As filed with the Securities and Exchange Commission on July 8, 1998
Registration No. 33-97090
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 4 to
FORM S-1
REGISTRATION STATEMENT CONFORMED COPY
UNDER THE --------------
SECURITIES ACT OF 1933
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ACG Holdings, Inc.
American Color Graphics, Inc.
(Exact name of registrants as specified in their charters)
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Delaware 2750 62-1395968
New York 2750 16-1003976
(State or jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification numbers)
ACG Holdings, Inc. American Color Graphics, Inc.
225 High Ridge Road 100 Winners Circle
Stamford, Connecticut 06905 Brentwood, Tennessee 37027
(203) 977-8101 (615) 377-0377
(Address, including zip code, and telephone number, including area code, of registrants' principal executive offices)
TIMOTHY M. DAVIS
Senior Vice President - Administration, General Counsel and Secretary
ACG Holdings, Inc.
American Color Graphics, Inc.
225 High Ridge Road
Stamford, Connecticut 06905
(203) 977-8101
(Name, address, including zip code, and telephone number, including area code, of agent for service for both registrants)
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Copies to:
JOHN R. ETTINGER
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
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Approximate date of commencement of proposed exchange offer:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 please check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earliest effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed Maximum Proposed
Amount Offering Maximum Amount of
Title of Each Class of to be Price Aggregate Offering Registration
Securities to be Registered Registered Per Note Price Fee(1)
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12 3/4% Senior Subordinated Exchange Notes Due $185,000,000 $1,000 $185,000,000 $63,793.10
2005(2)(3)
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(1) Previously paid.
(2) The guarantee of principal of and interest on the Notes is also being
registered hereby.
(3) An indeterminable amount of Notes to be offered and sold in market-making
transactions are also being registered hereby.
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This Post-Effective Amendment shall become effective in accordance with
Section 8(c) of the Securities Act of 1933.
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PROSPECTUS
American Color Graphics, Inc.
12 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
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Unconditionally Guaranteed on a Senior Subordinated Basis by
ACG Holdings, Inc.
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Interest on the 12 3/4% Senior Subordinated Exchange Notes Due
2005 (the "Notes") is payable semiannually on February 1 and August 1 of each
year. The Notes are redeemable at the option of American Color Graphics, Inc.
("Graphics"), in whole or in part, at any time on or after August 1, 2000,
initially at 106.375% of their principal amount, plus accrued interest,
declining to 100% of their principal amount, plus accrued interest, on or
after August 1, 2002. In addition, at the option of Graphics, at any time or
from time to time prior to August 1, 1998, the Notes are redeemable from the
proceeds of one or more Public Equity Offerings following which there is a
Public Market at 110% of their principal amount, plus accrued interest;
provided that at least $115 million aggregate principal amount of Notes
remains outstanding after each such redemption. Upon the occurrence of a
Change of Control Triggering Event (as defined herein) each holder of Notes
will have the right to require Graphics to repurchase all or any portion of
such holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest.
The Notes are subordinated in right of payment to all existing
and future Senior Indebtedness of Graphics, including indebtedness under the
Amended and Restated Credit Agreement (as defined herein) and pari passu in
right of payment with any future senior subordinated indebtedness of Graphics
and will be senior in right of payment to any future subordinated indebtedness
of Graphics. At March 31, 1998, Graphics had approximately $134.7 million of
Senior Indebtedness, no senior subordinated indebtedness other than the Notes
and no subordinated indebtedness outstanding and Graphics' subsidiaries had
approximately $0.3 million of liabilities (which were effectively senior to
the Notes).
The Notes are fully and unconditionally guaranteed on an
unsecured senior subordinated basis by ACG Holdings, Inc. ("Holdings").
Holdings has no significant assets other than the capital stock of Graphics,
all of which is pledged to secure Senior Indebtedness of Holdings.
The Notes were issued pursuant to an exchange offer (the
"Exchange Offer") consummated by Graphics and Holdings on January 3, 1996,
pursuant to which the Notes were issued in exchange for Graphics' outstanding
12 3/4% Senior Subordinated Notes Due 2005 (the "Old Notes").
------------
See "Risk Factors" beginning on page 13 of this Prospectus for
a discussion of certain information that should be considered in connection
with an investment in the Notes.
The Notes have received ratings from Moody's Investors Service,
Inc. and Standard and Poor's Ratings Services which are below "investment
grade" and there is no required rating that must be maintained.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is to be used by Morgan Stanley & Co.
Incorporated ("MS&Co."), in connection with offers and sales of the Notes in
market-making transactions at negotiated prices related to prevailing market
prices at the time of sale. MS&Co. may act as principal or agent in such
transactions. Graphics will receive no portion of the proceeds of such sales
and will bear the expenses incident to the registration thereof. If MS&Co.
conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the Notes
because of the beneficial ownership of Holdings by The Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF") and Morgan Stanley Capital Partners
III, L.P. ("MSCP") and two other limited partnerships, all of which are
affiliates of MS&Co. For so long as a market-making prospectus is required to
be delivered, the ability of MS&Co. to make a market in the Notes may, in
part, be dependent on the ability of Graphics and Holdings to maintain a
current market-making prospectus.
July 8, 1998
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by Graphics, Holdings or MS&Co. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstance create any implication that the information herein is correct as
of any date subsequent to the date hereof.
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TABLE OF CONTENTS
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Available Information...............2 Certain Transactions........................23
Prospectus Summary..................3 Description of the Amended and Restated
Risk Factors.......................13 Credit Agreement............................24
Use of Proceeds....................19 Description of the Notes....................27
Capitalization.....................19 Certain Federal Income Tax Considerations...54
Selected Historical Financial Data.20 Plan of Distribution........................56
Business...........................23 Legal Matters...............................56
Management's Discussion and Experts.....................................56
Analysis of Financial Condition Appendix 1: Holdings' and Graphics' Annual
and Results of Operations.......23 Report on Form 10-K for the Fiscal Year
Management.........................23 Ended March 31, 1998
Security Ownership of Certain
Beneficial Owners and
Management......................23
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AVAILABLE INFORMATION
Graphics and Holdings have filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement under the
Securities Act of 1933 (the "Securities Act") with respect to the Notes offered
hereby. For the purposes hereof, the term "Registration Statement" means the
original Registration Statement and any and all amendments thereto. In
accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration
Statement and the schedules and exhibits thereto. Each statement made in this
Prospectus concerning a document filed as an exhibit to the Registration
Statement is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. For further information pertaining to
Graphics, Holdings and the Notes offered hereby, reference is made to such
Registration Statement, including the exhibits and schedules thereto and the
financial statements, notes and schedules filed as a part thereof. The
Registration Statement (and the exhibits and schedules thereto) may be
inspected and copied at the public reference facilities maintained by the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, or at its regional offices at Citicorp
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661 and at
Seven World Trade Center, 13th Floor, New York, New York 10048. Any
interested party may obtain copies of all or any portion of the Registration
Statement and the exhibits thereto at prescribed rates from the Public
Reference Section of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. A copy of
the Company's Annual Report on Form 10-K for the year ended March 31, 1998
(its "Annual Report") is included as Appendix 1 hereto.
The Indenture requires Holdings and, in the circumstances
described below, Graphics to file with the Commission the annual, quarterly
and other reports required by Sections 13(a), 13(c) and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regardless of whether
such Sections are applicable to Graphics or Holdings. Holdings or Graphics,
as the case may be, will supply without cost to each holder of Notes, and file
with the trustee under the Indenture, within fifteen days after Holdings is
required to file the same with the Commission, copies of the audited financial
statements, quarterly reports and other reports which Graphics and Holdings
are required to file with the Commission pursuant to Sections 13(a), 13(c) and
15(d) of the Exchange Act; provided, however, that in the event Holdings is no
longer the guarantor on the Notes, Holdings shall no longer be required to
file such reports and Graphics will be required to file such reports, in each
case as of the date and time that Holdings is no longer the guarantor on the
Notes.
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the
detailed information and financial statements and accompanying notes appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the term "Company" refers to ACG Holdings, Inc. and its
subsidiaries, including its wholly-owned subsidiary, American Color Graphics,
Inc., the term "Graphics" refers to American Color Graphics, Inc. and its
subsidiaries and the term "Holdings" refers to ACG Holdings, Inc. The term
"Fiscal Year 1998" refers to the year ended March 31, 1998, the term "Fiscal
Year 1997" refers to the year ended March 31, 1997 and the term "Fiscal Year
1996" refers to the year ended March 31, 1996.
The Company
The Company is a successor to a business that commenced
operations in 1926, and is one of the largest national diversified commercial
printers in North America with ten printing plants in eight states and Canada
and 15 prepress facilities located throughout the United States. The Company
operates primarily in two business sectors of the commercial printing
industry: printing (which accounted for approximately 84% of total sales
during Fiscal Year 1998) and digital imaging and prepress services conducted
through its American Color division (which accounted for approximately 16% of
total sales in Fiscal Year 1998). The Company's printing business and
American Color division are both headquartered in Nashville, Tennessee.
Partnerships affiliated with Morgan Stanley, Dean Witter & Co.
currently own 61.4% of the outstanding common stock and 72.5% of the
outstanding preferred stock of Holdings.
On April 8, 1993 (the "Acquisition Date"), pursuant to an
Agreement and Plan of Merger dated March 12, 1993, as amended (the "Merger
Agreement"), between Holdings and SGI Acquisition Corp. ("Acquisition Corp."),
Acquisition Corp. was merged with and into Holdings (the "1993 Acquisition").
Acquisition Corp. was formed by MSLEF, certain institutional investors and
certain members of management (the "Purchasing Group") for the purpose of
acquiring a majority interest in Holdings. Acquisition Corp. acquired a
substantial and controlling majority interest in Holdings in exchange for $40
million in cash. In the 1993 Acquisition, Holdings continued as the surviving
corporation and the separate corporate existence of Acquisition Corp. was
terminated.
On August 15, 1995, the Company completed a merger transaction
(the "Shakopee Merger") with Shakopee Valley Printing Inc. ("Shakopee").
Shakopee was formed to effect the purchase of certain assets and assumption
of certain liabilities of Shakopee Valley Printing, a division of Guy Gannett
Communications. On December 22, 1994, pursuant to an Agreement for the
Purchase of Assets between Guy Gannett Communications (the "Seller") and
Shakopee (the "Buyer"), the Seller sold certain assets and transferred certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase
price of approximately $42.6 million, primarily financed through the issuance
of 35,000 shares of Common Stock and bank borrowings. The 35,000 shares were
purchased by MSCP, Morgan Stanley Capital Investors, L.P. and MSCP III 892
Investors, L.P. (collectively, the "MSCP III Entities"), together with First
Plaza Group Trust and Leeway & Co. Each of the MSCP III Entities is
affiliated with Morgan Stanley, Dean Witter & Co. In addition, the other
stockholders of Shakopee were also stockholders of the Company. See "-- The
Transactions -- The Shakopee Merger."
On March 11, 1996, Graphics sold its 51% interest in National
Inserting Systems, Inc. ("NIS"). The proceeds from the sale were used to
repay indebtedness under the Bank Credit Agreement (as defined below).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc.,
a Medina, Ohio regional printer of newspapers, T.V. books and retail
advertising inserts and catalogs (the "Medina Facility") for cash and
assumption of certain liabilities of Gowe, Inc. (the "Medina Acquisition").
During March 1996, the Company completed the construction and
start-up of a plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech is
dedicated to the production of commercial flexi books (a form of advertising
inserts) serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In February 1997, the Company made a strategic decision to shut
down the operations of its wholly-owned subsidiary, Sullivan Media Corporation
("SMC"). SMC's shutdown has been accounted for as a discontinued operation,
and accordingly, SMC's operations are segregated in the Company's consolidated
financial statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Discontinued Operations" and note 5 to
the Company's consolidated financial statements appearing elsewhere in this
Prospectus.
Market data used throughout this Prospectus was obtained from
industry publications and internal Company estimates. While the Company
believes such information is reliable, the accuracy of such information has
not been independently verified and cannot be guaranteed.
Printing. The Company's printing business, which accounted for
approximately 84% of the Company's sales in Fiscal Year 1998, produces retail
advertising inserts, comics (newspaper Sunday comics, comic insert advertising
and comic books) and other publications.
Retail Advertising Inserts (80% of printing sales in Fiscal
Year 1998). The Company believes that it is one of the largest printers of
retail advertising inserts in the United States. Retail advertising inserts
are preprinted advertisements, generally in color, that display products sold
by a particular retailer or manufacturer. Advertising inserts are used
extensively by many retailers and are believed to be an important and
cost-effective means of advertising for these merchants. Advertising inserts
are primarily distributed through insertion in newspapers but are also
distributed by direct mail or in-store by retailers. They generally advertise
for a specific, limited sale period. The Company prints advertising inserts
for approximately 300 retailers.
Comics (14% of printing sales in Fiscal Year 1998 include
Sunday comics and comic books). The Company believes that it is one of the
largest printers of comics in the United States. The Company prints Sunday
comics for over 300 newspapers in the United States and Canada and prints the
majority of the annual comic book requirements of Marvel Entertainment Group,
Inc. ("Marvel").
Other Publications (6% of printing sales in Fiscal Year 1998).
The Company prints local newspapers, T.V. guide listings and other
publications.
In January 1998, the Company approved a plan for its printing
division which was designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restructuring Costs and Other Special Charges" and note 19 to
the Company's consolidated financial statements appearing elsewhere in this
Prospectus.
American Color. The Company's digital imaging and prepress
services business is conducted by its American Color division, which accounted
for approximately 16% of the Company's sales in Fiscal Year 1998. The Company
believes it is one of the largest full-service providers of digital imaging,
prepress and color separation services in the United States and a
technological leader in its industry. American Color commenced operations in
1975 and maintains 15 full service locations nationwide.
American Color assists its customers in the capture,
manipulation, transmission and distribution of images. The majority of its
work leads to the production of four-color separations in a format appropriate
for use by printers. In recent years, technological advances have made it
possible to replace largely manual and photography-based production methods
with computer-based, electronic means for producing four-color films faster
and at lower costs. American Color makes page changes, including typesetting,
and combines digital page layout information with electronically captured and
color-corrected four-color images. From these digital files, proofs, final
corrections and, finally, four-color films or digital output are produced for
each advertising or editorial page. The final four-color films or digital
output enables printers to prepare plates for each color resulting in the
appearance of full color in the printed page.
American Color's revenue from these traditional services is
being supplemented by new revenue sources from electronic prepress services
such as digital image storage, facilities management (operating digital
imaging prepress service facilities at a customer location), computer-to-plate
services, creative services, consulting and training services and software and
data management. American Color has been a leader in implementing these new
technologies, enabling it to reduce unit costs and effectively service the
increasingly complex demands of its customers more quickly than many of its
competitors. American Color has also been one of the leaders in the
integration of electronic page make-up, microcomputer-based design and layout,
and digital cameras into prepress production.
The digital imaging and prepress services industry is highly
fragmented, primarily consisting of smaller local and regional companies, with
only a few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share. Many
smaller digital imaging and prepress companies have left the industry in
recent years due to their inability to keep pace with technological advances
in the industry.
In April 1995, the Company implemented a plan for its American
Color division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Restructuring Costs and Other Special Charges" and note 19 to
the Company's consolidated financial statements in this Prospectus.
Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the
following competitive advantages in its printing and digital imaging and
prepress services businesses:
Modern Equipment. The Company believes that its web heatset
offset and flexographic web printing equipment is among the most advanced in
the industry and that the average age of its equipment is significantly less
than the majority of its regional competitors and is comparable to its major
national competitors. The Company is also committed to a comprehensive,
long-term maintenance program which enhances the reliability and extends the
life of its presses and other production equipment. It also believes that its
digital imaging and prepress equipment is significantly more advanced than
many of its smaller regional competitors, many of whom have not incorporated
digital prepress technologies to the same extent as the Company, nor adopted
an open systems environment which allows greater flexibility and more
efficient maintenance.
Strong Customer Base. The Company provides printing services
to a diverse base of customers, including approximately 300 retailers and over
300 newspapers in the United States and Canada. The customer base includes a
significant number of the major national retailers and larger newspaper chains
as well as numerous smaller regional retailers. The Company's consistent focus
on providing high quality printing products and strong customer service at
competitive prices has resulted in long-term relationships with many of these
customers. American Color's customer base includes large and medium-sized
customers in the retail, publishing and catalog businesses, many of whom have
long-term relationships with the Company. Although the digital imaging and
prepress services business has generally been on a spot bid basis in the past,
the Company has been successful in continuing to increase the proportion of
its business under long-term contracts.
Competitive Cost Structure. The Company has reduced the
variable and fixed costs of production at its printing facilities over the
past several years and believes it is well positioned to maintain its
competitive cost structure in the future due to economies of scale. The
Company has also reduced both labor and material costs (the principal variable
production costs) in its digital imaging and prepress services business
primarily through the adoption of new digital prepress production
methodologies.
Strong Management Team. Since the 1993 Acquisition, the
Company has strengthened its printing management group by hiring experienced
managers with a clear focus on growth and continued cost reduction, resulting
in an improved cost structure and a well-defined strategy for future
expansion. The Company also has strengthened its management group in its
digital imaging and prepress services business, filling a number of senior,
regional and plant management positions with individuals who the Company
believes will manage the digital imaging and prepress services business for
growth and profitability and will continue to upgrade its capabilities.
National Presence. The Company's nine printing plants in the
United States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround times,
all of which are instrumental in the Company's continued success in servicing
its large national and regional retail accounts. The Company's expanded sales
and marketing groups provide greater customer coverage and enable it to more
successfully penetrate regional markets. The Company believes that its 15
digital imaging and prepress facilities provide it with contingency
capabilities, increased capacity during peak periods, access to top quality
internal technical personnel throughout the country, short turnaround time and
other customer service advantages.
Strategy. The Company's objective is to increase
sharheolder value by growing its revenues, increasing its market share and
reducing costs. The Company's strategy to achieve this objective is as
follows:
Grow Unit Volume. Management believes that the Company's level
of national sales coverage, when coupled with its significant industry
experience and customer-focused sales force, will result in unit growth. In an
effort to stimulate unit volume growth, the Company has strengthened its
printing sales group. Unit volume growth is also expected to result from
continued capital expansion and selective printing acquisitions. In
addition, in its digital imaging and prepress services business, the
Company has expanded its sales force, strengthened training, more closely
focused its marketing efforts on new, larger customers and implemented a
revised incentive compensation program.
Continue to Improve Product Mix. The Company intends to
increase its share of the retail advertising insert market. In addition, the
Company expects to continue to adjust the mix of its customers and products
within the retail advertising insert market to those that are more profitable
and less seasonal and to maximize the use of the Company's equipment. The
Company is also continuing expansion of its printing facilities' capabilities
for in-plant prepress and postpress services. The Company's digital imaging
and prepress services business will continue to focus on high value-added new
business opportunities, particularly large-scale projects that will best
utilize the breadth of services and technologies the Company has to offer.
Additionally, the Company will continue to pursue large facilities management
opportunities as well as national and large regional customers that require
more sophisticated levels of service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality.
The Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the
Company plans to continue to maximize scale advantages in the purchasing,
technology and engineering areas. The Company also intends to continue to gain
variable cost efficiencies in its digital imaging and prepress services
business by using its technical resources to improve digital prepress
workflows at its various facilities. The Company also believes it will be able
to reduce its per unit technical, sales and management costs as its sales
volumes increase in this business.
Continue to Make Opportunistic Acquisitions. An integral part
of the Company's long-term growth strategy includes a plan to selectively
assess and acquire other printing and digital imaging and prepress services
companies that the Company believes will enhance its leadership position in
these industries.
The Transactions
The Company entered into the following merger and refinancing
transactions (the "Refinancing" and, together with the Shakopee Merger, the
"Transactions") in connection with the offering of the Old Notes:
The Shakopee Merger. In December 1994, certain shareholders of
Holdings and others established Shakopee to acquire a Minneapolis regional
printer for an aggregate purchase price of $42.6 million, of which $17.5
million was contributed in the form of equity. As part of the Transactions,
Shakopee was merged with Graphics.
The August 1995 Refinancing. The offering of the Old Notes was
part of a series of transactions, including the following: (i) Graphics
entered into a Credit Agreement with BT Commercial Corporation (the "Bank
Credit Agreement"), providing for a $75 million revolving credit facility
maturing in 2000 (the "Revolving Credit Facility") and a $60 million
amortizing term loan maturing in 2000 (the "Term Loan"); (ii) the repayment of
all $126.5 million of indebtedness outstanding under Graphics' old bank credit
agreement (the "Old Bank Credit Agreement") (plus $2.3 million of accrued
interest to August 15, 1995, the date of repayment); (iii) the redemption of
all outstanding 15% Senior Subordinated Notes Due 2000 of Graphics (the "15%
Notes") at an aggregate redemption price of $105.6 million (plus $1.8 million
of accrued interest to September 15, 1995, the redemption date); (iv) the
repayment of all $24.6 million of indebtedness assumed in the Shakopee Merger
(plus $0.1 million of accrued interest to August 15, 1995, the date of
repayment); and (v) the payment of approximately $11.8 million of fees and
expenses incurred in connection with the Transactions.
Subsequent Financings
The June 1997 Term Loan Facility. On June 30, 1997,
Graphics entered into a Term Loan Agreement (the "Term Loan Agreement")
with Bankers Trust Company and a syndicate of lenders (including Morgan
Stanley Senior Funding, Inc., an affiliate of the Company's majority
stockholders, which agreed to purchase a $5 million participation in the
Term Loan Agreement) providing for a $25 million term loan maturing on
March 31, 2001.
The May 1998 Refinancing. On May 8, 1998, the Company
completed a refinancing transaction (the "1998 Refinancing") which included
the following: (1) the Company entered into a $145 million credit facility with
Bankers Trust Company, Morgan Stanley Senior Funding, Inc., General Electric
Capital Corporation and a syndicate of lenders (the "Amended and Restated
Credit Agreement") providing for a $70 million revolving credit facility,
which is not subject to a borrowing base limitation, maturing on March 31,
2004, a $25 million amortizing term loan facility maturing on March 31, 2004
and a $50 million amortizing term loan facility maturing on March 31, 2005;
(2) the repayment of all $57.0 million of indebtedness outstanding under the
existing Bank Credit Agreement (plus $0.4 million of accrued interest to the
date of repayment); (3) the repayment of all $25.0 million of indebtedness
outstanding under its existing term loan facility (plus $0.6 million of
accrued interest to the date of repayment) and (4) the payment of
approximately $2.2 million in fees and expenses associated with the
refinancing transaction. In connection with its write-off of refinanced
indebtedness and deferred financing costs, the Company recorded in the first
quarter of the fiscal year ending March 31, 1999 an extraordinary loss related
to early extinguishment of debt of $4.0 million, net of taxes.
Interest under the Amended and Restated Credit Agreement is
floating, based upon existing market rates plus agreed upon margin levels.
Borrowings under the Amended and Restated Credit Agreement are secured by
substantially all of the Company's assets. In addition, Holdings has
guaranteed the indebtedness under the Amended and Restated Credit Agreement,
which guarantee is secured by a pledge of all of Graphics' and its
subsidiaries' stock. The Amended and Restated Credit Agreement (1) requires
satisfaction of certain financial covenants including Minimum Consolidated
EBITDA, Consolidated Interest Coverage Ratio and Leverage Ratio requirements,
(2) requires prepayments in certain circumstances including excess cash flows,
proceeds from asset dispositions in excess of prescribed levels and certain
capital structure transactions and (3) contains various customary affirmative
and negative covenants. See "Description of the Amended and Restated Credit
Agreement".
Summary Description of the Notes
Issuer.............................. American Color Graphics, Inc.
Maturity Date....................... August 1, 2005.
Securities.......................... $185 million aggregate principal amount
of 12 3/4% Senior Subordinated Exchange
Notes Due 2005.
Interest Payment Dates.............. Payable semiannually, in cash, on
February 1 and August 1 of each year.
Ranking............................. The Notes are unsecured obligations of
Graphics, subordinated in right of
payment to all existing and future
Senior Indebtedness of Graphics,
including indebtedness under the
Amended and Restated Credit Agreement.
The Notes will rank pari passu in right
of payment with any future senior
subordinated indebtedness of Graphics
and will be senior in right of payment
to any future subordinated indebtedness
of Graphics. See "Description of the
Notes -- Ranking." At March 31, 1998,
Graphics had $134.7 million of Senior
Indebtedness, no senior subordinated
indebtedness other than the Notes and no
subordinated indebtedness outstanding
and Graphics' subsidiaries had
approximately $0.3 million of
liabilities (which were effectively
senior to the Notes). See "Risk
Factors--High Level of Indebtedness" and
"--Subordinated Ranking of the Notes
and Holdings Guaranty; Liens Securing
Amended and Restated Credit Agreement."
Guaranty............................ The payment of principal and interest
on the Notes is fully and
unconditionally guaranteed on an
unsecured senior subordinated basis by
Holdings. The guaranty by Holdings is
subordinated to all existing and future
Senior Indebtedness of Holdings,
including Holdings' guaranty of
Graphics' obligations under the Amended
and Restated Credit Agreement.
Holdings conducts no business other
than as the sole shareholder of
Graphics and has no significant assets
other than the capital stock of
Graphics, all of which is pledged to
secure Holdings' obligations under the
Amended and Restated Credit Agreement.
See "Description of the
Notes--Guaranty."
Optional Redemption................. The Notes are redeemable at the option
of Graphics, in whole or in part, at
any time or from time to time on and
after August 1, 2000, initially at
106.375% of their principal amount,
plus accrued interest, declining ratably
to 100% of their principal amount, plus
accrued interest, on and after August
1, 2002. In addition, at any time or
from time to time prior to August 1,
1998, the Notes are redeemable at the
option of Graphics from the proceeds
of one or more Public Equity Offerings
(as defined herein) following which
there is a Public Market (as defined
herein), at 110% of their principal
amount plus accrued interest to the
redemption date; provided that at least
$115 million aggregate principal amount
of Notes remains outstanding. See
"Description of the Notes -- Optional
Redemption."
Change of Control Triggering
Event............................... In the event of a Change of Control
Triggering Event (as defined herein),
the holders of the Notes will have the
right to require Graphics to purchase
the Notes at a purchase price of 101%
of their principal amount plus accrued
interest to the purchase date. See
"Risk Factors -- Possible Inability of
Graphics to Repurchase Notes upon a
Change of Control Triggering Event" and
"Description of the Notes -- Repurchase
of Notes upon a Change of Control
Triggering Event." The occurrence of a
Change of Control Triggering Event will
require Graphics to repay all
indebtedness then outstanding which by
its terms would prohibit Graphics from
repurchasing the Notes or obtain
consents from the holders of such
indebtedness, including indebtedness
outstanding under the Amended and
Restated Credit Agreement. There can
be no assurance that Graphics would
have sufficient funds available to
repurchase such indebtedness and the
Notes. See "Risk Factors -- Possible
Inability of Graphics to Repurchase
Notes upon a Change of Control
Triggering Event."
Covenants........................... The Indenture contains covenants that,
among other things, limit the ability
of Graphics and its subsidiaries to
incur indebtedness, pay dividends,
redeem capital stock, make investments
and make other restricted payments,
issue capital stock of subsidiaries,
engage in transactions with
stockholders and affiliates, sell
assets and engage in mergers and
consolidations. However, these
limitations are subject to a number of
important qualifications and
exceptions. See "Description of the
Notes -- Covenants."
Credit Rating....................... The Notes have received ratings from
Moody's Investors Service, Inc. and
Standard and Poor's Ratings Group which
are below "investment grade" and there
is no required rating that must be
maintained.
Settlement at DTC................... Transfers of Notes between participants
in The Depository Trust Company ("DTC")
will be effected in the ordinary way in
accordance with DTC rules and will be
settled in next-day funds.
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical consolidated financial data and other
data presented as of and for the fiscal years ended March 31, 1994, 1995,
1996, 1997 and 1998 were derived from the Consolidated Financial Statements of
Holdings. The summary historical financial data should be read in conjunction
with "Capitalization," "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of Holdings appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995(a) 1994
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales...................................... $ 533,335 $ 524,551 $ 529,523 $ 433,198 $ 414,673
Gross profit............................... 71,928 64,671 64,413 62,931 45,153
Restructuring costs and other special
charges (b)............................... 5,598 2,881 7,533 -- --
Gain from curtailment and establishment of
defined benefit pension plans, net (c).... -- -- -- (3,311) --
Operating income........................... 12,103 10,372 12,716 24,450 5,810
Interest expense, net...................... 38,813 36,132 32,425 25,334 23,737
Loss from continuing operations before
extraordinary items....................... (29,228) (28,596) (26,305) (4,421) (22,676)
(Loss) income from discontinued operations
(net of tax)(d)........................... (667) (3,107) 1,504 17,583 (61,684)
Loss on early extinguishment of debt (e)... -- -- (4,526) -- --
Net (loss) income.......................... $ (29,895) (31,703) (29,327) 13,162 (84,360)
Balance Sheet Data (at end of period):
Cash and cash equivalents.................. $ 0 $ 0 $ 0 $ 4,635 $ 8,839
Working capital (deficit).................. 11,610 (8,598) 9,612 4,958 6,956
Total assets............................... 329,958 333,975 351,181 328,368 305,521
Long-term debt and capitalized leases,
including current installments(f)......... 319,657 312,309 297,617 258,201 250,439
Other Data:
Net cash provided (used) by operating
activities................................ $ 18,625 $ 24,313 $ (4,187) $ 30,510 $ (27,329)
Net cash (used) by investing activities.... (10,024) (10,997) (24,436) (17,580) (1,332)
Net cash (used) provided by financing
activities................................ (8,587) (13,312) 23,982 (17,527) 23,113
Capital expenditures....................... 23,713 37,767 28,022 20,415 15,722
Deficiency of earnings to cover fixed
charges(g)................................ (27,122) (26,005) (21,431) (1,869) (20,296)
EBITDA(h):
Printing.................................. $ 46,838 $ 46,755 $ 46,597 $ 38,357 $ 23,103
American Color............................ 9,927 5,770 2,907 12,662 12,656
Other..................................... (4,398) (5,553) (2,657) 700 (2,691)
------- ------- ------- ------- -------
Total $ 52,367 $ 46,972 $ 46,847 $ 51,719 $ 33,068
======= ======= ======= ======= =======
(footnotes on following page)
(a) On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under common
control (similar to a pooling-of-interests), and accordingly, the
consolidated financial statements give retroactive effect to the Shakopee
Merger and include the combined operations of Holdings and Shakopee
subsequent to December 22, 1994 (the date on which Shakopee became under
common control with the Company). Shakopee's financial results are not
reflected in periods prior to December 22, 1994 as these periods were
prior to common control ownership.
(b) In January 1998, the Company approved a restructuring plan for its
printing division designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs. The
Company recognized $3.9 million of costs under such plan in Fiscal Year
1998.
In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased
growth in the business. The Company recognized $0.9 million and $4.1
million of costs under such plan in Fiscal Year 1997 and Fiscal Year
1996, respectively.
In addition, the Company recorded $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its printing and American Color divisions in Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively. See
note 19 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus.
(c) In October 1994, the Company amended its defined benefit pension plans,
which resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. The Company
recognized a curtailment gain of $3.7 million as a result of freezing
such benefits. Also in October 1994, the Board of Directors approved a
new Supplemental Executive Retirement Plan ("SERP"), which is a defined
benefit plan for certain key executives. The Company recognized a $0.4
million expense associated with the establishment of the SERP.
(d) In February 1997, the Company made a strategic decision to shut down the
operation of its wholly-owned subsidiary SMC. SMC's shut down has been
accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial
statements. Sales, cost of sales and selling, general and administrative
expenses for Fiscal Years 1996 and 1995 have been reclassified to
discontinued operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations"
and note 5 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus.
On February 16, 1994, the Company assigned the coupon free-standing
insert ("FSI") contracts of its subsidiary, Sullivan Marketing, Inc.
("SMI"), to News America FSI, Inc. ("News America"). In June 1994,
the Company recorded income from the settlement of a lawsuit entitled
Sullivan Marketing Inc. and Sullivan Graphics, Inc. v. Valassis
Communications, Inc., News America FSI Inc. and David Brandon (the
"SMI Settlement") of $18.5 million, net of taxes, and when coupled
with settlement expenses which had previously been accrued, the net
cash proceeds resulting from this settlement were approximately $16.7
million.
In Fiscal Year 1996, the Company recognized settlement of the lawsuit
with EPI Group Limited ("EPI") (the "EPI lawsuit") and reversed
certain accruals related to the estimated loss on shut down of SMI.
The resulting effect reflected in the Fiscal Year 1996 consolidated
statement of operations was $2.9 million income in discontinued
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Operations" and
note 5 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus.
(e) As part of the Transactions, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.5 million, net of zero
taxes. This extraordinary loss primarily consisted of the early
redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by
the write-off of a bond premium associated with the 15% Notes.
(f) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes resulting
from the 1993 Acquisition. The principal amount payable at maturity of
the 15% Notes remained at $100 million. The 15% Notes were redeemed in
connection with the Transactions.
(footnotes continued on following page)
(g) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, discontinued
operation and extraordinary items from fixed charges. Fixed charges
consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor.
The deficiency in earnings required to cover fixed charges includes
depreciation of property, plant and equipment and amortization of
goodwill and other assets and non-cash charges which are reflected in
cost of sales and selling, general and administrative expenses, in the
following amounts (in thousands):
Fiscal Year Ended March 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Depreciation.. $28,124 $25,282 $21,385 $18,327 $17,897
Amortization.. 10,413 9,374 9,311 8,941 9,361
------ ------ ------ ------ ------
Total........ $38,537 $34,656 $30,696 $27,268 $27,258
====== ====== ====== ====== ======
(h) EBITDA is included in the Summary Historical Financial Data because
management believes that investors regard EBITDA as a key measure of a
leveraged company's performance and ability to meet its future debt
service requirements. EBITDA is defined as earnings before net interest
expense, income tax expense (benefit), depreciation, amortization, other
special charges related to asset write-offs and write-downs, other income
(expense), discontinued operations and extraordinary items. EBITDA is
not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to net
income (or any other measure of performance under generally accepted
accounting principles) as a measure of performance or to cash flows from
operating, investing or financing activities as an indicator of cash
flows or as a measure of liquidity. Certain covenants in the Indenture
and the Amended and Restated Credit Agreement are based on EBITDA,
subject to certain adjustments.
EBITDA includes (1) $1.5 million of non-recurring charges associated with
the relocation of American Color's corporate office and various severance
related expenses and (2) $0.6 million of non-cash charges associated with
an employee benefit program in Fiscal Year 1998.
EBITDA includes $3.9 million in restructuring costs related to its
printing division in Fiscal Year 1998 and $0.9 million and $4.1
million of restructuring costs related to its American Color division
in Fiscal Year 1997 and Fiscal Year 1996, respectively. See note 19
to the Company's consolidated financial statements appearing elsewhere
in this Prospectus.
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 21 to
the Company's consolidated financial statements appearing elsewhere in
this Prospectus).
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to
a change in the Company's defined benefit pension plans (as discussed
in note (c) above).
</TABLE>
RISK FACTORS
In addition to the other information and financial data set
forth elsewhere in this Prospectus, the following information should be
considered carefully by prospective investors in evaluating the Company, its
business and an investment in the Notes.
High Level of Indebtedness
The Company has had a negative net worth in each of the last
eight fiscal years. At March 31, 1998, the Company's consolidated indebtedness
including capital leases was approximately $319.7 million (including $9.1
million of current installments) and the Company's negative net worth was
$106.1 million. The level of the Company's indebtedness could have important
consequences to holders of the Notes including the following: (i) the ability
of the Company to obtain any necessary financing in the future for working
capital, capital expenditures, debt service requirements or other purposes may
be limited; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of the principal of and interest
on its indebtedness and will not be available for other purposes; (iii) the
Company's level of indebtedness could limit its flexibility in planning for,
or reacting to changes in, its business; (iv) the Company is more highly
leveraged than some of its competitors, which may place it at a competitive
disadvantage; and (v) the Company's high degree of indebtedness will make it
more vulnerable in the event of a downturn in its business. See "-- Possible
Inability to Service Debt; Deficit of Earnings to Fixed Charges," "Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of the Amended and Restated Credit Agreement." If the Company is
not able to satisfy its obligations, including its interest payment
obligations, it could default on its indebtedness, including the Notes, which
would entitle the holders of such indebtedness to accelerate the maturity
thereof. Because the Notes are subordinated in right of payment to all Senior
Indebtedness and at March 31, 1998, approximately 26% of the Company's total
assets were intangible assets, payment in full on the Notes in the event of an
acceleration of the Notes may not occur.
There can be no assurance that the Company will not need
additional financing in the future or that the Company will be able to obtain
such financing on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." In addition, the Indenture permits the Company to incur
additional indebtedness to finance the acquisition of additional assets.
Possible Inability to Service Debt; Deficit of Earnings to Fixed Charges
The Company's earnings before fixed charges were insufficient
to cover fixed charges for the years ended Fiscal Year 1994, Fiscal Year 1995,
Fiscal Year 1996, Fiscal Year 1997 and Fiscal Year 1998 by $20.3 million, $1.9
million, $21.4 million, $26 million and $27.1 million, respectively. See
"Selected Historical Financial Data."
There can be no assurance that the Company will be able to
improve its earnings before fixed charges or that the Company will be able to
meet its debt service obligations, including its obligations on the Notes.
Graphics is obligated to make substantial principal and interest payments
under the Amended and Restated Credit Agreement during the next several years.
The term loan facilities under the Amended and Restated Credit Agreement
require principal repayments in quarterly installments in the following
aggregate annual amounts:
Term Loan Principal Repayments
Fiscal year ended March 31, Due in the Year
- --------------------------- ------------------------------
1999 $ 500,000
2000 2,500,000
2001 6,250,000
2002 6,250,000
2003 6,250,000
2004 29,500,000
2005 23,750,000
If the Company's cash flow is inadequate to meet its debt
service obligations, the Company could face liquidity problems and might be
required to dispose of material assets or operations to meet its obligations,
and there can be no assurance as to the timing of such sales or the proceeds
which the Company could realize therefrom. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of the Amended and Restated Credit
Agreement." In addition, most of the Company's indebtedness (other than the
Notes) bears interest at floating rates (8.48% weighted average rate at March
31, 1998), causing the Company to be sensitive to prevailing market interest
rates. If interest rates rise, the Company's ability to meet its debt service
obligations, including its obligations pursuant to the Notes, may be adversely
affected.
If the Company is unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments on its indebtedness
or, if the Company otherwise fails to comply with the various covenants in such
indebtedness (including covenants in the Amended and Restated Credit
Agreement), it would be in default under the terms thereof, which would permit
the holders of such indebtedness to accelerate the maturity of such
indebtedness and could cause defaults under other indebtedness of the Company
or result in a bankruptcy of the Company. Such defaults or any bankruptcy of
the Company resulting therefrom would result in a default on the Notes and
could delay or preclude payment of principal of, or interest on, the Notes.
The ability of the Company to meet its obligations will be dependent upon the
future performance of the Company, which will be subject to prevailing
economic conditions and to financial, business and other factors, including
factors beyond the control of the Company.
Certain Financial and Operating Restrictions
The Indenture and the Amended and Restated Credit Agreement
impose significant operating and financial restrictions on the Company. Such
restrictions affect, and in certain cases significantly limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness or create liens on its assets, sell assets, engage in mergers or
acquisitions or make investments. These restrictions could also limit the
ability of the Company to effect future financings, make needed capital
expenditures, react to future industry trends, withstand downturns in its
business or the economy or otherwise conduct necessary corporate activities.
The Amended and Restated Credit Agreement contains covenants
requiring the Company to meet certain financial ratios. See "Description of
the Amended and Restated Credit Agreement." Such covenants are similar to
those under the Company's prior Bank Credit Agreement, which was replaced in
May 1998 by the Amended and Restated Credit Agreement. Failure to comply with
any such covenant could limit the availability of borrowings under the Amended
and Restated Credit Agreement or result in a default thereunder. There can be
no assurance that the Company will be able to comply with such covenants. As
a result of the Company's past financial results, the Company and its banks
amended certain of the financial covenants contained in the Bank Credit
Agreement on February 27, 1997 and again on June 30, 1997. A default under
the Amended and Restated Credit Agreement could result in an acceleration of
the Notes, in which case the holders of the Notes may not be paid in full
because under the Indenture, Senior Indebtedness (including indebtedness under
the Amended and Restated Credit Agreement) would be entitled to be paid first.
