Discontinued
Operations in the accompanying Consolidated Statements of Operations as
follows:
For the six months For the three months
ended ended
June 30, June 30,
2001 2000 2001 2000
Revenues $ 36,007 $ 36,361 $ 17,578 $ 17,955
Income (loss) from $ 1,598 $ (3,134) $ 776 $ (1,663)
operations
before income taxes
Provision (benefit) 868 7 (150) 4
equivalent to
income taxes
Income (loss) from 730 (3,141) 926 (1,667)
operations
Reversal of (loss on) 97,996 (95,242) 97,800 (95,242)
disposal
Income (loss) from $ 98,726 $ (98,383) $ 98,726 $ (96,909)
discontinued operations
The results of operations for the six and three months ended June 30, 2001,
include income from discontinued operations for the reversal of the remaining
estimated accrued loss on disposal of the publishing business originally
recognized in the second quarter of 2000. The results of operations of the
publishing business include an allocation of interest expense of $646 and
$2,950 for the six months ended June 30, 2001 and 2000, respectively, and $325
and $1,321 for the three months ended June 30, 2001 and 2000, respectively.
The allocated interest expense consisted solely of the interest expense on the
Company's borrowings under its credit facility (the "1999 Credit Agreement"),
which represents the interest expense not directly attributable to the
Company's other operations. Interest expense was allocated based on the ratio
of the net assets of the discontinued operation to the sum of the consolidated
net assets of the Company and the outstanding borrowings under the 1999 Credit
Agreement.
Upon the reclassification of the publishing business to "Net assets held for
sale," the Company recognized an impairment charge of $97,766 in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires assets held for sale to be valued at
the lower of carrying amount or fair value less estimated costs to sell. The
fair value of the publishing business was estimated based on the recently
received non-binding indications of interest. Commencing July 1, 2001, the
assets of the publishing business will not be depreciated and its results of
operations will be included as part of continuing operations.
The results of operations and the cash flows of the publishing business
include amounts for selected items as follows:
For the six months For the three months
ended ended
June 30, June 30,
2001 2000 2001 2000
Income (loss) from $ 1,598 $ (3,134) $ 776 $ (1,663)
operations before
income tax
Interest expense $ 707 $ 3,026 $ 355 $ 1,359
Interest income $ 73 $ 68 $ 35 $ 34
Depreciation and $ 734 $ 2,150 $ 358 $ 1,080
amortization expense
Loss on disposal of $ 6 $ 8 $ 1 $ 9
property and equipment
Property, plant, and $ 351 $ 706 $ 165 $ 361
equipment expenditures
Repayments of notes and $ 51 $ 87 $ 26 $ 57
capital lease
obligations
The net assets of discontinued operations include $312 of long-term debt and
obligations under capital leases, inclusive of the current portion, at June
30, 2001.
3. RESTRUCTURING
In June 2001, the Company initiated and completed a plan (the "2001 Second
Quarter Plan") to consolidate certain of its content management facilities in
Chicago. As part of the 2001 Second Quarter Plan, the Company terminated
certain employees and consolidated the work previously performed at three
facilities into a single facility. The results of operations for the six and
three months ended June 30, 2001, include a charge of $1,167 for the 2001
Second Quarter Plan, which consisted of $614 for facility closure costs and
$553 for employee termination costs for 50 employees. In addition, the
Company completed various restructuring plans in prior periods (the "1998
Second Quarter Plan," the "1998 Fourth Quarter Plan," the "1999 Third Quarter
Plan," the "1999 Fourth Quarter Plan," and the "2000 Second Quarter Plan,"
respectively). The amounts included in "Other current liabilities" in the
accompanying Consolidated Balance Sheets as of June 30, 2001, for the future
costs of the various restructuring plans, primarily future rental obligations
for abandoned property and equipment, and the amounts charged against the
respective restructuring liabilities during the six months ended June 30,
2001, were as follows:
1998 1998 1999 1999 2000 2001
Second Fourth Third Fourth Second Second
Quarter Quarter Quarter Quarter Quarter Quarter
Plan Plan Plan Plan Plan Plan
Balance at $ 120 $ 249 $ 7 $ 407 $ 336
January 1,
2001
Restructuring $ 1,167
charge
Facility (20) (91) (48)
closure costs
Employee (186)
termination
costs
Abandoned (60) (7) (108)
assets
Balance at $ 60 $ 229 $ - $ 299 $ 245 $ 933
June 30, 2001
The charge against the 2001 Second Quarter Plan's liability for
employee termination costs included 40 employees. The employees terminated
under the 2001 Second Quarter Plan are principally production workers,
salespeople, and administrative support staff.
