As filed with the Securities and Exchange Commission on July 9, 1999
Registration No. 33-97090
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
POST-EFFECTIVE AMENDMENT NO. 5 to
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
---------------------------
ACG Holdings, Inc.
American Color Graphics, Inc.
(Exact name of registrants as specified in their charters)
Delaware 2750 62-1395968
New York 2750 16-1003976
(State or other 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)
---------------------------
Copies to:
ANDREW R. SCHLEIDER
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
Approximate date of commencement of proposed sale of the securities to the
public: 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 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 earlier 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. |_|
---------------------------
This Post-Effective Amendment shall become effective in accordance with
Section 8(c) of the Securities Act of 1933.
================================================================================
<PAGE>
Prospectus
American Color Graphics, Inc.
12 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
----------------
Unconditionally Guaranteed on a Senior Subordinated Basis by
ACG Holdings, Inc.
----------------
Interest on the 12 3/4% Senior Subordinated Exchange Notes Due 2005 is
payable semiannually on February 1 and August 1 of each year. American Color
Graphics may redeem any of the Notes beginning on August 1, 2000. The initial
redemption price is 106.375% of their principal amount, plus accrued interest.
The Notes rank junior to all existing and future senior indebtedness of
American Color Graphics, Inc. and to all liabilities of its subsidiaries. The
Notes will rank equally with any future senior subordinated indebtedness of
American Color Graphics and will rank senior to any future subordinated
indebtedness of American Color Graphics.
The Notes are fully and unconditionally guaranteed on an unsecured senior
subordinated basis by ACG Holdings. ACG Holdings has no significant assets other
than the capital stock of American Color Graphics, all of which is pledged to
secure senior indebtedness of ACG Holdings.
----------------
Investing in the Notes involves risks. See "Risk Factors" beginning on page
11.
The Notes have received ratings from Moody's Investors Services Inc. and
Standard and Poor's Ratings Services which are below "investment grade" and
there is no required rating that must be maintained.
----------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
----------------
Morgan Stanley & Co. Incorporated and Dean Witter Reynolds Inc.
(collectively, "Morgan Stanley Dean Witter") will use this prospectus 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.
Morgan Stanley Dean Witter may act as principal or agent in the transactions.
American Color Graphics will receive no portion of the proceeds of the sales of
the Notes and will bear the expenses incident to the registration of the Notes.
If Morgan Stanley Dean Witter conducts any market-making activities, it may be
required to deliver a "market-making prospectus" when effecting offers and sales
of the Notes because of the equity ownership of ACG Holdings by certain private
investment partnerships, which are affiliates of Morgan Stanley Dean Witter. For
so long as a market-making prospectus is required to be delivered, the ability
of Morgan Stanley Dean Witter to make a market in the Notes may be dependent, in
part, on the ability of American Color Graphics and ACG Holdings to maintain a
current market-making prospectus.
July 9, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Prospectus Summary .......................................................... 3
Risk Factors ................................................................ 11
Use of Proceeds ............................................................. 17
Capitalization .............................................................. 18
Selected Historical Financial Data .......................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 22
Business .................................................................... 22
Management .................................................................. 22
Certain Transactions ........................................................ 22
Security Ownership of Certain Beneficial Owners and Management .............. 22
Description of the Credit Agreement ......................................... 23
Description of the Notes .................................................... 25
Certain Federal Income Tax Considerations ................................... 58
Plan of Distribution ........................................................ 60
Legal Matters ............................................................... 60
Experts ..................................................................... 60
Available Information ....................................................... 61
Forward-Looking Statement ................................................... 61
Appendix 1: Holdings' and Graphics' Annual
Report on Form 10-K for the Fiscal
Year Ended March 31, 1999
-----------------
You should rely only on information contained in this prospectus. We
have not authorized anyone else to provide you with different information.