See "-- Subordinated Ranking of the Notes and Holdings' Guaranty; Liens
Securing the Amended and Restated Credit Agreement."
Subordinated Ranking of the Notes and Holdings' Guaranty; Liens Securing the
Amended and Restated Credit Agreement
The Notes are subordinated to all Senior Indebtedness of
Graphics, including indebtedness under the Amended and Restated Credit
Agreement. Therefore, in the event of bankruptcy, liquidation or
reorganization of Graphics, the assets of Graphics will be available to pay
obligations on the Notes only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on
the Notes. See "Description of the Notes -- Ranking." At March 31, 1998,
Graphics had $134.7 million of Senior Indebtedness, no senior subordinated
indebtedness other than the Notes and no subordinated indebtedness
outstanding. At that date, Graphics' subsidiaries had approximately $0.3
million of liabilities (which were effectively senior to the Notes). In
addition, the indebtedness under the Amended and Restated Credit Agreement is
secured by liens on substantially all of the assets of Graphics and guaranteed
by Holdings, which guarantee is secured by a pledge of all of the capital
stock of Graphics. See "Description of the Amended and Restated Credit
Agreement." Accordingly, if an event of default occurs under the Amended and
Restated Credit Agreement and the Notes, the lenders under the Amended and
Restated Credit Agreement will have a prior right to such collateral and may
foreclose thereon to the exclusion of the holders of the Notes,
notwithstanding the existence of an event of default with respect to the
Notes. In such an event, those assets constituting collateral would first be
used to repay in full all amounts outstanding under the Amended and Restated
Credit Agreement, resulting in such assets being unavailable to satisfy the
claims of holders of the Notes.
Holdings has fully and unconditionally guaranteed the Notes on
an unsecured, senior subordinated basis. Currently, Holdings conducts no
business other than as sole shareholder of Graphics and has no significant
assets other than the capital stock of Graphics, all of which has been pledged
to secure Holdings' obligations under the Amended and Restated Credit
Agreement. Thus, currently there are no resources supporting Holdings'
guarantee of the Notes that are incremental to those to which holders of the
Notes already have access as direct creditors of Graphics. Holdings' guarantee
of the Notes is subordinated in right of payment to the guarantee by Holdings
of Graphics' obligations under the Amended and Restated Credit Agreement.
Generally, the Indenture contains no restrictions on the activities of
Holdings. See "Description of the Notes -- Guaranty."
Possible Inability of Graphics to Repurchase Notes upon a Change of Control
Triggering Event
The Amended and Restated Credit Agreement does not permit
Graphics to repurchase Notes upon the occurrence of a Change of Control
Triggering Event. In addition, the occurrence of a "Change of Control" under
the Amended and Restated Credit Agreement, which is defined to include a
"Change of Control" under the Notes, would constitute an event of default
under the Amended and Restated Credit Agreement. See "Description of the
Amended and Restated Credit Agreement." Therefore, unless Graphics obtains a
waiver, upon the occurrence of a Change of Control Triggering Event, the
amounts outstanding under the Amended and Restated Credit Agreement (and any
other indebtedness then outstanding which by its terms would prohibit Graphics
from repurchasing Notes) would have to be repaid before the holders of Notes
could receive any payment. Due to the highly leveraged nature of Graphics,
there can be no assurance that sufficient funds will be available at the time
of any Change of Control Triggering Event to make any payments due under the
Amended and Restated Credit Agreement or, thereafter, to make any required
repurchases of the Notes.
The obligation of Graphics to offer to repurchase Notes upon
the occurrence of a Change of Control Triggering Event may in certain
circumstances make more difficult or discourage a takeover of Graphics and
Holdings, and, thus, the removal of incumbent management. Graphics could in
the future enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control Triggering Event under the Indenture, but that could increase the
amount of Indebtedness outstanding at such time or otherwise affect Graphics'
capital structure or credit ratings. Except as described under "Description
of Notes -- Repurchase of Notes upon a Change of Control Triggering Event",
there are no covenants or other provisions in the Indenture providing for a
put or increased interest rate or otherwise that would afford holders of the
Notes additional protection in the event of a recapitalization transaction, a
change of control of Graphics and Holdings or a highly leveraged transaction.
If Graphics is required to make an offer to repurchase Notes pursuant to the
"Repurchase of Notes upon a Change of Control Triggering Event" covenant,
Graphics will comply with any tender offer rules under the Exchange Act which
may then be applicable, including Rule 14e-1. See "Description of the Notes
- -- Repurchase of Notes upon a Change of Control Triggering Event."
Competitive Climate
Commercial printing in the United States is a large, highly
fragmented, capital-intensive industry and the Company competes with numerous
national, regional and local printers. A trend of industry consolidation in
recent years can be attributed to (1) customer preferences for larger printers
with a greater range of services, (2) capital requirements and (3) competitive
pricing pressures.
The Company believes that competition in the printing business
is based primarily on quality and service at a competitive price. The
advertising insert business is a large, fragmented industry in which the
Company competes for national accounts with several large national printers,
several of whom are larger and better capitalized than the Company. In
addition, the Company also competes with numerous regional printers for the
printing of advertising inserts. Although the Company faces competition
principally from one other company (Big Flower Holdings, Inc.) in the
printing of newspaper Sunday comics in the United States, there are
numerous newspapers that print their own Sunday comics. The Company's
other publication business competes with many large national and regional
commercial printers.
American Color competes with numerous digital imaging and
prepress service firms on both a national and regional basis. The industry is
highly fragmented, primarily consisting of smaller local and regional
companies, with only a few national full-service digital imaging and prepress
companies such as American Color, none of which has a significant nationwide
market share. Many smaller digital imaging and prepress companies have left
the industry in recent years due to their inability to keep pace with
technological advances required to service increasingly complex customer
demands. The Company believes that the digital imaging and prepress services
sector will continue to be subject to high levels of ongoing technological
change and the need for capital expenditures to keep up with such change.
Technological Change
The digital imaging and prepress services business has
experienced rapid and substantial changes during the past few years primarily
due to advancements in available technology, including the evolution to
electronic and digital formats. Many smaller competitors have left the
industry as a result of their inability to keep pace with technological
advances required to service customer demands. The Company expects that
further changes in technology will affect the Company's digital imaging and
prepress services business and that the Company will need to adapt to
technological advances as they occur. As technology in this business continues
to improve and evolve, the Company will need to make capital expenditures to
maintain its competitive position. If the Company is unable to respond to
future changes and advancements in digital imaging and prepress technology,
the Company's American Color business could be adversely affected.
Sensitivity to Paper Prices
The Company's results of operations and financial condition are
affected by the cost of paper, which is determined by constantly changing
market forces of supply and demand over which the Company has no control.
Beginning in the fiscal year ended March 31, 1994 ("Fiscal Year 1994") and
throughout Fiscal Year 1995 and the majority of Fiscal Year 1996, the printing
industry experienced substantial increases in the cost of paper. In late
Fiscal Year 1996 and throughout Fiscal Year 1997, however, the overall cost of
paper declined. During Fiscal Year 1998, paper prices remained relatively
stable. Management expects that as a result of the Company's strong
relationship with key suppliers that its material costs will remain
competitive within the industry. In accordance with industry practice, the
Company generally passes through changes in the cost of paper to its
customers. Although the Company has been successful in passing through paper
price increases to its customers, there can be no assurance that the Company
will be able to pass through future paper price increases. In the event the
Company is unable to pass through such increases, severe increases in paper
prices could have a material adverse effect on the Company's profits and cash
flow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." In addition, increases in the cost of paper, and
therefore the cost of printed advertisements, may cause some of the Company's
advertising customers to reduce their print advertising programs, which could
have a material adverse effect on the Company.
Acquisitions and Integration of Additional Businesses
As part of its long-term strategy, the Company seeks to acquire
other commercial printers, such as Shakopee and the Medina Facility, and other
digital imaging and prepress services businesses. This strategy also provides
for the integration of new start-up ventures into the Company's operations,
such as Flexi-Tech. While the Company's management has experience acquiring
companies and integrating their operations into existing operations, there can
be no assurance that the Company will find additional attractive acquisition
candidates or succeed at effectively managing the integration of any other
acquired business and start-up ventures into the Company's existing business.
Environmental Regulations
The Company is subject to federal, state and local laws,
regulations and ordinances that (i) govern activities or operations that may
have adverse environmental effects, such as discharges to air and water, as
well as handling and disposal practices for solid and hazardous wastes and
(ii) impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposals or other releases of hazardous
substances (together, "Environmental Laws"). The Company believes that it
currently conducts its operations, and in the past has operated its business,
in substantial compliance with applicable Environmental Laws. Noncompliance
with or liability for cleanup pursuant to Environmental Laws could have a
material adverse effect on the Company's results of operations or financial
condition. See "Business -- Environmental Matters."
Risk of Fraudulent Transfer Liability
Management of the Company believes that the indebtedness of
Graphics represented by the Notes, and the indebtedness of Holdings under its
guarantee of the Notes, were incurred for proper purposes and in good faith,
and that, based on present forecasts, asset valuations and other financial
information at the time of issuance of the Notes, Graphics and Holdings were
and are solvent, had and will have sufficient capital for carrying on their
business and were and will be able to pay their debts as they mature.
Notwithstanding management's belief, if a court of competent jurisdiction in a
suit by an unpaid creditor or a representative of creditors (such as a trustee
in bankruptcy or a debtor-in-possession) were to find that Graphics (or
Holdings) did not receive fair consideration or reasonably equivalent value
for incurring the Notes (or the guarantee) or any debt being refinanced
thereby and, at the time of the incurrence of the Notes (or the guarantee) or
such indebtedness, Graphics (or Holdings) was insolvent, was rendered
insolvent by reason of such incurrence, was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay as such debts matured, or intended to hinder, delay or defraud
its creditors, such court could avoid such indebtedness. A likely consequence
of such avoidance would be the subordination of the indebtedness represented
by the Notes (or the guarantee) to existing and future indebtedness of
Graphics (or Holdings). The measure of insolvency for purposes of the
foregoing will vary depending upon the law of the relevant jurisdiction.
Generally, however, a company would be considered insolvent for purposes of
the foregoing if the present fair saleable value of the company's assets is
less than the amount that will be required to pay its probable liability on
existing debts as they become absolute and matured.
Control by Morgan Stanley, Dean Witter & Co.
MSLEF and the MSCP III Entities (collectively, the "MSCP
Entities") own a substantial majority of the outstanding shares of capital
stock of Holdings. Each of the MSCP Entities is a limited partnership whose
general partner is affiliated with Morgan Stanley, Dean Witter & Co. Two of
the current directors of Holdings, Messrs. Janson and Fry, are employees of
MS&Co., an affiliate of MSLEF and the MSCP Entities and also a subsidiary of
Morgan Stanley, Dean Witter & Co. As a result of these relationships, Morgan
Stanley, Dean Witter & Co. may be deemed to control the management and
policies of the Company, although such control is not exercised on a
day-to-day basis. In addition, Morgan Stanley, Dean Witter & Co. may be
deemed to control all matters requiring stockholder approval, including the
election of all directors, the adoption of amendments to the Company's
certificate of incorporation and the approval of mergers and sales of all or
substantially all of the Company's assets. Circumstances could arise under
which the interests of the MSCP Entities could be in conflict with the
interests of holders of the Notes. See "Certain Transactions" and "Security
Ownership of Certain Beneficial Owners and Management."
Lack of a Public Market
There is currently no established public market for the Notes.
Graphics does not intend to list the Notes on any national securities exchange
or to seek approval for quotation through any automated quotation system.
Graphics has been advised by MS&Co. that it intends to make a market in the
Notes. However, MS&Co. is not obligated to do so and any market-making
activities with respect to the Notes may be discontinued at any time without
notice. In addition, MS&Co. will be required to deliver a current prospectus
pursuant to Section 10(a)(3) of the Securities Act in connection with any
market making activities and may be prohibited from engaging in market-making
activities during certain distributions of securities by the Company pursuant
to Rule 10b-6 under the Exchange Act. For so long as a market-making
prospectus is required to be delivered, the ability of MS&Co. to make a market
in the Notes may, in part, be dependent on the ability of Graphics and
Holdings to maintain a current market-making prospectus. Accordingly, no
assurance can be given that an active public or other market will develop for
the Notes or as to the liquidity of or the trading market for the Notes. If a
trading market does not develop or is not maintained, holders of the Notes may
experience difficulty in reselling the Notes or may be unable to sell them at
all. If a market for the Notes develops, any such market may cease to
continue at any time. If a public trading market develops for the Notes,
future trading prices of the Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities and other factors, including
the financial condition of the Company.
USE OF PROCEEDS
This Prospectus is to be used by MS&Co. in connection with
offers and sales of the Notes in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. MS&Co. may
act as principal or agent in such transactions. The Company will not receive
any portion of the proceeds of such sales.
CAPITALIZATION
The following table sets forth the consolidated capitalization
of Holdings as of March 31, 1998. This table should be read in conjunction
with "Selected Historical Financial Data," "Description of the Amended and
Restated Credit Agreement" and the consolidated financial statements of
Holdings appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
(dollars in
thousands)
--------------
<S> <C>
Short-term debt:
Current installments of long-term debt and capitalized leases:
Term loan.................................................................................... $ 500*
Other........................................................................................ 8,631
-------
Total short-term debt...................................................................... $ 9,131
Long-term debt:
Revolving credit facility...................................................................... $ 29,257
Term loan...................................................................................... 35,479*
Term loan facility............................................................................. 25,000
Senior subordinated notes due 2005............................................................. 185,000
Other.......................................................................................... 35,790
-------
Total long-term debt and capitalized leases, excluding current installments................ 310,526
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized, 134,812 shares issued and
outstanding.................................................................................... 1
Preferred stock, $.01 par value, 15,823 shares authorized, 3,631 shares Series AA convertible
preferred stock issued and outstanding at March 31, 1998, $40,000,000 liquidation
preference, 1,606 shares Series BB convertible preferred stock issued and outstanding at
March 31, 1998, $17,500,000 liquidation preference............................................. --
Additional paid-in capital...................................................................... 58,249
Accumulated deficit............................................................................. (162,250)
Unfunded pension liability...................................................................... (85)
Cumulative translation adjustment............................................................... (2,000)
-------
Total stockholders' deficit.................................................................... (106,085)
-------
Total long-term debt and stockholders' deficit............................................... $(204,441)
=======
- ------------
* The amortization for the term loan has been adjusted to reflect the
scheduled payments due under the terms of the Company's senior debt
structure as refinanced on May 8, 1998 (see note 23 of the Company's
consolidated financial statements appearing elsewhere in this Prospectus).
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA
(dollars in thousands)
Set forth below is selected historical financial data as of
and for the fiscal years ended March 31, 1994, 1995, 1996, 1997 and 1998.
The balance sheet data as of March 31, 1994, 1995, 1996, 1997 and 1998, and
the statement of operations data for the fiscal years ended March 31, 1994,
1995, 1996, 1997 and 1998 are derived from the audited consolidated
financial statements for such periods and at such dates. The selected
historical financial data below also reflects the Company's discontinued
wholly-owned subsidiaries SMI and SMC. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements of Holdings appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------------------------
1998 1997 1996 1995(a) 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales................................................ $533,335 $524,551 $529,523 $433,198 $414,673
Cost of Sales........................................ 461,407 459,880 465,110 370,267 369,520
------- ------- ------- ------- -------
Gross Profit........................................ 71,928 64,671 64,413 62,931 45,153
Selling, general and administrative expenses (b)..... 54,227 51,418 44,164 41,792 39,343
Restructuring costs and other special charges (c)... 5,598 2,881 7,533 -- --
Gain from curtailment and establishment of
defined benefit pension plans, net (d).............. -- -- -- (3,311) --
------- ------- ------- ------- -------
Operating income.................................... 12,103 10,372 12,716 24,450 5,810
Interest expense, net................................ 38,813 36,132 32,425 25,334 23,737
Other expense (income)............................... 412 245 1,722 985 2,369
Income tax expense................................... 2,106 2,591 4,874 2,552 2,380
------- ------- ------- ------- -------
Loss from continuing operations before
extraordinary items...............................
(29,228) (28,596) (26,305) (4,421) (22,676)
Discontinued operations (e)
Loss from operations, net of tax.................... -- (1,557) (1,364) (912) (23,272)
Estimated (loss) on shut down, and gain
on settlement, net of tax......................... (667) (1,550) 2,868 18,495 (38,412)
Loss on early extinguishment of debt (f)............ -- -- (4,526) -- --
------- ------- ------- ------- -------
Net loss............................................ $(29,895) $(31,703) $(29,327) $ 13,162 $(84,360)
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents............................ $ 0 $ 0 $ 0 $ 4,635 $ 8,839
Working capital (deficit)............................ 11,610 (8,598) 9,612 4,958 6,956
Total assets......................................... 329,958 333,975 351,181 328,368 305,521
Long-term debt and capitalized leases,
including current installments (g)................. 319,657 312,309 297,617 258,201 250,439
Stockholders' deficit................................ (106,085) (76,318) (44,396) (14,970) (45,485)
Other Data:
Net cash provided (used) by operating activities.... $ 18,625 $ 24,313 $ (4,187) $ 30,510 $(27,329)
Net cash (used) by investing activities.............. (10,024) (10,997) (24,436) (17,580) (1,332)
Net cash (used) provided by financing activities.... (8,587) (13,312) 23,982 (17,527) 23,113
Capital expenditures................................. 23,713 37,767 28,022 20,415 15,722
Deficiency of earnings to cover fixed charges
(h)................................................. (27,122) (26,005) (21,431) (1,869) (20,296)
EBITDA(i)............................................ 52,367 46,972 46,847 51,719 33,068
(footnotes on following page)
NOTES TO SELECTED HISTORICAL FINANCIAL DATA
(a) On August 15, 1995, Shakopee was merged with and into Graphics. The
merger has been accounted for as a combination of entities under common
control (similar to a pooling-of-interests), and accordingly, the
consolidated financial statements give retroactive effect to the Shakopee
Merger and include the combined operations of Holdings and Shakopee
subsequent to December 22, 1994 (the date on which Shakopee became under
common control with the Company). Shakopee's financial results are not
reflected in periods prior to December 22, 1994 as these periods were
prior to common control ownership.
(b) Fiscal Year 1998 selling, general and administrative expenses includes
(1) $1.5 million of non-recurring American Color charges associated with
the relocation of American Color's corporate office and various severance
related expenses, and (2) $0.6 million on non-cash charges associated
with an employee benefit program. Fiscal Year 1997 selling, general and
administrative expenses include $2.5 million of non-recurring employee
termination expenses (including $1.9 million related to the resignation
of the Company's former Chief Executive Officer - see note 21 to the
Company's consolidated financial statements appearing elsewhere in this
Prospectus).
(c) In January 1998, the Company approved a plan for its printing division
which was designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. The Company
recognized $3.9 million of costs under such plan in Fiscal Year 1998.
In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased
growth in the business. The Company recognized $0.9 million and $4.1
million of costs under such plan in Fiscal Year 1997 and Fiscal Year
1996, respectively.
In addition, the Company recorded $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its Printing and American Color divisions in Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively. See
note 19 to the Company's consolidated financial statements appearing
elsewhere in this Prospectus.
(d) In October 1994, the Company amended its defined benefit pension plans,
which resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. The Company
recognized a curtailment gain of $3.7 million as a result of freezing
such benefits. Also in October 1994, the Board of Directors approved a
new SERP, which is a defined benefit plan for certain key executives. The
Company recognized a $0.4 million expense associated with the
establishment of the SERP.
(e) In February 1997, the Company made a strategic decision to shut down the
operation of its wholly-owned subsidiary SMC. SMC's shut down has been
accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial
statements. Sales, cost of sales and selling, general and administrative
expenses attributable to SMC for Fiscal Years 1996 and 1995 have been
reclassified to discontinued operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--
Discontinued Operations" and note 5 to the Company's consolidated
financial statements appearing elsewhere in this Prospectus.
On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, SMI, to News America. In June 1994, the Company
recorded income from the SMI Settlement of $18.5 million, net of
taxes, and when coupled with settlement expenses which had previously
been accrued, the net cash proceeds resulting from this settlement
were approximately $16.7 million.
In Fiscal Year 1996, the Company recognized settlement of the EPI
lawsuit and reversed certain accruals related to the estimated loss on
shut down of SMI. The resulting effect reflected in the Fiscal Year
1996 consolidated statement of operations was $2.9 million income in
discontinued operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 to the Company's consolidated financial
statements appearing elsewhere in this Prospectus.
(f) As part of the Transactions, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.5 million, net of zero
taxes. This extraordinary loss primarily consisted of the early
redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by
the write-off of a bond premium associated with the 15% Notes.
(g) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes resulting
from the 1993 Acquisition. The principal amount payable at maturity of
the 15% Notes remained at $100 million. The 15% Notes were redeemed in
connection with the Transactions.
(h) The deficiency of earnings to cover fixed charges is computed by
subtracting earnings before fixed charges, income taxes, discontinued
operations and extraordinary items from fixed charges. Fixed charges
consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor. The
deficiency in earnings required to cover fixed charges includes
depreciation of property, plant and equipment and amortization of
goodwill and other assets and non-cash charges which are reflected in
cost of sales and selling, general and administrative expenses, in the
following amounts (in thousands):
Fiscal Year Ended March 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Depreciation.. $28,124 $25,282 $21,385 $18,327 $17,897
Amortization.. 10,413 9,374 9,311 8,941 9,361
------ ------ ------ ------ ------
Total........ $38,537 $34,656 $30,696 $27,268 $27,258
====== ====== ====== ====== ======
(i) EBITDA is included in the Selected Historical Financial Data because
management believes that investors regard EBITDA as a key measure of a
leveraged company's performance and ability to meet its future debt
service requirements. EBITDA is defined as earnings before net interest
expense, income tax expense (benefit), depreciation, amortization, other
special charges related to asset write-off and write-downs, other income
(expense), discontinued operations and extraordinary items. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income (or
any other measure of performance under generally accepted accounting
principles) as a measure of performance or to cash flows from operating,
investing or financing activities as an indicator of cash flows or as a
measure of liquidity. Certain covenants in the Indenture and the Amended
and Restated Credit Agreement are based on EBITDA, subject to certain
adjustments.
EBITDA includes (1) $1.5 million of non-recurring American Color
charges in Fiscal Year 1998 associated with the relocation of American
Color's corporate office and various severance related expenses, and
(2) $0.6 million of non-cash charges associated with an employee
benefit program in Fiscal Year 1998.
EBITDA includes $3.9 million in restructuring costs related to its
printing division in Fiscal Year 1998 and $0.9 million and $4.1
million of restructuring costs related to its American Color division
in Fiscal Year 1997 and Fiscal Year 1996, respectively. See note 19
to the Company's consolidated financial statements appearing elsewhere
in this Prospectus.
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's Chief Executive Officer - see note 21 to
the Company's consolidated financial statements appearing elsewhere in
this Prospectus).
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to
a change in the Company's defined benefit pension plans (as discussed
in note (d) above).
</TABLE>
BUSINESS
See Items 1, 2 and 3 in Part I of the Annual Report attached as Appendix 1
hereto.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Item 7 in Part II of the Annual Report attached as Appendix 1 hereto.
MANAGEMENT
See Items 10 and 11 in Part III of the Annual Report attached as Appendix 1
hereto.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
See Item 12 in Part III of the Annual Report attached as Appendix 1 hereto.
CERTAIN TRANSACTIONS
See Item 13 in Part III of the Annual Report attached as Appendix 1 hereto.
DESCRIPTION OF THE AMENDED AND RESTATED CREDIT AGREEMENT
The following summary of the material provisions of the Amended
and Restated Credit Agreement does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Amended and Restated
Credit Agreement, a copy of which is incorporated by reference as an exhibit
to the Registration Statement of which this Prospectus is a part. Defined
terms that are used but not defined in this section have the meanings given
such terms in the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement
On May 8, 1998, the Company entered into a $145 million credit
facility with Bankers Trust Company, Morgan Stanley Senior Funding, Inc.,
General Electric Capital Corporation and a syndicate of lenders (the "Amended
and Restated Credit Agreement"). The Amended and Restated Credit Agreement
comprises (i) a $70 million revolving credit facility, which is not subject to
a borrowing base limitation, maturing on March 31, 2004, (ii) a $25 million
amortizing term loan facility maturing on March 31, 2004 and (iii) a $50
million amortizing term loan facility maturing on March 31, 2005.
Concurrently with the Company entering into the Amended and Restated Credit
Agreement, it paid off all amounts outstanding under the Bank Credit
Agreement and the Term Loan Agreement. In connection with its write-off of
deferred financing costs related to refinanced indebtedness, the Company
recorded in the first quarter of the fiscal year ending March 31, 1999 an
extraordinary loss related to early extinguishment of debt of $4.0 million,
net of taxes.
Interest under the Amended and Restated Credit Agreement is
floating, based upon existing market rates plus agreed-upon margin levels. In
addition, the Company is obligated to pay specific commitment and letter of
credit fees. Such margin levels and fees will diminish if the Company achieves
certain leverage ratio measures.
Borrowings under the Amended and Restated Credit Agreement are
secured by substantially all of the Company's assets. In addition, Holdings
has guaranteed the indebtedness under the Amended and Restated Credit
Agreement, which guarantee is secured by a pledge of all of Graphics' and its
subsidiaries' stock. The Amended and Restated Credit Agreement (1) requires
satisfaction of certain financial covenants including Minimum Consolidated
EBITDA, Consolidated Interest Coverage Ratio and Leverage Ratio requirements,
(2) requires prepayments in certain circumstances including excess cash flows,
proceeds from asset dispositions in excess of prescribed levels and certain
capital structure transactions and (3) contains various restrictions and
limitations on items including the following: (a) mergers, acquisitions,
investments and similar transactions and dividends and other
distributions, (b) the incurrence of additional liens, (c) the incurrence of
additional indebtedness, (d) the level of capital spending, (e) the
undertaking of certain investments, (f) payment of dividends or other
distributions, (g) transactions with affiliates, (h) issuances of subsidiary
stock and (i) restrictions affecting subsidiaries. In addition, the agreement
includes various other customary affirmative and negative covenants.
The failure to satisfy any of the covenants will, after giving
effect to any grace period therefor, constitute an Event of Default under the
Amended and Restated Credit Agreement, notwithstanding the ability of Graphics
to meet its debt service obligations. The Amended and Restated Credit
Agreement includes other customary events of default, including cross defaults
to other indebtedness, change of control provisions and certain events
including bankruptcy, reorganization and insolvency. An Event of Default
under the Amended and Restated Credit Agreement would allow the lenders
thereunder to accelerate or, in certain cases, would automatically cause the
acceleration of, the maturity of the indebtedness under the Amended and
Restated Credit Agreement and would restrict the ability of Graphics to meet
its obligations on the Notes.
Certain of the financial covenants contained in the Amended and
Restated Credit Agreement are set forth below.
Minimum Consolidated EBITDA
Holdings will not permit its Consolidated EBITDA for any
period of four consecutive fiscal quarters, in each case taken as one
accounting period, ended on the last day of a fiscal quarter set forth
below, to be less than the amount set forth opposite each fiscal quarter
ended in the corresponding period set forth below:
Fiscal Quarters Ended Minimum EBITDA
------------------------------------- -------------------
June 30, 1998 - December 31, 1998 $50,000,000
March 31, 1999 - December 31, 1999 52,500,000
March 31, 2000 - June 30, 2000 55,000,000
September 30, 2000 - June 30, 2001 57,500,000
September 30, 2001 - March 31, 2002 60,000,000
June 30, 2002 - September 30, 2002 62,500,000
December 31, 2002 - March 31, 2003 65,000,000
June 30, 2003 - September 30, 2003 67,500,000
December 31, 2003 - March 31, 2004 70,000,000
June 30, 2004 - September 30, 2004 72,500,000
December 31, 2004 - March 31, 2005 75,000,000
Consolidated EBITDA shall mean, for any period, Consolidated
EBIT, adjusted by (i) adding thereto without duplication (to the extent
deducted in arriving at Consolidated EBIT for such period (a) amortization,
depreciation and similar non cash charges, plus (b) restructuring charges,
severance expenses and other non-recurring charges accrued during such
period and (ii) subtracting therefrom restructuring charges, severance
expenses and other non-recurring charges paid during such period whether or
not such charges and expenses were accrued during such period (provided
such charges and expenses are accrued after the Restatement Effective
Date).
Consolidated EBIT shall mean, for any period, the
Consolidated Net of Income Holdings and its Subsidiaries for such period,
determined on a consolidated basis, before Consolidated Interest Expense
(to the extent deducted in arriving at Consolidated Net Income) and
provision for taxes based on income gains or losses from sales or assets
other than inventory sold in the ordinary course of business, in each case
that were included in arriving at Consolidated Net Income.
Consolidated Net Income shall mean, for any period, the net
after tax income of Holdings and its Subsidiaries determined on a
consolidated basis, without giving effect to any extraordinary items which
would otherwise be reflected therein and any non-cash expenses incurred or
payments made in connection with the Transaction; provided that the
following items shall be excluded in computing Consolidated Net Income
(without duplication): (i) the net income or net losses of any Person in
which any other Person or Persons (other than the Borrower or any of its
Wholly-Owned Subsidiaries) has an equity interest or interests, (ii) the
net income or net losses of any Unrestricted Subsidiary, (iii) except for
determinations expressly required to be made on a Pro Forma Basis, the net
income (or loss) of any Person accrued prior to the date it becomes a
Wholly-Owned Subsidiary or all or substantially all of the property or
assets of such Person are acquired by a Wholly-Owned Subsidiary and (iv)
the net income of any Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by such Subsidiary of such
net income is not at the time of such declaration or payment permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Subsidiary, except, in the case of clauses (i) and (ii)
above, to the extent of the amount of dividends and other distributions
actually paid to the Borrower or Wholly-Owned Subsidiaries by such Person
during such period.
Consolidated Interest Coverage Ratio
Holdings will not permit its Consolidated Interest Coverage
Ratio, as measured on the last day of any fiscal quarter, to be less than the
ratio set forth opposite each fiscal quarter ended in the corresponding period
set forth below:
Fiscal Quarters Ended Ratio
------------------------------------- -------------------
June 30, 1998 - December 31, 1998 1.40:1.0
March 31, 1999 - June 30, 1999 1.45:1.0
September 30, 1999 - December 31, 1999 1.50:1.0
March 31, 2000 - June 30, 2000 1.55:1.0
September 30, 2000 - December 31, 2000 1.65:1.0
March 31, 2001 - June 30, 2001 1.70:1.0
September 30, 2001 - December 31, 2001 1.75:1.0
March 31, 2002 - June 30, 2002 1.85:1.0
September 30, 2002 - December 31, 2002 1.90:1.0
Each fiscal quarter ended thereafter
through March 31, 2005 2.00:1.0
"Consolidated Interest Coverage Ratio" for any period means the ratio of
Consolidated EBITDA for such period to Consolidated Interest Expense for such
period, all as calculated on a Pro Forma Basis.
Leverage Ratio
Holdings will not permit the Leverage Ratio, as measured on
the last day of any fiscal quarter, to exceed the ratio set forth opposite
the last day of each fiscal quarter ended in the corresponding period set
forth below:
Fiscal Quarters Ended Ratio
------------------------------------- -------------------
June 30, 1998 - December 31, 1998 6.000:1.0
March 31, 1999 - June 30, 1999 5.875:1.0
September 30, 1999 - December 31, 1999 5.750:1.0
March 31, 2000 - June 30, 2000 5.625:1.0
September 30, 2000 5.500:1.0
December 31, 2000 5.375:1.0
March 31, 2001 - June 30, 2001 5.250:1.0
September 30, 2001 - December 31, 2001 5.125:1.0
March 31, 2002 - June 30, 2002 5.000:1.0
September 30, 2002 - December 31, 2002 4.875:1.0
March 31, 2003 - June 30, 2003 4.750:1.0
September 30, 2003 - December 31, 2003 4.625:1.0
Each fiscal quarter ended thereafter
through march 31, 2005 4.500:1.0
"Leverage Ratio" for any date means the ratio of Consolidated Debt on such
date to Consolidated EBITDA for the four quarter period most recently
then-ended, computed on a Pro Forma Basis.
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of August
15, 1995 (the "Indenture"), among Graphics, Holdings and NationsBank of
Georgia, National Association, as trustee (the "Trustee"). The terms of the
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), as in effect on the date of the Indenture. The Notes
are subject to all such terms and reference is made to the Indenture and the
Trust Indenture Act for a statement thereof. A copy of the Indenture is
filed with the Commission as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summary, which describes certain
provisions of the Indenture and the Notes, does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the Indenture
and the Notes, including the definitions therein of terms not defined herein
and those terms made a part thereof by the Trust Indenture Act.
General
The Notes are unsecured senior subordinated obligations of
Graphics, limited to $185 million aggregate principal amount, and will mature
on August 1, 2005. Interest will accrue on the Notes from the most recent
date to which interest has been paid or provided for, and will be payable in
cash semiannually in arrears at the rate of 12 3/4% per annum on the principal
amount of the Notes on each February 1 and August 1 to holders of record
thereof at the close of business on the January 15 or July 15 immediately
preceding such interest payment date.
Interest on overdue principal and (to the extent permitted by
law) on overdue installments of interest will accrue at the rate per annum
borne by the Notes. Interest on the Notes will be computed on the basis of a
360-day year of twelve 30-day months.
Optional Redemption
Except as set forth below, the Notes may not be redeemed prior
to August 1, 2000. On or after such date, the Notes may be redeemed at the
option of Graphics, at any time as a whole, or from time to time in part, on
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of the principal amount) set forth below, plus
accrued interest to the date of redemption (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing
August 1:
Year Redemption Price
- ---- ----------------
2000................................. 106.375%
2001................................. 103.188
2002 and thereafter.................. 100.000
In addition, at any time and from time to time prior to
August 1, 1998, Graphics may redeem the Notes with the proceeds actually
received by Graphics (including proceeds received by Holdings and
contributed to Graphics) from one or more Public Equity Offerings following
which there is a Public Market, at a redemption price (expressed as a
percentage of principal amount) of 110% plus accrued interest to the
redemption date; provided, however, that at least $115 million aggregate
principal amount of Notes remains outstanding after each such redemption.
Sinking Fund
There will be no mandatory sinking fund payments for the Notes.
Ranking
The Indebtedness evidenced by the Notes is subordinated in
right of payment, as set forth in the Indenture, to the payment when due of
all existing and future Senior Indebtedness of Graphics, rank pari passu with
all existing and future Senior Subordinated Indebtedness of Graphics and rank
senior in right of payment to all future Subordinated Obligations of Graphics.
At March 31, 1998, Graphics had $134.7 million of Senior Indebtedness, no
senior subordinated indebtedness other than the Notes and no subordinated
indebtedness outstanding and Graphics' subsidiaries had approximately $0.3
million of liabilities (which were effectively senior to the Notes).
Notwithstanding the foregoing, payment from the money or the proceeds of U.S.
Government Obligations held in any defeasance trust described under
"Defeasance" below will not be contractually subordinated in right of payment
to any Senior Indebtedness or subject to the restrictions described herein.
Graphics may not make any payment with respect to any Senior
Subordinated Obligations if at such time there exists a default in the payment
of any Senior Indebtedness unless (x) the default has been cured or waived and
any acceleration of such Indebtedness has been rescinded or (y) such Senior
Indebtedness has been paid in full in cash or cash equivalents. However,
Graphics may make any payment with respect to the Notes without regard to the
foregoing if Graphics and the Trustee receive written notice approving such
payment from the Representative of such Senior Indebtedness. During the
continuance of any default (other than a payment default described in the
second preceding sentence) with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or after the expiration of any applicable grace periods,
Graphics may not make any payment with respect to the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by Graphics and the
Trustee of written notice of such default from the Representative of such
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter
(or earlier (i) if such Payment Blockage Period is terminated by written
notice to the Trustee and Graphics from the Person who gave such Payment
Blockage Notice, (ii) by repayment in full of the Designated Senior
Indebtedness on behalf of which the Payment Blockage Notice was given or (iii)
if no default permitting acceleration of any Designated Senior Indebtedness is
continuing). Notwithstanding the provisions described in the immediately
preceding sentence, unless the holders of such Designated Senior Indebtedness
or the Representative of such holders shall have accelerated the maturity of
such Designated Senior Indebtedness, Graphics may, subject to the provisions
contained in the first sentence of this paragraph, resume payments on the
Notes after such Payment Blockage Period. The Notes will not be subject to
more than one Payment Blockage Notice in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period; provided, however, that if any Payment
Blockage Notice within such 360-day period is given by or on behalf of any
holders of Designated Senior Indebtedness (other than by the Bank Agent in
respect of the Amended and Restated Credit Agreement), the Bank Agent may give
another Payment Blockage Notice in relation to the Amended and Restated Credit
Agreement within such period; provided further, however, that in no event may
the total number of days during which any Payment Blockage Period or Periods
is in effect exceed 179 days in the aggregate during any 360 consecutive day
period. For purposes of the subordination provisions described hereunder, no
default or event of default (excluding defaults and events of default arising
under financial covenants) which existed or was continuing (it being
acknowledged that any subsequent action that would give rise to an event of
default pursuant to any provision under which an event of default previously
existed or was continuing shall constitute a new event of default for this
purpose) on the date of the commencement of any Payment Blockage Period with
respect to the Designated Senior Indebtedness initiating such Payment Blockage
Period shall be, or be made, the basis of the commencement of a subsequent
Payment Blockage Period by the Representative of such Designated Senior
Indebtedness, even if not within a period of 360 consecutive days, unless such
default or event of default shall have been cured or waived for a period of
not less than 90 consecutive days.
Upon any payment or distribution of assets or securities of
Graphics of any kind or character, whether in cash, property or securities,
upon a total or partial liquidation or a total or partial dissolution of
Graphics or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to Graphics or its property, the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Senior
Indebtedness in cash or cash equivalents before holders of the Notes shall be
entitled to receive any payment or distribution in respect of any Senior
Subordinated Obligations.
If payment of the Notes is accelerated because of an Event of
Default, Graphics or the Trustee shall promptly notify the holders of
Designated Senior Indebtedness (or their Representative) of the acceleration.
If any Designated Senior Indebtedness is outstanding, Graphics may not make
any payment in respect of Senior Subordinated Obligations until five Business
Days after such notice is received and, thereafter, may pay the Senior
Subordinated Obligations only if the subordination provisions of the Indenture
otherwise permit the payment at that time.
By reason of the subordination provisions contained in the
Indenture, in the event of insolvency, creditors of Graphics who are holders
of Senior Indebtedness may recover more, ratably, than the holders of the
Notes, and creditors of Graphics who are not holders of Senior Indebtedness or
the Notes may recover less, ratably, than holders of Senior Indebtedness and
may recover more, ratably, than the holders of the Notes.
Guaranty
Holdings, as primary obligor and not merely as surety, has
irrevocably, fully and unconditionally guaranteed on an unsecured senior
subordinated basis, the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all obligations of Graphics under the
Indenture and the Notes, whether for principal of or interest on the Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by
Holdings being herein called the "Guaranteed Obligations"). Holdings agreed
to pay, on a senior subordinated basis and in addition to the amount stated
above, any and all expenses (including reasonable counsel fees and expenses)
incurred by the Trustee or the Holders in enforcing any rights under the
Guaranty with respect to Holdings.
The obligations of Holdings under the Guaranty are unsecured
senior subordinated obligations. As such, the rights of Noteholders to
receive payment by Holdings pursuant to the Guaranty will be subordinated in
right of payment to the rights of holders of Senior Indebtedness of Holdings.