In addition to the restructuring charge incurred in connection with the 2001
Second Quarter Plan, for the six and three months ended June 30, 2001, the
Company incurred nonrestructuring-related severance charges of $767 and $348,
respectively, and incurred losses on the disposal of property and equipment of
$1,976 and $1,948, respectively. The losses on disposal of property and
equipment primarily consisted of equipment disposed of in connection with the
2001 Second Quarter Plan and other integration efforts at the Company's
Midwest operations.
The Company is currently performing an overall review of its various
operations in an effort to identify additional operating efficiencies and
synergies and, as a result, may incur additional restructuring charges. The
Company does not anticipate any material adverse effect on its future results
of operations from the various restructuring plans.
4. INVENTORY
The components of inventory were as follows:
June 30, December 31,
2001 2000
Work-in-process $ 18,063 $ 19,089
Raw materials 2,409 2,753
Total $ 20,472 $ 21,842
5. LONG-TERM DEBT
In July 2001, the Company entered into an amendment to the 1999 Credit
Agreement (the "Fifth Amendment") that modified all of the financial covenant
requirements to be less restrictive than previously required for the quarterly
fiscal periods through December 31, 2002, removed the minimum net worth
covenant requirement, and established a minimum cumulative EBITDA covenant.
If the Company does not satisfy such minimum cumulative EBITDA covenant for
any non-quarter month end, the Company's short-term borrowing availability
would be limited until such time as the Company is in compliance with the
covenant, but such failure would not constitute an event of default. The
terms of the Fifth Amendment also accelerated the maturity to January 2003,
deferred scheduled principal payments until July 2002, and increased interest
rates on borrowings by 50 basis points. In addition, with respect to the last
$30,000 of availability under the revolving line of credit (the "Revolver"),
the Company will be limited to borrowing an amount equal to a percentage of
certain trade receivables. The first $51,000 of availability under the
Revolver is not subject to such potential limitation. At June 30, 2001, there
would have been no limitation on the amounts the Company could borrow under
the Revolver. Furthermore, the Company agreed to attempt to raise $50,000 to
be used to repay borrowings under the 1999 Credit Agreement. The Fifth
Amendment contains a number of deadlines by which the Company must satisfy
certain milestones in connection with raising such amount, the earliest of
which is October 31, 2001. For each deadline missed, the Company will be
required to either pay additional fees or issue warrants to its lenders to
purchase shares representing a maximum of 10% of the then outstanding common
stock or, until such time as the Company satisfies each requirement, incur an
increase in interest rates on borrowings of a maximum of 200 basis points.
The Company incurred bank fees and expenses of approximately $2,500 in
connection with the Fifth Amendment.
The principal payments on long-term debt, reflecting the modified principal
payment schedule of the Fifth Amendment, including the deferral of $22,188 of
principal payments that otherwise would have been classified as a current
liability, are due as follows:
2001 $ 491
2002 14,009
2003 243,381
2004 900
Total 258,781
Less current portion 522
Total long-term debt $ 258,259
As a result of the substantial modifications to the principal payment
schedule resulting from the Fifth Amendment, the Company's financial statements
will reflect an extinguishment of old debt and the incurrence of new debt.
Accordingly, the Company will recognize a loss on extinguishment in the third
quarter of 2001 of approximately $3,500, net of taxes of approximately of
$2,450, as an extraordinary item.
Based upon the modified financial covenants contained in the Fifth Amendment,
the Company was in compliance with all covenants at June 30, 2001. Had the
Company not entered into the Fifth Amendment, the Company would not have been
in compliance with the financial covenants. There can be no assurance that
the Company will be able to maintain compliance with the amended covenant
requirements in future periods.
6. DERIVATIVES
In accordance with the terms of the 1999 Credit Agreement, the Company entered
into four interest rate swap agreements with an aggregate notional amount of
$90,000, two of which expire in 2001 (the "2001 Swaps") and two of which
expire in 2003 (the "2003 Swaps") (collectively, the "Swaps"). Under the
Swaps, the Company pays a fixed rate on a quarterly basis and is paid a
floating rate based on the three-month LIBOR in effect at the beginning of
each quarterly payment period. Through December 31, 2000, the Company
accounted for the Swaps as hedges against the variable interest rate component
of the 1999 Credit Agreement.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities (an amendment of FASB Statement No.