Neither we nor Morgan Stanley Dean Witter are making an offer to sell or seeking
offers to buy Notes in any state where the offer or sale is not permitted. The
information in this prospectus is accurate only as of the date of this
prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights detailed information appearing
elsewhere in this prospectus. As used in this prospectus, unless the context
suggests otherwise, the terms "we," "us," "our" and "ours" refer 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. Our fiscal year ends on March 31 and references to our fiscal
years are to the years in which they end. For example, the term "Fiscal Year
1999" refers to the year ended March 31, 1999. Market data used throughout this
prospectus was obtained from industry publications and our internal company
estimates. While we believe the market data is reliable, the accuracy of the
data has not been independently verified and cannot be guaranteed.
We are a successor to a business that commenced operations in 1926, and
are one of the largest national diversified commercial printers in North America
with ten printing plants in eight states and Canada, ten prepress facilities
located throughout the United States and one digital visual effects facility,
that provides special effects services for the motion picture industry, located
in California. We operate primarily in two business segments of the commercial
printing industry: printing, which accounted for approximately 83% of total
sales during Fiscal Year 1999, and digital imaging and prepress services
conducted through our American Color division, which accounted for approximately
16% of total sales in Fiscal Year 1999. Our printing business produces retail
advertising inserts, comics (newspaper Sunday comics, comic insert advertising
and comic books), and other publications. Our digital imaging and prepress
services business assists customers in the capture, manipulation, transmission
and distribution of images. The majority of American Color's work leads to the
production of four-color separations in a format appropriate for use by
printers. Our printing business and American Color division are both
headquartered in Nashville, Tennessee. Partnerships affiliated with Morgan
Stanley Dean Witter & Co. currently own 61.7% of the outstanding common stock
and 72.7% of the outstanding preferred stock of Holdings.
Printing. Our printing business, which accounted for approximately 83%
of our sales in Fiscal Year 1999, produces retail advertising inserts, comics
(newspaper Sunday comics, comic insert advertising and comic books), and other
publications.
Retail Advertising Inserts (81% of printing sales in Fiscal Year 1999).
We believe that we are one of the largest printers of retail advertising inserts
in the United States. We printed advertising inserts for approximately 300
retailers in Fiscal Year 1999. 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.
Comics (13% of printing sales in Fiscal Year 1999). We believe that we
are one of the largest printers of comics in the United States. We print Sunday
comics for over 300 newspapers in the United States and Canada and print a
significant share of the annual comic book requirements of Marvel Entertainment
Group, Inc.
Other Publications (6% of printing sales in Fiscal Year 1999). We print
local newspapers, T.V. guide listings and other publications.
In January 1998, we approved a plan for our 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 14 to our consolidated financial statements
appearing elsewhere in this prospectus.
Digital Imaging and Prepress Services. Our digital imaging and prepress
services business, which is conducted by our American Color division, accounted
for approximately 16% of our sales in Fiscal Year 1999. We believe American
Color is one of the largest full-service providers of digital imaging, prepress
and color
3
<PAGE>
separation services in the United States and a technological leader in its
industry. American Color commenced operations in 1975 and maintains 10
full service locations nationwide.
American Color assists its customers in the capture, manipulation,
transmission and distribution of images. The majority of this work leads to the
production of four-color separations in a format appropriate for use by
printers. 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, multimedia and internet
services, and software and data-base 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 March 1999, we approved a restructuring plan for our American Color
division which was designed to primarily:
o consolidate certain facilities in order to improve asset
utilization and operational efficiency,
o modify the organizational structure as a result of facility
consolidation and other changes and
o reduce overhead and other costs.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Restructuring Costs and Other Special Charges" and note
14 to our consolidated financial statements appearing elsewhere in this
prospectus.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following
competitive advantages in our printing and digital imaging and prepress services
businesses:
Modern Equipment. We believe that our web heatset offset and
flexographic web printing equipment is among the most advanced in the industry
and that the average age of our equipment is significantly less than the
majority of our regional competitors and is comparable to our major national
competitors. We are also committed to a comprehensive, long-term maintenance
program, which enhances the reliability and extends the life of our presses and
other production equipment. We also believe that our digital imaging and
prepress equipment is significantly more advanced than many of our smaller
regional competitors, many of whom have not incorporated digital prepress
technologies and computer-to-plate services to the same extent as we have, nor
adopted an open systems environment which allows greater flexibility and more
efficient maintenance.