At March 31, 1998, Holdings had outstanding $134.7 million of Senior
Indebtedness, including its obligations under the Amended and Restated Credit
Agreement. The Indenture does not limit the incurrence of Indebtedness by
Holdings.
The Guaranty is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon Holdings and (c) enure to the benefit of and be
enforceable by the Trustee, the Holders and their successors, transferees and
assigns.
Pursuant to the Indenture, Holdings may consolidate with, merge
with or into, or transfer all or substantially all its assets to any other
Person to the same extent Graphics may consolidate with, merge with or into,
or transfer all or substantially all its assets to, any other Person;
provided, however, that if such other Person is not Graphics, Holdings'
obligations under the Indenture must be expressly assumed by such other
Person. See "Successor Company."
Certain Definitions
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by Graphics or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that
any such Restricted Subsidiary described in clauses (ii) or (iii) above is
primarily engaged in a Related Business.
"Adjusted Consolidated Assets" means at any time the total
amount of assets of Graphics and its consolidated Restricted Subsidiaries
(less applicable depreciation, amortization and other valuation reserves),
after deducting therefrom all current liabilities of Graphics and its
consolidated Restricted Subsidiaries (excluding intercompany items), all as
set forth on the consolidated balance sheet of Graphics and its consolidated
Restricted Subsidiaries as of the end of the most recent fiscal quarter ended
at least 45 days prior to the date of determination.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the covenants described under "-- Limitation on
Restricted Payments," "--Limitation on Sales of Assets and Subsidiary Stock"
and "--Limitation on Affiliate Transactions," "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power
of the Voting Stock (on a fully diluted basis) of Graphics or of rights or
warrants to purchase such stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Amended and Restated Credit Agreement" is defined to mean the
Credit Agreement, dated as of August 15, 1995 and amended and restated as of
May 8, 1998, among Holdings, Graphics, the Banks party thereto and the Bank
Agent, together with the related documents thereto (including, without
limitation, any Guarantees and security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented, replaced or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing or otherwise restructuring
(including, but not limited to, the inclusion of additional borrowers or
guarantors thereunder that are Subsidiaries of Holdings or Graphics and whose
obligations are guaranteed by Holdings or Graphics thereunder) all or a
portion of the Indebtedness under such agreement or any successor agreement.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
Graphics or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares) or
(ii) any assets of Graphics or any Restricted Subsidiary outside the ordinary
course of business of Graphics or such Restricted Subsidiary (other than (y) a
disposition by a Restricted Subsidiary to Graphics or by Graphics or a
Subsidiary to a Wholly Owned Subsidiary and (z) for purposes of the covenant
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, a Restricted Payment permitted by the covenant
described under "Certain Covenants -- Limitation on Restricted Payments");
provided, however, that for purposes of the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, the
term "Asset Disposition" shall not include any disposition of assets if such
disposition is governed by the provisions of the Indenture described under
"Successor Company."
"Average Life" means, as of the date of determination, with
respect to any Indebtedness, the quotient obtained by dividing (i) the sum of
the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Bank Agent" is defined to mean Bankers Trust Company, as agent
for the Banks pursuant to the Amended and Restated Credit Agreement, and any
successor or successors thereto.
"Banks" is defined to mean the lenders who are from time to
time parties to the Amended and Restated Credit Agreement.
"Board of Directors" means the Board of Directors of Graphics
or any committee thereof duly authorized to act on behalf of such Board.
"Capital Expenditures" means expenditures (whether paid in cash
or accrued as liabilities and including Capital Lease Obligations) of Graphics
and its Restricted Subsidiaries relating to the acquisition of equipment used
or useful in the business of Graphics or any Restricted Subsidiary or in a
Related Business.
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capitalized lease for
financial reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligation shall be the capitalized amount of
such obligation determined in accordance with GAAP; and the Stated Maturity
thereof shall be the date of the last payment of rent of any other amount due
under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Change of Control" means such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act),
other than the Permitted Holders and their respective Affiliates, becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than (A) forty percent (40%) of the total voting power of the then outstanding
Voting Stock of Graphics or Holdings and (B) the total voting power of the
then outstanding Voting Stock of Graphics or Holdings, as the case may be,
beneficially owned by the Permitted Holders and their respective Affiliates,
treating the Permitted Holders and their respective Affiliates as a "group";
or (ii) during any period of two consecutive calendar years, individuals who
at the beginning of such period constituted the Board of Directors of (A)
Graphics (together with any new directors whose election by Graphics's Board
of Directors or whose nomination for election by Graphics's Board of Directors
or whose nomination for election by Graphics's shareholders was approved by a
vote of at least two-thirds of the directors then still in office who either
were directors at the beginning of such period or whose election or nomination
for election was previously so approved) or (B) Holdings (together with any new
directors whose election by Holdings' Board of Directors or whose nomination
for election by Holdings' shareholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of such period or whose election or nomination for election was
previously so approved), in either case, cease for any reason to constitute a
majority of the directors of Graphics or Holdings, as the case may be, then in
office; or (iii) (A) Graphics or Holdings consolidates with or merges into any
other Person or conveys, transfers or leases all or substantially all its
assets to any Person or (B) any Person merges into Graphics or Holdings, in
either event pursuant to a transaction in which any Voting Stock of Graphics
or Holdings, as the case may be, outstanding immediately prior to the
effectiveness thereof is reclassified or changed into or exchanged for cash,
securities or other property; provided, however, that any consolidation,
conveyance, transfer or lease (x) between Graphics and any of its
Subsidiaries, between Holdings and any Holdings Subsidiaries, between
Subsidiaries of Graphics or between Holdings Subsidiaries (including the
reincorporation of Graphics or Holdings in another jurisdiction) or (y) for
the purpose of creating a public holding company for Graphics or Holdings in
another jurisdiction or (z) for the purpose of creating a public holding
company for Graphics or Holdings in which all holders of the capital stock of
Graphics or Holdings, as the case may be, would be entitled to receive (other
than cash in lieu of fractional shares) solely capital stock of the holding
company in amounts proportionate to their holdings of such capital stock of
Graphics or Holdings immediately prior to such transaction, shall be excluded
from the operation of this clause (iii).
"Change of Control Triggering Event" means the occurrence of
both a Change of Control and a Rating Decline.
"Code" means the Internal Revenue Code of 1986, as amended.
"Holdings Subsidiary" means a corporation a majority of the
equity ownership or the Voting Stock of which is at the time owned, directly
or indirectly, by Holdings or by one or more other Subsidiaries of Holdings,
or by Holdings and one or more other Subsidiaries of Holdings.
"Consolidated Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of EBITDA for the period of the
most recent four consecutive fiscal quarters ending at least 45 days prior to
the date of such determination to (ii) Consolidated Interest Expense for such
four fiscal quarters; provided, however, that (1) if Graphics or any
Restricted Subsidiary has Incurred any Indebtedness since the beginning of
such period that remains outstanding (other than Indebtedness Incurred under a
revolving credit or similar arrangement Incurred after the end of such four
consecutive fiscal quarters to the extent of the commitment thereunder) or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of
such new Indebtedness as if such discharge had occurred on the first day of
such period, (2) if Graphics or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness (other than
Indebtedness under a revolving credit or similar arrangement unless such
revolving credit Indebtedness has been permanently repaid) since the beginning
of such period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged on the date of the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest
Expense for such period shall be calculated on a pro forma basis as if such
discharge had occurred on the first day of such period (except for
Consolidated Interest Expense accrued (as adjusted pursuant to clause (1))
since the end of such period under a revolving credit or similar arrangement
to the extent of the commitment thereunder in effect on the date of the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio) and as if Graphics or such Restricted Subsidiary has not earned the
interest income actually earned during such period in respect of cash or
Temporary Cash Investments used to repay, repurchase, defease or otherwise
discharge such Indebtedness, (3) if since the beginning of such period
Graphics or any Restricted Subsidiary shall have made any Asset Disposition,
the EBITDA for such period shall be reduced by an amount equal to the EBITDA
(if positive) directly attributable to the assets which are the subject of
such Asset Disposition for such period, or increased by an amount equal to the
EBITDA (if negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of Graphics or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to Graphics and its continuing
Restricted Subsidiaries in connection with such Asset Dispositions for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent Graphics and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (4) if since the beginning of such period Graphics or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Subsidiary (or any Person which becomes a Restricted Subsidiary) or any
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder,
which constitutes all or substantially all of an operating unit of a business,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Investment or acquisition
occurred on the first day of such period, excluding, in the case of an
acquisition of assets or Capital Stock, any operating expense or cost
reduction of such Person or the Person to be acquired which, in the good faith
estimate of a responsible financial or accounting officer of such Person, will
be eliminated or realized, as the case may be, during the 12 month period
following the date of determination, as a result of such acquisition as if
such elimination of such operating expense or the realization of such cost
reductions were achieved on the first day of such period, and (5) if since the
beginning of such period any Person (that subsequently became a Restricted
Subsidiary or was merged with or into Graphics or any Restricted Subsidiary
since the beginning of such period) shall have made any Asset Disposition,
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (3) or (4) above if made by Graphics or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for
such period shall be calculated after giving pro forma effect thereto as if
such Asset Disposition, Investment or acquisition of assets occurred on the
first day of such period and excluding any operating expenses or cost
reductions as provided in clause (4). For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the
amount of income or earnings relating thereto, and the amount of Consolidated
Interest Expense associated with any Indebtedness Incurred in connection
therewith, the pro forma calculations shall be determined in good faith by a
responsible financial or accounting officer of Graphics. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest of such Indebtedness shall be calculated as if the rate in effect on
the date of determination had been the applicable rate for the entire period
(taking into account any Interest Rate Protection Agreement applicable to such
Indebtedness if such Interest Rate Protection Agreement has a remaining term
in excess of 12 months or, if shorter, the remaining term of the Indebtedness
to which it relates).
"Consolidated Interest Expense" means, for any period, the
total interest expense of Graphics and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such total interest expense,
and to the extent incurred by Graphics or any Restricted Subsidiary, (i)
interest expense attributable to capital leases, (ii) amortization of debt
discount and premium and debt issuance cost, (iii) capitalized interest, (iv)
non-cash interest expense, (v) commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs under Interest Rate Protection Agreements (including
amortization of fees), (vii) Preferred Stock dividends paid in respect of all
Preferred Stock of Graphics or a Restricted Subsidiary held by Persons other
than Graphics or a Restricted Subsidiary, (viii) interest incurred in
connection with Investments in discontinued operations and (ix) interest
actually paid by Graphics or any consolidated Restricted Subsidiary under any
Guarantee of Indebtedness of any Person; excluding, however, (A) any amount of
such interest expense of any Restricted Subsidiary if the net income (or loss)
of such Restricted Subsidiary is excluded in the calculation of Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income (or loss) of such Restricted Subsidiary is
excluded from the calculation of Consolidated Net Income pursuant to clause
(iii) of the definition thereof) and (B) any premiums, fees and expenses (and
any amortization thereof) payable in connection with the Transactions, all as
determined on a consolidated basis in conformity with GAAP.
"Consolidated Net Income" means, for any period, the net income
(or loss) of Graphics and its consolidated Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income:
(i) any net income or loss of any Person if such Person is not a
Restricted Subsidiary, except that subject to the limitations
contained in clause (iv) below, Graphics' equity in the net income or
loss of any such Person for such period shall be included in such
Consolidated Net Income up to, in the case of net income, the
aggregate amount of cash actually distributed by such Person during
such period to Graphics or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (iii) below) and, in the case of a net loss, the
aggregate amount of cash actually contributed by Graphics or a
Restricted Subsidiary to such Person during such period;
(ii) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to paragraph (a) of the covenant
described under "Certain Covenants -- Limitation on Restricted
Payments" (and in such case, except to the extent includable pursuant
to the foregoing clause (i) above), any net income (or loss) of any
Person acquired by Graphics or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition;
(iii) any net income or loss of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to Graphics,
except that subject to the limitations contained in clause (iv) below,
Graphics' equity in the net income or loss of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to, in the case of net income, the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period
to Graphics or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in
this clause) and, in the case of a net loss, the aggregate amount of
cash actually contributed by Graphics or another Restricted Subsidiary
to such Restricted Subsidiary during such period;
(iv) any gain or loss realized upon the sale or other disposition
of any assets of Graphics or its consolidated Subsidiaries (including
pursuant to any sale-and-leaseback arrangement) which is not sold or
otherwise disposed of in the ordinary course of business and any gain
or loss realized upon the sale or other disposition of any Capital
Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles;
provided, however, that solely for the purposes of calculating the
Consolidated Coverage Ratio (and in such case, except to the extent it is
already included pursuant to clause (i) above), "Consolidated Net Income"
shall include the amount of all cash dividends received by Graphics or any
Restricted Subsidiary from an Unrestricted Subsidiary (subject, in the case
of a dividend paid to a Restricted Subsidiary, to the limitation contained
in clause (iii) above); provided further, however, that solely for purposes
of calculating the amount of Restricted Payments that may be made pursuant
to paragraph (a) of the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments", any amortization, depreciation or other
non-cash charge relating to the Transactions or any acquisitions subsequent
to the Issue Date, including good-will, non-compete agreements, the
stepped-up basis on assets acquired and deferred financing costs, to the
extent such items reduced Consolidated Net Income, shall not be included.
"Consolidated Net Tangible Assets" as of any date of
determination, means the total amount of assets (less accumulated depreciation
or amortization, allowances for doubtful receivables, other applicable
reserves and other properly deductible items) which would appear on a
consolidated balance sheet of Graphics and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, and
after giving effect to purchase accounting and after deducting therefrom all
current liabilities of Graphics and its consolidated Restricted Subsidiaries
as well as, to the extent otherwise included, the amounts of (without
duplication): (i) minority interests in consolidated Restricted Subsidiaries
held by Persons other than Graphics or a Restricted Subsidiary; (ii) excess of
cost over fair value of assets of businesses acquired, as determined in good
faith, by the Board of Directors; (iii) any revaluation or other write-up in
book value of assets subsequent to the Issue Date as a result of a change in
the method of valuation in accordance with GAAP consistently applied; (iv)
unamortized debt discount and expenses and other unamortized deferred charges,
goodwill, patents, trademarks, service marks, trade names, copyrights,
licenses, organization or developmental expenses and other intangible items;
and (v) treasury stock.
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of Graphics and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP (excluding the
effects of foreign currency exchange adjustments under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 52), as of the
end of the most recent fiscal quarter of Graphics ending at least 45 days
prior to the taking of any action for the purpose of which the determination
is being made, as (i) the par or stated value of all outstanding Capital Stock
of Graphics plus (ii) paid-in capital or capital surplus relating to such
Capital Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Designated Senior Indebtedness" is defined to mean (i)
Indebtedness under the Amended and Restated Credit Agreement and (ii) any
other Indebtedness constituting Senior Indebtedness that, at any date of
determination, has an aggregate principal amount of at least $25 million and
is specifically designated by Graphics in the instrument creating or
evidencing such Senior Indebtedness as "Designated Senior Indebtedness."
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms or upon the happening of any event (i)
matures or is mandatorily redeemable pursuant to a sinking fund obligation or
otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of any "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the
covenants described under "Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" and "-- Change of Control Triggering Event" and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such Capital Stock pursuant to such provision prior to such
Person's repurchase of such Notes as are required to be repurchased pursuant
to the covenants described under "Certain Covenants -- Limitation on Sales of
Assets and Subsidiary Stock" and "-- Change of Control Triggering Event."
"EBITDA" for any period means the sum of Consolidated Net
Income, plus Consolidated Interest Expense, plus the following to the extent
deducted in calculating such Consolidated Net Income: (a) all income tax
expense, (b) depreciation expense, (c) amortization expense and (d) all other
non-cash charges, less all non-cash items increasing Consolidated Net Income,
in each case for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those
set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such
other statements by such other entity as approved by a significant segment of
the accounting profession. All ratios and computations based on GAAP
contained in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Transactions and
(ii) except as otherwise expressly provided, the amortization of any amount
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 in
connection with the 1993 Acquisition, the Transactions or any acquisitions
after the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
financial obligation of any other Person and any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or
other financial obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other
financial obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the
term "Guarantee" shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person
Guaranteeing any Indebtedness or financial obligation.
"Holder" or "Noteholder" means the Person in whose name a Note
is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock
of a Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed
to be Incurred by such Restricted Subsidiary at the time it becomes a
Restricted Subsidiary. The term "Incurrence" when used as a noun shall have a
correlative meaning.
"Indebtedness" of any Person means, without duplication:
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable (other than
Interest Rate Protection Agreements);
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto, all conditional sale obligations of
such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (i)
through (iii) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn upon
or, if and to the extent drawn upon, such drawing is reimbursed no
later than the third Business Day following receipt by such Person of
a demand for reimbursement following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified
Stock, and in respect of a Restricted Subsidiary, all obligations of
such Subsidiary with respect to the redemption, repayment or other
repurchase of any Preferred Stock (but excluding, in each case, any
accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or
liable, directly or indirectly, as obligor, Guarantor or otherwise,
including by means of any Guarantee; and
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the
lesser of the fair market value of such property or assets (as
determined by the Board of Directors) or the amount of the obligation
so secured.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided,
however, (i) that the amount outstanding at any time of any Indebtedness
Incurred with original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include (A) any liability for Federal, state, local or
other taxes, (B) any obligations under Interest Rate Protection Agreements or
Raw Material Hedge Agreements or (C) any liability arising from the honoring
by a bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds in the ordinary
course of business.
"Interest Rate Protection Agreement" means any interest rate or
currency swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect Graphics or any Restricted
Subsidiary against fluctuations in interest rates or currency values.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts receivable) or other extension of credit
(including by way of Guarantee or similar arrangement) or capital contribution
to (by means of any transfer of cash or other property to others or any
payment for property or services of the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary," the definition of "Restricted Payment," and the
covenant described under "Certain Covenants -- Limitation on Restricted
Payments," (i) "Investment" shall include the portion (proportionate to
Graphics' equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of Graphics at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Graphics shall be
deemed to continue to have a permanent "Investment" in such Subsidiary at the
time of such redesignation equal to the amount (if positive) equal to (x)
Graphics' "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to Graphics' equity interest in such
Subsidiary) of the fair market value of the net assets of such Subsidiary at
the time of such redesignation; and (ii) any property transferred to or from
an Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the Board
of Directors.
"Investment Grade" means (i) BBB- (or its equivalent) or higher
by S&P or (ii) Baa3 (or its equivalent) or higher by Moody's or (iii) the
equivalent of such rating by a substitute Rating Agency.
"Issue Date" means the date on which the Notes are originally
issued.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or
other title retention agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and its
successors.
"MSCP Entities" means, collectively, Morgan Stanley Capital
Partners III, L.P., a Delaware limited partnership, Morgan Stanley Capital
Investors, L.P., a Delaware limited partnership, and MSCP III 892 Investors,
L.P., a Delaware limited partnership.
"MSLEF" means The Morgan Stanley Leveraged Equity Fund II,
L.P., a Delaware limited partnership.
"Net Available Cash" from an Asset Disposition means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal (but not interest) pursuant to a note or
installment receivable or otherwise, including upon release to Graphics or a
Restricted Subsidiary from any reserve established by Graphics or such
Restricted Subsidiary against any liabilities associated with such Asset
Disposition, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring person of
Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form) in each case net of all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition (without
regard to the consolidated results of operations of Graphics and its
Subsidiaries, taken as whole), and in each case net of all payments made on
any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be repaid out of the proceeds from such Asset Disposition, and,
until released to Graphics or a Restricted Subsidiary, net of appropriate
amounts to be provided by Graphics or any Restricted Subsidiary of Graphics as
a reserve against any liabilities associated with such Asset Disposition,
including pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Disposition, all as determined in
accordance with GAAP, and net of all distributions and other payments required
to be made to minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Permitted Holders" means, collectively, MSLEF, the MSCP
Entities and the other investors, including the officers and directors of
Graphics or Holdings, who beneficially own Voting Stock of Holdings on the
Issue Date after giving effect to the Transactions, or, upon the death of such
an individual investor, such person's executors, administrators, testamentary
trustees, heirs, legatees or beneficiaries.
"Permitted Investment" means (i) an Investment in Graphics or
in a Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary or such Person is a Related
Business; (ii) an Investment by Graphics or any Restricted Subsidiary in
another Person if as a result of such Investment such other Person is merged
or consolidated with or into, or transfers or conveys all or substantially all
its assets to, Graphics or a Restricted Subsidiary; provided, however, that
such Person's primary business is a Related Business; (iii) a Temporary Cash
Investment; (iv) receivables owing to Graphics or any Restricted Subsidiary,
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as Graphics or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business in accordance
with past practices of Graphics or of its Restricted Subsidiaries; (vii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to Graphics or any Restricted Subsidiary
or in satisfaction of judgments, (viii) Interest Rate Protection Agreements
and Raw Material Hedge Agreements and (ix) Investments at any time not
exceeding $12 million (valued at the fair market value at the time any such
Investment was made).
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become
due at the relevant time.
"Public Equity Offering" means an underwritten primary public
offering of common stock of Graphics or Holdings pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity
Offering has been consummated and (y) at least 15% of the total issued and
outstanding common stock of Graphics or Holdings has been distributed by means
of an effective registration statement under the Securities Act or sales
pursuant to Rule 144 under the Securities Act.
"Rating Agencies" means S&P and Moody's; provided, however,
that if S&P or Moody's or both shall not make a rating of the Notes publicly
available, the term Rating Agencies shall refer to a nationally recognized
securities rating agency or agencies, as the case may be, selected by Graphics
to substitute for S&P or Moody's or both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the
following categories: BB, B, CCC, CC, C and D (or equivalent successor
categories); (ii) with respect to Moody's, any of the following categories: Ba,
B, Caa, Ca, C and D (or equivalent successor categories); and (iii) the
equivalent of any such category of S&P or Moody's used by a substitute Rating
Agency. In determining whether the rating of the Notes has decreased by one
or more gradations, gradations within Rating Categories (+ and - for S&P; 1, 2
and 3 for Moody's; or the equivalent gradations for another Rating Agency)
shall be taken into account (e.g., with respect to S&P, a decline in rating
from BB+ to BB, as well as from BB- to B+, will constitute a decrease of one
gradation).
"Rating Date" means the date that is 90 days prior to the
earlier of (i) a Change of Control and (ii) public notice of the occurrence of
a Change of Control or of the intention by Graphics or Holdings to effect a
Change of Control.
"Rating Decline" means the occurrence of the following on, or
within 90 days after, the date of public notice of the occurrence of a Change
of Control or of the intention by Graphics to effect a Change of Control
(which period shall be extended so long as the rating of the Notes is under
publicly announced consideration for possible downgrade by any Rating Agency):
(a) in the event the Notes are rated by any Rating Agency on the Rating Date
as Investment Grade, the rating of such Notes by both Rating Agencies shall be
below Investment Grade, or (b) in the event the Notes are rated below
Investment Grade by both Rating Agencies on the Rating Date, the rating of the
Notes by either Rating Agency shall be decreased by one or more gradations.
"Raw Material Hedge Agreement" means an agreement designed to
hedge against fluctuations in the cost of raw materials entered into by
Graphics or its Restricted Subsidiaries in the ordinary course of business in
connection with their business operations.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue Indebtedness in exchange, substitution or replacement for, such
Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of Graphics or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with the Indenture, including
Indebtedness that Refinances Refinancing Indebtedness; provided, however, that
(i) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees, accrued interest and expenses, including
any premium and defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of
Graphics.
"Registration Agreement" means the Registration Agreement dated
August 10, 1995, among Graphics, Holdings and Morgan Stanley & Co.
Incorporated.
"Related Business" means as of any date the businesses of
Graphics and its Restricted Subsidiaries on such date and any business
related, ancillary or complementary thereto.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the
direct or indirect holders of its Capital Stock (other than dividends or
distributions payable solely in its Capital Stock (other than Disqualified
Stock) or options, warrants or other rights to acquire its Capital Stock
(other than Disqualified Stock) and dividends or distributions payable solely
to Graphics or a Restricted Subsidiary, and other than pro rata dividends or
other distributions made by a Subsidiary of Graphics that is not a Wholly
Owned Subsidiary to minority stockholders (or owners of an equivalent interest
in the case of a Subsidiary that is an entity other than a corporation)), (ii)
the purchase, redemption or other acquisition or retirement for value of any
Capital Stock of Graphics held by any Person or of any Capital Stock of a
Subsidiary of Graphics held by any Affiliate of Graphics (other than a
Restricted Subsidiary), including the exercise of any option to exchange any
Capital Stock (other than into Capital Stock of Graphics that is not
Disqualified Stock), (iii) the purchase, repurchase, redemption, defeasance or
other acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition) or (iv) the making of any
Investment, other than a Permitted Investment, in any Person; provided,
however, that the purchase or redemption of Subordinated Obligations (or
dividends to Holdings for the purchase or redemption of Indebtedness of
Holdings) upon the occurrence of an "asset sale" or "change of control" shall
not constitute a "Restricted Payment" if, prior to such purchase or redemption
(or dividend), Graphics shall have purchased all Notes tendered pursuant to an
Excess Proceeds Offer or an offer to purchase the Notes upon the occurrence of
a Change of Control Triggering Event with respect to such "asset sale" or
"change of control."
"Restricted Subsidiary" means any Subsidiary of Graphics that
is not an Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Graphics
secured by a Lien.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" of any Person means the following
obligations of such Person, whether outstanding on the Issue Date or
thereafter Incurred (i) all Indebtedness and other monetary obligations of
such Person under (A) the Amended and Restated Credit Agreement and all fees,
expenses and indemnities payable in connection therewith, (B) any Interest
Rate Agreement which the Company has determined in good faith at the time of
the Incurrence thereof is related to indebtedness under the Amended and
Restated Credit Agreement (which determination shall be conclusive) and all
fees, expenses and indemnities payable in connection therewith or (C) any
Guarantee of Indebtedness or monetary obligations described in clauses (A) and
(B), and (ii) all other Indebtedness of such Person (other than the Notes),
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such obligations are not superior
in right of payment to the Notes or the Guaranty, as the case may be;
provided, however, that Senior Indebtedness of such Person shall not include
(1) any obligation of such Person to any Subsidiary of such Person, (2) any
liability for Federal, state, local or other taxes owned or owing by such
Person, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities), (4) any Indebtedness of such Person
(and any accrued and unpaid interest in respect thereof) which is expressly
subordinated in right of payment to any other Indebtedness or other obligation
of such Person or (5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the Indenture. Senior Indebtedness
will also include interest accruing subsequent to events of bankruptcy of
Graphics, Holdings and their respective Subsidiaries at the rate provided for
in the documentation governing such Senior Indebtedness, whether or not such
interest is an allowed claim enforceable against the debtor in a bankruptcy
case under relevant bankruptcy law.
"Senior Subordinated Indebtedness" means (i) with respect to
Graphics, the Notes and any other Indebtedness of Graphics that specifically
provides that such Indebtedness is to rank pari passu with the Notes in right
of payment and is not subordinated by its terms in right of payment to any
Indebtedness or other obligation of Graphics which is not Senior Indebtedness
of Graphics and (ii) with respect to Holdings, the Guaranty and any other
Indebtedness of Holdings that specifically provides that such Indebtedness is
to rank pari passu with the Guaranty in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of Holdings which is not Senior Indebtedness of Holdings.
"Senior Subordinated Obligations" means any principal, premium,
if any, and interest on the Notes payable pursuant to the terms of the Notes
or upon acceleration, including any amounts received on the exercise of rights
of rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase price of the Notes or
amounts corresponding to such principal, premium, if any, or interest on the
Notes.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of Graphics within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Group and its successors.
"Stated Maturity" means with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of Graphics
(whether outstanding on the Issue Date or thereafter incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of
the total voting power of shares of Voting Stock is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or
any agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) investments in commercial paper, maturing
not more than 90 days after the date of acquisition, issued by a corporation
(other than an Affiliate of Graphics) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P, and (v) investments in securities with maturities of six
months or less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
S&P or "A" by Moody's.
"Unrestricted Subsidiary" means (i) any Subsidiary of Graphics
that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) of Graphics to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock or Indebtedness of, or holds any Lien on any
property of, Graphics or any Restricted Subsidiary of Graphics that is not a
Subsidiary of the Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such
designation would be permitted under the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments." The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (x) Graphics
could Incur $1.00 of additional Indebtedness under the first paragraph of the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness"
and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced by the Company to the
Trustee by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares) is owned by
Graphics or one or more Wholly Owned Subsidiaries.
Certain Covenants
Set forth below are certain covenants contained in the
Indenture:
Limitation on Indebtedness
(a) Graphics shall not, and shall not permit any of its
Restricted Subsidiaries to, Incur any Indebtedness; provided, however, that
Graphics may Incur Indebtedness if on the date of such Incurrence the
Consolidated Coverage Ratio would be greater than 1.75 to 1.0, on or prior to
August 1, 1998, and 2.0 to 1.0, thereafter.
(b) Notwithstanding the foregoing paragraph (a), Graphics and
its Restricted Subsidiaries may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to one or more credit
facilities (including related Guarantees and security agreements) in
an aggregate principal amount outstanding at any time not to exceed
the greater of (a) the sum of (x) 90% of the consolidated book value
of the accounts receivable of Graphics and its Restricted Subsidiaries
and (y) 60% of the consolidated book value of the inventory of
Graphics and its Restricted Subsidiaries, in each case as determined
at the time of the respective Incurrence in accordance with GAAP and
(b) $75,000,000; provided, however, that no Restricted Subsidiary
shall Incur Indebtedness pursuant to this clause (1) in an aggregate
principal amount outstanding at any time which exceeds the sum of (a)
90% of the book value of its accounts receivable on a stand-alone
basis and (b) 60% of the book value of its inventory on a stand-alone
basis, in each case as determined in accordance with GAAP;
(2) Indebtedness of Graphics (and any Guarantee or Liens with
respect thereto) originally Incurred pursuant to the term loan
provisions of the Bank Credit Agreement and any refinancing thereof in
an aggregate principal amount outstanding at any time not to exceed
(i) $60,000,000 less (ii) the aggregate sum of all principal payments
actually made from time to time under the Bank Credit Agreement or
such refinancing as a result of the application of Net Available Cash
pursuant to the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock;"
(3) Indebtedness owed to and held by Graphics or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to Graphics or another
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness;
(4) the Notes;
(5) Indebtedness outstanding on the Issue Date after giving effect
to the Transactions (other than Indebtedness described in clause (1),
(2), (3) or (4) of the covenant described hereunder);
(6) Guarantees by Graphics or a Restricted Subsidiary of
Indebtedness of a Restricted Subsidiary otherwise permitted to be
Incurred by the Restricted Subsidiary (other than Indebtedness
permitted by clause (10) below) or Guarantees by a Restricted
Subsidiary of Senior Indebtedness of Graphics permitted to be Incurred
by Graphics under the Indenture;
(7) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) of the covenant described hereunder or
pursuant to clause (4) or (5) above or clause (9) or (10) below;
provided, however, that Refinancing Indebtedness the proceeds of which
are used to Refinance the Notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (7) if (A) in case the Notes are
Refinanced in part or the Indebtedness to be Refinanced is pari passu
with the Notes, such Refinancing Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Refinancing Indebtedness is Incurred or is outstanding, is expressly
made pari passu with, or subordinate in right of payment to, the
remaining Notes and (B) in case the Indebtedness to be Refinanced is
subordinated in right of payment to the Notes, such Refinancing
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Refinancing Indebtedness is Incurred
or is outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be
Refinanced is subordinated to the Notes; provided further, however,
that Refinancing Indebtedness the proceeds of which are used to
Refinance Indebtedness Incurred pursuant to clause (10) below shall
only be permitted under this clause (7) if such Refinancing
Indebtedness is Incurred by Graphics or the Restricted Subsidiary that
originally Incurred the Indebtedness pursuant to clause (10) below;
(8) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
agreements providing for indemnification, adjustment of purchase price
or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of Graphics
or any of its Restricted Subsidiaries pursuant to such agreements, in
any case Incurred in connection with the acquisition or disposition of
any business, assets or Restricted Subsidiary (other than Guarantees
of Indebtedness or other obligations Incurred by any Person acquiring
all or any portion of such business, assets or Restricted Subsidiary
for the purpose of financing such acquisition), in a principal amount
not to exceed the gross proceeds actually received by Graphics or any
Restricted Subsidiary in connection with such disposition;
(9) Indebtedness, in an aggregate principal amount outstanding at
any time not to exceed $5 million, Incurred by Graphics in connection
with the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of Graphics, any of
its Subsidiaries or Holdings, options on any such shares or related
stock appreciation rights or similar securities (including phantom
equity rights) held by employees, former employees, directors or
former directors of Holdings, Graphics or its Subsidiaries (or their
estates or beneficiaries under their estates), upon death, disability,
retirement, termination of employment or pursuant to any agreement
under which such shares of stock or related rights were issued;
provided, however, that (A) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, is expressly made subordinate in right of
payment to the Notes and (B) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, provides that no payments of principal of
such Indebtedness, including by way of sinking fund, mandatory
redemption or otherwise (including defeasance), may be made by
Graphics at any time while any of the Notes are outstanding;
(10) Indebtedness of any Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by Graphics (other than Indebtedness Incurred
as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary or was acquired by Graphics);
(11) Capital Lease Obligations;
(12) Indebtedness constituting purchase money obligations for
property acquired in the ordinary course of business or other similar
financing transactions;
(13) Indebtedness Incurred to finance Capital Expenditures or the
acquisition of Additional Assets in any fiscal year in an aggregate
principal amount not to exceed 6% of Graphics' consolidated net sales
for the immediately preceding fiscal year and Refinancing Indebtedness
in respect thereof; and
(14) Indebtedness (which may, but need not, be incurred under the
Amended and Restated Credit Agreement), in addition to that described
in clauses (1) through (13), in an aggregate principal amount
outstanding at any time not in excess of the greater of (A) $25
million and (B) 10% of the Consolidated Net Worth of Graphics as of
the end of the most recent fiscal quarter ending at least 45 days
prior to the date of the incurrence of such Indebtedness.
(c) Graphics shall not Incur any Indebtedness pursuant to
paragraph (a) or (b) above if such Indebtedness is subordinate in right of
payment to any Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right of payment to
Senior Subordinated Indebtedness. In addition, Graphics shall not Incur any
Secured Indebtedness which is not Senior Indebtedness unless contemporaneously
therewith effective provision is made to secure the Notes equally and ratably
with such Secured Indebtedness for so long as such Secured Indebtedness is
secured by a Lien.
Limitation on Restricted Payments
(a) Graphics shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to make a Restricted Payment if at the
time Graphics or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) Graphics is not able to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a) of the covenant described under "-- Limitation on
Indebtedness;" or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of:
(a) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of
the fiscal quarter immediately following the fiscal quarter
during which the Old Notes were issued to the end of the most
recent fiscal quarter ending at least 45 days prior to the date
of such Restricted Payment (or, in case such Consolidated Net
Income shall be a deficit, minus 100% of such deficit);
(b) the aggregate Net Cash Proceeds received by Graphics as a
capital contribution or from the issuance or sale of its Capital
Stock (other than Disqualified Stock) subsequent to the Issue
Date (other than an issuance or sale to a Subsidiary of Graphics
and other than an issuance or sale to an employee stock ownership
plan or other trust established by Graphics or any of its
Subsidiaries for the benefit of their employees to the extent the
purchase by such plan or trust is financed by Indebtedness of
such plan or trust and for which Graphics is liable as Guarantor
or otherwise);
(c) the amount by which Indebtedness of Graphics is reduced on
Graphics' balance sheet upon the conversion or exchange (other
than by a Subsidiary of Graphics) subsequent to the Issue Date,
of any Indebtedness for Capital Stock (other than Disqualified
Stock) of Graphics (less the amount of any cash, or other
property, distributed by Graphics upon such conversion or
exchange);
(d) an amount equal to the net reduction in Investments in any
Person resulting from dividends, repayments of loans or advances,
or other transfers of assets, in each case to Graphics or any
Restricted Subsidiary from such Person, or for the sale of such
Investment by Graphics or a Restricted Subsidiary or from the
redesignation of an Unrestricted Subsidiary as a Restricted
Subsidiary; provided, however, that the foregoing sum shall not
exceed the amount of Investments previously made by Graphics or
any Restricted Subsidiary in such Person, which amount was
treated as a Restricted Payment; and
(e) $5 million.
(b) The provisions of the foregoing paragraph (a) shall not
prohibit:
(i) any purchase or redemption of Capital Stock or Subordinated
Obligations of Graphics made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Capital Stock of Graphics
(other than Disqualified Stock and other than Capital Stock issued or
sold to a Subsidiary of Graphics or an employee stock ownership plan
or similar trust established by Graphics or any of its Subsidiaries
for the benefit of their employees to the extent the purchase by such
plan or trust is financed by Indebtedness of such plan or trust and
for which Graphics is liable as Guarantor or otherwise); provided,
however, that (A) such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale (to the extent used for such purchase or
redemption) shall be excluded from the calculation of amounts under
clause (3)(b) of paragraph (a) above;
(ii) any purchase or redemption of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Indebtedness of Graphics which is permitted to be Incurred
pursuant to the covenant described under "-- Limitation on
Indebtedness;" provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted
Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with this covenant; provided, however, that at the time of
payment of such dividend, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that the
payment of such dividend shall be included in the calculation of the
amount of Restricted Payments;
(iv) the repurchase (or dividends to Holdings for the repurchase)
of shares of, or options to purchase shares of, Capital Stock of
Graphics or any of its Subsidiaries or of Holdings from employees,
former employees, directors or former directors of Holdings, Graphics
or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant
to the terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the Board of Directors under
which such persons purchase or sell or are granted the option to
purchase or sell, shares of such stock; provided, however, that the
aggregate amount of such repurchases or dividends shall not exceed $2
million in cash consideration in any calendar year or $12 million in
cash consideration in the aggregate (unless such repurchases or
dividends are made with the proceeds of insurance policies and the
shares of Capital Stock are repurchased from the executors,
administrators, testamentary trustees, heirs, legatees or
beneficiaries) plus the aggregate Net Cash Proceeds from any
reissuance during such calendar year of Capital Stock to employees,
officers or directors of Graphics or its Subsidiaries (which Net Cash
Proceeds shall be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above, and that any consideration in
excess of such amounts is in the form of Indebtedness that would be
permitted to be Incurred under clause (8) of paragraph (b) of the
covenant described under "-- Limitation on Indebtedness," provided
that to the extent less than $2 million in cash consideration (plus
the aggregate Net Cash Proceeds from any such reissuance during such
calendar year, as described above) is paid in any single calendar year
pursuant to this clause (iv), the unused portion may be carried
forward and paid in any subsequent calendar year; provided further,
however, that such cash repurchases or dividends, except to the extent
made with the proceeds of insurance policies, shall be included in the
calculation of the amount of Restricted Payments;
(v) the payment of dividends on the Capital Stock of Graphics or
Holdings following any Public Equity Offering, of up to 6% per annum
of the net proceeds received by Graphics in such Public Equity
Offering (including proceeds received by Graphics as a capital
contribution from Holdings from the net proceeds received by Holdings
in such Public Equity Offering); provided, however, that any such
dividends shall be included in the calculation of the amount of
Restricted Payments;
(vi) payments or distributions pursuant to appraisal rights
required by law in connection with a consolidation, merger or transfer
of assets that complies with the provisions of the Indenture described
under "Successor Company" below; provided, however, that any such
payments or distributions shall be included in the calculation of the
amount of Restricted Payments;
(vii) any payments pursuant to any tax-sharing agreement between
Graphics and any other Person with which Graphics is required or
permitted to file a consolidated tax return or with which Graphics is
or could be part of a consolidated group for tax purposes; provided,
however, that any such payment shall be excluded in the calculation of
the amount of Restricted Payments;
(viii) payments to Holdings necessary for Holdings to pay corporate
overhead expenses, not to exceed $250,000 in any fiscal year;
provided, however, that any such payments shall be excluded in the
calculation of the amount of Restricted Payments;
(ix) payments to Holdings sufficient to permit Holdings to pay for
the registration of its securities with the SEC (including all
reasonable professional fees and expenses); provided, however, that
any such payments shall be excluded in the calculation of the amount
of Restricted Payments; and
(x) Investments in Unrestricted Subsidiaries made either in
exchange for Capital Stock (other than Disqualified Stock) of Graphics
or with the Net Cash Proceeds of the sale (other than to a Restricted
Subsidiary) of Capital Stock (other than Disqualified Stock) of
Graphics received by Graphics not more than 12 months prior to the
date of such Investment (provided that such Net Cash Proceeds shall be
excluded from the calculation of amounts of clause (3)(B) of paragraph
(a) above); provided, however, that any such Investments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries
Graphics shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (i) to pay dividends or make any other distributions on
its Capital Stock owned by, or pay any Indebtedness owed to, Graphics, (ii) to
make any loans or advances to Graphics or (iii) transfer any of its property
or assets to Graphics, except:
(1) any encumbrance or restriction pursuant to the Bank Credit Agreement
or any other agreement in effect at or entered into on the date of the
Indenture and any extensions, refinancings, renewals or replacements of any
such agreement; provided, however, that the encumbrances and restrictions
in any such extension, refinancing, renewal or replacement are no less
favorable in any material respect to the Noteholders than those
encumbrances or restrictions being extended, refinanced, renewed or
replaced;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by Graphics (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by Graphics) and outstanding on such
date;
(3) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (2) of this covenant or contained in any amendment to an
agreement referred to in clause (2) of this covenant; provided, however,
that the encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or amendment are no
less favorable in any material respect to the Noteholders than encumbrances
and restrictions with respect to such Restricted Subsidiary contained in
the agreements referred to in clause (2) of this covenant;
(4) any encumbrance or restriction consisting of customary nonassignment
provisions in leases governing leasehold interests to the extent such
provisions restrict the transfer of the lease or the property leased
thereunder.