133)." SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and for hedging activities, and requires
that entities measure derivative instruments at fair value and recognize those
instruments as either assets or liabilities in the statement of financial
position. The accounting for the change in fair value of a derivative
instrument depends on the intended use of the instrument. In accordance with
the provisions of SFAS No. 133, the Company designated the Swaps as cash flow
hedging instruments of the variable interest rate component of the 1999 Credit
Agreement. Upon the adoption of SFAS No. 133, the fair value of the Swaps, a
net loss of $26, was recognized in "Other noncurrent liabilities" and
reflected, net of tax, as a cumulative effect of a change in accounting
principle in "Other comprehensive income (loss)."
At June 30, 2001, the fair value of the Swaps was a net loss of $1,311,
resulting in a loss of $1,284 for the six months ended June 30, 2001, and
income of $60 for the three months ended June 30, 2001. For the six and three
months ended June 30, 2001, the Company recognized expense of $17 and income
of $236, respectively, as a component of interest expense in the Consolidated
Statement of Operations, representing the ineffectiveness of the Swaps during
the periods. For the six and three months ended June 30, 2001, the Company
also recognized pretax losses of $1,267 and $176, respectively, as a component
of "Other comprehensive income (loss)." During the six and three months ended
June 30, 2001, the Company recognized a reduction of interest expense of $30
and $15, respectively, relating to the reclassification into earnings of the
cumulative effect recorded in "Other comprehensive income (loss)" upon the
adoption of SFAS No. 133.
As a result of the accelerated maturity of the 1999 Credit Agreement in
accordance with the terms of the Fifth Amendment, the 2003 Swaps will no
longer qualify for hedge accounting. Accordingly, the loss in "Accumulated
other comprehensive income (loss)" pertaining to the 2003 Swaps on the
effective date of the Fifth Amendment will be reclassified into earnings over
the remaining term of the 1999 Credit Agreement, and all future changes in
fair value of the 2003 Swaps will be included as a component of interest
expense in the current period. The 2001 Swaps will continue to qualify for
hedge accounting. Were the Company to unwind either of the 2001 Swaps, the
gain or loss in "Accumulated other comprehensive income (loss)" associated
with such swap agreement would be reclassified into earnings over the original
term of that swap agreement. The Company expects $561 of the loss in "
Accumulated other comprehensive income (loss)" to be reclassified into
earnings in the next twelve months.
The Financial Accounting Standards Board continues to discuss issues and
release definitive guidance pertaining to SFAS No. 133, some of which could
cause the 2001 Swaps to no longer qualify for hedge accounting. In such
event, any gain or loss in "Accumulated other comprehensive income (loss)"
associated with the 2001 Swaps would be reclassified into earnings over the
original term of the 2001 Swaps, and all future changes in fair value of the
2001 Swaps would be included as a component of interest expense in the current
period.
7. RELATED PARTY TRANSACTIONS
Sales to, purchases from, and administrative charges incurred with
related parties during the six and three months ended June 30, 2001 and 2000,
were as follows:
Six months ended June Three months ended June
30, 30,
2001 2000 2001 2000
Affiliate $ 5,084 $ 5,493 $ 2,376 $ 2,734
sales
Affiliate $ 48 $ 278 $ 24 $ 161
purchases
Administrative $ 1,061 $ 734 $ 525 $ 419
charges
Administrative charges include charges for certain legal, administrative, 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 six months ended June
30, 2001 and 2000, were as follows:
2001 2000
Interest paid $ 11,465 $ 15,145
Income taxes paid $ 2,462 $ 1,341
Noncash investing and financing activities for the six months ended
June 30, 2001 and 2000, were as follows:
2001 2000
Issuance of common stock as additional $ 720 $ 2,000
consideration in connection with prior period
acquisitions
Reduction of goodwill from amortization of excess $ 72 $ 98
tax deductible goodwill
Fair value of stock options issued to $ 35
non-employees
Exchange of Preference Shares for subordinated $ 68
notes
9. SEGMENT INFORMATION
Segment information relating to results of continuing operations for the six
and three months ended June 30, 2001 and 2000, was as follows:
Six months ended Three months ended
June 30, June 30,
2001 2000 2001 2000
Revenue:
Content Management $ 219,703 $ 263,465 $ 110,657 $ 132,426
Services
Other operating segments 15,126 27,877 7,403 14,597
Total $ 234,829 $ 291,342 $ 118,060 $ 147,023
Operating Income (Loss):
Content Management $ 16,144 $ 28,434 $ 9,464 $ 16,556
Services
Other operating segments (767) 3,602 (316) 1,606
Total 15,377 32,036 9,148 18,162
Other business (14,581) (16,579) (7,688) (8,712)
activities
Amortization of (6,778) (6,744) (3,389) (3,381)