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 300 retailers and over 300 newspapers in the
United States and Canada. Our printing services customer base includes a
significant number of the major national retailers and larger newspaper chains
as well as numerous smaller regional retailers. Our consistent focus on
providing high quality printing products and strong customer service at
competitive prices has resulted in long-term relationships with many
4
<PAGE>
of these customers. American Color's customer base includes large and
medium-sized customers in the publishing, retail and catalog businesses, many of
whom also have long-term relationships with us. Although the digital imaging and
prepress services business has generally been on a spot bid basis in the past,
we have been successful in continuing to increase the proportion of our business
under long-term contracts.
Competitive Cost Structure. We have reduced the variable and fixed
costs of production at our printing facilities over the past several years and
believe we are well positioned to maintain our competitive cost structure in the
future due to economies of scale. We have also reduced both labor and material
costs (the principal variable production costs) in our digital imaging and
prepress services business primarily through the adoption of new digital
prepress production methodologies.
Strong Management Team. We have strengthened our printing management
group by hiring experienced managers with a clear focus on growth, quality and
continued cost reduction, resulting in an improved cost structure and a
well-defined strategy for future expansion. We have also strengthened our
management group in our digital imaging and prepress services business, filling
a number of senior, regional and plant management positions with individuals who
we believe will manage the digital imaging and prepress services business for
growth and profitability and will continue to upgrade our capabilities.
National Presence. Our nine printing plants in the United States and
one plant in Canada provide us with distribution efficiencies, strong customer
service, flexibility and short turnaround times, all of which are instrumental
in our continued success in servicing our large national and regional retail
accounts. Our expanded sales and marketing groups provide greater customer
coverage and enable us to more successfully penetrate regional markets. We
believe that our ten digital imaging and prepress facilities provide us 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. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
o Grow unit volume using our national sales coverage, significant
industry experience and customer-focused sales force and through
continued capital expansion;
o Continue to improve our product mix and increase our share
of the retail advertising insert market and continue to adjust
the mix of our customers to those that are more profitable and
less seasonal, to maximize the use of our equipment and to focus
on high value-added new business opportunities;
o Continue to reduce manufacturing costs and improve quality and
o Continue to make opportunistic acquisitions.
5
<PAGE>
Summary Description of the Notes
The following summary is provided for your convenience. You should read
and consider carefully the more specific details contained elsewhere in this
prospectus prior to investing in the Notes. For more detailed information on the
Notes, see "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.................... February 1 and August 1.
Ranking................................... The Notes rank junior to all
existing and future senior
indebtedness of Graphics,
including indebtedness under our
credit agreement. The Notes will
rank equally with any future
senior subordinated indebtedness
of Graphics and will rank
senior to any future subordinated
indebtedness of Graphics.
At March 31, 1999, Graphics had
$104.6 million of senior
indebtedness, no senior
subordinated indebtedness other
than the Notes and no
subordinated indebtedness
outstanding. See "Risk Factors --
Our significant debt could
adversely affect our ability to
fulfill our obligations under the
Notes," and "-- The Notes rank
junior to all senior indebtedness
of Graphics and secured
indebtedness under the credit
agreement," and "--Holdings'
guarantee of the Notes ranks
junior to the guarantee by
Holdings' of Graphics'
obligations under the credit
agreement."
Guaranty.................................. Holdings has fully and
unconditionally guaranteed the
payment of principal and interest
on the Notes on an unsecured
senior subordinated basis. The
guaranty by Holdings ranks junior
to all existing and future senior
indebtedness of Holdings,
including its guaranty of
Graphics' obligations under the
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 credit
agreement.
Optional Redemption....................... Graphics may redeem any of the
Notes beginning on August 1,
2000. The initial redemption
price is 106.375% of their
principal amount, plus accrued
interest. The redemption price
will decline annually to 100% of
their principal amount, plus
accrued interest, on and after
August 1, 2002.
Change of Control Triggering
Event................................... Upon a change of control
triggering event (as defined
under "Description of the
Notes"), Graphics will be
required to make an offer to
purchase the Notes. The purchase
price will equal 101% of their
principal amount plus accrued
interest. 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 credit agreement. We cannot
assure you that we will have
sufficient funds available to
repurchase such indebtedness and
the Notes. See
6
<PAGE>
"Risk Factors -- Graphics may be
unable to repurchase Notes upon
a change of control tiggering
event."