(5) in the case of clause (iii) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition;
(7) encumbrances and restrictions contained in any Indebtedness or any
agreement relating to any Indebtedness of Graphics or a Restricted
Subsidiary permitted pursuant to the covenant described under "Limitation
on Indebtedness"; provided, however, that either (i) such encumbrances and
restrictions are no more restrictive than the encumbrances and restrictions
imposed by the Amended and Restated Credit Agreement or (ii) each
Restricted Subsidiary subject to any such encumbrances or restrictions
after the Issue Date shall Guarantee the Notes on a senior subordinated
basis; and
(8) any encumbrance or restriction existing under or by reason of
applicable law.
Nothing contained in the covenant described hereunder shall
prevent Graphics or any Restricted Subsidiary from restricting the sale or
other disposition of property or assets of Graphics or any Restricted
Subsidiary that secure Indebtedness of Graphics or any of its Restricted
Subsidiaries.
Limitation on Sales of Assets and Subsidiary Stock
In the event and to the extent that the Net Available Cash
received by Graphics or any Restricted Subsidiary from one or more Asset
Dispositions occurring on or after the Issue Date in any period of 12
consecutive months exceeds 10% of Adjusted Consolidated Assets as of the
beginning of such 12-month period, then Graphics shall (i) within 12 months
after the date such Net Available Cash so received exceeds such 10% of
Adjusted Consolidated Assets and to the extent Graphics elects (or is required
by the terms of any Indebtedness) (A) apply an amount equal to or less than
such excess Net Available Cash (1) to repay, or permanently reduce commitments
to make loans or advances resulting in, Senior Indebtedness of Graphics or
Indebtedness of any Restricted Subsidiary, or (2) to acquire the Notes and any
other Senior Subordinated Indebtedness of Graphics (provided that the
percentage of such Senior Subordinated Indebtedness of Graphics acquired (as a
percent of the aggregate principal amount thereof at such time) shall be no
greater than the percentage of the Notes so acquired (as a percent of the
aggregate principal amount of the Notes at such time) in each case owing to or
held by a Person other than Graphics or any Affiliate of Graphics or (B)
invest an amount, equal to or less than the difference between such excess Net
Available Cash and the amount so applied pursuant to clause (A) (or enter into
a definitive agreement committing to so invest within 12 months after the date
of such agreement), in Additional Assets and (ii) apply an amount equal to the
difference between such excess Net Available Cash and the amount applied
pursuant to clause (i) as provided in the following paragraphs of this
covenant. The amount of such excess Net Available Cash required to be applied
pursuant to clause (ii) of the preceding sentence shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate
amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer
(as defined below) totals at least $5 million, Graphics must, not later than
the fifteenth Business Day of such month, make an offer (an "Excess Proceeds
Offer") to purchase Notes from the Holders in accordance with the Indenture at
a purchase price equal to 100% of the principal amount of such Notes plus
accrued interest to the date of purchase (the "Excess Proceeds Payment").
Graphics will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations thereunder in the event that such Excess Proceeds are
received by Graphics under this covenant and Graphics is required to
repurchase Notes as described above. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
Limitation on Affiliate Transactions
Graphics shall not, and shall not permit any Restricted
Subsidiary to, enter into, renew or extend any transaction (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of Graphics (an "Affiliate Transaction") unless
the terms thereof (1) are no less favorable to Graphics or such Restricted
Subsidiary (or, in the case of an Affiliate Transaction between Graphics and a
Restricted Subsidiary, are no less favorable to Graphics or are, in the good
faith determination of the Board of Directors, in the best interests of
Graphics) than those which could be obtained at the time of such transaction
in arm's-length dealings with a Person who is not such an Affiliate and (2) if
such Affiliate Transaction involves an amount in excess of $2.5 million, the
terms thereof are set forth in writing and either (A) have been approved by a
majority of the disinterested members of the Board of Directors or (B) for
which Graphics or such Restricted Subsidiary delivers to the Trustee a written
opinion of a nationally recognized investment banking firm stating that the
transaction is fair to Graphics or such Restricted Subsidiary from a financial
point of view.
The provisions of the preceding paragraph shall not prohibit
(i) any Restricted Payment permitted to be paid pursuant to the covenant
described under "-- Limitation on Restricted Payments," (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or
otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii)
the grant of stock options or similar rights to employees and directors of
Graphics pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with
the past practices of Graphics or its Restricted Subsidiaries; (v) the payment
of reasonable fees to directors of Graphics and its Restricted Subsidiaries
who are not employees of Graphics or its Restricted Subsidiaries; (vi) any
payments or other transactions pursuant to any tax-sharing agreement between
Graphics and any other Person with which Graphics is required or permitted to
file a consolidated tax return or with which Graphics is or could be part of a
consolidated group for tax purposes; (vii) any Affiliate Transaction between
Graphics and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries;
(viii) the Transactions; (ix) any employment or other agreement providing for
compensation between Graphics or any of its Restricted Subsidiaries and James
T. Sullivan or Stephen M. Dyott that is approved, in good faith, by the Board
of Directors; (x) the payment of fees to Morgan Stanley & Co. Incorporated or
its Affiliates for financial, advisory, consulting or investment banking
services that the Board of Directors of Graphics deems to be advisable or
appropriate for Graphics or any Subsidiary to obtain (and including the
payment to Morgan Stanley & Co. Incorporated or its Affiliates of any
underwriting discounts or commissions or placement agency fees in connection
with the issuance and sale of any securities by Graphics or any Subsidiary of
Graphics); or (xi) sales of Capital Stock of Holdings or Graphics to Morgan
Stanley & Co. Incorporated or its Affiliates.
Change of Control Triggering Event
Upon the occurrence of a Change of Control Triggering Event,
each holder of Notes will have the right to require Graphics to repurchase all
or any part of such holder's Notes at a repurchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment date) in
accordance with the terms described below. The Indenture will provide that,
prior to the mailing of the notice referred to below, but in any event within
30 days following any Change of Control Triggering Event, Graphics covenants
to (i) repay in full all Indebtedness under the Amended and Restated Credit
Agreement (and terminate all commitments thereunder) or offer to repay in full
all Indebtedness under the Amended and Restated Credit Agreement (and
terminate all commitments thereunder) and to repay the Indebtedness owed to
(and terminate the commitments of) each lender which has accepted such offer
or (ii) obtain the requisite consents under the Amended and Restated Credit
Agreement to permit the repurchase of the Notes as provided below. Graphics
shall first comply with the covenant in the immediately preceding sentence
before it shall be required to repurchase Notes pursuant to the provisions
described below. Graphics' failure to comply with the covenant described in
the second preceding sentence resulting in a failure to mail the notice
referred to below shall constitute an Event of Default under clause (iv) and
not in clause (ii) under "Defaults" below.
Within 30 days following any Change of Triggering Event,
Graphics will mail a notice to each holder stating
(i) that a Change of Control Triggering Event has occurred and that such
holder has the right to require Graphics to repurchase all or any part of
such holder's Notes at a repurchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
(ii) the circumstances and relevant facts regarding such Change of
Control Triggering Event (including, to the extent available,
information with respect to pro forma historical income, cash flow and
capitalization of Graphics after giving effect to such Change of Control
Triggering Event);
(iii) the repurchase date (which will be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(iv) the instructions, determined by Graphics consistent with the
Indenture, that a holder must follow in order to have its Notes
repurchased.
The obligation of Graphics to offer to purchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain
circumstances make more difficult or discourage a takeover of Graphics and
Holdings, and, thus, the removal of incumbent management. Subject to the
limitations discussed below, Graphics could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of Indebtedness outstanding at such time or
otherwise affect Graphics' capital structure or credit ratings.
Graphics' ability to pay cash to the Holders of Notes upon a
repurchase may be limited by Graphics' then existing financial resources.
Graphics will comply with any tender offer rules under the
Exchange Act which may then be applicable, including Rule 14e-1, in connection
with any offer required to be made by Graphics to repurchase the Notes as a
result of a Change of Control Triggering Event. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
of the covenant described hereunder, Graphics shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the covenant described hereunder by virtue thereof.
The provisions relative to Graphics' obligation to make an
offer to repurchase the Notes as a result of a Change of Control Triggering
Event may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
Limitation on the Issuance of Preferred Stock of Restricted
Subsidiaries
Graphics shall not sell or otherwise dispose of any shares of
Preferred Stock of a Restricted Subsidiary, and shall not permit any
Restricted Subsidiary, directly or indirectly, to issue, sell or otherwise
dispose of any shares of its Preferred Stock, except, in each case, (i) to
Graphics or a Wholly Owned Subsidiary or (ii) if, immediately after giving
effect to such issuance, sale or other disposition, such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary.
SEC Reports
Notwithstanding that Graphics may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, Graphics
shall file with the Commission and provide the Trustee and Noteholders with
such annual reports and such information, documents and other reports which
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
Person subject to such Sections, such information, documents and other reports
to be so filed and provided at the times specified for the filing of such
information, documents and reports under such Sections; provided, however,
that, so long as Holdings is the Guarantor of the Notes, the reports,
information and other documents required to be filed and provided as described
hereunder shall be those of Holdings rather than Graphics.
Except for the limitations on dividends and redemptions of
capital stock and the limitations on the Incurrence of Indebtedness, the
Indenture will not contain any covenants or provisions that may afford holders
of the Notes protection in the event of a highly leveraged transaction.
Successor Company
Neither Holdings nor Graphics may consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person (other than Graphics or Holdings, respectively, or a Wholly
Owned Subsidiary with a positive net worth immediately prior to such
consolidation, merger or transfer of assets; provided, however, that in
connection with any such consolidation, merger or transfer, no consideration
(other than Capital Stock (excluding Disqualified Stock) of the surviving
Person, Holdings or Graphics) shall be issued or distributed to the
stockholders of Graphics) unless: (i) the resulting, surviving or transferee
Person (the "Successor Company") is organized and existing under the laws of
the United States of America or any State thereof or the District of Columbia
and such entity (if not the Company) expressly assumes by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Holdings or Graphics, as the case may be,
under the Indenture and the Notes; (ii) immediately prior to and after giving
effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Subsidiary of the Successor Company
as a result of such transaction as having been Incurred by the Successor
Company or such Subsidiary at the time of such transaction), no Default has
happened and is continuing; (iii) in the case of a transaction involving
Graphics, immediately after giving effect to such transaction, the
Consolidated Coverage Ratio of the Successor Company is at least 1:1; provided,
however, that, if the Consolidated Coverage Ratio of Graphics before giving
effect to such transaction is within the range set forth in column (A) below,
then the Consolidated Coverage Ratio of the Successor Company shall be at
least equal to the lesser of (1) the ratio determined by multiplying the
percentage set forth in column (B) below by the Consolidated Coverage Ratio of
Graphics prior to such transaction and (2) the ratio set forth in column (C)
below:
(A) (B) (C)
- ------------------------------- ------- -------
1.11:1 to 1.99:1............... 90% 1.50:1
2.00:1 to 2.99:1............... 80% 2.10:1
3.00:1 to 3.99:1............... 70% 2.40:1
4.00:1 or more................. 60% 2.50:1
(iv) in the case of a transaction involving Graphics, immediately after giving
effect to such transaction, the Successor Company has Consolidated Net Worth
in an amount which is not less than the Consolidated Net Worth of Graphics
prior to such transaction and (v) Holdings or Graphics, as the case may be,
delivers to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture. The Successor Company will be
the successor to Holdings or Graphics, as the case may be, and shall succeed
to, and be substituted for, and may exercise every right and power of,
Holdings or Graphics, as the case may be, under the Indenture but the
predecessor company, in the case of a lease, shall not be released from the
obligation to pay the principal of and interest on the Notes.
Defaults
An Event of Default is defined in the Indenture as (i) a
default in the payment of interest on the Notes when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by Graphics to comply with its
obligations under "Successor Company" above, (iv) the failure by Graphics to
comply for 30 days after notice with any of its obligations under the
covenants described above in "Certain Covenants" under "Limitation on
Indebtedness", "Limitation on Restricted Payments", "Limitation on
Restrictions on Distributions from Subsidiaries", "Limitation on Sales of
Assets and Subsidiary Stock" (other than a failure to repurchase Notes),
"Limitation on Affiliate Transactions", "Change of Control Triggering Event"
(other than a failure to repurchase Notes), or "SEC Reports", (v) the failure
by Holdings or Graphics to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of Holdings, Graphics
or any Significant Subsidiary is not paid within any applicable grace period
after final maturity thereof or becomes, or is declared by the holders thereof
to be, immediately and unconditionally due and payable because of a default
and the total amount of such Indebtedness unpaid or becoming or declared to
be due and payable exceeds $10 million and such failure continues (or such
payment shall not have been waived or extended or such Indebtedness shall
continue to be due and payable) for 30 days after notice (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of Holdings, Graphics or a Significant Subsidiary (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of
money in excess of $10 million (provided that the amount of such money
judgment or decree shall be calculated net of any insurance coverage that the
Company has determined in good faith is available in whole or in part with
respect to such money judgment or decree) is rendered against Holdings,
Graphics or a Significant Subsidiary, remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed within 10
days after notice (the "judgment default provision") or (ix) the Guaranty
ceases to be in full force and effect (other than in accordance with the terms
of such Guaranty) or Holdings denies or disaffirms its obligations under the
Guaranty. However, a default under clause (iv), (v), (vi) and (viii) will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify Graphics of the default and
Graphics does not cure such default within the time specified after receipt of
such notice.
If an Event of Default occurs and is continuing, the Trustee or
the holders of at least 25% of principal amount of the outstanding Notes may
declare the principal amount of and accrued but unpaid interest on all the
Notes as of the date of such declaration to be due and payable. Upon such a
declaration, such amounts shall be due and payable immediately. If an Event
of Default relating to certain events of bankruptcy, insolvency or
reorganization of Graphics occurs and is continuing, the principal amount of
and any accrued but unpaid interest on all the Notes will ipso facto become
and be immediately due and payable without any declaration or other act on the
part of the Trustee or any holders of the Notes. Under certain circumstances,
the holders of a majority in principal amount of the outstanding Notes may
rescind any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default occurs and is continuing,
the Trustee will be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders
of the Notes unless such holders have offered to the Trustee reasonable
indemnity or security against any loss, liability or expense. Except to
enforce the right to receive payment of principal, premium (if any) or
interest when due, no holder of a Note may pursue any remedy with respect to
the Indenture or the Notes unless (i) such holder has previously given the
Trustee notice that an Event of Default is continuing, (ii) holders of at
least 25% in principal amount of the outstanding Notes have requested the
Trustee to pursue the remedy, (iii) such holders have offered the Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the holders of
a majority in principal amount of the outstanding Notes have not given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights
of any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to each holder
of the Notes notice of the Default within 90 days after it occurs. Except in
the case of a Default in the payment of principal of or interest on any Note,
the Trustee may withhold notice if and so long as a committee of its trust
officers determines that withholding notice is in the interest of the holders
of the Notes. In addition, Graphics is required to deliver to the Trustee,
within 120 days after the end of the fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. Graphics also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action Graphics is taking
or proposes to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent
of each holder of an outstanding Note, no amendment may, among other things,
(i) reduce the amount of Notes whose holders must consent to an amendment,
(ii) reduce the rate of or extend the time for payment of interest on any
Note, (iii) reduce the principal of or extend the Stated Maturity of any Note
or reduce the principal amount of any Note, (iv) reduce the premium payable
upon the redemption of any Note or change the time at which any Note may be
redeemed as described under "Optional Redemption" above, (v) make any Note
payable in money other than that stated in the Note, (vi) impair the right of
any holder of the Notes to receive payment of principal of and interest on
such holder's Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Notes,
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions, (viii) make any change to the
subordination provisions of the Indenture that would adversely affect the
Noteholders or (ix) make any change in the Guaranty that would adversely
affect the Noteholders.
Without the consent of any holder of the Notes, Graphics and
the Trustee may amend or supplement the Indenture to cure any ambiguity,
omission, defect or inconsistency, to provide for the assumption by a
successor corporation of the obligations of Graphics under the Indenture, to
provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form
for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to
add additional guarantees with respect to the Notes, to secure the Notes, to
add to the covenants of Graphics or Holdings for the benefit of the holders of
the Notes or to surrender any right or power conferred upon Graphics or
Holdings, to provide for the issuance of the Notes, to make any change that
does not adversely affect the rights of any holder of the Notes or to comply
with any requirement of the Commission in connection with the qualification of
the Indenture under the Trust Indenture Act. However, no amendment may be
made to the subordination provisions of the Indenture that adversely affects
the rights of any holder of Senior Indebtedness then outstanding unless the
holders of such Senior Indebtedness (or their Representative) consents to such
change.
The consent of the holders of the Notes is not necessary under
the Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective,
Graphics is required to mail to holders of the Notes a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the Notes, or any defect therein, will not impair or affect the
validity of the amendment.
Defeasance
Graphics at any time may terminate all its obligations under
the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain a registrar and paying agent
in respect of the Notes. Graphics at any time may terminate its obligations
under the covenants described under "Certain Covenants", the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under
"Defaults" above and the limitations contained in clauses (iii) and (iv) under
"Successor Company" above ("covenant defeasance").
Graphics may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. If
Graphics exercises its legal defeasance option, payment of the Notes may not be
accelerated because of an Event of Default with respect thereto. If Graphics
exercises its covenant defeasance option, payment of the Notes may not be
accelerated because of an Event of Default specified in clause (iv), (vi),
(vii) (with respect only to Significant Subsidiaries) or (viii) under
"Defaults" above or because of the failure of Graphics to comply with clause
(iii) or (iv) under "Successor Company" above. If Graphics exercises its
legal defeasance option or its covenant defeasance option, Holdings will be
released from all its obligations with respect to the Guaranty.
In order to exercise either defeasance option, Graphics must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money
or U.S. Government Obligations for the payment of principal of and interest on
the Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an opinion of
counsel to the effect that holders of the Notes will not recognize income,
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal
Revenue Service or other change in applicable Federal income tax law).
Concerning the Trustee
On December 4, 1995, The Bank of New York purchased the
corporate trust business of NationsBank of Georgia, National Association, and
became the Trustee under the Indenture and the Registrar and Paying Agent with
regard to the Notes.
Governing Law
The Indenture provides that it and the Notes will be governed
by, and construed in accordance with, the laws of the State of New York
applicable to contracts executed and to be performed entirely in such State.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which represents the opinion of Shearman
& Sterling, counsel to the Company, describes the material United States
federal income tax consequences of the acquisition, ownership and disposition
of the Notes. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed on the date
hereof and all of which are subject to change, possibly with retroactive
effect, or different interpretations. This discussion assumes that all of the
Notes will be held as capital assets (i.e., generally assets that are held for
investment), within the meaning of Section 1221 of the Code, and will not be
part of a straddle, a hedge or a conversion transaction, within the meaning of
Section 1258 of the Code. The discussion is for general information only, and
does not address all of the tax consequences that may be relevant to
particular purchasers in light of their personal circumstances, or to certain
types of purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities or foreign persons).
Persons considering the purchase of Notes should consult their tax advisors
with regard to the applications of the United States federal income tax laws
to their particular situations, as well as any tax consequences arising under
the laws of any state, local, or foreign taxing jurisdictions.
The Notes
Stated Interest. Each holder of Notes must include as ordinary
interest income the interest attributable to such Notes at the time it accrues
or is received, in accordance with the holder's accounting method for United
States federal income tax purposes.
The Notes were not issued with original issue discount ("OID"),
unless the existence of Graphics' obligation to offer to repurchase such Notes
upon a Change of Control Triggering Event affects the yield or maturity date
of the Notes. In the event of a Change of Control Triggering Event, Graphics
will be required to offer to repurchase the Notes. Based on the applicable
regulations, the right of holders of the Notes to require repurchase upon the
occurrence of a Change of Control Triggering Event will not affect the yield or
maturity date of the Notes unless, based on all the facts and circumstances as
of the issue date, it is more likely than not that such an event giving rise
to the repurchase will occur. Graphics has not treated the Change of Control
Triggering Event provisions as affecting the computation of the yield to
maturity. If the Change of Control Triggering Event provisions were to affect
the computation of the yield to maturity, the Notes could be treated as having
been issued with OID in the amount of the premium payable upon exercise of the
holder's rights under such provisions.
Sale, Exchange or Retirement. Upon the sale, exchange or
retirement of a Note, a holder will recognize taxable gain or loss equal to
the difference between the amount realized on the sale, exchange or retirement
(reduced, in the case of a cash basis taxpayer, by an amount attributable to
accrued stated interest, which is taxable as such) and such holder's adjusted
tax basis in such Note. A holder's adjusted tax basis in a Note will
generally equal the cost of such Note to such holder, increased by any accrued
interest and market discount previously included in taxable income by the
holder, and reduced by any amortized bond premium and any payments received by
the holder, all with respect to such Note.
Subject to the exception discussed below for market discount,
gain or loss recognized on the sale, exchange or retirement of a Note
generally will be capital gain or loss and will be long-term capital gain or
loss if at the time of sale, exchange or retirement such Note has been held
for more than one year.
Amortizable Bond Premium and Market Discount. If a holder
purchased a Note for an amount that is greater than the amount payable at
maturity, such holder will be considered to have purchased such Note with
"bond premium." The amount of bond premium is the excess of (i) the holder's
tax basis in such Note, over (ii) the amount payable at maturity (or on an
earlier call date if it results in a smaller amortizable bond premium). Such
holder may elect (in accordance with applicable Code provisions) to amortize
such premium using a constant yield method over the remaining term of such
Note (or until an earlier call date if it resulted in a smaller amount of bond
premium) and to offset interest otherwise required to be included in income in
respect of such Note during any taxable year by the amortized amount of such
excess for such taxable year. Such election, once made, is irrevocable
(unless permission is received from the Internal Revenue Service (the "IRS"))
and applies to all taxable bonds held during the taxable year for which the
election is made or subsequently acquired. A holder who has elected to
amortize premium using the constant yield method may also elect to compute
interest accruals by treating the purchase as a purchase at original issuance
and applying the constant yield method.
If a holder purchased a Note for an amount that is less than
the stated redemption price at maturity, such holder will generally be
considered to have purchased such Note with "market discount." For this
purpose, the stated redemption price at maturity of a Note will equal its
principal amount. Market discount with respect to a Note is the excess of the
stated redemption price at maturity over the amount paid by the holder for such
Note. However, the amount of market discount will be considered zero if it
would otherwise be less than 1/4 of 1 percent of the stated redemption price
of such Note at maturity multiplied by the number of complete years to
maturity (after the holder acquired such Note). If a Note is subject to the
market discount rules, a holder will generally be required to (i) treat any
gain realized with respect to such Note as ordinary income to the extent
market discount accrued during the period such holder held the Note, (ii)
possibly treat any payment on such Note (other than stated interest) as
ordinary income to the extent market discount accrued during the period such
holder held such Note and (iii) defer the deduction of all or a portion of the
interest expense on any indebtedness incurred or maintained by such holder to
purchase or carry such Note. If such Note is disposed of in a nontaxable
transaction (other than a nonrecognition transaction described in Section
1276(c) of the Code), accrued market discount will be includable as ordinary
income to the holder as if such holder had sold such Note at its then fair
market value. Market discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of such Note, unless
the holder irrevocably elects (on an instrument-by-instrument basis) to accrue
market discount on the basis of a constant interest rate. A holder may elect
to include market discount in income currently as it accrues (on either a
ratable or constant yield basis), in which case the rule described above
regarding deferral of interest deductions will not apply. An election to
include market discount currently, once made, will apply to all market
discount obligations acquired by the holder on or after the first day of the
first taxable year to which the election applies, and may not be revoked
without the consent of the IRS. In the case of a holder who has made both of
the elections described above with respect to such Note, such a holder may
elect to compute interest accruals by treating the purchase as a purchase at
original issuance and applying the constant yield method.
Because of the complexity of the rules relating to bond premium
and market discount, holders should consult their tax advisors as to the
application of these rules to their particular circumstances and as to the
merit of making any elections in connection therewith.
Backup Withholding and Information Reporting
The information reporting requirements of the Code and Treasury
Regulations apply to certain payments of principal, premium, if any, and
interest (including OID) on a Note, and to proceeds of the sale or redemption
of a Note. Certain holders may also be subject to backup withholding at a
rate of 31% on any payments made with respect to, and proceeds of disposition
of, the Notes. Backup withholding will apply to such payments if the holder
fails to furnish a correct taxpayer identification number (social security
number or employer identification number). Backup withholding may also apply
to payments of interest to a holder if such holder has failed to report
interest or dividend income to the IRS and the IRS has so notified the payor
or, in certain circumstances, if a holder has failed to certify that such
holder is not subject to such backup withholding, or failed to otherwise
comply with the applicable requirements of the backup withholding rules. Any
amount withheld under these backup withholding rules will be creditable
against the holder's federal income tax liability provided that the required
information is furnished to the IRS. Certain holders (including, among
others, corporations) are not subject to the backup withholding requirements.
The procedures described above for withholding tax on interest payments, and
some of the associated backup withholding and information reporting rules, are
currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules.
PLAN OF DISTRIBUTION
This Prospectus is to be used by MS&Co. in connection with
offers and sales in market-making transactions at negotiated prices relating
to prevailing market prices at the time of sale. MS&Co. may act as principal
or agent in such transactions. MS&Co. has no obligation to make a market in
the Notes and may discontinue its market-making activities at any time without
notice, at its sole discretion.
There is currently no established public market for the Notes.
Graphics does not currently intend to apply for listing of the Notes on any
securities exchange or approval for quotation through any automated quotation
system. Therefore, any trading that does develop will occur on the
over-the-counter market. The Company has been advised by MS&Co. that it
intends to make a market in the Notes but it has no obligation to do so and
any market-making may be discontinued at any time without notice. No
assurance can be given that an active public market for the Notes will develop.
MS&Co. acted as placement agent in connection with the original
private placement of the Old Notes and received a placement fee of $5.6
million in connection therewith. MS&Co. is affiliated with entities that
beneficially own a substantial majority of the outstanding shares of capital
stock of Holdings. An affiliate of MS&Co. holds an $11.5 million
participation in the Amended and Restated Credit Agreement and collects
customary fees in connection with its lending role thereunder. Such affiliate
also collected $0.5 million in fees in connection with the 1998 Refinancing.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby
were passed on for Graphics and Holdings by Shearman & Sterling, New York, New
York. Shearman & Sterling has performed, and will continue to perform, legal
services for MSLEF and the MSCP Entities, companies controlled by MSLEF and
the MSCP Entities and MS&Co.
EXPERTS
The consolidated financial statements and schedules of ACG
Holdings, Inc. at March 31, 1998 and 1997, and for each of the three fiscal
years in the period ended March 31, 1998, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph with respect to an accounting change mentioned in note 15 to the
consolidated financial statements) appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
Appendix 1
Holdings' and Graphics' Annual Report on Form 10-K
For the Fiscal Year Ended March 31, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Aggregate market value of the voting and non-voting Common Stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 134,812 shares outstanding of its Common Stock, $.01
Par Value, as of June 11, 1998 (all of which are privately owned and not
traded on a public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page
Referenced
Form 10-K
----------
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal proceedings........................................... 8
Item 4. Submission of matters to a vote of security holders......... 9
PART II
Item 5. Market for registrant's common equity and related stockholder
matters..................................................... 10
Item 6. Selected financial data..................................... 11
Item 7. Management's discussion and analysis of financial condition
and results of operations................................... 15
Item 8. Financial statements and supplementary data................. 28
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................... 60
PART III
Item 10. Directors and executive officers............................ 61
Item 11. Executive compensation...................................... 62
Item 12. Security ownership of certain beneficial owners and
management...................................................67
Item 13. Certain relationships and related transactions.............. 68
PART IV
Item 14. Exhibits, financial statement schedules and reports on
Form 8-K.................................................... 70
Signatures.................................................. 81
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (the "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Act of 1934.
Discussions containing such forward-looking statements may be found in Items 1,
3 and 7 hereof, as well as within this Report generally. In addition, when used
in this Report, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the forward-looking statements
as a result of many factors outside the control of ACG Holdings, Inc.
("Holdings") formerly Sullivan Communications, Inc. ("Communications"), together
with its wholly-owned subsidiary, American Color Graphics, Inc. ("Graphics")
formerly Sullivan Graphics, Inc., (collectively the "Company"), including
fluctuations in the cost of paper and other raw materials used by the Company,
changes in the advertising and printing markets, actions by the Company's
competitors particularly with respect to pricing, the financial condition of the
Company's customers, the financial condition and liquidity of the Company, the
general condition of the United States economy, demand for the Company's
products and services and the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as the
Company's current plans, estimates and beliefs. The Company does not
undertake and specifically declines any obligation to publicly release the
results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 1. BUSINESS
General
The Company is a successor to a business that commenced operations in 1926, and
is one of the largest national diversified commercial printers in North America
with ten printing plants in eight states and Canada and fifteen prepress
facilities located throughout the United States. The Company operates primarily
in two business sectors of the commercial printing industry: printing (which
accounted for approximately 84% of total sales during the fiscal year ended
March 31, 1998 ("Fiscal Year 1998")) and digital imaging and prepress services
conducted through its American Color division (which accounted for approximately
16% of total sales in Fiscal Year 1998). The Company's printing business and
American Color division are both headquartered in Nashville, Tennessee.
Partnerships affiliated with Morgan Stanley Dean Witter & Co. currently own
61.4% of the outstanding common stock and 72.5% of the outstanding preferred
stock of Holdings.
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger dated March 12, 1993, as amended (the "Merger Agreement"),
between Communications and SGI Acquisition Corp. ("Acquisition Corp."),
Acquisition Corp. was merged with and into Communications (the "1993
Acquisition"). Acquisition Corp. was formed by The Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF II"), certain institutional
investors and certain members of management (the "Purchasing Group") for
the purpose of acquiring a majority interest in Communications.
Acquisition Corp. acquired a substantial and controlling majority interest
in Communications in exchange for $40 million in cash. In the 1993
Acquisition, Communications continued as the surviving corporation and the
separate corporate existence of Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the
"Shakopee Merger") with Shakopee Valley Printing, Inc. ("Shakopee").
Shakopee was formed to effect the purchase of certain assets and assumption
of certain liabilities of Shakopee Valley Printing, a division of Guy
Gannett Communications. On December 22, 1994, pursuant to an Agreement for
the Purchase of Assets between Guy Gannett Communications (the "Seller")
and Shakopee (the "Buyer"), the Seller agreed to sell (effective at the
close of business on December 22, 1994) certain assets and transfer certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase
price of approximately $42.6 million, primarily financed through the
issuance of 35,000 shares of common stock and bank borrowings. The 35,000
shares were purchased by Morgan Stanley Capital Partners III, L.P., Morgan
Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group
Trust and Leeway & Co. Each of the MSCP III Entities is affiliated with
Morgan Stanley Dean Witter & Co. In addition, the other stockholders of
Shakopee were also stockholders of the Company.
On March 11, 1996, Graphics sold its 51% interest in National Inserting
Systems, Inc. ("NIS"). The proceeds from the sale were used to repay
indebtedness under the Bank Credit Agreement (as defined below).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs (the "Medina Facility") for cash and assumption of
certain liabilities of Gowe, Inc. (the "Medina Acquisition").
During March 1996, the Company completed the construction and start-up of a
plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech is dedicated to
the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In February of the fiscal year ended March 31, 1997 ("Fiscal Year 1997"),
the Company made a strategic decision to shut down the operations of its
wholly-owned subsidiary Sullivan Media Corporation ("SMC"). SMC's shut
down was accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial
statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and note 5 of
the Company's consolidated financial statements.
Market data used throughout this report was obtained from industry
publications and internal Company estimates. While the Company believes
such information is reliable, the accuracy of such information has not been
independently verified and cannot be guaranteed.
Printing
The Company's printing business, which accounted for approximately 84%, 86%
and 85% of the Company's sales in Fiscal Year 1998, Fiscal Year 1997 and
the fiscal year ending March 31, 1996 ("Fiscal Year 1996"), respectively,
produces retail advertising inserts, comics (newspaper Sunday comics, comic
insert advertising and comic books), and other publications.
Retail Advertising Inserts (80% of printing sales in Fiscal Year 1998 and
Fiscal Year 1997 and 75% in Fiscal Year 1996). The Company believes that
it is one of the largest printers of retail advertising inserts in the
United States. Retail advertising inserts are preprinted advertisements,
generally in color, that display products sold by a particular retailer or
manufacturer. Advertising inserts are used extensively by many different
retailers, including discount, department, supermarket, home center, drug
and automotive stores. Inserts are an important and cost effective means
of advertising for these merchants. Advertising inserts are primarily
distributed through insertion in newspapers but are also distributed by
direct mail or in-store by retailers. They generally advertise for a
specific, limited sale period. As a result, advertising inserts are both
time sensitive and seasonal. The Company prints advertising inserts for
approximately 300 retailers.
Comics (14% of printing sales in Fiscal Year 1998 and Fiscal Year 1997 and
16% in Fiscal Year 1996, include newspaper Sunday comics, comic insert
advertising and comic books). The Company believes that it is one of the
largest printers of comics in the United States. The Company prints Sunday
comics for over 300 newspapers in the United States and Canada and prints a
significant share of the annual comic book requirements of Marvel
Entertainment Group, Inc. ("Marvel").
Other Publications (6% of printing sales in Fiscal Year 1998 and Fiscal
Year 1997 and 9% in Fiscal Year 1996). The Company prints local
newspapers, T.V. guide listings and other publications.
In January 1998, the Company approved a plan for its printing division
which was designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring Costs and Other Special Charges" and note 19 to the Company's
consolidated financial statements.
Printing Production
The Company's network of ten printing plants in the United States and
Canada is strategically positioned to service major metropolitan centers
and provide the Company with distribution efficiencies and shorter
turnaround times; two factors instrumental in continuing the Company's
success in servicing large national and regional accounts. There are three
printing processes used to produce advertising insert and newspaper
supplements: offset lithography (heatset and cold), rotogravure and
flexography. The Company principally uses heatset offset and flexographic
web printing equipment in its printing operations. The Company owns a
substantial majority of its printing equipment, which currently consists of
36 heatset offset presses, 5 coldset offset presses and 11 flexographic
presses. Most of the Company's advertising inserts and all of its other
publications and comic books are printed using the heatset offset process,
while some advertising inserts and substantially all of the Company's
newspaper Sunday comics and comic advertising inserts are printed using the
flexographic process.
In the offset process, images are distinguished chemically from non-image
areas of a metal plate and transferred from the plate to a rubber blanket
and then to the paper surface. The printed web goes through an oven which
dries the solvents from the ink, thereby setting the ink on the paper. In
the cold offset process, the ink solvents are absorbed into the paper.
Because heatset offset presses can print on a wide variety of papers and
produce sharper reproductions, the heatset offset process provides a more
colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes
flexible plates and rapid-drying, water-based (as opposed to solvent-based)
inks. The flexographic image area results from a raised surface on a
polymer plate which is transferred directly to the paper surface.
Flexography is used extensively in printing high quality consumer goods
packaging. The Company's flexographic printing generally provides vibrant
color reproduction at lower cost than heatset offset printing. The
strengths of flexography compared with the rotogravure and offset processes
are faster press set up times, brighter colors, reduced paper waste,
reduced energy use and maintenance costs, and environmental advantages due
to the use of water-based inks. Faster set up times make the process
suited to commercial customers with shorter runs and extensive regional
versioning.
In addition to advertising insert capacity, certain equipment parameters
are critical to competing in the advertising insert market, including cut-
off length, folding capabilities and in-line finishing. Cut-off length is
one of the determinants of the size of the printed page. Folding
capabilities for advertising inserts must include a wide variety of page
sizes, page counts and special paper folding effects. Finally, many
advertising inserts require gluing or stitching of the product, adding
cards, trimming and numbering. These production activities generally are
done in-line with the press to meet the expedited delivery schedules and
pricing required by many customers. The Company believes that its mix and
configuration of presses and press services allows for efficient tailoring
of printing services to customers' product needs.
Digital Imaging and Prepress Services
The Company's digital imaging and prepress services business is conducted
by its American Color division ("American Color") which accounted for
approximately 16%, 14% and 13% of the Company's Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 sales, respectively. The Company believes
American Color is one of the largest full-service providers of digital
imaging, prepress and color separation services in the United States and a
technological leader in its industry. American Color commenced operations
in 1975 and maintains 15 full service locations nationwide.
American Color assists its customers in the capture, manipulation,
transmission and distribution of images. The majority of its work leads to
the production of four-color separations in a format appropriate for use by
printers. In recent years, technological advances have made it possible to
replace largely manual and photography-based production methods with
computer-based, electronic means for producing four-color films faster and
at lower costs. American Color makes page changes, including typesetting,
and combines digital page layout information with electronically captured
and color-corrected four-color images. From these digital files, proofs,
final corrections and, finally, four-color films or digital output are
produced for each advertising or editorial page. The final four-color
films or digital output enable printers to prepare plates for each color
resulting in the appearance of full color in the printed page.
American Color's revenue from these traditional services is being
supplemented by new revenue sources from electronic prepress services such
as digital image storage, facilities management (operating digital imaging
and prepress service facilities at a customer location), computer-to-plate
services, creative services, consulting and training services and software
and data management. American Color has been a leader in implementing
these new technologies, enabling it to reduce unit costs and effectively
service the increasingly complex demands of its customers more quickly than
many of its competitors. American Color has also been one of the leaders
in the integration of electronic page make-up, microcomputer-based design
and layout, and digital cameras into prepress production.
The digital imaging and prepress services industry is highly fragmented,
primarily consisting of smaller local and regional companies, with only a
few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share.
Many smaller digital imaging and prepress companies have left the industry
in recent years due to their inability to keep pace with technological
advances in the industry.
In April 1995, the Company implemented a plan for its American Color
division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring Costs and Other Special Charges" and note 19 to
the Company's consolidated financial statements.
Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress
services businesses:
Modern Equipment. The Company believes that its web heatset
offset and flexographic web printing equipment is among the most advanced
in the industry and that the average age of its equipment is significantly
less than the majority of its regional competitors and is comparable to its
major national competitors. The Company is also committed to a
comprehensive, long-term maintenance program which enhances the reliability
and extends the life of its presses and other production equipment. It
also believes that its digital imaging and prepress equipment is
significantly more advanced than many of its smaller regional competitors,
many of whom have not incorporated digital prepress technologies to the
same extent as the Company, nor adopted an open systems environment which
allows greater flexibility and more efficient maintenance.