intangibles
Restructuring charges (1,167) (611) (1,167) (611)
Gain (loss) on disposal (1,976) 47 (1,948) 272
of fixed assets
Impairment charges (97,766) (1,241) (97,766) (1,241)
Interest expense (11,657) (12,944) (5,735) (5,880)
Interest income 337 433 134 231
Other income (expense) 2,170 (154) 768 48
Consolidated loss from $ (116,041) $ (5,757) $ (107,643) $ (1,112)
continuing
operations before
provision for
income taxes and
minority interest
Segment information relating to the Company's assets as of June 30, 2001, was
as follows:
Total Assets:
Content Management Services $ 625,092
Other operating segments 27,782
Other business activities 23,305
Net assets held for sale 37,567
Total $ 713,746
The net assets held for sale at June 30, 2001, relate entirely to the
Company's publishing business that was previously reported as a discontinued
operation (see Note 2 to the Interim Consolidated Financial Statements).
10. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," was issued in June 2001, and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 establishes accounting
and reporting standards for acquired goodwill and other intangible assets, and
supercedes Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets." Under SFAS No. 142, acquired goodwill and other intangible assets
without finite useful lives will no longer be amortized over an estimated
useful life, but instead will be subject to an annual impairment test. SFAS
No. 142 provides specific guidance for such impairment tests. Intangible
assets with finite useful lives will continue to be amortized over their
useful lives. Any impairment charge resulting from the initial adoption of
SFAS No. 142 will be accounted for as a cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." Impairment charges subsequent to the initial adoption of SFAS No.
142 will be reflected as a component of income from continuing operations.
The calculation of the impairment charge will be based on valuations at
January 1, 2002, and will be impacted by many factors, including the overall
state of the economy. Based on preliminary analyses at June 30, 2001, the
Company estimates that it will incur an impairment charge in the range of
$300,000 to $350,000 upon the initial adoption of SFAS No. 142, which would
exceed the book value of the Company's shareholders' equity. The actual
impairment incurred could differ from this range due to a change in one or
more of the factors that impact the valuations.
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); 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 ability to raise funds to repay borrowings under
the 1999 Credit Agreement by certain stated deadlines; the rate and level of
capital expenditures; and the adequacy of the Company's credit facilities and
cash flows to fund cash needs.
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
Six months ended June 30, 2001, compared with 2000
Revenues in the first six months of 2001 were $56,513 lower than in the
comparable period in 2000. Revenues in the 2001 period decreased by $43,762
from content management services, $9,842 from digital services, and $2,909
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, the loss of a low-margin customer at the Company's West Coast
operations, and the anticipated reduction in revenues associated with both the
sale of the Company's photographic laboratory business and the closing of one
of its Atlanta prepress facilities, the results of which are included in the
2000 period. Decreased revenues from digital services primarily resulted from
the sale of the Company's digital portrait systems business in December 2000
and a decrease in revenues resulting from the continued contraction of
Internet-related business. 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 $26,581 in the first six months of 2001 as a result of
the decrease in revenues for the period as discussed above. The gross profit
percentage in the first six months of 2001 was 30.2% as compared to 33.4% 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 six months of 2001
were $11,762 lower than in the 2000 period, but as a percent of revenue
increased to 29.8% in the 2001 period from 28.1% in the 2000 period. Selling,
general, and administrative expenses in 2001 include charges of $767 for
nonrestructuring-related employee termination costs and $1,174 for consultants
retained to assist the Company with its restructuring and integration efforts.
Selling, general, and administrative expenses in 2000 include a charge of
$1,732 for non-restructuring-related employee termination costs.
The results of operations for the six months ended June 30, 2001,
include a restructuring charge of $1,167 related to the closing of certain of
the Company's content management facilities in Chicago and the consolidation
of those operations into a single facility (the "2001 Second Quarter Plan").
The charge for the 2001 Second Quarter Plan consisted of $614 for facility
closure costs and $553 for employee termination costs for 50 employees.