Covenants................................. The indenture relating to the
Notes contains covenants that,
among other things, limit the
ability of Graphics and its
subsidiaries to:
o incur indebtedness,
o pay dividends,
o redeem capital stock,
o make investments and make
other restricted
payments,
o issue capital stock of
subsidiaries,
o engage in transactions
with stockholders and
affiliates,
o sell assets or
o effect a merger and
consolidations.
However, these limitations are
subject to a number of important
qualifications and exceptions.
Credit Rating............................. The Notes have received ratings
from Moody's Investors Services
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 will be effected in
the ordinary way in accordance
with DTC's rules and will be
settled in same-day funds.
7
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical consolidated financial data and other data
presented as of and for the fiscal years ended March 31, 1995, 1996, 1997, 1998
and 1999 were derived from our audited consolidated financial statements. 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 our
consolidated financial statements appearing elsewhere in this prospectus.
On August 15, 1995, we acquired Shakopee Valley Printing, Inc.
("Shakopee") by merging Shakopee with and into Graphics (the "Shakopee Merger").
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 (the date on which Shakopee became under our common control).
Shakopee's financial results are not reflected in periods prior to December 22,
1994 as these periods were prior to common control ownership.
In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the organizational
structure as a result of facility consolidation and other changes and reduce
overhead and other costs. We recorded $4.6 million of costs under this plan in
Fiscal Year 1999. In January 1998, we approved a restructuring plan for our
printing division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9 million
of costs under this plan in Fiscal Year 1998. In April 1995, we implemented a
restructuring plan for our American Color division, which was designed to
improve productivity, increase customer service and responsiveness and provide
increased growth in the business. We recognized $0.9 million and $4.1 million of
costs under this plan in Fiscal Year 1997 and Fiscal Year 1996, respectively. In
addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4 million
of other special charges related to asset write-offs and write-downs in our
printing and American Color divisions in Fiscal Year 1999, Fiscal Year 1998,
Fiscal Year 1997 and Fiscal Year 1996, respectively. See note 14 to our
consolidated financial statements appearing elsewhere in this prospectus.
In February 1997, we made a strategic decision to shut down the
operation of our wholly-owned subsidiary, Sullivan Media Corporation. Sullivan
Media's shut down has been accounted for as a discontinued operation, and
accordingly, Sullivan Media's operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and
administrative expenses attributable to Sullivan Media for Fiscal Years 1997,
1996 and 1995 have been reclassified to discontinued operations (Sullivan Media
began operations in Fiscal Year 1995).
As part of a refinancing completed on May 8, 1998 (the "1998
Refinancing"), we recorded an extraordinary loss related to early extinguishment
of debt of $4.1 million, net of zero taxes. This extraordinary loss primarily
consisted of the write-off of deferred financing costs related to refinanced
indebtedness in the quarter ended June 30, 1998. In August 1995, as part of the
Shakopee Merger and the refinancing transactions (the "1995 Refinancing"), we
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.
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):
8
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Depreciation................. $29,651 $28,124 $25,282 $21,385 $18,327
Amortization................. 4,025 10,413 9,374 9,311 8,941
Non-cash charges (gain)...... 1,150 2,301 1,944 3,435 (3,311)
--------- --------- --------- --------- ---------
Total............... $34,826 $40,838 $36,600 $34,131 $23,957
======= ======= ======= ======= =======
</TABLE>
EBITDA is included in the summary historical financial data because we
believe 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 relating to the
Notes and the credit agreement are based on EBITDA, subject to certain
adjustments.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs
related to the American Color division, $0.6 million of non-recurring costs
associated with the consolidation of certain production facilities at the
American Color division, $0.3 million of non-recurring employee termination
expenses and $0.2 million of non-cash charges associated with an employee
benefit program. EBITDA in Fiscal Year 1998 includes $3.9 million in
restructuring costs related to the printing division, $1.5 million of
non-recurring charges associated with the relocation of American Color's
corporate office and various severance related expenses, and $0.7 million of
certain charges associated with employee benefit programs. EBITDA in Fiscal Year
1997 includes $0.9 million of restructuring costs related to the American Color
division and non-recurring employee termination expenses of $2.5 million. See
note 15 to our consolidated financial statements appearing elsewhere in this
prospectus. EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring
costs related to the American Color division. EBITDA in Fiscal Year 1995
includes a $3.3 million net gain related to a change in our defined benefit
pension plans (as discussed in note (a) below).