Strong Customer Base. The Company provides printing services to a
diverse base of customers, including approximately 300 retailers and over
300 newspapers in the United States and Canada. The customer base includes
a significant number of the major national retailers and larger newspaper
chains as well as numerous smaller regional retailers. The Company's
consistent focus on providing high quality printing products and strong
customer service at competitive prices has resulted in long-term
relationships with many of these customers. American Color's customer base
includes large and medium-sized customers in the retail, publishing and
catalog businesses, many of whom also have long-term relationships with the
Company. Although the digital imaging and prepress services business has
generally been on a spot bid basis in the past, the Company has been
successful in continuing to increase the proportion of its business under
long-term contracts.
Competitive Cost Structure. The Company has reduced the variable
and fixed costs of production at its printing facilities over the past
several years and believes it is well positioned to maintain its
competitive cost structure in the future due to economies of scale. The
Company has also reduced both labor and material costs (the principal
variable production costs) in its digital imaging and prepress services
business primarily through the adoption of new digital prepress production
methodologies.
Strong Management Team. Since the 1993 Acquisition, the Company
has strengthened its printing management group by hiring experienced
managers with a clear focus on growth and continued cost reduction,
resulting in an improved cost structure and a well-defined strategy for
future expansion. The Company also has strengthened its management group
in its digital imaging and prepress services business, filling a number of
senior, regional and plant management positions with individuals who the
Company believes will manage the digital imaging and prepress services
business for growth and profitability and will continue to upgrade its
capabilities.
National Presence. The Company's nine printing plants in the
United States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround
times, all of which are instrumental in the Company's continued success in
servicing its large national and regional retail accounts. The Company's
expanded sales and marketing groups provide greater customer coverage and
enable it to more successfully penetrate regional markets. The Company
believes that its 15 digital imaging and prepress facilities provide it
with contingency capabilities, increased capacity during peak periods,
access to top quality internal technical personnel throughout the country,
short turnaround time and other customer service advantages.
Strategy. The Company's objective is to increase shareholder value by
growing its revenues, increasing its market share and reducing costs. The
Company's strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that the Company's level of
national sales coverage, when coupled with its significant industry
experience and customer-focused sales force, will result in unit growth.
In an effort to stimulate unit volume growth, the Company has strengthened
its printing sales group. Unit volume growth is also expected to result
from continued capital expansion and selective printing acquisitions. In
addition, in its digital imaging and prepress services business, the
Company has expanded its sales force, strengthened training, more closely
focused its marketing efforts on new, larger customers and implemented a
revised incentive compensation program.
Continue to Improve Product Mix. The Company intends to increase
its share of the retail advertising insert market. In addition, the
Company expects to continue to adjust the mix of its customers and products
within the retail advertising insert market to those that are more
profitable and less seasonable and to maximize the use of the Company's
equipment. The Company is also continuing expansion of its printing
facilities' capabilities for in-plant prepress and postpress services. The
Company's digital imaging and prepress services business will continue to
focus on high value-added new business opportunities, particularly large-
scale projects that will best utilize the breadth of services and
technologies the Company has to offer. Additionally, the Company will
continue to pursue large facilities management opportunities as well as
national and large regional customers that require more sophisticated
levels of service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The
Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the
Company plans to continue to maximize scale advantages in the purchasing,
technology and engineering areas. The Company also intends to continue to
gain variable cost efficiencies in its digital imaging and prepress
services business by using its technical resources to improve digital
prepress workflows at its various facilities. The Company also believes it
will be able to reduce its per unit technical, sales and management costs
as its sales volumes increase in this business.
Continue to Make Opportunistic Acquisitions. An integral part of
the Company's long-term growth strategy includes a plan to selectively
assess and acquire other printing and digital imaging and prepress services
companies that the Company believes will enhance its leadership position in
these industries.
Customers and Distribution
Customers. The Company sells its printing products and services to a large
number of customers, primarily retailers and newspapers, and all of the
products are produced in accordance with customer specifications. The
Company performs a portion of its printing work, primarily the printing of
Sunday comics and comic books, under long-term contracts with its
customers. The contracts vary in length and many of the contracts
automatically extend for one year unless there has been notice to the
contrary from either of the contracting parties within a certain number of
days before the end of any term. For the balance of its printing work, the
Company obtains varying time commitments from its customers ranging from
job to job to annual allocations. Printing prices are generally fixed
during such commitments; however, the Company's standard terms of trade
call for the pass-through of changes in the cost of raw materials,
primarily paper and ink.
American Color's customers consist of retailers, magazine publishers,
newspaper publishers, printers, catalog sales organizations, consumer
products companies, advertising agencies and direct mail advertisers. Its
customers typically have a need for high levels of technical expertise,
short turnaround times and responsive customer service. In addition to its
historical regional customer base, American Color is increasingly focused
on larger, national accounts that have a need for a broad range of fully
integrated services and communication capabilities requiring leading edge
technology. This trend results in an increasing amount of contractual
business related to facilities management arrangements with customers. The
Company's contracts typically extend from three to five years in length.
The printing and American Color divisions have historically had certain
common customers and their ability to cross-market is an increasingly
valuable tool as computer-to-plate, regional versioning, electronic digital
imaging, facilities management and speed to market become more important to
their customers. This enables the Company to provide more comprehensive
solutions to customers' digital imaging and prepress and printing needs
No single customer accounted for sales in excess of 10% of the Company's
consolidated sales in Fiscal Year 1998. The Company's top ten customers
accounted for approximately 34% of consolidated sales in Fiscal Year 1998.
Distribution. The Company distributes its printing products primarily by
truck to customer designated locations, primarily newspapers. Costs of
distribution are generally paid by the customers, and most shipping is by
common carrier. American Color generally distributes its products via
electronic transmission, overnight express, or other methods of personal
delivery or by courier.
Competition
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and the Company competes with numerous national,
regional and local printers. A trend of industry consolidation in recent
years can be attributed to (1) customer preferences for larger printers
with a greater range of services, (2) capital requirements and (3)
competitive pricing pressures.
The Company believes that competition in the printing business is based
primarily on quality and service at a competitive price. The advertising
insert business is a large, fragmented industry in which the Company
competes for national accounts with several large national printers,
several of whom are larger and better capitalized than the Company. In
addition, the Company also competes with numerous regional printers for the
printing of advertising inserts. Although the Company faces competition
principally from one other company (Big Flower Press Holdings, Inc.) in the
printing of Sunday newspaper comics in the United States, there are
numerous newspapers that print their own Sunday comics. The Company's
other publication business competes with many large national and regional
commercial printers.
American Color competes with numerous digital imaging and prepress service
firms on both a national and regional basis. The industry is highly
fragmented, primarily consisting of smaller local and regional companies,
with only a few national full-service digital imaging and prepress
companies such as American Color, none of which has a significant
nationwide market share. Many smaller digital imaging and prepress
companies have left the industry in recent years due to their inability to
keep pace with the technological advances required to service increasingly
complex customer demands. The Company believes that the digital imaging
and prepress services sector will continue to be subject to high levels of
ongoing technological change and the need for capital expenditures to keep
up with such change.
Raw Materials
The primary raw materials used in the Company's printing business are paper
and ink. The Company purchases substantially all of its ink and related
products under long-term ink supply contracts. Throughout the fiscal year
ended March 31, 1995 ("Fiscal Year 1995") and the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper declined. During Fiscal Year 1998,
paper prices remained relatively stable. Management expects that, as a
result of the Company's strong relationships with key suppliers, its
material costs will remain competitive within the industry. In accordance
with industry practice, the Company generally passes through changes in the
cost of paper to its customers. The primary inputs in prepress services
processes are film and proofing materials.
In both of the Company's business sectors, there is an adequate supply of
the necessary materials available from multiple vendors. The Company is
not dependent on any single supplier and has had no significant problems in
the past obtaining necessary materials.
Seasonality
Some of the Company's printing and digital imaging and prepress services
business is seasonal in nature, particularly those revenues derived from
advertising inserts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
Backlog
Because the Company's printing, digital imaging and prepress services
products are required to be delivered soon after final customer orders are
received, the Company does not experience any backlog of unfilled customer
orders.
Employees
As of May 31, 1998, the Company had a total of approximately 2,800
employees, of which approximately 200 employees are represented by a
collective bargaining agreement that will expire on December 31, 2001. The
Company considers its relations with its employees to be excellent.
Governmental and Environmental Regulations
The Company is subject to regulation under various federal, state and local
laws relating to employee safety and health, and to the generation,
storage, transportation, disposal and emission into the environment of
hazardous substances. The Company believes that it is in material
compliance with such laws and regulations. Although compliance with such
laws and regulations in the future is likely to entail additional capital
expenditures, the Company does not anticipate that such expenditures will
be material. See "Legal Proceedings - Environmental Matters."
ITEM 2. PROPERTIES
The Company operates in 25 locations in 16 states and Canada. The Company
owns seven printing plants in the United States and one in Canada and
leases two printing plants, one in California and one in Pennsylvania. The
American Color division of the Company has 15 production locations, all of
which are leased by American Color. The American Color division also
operates digital imaging and prepress facilities on the premises of several
of its customers ("facilities management"). In addition, the Company
maintains one small executive office and its Nashville headquarter
facility, both of which are leased. The Company believes that its plants
and facilities are adequately equipped and maintained for present and
planned operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in several legal actions arising
from its normal business activities. In the opinion of management, any
liability that may arise from such actions will not have a material adverse
effect on the financial condition or results of operations of the Company.
Environmental Matters
Graphics, together with over 300 other persons, has been designated by the
U.S. Environmental Protection Agency as a potentially responsible party (a
"PRP") under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA," also known as "Superfund") at one Superfund site.
Although liability under CERCLA may be imposed on a joint and several basis
and the Company's ultimate liability is not precisely determinable, the
PRPs have agreed that Graphics' share of removal costs is approximately
0.46% and therefore Graphics believes that its share of the anticipated
remediation costs at such site will not be material to its business or
financial condition. Based upon an analysis of Graphics' volumetric share
of waste contributed to the site and the agreement among the PRPs, the
Company has a reserve of approximately $0.1 million in connection with this
liability on its consolidated balance sheet at March 31, 1998. The Company
believes this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 16, 1998, a majority of the shareholders of Holdings approved a
recapitalization plan for Holdings (see note 14 to the Company's
consolidated financial statements) pursuant to Section 228 of the General
Corporation Law of the State of Delaware and the By-laws of Holdings. All
other shareholders were notified of the recapitalization plan.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for the common stock of either
Holdings or Graphics.
Holders
As of June 11, 1998, there were approximately 96 shareholders of
Holdings' common stock. Holdings is the sole shareholder of
Graphics' common stock.
Dividends
There have been no cash dividends declared on any class of common
equity for the two most recent fiscal years. See restrictions on
Holdings' ability to pay dividends and Graphics' ability to
transfer funds to Holdings in note 1 to the Company's consolidated
financial statements.
Recent Sales of Unregistered Securities
During the fourth quarter of Fiscal Year 1998, certain officers of
the Company exercised options to purchase Holdings' Common Stock
for $0.01/share. The sold securities were exempt from
registration on the basis that all such officers are "accredited
investors" within the meaning of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years
ended March 31, 1994, 1995, 1996, 1997 and 1998. The balance sheet data as
of March 31, 1994, 1995, 1996, 1997 and 1998 and the statement of
operations data for the fiscal years ended March 31, 1994, 1995, 1996, 1997
and 1998 are derived from the audited consolidated financial statements for
such periods and at such dates. The selected financial data below also
reflects the Company's discontinued wholly-owned subsidiary, SMC and its
coupon free standing insert ("FSI") operation previously conducted by its
discontinued wholly-owned subsidiary SMI. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 of the Company's consolidated financial statements.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements appearing elsewhere in this
annual report.
Selected Financial Data
ACG Holdings, Inc.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994
----------------------------------------------------
Statement of Operations Data: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Sales $ 533,335 524,551 529,523 433,198 414,673
Cost of Sales 461,407 459,880 465,110 370,267 369,520
------- ------- ------- ------- -------
Gross Profit 71,928 64,671 64,413 62,931 45,153
Selling, general and administrative expenses (b) 54,227 51,418 44,164 41,792 39,343
Restructuring costs and other special charges (c) 5,598 2,881 7,533 -- --
Gain from curtailment and establishment of defined benefit
pension plans, net (d) -- -- -- (3,311) --
------- ------- ------- ------- -------
Operating income 12,103 10,372 12,716 24,450 5,810
Interest expense, net 38,813 36,132 32,425 25,334 23,737
Other expense (income) 412 245 1,722 985 2,369
Income tax expense 2,106 2,591 4,874 2,552 2,380
------- ------- ------- ------- -------
Loss from continuing operations before extraordinary items (29,228) (28,596) (26,305) (4,421) (22,676)
------- ------- ------- ------- -------
Discontinued operations: (e)
Loss from operations, net of tax -- (1,557) (1,364) (912) (23,272)
Estimated (loss) on shut down and gain on settlement, net of tax (667) (1,550) 2,868 18,495 (38,412)
Loss on early extinguishment of debt (f) -- -- (4,526) -- --
------- ------- ------- ------- -------
Net (loss) income $ (29,895) (31,703) (29,327) 13,162 (84,360)
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 0 4,635 8,839
Working capital (deficit) 11,610 (8,598) 9,612 4,958 6,956
Total assets 329,958 333,975 351,181 328,368 305,521
Long-term debt and capitalized leases, including current installments (g) 319,657 312,309 297,617 258,201 250,439
Stockholders' deficit (106,085) (76,318) (44,396) (14,970) (45,485)
Other Data:
Net cash provided (used) by operating activities $ 18,625 24,313 (4,187) 30,510 (27,329)
Net cash used by investing activities (10,024) (10,997) (24,436) (17,580) (1,332)
Net cash (used) provided by financing activities (8,587) (13,312) 23,982 (17,527) 23,113
Capital expenditures (including lease obligations entered into) 23,713 37,767 28,022 20,415 15,722
EBITDA (h) $ 52,367 46,972 46,847 51,719 33,068
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, Shakopee was merged with and into Graphics (the
"Shakopee Merger"). The merger has been accounted for as a
combination of entities under common control (similar to a pooling-of-
interests), and accordingly, the consolidated financial statements
give retroactive effect to the Shakopee Merger and include the
combined operations of Holdings and Shakopee subsequent to December
22, 1994 (the date on which Shakopee became under common control with
the Company). Shakopee's financial results are not reflected in
periods prior to December 22, 1994 as these periods were prior to
common control ownership.
(b) Fiscal Year 1998 selling, general and administrative expenses include
(1) $1.5 million of non-recurring American Color charges associated
with the relocation of American Color's corporate office and various
severance related expenses, and (2) $0.6 million of non-cash charges
associated with an employee benefit program. Fiscal Year 1997
selling, general and administrative expense includes $2.5 million of
non-recurring employee termination expenses (including $1.9 million
related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial
statements).
(c) In January 1998, the Company approved a restructuring plan for its
printing division designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs.
The Company recognized $3.9 million of costs under such plan in Fiscal
Year 1998.
In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness and provide increased
growth in the business. The Company recognized $0.9 million and $4.1
million of costs under such plan in Fiscal Year 1997 and Fiscal Year
1996, respectively.
In addition, the Company recorded $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its printing and American Color divisions in Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively (see
note 19 to the Company's consolidated financial statements).
(d) In October 1994, the Company amended its defined benefit pension
plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995. The
Company recognized a curtailment gain of $3.7 million as a result of
freezing such benefits. Also in October 1994, the Board of Directors
approved a new Supplemental Executive Retirement Plan ("SERP"), which
is a defined benefit plan, for certain key executives. The Company
recognized a $0.4 million expense associated with the establishment of
the SERP.
(e) In February of Fiscal Year 1997, the Company made a strategic decision
to shut down the operation of its wholly-owned subsidiary SMC. SMC's
shut down has been accounted for as a discontinued operation, and
accordingly, SMC's operations are segregated in the Company's
consolidated financial statements. Sales, costs of sales and selling,
general and administrative expenses attributable to SMC for Fiscal
Years 1997, 1996 and 1995 have been reclassified to discontinued
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and note
5 of the Company's consolidated financial statements.
On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, Sullivan Marketing, Inc. ("SMI"), to News America
FSI, Inc. ("News America"). In June 1994, the Company recorded
income from the settlement of a lawsuit entitled Sullivan Marketing,
Inc. and Sullivan Graphics, Inc. v. Valassis Communications, Inc.,
News America FSI Inc. and David Brandon, (the "SMI Settlement") of
$18.5 million, net of taxes, and when coupled with settlement expenses
which had previously been accrued, the net cash proceeds resulting
from this settlement were approximately $16.7 million.
In Fiscal Year 1996, the Company recognized settlement of a complaint
naming SMI, News America and two packaged goods companies as
defendants (the "EPI lawsuit") and reversed certain accruals related
to the estimated loss on shut down of SMI. The resulting effect
reflected in the Fiscal Year 1996 consolidated statement of operations
was $2.9 million income in discontinued operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations" and note 5 of the Company's
consolidated financial statements.
(f) As part of the Shakopee Merger and the refinancing transactions (the
"Refinancing"), collectively (the "Transactions"), the Company
recorded an extraordinary loss related to early extinguishment of debt
of $4.5 million, net of zero taxes. This extraordinary loss primarily
consisted of the early redemption premium on Graphics' 15% Senior
Subordinated Notes due 2000 (the "15% Notes") and the write-off of
deferred financing costs related to refinanced indebtedness partially
offset by the write-off of a bond premium associated with the 15%
Notes.
(g) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes
resulting from the 1993 Acquisition. The principal amount payable at
maturity of the 15% Notes remained at $100 million. The 15% Notes
were redeemed in connection with the Refinancing.
(h) EBITDA is included in the Selected Financial Data because management
believes that investors regard EBITDA as a key measure of a leveraged
company's performance and ability to meet its future debt service
requirements. EBITDA is defined as earnings before net interest
expense, income tax expense, depreciation, amortization, other special
charges related to asset write-offs and write-downs, other income
(expense), discontinued operations and extraordinary items. EBITDA is
not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to
net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash
flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Certain covenants in the
Indenture dated as of August 15, 1995 (the "Indenture") and the
Company's Credit Agreement with BT Commercial Corporation (the "Bank
Credit Agreement") are based on EBITDA, subject to certain adjustments.
EBITDA includes (1) $1.5 million of non-recurring charges associated
with the relocation of American Color's corporate office and various
severance related expenses, and (2) $0.6 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1998.
EBITDA includes $3.9 million in restructuring costs related to its
printing division in Fiscal Year 1998 and $0.9 million and $4.1
million of restructuring costs related to its American Color division
in Fiscal Year 1997 and Fiscal Year 1996, respectively (see note 19 to
the Company's consolidated financial statements).
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's former Chief Executive Officer - see note
21 to the Company's consolidated financial statements).
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to
a change in the Company's defined benefit pension plans (as discussed
in note (d) above).
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On August 15, 1995, Shakopee was merged with and into Graphics (the
"Shakopee Merger"). The merger has been accounted for as a combination of
entities under common control (similar to a pooling-of-interests), and
accordingly, the consolidated financial statements give retroactive effect
to the Shakopee Merger and include the combined operations of Holdings and
Shakopee subsequent to December 22, 1994 (the date on which Shakopee became
under common control with the Company).
On March 11, 1996, the Company sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2
million. This transaction resulted in a net gain on disposal of
approximately $1.3 million, which is classified as Other, net in the
consolidated statement of operations. The proceeds of the sale were used
to repay indebtedness under the Bank Credit Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio based regional printer of newspapers, T.V. books and retail
advertising inserts and catalogs (the "Medina Facility") for cash and
assumption of certain liabilities of Gowe, Inc. (the "Medina
Acquisition"). The Medina Acquisition was accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). The Medina Facility's results of operations are
included in the Company's consolidated financial statements subsequent to
March 11, 1996.
During March 1996, the Company completed the construction and start-up of
Flexi-Tech, a new plant in Hanover, Pennsylvania. Flexi-Tech is dedicated
to the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In Fiscal Year 1997, the Company began to present certain costs of its
American Color production facilities within cost of sales rather than as
selling, general and administrative expenses. This new presentation is
consistent with the Company's presentation of the printing sector's
financial information, and the Company believes that this is a more
accurate measure of the gross margin of the business. The financial
information for Fiscal Year 1996 has been reclassified to conform with this
presentation.
In February of Fiscal Year 1997, the Company made a strategic decision to
shut down the operations of its wholly-owned subsidiary SMC. SMC's shut
down has been accounted for as a discontinued operation, and accordingly,
SMC's operations are segregated in the Company's consolidated financial
statements. Sales, cost of sales and selling, general and administrative
expenses attributable to SMC for Fiscal Year 1996 have been reclassified to
discontinued operations.
Printing. In recent years, the Company has taken a number of steps which
have resulted in improved printing sector performance including the hiring
of several key managers in the manufacturing, purchasing, quality,
technical services, production planning and customer service departments
(see "EBITDA" below). Comprehensive quality improvement and cost reduction
programs have also been implemented for all the Company's printing
processes. As a result of these measures, the Company has been successful
in lowering its manufacturing costs within the printing sector, while
improving product quality.
Additionally, in order to grow sales and improve gross margins, the Company
increased the geographic and industry scope of its sales force and shifted
the mix of its business toward retail customers and away from the printing
of certain lower margin publications. The Shakopee Merger, Medina
Acquisition and Flexi-Tech operations (see "Business - Printing") are
consistent with the Company's overall strategy to continue to increase
profitability by growing its revenues, increasing its market share and
reducing costs.
Furthermore, management believes that continued strong demand for the
retail advertising insert product has resulted in less excess industry
capacity and therefore an improved supply/demand position within the
marketplace. This dynamic has resulted in a greater stabilization of
printing prices which in conjunction with the Company's cost reduction
programs has had favorable impact on printing gross profit levels.
Commercial Printing in the United States is highly competitive. The
significant capital required to keep pace with changing technology and
competitive pricing trends has led to a trend of industry consolidation in
recent years. In addition, customers' preference for larger printers, such
as the Company, with a wider variety of services, greater distribution
capabilities and more flexibility have also contributed to consolidation
within the industry. The industry is expected to remain competitive in the
near future and the Company's sales will continue to be subject to changes
in retailers' demands for printed products.
The cost of paper is a principal factor in the Company's overall pricing to
its customers. The level of paper costs also has a significant impact on
the Company's reported sales. Beginning in Fiscal Year 1994 and throughout
Fiscal Year 1995 and the majority of Fiscal Year 1996, the paper industry
experienced increased demand and high capacity utilization in various
grades of paper. This led to a global tightening of the paper supply, and
as a result, the printing industry experienced substantial increases in the
cost of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
the overall cost of paper declined. During Fiscal Year 1998, paper prices
remained relatively stable. In accordance with industry practice, the
Company generally passes through changes in the cost of paper to its
customers. Although the Company has been successful in passing through
paper price increases to its customers in the past, there can be no
assurances that the Company will be able to pass through future paper price
increases.
In January 1998, the Company approved a plan for its printing division
which was designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. The cost of this
plan was accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") (see
"Restructuring Costs and Other Special Charges" below).
American Color. The digital imaging and prepress services industry has
experienced significant technological advances as electronic digital
prepress systems have replaced the largely manual and photography-based
methods utilized in the past. This shift in technology (which improved
process efficiencies and decreased processing costs) produced increased
unit growth for American Color as the demand for color pages increased.
However, American Color's selling price levels per page have declined
because of greater efficiencies resulting from increased use of technology.
American Color's revenue from traditional services are now supplemented by
new revenue sources from electronic digital imaging and prepress services
such as digital image storage, facilities management, computer-to-plate
services, creative services, consulting and training services and software
and data-base management.
In April 1995, the Company implemented a plan for its American Color
division which was designed to improve productivity, increase customer
service and responsiveness, and provide increased growth in this business.
The cost of this plan was accounted for in accordance with the guidelines
set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges"
below).
The following table summarizes the Company's historical results of continuing
operations for Fiscal Year 1998, 1997 and 1996.
Fiscal Year Ended March 31,
-----------------------------------------------
1998 1997 1996
------------ ----------- -----------
(dollars in thousands)
Sales:
Printing $446,350 $449,924 $453,381
American Color 86,985 74,627 72,461
Other (a) -- -- 3,681
------- ------- -------
Total $533,335 $524,551 $529,523
======= ======= =======
Gross Profit:
Printing $51,278 $49,469 $49,015
American Color 20,628 15,133 13,687
Other (a) 22 69 1,711
------- ------- -------
Total $71,928 $64,671 $64,413
======= ======= =======
Gross Margin:
Printing 11.5% 11.0% 10.8%
American Color 23.7% 20.3% 18.9%
Total 13.5% 12.3% 12.2%
Operating Income (Loss):
Printing (b)(c) $22,612 $25,858 $28,239
American Color (b) (c) 2,509 (1,576) (3,975)
Other (a) (d) (13,018) (e) (13,910) (e) (11,548)
------- ------- -------
Total $12,103 $10,372 $12,716
======= ======= =======
(a) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996, see note 4 to the Company's consolidated financial
statements).
(b) Printing operating income includes the impact of $1.7 million, $0.4
million and $2 million in Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996, respectively, of other special charges related to
asset write-offs and write-downs. American Color's operating loss
includes the impact of $1.5 million and $1.4 million in Fiscal Year
1997 and Fiscal Year 1996, respectively, of other special charges
related to asset write-offs and write-downs (see note 19 to the
Company's consolidated financial statements).
(c) Printing operating income includes the impact of $3.9 million of
restructuring costs in Fiscal Year 1998. American Color's operating
income (loss) includes the impact of restructuring costs of $0.9
million and $4.1 million in Fiscal Year 1997 and Fiscal Year 1996,
respectively (see note 19 to the Company's consolidated financial
statements) and $1.5 million of non-recurring charges in Fiscal Year
1998 associated with the relocation of its corporate office and
various severance related expenses.
(d) Also includes corporate general and administrative expenses, and
amortization expense.
(e) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer-see note 21 to the Company's consolidated financial statements).
Historical Results of Operations
Fiscal Year 1998 vs. Fiscal Year 1997
The Company's sales increased 1.7% to $533.3 million in Fiscal Year 1998
from $524.6 million in Fiscal Year 1997. This increase includes an
increase in American Color sales of $12.4 million, or 16.6%, offset in part
by a decrease in printing sales of $3.5 million, or 0.8%. The Company's
gross profit increased to $71.9 million or 13.5% of sales in Fiscal Year
1998 from $64.7 million or 12.3% of sales in Fiscal Year 1997. The
Company's operating income increased to $12.1 million or 2.3% of sales in
Fiscal Year 1998 from $10.4 million or 2% of sales in Fiscal Year 1997.
See the discussion of these changes by sector below.
Printing
Sales. Printing sales decreased $3.5 million to $446.4 million in Fiscal
Year 1998 from $449.9 million in Fiscal Year 1997. This decrease is
primarily the result of an increase in sales to customers that supply their
own paper offset in part by an increase in production volume of
approximately 2.5%.
Gross Profit. Printing gross profit increased $1.8 million to $51.3
million in Fiscal Year 1998 from $49.5 million in Fiscal Year 1997.
Printing gross margin increased to 11.5% in Fiscal Year 1998 from 11.0% in
Fiscal Year 1997. The increase in gross profit includes reduced
manufacturing costs, improved mix and pricing, along with an increase in
production volume. These gains were partially offset by an increase in
depreciation and amortization expense. The increase in gross margin
includes the above mentioned factors and the impact of an increase in sales
to customers that supply their own paper.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses remained relatively unchanged at $23.1 million,
or 5.2% of printing sales, in Fiscal Year 1998 compared to $23.1 million,
or 5.1% of printing sales, in Fiscal Year 1997.
Operating Income. As a result of the above factors and the incurrence of
both restructuring costs associated with the printing restructuring plan of
$3.9 million in Fiscal Year 1998 and other special charges related to asset
write-offs and write-downs of $1.7 million and $0.4 million in Fiscal Year
1998 and 1997, respectively (see "Restructuring Costs and Other Special
Charges" below), operating income from the printing business decreased to
$22.6 million in Fiscal Year 1998 from $25.9 million in Fiscal Year 1997.
American Color
Sales. American Color's sales increased $12.4 million, or 16.6%, to $87.0
million in Fiscal Year 1998 from $74.6 million in Fiscal Year 1997. The
increase in Fiscal Year 1998 was primarily the result of higher digital
imaging and prepress production volume due to American Color's
implementation of various digital prepress technologies, including
facilities management, packaging prepress, software and image management
services and increases in digital visual effects work.
Gross Profit. American Color's gross profit increased $5.5 million to
$20.6 million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997.
American Color's gross margin increased to 23.7% in Fiscal Year 1998 from
20.3% in Fiscal Year 1997. These improvements resulted from increased
volume (primarily from increased facilities management sales) and material
and payroll cost savings offset in part by costs associated with new
operations servicing the packaging industry.
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased to $18.1 million, or 20.8% of
American Color's sales in Fiscal Year 1998 from $14.3 million, or 19.2% of
American Color's sales in Fiscal Year 1997. This increase includes
relocation costs related to the move of American Color's corporate office
from Phoenix to Nashville and various severance related expenses of $1.5
million in Fiscal Year 1998. In addition, the increase includes increased
sales and marketing expenses, including the costs of the new packaging
sales group.
Operating Income (Loss). As a result of the above factors and the
incurrence of both restructuring costs associated with the American Color
restructuring plan of $0.9 million in Fiscal Year 1997 and other special
charges related to asset write-offs and write-downs of $1.5 million in
Fiscal Year 1997 (see "Restructuring Costs and Other Special Charges"
below), operating income (loss) at American Color increased to income of
$2.5 million in Fiscal Year 1998 from a loss of $1.6 million in Fiscal Year
1997.
Fiscal Year 1997 vs. Fiscal Year 1996
The Company's sales decreased 0.9% to $524.6 million in Fiscal Year 1997
from $529.5 million in Fiscal Year 1996. This decrease includes a decrease
in printing sales of $3.5 million, or 0.8%, an increase in American Color
sales of $2.2 million, or 3% and a $3.7 million decrease in other sales.
The Company's gross profit increased to $64.7 million or 12.3% of sales in
Fiscal Year 1997 from $64.4 million or 12.2% of sales in Fiscal Year 1996.
The Company's operating income decreased to $10.4 million or 2% of sales in
Fiscal Year 1997 from $12.7 million or 2.4% of sales in Fiscal Year 1996.
See the discussion of these changes by sector below.
Printing
Sales. Printing sales decreased to $449.9 million in Fiscal Year 1997 from
$453.4 million in Fiscal Year 1996. This decrease includes a decrease in
paper prices and the effect of an increase in customer supplied paper.
These decreases were partially offset by $46.2 million of incremental sales
from the Medina Facility and Flexi-Tech and an increase in production
volume of approximately 3% (excluding the Medina Facility and Flexi-Tech).
Gross Profit. Printing gross profit increased $0.5 million, or 0.9%, to
$49.5 million in Fiscal Year 1997 from $49 million in Fiscal Year 1996.
Printing gross margin increased to 11% in Fiscal Year 1997 from 10.8% in
Fiscal Year 1996. The increase in gross profit primarily reflects
incremental gross profit from the Medina Facility and an increase in
production volume. In addition, the gross profit improvement includes
reduced variable production and certain other manufacturing costs due to
continued cost containment programs at the printing plants. These gains
were partially offset by an increase in depreciation expense, a reduction
in the price of scrap paper and incremental costs related to the start-up
of Flexi-Tech. The increase in gross margin as a percentage of sales is
due primarily to the impact of the above described items and the impact of
lower paper prices on sales in Fiscal Year 1997.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses increased 23.2% to $23.1 million, or 5.1% of
printing sales, in Fiscal Year 1997 from $18.8 million, or 4.1% of printing
sales, in Fiscal Year 1996. The increase in Fiscal Year 1997 was primarily
the result of increased sales and marketing expenses and incremental
selling, general and administrative costs at the Medina Facility and Flexi-
Tech.
Operating Income. As a result of the above factors and the incurrence of
other special charges related to asset write-offs and write-downs of $0.4
million and $2 million in Fiscal Year 1997 and 1996, respectively (see
"Restructuring Costs and Other Special Charges" below), operating income
from the printing business decreased to $25.9 million in Fiscal Year 1997
from $28.2 million in Fiscal Year 1996.
American Color
Sales. American Color's sales increased 3% to $74.6 million in Fiscal Year
1997 from $72.5 million in Fiscal Year 1996. The increase in Fiscal Year
1997 was primarily the result of higher digital imaging and prepress
production volume due to American Color's implementation of various digital
prepress technologies, including facilities management and software and
image management services and increases in digital visual effects work
partially offset by lower equipment sales.
Gross Profit. American Color's gross profit increased $1.4 million to
$15.1 million in Fiscal Year 1997 from $13.7 million in Fiscal Year 1996.
American Color's gross margin was 20.3% in Fiscal Year 1997, up from 18.9%
in Fiscal Year 1996. These increases were primarily the result of
increased volume and material cost savings offset in part by increased
facilities management costs.
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased 18% to $14.3 million or 19.2%
of American Color sales in Fiscal Year 1997 from $12.1 million or 16.7% of
American Color sales in Fiscal Year 1996, primarily as a result of the
addition of sales and marketing and administrative support personnel and
related expenses, including expenses related to its digital visual effects
group.
Operating Loss. As a result of the above factors and the incurrence of
both restructuring costs associated with the American Color restructuring
plan of $0.9 million in Fiscal Year 1997 and $4.1 million in Fiscal Year
1996 and other special charges related to asset write-offs and write-downs
of $1.5 million and $1.4 million in Fiscal Year 1997 and 1996, respectively
(see "Restructuring Costs and Other Special Charges" below), operating loss
at American Color decreased to $1.6 million in Fiscal Year 1997 from $4
million in Fiscal Year 1996.
Other Operations (Fiscal Year 1998 vs. Fiscal Year 1997 and Fiscal Year
1997 vs. Fiscal Year 1996)
Other operations primarily include corporate general and administrative
expenses, other expenses and amortization expense. Fiscal Year 1996 also
included revenues and expenses associated with the Company's 51% owned
subsidiary, NIS (sold on March 11, 1996). Amortization expenses for other
operations, including goodwill amortization (see below), were $8.6 million,
$8.4 million and $8.7 million in Fiscal Year 1998, 1997 and 1996,
respectively.
Operating losses from other operations decreased $0.9 million to a loss of
$13.0 million in Fiscal Year 1998 from a loss of $13.9 million in Fiscal
Year 1997. This decrease includes non-recurring employee termination
expenses of $2.5 million in Fiscal Year 1997 (including $1.9 million
related to the resignation of the Company's former Chief Executive Officer
- - see note 21 to the Company's consolidated financial statements) offset in
part by $0.6 million of non-cash expenses associated with an employee
benefit program in Fiscal Year 1998, a $0.2 million increase in
amortization expenses and increases in certain corporate general and
administrative expenses during Fiscal Year 1998.
Operating losses from other operations increased $2.4 million to a loss of
$13.9 million in Fiscal Year 1997 from a loss of $11.5 million in Fiscal
Year 1996. This increase primarily reflects non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial statements).
Goodwill Amortization
Amortization expense associated with goodwill was $8.5 million, $8.3
million and $8.6 million for Fiscal Year 1998, 1997 and 1996, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
Printing In January 1998, the Company approved a plan for its printing
division which was designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs. The
cost of this plan is being accounted for in accordance with the guidance
set forth in EITF 94-3. The pretax costs of $3.9 million which were
incurred as a direct result of this plan (excluding other special charges
related to asset write-offs and write-downs - see below) includes $3.3
million of employee termination costs and $0.6 million of relocation and
other transition expenses. This restructuring charge was recorded in the
quarter ended March 31, 1998. The majority of these costs will be paid or
settled before March 31, 1999.
American Color In April 1995, the Company implemented a plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased growth
in the digital imaging and prepress services business. The cost of this
plan was accounted for in accordance with the guidance set forth in EITF
94-3. The pretax costs of $5 million which were incurred as a part of this
plan (excluding other special charges related to asset write-offs and write
downs - see below) represent employee termination, goodwill write-down and
other related costs that were incurred as a direct result of the plan.
Approximately $0.9 million of restructuring costs primarily related to
relocation expenses were recognized in Fiscal Year 1997. In Fiscal Year
1996 the Company recognized $4.1 million of such restructuring charges,
which included $0.9 million of goodwill write-down related to certain
facilities that were either shut down or relocated in conjunction with the
American Color restructuring and $3.2 million primarily for severance and
other personnel related costs.
Other Special Charges:
During the quarter ended March 31, 1998, the Company recorded special
charges totaling $1.7 million to adjust the carrying values of idle,
disposed and under-performing assets of the Company's printing sector to
estimated fair values. The provision was based on a review of Company
long-lived assets in accordance with Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("FASB 121"). Fair value was
based on the Company's estimate of held and used and idle assets based on
current market conditions using the best information available.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded special
charges totaling $1.9 million and $3.4 million, respectively, for impaired
long-lived assets and to adjust the carrying values of idle, disposed and
under performing assets to estimated fair values. The provisions were
based on a review of long-lived assets in connection with the adoption of
FASB 121. Of the Fiscal Year 1997 total of long-lived assets that were
adjusted based on being idle, disposed of or under performing,
approximately $0.4 million and $1.5 million related to the printing and
American Color divisions, respectively. Fair value was based on the
Company's estimate of held and used and idle assets based on current market
conditions using the best information available. Approximately $2 million
of the Fiscal Year 1996 total related to the printing sectors long-lived
assets that were adjusted based on being idle, disposed of or under
performing. The remaining $1.4 million of the Fiscal Year 1996 total
related to the American Color division. The estimated undiscounted future
cash flows attributable to certain American Color division identifiable
long-lived assets held and used was less than their carrying value
principally as a result of high levels of ongoing technological change.
The methodology used to assess the recoverability of the American Color
division long-lived assets involved projecting aggregate cash flows. Based
on this evaluation, the Company determined in Fiscal Year 1996 that long-
lived assets with a carrying amount of $2.2 million were impaired and such
assets were then written down by $1.4 million to their fair value. Fair
value was based on Company estimates and appraisals.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense increased 7.3% to $39.0 million in Fiscal Year 1998 from
$36.3 million in Fiscal Year 1997. This increase includes the impact of
increased obligations under capital leases and incremental costs related to
the $25 million term loan facility entered into on June 30, 1997 (the "Term
Loan Facility") (see note 9 to the Company's consolidated financial
statements).
Interest expense increased 11% to $36.3 million in Fiscal Year 1997 from
$32.7 million in Fiscal Year 1996. This increase includes the impact of
increased average indebtedness levels including indebtedness related to the
Transactions and obligations under capital leases. The increased
indebtedness includes the additional indebtedness related to the Shakopee
Merger and indebtedness incurred to fund the fees and expenses associated
with the Refinancing (see notes 2 and 9 to the Company's consolidated
financial statements).
Nonrecurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
Other Expense (Income) and Taxes
Other expenses net, increased to $0.4 million in Fiscal Year 1998 from $0.2
million in Fiscal Year 1997, which was relatively unchanged from Fiscal
Year 1996.
Income tax expense decreased to $2.1 million in Fiscal Year 1998 from $2.6
million in Fiscal Year 1997. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions and changes in the
deferred tax valuation allowance. During Fiscal Year 1998, the Company
increased its valuation allowance by $7.1 million to $37.2 million.
Income tax expense decreased to $2.6 million in Fiscal Year 1997 from $4.9
million in Fiscal Year 1996. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions, the Shakopee Merger and
the sale of NIS, partially offset by changes in the deferred tax valuation
allowance. During Fiscal Year 1997, the Company increased its valuation
allowance by $8.9 million to $30.1 million.
Discontinued Operations
SMC
The Company's Fiscal Year 1998 and Fiscal Year 1997 net loss includes the
estimated net loss on shut down of approximately $0.4 million and $1.5
million, respectively. See note 5 to the Company's consolidated financial
statements. The Company's net loss in Fiscal Year 1997 and Fiscal Year
1996 includes the loss from operations of its discontinued wholly-owned
subsidiary SMC of approximately $1.6 million and $1.4 million,
respectively.