The loss on disposal of property and equipment was $1,976 for the six
months ended June 30, 2001. The loss included $654 resulting from equipment
disposed of in connection with the 2001 Second Quarter Plan and $1,030
resulting from integration efforts at the Company's other Midwest content
management facilities.
At June 30, 2001, the Company reclassified the net assets of its
publishing business that were previously reported as a discontinued operation
to "Net assets held for sale" in its Consolidated Balance Sheet. In
connection with this reclassification, for the six months ended June 30, 2001,
the Company reversed the estimated loss on disposal of the publishing
business, resulting in income from discontinued operations of $98,726, and
incurred an impairment charge of $97,766 relating to the write down of the net
assets of the publishing business to their fair value less estimated costs to
sell.
Interest expense in the first six months of 2001 was $1,445 lower than
in the 2000 period due primarily to the reduced borrowings outstanding under
the Company's 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 $2,480 for the first six months
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 six months ended
June 30, 2001 and 2000, totaled $5,084 and $5,493, respectively, representing
2.2% and 1.9%, respectively, of the Company's revenues.
Three months ended June 30, 2001, compared with 2000
Revenues in the second quarter of 2001 were $28,963 lower than in the
comparable period in 2000. Revenues in the 2001 period decreased by $21,769
from content management services, $5,336 from digital services, and $1,858
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, the loss of a low-margin customer at the Company's West Coast
operations, and the anticipated reduction in revenues associated with both the
sale of the Company's photographic laboratory business and the closing of one
of its Atlanta prepress facilities, the results of which are included in the
2000 period. Decreased revenues from digital services primarily resulted from
the sale of the Company's digital portrait systems business in December 2000
and a decrease in revenues resulting from the continued contraction of
Internet-related business. 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 $14,482 in the second quarter of 2001 as a result of
the decrease in revenues for the period as discussed above. The gross profit
percentage in the second quarter of 2001 was 30.4% as compared to 34.3% 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 second quarter of 2001
were $6,406 lower than in the 2000 period, but as a percent of revenue
increased to 29.2% in the 2001 period from 27.8% in the 2000 period. Selling,
general, and administrative expenses in the second quarter of 2001 include
charges of $348 for nonrestructuring-related employee termination costs and
$1,174 for consultants retained to assist the Company with its restructuring
and integration efforts. Selling, general, and administration expenses in the
second quarter of 2000 include a charge of $821 for nonrestructuring-related
employee termination costs. Adjusting for these charges, selling, general,
and administration expenses represented 27.9% and 27.2% of revenues in the
2001 and 2000 periods, respectively.
The results of operations in the second quarter of 2001 include a
restructuring charge of $1,167 related to the 2001 Second Quarter Plan.
The loss on disposal of property and equipment was $1,948 in the
second quarter of 2001. The loss included $654 resulting from equipment
disposed of in connection with the 2001 Second Quarter Plan and $1,030
resulting from nonrestructuring-related integration efforts at the Company's
other Midwest content management facilities.
At June 30, 2001, the Company reclassified the net assets of its
publishing business that were previously reported as a discontinued operation
to "Net assets held for sale" in its Consolidated Balance Sheet. In
connection with this reclassification, for the three months ended June 30,
2001, the Company reversed the estimated loss on disposal of the publishing
business, resulting in income from discontinued operations of $98,726, and
incurred an impairment charge of $97,766 relating to the write down of the net
assets of the publishing business to their fair value less estimated costs to
sell.
The Company recorded an income tax benefit of $2,123 in the second 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 June 30, 2001 and 2000, totaled $2,376 and $2,734, respectively,
representing 2.0% and 1.9%, respectively, of the Company's revenues.
Financial Condition
In July 2001, the Company entered into an amendment to the 1999 Credit
Agreement (the "Fifth Amendment") that modified all of the financial covenant
requirements to be less restrictive than previously required for the quarterly
fiscal periods through December 31, 2002, removed the minimum net worth
covenant requirement, and established a minimum cumulative EBITDA covenant.