SMI
In Fiscal Year 1998, the Company recorded an additional $0.3 million
estimated loss on shut down. In Fiscal Year 1996, the Company recognized
the settlement of the EPI lawsuit and reversed certain accruals related to
the estimated loss on shut down of SMI. The resulting effect reflected in
the Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations.
Loss on Early Extinguishment of Debt, Net of Tax
As part of the Shakopee Merger and the Refinancing in Fiscal Year 1996 (see
notes 2 and 9 to the Company's consolidated financial statements), the
Company recorded an extraordinary loss related to early extinguishment of
debt of $4.5 million, net of zero taxes. This extraordinary loss primarily
consisted of the early redemption premium on the 15% Notes and the write-
off of deferred financing costs related to refinanced indebtedness
partially offset by the write-off of a bond premium associated with the 15%
Notes.
Net Loss
As a result of the factors discussed above, the Company's net loss
decreased to a loss of $29.9 million in Fiscal Year 1998 from a loss of
$31.7 million in Fiscal Year 1997. As discussed above, Fiscal Year 1998
includes $3.9 million of restructuring costs and $1.7 million of other
special charges related to asset write-offs and write-downs associated with
the Company's printing division. In addition, Fiscal Year 1998 includes
$1.5 million of non-recurring charges related to the relocation of American
Color's corporate office and various severance related expenses, non-cash
charges of $0.6 million associated with an employee benefit program and an
approximate $0.7 million loss from discontinued operations related to SMC
and SMI. The Company's net loss increased to a loss of $31.7 million in
Fiscal Year 1997 from a loss of $29.3 million in Fiscal Year 1996. Fiscal
Year 1997 includes $0.9 million of expense related to the American Color
restructuring, $1.9 million of other special charges related to asset
write-offs and write-downs, $2.5 million of non-recurring employee
termination expenses (including $1.9 million related to the resignation of
the Company's former Chief Executive Officer - see note 21 to the Company's
consolidated financial statements) and an approximate $3.1 million loss
from discontinued operations related to SMC. The Company's net loss in
Fiscal Year 1996 includes $4.1 million of expense related to the American
Color restructuring, $3.4 million of other special charges related to asset
write-offs and write-downs, a $1.5 million non-recurring expense associated
with a terminated merger, a $4.5 million extraordinary loss on early
extinguishment of debt and approximately $2.9 million of income and a $1.4
million loss from discontinued operations related to SMI and SMC,
respectively.
Liquidity and Capital Resources
On May 8, 1998, the Company refinanced all of its existing bank
indebtedness (see notes 9 and 23 to the Company's consolidated financial
statements). The primary objectives of the refinancing were to gain
greater financial and operating flexibility, reduce the Company's overall
cost of capital and provide greater opportunity for internal growth and
growth through acquisitions.
The 1998 refinancing transaction included the following (1) the Company
entered into a $145 million credit facility with Bankers Trust Company,
Morgan Stanley Senior Funding, Inc., General Electric Capital Corporation,
and a syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not subject
to a borrowing base limitation (the "New Revolving Credit Facility")
maturing on March 31, 2004, a $25 million amortizing term loan facility
maturing on March 31, 2004 (the "A Term Loan Facility") and a $50 million
amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan
Facility"); (2) the repayment of all $57.0 million of indebtedness
outstanding under the existing Bank Credit Agreement (plus $0.4 million of
accrued interest to the date of repayment); (3) the repayment of all $25.0
million of indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment) and (4)
the payment of approximately $2.2 million in fees and expenses associated
with the refinancing transaction.
The New Revolving Credit Facility provides for a maximum of $70 million
borrowing availability and includes a $40 million letter of credit sub-
limit. As of May 31, 1998, the Company had total borrowings and letters of
credit outstanding under the New Revolving Credit Facility of approximately
$33.3 million, and therefore, additional borrowing availability of
approximately $36.7 million.
At May 31, 1998, the $25 million of the A Term Loan Facility and $50
million of the B Term Loan Facility remained outstanding. Scheduled A Term
Loan Facility and B Term Loan Facility payments due over the remainder of
fiscal year ending March 31, 1999 ("Fiscal Year 1999") are $0 and $0.5
million, respectively. In addition, scheduled repayments of capital lease
obligations and other senior indebtedness during Fiscal Year 1999 are
approximately $7 million and $2.3 million, respectively.
In Fiscal Year 1998, cash flow from operations and proceeds from the Term
Loan Facility (see the consolidated statements of cash flows) were used to
reduce borrowings under the Revolving Credit Facility of $11.5 million and
to pay $19.8 million in scheduled principal payments on indebtedness
(including capital lease obligations). Additionally, these cash sources
were used to fund the Company's Fiscal Year 1998 cash capital expenditures
of $10.8 million and meet additional investing and financing needs of $1.5
million. The Company plans to continue its program of upgrading its
printing and prepress equipment and currently anticipates that cash capital
expenditures will approximate $8 million and equipment acquired under
capital leases will approximate $7 million during Fiscal Year 1999. The
Company had zero cash on hand at March 31, 1998 due to a requirement under
the Bank Credit Agreement that the Company's daily available funds be used
to reduce borrowings under the Revolving Credit Facility.
At March 31, 1998, the Company had total indebtedness outstanding of $319.7
million, including capital lease obligations. Of the total debt
outstanding at March 31, 1998, $65.2 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.48% and $25
million was outstanding under the Term Loan Facility at a weighted average
interest rate of 10.63%. Indebtedness under the Amended and Restated
Credit Agreement (effective May 8, 1998) had interest at floating rates.
At March 31, 1998, the Company had indebtedness other than obligations
under the Bank Credit Agreement and Term Loan Facility of $229.5 million
(including $185 million of the Notes). The Company was in compliance with
all financial covenants set forth in the Bank Credit Agreement, as amended,
at March 31, 1998. The Company is currently in compliance with all
financial covenants set forth in the Amended and Restated Credit Agreement.
See notes 9 and 23 to the Company's consolidated financial statements.
A significant portion of Graphics long-term obligations, including
indebtedness under the Amended and Restated Credit Agreement, has been
fully and unconditionally guaranteed by Holdings. Holdings is subject to
certain restrictions under its guarantee of indebtedness under the Amended
and Restated Credit Agreement, including among other things, restrictions
on merges, acquisitions, incurrence of additional debt and payment of cash
dividends. See Notes 1 and 23 to the Company's consolidated financial
statements.
<TABLE>
<CAPTION>
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
EBITDA:
<S> <C> <C> <C>
Printing (a) $ 46,838 $ 46,755 $ 46,597
American Color (a) 9,927 5,770 2,907
Other (b) (c) (4,398) (d) (5,553) (d) (2,657)
--------- --------- ---------
Total $ 52,367 $ 46,972 $ 46,847
========= ========= =========
EBITDA Margin:
Printing 10.5% 10.4% 10.3%
American Color 11.4% 7.7% 4.0%
Total 9.8% 9.0% 8.8%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring
costs in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1997
and 1996 includes the impact of restructuring costs of $0.9 million
and $4.1 million, respectively (see note 19 to the Company's
consolidated financial statements and discussion above) and $1.5
million of non-recurring charges in Fiscal Year 1998 associated with
the relocation of its corporate office and various severance related
expenses.
(b) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996; see note 4 to the Company's consolidated financial
statements).
(c) Also includes corporate general and administrative expenses.
(d) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including
$1.9 million related to the resignation of the Company's former Chief
Executive Officer - see note 21 to the Company's consolidated
financial statements).
</TABLE>
EBITDA is presented and discussed because management believes that
investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements.
"EBITDA" is defined as earnings before net interest expense, income tax
expense (benefit), depreciation, amortization, other special charges
related to asset write-offs and write-downs, other income (expense),
discontinued operations and extraordinary items. "EBITDA Margin" is defined
as EBITDA as a percentage of net sales. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income (or any other measure
of performance under generally accepted accounting principles) as a measure
of performance or to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
Certain covenants in the Indenture, the Bank Credit Agreement and the
Amended and Restated Credit Agreement are based on EBITDA, subject to
certain adjustments.
Printing. As a result of the reasons previously described under
"--Printing," (excluding changes in depreciation and amortization expense
and other special charges related to asset write-offs and write-downs),
printing EBITDA was $46.8 million in both Fiscal Year 1998 and Fiscal Year
1997 and printing EBITDA increased to $46.8 million in Fiscal Year 1997
from $46.6 million in Fiscal Year 1996, representing an increase of $0.2
million. Printing EBITDA Margin increased to 10.5% in Fiscal Year 1998
from 10.4% in Fiscal Year 1997 and printing EBITDA Margin increased to
10.4% in Fiscal Year 1997 from 10.3% in Fiscal Year 1996. Included in the
Fiscal Year 1998 EBITDA and EBITDA Margin is $3.9 million of restructuring
costs related to the printing restructuring plan (see discussion above).
American Color. As a result of the reasons previously described
under "--American Color," (excluding changes in depreciation and
amortization expense and other special charges related to asset write-offs
and write-downs), American Color EBITDA increased to $9.9 million in Fiscal
Year 1998 from $5.8 million in Fiscal Year 1997, representing an increase
of $4.1 million. EBITDA Margin increased to 11.4% in Fiscal Year 1998 from
7.7% in Fiscal Year 1997. American Color EBITDA increased to $5.8 million
in Fiscal Year 1997 from $2.9 million in Fiscal Year 1996, representing an
increase of $2.9 million. EBITDA Margin increased to 7.7% in Fiscal Year
1997 from 4% in Fiscal Year 1996. American Color EBITDA and EBITDA Margin
in Fiscal Year 1998 includes $1.5 million of non-recurring charges
associated with the relocation of its corporate office and various
severance related expenses. Included in the Fiscal Year 1997 and Fiscal
Year 1996 EBITDA and EBITDA Margin is the impact of restructuring costs of
$0.9 million and $4.1 million, respectively (see discussion above).
Other Operations. As a result of the reasons previously described
under "--Other Operations," (excluding changes in depreciation and
amortization expense), other operations negative EBITDA decreased to
negative EBITDA of $4.4 million in Fiscal Year 1998 from negative EBITDA of
$5.6 million in Fiscal Year 1997. EBITDA from other operations increased
to negative EBITDA of $5.6 million in Fiscal Year 1997 from negative EBITDA
of $2.7 million in Fiscal Year 1996. Negative EBITDA for Fiscal Year 1998
includes the impact of non-cash charges of $0.6 million associated with an
employee benefit program. Negative EBITDA for Fiscal Year 1997 includes
the impact of non-recurring employee termination expenses of $2.5 million
(including $1.9 million related to the resignation of the Company's former
Chief Executive Officer - see note 21 to the Company's consolidated
financial statements).
Amortization of Goodwill
The goodwill is amortized on a straight-line basis by business sector.
Goodwill amortization expense will be approximately $2.5 million in Fiscal
Year 1999.
Impact of Inflation
Generally, the Company believes it has been able to pass along increases in
its costs to its customers (primarily paper and ink) through increased
prices of its printed products. Throughout the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper began to decline. During Fiscal Year
1998, paper prices remained relatively stable. Management expects that, as
a result of the Company's strong relationship with key suppliers, its
material costs will remain competitive within the industry.
Seasonality
Some of the Company's printing and digital imaging and prepress services
business is seasonal in nature, particularly those revenues derived from
advertising inserts. Generally, the Company's sales from advertising
inserts are highest during periods prior to the following advertising
periods: Spring advertising season (March 15 -- May 15); Back-to-School
(July 15 -- August 15); and Thanksgiving/Christmas (October 15 -- December
15). One of the reasons the Company chose to enter the comic book printing
market is that it is not subject to significant seasonal fluctuations.
Sales of newspaper Sunday comics are also not subject to significant
seasonal fluctuations. The Company's strategy has been and will continue
to include the mitigation of the seasonality of its printing business by
increasing its sales to customers whose own sales are less seasonal (i.e.,
food and drug companies).
Environmental
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and which do not contribute to current
or future period revenue generation are expensed. Environmental
liabilities are recorded when assessments and/or remedial efforts are
probable and the related costs can be reasonably estimated.
The Company believes that environmental liabilities, currently and in the
prior periods discussed herein, are not material. The Company has recorded
an environmental reserve of approximately $0.1 million in connection with a
Superfund site in its consolidated statement of financial position at March
31, 1998 which the Company believes to be adequate. See "Legal Proceedings
- - Environmental Matters". The Company does not anticipate receiving
insurance proceeds related to this potential settlement. Management does
not expect that any identified matters, individually or in the aggregate,
will have a material adverse effect on the consolidated financial position
or results of operations of the Company.
Accounting
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect in the Company's results of operations
or its financial position.
Year 2000 Compliance
The Year 2000 issue is the result of certain computer programs being
written using two digits rather than four digits to define the applicable
year. Software that is not Year 2000 compliant recognizes a date using
"00" as the year 1900 rather than 2000, which could result in system
failures, miscalculations or temporary inability to engage in normal
business activity. The Company is currently working to resolve the
potential impact of this issue. The Company has determined that certain
software programs and computer hardware will need to be modified or
replaced. Although there can be no assurance, the Company believes such
modification or replacement will mitigate the potential impact of this
issue. The Company will utilize both internal and external resources to
accomplish this task. Based upon management's best estimate, the cost
associated with these modifications and/or replacement is not expected to
be material to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
The following consolidated financial statements of ACG Holdings, Inc.
are included in this report:
Report of Independent Auditors........................................... 29
Consolidated balance sheets - March 31, 1998 and 1997.................... 30
For the Years Ended March 31, 1998, 1997 and 1996:
Consolidated statements of operations.......................... 32
Consolidated statements of stockholders' deficit............... 33
Consolidated statements of cash flows.......................... 34
Notes to Consolidated Financial Statements............................... 36
The following consolidated financial statement schedules of ACG Holdings,
Inc. are included in Part IV, Item 14:
I. Condensed Financial Information of Registrant
Condensed Consolidated Financial Statements (parent
company only) for the years ended March 31, 1998, 1997,
and 1996, and as of March 31, 1998 and 1997
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for ACG Holdings, Inc.
have been omitted because they are either not applicable, not required, or
because the information required is included in the financial statements or
notes thereto.
Report of Independent Auditors
The Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. (formerly Sullivan Communications, Inc.) as of March 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the three fiscal years in the period ended March 31,
1998. Our audits also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACG
Holdings, Inc. at March 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, in fiscal year
1998 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation."
ERNST & YOUNG LLP
Nashville, Tennessee
May 22, 1998
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Assets
Current assets:
<S> <C> <C>
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,112 and $5,879 at March 31, 1998 and 1997, respectively 63,185 53,510
Other 2,605 3,252
----------------- -----------------
Total receivables 65,790 56,762
Inventories 10,795 9,711
Prepaid expenses and other current assets 3,578 3,604
----------------- -----------------
Total current assets 80,163 70,077
Property, plant and equipment:
Land and improvements 3,148 3,278
Buildings and improvements 19,426 17,837
Machinery and equipment 178,713 175,196
Furniture and fixtures 5,379 3,625
Leased assets under capital leases 48,039 35,113
Equipment installations in process 1,612 3,118
----------------- -----------------
256,317 238,167
Less accumulated depreciation (96,684) (71,270)
----------------- -----------------
Net property, plant and equipment 159,633 166,897
Excess of cost over net assets acquired, less accumulated
amortization of $42,060 and $33,523 at March 31, 1998 and 1997, respectively 74,556 81,964
Other assets 15,606 15,037
----------------- -----------------
Total assets $ 329,958 333,975
================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Liabilities and Stockholders' Deficit
Current liabilities:
<S> <C> <C>
Current installments of long-term debt and capitalized leases $ 9,131 18,252
Trade accounts payable 27,381 29,364
Accrued expenses 31,539 30,037
Income taxes 502 1,022
------------------- ------------------
Total current liabilities 68,553 78,675
Long-term debt and capitalized leases, excluding current installments 310,526 294,057
Deferred income taxes 9,443 8,713
Other liabilities 47,521 28,848
------------------- ------------------
Total liabilities 436,043 410,293
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
134,812 shares issued and outstanding at March 31, 1998 and
123,889 shares issued and outstanding at March 31, 1997 1 1
Preferred Stock, $.01 par value, 5,750 shares authorized, 4,000 shares
Series A convertible preferred stock issued and outstanding at
March 31, 1997, $40,000,000 liquidation preference, 1,750 shares
Series B convertible preferred stock issued and outstanding at
March 31, 1997, $17,500,000 liquidation preference -- --
Preferred Stock, $.01 par value, 15,823 shares authorized, 3,631 shares
Series AA convertible preferred stock issued and outstanding at
March 31, 1998, $40,000,000 liquidation preference, 1,606 shares
Series BB convertible preferred stock issued and outstanding at March
31, 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,249 57,499
Accumulated deficit (162,250) (132,228)
Cumulative translation adjustment (2,000) (1,590)
Unfunded pension liability (85) --
------------------- ------------------
Total stockholders' deficit (106,085) (76,318)
------------------- ------------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 329,958 333,975
=================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Sales $ 533,335 524,551 529,523
Cost of sales 461,407 459,880 465,110
--------- --------- ---------
Gross profit 71,928 64,671 64,413
Selling, general and administrative expenses 45,690 43,164 35,533
Amortization of goodwill 8,537 8,254 8,631
Restructuring costs and other special charges 5,598 2,881 7,533
--------- --------- ---------
Operating income 12,103 10,372 12,716
--------- --------- ---------
Other expense (income):
Interest expense 38,956 36,289 32,688
Interest income (143) (157) (263)
Nonrecurring charge related to terminated merger -- -- 1,534
Other, net 412 245 188
--------- --------- ---------
Total other expense 39,225 36,377 34,147
--------- --------- ---------
Loss from continuing operations before income
taxes and extraordinary item (27,122) (26,005) (21,431)
Income tax expense (2,106) (2,591) (4,874)
--------- --------- ---------
Loss from continuing operations before
extraordinary item (29,228) (28,596) (26,305)
Discontinued operations:
Loss from operations, net of tax -- (1,557) (1,364)
Estimated (loss) on shut down and gain
on SMI settlement, net of tax (667) (1,550) 2,868
--------- --------- ---------
Loss before extraordinary item (29,895) (31,703) (24,801)
Loss on early extinguishment of debt, net of tax -- -- (4,526)
--------- --------- ---------
Net loss $ (29,895) (31,703) (29,327)
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
<TABLE>
<CAPTION>
Series AA Series A
and BB and B
Voting Convertible Convertible Additional Cumulative Unfunded
common preferred preferred paid-in Accumulated translation Pension
stock stock stock capital deficit adjustment Liability Total
------ ----------- ----------- ---------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1995 $ 1 -- -- 57,499 (71,198) (1,272) -- (14,970)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (99) -- (99)
Net loss -- -- -- -- (29,327) -- -- (29,327)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1996 $ 1 -- -- 57,499 (100,525) (1,371) -- (44,396)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (219) -- (219)
Net loss -- -- -- -- (31,703) -- -- (31,703)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1997 $ 1 -- -- 57,499 (132,228) (1,590) -- (76,318)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (410) -- (410)
Treasury stock -- -- -- -- (127) -- -- (127)
Exercise of stock options -- -- -- 176 -- -- -- 176
Executive stock compensation -- -- -- 574 -- -- -- 574
Unfunded pension liability -- -- -- -- -- -- (85) (85)
Net loss -- -- -- -- (29,895) -- -- (29,895)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1998 $ 1 -- -- 58,249 (162,250) (2,000) (85) (106,085)
====== ====== ======= ====== ======= ====== ====== =======
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------
1998 1997 1996
-------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (29,895) (31,703) (29,327)
Adjustments to reconcile net loss to cash provided (used)
by operating activities:
Extraordinary item - non cash -- -- (1,912)
Other special charges - non cash 1,727 1,944 4,306
Depreciation 28,124 25,282 21,385
Depreciation and amortization related to SMC -- 251 932
Amortization of goodwill 8,537 8,254 8,631
Amortization of other assets 1,876 1,120 680
Amortization of deferred financing costs and bond premium 2,292 1,784 1,469
Gain on shut down of SMI, net of tax -- -- (1,480)
Loss on shut down 667 1,550 --
(Gain) loss on disposals of property, plant and equipment (37) 6 350
Deferred income tax expense 930 911 595
Changes in assets and liabilities, net of effects of shut down of SMI
and SMC and acquisition of the Medina Facility:
(Increase) decrease in receivables (9,079) 11,262 (12,870)
(Increase) decrease in inventories (1,122) 3,453 (1,744)
(Decrease) increase in trade accounts payable (1,887) (6,528) 11,571
Increase (decrease) in accrued expenses 1,172 1,226 981
(Decrease) increase in current income taxes payable (520) (193) 195
Increase (decrease) in other liabilities 18,588 3,106 (2,722)
Other (2,748) 2,588 (5,227)
------- ------- -------
Total adjustments 48,520 56,016 25,140
------- ------- -------
Net cash provided (used) by operating activities 18,625 24,313 (4,187)
------- ------- -------
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------
1998 1997 1996
-------------- ------------ --------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (10,826) (10,810) (20,276)
Proceeds from sales of property, plant and equipment 1,067 63 36
Medina acquisition -- -- (6,682)
Proceeds from sale of NIS -- -- 2,550
Other (265) (250) (64)
------- ------- -------
Net cash used by investing activities (10,024) (10,997) (24,436)
------- ------- -------
Cash flows from financing activities:
Debt:
Proceeds 25,000 1,162 280,451
Payments (24,899) (10,374) (242,970)
Increase in deferred financing costs (2,467) (827) (12,095)
Repayment of capital lease obligations (6,349) (3,212) (591)
Other 128 (61) (813)
------- ------- -------
Net cash (used) provided by financing activities (8,587) (13,312) 23,982
------- ------- -------
Effect of exchange rates on cash (14) (4) 6
------- ------- -------
Decrease in cash 0 0 (4,635)
Cash:
Beginning of period 0 0 4,635
------- ------- -------
End of period $ 0 0 0
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 35,931 34,284 30,581
Income taxes, net of refunds 1,751 1,863 3,964
Exchange rate adjustment to long-term debt (67) (61) 53
Non cash investing activities:
Lease obligations $ 12,887 26,957 7,746
See accompanying notes to consolidated financial statements.
</TABLE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
ACG Holdings, Inc. ("Holdings"), together with its wholly-owned
subsidiary, American Color Graphics, Inc. ("Graphics"),
(collectively the "Company"), was formed in April 1989 under the
name GBP Holdings, Inc. to effect the purchase of all the capital
stock of GBP Industries, Inc. from its stockholders in a
leveraged buyout transaction. In October 1989, GBP Holdings,
Inc. changed its name to Sullivan Holdings, Inc. and GBP
Industries, Inc. changed its name to Sullivan Graphics, Inc.
Effective June 1993, Sullivan Holdings, Inc. changed its name to
Sullivan Communications, Inc. Effective July 1997, Sullivan
Communications, Inc. changed its name to ACG Holdings, Inc. and
Sullivan Graphics, Inc. changed its name to American Color
Graphics, Inc.
On August 15, 1995, the Company completed a merger transaction
with Shakopee Valley Printing Inc. ("Shakopee") (the "Shakopee
Merger"). Shakopee was formed to effect the purchase of certain
assets and assumption of certain liabilities of Shakopee Valley
Printing, a Guy Gannett Communications division. On December 22,
1994, Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(collectively the "MSCP III Entities"), together with First Plaza
Group Trust and Leeway & Co. purchased 35,000 shares of common
stock of Shakopee. On December 22, 1994, pursuant to an
Agreement for the Purchase of Assets between Guy Gannett
Communications (the "Seller") and Shakopee (the "Buyer"), the
Seller agreed to sell (effective at the close of business on
December 22, 1994) certain assets and transfer certain
liabilities of Shakopee Valley Printing to the Buyer for a total
purchase price of approximately $42.6 million, primarily financed
through the issuance of 35,000 shares of Common Stock and bank
borrowings. Each of the MSCP III Entities is affiliated with
Morgan Stanley Dean Witter & Co., the parent company of the
general partner of the Company's majority stockholder. In
addition, the other stockholders of Shakopee were also
stockholders of the Company. See note 2 for a description of the
specific terms of the Shakopee Merger.
Holdings has no operations or significant assets other than its
investment in Graphics. Holdings is dependent upon distributions
from Graphics to fund its obligations. Under the terms of its
debt agreements at March 31, 1998, Graphics' ability to pay
dividends or lend to Holdings was either restricted or
prohibited, except that Graphics may pay specified amounts to
Holdings (i) to pay the repurchase price payable to any officer
or employee (or their estates) of Holdings, Graphics or any of
their respective subsidiaries in respect of their stock or
options to purchase stock in Holdings upon the death, disability
or termination of employment of such officers and employees (so
long as no default, or event of default, as defined, has occurred
under the terms of the Bank Credit Agreement and the Amended and
restated Credit Agreement, as defined below, and provided the
aggregate amount of all such repurchases does not exceed $2
million) and (ii) to fund the payment of Holdings' operating
expenses incurred in the ordinary course of business, other
corporate overhead costs and expenses (so long as the aggregate
amount of such payments does not exceed $250,000 in any fiscal
year) and Holdings' obligations pursuant to a tax sharing
agreement with Graphics. A significant portion of Graphics'
long-term obligations have been fully and unconditionally
guaranteed by Holdings.
The two business sectors of the commercial printing industry in
which the Company operates are (i) printing and (ii) digital
imaging and prepress services conducted by its American Color
division.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Significant accounting policies are as follows:
(a) Basis of Presentation
The consolidated financial statements include the accounts
of Holdings and all greater than 50% - owned subsidiaries
which are consolidated under generally accepted accounting
principles.
All significant intercompany transactions and balances have
been eliminated in consolidation.
The Shakopee Merger has been accounted for as a combination
of entities under common control (similar to a pooling-of-
interests). The consolidated financial statements give
retroactive effect to the merger of the Company and Shakopee
and include the combined operations of the Company and
Shakopee for the fiscal year ended March 31, 1995. Shakopee
was not under common control until December 22, 1994, and,
accordingly, the consolidated financial statements reflect
Shakopee as under common control subsequent to such date.
Earnings per share data has not been provided since
Holdings' common stock is closely held.
(b) Revenue Recognition
In accordance with trade practices of the printing industry,
printing revenues are recognized upon the completion of
production. Shipment of printed material generally occurs
upon completion of this production process. Materials are
printed to unique customer specifications and are not
returnable. Credits relating to specification variances and
other customer adjustments are not significant.
(c) Inventories
Inventories are valued at the lower of first-in, first-out
("FIFO") cost or market (net realizable value) (see note
6).
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost.
Depreciation, which includes amortization of assets under
capital leases, is based on the straight-line method over
the estimated useful lives of the assets or the remaining
terms of the leases.
(e) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired (or "goodwill")
is amortized on a straight-line basis over a range of 5 to
40 years for each of its principal business sectors. The
carrying value of goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted future cash
flows of the assets acquired, the Company's carrying amount
of the goodwill is reduced by the estimated shortfall of
such cash flows. In addition, the Company assesses long-
lived assets for impairment under Financial Accounting
Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FASB 121"). Under these rules, goodwill
associated with assets acquired in a purchase business
combination is included in impairment evaluations when
assets or circumstances exist that indicate the carrying
amount of these assets may not be recoverable.
(f) Other Assets
Financing costs related to the Bank Credit Agreement and
Term Loan Facility (as defined herein) are deferred and
amortized over the term of the respective agreements. Costs
related to the Notes (as defined herein) are deferred and
amortized over the ten-year term of the Notes.
The covenants not to compete are amortized over the three
and five year terms of the respective underlying agreements.
(g) Income Taxes
Income taxes have been provided using the liability method
in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS
109").
(h) Foreign Currency Translation
The assets and liabilities of the Company's Canadian
facility, which include interdivisional balances, are
translated at year-end rates of exchange while revenue and
expense items are translated at average rates for the year.
Translation adjustments are recorded as a separate component
of stockholders' deficit. Since the transactions of the
Canadian facility are denominated in its functional currency
and the interdivision accounts are of a long-term investment
nature, no transaction adjustments are included in
operations.
(i) Reclassifications
Certain prior period amounts have been reclassified to
conform with the most recent period presentation.
(j) Environmental
Environmental expenditures that relate to current operations
are expensed or capitalized as appropriate. Expenditures
that relate to an existing condition caused by past
operations, and which do not contribute to current or future
period revenue generation, are expensed. Environmental
liabilities are provided when assessments and/or remedial
efforts are probable and the related amounts can be
reasonably estimated.
(k) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its
financial instruments together with the related carrying
amount. The Company is not a party to any financial
instruments with material off-balance-sheet risk.
(l) Concentration of Credit Risk
Financial instruments which subject the Company to credit
risk consist primarily of trade accounts receivable.
Concentration of credit risk with respect to trade accounts
receivable are generally diversified due to the large number
of entities comprising the Company's customer base and their
geographic dispersion. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for
potential credit losses.
(m) Use of Estimates
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
(n) Stock Based Compensation
Effective April 1, 1997 the Company changed its method of
accounting for stock based compensation plans from the
intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") to the fair value method established by Statement
of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Application of the
recognition provisions of SFAS 123 is prospective
(restatement of prior periods is prohibited). The Company
believes that including the fair value of compensation plans
in determining net income is consistent with accounting for
the cost of all other forms of compensation.
(2) The Shakopee Merger
On August 15, 1995, the Shakopee Merger was consummated and each
outstanding share of the Common Stock of Shakopee was converted
into one share of the New Common Stock of the Company and 1/20 of
one share of Series B Preferred Stock of the Company. Also on
August 15, 1995, concurrent with the Shakopee Merger, the Company
also refinanced its then existing indebtedness (the
"Refinancing") (see note 9).
The Shakopee Merger was accounted for under the purchase method
of accounting applying the provisions of Accounting Principles
Board Opinion No. 16 ("APB 16"). The purchase price of $42.6
million, was allocated to the tangible assets and identifiable
intangible assets and liabilities assumed based upon their
respective fair values. The resulting excess of cost over net
assets acquired was $12.2 million.
The Shakopee Merger has been accounted for as a combination of
entities under common control (similar to a pooling-of-
interests), and accordingly the consolidated financial statements
give retroactive effect to the Shakopee Merger and include the
combined operations of Holdings and Shakopee subsequent to
December 22, 1994.
(3) The Medina Acquisition
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio based regional printer of newspapers, T.V. books and
retail advertising inserts and catalogs (the "Medina Facility"),
for cash and assumption of certain liabilities of Gowe, Inc.,
pursuant to an Asset Purchase Agreement, among Graphics, Gowe,
Inc. and ComCorp, Inc., the parent company of Gowe, Inc. (the
"Medina Acquisition"). The Medina Acquisition was accounted for
under the purchase method of accounting applying the provisions
of APB 16. The Medina Facility's results of operations are
included in the Company's consolidated financial statements
subsequent to March 11, 1996.
The Company's pro forma unaudited results of operations for the
fiscal year ended March 31, 1996 ("Fiscal Year 1996"), assuming
that the Medina Acquisition occurred as of April 1, 1995, were
$561.6 million in sales, a $25.9 million loss from continuing
operations before extraordinary item and a $28.9 million net
loss.
(4) Disposal of 51% Interest in National Inserting Systems, Inc.
On March 11, 1996, the Company sold its 51% interest in National
Inserting Systems, Inc. ("NIS") for approximately $2.5 million
in cash and a note for approximately $0.2 million under the terms
of a Stock Redemption Agreement between NIS and Graphics. This
transaction resulted in a net gain on disposal of approximately
$1.3 million, which is classified as other, net in the
consolidated statement of operations. The proceeds of the sale
were used to repay indebtedness under Graphics' Bank Credit
Agreement (as defined herein).
(5) Discontinued Operations
SMC
In February 1997, the Company made a strategic decision to shut
down the operations of its wholly-owned subsidiary Sullivan Media
Corporation ("SMC"). This resulted in an estimated net loss on
shut down of approximately $1.5 million, which is net of zero
income tax benefits. In the fiscal year ended March 31, 1998
("Fiscal Year 1998") the Company recorded an additional $0.4
million estimated net loss on shutdown.
The shut down of SMC has been accounted for as a discontinued
operation, and accordingly, its operating results are segregated
and reported as a discontinued operation in the accompanying
consolidated statements of operations. The assets of SMC and any
resulting gain or loss on the disposal of those assets, is
immaterial to the results of operations and financial position of
the Company.
The condensed consolidated statements of operations relating to
the discontinued SMC operation follows:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Sales $ -- 9,786 6,819
Cost and expenses -- 11,343 8,183
------------------ ------------------ ------------------
Loss before income taxes -- (1,557) (1,364)
Income taxes -- -- --
------------------ ------------------ ------------------
Net loss $ -- (1,557) (1,364)
================== ================== ==================
</TABLE>
SMI
In Fiscal Year 1996, the Company recognized settlement of the EPI Group
Limited ("EPI") complaint naming Sullivan Marketing, Inc. ("SMI"), News
America FSI, Inc. ("News America") and two packaged goods companies as
defendants ("EPI Lawsuit") and reversed certain accruals related to the
estimated loss on shut down of SMI. The resulting effect reflected in the
Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations. In Fiscal Year 1998, the Company
recorded an additional $0.3 million estimated net loss on shut down.
(6) Inventories
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
Paper $ 9,161 7,831
Ink 227 324
Supplies and other 1,407 1,556
-------------------- --------------------
Total $ 10,795 9,711
==================== ====================
In the third quarter of Fiscal Year 1996, the Company changed
to the FIFO method of accounting from the last-in, first-out
("LIFO") method of accounting as the principal method of
accounting for inventories. The change results in a balance
sheet which (1) reflects inventories at a value that more
closely represents current costs which the Company believes
are the primary concern of its constituents (bank lenders,
financial markets, customers, trade creditors, etc.) and (2)
enhances the comparability of the Company's financial
statements by changing to the predominant method used by key
competitors in the printing industry. The effect
(approximately $0.8 million) of the change for the six months
ended September 30, 1995 resulted in the retroactive
restatement of the first and second quarters of Fiscal Year
1996 of approximately $0.5 million and $0.3 million,
respectively, as a decrease of cost of sales and a decrease to
net loss.
(7) Other Assets
The components of other assets are as follows (in thousands):
March 31,
-------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Deferred financing costs, less accumulated
amortization of $5,185 in 1998 and $2,893
in 1997 $ 10,104 9,996
Spare parts inventory, net of valuation allowance
of $100 in 1998 and 1997 1,852 1,699
Other 3,650 3,342
-------------- -------------
Total $ 15,606 15,037
============== =============
</TABLE>
(8) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1998 1997
------------------ --------------------
<S> <C> <C>
Compensation and related taxes $ 10,004 9,206
Employee benefits 8,755 8,353
Interest 5,028 4,445
Accrued costs related to shut down of SMC 163 1,046
Other 7,589 6,987
------------------ --------------------
Total $ 31,539 30,037
================== ====================
</TABLE>
(9) Notes Payable, Long-term Debt and Capitalized Leases
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Bank Credit Agreement:
Term Loan $ 35,979 47,088
Revolving Credit Facility Borrowings 29,257 40,710
------------------ --------------------
65,236 87,798
Term Loan Facility 25,000 --
12 3/4% Senior Subordinated Notes Due 2005 185,000 185,000
Capitalized leases 38,147 31,607
Other loans with varying maturities and
interest rates 6,274 7,904
------------------ --------------------
Total long-term debt 319,657 312,309
Less current installments 9,131 18,252
------------------ --------------------
Long-term debt and capitalized leases,
excluding current installments $ 310,526 294,057
================== ====================
</TABLE>
August 15, 1995 Refinancing
On August 15, 1995 the Company sold $185 million of 12 3/4% Senior
Subordinated Notes Due 2005 (the "Notes"). Concurrently with the closing
of the sale of the Notes, the Company entered into a series of
transactions, (the "Refinancing," and together with the Shakopee Merger,
the "Transactions") including the following: (i) the Company entered into
a Credit Agreement with BT Commercial Corporation ("BTCC") (the "BTCC
Agreement"), providing for a $75 million revolving credit facility maturing
in 2000 (the "Revolving Credit Facility") and a $60 million amortizing term
loan with a final maturity in 2000 (the "Term Loan"); (ii) the repayment
of all $126.5 million of indebtedness outstanding under Graphics' old bank
credit agreement (the "Old Bank Credit Agreement") (plus $2.3 million of
accrued interest to the date of repayment); (iii) the redemption of all
outstanding 15% Senior Subordinated Notes due 2000 ("the 15% Notes") at an
aggregate redemption price of $105.6 million (plus $1.8 million of accrued
interest to the redemption date); (iv) the repayment of all $24.6 million
of indebtedness, including the Shakopee bank credit agreement, assumed in
the Shakopee Merger (plus $0.1 million of accrued interest to the date of
repayment) and (v) the payment of approximately $11.8 million of fees and
expenses incurred in connection with the Transactions. As a result of the
Transactions, the Company recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of zero taxes. This
extraordinary loss consisted primarily of the early redemption premium on
the 15% Notes and the write-off of deferred financing costs related to
refinanced indebtedness partially offset by the write-off of a bond premium
associated with the 15% Notes.
The Notes bear interest at 12 3/4% and mature August 1, 2005. Interest on
the Notes is payable semi-annually on February 1 and August 1. The Notes
are redeemable at the option of Graphics in whole or in part after August
1, 2000 at 106.375% of the principal amount, declining to 100% of the
principal amount, plus accrued interest, on or after August 1, 2002. Upon
the occurrence of a change of control triggering event, as defined, each
holder of a Note will have the right to require Graphics to repurchase all
or any portion of such holder's Note at 101% of the principal amount
thereof, plus accrued interest. The Notes are subordinate to all existing
and future senior indebtedness, as defined, of Graphics, and are guaranteed
on a senior subordinated basis by Holdings.
The BTCC Agreement as amended (the "Bank Credit Agreement"), required the
Company to meet certain financial covenants which as of March 31, 1998 were
met. The Bank Credit Agreement required prepayments in certain
circumstances including: excess cash flows, proceeds from asset
dispositions totaling prescribed levels, and changes in ownership.
Borrowings under the Revolving Credit Facility were subject to a borrowing
base requirement including accounts receivable and inventory. Graphics had
outstanding borrowings under the Revolving Credit Facility of $29.3 million
at March 31, 1998.
Interest under the Bank Credit Agreement was floating based on prevailing
market rates . The weighted average rate on outstanding indebtedness under
the Bank Credit Agreement at March 31, 1998 was 8.48%.
Holdings guaranteed Graphics' indebtedness under the Bank Credit Agreement,
which guarantee was secured by a pledge of all of Graphics' and its
subsidiaries' stock. In addition, borrowings under the Bank Credit
Agreement were secured by substantially all of the assets of Graphics.
Holdings was restricted under its guarantee of indebtedness under the Bank
Credit Agreement from, among other things, entering into mergers,
acquisitions, incurring additional debt, or paying cash dividends.
June 30, 1997 Term Loan Facility
On June 30, 1997, the Company entered into a $25 million term loan facility
which included a $5 million participation by Morgan Stanley Senior Funding,
Inc., a related party, which matures on March 31, 2001 (the "Term Loan
Facility"). Net proceeds of approximately $23.5 million (after loan fees
and other transaction costs) were received and used to reduce outstanding
borrowings under the existing Revolving Credit Facility. Interest under
the Term Loan Facility was floating based upon existing market rates plus
agreed upon margin levels which escalated over the initial 24 months of the
facility. The obligations under this facility were guaranteed on the same
basis and by the same guarantors as the Company's Bank Credit Agreement
although such guarantees were secured by second priority security interests
in the tangible and intangible assets of the Company and such guarantors.
Covenants under this agreement were substantially similar to, but in
certain respects are more restrictive than, existing covenants under the
Senior Subordinated Notes Indenture. Morgan Stanley Senior Funding, Inc.
received transaction fees of approximately $0.3 million. In connection
with the Term Loan Facility, the Company obtained amendments to the Bank
Credit Agreement with respect to certain financial covenants and an
amendment that decreased the Borrowing Base through March 30, 1998.
May 8, 1998 Refinancing
On May 8, 1998, the Company refinanced all outstanding indebtedness under
the BTCC Agreement and the Term Loan Facility (see note 23 for a discussion
of the terms of this refinancing transaction).
The amortization for total long-term debt and capitalized leases at March
31, 1998 as adjusted to reflect the scheduled payments due under the terms
of the Company's senior debt structure as refinanced on May 8, 1998 (see
note 23), is shown below (in thousands):
<TABLE>
<CAPTION>
Long-Term Capitalized
Fiscal year Debt Leases
---------------------- --------------------- -----------------------
<C> <C> <C>
1999 $ 2,779 $ 9,728
2000 3,278 9,054
2001 7,152 7,527
2002 6,980 6,290
2003 7,835 5,709
Thereafter 253,486 13,077
--------------------- -----------------------
Total $ 281,510 51,385
=====================
Imputed interest (13,238)
-----------------------
Present value of minimum $
lease payments 38,147
=======================
</TABLE>
Capital leases have varying maturity dates and interest rates which
generally approximate 9%-10%. The Company estimates that the carrying
amounts of the Company's debt and other financial instruments approximate
their fair values at March 31, 1998 and 1997.
(10) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts as
measured by tax laws and regulations. Significant components of
the Company's deferred tax liabilities and assets as of March 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------
1998 1997
-------------------- ---------------------
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis in fixed assets $ 31,466 31,402
Foreign taxes 3,701 2,505
Accumulated amortization 766 483
Other, net 4,594 4,459
-------------------- ---------------------
Total deferred tax liabilities 40,527 38,849
Deferred tax assets:
Bad debts 830 2,197
Accrued expenses and other liabilities 34,754 24,953
Accrued loss on discontinued operations 254 722
Net operating loss carryforwards 30,420 30,515
AMT credit carryforwards 1,262 1,262
Cumulative translation adjustment 786 625
-------------------- ---------------------
Total deferred tax assets 68,306 60,274
Valuation allowance for deferred tax assets 37,222 30,138
-------------------- ---------------------
Net deferred tax assets 31,084 30,136
-------------------- ---------------------
Net deferred tax liabilities $ 9,443 8,713
==================== =====================
</TABLE>
Management has evaluated the need for a valuation allowance and as such, a
valuation allowance of $37.2 million has been recorded . The valuation
allowance was increased by $7.1 million during the current fiscal year.
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C>
Amount attributable to
continuing operations $ 2,106 2,591 4,874
Amount attributable to
discontinued operations -- -- 75
-------------------- -------------------- --------------------
Total expense $ 2,106 2,591 4,949
==================== ==================== ====================
</TABLE>
Income tax expense attributable to loss from continuing operations consists
of (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ------------------
<S> <C> <C>
Current
Federal $ -- -- 689
State 230 145 618
Foreign 946 1,535 3,047
-------------------- ------------------- ------------------
Total current 1,176 1,680 4,354
-------------------- ------------------- ------------------
Deferred
Federal (108) 354 513
State (157) 120 7
Foreign 1,195 437 --
-------------------- ------------------- ------------------
Total deferred 930 911 520
-------------------- ------------------- ------------------
Provision for income taxes $ 2,106 2,591 4,874
==================== =================== ==================
</TABLE>
The effective tax rates for Fiscal Year 1998, the fiscal year ending March
31, 1997 ("Fiscal Year 1997") and Fiscal Year 1996 were (7.8%), (10.0%),
and (22.7%), respectively. The difference between these effective rates
relating to continuing operations and the statutory federal income tax rate
is composed of the following items:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
federal tax impact (0.2) (0.7) (1.9)
Foreign taxes, less Federal
tax impact (5.2) (5.0) (9.4)
Amortization (9.9) (11.9) (16.1)
Change in valuation
allowance (24.1) (28.3) (26.7)
Other, net (3.4) 0.9 (3.6)
------------------- -------------------- ------------------
Effective income tax rate (7.8)% (10.0)% (22.7)%
=================== ==================== ==================
</TABLE>
As of March 31, 1998, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $63.1 million which can be
used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 1999 and will be totally expired in
2013.
As of March 31, 1998, the Company had available NOL's for federal purposes
of $79.7 million which can be used to offset future federal taxable income.
If these NOL's are not utilized, they will begin to expire in 2006 and will
be totally expired in 2013.
The Company also had available an alternative minimum tax credit
carryforward of $1.3 million which can be used to offset future taxes in
years in which the alternative minimum tax does not apply. This credit can
be carried forward indefinitely.
The Company has alternative minimum tax NOL's in the amount of $60.3
million which will begin to expire in 2007 and will be completely expired
in 2013.
(11) Pension Plans
The Company sponsors defined benefit pension plans covering full-
time employees of the Company who had at least one year of
service at December 31, 1994. Benefits under these plans
generally are based upon the employee's years of service and, in
the case of salaried employees, compensation during the years
immediately preceding retirement. The Company's general funding
policy is to contribute amounts within the annually calculated
actuarial range allowable as a deduction for federal income tax
purposes. The plans' assets are maintained by trustees in
separately managed portfolios consisting primarily of equity
securities, bonds and guaranteed investment contracts.
In October 1994, the Board of Directors approved an amendment to
the Company's defined benefit pension plans which resulted in the
freezing of additional defined benefits for future services under
the plans effective January 1, 1995.
Total net periodic pension expense and its components for these
plans during the periods indicated is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
<S> <C> <C> <C>
Service cost $ 499 446 318
Interest cost 3,533 3,546 3,428
Actual return on assets (6,046) (4,349) (6,404)
Net amortization and deferral 2,071 725 3,076
-------------------- -------------------- ---------------------
Total pension expense $ 57 368 418
==================== ==================== =====================
</TABLE>
Funded status of the four plans sponsored by the Company is as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1998 1997
-------------------- ------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 52,759 47,756
Non-Vested 179 829
--------------- --------------
$ 52,938 48,585
=============== ==============
March 31,
-----------------------------------------
1998 1997
-------------------- ------------
Projected benefit obligations $ 52,938 48,585
Plan assets on deposit with trustees at fair value 45,306 41,436
--------------- --------------
Projected benefit obligations in excess of plan assets (7,632) (7,149)
Unrecognized:
Net gain (2,142) (3,146)
Prior Service Cost (627) (784)
--------------- --------------
Pension liability recognized in consolidated balance sheets $ (10,401) (11,079)
=============== ==============
</TABLE>
The above pension liability balance is recorded in the consolidated balance
sheets as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------
1998 1997
---------------------- ---------------------
<S> <C> <C>
Accrued expenses - employee benefits $ 938 771
Other liabilities 9,463 10,308
---------------------- ---------------------
$ 10,401 11,079
====================== =====================
</TABLE>
The pension liability at March 31, 1998 and 1997 reflects the impact of
changes in certain assumptions effective during such times as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Discount rate:
Pension expense 7.75% 7.50% 8.75%
Funded status 7.25% 7.75% 7.50%
Rate of increase in compensation levels N/A N/A N/A
</TABLE>
The expected long-term rate of return on plan assets was 9.25% in
the Fiscal Years 1998, 1997 and 1996.
(12) Other Postretirement Benefits
The Company provides certain other postretirement benefits for
employees, primarily life and health insurance. Full-time
employees who have attained age 55 and have at least five years
of service are entitled to postretirement health care and life
insurance coverage. Postretirement life insurance coverage is
provided at no cost to eligible retirees. Special cost sharing
arrangements for health care coverage are available to employees
whose age plus years of service at the date of retirement equals
or exceeds 85 ("Rule of 85"). Any eligible retiree not meeting
the Rule of 85 must pay 100% of the required health care
insurance premium.
Effective January 1, 1995, the Company amended the health care
plan changing the health care benefit for all employees retiring
on or after January 1, 2000. This amendment had the effect of
reducing the accumulated postretirement benefit obligation by
approximately $3 million. This reduction is reflected as
unrecognized prior service cost and is being amortized on a
straight line basis over 15.6 years, the average remaining years
of service to full eligibility of active plan participants at the
date of the amendment.
The following table sets forth the plan's funded status,
reconciled with amounts recognized in the Company's consolidated
balance sheets at March 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------
1998 1997
-------------------- ---------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 2,506 2,371
Active plan participants 1,260 1,022
-------------------- ---------------------
Total 3,766 3,393
Plan assets at fair value -- --
-------------------- ---------------------
Accumulated postretirement benefit obligation in
excess of plan assets 3,766 3,393
Unrecognized prior service cost 2,391 2,584
Unrecognized net gain 1,145 1,694
-------------------- ---------------------
Accrued postretirement benefit cost $ 7,302 7,671
==================== =====================
</TABLE>
The estimated current portion of the above accrued postretirement
benefit cost is $0.3 million and is included in accrued expenses
in the accompanying consolidated balance sheet at March 31, 1998.
The remaining $7.0 million is included in the other liabilities
section of the consolidated balance sheet.
Net periodic postretirement benefit cost for the periods
indicated included the following components (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Service cost attributed to service during the period $ 46 40 35
Interest cost in accumulated postretirement benefit
obligation 266 250 317
Amortization of net gain from earlier periods (79) (92) (67)
Amortization of prior service cost (194) (194) (194)
-------------------- -------------------- -------------------
Net periodic postretirement benefit cost $ 39 4 91
==================== ==================== ===================
</TABLE>
The significant assumptions used in determining postretirement
benefit cost and the accumulated postretirement benefit
obligation were as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Discount rate - expense 7.75% 7.50% 8.75%
Discount rate - APBO 7.25% 7.75% 7.50%
</TABLE>
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation at March 31, 1998
was 9.95% gradually declining to 5.75% in the year 2005 and
forward. The effect of a one percentage point increase in the
assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of March 31,
1998 by approximately 8%, and the aggregate of the service and
interest cost components of net annual postretirement benefit
cost by approximately 8%.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new
Supplemental Executive Retirement Plan ("SERP"), which is a
defined benefit plan, for certain key executives. Such benefits
will be paid from the Company's assets. The unfunded accumulated
benefit obligation under this plan is approximately $2.1 million.
(13) 401(k) Defined Contribution Plan
Effective January 1, 1995, the Company amended its 401(k) defined
contribution plan. Eligible participants may contribute up to
15% of their annual compensation subject to maximum amounts
established by the Internal Revenue Service and receive a
matching employer contribution on amounts contributed. The
employer matching contribution is made bi-weekly and equals 2% of
annual compensation for all plan participants plus 50% of the
first 6% of annual compensation contributed to the plan by each
employee, subject to maximum amounts established by the Internal
Revenue Service. The Company's contribution under this Plan
amounted to $3.3 million during Fiscal Year 1998, $3.4 million
during Fiscal Year 1997 and $2.8 million during the Fiscal Year
1996.
(14) Capital Stock
Effective January 16, 1998, the Company amended and restated its
Certificate of Incorporation and approved a recapitalization plan
resulting in the conversion of Series A and Series B convertible
preferred stock (the "Previously Issued Preferred Stock") into
Series AA and Series BB convertible Preferred Stock collectively,
("Preferred Stock"). At March 31, 1998, capital stock consists
of Holdings Common Stock ("Common Stock") and Preferred Stock.
The Preferred Stock has rights on preferences substantially the
same as the Previously Issued Preferred Stock. Each share of
Common Stock is entitled to one vote on each matter common
shareholders are entitled to vote on. The Preferred Stock has no
voting rights. Dividends on the Common Stock and Preferred Stock
are discretionary by the Board of Directors. Upon the occurrence
of a Liquidation Event (as defined in the amended and restated
Certificate of Incorporation), all amounts available for payment
or distribution shall first be paid to holders of Series BB
preferred stock, then holders of Series AA preferred stock and
then to holders of Common Stock. Each share of the Preferred
Stock may be converted, at the option of the holder, into shares
of Common Stock using conversion ratios and subject to conditions
set forth in the Company's Certificate of Incorporation.
(15) Stock Option Plans
Effective April 1, 1997 the Company changed its method of
accounting for stock based compensation plans from the intrinsic
value method of APB 25 to the fair value method established by
SFAS 123. Application of the recognition provisions of SFAS 123
is prospective (restatement of prior periods is prohibited).
However, SFAS 123 pro forma information for prior years is
required. The effects of applying SFAS 123 for either
recognizing compensation expense or providing pro forma
disclosures are not likely to be representative of the effects on
future years.
Common Stock Option Plan
In 1993, the Company established the ACG Holdings, Inc. Common
Stock Option Plan. This plan, as amended, (the "1993 Common
Stock Option Plan") is administered by a committee of the Board
of Directors (the "Committee") and provides for granting up to
20,841 shares of Common Stock. On January 16, 1998, the Company
established another common stock option plan (the "1998 Common
Stock Option Plan"). This plan is administered by the Committee
and provides for granting up to 36,939 shares of Common Stock.
The 1993 Common Stock Option Plan and the 1998 Common Stock
Option Plan are collectively referred to as the "Common Stock
Option Plans". Stock options may be granted under the Common
Stock Option Plans to officers and other key employees of the
Company (the "Participants") at the exercise price per share of
Common Stock, as determined at the time of grant by the Committee
in its sole discretion. All options are 25% exercisable on the
first anniversary date of a grant and vest in additional 25%
increments on each of the next three anniversary dates of each
grant. All options expire 10 years from date of grant.
A summary of activity under the Common Stock Option Plans is as
follows:
Options
--------------
Outstanding at April 1, 1995 15,264
Granted 2,497
Exercised --
Canceled (1,262)
-------------
Outstanding at March 31, 1996 16,499
Granted 6,015
Exercised --
Canceled (3,108)
-------------
Outstanding at March 31, 1997 19,406
Granted 30,014
Exercised (11,774)
Canceled (105)
-------------
Outstanding at March 31, 1998 37,541
=============
During Fiscal Year 1998, certain common stock option agreements
were modified to reprice options previously granted with a $50
exercise price to a $.01 exercise price. Based upon the Board of
Directors determination, the new exercise price was not less than
the fair market value of such options. Additionally, the options
granted in Fiscal Year 1998 were with a $.01 exercise price. The
weighted average fair value of options granted at the grant date
was $0 for fiscal years ending March 31, 1998, 1997 and 1996. The
weighted average remaining contractual life of the options
outstanding at March 31, 1998, 1997 and 1996, is 8.5 years, 7.6
years and 7.9 years, respectively. Of the options outstanding;
1,147, 9,004 and 5,507 were exercisable at March 31, 1998, 1997
and 1996, respectively. A total of 8,466 shares of Holdings
Common Stock were reserved for issuance, but not granted under the
Common Stock Option Plans at March 31, 1998. The fair value for
these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average
assumptions for Fiscal Year 1998 and Fiscal Year 1997,
respectively: risk-free interest rates of 5.5% and 6.5%; no annual
dividend yield; volatility factors of 0; and an expected option
life of 5 years.
For the purposes of Fiscal Year 1997 and Fiscal Year 1996 SFAS 123
pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. Because
the fair value of the Company's options equals $0, earnings were
the same for Fiscal Year 1997 and Fiscal Year 1996 under both APB
25 and SFAS 123.
Preferred Stock Option Plan
In Fiscal Year 1998, the Company established the ACG Holdings,
Inc. Preferred Stock Option Plan (the "Preferred Stock Option
Plan"). This plan is administered by the Committee and provides
for granting up to 583 shares of Holdings Preferred Stock
("Preferred Stock"). Stock options may be granted under this
Preferred Stock Option Plan to officers and other key employees of
the Company at the exercise price per share of Preferred Stock, as
determined at the time of grant by the Committee in its sole
discretion. All options are fully vested and are 100% exercisable
at the date of grant. All options expire 10 years from date of
grant.
A summary of the Preferred Stock Option Plan is as follows:
Options
-------------
Outstanding at March 31, 1997 --
Granted 526
Exercised --
Canceled --
----------
Outstanding at March 31, 1998 526
==========
All options were granted with a $1,909 exercise price. The
weighted average fair value of options granted at the grant date
was $1,091 for Fiscal Year 1998. The weighted average remaining
contractual life of the options outstanding at March 31, 1998 is
9.8 years. The fair value for these options was estimated at the
date of grant using a Black- Scholes option pricing model with the
following weighted average assumptions for Fiscal Year 1998: risk
free interest rate of 5.5%; no annual dividend yield; volatility
factors of 0; and an expected option life of 2 years. All of the
options outstanding were exercisable at March 31, 1998. A total
of 57 shares of Holdings Preferred Stock were reserved for
issuance, but not granted under the Preferred Stock Option Plan at
March 31, 1998.
The Company recognized $0.6 million of related compensation expense
within Fiscal Year 1998 selling, general and administrative
expenses as a result of the SFAS 123 requirements.
(16) Commitments and Contingencies
The Company incurred rent expense for Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 of $6.4 million, $5.4 million and
$4.9 million, respectively, under various operating leases.
Future minimum rental commitments under existing operating lease
arrangements at March 31, 1998 are as follows (in thousands):
Fiscal Year
-----------
1999 $ 6,824
2000 6,152
2001 4,786
2002 2,667
2003 1,377
Thereafter 4,995
-----------------
Total $ 26,801
=================
The Company has employment agreements with two of its principal
officers and five other employees. Such agreements provide for
minimum salary levels as well as for incentive bonuses which are
payable if specified management goals are attained. The aggregate
commitment for future salaries at March 31, 1998, excluding
bonuses, was approximately $3.3 million.
On December 21, 1989, Graphics sold CPS, its ink manufacturing
operations and facilities. Graphics remains contingently liable
under $2.7 million of industrial revenue bonds assumed by CPS.
CPS assumed these liabilities and has agreed to indemnify Graphics
for any resulting obligation and has also provided an irrevocable
letter of credit in favor of the holders of such bonds.
Accordingly, management believes that any obligation of Graphics
under this contingency is unlikely.
Concurrent with the sale of its ink manufacturing facility,
Graphics entered into a long-term ink supply contract with CPS.
The supply contract requires Graphics to purchase a significant
portion of its ink requirements, within certain limitations and
minimums, from CPS. Graphics believes that prices for products
under this contract approximate market prices at the time of
purchase of such products.
In the quarter ending December 31, 1997, the Company entered into
multi-year contracts to purchase a portion of the Company's raw
materials to be used in its normal operations. In connection with
such purchase agreements, pricing for a portion of the Company's
raw materials is adjusted for certain movements in market prices,
changes in raw material costs and other specific price increases.
The Company is deferring certain contractual provisions over the
life of the contracts which are being recognized as the purchase
commitments are achieved. The amount deferred at March 31, 1998
is $19.2 million and is included within other liabilities in the
Company's consolidated balance sheet .
Graphics, together with over 300 other persons, has been
designated by the U.S. Environmental Protection Agency as a
potentially responsible party (a "PRP") under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA",
also known as "Superfund") at one Superfund site. Although
liability under CERCLA may be imposed on a joint and several basis
and the Company's ultimate liability is not precisely
determinable, the PRPs have agreed that Graphics' share of removal
costs is 0.46% and therefore Graphics believes that its share of
the anticipated remediation costs at such site will not be
material to its business or financial condition. Based upon an
analysis of Graphics' volumetric share of waste contributed to the
site and the agreement among the PRPs, the Company has a reserve
of approximately $0.1 million in connection with this liability on
its consolidated balance sheet at March 31, 1998. The Company
believes this amount is adequate to cover such liability.
The Company has been named as a defendant in several legal actions
arising from its normal business activities. In the opinion of
management, any liability that may arise from such actions will
not have a material adverse effect on the consolidated financial
statements of the Company.
(17) Significant Customers
No single customer represented 10% or more of total sales in the
fiscal year ended March 31, 1998 and 1997. Sales to Best Buy Co.
for Fiscal Year 1996 amounted to approximately 12.7% of the
Company's consolidated sales. Receivables outstanding from these
sales were approximately $5.9 million at March 31, 1996.
(18) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
(a)
SMC
Quarter as Discontinued Revised
Issued Operations Quarter
--------------- --------------- --------------
Fiscal Year 1998:
<S> <C> <C> <C>
Quarter Ended June 30, 1997:
Net Sales $ 126,128 -- 126,128
Gross Profit $ 17,028 -- 17,028
Net Loss $ (4,950) -- (4,950)
Quarter Ended September 30, 1997:
Net Sales 135,609 -- 135,609
Gross Profit 17,863 -- 17,863
Net Loss (6,404) -- (6,404)
Quarter Ended December 31, 1997:
Net Sales 145,748 -- 145,748
Gross Profit 20,370 -- 20,370
Net Loss (2,285) -- (2,285)
Quarter Ended March 31, 1998:
Net Sales 125,850 -- 125,850
Gross Profit 16,667 -- 16,667
Net Loss (16,256) -- (16,256)
Totals:
Net Sales $ 533,335 -- 533,335
Gross Profit $ 71,928 -- 71,928
Net Loss $ (29,895) -- (29,895)
Fiscal Year 1997:
Quarter Ended June 30, 1996:
Net Sales $ 139,704 (1,603) 138,101
Gross Profit $ 15,393 (624) 14,769
Net Loss $ (7,604) -- (7,604)
Quarter Ended September 30, 1996:
Net Sales 138,495 (2,705) 135,790
Gross Profit 17,490 (1,167) 16,323
Net Loss (7,548) -- (7,548)
Quarter Ended December 31, 1996:
Net Sales 136,472 (1,153) 135,319
Gross Profit 19,719 (159) 19,560
Net Income (4,339) -- (4,339)
Quarter Ended March 31, 1997:
Net Sales 119,666 (4,325) 115,341
Gross Profit 15,915 (1,896) 14,019
Net Loss (12,212) -- (12,212)
Totals:
Net Sales $ 534,337 (9,786) 524,551
Gross Profit $ 68,517 (3,846) 64,671
Net Loss $ (31,703) -- (31,703)
(a) In February 1997, the Company shut down the operations of its wholly-
owned subsidiary SMC. The resulting effect of this change is a
retroactive restatement of Fiscal Year 1997, reclassifying SMC's
results of operations to Discontinued Operations (see note 5).
</TABLE>
(19) Restructuring Costs and Other Special Charges
Restructuring Costs:
Printing In January 1998, the Company approved a plan for its
printing division which was designed to improve responsiveness to
customer requirements, increase asset utilization and reduce
overhead costs. The cost of this plan is being accounted for in
accordance with the guidance set forth in Emerging Issues Task
Force Issue 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"). The pretax costs of $3.9 million which were incurred as a
direct result of this plan (excluding other special charges
related to asset write-offs and write-downs - see below) includes
$3.3 million of employee termination costs and $0.6 million of
relocation and other transition expenses. This restructuring
charge was recorded in the quarter March 31, 1998. The majority
of these costs will be paid or settled before March 31, 1999.
American Color In April 1995, the Company implemented a plan for
its American Color division which was designed to improve
productivity, increase customer service and responsiveness, and
provide increased growth in the digital imaging and prepress
services business. The cost of this plan was accounted for in
accordance with the guidance set forth in EITF 94-3. The pretax
costs of $5 million which were incurred as a part of this plan
(excluding other special charges related to asset write-offs and
write-downs - see below) represent employee termination, goodwill
write-down and other related costs that were incurred as a direct
result of the plan. Approximately $0.9 million of restructuring
costs primarily related to relocation expenses were recognized in
Fiscal Year 1997. In Fiscal Year 1996 the Company recognized $4.1
million of such restructuring charges, which included $0.9 million
of goodwill write-down related to certain facilities that were
either shut down or relocated in conjunction with the American
Color restructuring and $3.2 million primarily for severance and
other personnel related costs.
Other Special Charges:
During the quarter ended March 31, 1998, the Company recorded
special charges totaling $1.7 million to adjust the carrying
values of idle, disposed and under-performing assets of the
Company's printing sector to estimated fair values. The provision
was based on a review of Company long-lived assets in accordance
with FASB 121. Fair value was based on the Company's estimate of
held and used and idle assets based on current market conditions
using the best information available.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded
special charges totaling $1.9 million and $3.4 million,
respectively, for impaired long-lived assets and to adjust the
carrying values of idle, disposed and under performing assets to
estimated fair values. The provisions were based on a review of
long-lived assets in connection with the adoption of FASB 121. Of
the Fiscal Year 1997 total long-lived assets that were adjusted
based on being idle, disposed of or under performing,
approximately $0.4 million and $1.5 million related to the
printing and American Color sectors, respectively. Fair value was
based on the Company's estimate of held and used and idle assets
based on current market conditions using the best information
available. Approximately $2 million of the Fiscal Year 1996 total
related to the printing sector's long-lived assets, respectively
that were adjusted based on being idle, disposed of or under
performing. The remaining $1.4 million of the Fiscal Year 1996
total related to the American Color sector. The estimated
undiscounted future cash flows attributable to certain American
Color division identifiable long-lived assets held and used was
less than their carrying value principally as a result of high
levels of ongoing technological change. The methodology used to
assess the recoverability of the American Color sector long-lived
assets involved projecting aggregate cash flows. Based on this
evaluation, the Company determined in Fiscal Year 1996 that long-
lived assets with a carrying amount of $2.2 million were impaired
and such assets were then written down by $1.4 million to their
fair value. Fair value was based on Company estimates and
appraisals.
These special charges are classified within restructuring costs and
other special charges in the consolidated statements of
operations.
(20) Non-recurring Charge Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a
terminated merger in Fiscal Year 1996.
(21) Non-recurring Charge Related to Resignation of Former Chief Executive
Officer
A non-recurring charge of $1.9 million relating to the resignation
of the Company's former Chief Executive Officer was recorded in
Fiscal Year 1997, and is classified as a selling, general and
administrative expense. Payments under the related agreement
continue through 2001, subject to certain requirements.
(22) Summarized Financial Information of American Color Graphics, Inc.
Summary financial information for Holdings' wholly-owned subsidiary,
American Color Graphics, Inc., is as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
Balance sheet data:
Current assets $ 80,163 70,077
Noncurrent assets 249,795 263,898
Current liabilities 69,176 78,675
Noncurrent liabilities 367,490 331,618
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- ------------------
<S> <C> <C>
Statement of operations data:
Sales $ 533,335 524,551 529,523
Operating income 12,103 10,372 12,716
Net loss (29,895) (31,703) (29,327)
</TABLE>
(23) Subsequent Events
On May 8, 1998, the Company completed a refinancing transaction
which included the following: (1) the Company entered into a $145
million credit facility with Bankers Trust Company, Morgan Stanley
Senior Funding, Inc., General Electric Capital Corporation and a
syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not
subject to a borrowing base limitation (the "New Revolving Credit
Facility") maturing on March 31, 2004, a $25 million amortizing
term loan facility maturing on March 31, 2004 (the "A Term Loan
Facility") and a $50 million amortizing term loan facility
maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the
repayment of all $57.0 million of indebtedness outstanding under
the existing Bank Credit Agreement ($65.2 million was outstanding
at March 31, 1998) (plus $0.4 million of accrued interest to the
date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment)
and (4) the payment of approximately $2.2 million in fees and
expenses associated with the refinancing transaction. In
addition, the Company will record an extraordinary loss related to
early extinguishment of debt of $4.0 million, net of taxes
associated with the write-off of refinanced indebtedness deferred
financing costs in the first quarter of the fiscal year ending
March 31, 1999.
Interest under the Amended and Restated Credit Agreement is
floating based upon existing market rates plus agreed upon margin
levels. In addition, the Company is obligated to pay specific
commitment and letter of credit fees. Such margin levels and fees
reduce over the term of the agreement subject to the achievement
of certain Leverage Ratio measures.
Borrowings under the Amended and Restated Credit Agreement are
secured by substantially all of the Company's assets. In
addition, Holdings has guaranteed the indebtedness under the
Amended and Restated Credit Agreement, which guarantee is secured
by a pledge of all of Graphics' and its subsidiaries' stock. The
new agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated
Interest Coverage Ratio and Leverage Ratio requirements, (2)
requires prepayments in certain circumstances including excess
cash flows, proceeds from asset dispositions in excess of
prescribed levels and certain capital structure transactions and
(3) contains various restrictions and limitations on the following
items: (a) the level of capital spending, (b) the incurrence of
additional indebtedness, (c) mergers, acquisitions, investments
and similar transactions and (d) dividends and other
distributions. In addition, the agreement includes various other
customary affirmative and negative covenants. Graphics' ability
to pay dividends or lend funds to Holdings is restricted
substantially to the same extent as under the Bank Credit
Agreement (see note 1 for a discussion of those restrictions).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information about each of the current
directors and executive officers of Holdings and Graphics (ages as of March
31, 1998). All directors hold office until their successors are duly
elected and qualified.
Name Age Position with Graphics and Holdings
---- --- -----------------------------------
Stephen M. Dyott 46 Chairman, President, Chief Executive
Officer and Director
Michael M. Janson 49 Director
Eric T. Fry 31 Director
Joseph M. Milano 45 Executive Vice President and Chief
Financial Officer
Malcolm J. Anderson 59 Executive Vice President Operations of
Graphics
Terrence M. Ray 45 President/Chief Operating Officer of
American Color
Timothy M. Davis 43 Senior Vice President-Administration,
Secretary and General Counsel
Patrick W. Kellick 40 Senior Vice President/Corporate
Controller and Assistant Secretary
Stephen M. Dyott - Chairman and Chief Executive Officer of Graphics and
Holdings since September 1996; President of Holdings since February 1995;
Director of Graphics and Holdings since September 1994; Chief Operating
Officer of Holdings from February 1995 to September 1996 and Chief
Operating Officer of Graphics from 1991 to September 1996; President of
Graphics since 1991; Vice President and General Manager - Flexible
Packaging, American National Can Company ("ANCC") from 1988 to 1991; Vice
President and General Manager - Tube Packaging, ANCC from 1985 to 1987.
Michael M. Janson - Director of Holdings and Graphics since February 1998;
Managing Director of the general partner of Morgan Stanley Capital Partners
("MSCP") and of Morgan Stanley Dean Witter & Co. ("MWD"); 1987 joined
Morgan Stanley & Co., Incorporated ("MS&Co."); 1997 joined the Private
Equity Group of MWD; Managing Director in MS&Co.'s High Yield Capital
Markets Department before joining the Private Equity Group; Director of
Jefferson Smurfit Corporation and Renaissance Media Group.
Eric T. Fry - Director of Graphics and Holdings since March 1996. Vice
President of the general partner of MSCP and MWD. Joined MS&Co. in 1989,
initially in the Mergers and Acquisitions Department and from 1991 to 1992
in the Private Equity Group. From 1992 to 1994 attended Harvard Business
School and received an MBA. Rejoined MS&Co.'s Private Equity Group in
1994. Director of Enterprise Reinsurance Holdings Corporation, Vanguard
Health Systems, Inc. and LifeTrust America, L.L.C.
Joseph M. Milano - Executive Vice President and Chief Financial Officer of
Holdings and Graphics from 1997 to 1998; Senior Vice President and Chief
Financial Officer of Holdings and Graphics from 1994 to 1997; Vice
President - Finance of Holdings and Graphics from 1992 to 1994; Vice
President and Chief Financial Officer, Farrel Corporation, 1989 to 1992;
Vice President and Chief Financial Officer, Electronic Mail Corporation of
America from 1984 to 1988.
Malcolm J. Anderson - Executive Vice President Operations of Graphics since
1996; Senior Vice President Operations of Graphics from 1993 to 1996;
President, Plastic Products Division of Kerr Group, Inc. from 1989 to 1993;
Vice President Manufacturing - Flexible Packing, American National Can
Company from 1982 to 1989; Vice President, Eastern Division General
Manager of Sinclair and Valentine Ink Company from 1980 to 1982.
Terrence M. Ray - President and Chief Operating Officer of American Color
since August 1996; Executive Vice President of American Color from March
1996 to July 1996; Executive Vice President of Wace USA, Inc. from April
1994 to February 1996; Group Vice President, Chicago Group of Wace USA,
Inc. from January 1992 to March 1994; Vice President, Secretary and Chief
Financial Officer of Wace USA, Inc., 1988 to 1992.
Timothy M. Davis - Senior Vice President - Administration, Secretary and
General Counsel of Holdings and Graphics since 1989; Assistant General
Counsel of MacMillan, Inc. and counsel to affiliates of Maxwell
Communication Corporation North America, January 1989 to June 1989.
Attorney in private practice from 1981 to 1989.
Patrick W. Kellick - Senior Vice President/Corporate Controller of
Holdings and Graphics from 1997 to 1998; Vice President/Corporate
Controller of Holdings and Graphics from 1989 to 1997; Corporate
Controller of Graphics since 1987, and Assistant Secretary of Holdings and
Graphics since 1995; various financial positions with Williams Precious
Metals (a division of Brush Wellman, Inc.) from 1984 to 1987, including CFO
from 1986 to 1987; Auditor with KPMG from 1979 to 1984.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information concerning compensation paid for
services to Holdings and Graphics during the fiscal years ended March 31,
1998, 1997 and 1996 to the Chief Executive Officers and the four other most
highly compensated executive officers (the "Named Executive Officers") of
Holdings and/or Graphics.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------- ------------------------------------
Awards Payouts
----------------------- -----------
Securities
Other Under-
Annual Restricted lying All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation Award(s) SAR's (#) Payouts sation
- --------------------------- ------------------ -------- -------- ------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Dyott Fiscal Year 1998 $475,000 $525,000 -- -- 14,762 -- --
President, Chief Operating Fiscal Year 1997 $463,462 $350,000 -- -- 1,761 -- --
Officer & Director Fiscal Year 1996 $450,000 $250,000 -- -- 380 -- --
thru 09/96
Chairman, President and
Chief Executive Officer &
Director 09/96 forward
Joseph M. Milano Fiscal Year 1998 $275,000 $290,000 -- -- 7,381 -- --
Senior Vice President & Fiscal Year 1997 $260,097 $150,000 -- -- 760 -- --
Chief Financial Officer Fiscal Year 1996 $228,923 $125,000 -- -- 614 -- --
Malcolm J. Anderson Fiscal Year 1998 $230,000 $200,000 -- -- 1,809 -- --
Executive Vice President Fiscal Year 1997 $230,000 $105,000 -- -- 125 -- --
Operations Graphics Fiscal Year 1996 $212,693 $ 70,000 -- -- -- -- $38,504 (a)
Timothy M. Davis Fiscal Year 1998 $233,200 $160,000 -- -- 3,706 -- --
Senior Vice President Fiscal Year 1997 $220,562 $110,000 -- -- 290 -- --
Administration, Fiscal Year 1996 $209,923 $106,000 -- -- -- -- --
Secretary & General Counsel
Terrence M. Ray Fiscal Year 1998 $246,490 $ 35,000 -- -- 3,618 -- $50,000 (a)
President/Chief Fiscal Year 1997 $230,000 $ 50,000 -- -- 1,447 -- $14,550 (a)
Operating Officer Fiscal Year 1996 $ 20,962 $ 6,000 -- -- -- -- --
American Color
- -------------------------
(a) Represents relocation expense reimbursements.
</TABLE>
The following table presents information concerning the options granted to
the Named Executive Officers during the last fiscal year. All outstanding
options issued prior to April 8, 1993 were canceled in connection with the
1993 Acquisition.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------- -----------------------------
% of Total
Options/
Number of SAR's
Securities Granted to
Underlying Employees Exercise or
Options/SAR's in Fiscal Base Price Expiration 0%($) 5%($) 10%($)
Name Granted (#) Year 1998 ($/sh) Date (h) (h)* (h)*
- --------------------- ------------- ---------- ----------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Plan (a)
Stephen M. Dyott 14,470 (b) 32% .01 (b) -- -- --
Joseph M. Milano 7,235 (c) 16% .01 (c) -- -- --
Malcolm J. Anderson 1,809 (d) 4% .01 (d) -- -- --
Timothy M. Davis 3,618 (e) 8% .01 (e) -- -- --
Terrence M. Ray 3,618 (f) 8% .01 (f) -- -- --
* The Common Stock had no value at the date of grant and as such, the
potential realizable value is zero.
<CAPTION>
Preferred Plan (g)
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen M. Dyott 292 55% 1,908.76 01/19/2008 318,642 870,522 1,711,482
Joseph M. Milano 146 28% 1,908.76 01/19/2008 159,321 435,261 855,741
Timothy M. Davis 88 17% 1,908.76 01/19/2008 96,029 262,349 515,789
</TABLE>
- ------------
(a) All options will become 25 percent exercisable on the first
anniversary date from each option's respective date of grant and are
scheduled to vest in additional 25 percent increments on each of the
next three anniversary dates from each option's date of grant.
(b) 14,470 options consists of: 9,170 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 1,761 options granted 10/01/96 with an expiration of
10/01/2006; 380 options granted 10/01/95 with an expiration of 10/01/2005;
859 options granted 09/01/94 with an expiration of 09/01/2004 and 2,300
options granted 04/01/93 with an expiration of 04/01/2003.
(c) 7,235 options consists of 5,071 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 760 options granted 10/01/96 with an expiration of
10/01/2006; 614 options granted 10/01/95 with an expiration of
10/01/2005; 688 options granted 09/01/94 with an expiration of
09/01/2004 and 102 options granted 04/01/93 with an expiration of
04/01/2003.
(d) 1,809 options consists of: 1,158 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01
exercise price per option: 125 options granted 10/01/96 with an
expiration of 10/01/2006 and 526 options granted 09/01/94 with an
expiration of 09/01/2004.
(e) 3,618 options consists of: 2,538 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 290 options granted 10/01/96 with an expiration of
10/01/2006; 535 options granted 09/01/94 with an expiration of 09/01/2004
and 255 options granted 04/01/93 with an expiration of 04/01/2003.
(f) 3,618 options consists of: 2,171 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01
exercise price per option: 1,447 options granted 10/01/96 with an
expiration of 10/01/2006.
(g) All options vested and were exercisable at the date of grant.
(h) The potential realizable value shown in the table is based on
hypothetical increases in the estimated fair market value of the
common and preferred stock of Holdings ("Holdings Common Stock") over
the terms of the options, assuming 0%, 5% and 10% growth in such fair
market value. These estimates of potential realizable value have been
prepared pursuant to the rules of the Commission and are not
necessarily indicative of the amount that would have been utilized
upon exercise of the options had such options remained outstanding.
The following table presents information concerning the fiscal year-end
value of unexercised stock options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Shares Acquired Value Options/SAR's at 3/31/98 SAR's at 3/31/98
on Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- --------------- ----------------------------- -------------------------
<S> <C> <C> <C> <C>
Common Plan (a)
Stephen M. Dyott 3,574.50 35.75 0 / 10,896 (a)
Joseph M. Milano 1,115.00 11.15 0 / 6,120 (a)
Malcolm J. Anderson 425.75 4.26 0 / 1,383 (a)
Timothy M. Davis 728.75 7.28 0 / 2,889 (a)
Terrence M. Ray 361.75 3.62 0 / 3,256 (a)
Preferred Plan (b)
Stephen M. Dyott -- -- 292 / 0 (b)
Joseph M. Milano -- -- 146 / 0 (b)
Timothy M. Davis -- -- 88 / 0 (b)
(a) Holdings Common Stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. At
March 31, 1998, the Company believes fair market value to be $0 per
share of Common Stock.
(b) Holdings Preferred Stock has not been registered or publicly traded
and, therefore a public market price of the stock is not available. At
March 31, 1998, the Company believes fair market value to be $3,000 per
share of Preferred Stock.
</TABLE>
Pension Plan
Graphics sponsors the American Color Graphics, Inc. Salaried Employees'
Pension Plan (the "Pension Plan"), a defined benefit pension plan covering
full-time salaried employees of Graphics who had at least one year of
service as of December 31, 1994. The basic benefit payable under the
Pension Plan is a five-year certain single life annuity equivalent to (a)
1% of a participant's "final average monthly compensation" plus (b) 0.6% of
a participant's "final average monthly compensation" in excess of 40% of
the monthly maximum Social Security wage base in the year of retirement
multiplied by years of credited service (not to exceed 30 years of
service). For purposes of the Pension Plan, "final average compensation"
(which, for the Named Executive Officers, is reflected in the salary and
bonus columns of the Summary Compensation Table) means the average of a
participant's five highest consecutive calendar years of total earnings
(which includes bonuses) from the last 10 years of service. The maximum
monthly benefit payable from the Pension Plan is $5,000.