If the Company does not satisfy such minimum cumulative EBITDA covenant for
any non-quarter month end, the Company's short-term borrowing availability
would be limited until such time as the Company is in compliance with the
covenant, but such failure would not constitute an event of default. The
terms of the Fifth Amendment also accelerated the maturity to January 2003,
deferred scheduled principal payments until July 2002, and increased interest
rates on borrowings by 50 basis points. In addition, with respect to the last
$30,000 of availability under the revolving line of credit (the "Revolver"),
the Company will be limited to borrowing an amount equal to a percentage of
certain trade receivables. The first $51,000 of availability under the
Revolver is not subject to such potential limitation. At June 30, 2001, there
would have been no limitation on the amounts the Company could borrow under
the Revolver. Furthermore, the Company agreed to attempt to raise $50,000 to
be used to repay borrowings under the 1999 Credit Agreement. The Fifth
Amendment contains a number of deadlines by which the Company must satisfy
certain milestones in connection with raising such amount, the earliest of
which is October 31, 2001. For each deadline missed, the Company will be
required to either pay additional fees or issue warrants to its lenders to
purchase shares representing a maximum of 10% of the then outstanding common
stock or, until such time as the Company satisfies each requirement, incur an
increase in interest rates on borrowings of a maximum of 200 basis points.
The Company incurred bank fees and expenses of approximately $2,500 in
connection with the Fifth Amendment.
As a result of the substantial modifications to the principal payment schedule
resulting from the Fifth Amendment, the Company's financial statements will
reflect an extinguishment of old debt and the incurrence of new debt.
Accordingly, the Company will recognize a loss on extinguishment in the third
quarter of 2001 of approximately $3,500, net of taxes of approximately of
$2,450, as an extraordinary item.
Based upon the modified financial covenants contained in the Fifth Amendment,
the Company was in compliance with all covenants at June 30, 2001. Had the
Company not entered into the Fifth Amendment, the Company would not have been
in compliance with the financial covenants. There can be no assurance that
the Company will be able to maintain compliance with the amended covenant
requirements in future periods.
During the first six months of 2001, the Company repaid $752 of notes and
capital lease obligations, made contingent payments related to acquisitions of
$3,313, and invested $9,803 in facility construction, new equipment, and
software-related projects. Such amounts were primarily generated from
borrowings under the 1999 Credit Agreement and cash from operating activities.
Cash flows from operating activities of continuing operations during
the first six months of 2001 decreased by $10,808 as compared to the
comparable period in 2000 due primarily to a decrease in cash from operating
income and the timing of vendor payments, partially offset by the timing of
collections from customers. Cash generated by discontinued operations during
the first six months of 2001 decreased by $2,152 as compared to the 2000
period.
The Company expects to spend approximately $15,000 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 with working capital
or borrowings under the 1999 Credit Agreement.
The Company believes that the cash flow from operations, including potential
improvements in operations as a result of its various integration and
restructuring efforts, sales of certain properties and noncore businesses, and
available borrowing capacity, subject to the Company's ability to remain in
compliance with the revised financial covenants under the 1999 Credit
Agreement, will provide sufficient cash flows to fund its cash needs through
2002.
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets," was issued in June 2001, and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 establishes accounting
and reporting standards for acquired goodwill and other intangible assets, and
supercedes Accounting Principles Board (APB) Opinion No. 17, "Intangible
Assets." Under SFAS No. 142, acquired goodwill and other intangible assets
without finite useful lives will no longer be amortized over an estimated
useful life, but instead will be subject to an annual impairment test. SFAS
No. 142 provides specific guidance for such impairment tests. Intangible
assets with finite useful lives will continue to be amortized over their
useful lives. Any impairment charge resulting from the initial adoption of
SFAS No. 142 will be accounted for as a cumulative effect of a change in
accounting principle in accordance with APB Opinion No. 20, "Accounting
Changes." Impairment charges subsequent to the initial adoption of SFAS No.
142 will be reflected as a component of income from continuing operations.
The calculation of the impairment charge will be based on valuations at
January 1, 2002, and will be impacted by many factors, including the overall
state of the economy. Based on preliminary analyses at June 30, 2001, the
Company estimates that it will incur an impairment charge in the range of
$300,000 to $350,000 upon the initial adoption of SFAS No. 142, which would
exceed the book value of the Company's shareholders' equity. The actual
impairment incurred could differ from this range due to a change in one or
more of the factors that impact the valuations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's primary exposure to market risk is interest rate risk. The
Company had $257,235 outstanding under its credit facilities at June 30, 2001.
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 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 June 30, 2001. A change in interest rates of 1.0% would
result in an annual change in income before taxes of $1,672 based on the
outstanding balance under the Company's credit facilities and the notional
amounts of the interest rate swap agreements at June 30, 2001.
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