The basic benefit under the Pension Plan is payable upon completion of five
years of vesting service and retirement on or after attaining age 65.
Participants may elect early retirement under the Pension Plan upon
completion of five years of vesting service and the attainment of age 55,
and receive the basic benefit reduced by 0.4167% for each month that the
benefit commencement date precedes the attainment of age 65. A deferred
vested benefit is available to those participants who separate from service
before retirement, provided the participant has at least five years of
vesting service.
In October 1994, the Board of Directors approved an amendment to the
Pension Plan which resulted in the freezing of additional defined benefits
for future services under such plan effective January 1, 1995 (see note 11
to the Company's consolidated financial statements).
At March 31, 1998, all of the Named Executive Officers with the exception
of Malcolm J. Anderson and Terrence M. Ray had vested in the pension
plan. At March 31, 1998, the Named Executive Officers had the following
amounts of credited service (original hire date through January 1, 1995)
and annual benefit payable upon retirement at age 65 under the Pension
Plan: Stephen M. Dyott (3 years, 3 months; $8,220), Joseph M. Milano (2
years, 7 months; $5,820), Malcolm J. Anderson (1 year, 3 months; $2,820),
and Timothy M. Davis (5 years, 5 months; $11,700).
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new SERP, which is a
defined benefit plan, for the Named Executive Officers and certain other
key executives. The plan provides for a basic annual benefit payable upon
completion of five years vesting service (April 1, 1994 through March 31,
1999 for Messrs. Dyott, Milano, Anderson and Davis and April 1, 1996,
through March 31, 2001 for Mr. Ray) and retirement on or after attaining
age 65 or the present value of such benefit at an earlier date under
certain circumstances, if elected. The Named Executive Officers have the
following basic annual benefit payable under this plan at age 65:
Stephen M. Dyott $100,000
Joseph M. Milano $100,000
Malcolm J. Anderson $ 50,000
Timothy M. Davis $ 75,000
Terrence M. Ray $ 50,000
Such benefits will be paid from the Company's assets (see note 12 to the
Company's consolidated financial statements).
Compensation of Directors
Directors of Holdings and Graphics do not receive a salary or an annual
retainer for their services but are reimbursed for expenses incurred with
respect to such services.
Employment Agreements
In connection with the 1993 Acquisition, Graphics entered into a new
employment agreement with Stephen M. Dyott (the "New Employment
Agreement"). The New Employment Agreement for Mr. Dyott superseded
previous employment agreements.
The New Employment Agreement has been amended so that it has a term of four
years commencing as of the effective time Acquisition Corp. merged with and
into Holdings (the "Effective Time"). The term under the New Employment
Agreement is automatically extended at the end of the then current term for
one-year periods absent two year's notice of an intent not to renew. The
New Employment Agreement provides for the payment of an annual salary and
an annual bonus pursuant to a plan adopted following the 1993 Acquisition.
In addition, under the New Employment Agreement, Mr. Dyott is eligible to
receive all other employee benefits and perquisites made available to
Graphics' senior executives generally.
Under the New Employment Agreement, if the employee's employment is
terminated by Graphics "without cause" ("cause", as defined in the New
Employment Agreement, means a material breach by the employee of his
obligations under the New Employment Agreement; continued failure or
refusal of the employee to substantially perform his duties to Graphics; a
willful and material violation of Federal or state law applicable to
Graphics or the employee's conviction of a felony or perpetration of a
common law fraud; or other willful misconduct that is injurious to
Graphics) or by the employee for "good reason" (which, as defined in the
New Employment Agreement, means a decrease in base pay or a failure by
Graphics to pay material compensation due and payable; a material
diminution of the employee's responsibilities or title; a material change
in the employee's principal employment location; or a material breach by
Graphics of a material term of the New Employment Agreement), the employee
will be entitled to salary continuation payments (and certain other
benefits) through the greater of the remainder of the scheduled term and a
period of two years beginning on the date of termination. The New
Employment Agreement also provides for post-employment non-solicitation,
non-competition and confidentiality covenants.
Graphics entered into an employment agreement with Terrence M. Ray on
August 18, 1997, (the "Agreement"). The Agreement has a term of three
years commencing with the date of the Agreement and that term shall be
automatically extended for one year periods absent one year's notice of an
intent not to renew. The Agreement provides for the payment of an annual
salary and an annual bonus pursuant to an executive bonus plan adopted by
American Color. In addition, under the Agreement, Mr. Ray is eligible to
receive all other employee benefits and prerequisites made available to
Graphics' senior executives generally.
In addition, Graphics has entered into severance agreements with Joseph M.
Milano, Malcolm J. Anderson and Timothy M. Davis. These agreements
provide that if the employee's employment is terminated by Graphics
"without cause", as defined above, or by the employee for "good reason", as
defined above, the employee will be entitled to salary continuation
payments (and certain other benefits) for up to two years beginning on the
date of termination.
James T. Sullivan resigned as Chairman of the Board and Chief Executive
Officer and as a director and employee of Holdings effective as of
September 18, 1996 (the "Effective Date"). For the period commencing on
the Effective Date and ending on April 8, 1999, Mr. Sullivan will hold the
title of Vice Chairman of Holdings. Mr. Sullivan will receive salary
continuation payments at an annual rate of $0.6 million through April 8,
1999. For two years thereafter, Mr. Sullivan will be engaged as a
consultant to Holdings for which he will be paid an annual fee of $0.2
million. Under the terms of his resignation agreement, Mr. Sullivan will
be entitled, through April 8, 1999, to continue to participate in certain
employee benefit plans provided by Holdings to its employees generally.
Mr. Sullivan also received payment of his full supplemental retirement
benefit under the American Color Graphics, Inc. Supplement Executive
Retirement Plan. Mr. Sullivan's resignation agreement also contains
certain noncompetition and other restrictive covenants.
Compensation Committee Interlocks and Insider Participation
The Company has not maintained a formal compensation committee since the
1993 Acquisition. Mr. Dyott sets compensation in conjunction with the
Board of Directors.
Repriced Options
During 1998, certain common stock option agreements were modified to reprice
options previously granted with a $50 exercise price to a $.01 exercise price.
Based upon the Board of Directors determination, the new exercise price was
not less than the fair market value of such options. See note 15 to the
Company's consolidated financial Statements.
The following table presents information concerning all repricing of
options and SARs held by any executive officer during the last ten
completed fiscal years.
Ten Year Option / SAR Repricings
<TABLE>
<CAPTION>
Number of
Securities Market Length of
Underlying Price of Original Option
Options/ Stock at Exercise Term
SARs Time of Price at New Remaining at
Repriced or Repricing or Time of Exercise Date of
Amended Amendment Repricing Price Repricing or
Name Date (#) ($) ($) ($) Amendment
- --------------------- -------- ----------- ------------ --------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Dyott 01/16/98 1,761 -- 50 .01 8 yrs. 6 mo.
Chairman, President, 01/16/98 380 -- 50 .01 7 yrs. 6 mo.
Chief Executive 01/16/98 859 -- 50 .01 6 yrs. 5 mo.
Officer and Director 01/16/98 2,300 -- 50 .01 5 yrs. 0 mo.
Joseph M. Milano 01/16/98 760 -- 50 .01 8 yrs. 6 mo.
Executive Vice 01/16/98 614 -- 50 .01 7 yrs. 6 mo.
President and Chief 01/16/98 688 -- 50 .01 6 yrs. 5 mo.
Financial Officer 01/16/98 102 -- 50 .01 5 yrs. 0 mo.
Malcolm J. Anderson 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
Executive Vice 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
President Operations
of Graphics
Timothy M. Davis 01/16/98 290 -- 50 .01 8 yrs. 6 mo.
Senior Vice 01/16/98 535 -- 50 .01 6 yrs. 5 mo.
President- 01/16/98 255 -- 50 .01 5 yrs. 0 mo.
Administration,
Secretary and
General Counsel
Terrence M. Ray 01/16/98 1,447 -- 50 .01 8 yrs. 6 mo.
President/Chief
Operating Officer
of American Color
Patrick W. Kellick 01/16/98 257 -- 50 .01 8 yrs. 6 mo.
Senior Vice 01/16/98 105 -- 50 .01 6 yrs. 5 mo.
President/Corporate
Controller and
Assistant Secretary
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1998,
concerning the persons having beneficial ownership of more than five
percent of the capital stock of Holdings and the ownership thereof by each
director of Holdings and by all current officers of Holdings as a group.
Each holder below has sole voting power and sole investment power over the
shares designated below.
<TABLE>
<CAPTION>
Shares of Holdings Percent Shares of Holdings Percent
Name Common Stock of Class Preferred Stock of Class
- ---- ------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
The Morgan Stanley Leveraged Equity
Fund II, L.P.
1221 Ave. of the Americas
New York, NY 10020 59,450 44.1 2,727 52.0
MSCP Entities
1221 Ave. of the Americas
New York, NY 10020 23,333 17.3 1,070 20.4
First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 12.6 780 14.8
Leeway & Co.
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171 10,667 7.9 489 9.3
Stephen M. Dyott 4,075 3.0 315 (1) 5.7 (1)
Michael M. Janson -- -- -- --
Eric T. Fry -- -- -- --
All current directors and
officers as a group 8,854 6.6 554 (2) 9.6 (2)
- ------------
(1) Includes 292 preferred stock options exercisable within 60 days.
(2) Includes 526 preferred stock options exercisable within 60 days.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
On the Acquisition Date, MSLEF II and the Purchasing Group invested $40
million in Holdings and acquired control of Holdings and Graphics.
Pursuant to the Merger Agreement, (i) MSLEF II and the Purchasing Group
made a $40 million equity investment in Holdings and acquired (a) 90% of
the outstanding Holdings Common Stock and (b) all the outstanding shares of
the preferred stock of Holdings (the "Holdings Preferred Stock"), with a
total preference of $40 million and which, under certain circumstances, is
convertible into shares of Holdings Common Stock; and (ii) Golder, Thoma,
& Cressey, an Illinois limited partnership ("GTC") and its affiliates
received 4,987 shares of Holdings Common Stock.
MSLEF II is an investment fund affiliated with MWD. MWD is a holding
company that, through its subsidiaries, is a major international financial
services firm. In addition, two of the current directors of Holdings are
employees of Morgan Stanley & Co. Incorporated, an affiliate of MSLEF II
and also a subsidiary of MWD. As a result of these relationships, MWD may
be deemed to control the management and policies of Graphics and Holdings.
In addition, MWD may be deemed to control matters requiring shareholders'
approval, including the election of all directors, the adoption of
amendments to the Certificates of Incorporation of Holdings and Graphics
and the approval of mergers and sales of all or substantially all of
Graphics' and Holdings' assets.
Management Equity Participation. In connection with the 1993 Acquisition,
certain members of the Company's management at that time, including James
T. Sullivan and Stephen M. Dyott (collectively, the "Management
Investors"), invested an aggregate of approximately $2.3 million in
Holdings and received an aggregate of 3,700 shares of Holdings Common Stock
and 185 shares of Holdings Preferred Stock.
Each Management Investor also entered into a Management Equity Agreement,
dated as of April 8, 1993, with Holdings (collectively, the "Management
Agreements"), pursuant to which, if a Management Investor's employment with
the Company terminates for any reason, Holdings has the right to repurchase
any of the shares of Holdings Common Stock and Holdings Preferred Stock
held by such Management Investor at a price per share equal to the
"Threshold Amount" (as defined in section 4.2(d)(ix) of Holdings'
Certificate of Incorporation) applicable to such shares at such time
divided by the number of shares of Holdings Preferred Stock outstanding at
such time. In the case of shares of Holdings Common Stock held by such
Management Investor, the repurchase price will be equal to fair market
value. The payment of the repurchase price may be deferred (with interest)
if the making of such payment would cause Holdings to violate any debt
covenant or provision of applicable law, or if the Board of Directors of
Holdings determines that Holdings is not financially capable of making such
payment.
Stockholders' Agreement. In connection with the 1993 Acquisition,
Holdings, MSLEF II, each of the members of the Purchasing Group, the GTC
Funds, certain other stockholders of Holdings who were stockholders of
Holdings immediately prior to the Merger Agreement (such stockholders,
together with the GTC Funds, being referred to as the "Existing Holders")
and GTC entered into a Stockholders' Agreement, dated as of April 8, 1993
(the "Stockholders' Agreement"). The Stockholders' Agreement includes
provisions requiring the delivery of certain shares of Holdings Common
Stock from the Purchasing Group to Holdings, depending upon the return
realized by the members of the Purchasing Group on their investment, and
thereafter from Holdings to the Existing Holders. Depending upon the
returns realized by the members of the Purchasing Group on their
investment, their interest in the Holdings Common Stock could be reduced
and the interest of the Existing Holders could be increased as set forth in
the Stockholders' Agreement.
Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective July
27, 1989. Under the terms of the agreement, Graphics (whose income is
consolidated with that of Holdings for federal income tax purposes) is
liable to Holdings for amounts representing federal income taxes calculated
on a "stand-alone basis". Each year Graphics pays to Holdings the lesser
of (i) Graphics' federal tax liability computed on a stand-alone basis and
(ii) its allocable share of the federal tax liability of the consolidated
group. Accordingly, Holdings is not currently reimbursed for the separate
tax liability of Graphics to the extent Holdings' losses reduce
consolidated tax liability. Reimbursement for the use of such Holdings'
losses will occur when the losses may be used to offset Holdings' income
computed on a stand-alone basis. Graphics has also agreed to reimburse
Holdings in the event of any adjustment (including interest or penalties)
to consolidated income tax returns based upon Graphics' obligations with
respect thereto. No reimbursement obligation currently exists between
Graphics and Holdings. Also under the terms of the tax sharing agreement,
Holdings has agreed to reimburse Graphics for refundable federal income tax
equal to an amount which would be refundable to Graphics had Graphics filed
separate federal income tax returns for all years under the agreement.
Graphics and Holdings have also agreed to treat foreign, state and local
income and franchise taxes for which there is consolidated or combined
reporting in a manner consistent with the treatment of federal income taxes
as described above.
Shakopee Merger
In December 1994, Graphics and Shakopee entered into an agreement pursuant
to which they agreed in principle to the terms of the Shakopee Merger and
to negotiate definitive agreements with respect thereto. Prior to the
consummation of the Shakopee Merger, the MSCP III Entities owned a majority
of Shakopee's outstanding stock and the Company provided general
management, supervisory and administrative services to Shakopee, pursuant
to a management agreement entered into in December 1994, in exchange for an
annual service fee of $0.5 million. The Shakopee Merger was consummated
and the management agreement was terminated simultaneously with the
consummation of the offering of the Notes.
In 1998, the Company established the ACG Holdings, Inc. Preferred Stock Option
Plan (the "Preferred Stock Option Plan"). This plan is administered by the
Committee and provides for granting up to 583 shares of Holdings Preferred
Stock. Stock options may be granted under this Preferred Stock Option Plan
to officers and other key employees of the Company at the exercise price
per share of Preferred Stock, as determined at the time of grant by the
Committee in its sole discretion. All options are fully vested and are
100% exercisable at the date of grant. All options expire 10 years from
date of grant. In Fiscal Year 1998, the Company granted options to
purchase 526 shares of Preferred Stock to certain key executives, at an
exercise price of $1,909/share. See note 15 to the Company's consolidated
financial statements.
Other
MS&Co. acted as placement agent in connection with the original private
placement of the Notes and received a placement fee of $5.6 million in
connection therewith. MS&Co. is affiliated with entities that beneficially
own a substantial majority of the outstanding shares of capital stock of
Holdings. MS&Co. had a $5 million participation in the Term Loan Facility
and received fees of approximately $0.3 million in connection therewith.
In addition, Morgan Stanley Senior Funding, Inc. originally had a
participation of approximately $35 million in the Amended and Restated
Credit Agreement and received gross fees of approximately $0.5 million in
connection therewith. On June 8, 1998, Morgan Stanley Senior Funding Inc.
reduced its participation in such credit facility to $11.5 million.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Reports of Independent Auditors
1 and 2. Financial Statements: The following Consolidated
Financial Statements of Holdings are included in
Part II, Item 8:
Consolidated balance sheets - March 31, 1998 and 1997
For the Years Ended March 31, 1998, 1997 and 1996:
Consolidated statements of operations
Consolidated statements of stockholders' deficit
Consolidated statements of cash flows
Notes to Consolidated Financial Statements
Financial Statement Schedules: The following
financial statement schedules of Holdings
are filed as a part of this report.
Schedules Page No.
I. Condensed Financial Information of Registrant................. 73
Condensed Financial Statements (parent company only)
for the years ended March 31, 1998, 1997, and 1996
and as of March 31, 1998 and 1997
II. Valuation and qualifying accounts............................. 80
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or notes thereto.
3. Exhibits: The exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules are
filed as part of, or incorporated by reference into, this report.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as
amended to date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of
August 15, 1995, among Graphics, Holdings and
NationsBank of Georgia, National Association, as
Trustee**
10.0 Credit Agreement, dated as of August 15, 1995 and Amended
and Restated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan
Stanley Senior Funding, Inc. as Syndication Agent, Bankers
Trust Company as Administrative Agent and the parties
signatory thereto
10.0(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust Company
as Administrative Agent and the parties signatory thereto
10.1 Credit Agreement, dated as of August 15, 1995, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto**
10.1(a) January 10, 1996, First Amendment to Credit Agreement,
dated as of August 15, 1995, among Holdings, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto****
10.1(e) February 27, 1997, Fifth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto++++
10.1(f) June 30, 1997, Sixth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.1(g) March 13, 1998, Seventh Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.2 Agreement and Plan of Merger, dated as of August 14, 1995, among
Holdings, Graphics and Shakopee**
10.3 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan****
10.4(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.4(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.4(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of August 18, 1997, between
Graphics and Terrence M. Ray
10.6 Severance Letter, dated April 8, 1993, between Graphics and
Joseph M. Milano+
10.6(a) October 12, 1995, Amendment to Severance Letter, dated
April 8, 1993, between Graphics and Joseph M. Milano***
10.7 Severance Letter, dated April 8, 1993, between Graphics and
Timothy M. Davis+
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Timothy M. Davis***
10.8 Severance Letter dated September 8, 1995, between
Graphics and M.J. Anderson
10.9 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.9(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement dated as of August 14, 1995 among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein
10.10 Purchase Agreement between Guy Gannett, Holdings and Shakopee,
dated November 23, 1994+
10.11 First Amendment Agreement, dated as of December 22, 1994,
between Guy Gannett, Holdings and Shakopee**
10.12 Second Amendment Agreement, dated as of March 27,
1995, between Guy Gannett, Holdings and Shakopee**
10.13 Stock Option Plan of Holdings++
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe
Inc., dated March 12, 1996+++
10.15 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto
10.16 Holdings Common Stock Option Plan
10.17 Holdings Preferred Stock Option Plan
21.1 List of Subsidiaries
27.0 Financial Data Schedule
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number 33-31706-
01.
+++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-
97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the fourth quarter of
Fiscal Year 1998:
1. Form 8-K filed with the Securities and Exchange Commission on
January 29, 1998 under Item 5 to announce the Company's EBITDA for the
three months ended December 31, 1997.
The Company did not file any other reports on Form 8-K during the three
months ended March 31, 1998.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
---------------------------
1998 1997
---------- ----------
Assets
Current assets:
Receivable from subsidiary $ 359 128
---------- --------
Total assets $ 359 128
========= ========
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
March 31,
-----------------------------------
1998 1997
---------------- ----------------
Liabilities and Stockholders' Deficit
<S> <C> <C>
Current liabilities:
Income taxes payable $ 53 128
--------------- ---------------
Total current liabilities 53 128
Liabilities of subsidiary in excess of assets 106,391 76,318
--------------- ---------------
Total liabilities 106,444 76,446
--------------- ---------------
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 134,812 shares issued and outstanding at
March 31, 1998 and 123,889 shares issued and outstanding
at March 31, 1997 1 1
Preferred Stock, $.01 par value, 5,750 shares authorized,
4,000 shares Series A convertible preferred stock issued
and outstanding at March 31, 1997, $40,000,000 liquidation
preference, 1,750 shares Series B convertible preferred
stock issued and outstanding at March 31, 1997, $17,500,000
liquidation preference -- --
Preferred Stock, $.01 par value, 15,823 shares authorized, 3,631
shares series AA convertible preferred stock issued and
outstanding at March 31, 1998, $40,000,000 liquidation preference,
1,606 shares Series BB convertible preferred stock issued and
outstanding at March 31, 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,249 57,499
Accumulated deficit (162,250) (132,228)
Cumulative translation adjustment (2,000) (1,590)
Unfunded pension liability (85) --
--------------- ---------------
Total stockholders' deficit (106,085) (76,318)
--------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 359 128
=============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
<S> <C> <C> <C>
Equity in loss of subsidiary $ (29,895) (31,703) (29,327)
---------------------- -------------------- --------------------
Net loss $ (29,895) (31,703) (29,327)
====================== ==================== ====================
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities -- -- --
Cash flows from investing activities -- -- --
Cash flows from financing activities -- -- --
-------------------- ------------------- -------------------
Net change in cash -- -- --
==================== =================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
Description of ACG Holdings, Inc.
Sullivan Communications, Inc. ("Communications"), together with its
wholly-owned subsidiary, Sullivan Graphics, Inc., collectively the
("Company"), was formed in April 1989 under the name GBP Holdings, Inc. to
effect the purchase of all the capital stock of GBP Industries, Inc. from
its stockholders in a leveraged buyout transaction. In October 1989, GBP
Holdings, Inc. changed its name to Sullivan Holdings, Inc. and GBP
Industries, Inc. changed its name to Sullivan Graphics, Inc. Effective
June 1993, Sullivan Holdings, Inc. changed its name to Sullivan
Communications, Inc. Effective July 1997, Sullivan Communications, Inc.
changed its name to ACG Holdings, Inc. ("Holdings") and Sullivan Graphics,
Inc. changed its name to American Color Graphics, Inc. ("Graphics").
Holdings has no operations or significant assets other than its investment
in Graphics. Holdings is dependent upon distributions from Graphics to
fund its obligations. Under the terms of its debt agreements at March 31,
1998, Graphics' ability to pay dividends or lend to Holdings is either
restricted or prohibited, except that Graphics may pay specified amounts to
Holdings to fund the payment of Holdings' obligations pursuant to a tax
sharing agreement (see note 4).
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger dated as of March 12, 1993, as amended (the "Merger
Agreement"), between Holdings and SGI Acquisition Corp. ("Acquisition
Corp."), Acquisition Corp. was merged with and into Holdings (the
"Acquisition"). Acquisition Corp. was formed by The Morgan Stanley
Leveraged Equity Fund II, L.P., certain institutional investors and certain
members of management (the "Purchasing Group") for the purpose of acquiring
a majority interest in Holdings. Acquisition Corp. acquired a substantial
and controlling majority interest in Holdings in exchange for $40 million
in cash. In the Acquisition, Holdings continued as the surviving
corporation and the separate corporate existence of Acquisition Corp. was
terminated.
In connection with the Acquisition, the existing consulting agreement with
the managing general partner of Holdings' majority stockholder was
terminated and the related liabilities of Holdings were canceled. The
agreement required Holdings to make minimum annual payments of $1 million
for management advisory services subject to limitations in Graphics' debt
agreements. No amounts were paid during the periods presented in these
condensed financial statements.
1. Basis of Presentation
The accompanying condensed financial statements (parent company
only) include the accounts of Holdings and its investments in
Graphics accounted for in accordance with the equity method, and
do not present the financial statements of Holdings and its
subsidiary on a consolidated basis. These parent company only
financial statements should be read in conjunction with the
Company's consolidated financial statements. The Acquisition was
accounted for under the purchase method of accounting applying the
provisions of Accounting Principles Board Opinion No. 16 ("APB
16").
2. Guarantees
As set forth in the Company's consolidated financial statements, a
substantial portion of Graphics' long-term obligations have been
guaranteed by Holdings.
Holdings has guaranteed Graphics' indebtedness under the Bank
Credit Agreement, which guarantee is secured by a pledge of all of
Graphics' stock. Borrowings under the Bank Credit Agreement are
secured by substantially all assets of Graphics. Holdings is
restricted under its guarantee of the Bank Credit Agreement from,
among other things, entering into mergers, acquisitions, incurring
additional debt, or paying cash dividends.
On August 15, 1995, Graphics issued $185 million of Senior
Subordinated Notes (the "Notes") bearing interest at 12 3/4% and
maturing August 1, 2005. The Notes are guaranteed on a senior
subordinated basis by Holdings and are subordinate to all existing
and future senior indebtedness, as defined, of Graphics.
On May 8, 1998, the Company refinanced all outstanding indebtedness
under the Bank Credit Agreement and the Term Loan Facility (see
note 5 below for a discussion of the terms of this refinancing
transaction).
3. Dividends from Subsidiaries and Investees
No cash dividends were paid to Holdings from any consolidated
subsidiaries, unconsolidated subsidiaries or investees accounted
for by the equity method during the periods reflected in these
condensed financial statements.
4. Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement
effective July 27, 1989. Under the terms of the agreement,
Graphics (whose income is consolidated with that of Holdings for
federal income tax purposes) is liable to Holdings for amounts
representing federal income taxes calculated on a "stand-alone
basis". Each year Graphics pays to Holdings the lesser of (i)
Graphics' federal tax liability computed on a stand-alone basis
and (ii) its allocable share of the federal tax liability of the
consolidated group. Accordingly, Holdings is not currently
reimbursed for the separate tax liability of Graphics to the
extent Holdings' losses reduce consolidated tax liability.
Reimbursement for the use of such Holdings' losses will occur when
the losses may be used to offset Holdings' income computed on a
stand-alone basis. Graphics has also agreed to reimburse Holdings
in the event of any adjustment (including interest or penalties)
to consolidated income tax returns based upon Graphics'
obligations with respect thereto. Also, under the terms of the
tax sharing agreement, Holdings has agreed to reimburse Graphics
for refundable federal income taxes equal to an amount which would
be refundable to Graphics had Graphics filed separate federal
income tax returns for all years under the agreement. Graphics
and Holdings have also agreed to treat foreign, state and local
income and franchise taxes for which there is consolidated or
combined reporting in a manner consistent with the treatment of
federal income taxes as described above.
5. Subsequent Events
On May 8, 1998, the Company completed a refinancing transaction
which included the following: (1) the Company entered into a $145
million credit facility with Bankers Trust Company, Morgan Stanley
Senior Funding, Inc., General Electric Capital Corporation and a
syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not
subject to a borrowing base limitation (the "New Revolving Credit
Facility") maturing on March 31, 2004, a $25 million amortizing
term loan facility maturing on March 31, 2004 (the "A Term Loan
Facility") and a $50 million amortizing term loan facility
maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the
repayment of all $57.0 million of indebtedness outstanding under
the existing Bank Credit Agreement ($65.2 million was outstanding
at March 31, 1998) (plus $0.4 million of accrued interest to the
date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment)
and (4) the payment of approximately $2.2 million in fees and
expenses associated with the refinancing transaction. In
addition, the Company recorded an extraordinary loss related to
early extinguishment of debt of $4.0 million, net of taxes
associated with the write-off of refinanced indebtedness deferred
financing costs in the first quarter of the fiscal year ending
March 31, 1999.
Interest under the Amended and Restated Credit Agreement is
floating based upon existing market rates plus agreed upon margin
levels. In addition, the Company is obligated to pay specific
commitment and letter of credit fees. Such margin levels and fees
reduce over the term of the agreement subject to the achievement
of certain Leverage Ratio measures.
Borrowings under the Amended and Restated Credit Agreement are
secured by substantially all of the Company's assets. In
addition, Holdings has guaranteed the indebtedness under the
Amended and Restated Credit Agreement, which guarantee is secured
by a pledge of all of Graphics' and its subsidiaries' stock. The
new agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated
Interest Coverage Ratio and Leverage Ratio requirements, (2)
requires prepayments in certain circumstances including excess
cash flows, proceeds from asset dispositions in excess of
prescribed levels and certain capital structure transactions and
(3) contains various restrictions and limitations on the following
items: (a) the level of capital spending, (b) the incurrence of
additional indebtedness, (c) mergers, acquisitions, investments
and similar transactions and (d) dividends and other
distributions. In addition, the agreement includes various other
customary affirmative and negative covenants.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
<TABLE>
<CAPTION>
Balance
Balance at Additions at
Beginning of Charged to Other End of
Period Expense Write-offs Adjustments Period
------------ ---------- ---------- ----------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year ended March 31, 1998
Allowance for doubtful accounts $ 5,879 908 (4,675) -- $ 2,112
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 69 184 (47) (41) $ 165
Income tax valuation allowance $ 30,138 -- -- (a) 7,084 $37,222
Fiscal Year ended March 31, 1997
Allowance for doubtful accounts $ 4,830 4,847 (3,798) -- $ 5,879
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 611 318 (45) (815) $ 69
Income tax valuation allowance $ 21,210 -- -- (a) 8,928 $30,138
Fiscal Year ended March 31, 1996
Allowance for doubtful accounts $ 3,174 3,619 (1,963) -- $ 4,830
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 50 -- -- 561 $ 611
Income tax valuation allowance $ 13,808 -- -- (a) 7,402 $21,210
(a) The increase in the valuation allowance primarily relates to current
year losses for which no tax benefit has been recorded.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on their behalf by the undersigned thereunto duly authorized.
ACG Holdings, Inc.
American Color Graphics, Inc.
Date
----
/s/ Stephen M. Dyott June 29, 1998
------------------------------------- -------------
Stephen M. Dyott
Chairman, President and Chief Executive Officer
ACG Holdings, Inc.
Chairman, President and Chief Executive Officer
American Color Graphics, Inc.
Director of ACG Holdings, Inc. and American Color Graphics, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph M. Milano
- ---------------------------- Executive Vice President June 29, 1998
(Joseph M. Milano) Chief Financial Officer -------------
/s/ Patrick W. Kellick
- ---------------------------- Senior Vice President June 29, 1998
(Patrick W. Kellick) Corporate Controller -------------
Assistant Secretary
(Principal Accounting Officer)
/s/ Michael M. Janson Director June 29, 1998
- ---------------------------- -------------
(Michael M. Janson)
/s/ Eric T. Fry Director June 29, 1998
- ---------------------------- -------------
(Eric T. Fry)
ACG HOLDINGS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 1998
Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as
amended to date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of
August 15, 1995, among Graphics, Holdings and
NationsBank of Georgia, National Association, as
Trustee**
10.0 Credit Agreement, dated as of August 15, 1995 and Amended
and Restated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan
Stanley Senior Funding, Inc. as Syndication Agent, Bankers
Trust Company as Administrative Agent and the parties
signatory thereto
10.0(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust Company
as Administrative Agent and the parties signatory thereto
10.1 Credit Agreement, dated as of August 15, 1995, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto**
10.1(a) January 10, 1996, First Amendment to Credit Agreement,
dated as of August 15, 1995, among Holdings, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto****
10.1(e) February 27, 1997, Fifth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto++++
10.1(f) June 30, 1997, Sixth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.1(g) March 13, 1998, Seventh Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.2 Agreement and Plan of Merger, dated as of August 14, 1995, among
Holdings, Graphics and Shakopee**
10.3 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan****
10.4(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.4(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.4(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of August 18, 1997, between
Graphics and Terrence M. Ray
10.6 Severance Letter, dated April 8, 1993, between Graphics and
Joseph M. Milano+
10.6(a) October 12, 1995, Amendment to Severance Letter, dated
April 8, 1993, between Graphics and Joseph M. Milano***
10.7 Severance Letter, dated April 8, 1993, between Graphics and
Timothy M. Davis+
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Timothy M. Davis***
10.8 Severance Letter dated September 8, 1995, between
Graphics and M.J. Anderson
10.9 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.9(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement dated as of August 14, 1995 among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein
10.10 Purchase Agreement between Guy Gannett, Holdings and Shakopee,
dated November 23, 1994+
10.11 First Amendment Agreement, dated as of December 22, 1994,
between Guy Gannett, Holdings and Shakopee**
10.12 Second Amendment Agreement, dated as of March 27,
1995, between Guy Gannett, Holdings and Shakopee**
10.13 Stock Option Plan of Holdings++
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe
Inc., dated March 12, 1996+++
10.15 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto
10.16 Holdings Common Stock Option Plan
10.17 Holdings Preferred Stock Option Plan
21.1 List of Subsidiaries
27.0 Financial Data Schedule
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number 33-31706-
01.
+++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-
97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Indemnification of Directors and Officers
Graphics
The Business Corporation Law of the State of New York (the "New
York Law") permits indemnification of directors, employees and agents of
corporations under certain conditions and subject to certain limitations.
Pursuant to the New York Law, Graphics has included in its Certificate of
Incorporation and bylaws a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their duty
of care to the fullest extent permitted by the New York Law and to provide
that Graphics shall indemnify its directors and officers to the fullest extent
permitted by the New York Law.
Holdings
The General Corporation Law of the State of Delaware (the
"Delaware Law") permits indemnification of directors, employees and agents of
corporations under certain conditions and subject to certain limitations.
Pursuant to the Delaware Law, Holdings has included in its Amended and
Restated Certificate of Incorporation and bylaws a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their duty of care to the fullest extent permitted by the Delaware
Law and to provide that Holdings shall indemnify its directors and officers to
the fullest extent permitted by the Delaware Law.
Each party to the Stockholders' Agreement has agreed that no
past, current or future director or officer of Holdings shall have any
liability (whether direct or indirect, in contract, tort or otherwise) to such
party arising out of or relating to any action or omission of such director or
officer in his or her capacity as a director or officer of Holdings, except to
the extent that any loss, claim, damage or liability is found in a final
judgment of a court to have resulted form such director's or officer's bad
faith, willful misconduct or gross negligence. Furthermore, each party to the
Stockholders' Agreement will discharge and release each such director and
officer from, and waive and relinquish any and all rights to, any and all
claims, demands, rights of action or causes of action arising out of or
relating to any action or omission of such director or officer in his or her
capacity as a director or officer of Holdings, except to the extent that any
loss, claim, damage or liability is found in a final judgment of a court to
have resulted from such director's or officer's bad faith, willful misconduct
or gross negligence.
Item 15. Recent Sales of Unregistered Securities.
See Item 5 of Part II of the Annual Report attached as Appendix 1 to the
Prospectus.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Amended and Restated Certificate of Incorporation of Holdings, as
amended to date*****
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of August 15,
1995, among Graphics,
Holdings and NationsBank of Georgia, National Association, as
Trustee**
5.1 Opinion of Shearman & Sterling regarding the legality of the
securities being registered++
8.1 Opinion of Shearman & Sterling regarding tax matters++
10.0 Credit Agreement, dated as of August 15, 1995 and Amended and
Restated as of May 8, 1998, among Holdings, Graphics, GE Capital
Corporation as Documentation Agent, Morgan Stanley Senior Funding,
Inc. as Syndication Agent, Bankers Trust Company as Administrative
Agent and the parties signatory thereto*****
10.0(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics, GE
Capital Corporation as Documentation Agent, Morgan Stanley Senior
Funding, Inc. as Syndication Agent, Bankers Trust Company as
Administrative Agent and the parties signatory thereto*****
10.1 Credit Agreement, dated as of August 15, 1995, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto**
10.1(a) January 10, 1996, First Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto+++
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto+++
10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto****
10.1(e) February 27, 1997, Fifth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto++++
10.1(f) June 30, 1997, Sixth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto****
10.1(g) March 13, 1998, Seventh Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and
the parties signatory thereto*****
10.2 Agreement and Plan of Merger, dated as of August 14, 1995, among
Holdings, Graphics and Shakopee**
10.3 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan****
10.4(a) Employment Agreement, dated as of April 8, 1993, between Graphics
and Stephen M. Dyott*
10.4(b) Amendment to Employment Agreement, dated December 1, 1994, between
Graphics and Stephen M. Dyott++
10.4(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of August 18, 1997, between
Graphics and Terrence M. Ray*****
10.6 Severance Letter, dated April 8, 1993, between Graphics and Joseph
M. Milano+
10.6(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Joseph M. Milano***
10.7 Severance Letter, dated April 8, 1993, between Graphics and
Timothy M. Davis+
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Timothy M. Davis***
10.8 Severance Letter, dated September 8, 1995, between Graphics and M.
J. Anderson.*****
10.9 Amended and Restated Stockholders' Agreement, dated as of August
14, 1995, among Holdings, the Morgan Stanley Leveraged Equity Fund
II, L.P., Morgan Stanley Capital Partners III, L.P. and the
additional parties named therein**
10.9(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement, dated as of August 14, 1995, among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein*****
10.10 Purchase Agreement between Guy Gannett, Holdings and Shakopee,
dated November 23, 1994+
10.11 First Amendment Agreement, dated as of December 22, 1994, between
Guy Gannett, Holdings and Shakopee*
10.12 Second Amendment Agreement, dated as of March 27, 1995, between
Guy Gannett, Holdings and Shakopee**
10.13 Stock Option Plan of Holdings++
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe Inc.,
dated March 12, 1996+++
10.15 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto*****
10.16 Common Stock Option Plan of Holdings*****
10.17 Preferred Stock Option Plan of Holdings*****
21.1 List of Subsidiaries of Holdings*****
23.1 Consent of Ernst & Young LLP
23.4 Consent of Shearman & Sterling (included in its opinion filed as
Exhibit 5.1)
24.1 Powers of Attorney++
25.1 Statement of Eligibility of NationsBank of Georgia, National
Association on Form T-1 (bound separately)
- ------------
++ Previously filed.
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995 - Commission file number 33-31706-01.
+++ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1996 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 - Commission file number 33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1997 - Commission file number 33-97090.
***** Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1998 - Commission file number 33-97090.
(b) Financial Statement Schedules.
See Part IV of the Annual Report attached as Appendix 1 to the
Prospectus.
Item 17. Undertakings.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the provisions described under Item 14
"Indemnification of Directors and Officers", above, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act, American
Color Graphics, Inc. has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut, on July 8, 1998.
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Joseph M. Milano
-----------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated on July 8, 1998.
Signature Title
--------- -----
* Chairman, Chief Executive Officer,
- ------------------------------- President, and Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano Executive Vice President and
- --------- ---------------------- Chief Financial Officer
Joseph M. Milano (Principal Financial Officer)
* Senior Vice President, Corporate
- ------------------------------- Controller and Assistant Secretary
Patrick W. Kellick (Principal Accounting Officer)
/s/ Michael M. Janson
- ------------------------------- Director
Michael M. Janson
/s/ Eric T. Fry
- ------------------------------- Director
Eric T. Fry
* By: /s/ Joseph M. Milano
------------------------------
Attorney in fact
SIGNATURES
Pursuant to the requirements of the Securities Act, ACG
Holdings, Inc. has duly caused this Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Stamford, State of Connecticut, on July 8, 1998.
ACG HOLDINGS, INC.
By: /s/ Joseph M. Milano
-----------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 8, 1998.
Signature Title
--------- -----
* Chairman, Chief Executive Officer,
- ------------------------------- President, and Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano Executive Vice President and
- ------------------------------- Chief Financial Officer
Joseph M. Milano (Principal Financial Officer)
* Senior Vice President, Corporate
- ------------------------------- Controller and Assistant
Patrick W. Kellick Secretary (Principal Accounting
Officer)
/s/ Michael M. Janson
- ------------------------------- Director
Michael M. Janson
/s/ Eric T. Fry
- ------------------------------- Director
Eric T. Fry
* By: /s/ Joseph M. Milano
------------------------------
Attorney in fact
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 22, 1998, included in the Annual Report
(Form 10-K) of ACG Holdings, Inc. (formerly Sullivan Communications, Inc.)
that is made a part of the Post-Effective Amendment No. 4 to the
Registration Statement (Form S-1, No. 33-97090) and related Prospectus of
ACG Holdings, Inc. for the registration of $185,000,000 of its 12 3/4
percent Senior Subordinated Exchange Notes Due 2005.
/s/ Ernst & Young LLP
Nashville, Tennessee
July 1, 1998