9
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales............................................ $520,343 $533,335 $524,551 $529,523 $433,198
Gross profit..................................... 81,252 71,928 64,671 64,413 62,931
Restructuring costs and other special charges ... 5,464 5,598 2,881 7,533 --
Gain from curtailment and establishment of
defined benefit pension plans, net............ -- -- -- -- (3,311)(a)
Operating income................................. 29,455 12,103 10,372 12,716 24,450
Interest expense, net............................ 36,077 38,813 36,132 32,425 25,334
Loss from continuing operations before
extraordinary items........................... (8,362) (29,228) (28,596) (26,305) (4,421)
(Loss) income from discontinued operations,
net of tax.................................... -- (667) (3,107) 1,504(b) 17,583(b)
Extraordinary loss on early extinguishment
of debt....................................... (4,106) -- -- (4,526) --
Net (loss) income ............................... $(12,468) $(29,895) $(31,703) $(29,327) $ 13,162
Balance Sheet Data (at end of period):
Cash and cash equivalents........................ $ 0 $ 0 $ 0 $ 0 $ 4,635
Working capital (deficit)........................ (5,451) 11,610 (8,598) 9,612 4,958
Total assets..................................... 299,000 329,958 333,975 351,181 328,368
Long-term debt and capitalized leases,
including current installments................ 289,589 319,657 312,309 297,617 258,201(c)
Other Data:
Net cash provided (used) by operating
activities.................................... $ 48,137 $ 18,257 $ 24,313 $ (4,187) $ 30,510
Net cash used by investing activities............ (10,364) (10,100) (10,997) (24,436) (17,580)
Net cash (used) provided by financing
activities.................................... (37,812) (8,143) (13,312) 23,982 (17,527)
Capital expenditures (including lease
obligations entered into)..................... 16,238 23,713 37,767 28,022 20,415
Deficiency of earnings to cover fixed charges.... (7,839) (27,122) (26,005) (21,431) (1,869)
EBITDA:
Printing...................................... $ 61,627 $ 46,838 $ 46,755 $ 46,597 $ 38,357
American Color................................ 5,283 8,405 5,180 2,691 12,662
Other......................................... (2,624) (2,876) (4,963) (2,441) 700
--------- -------- --------- -------- --------
Total....................................... $ 64,286 $ 52,367 $ 46,972 $ 46,847 $ 51,719
========= ======== ========= ======== ========
<FN>
______________
(a) In October 1994, we amended our defined benefit pension plans, which
resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. We 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. We recognized a $0.4 million expense associated
with the establishment of the SERP.
(b) On February 16, 1994, we assigned the coupon free-standing insert
contracts of our subsidiary, Sullivan Marketing, Inc. to News America FSI,
Inc. In June 1994, we 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 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, we recognized settlement of the lawsuit with EPI
Group Limited and reversed certain accruals related to the estimated loss
on shut down of Sullivan Marketing, Inc. The resulting effect reflected in
the Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations.
(c) The balance of long-term debt outstanding at March 31, 1995 includes an
additional $9.7 million relating to a purchase accounting adjustment to
the 15% Notes resulting from the merger of SGI Acquisition Corp. and
Holdings on April 8, 1993 (the "1993 Acquisition"). SGI Acquisition Corp.
was formed by Morgan Stanley Leveraged Equity Fund II, L.P., certain
institutional investors and certain members of management to acquire a
majority interest in Holdings. Holdings was the surviving corporation in
the merger. The principal amount payable at maturity of the 15% Notes
remained at $100 million. The 15% Notes were redeemed in connection with
the refinancing transactions in 1995.
</FN>
</TABLE>
10
<PAGE>
RISK FACTORS
In addition to the other information and financial data contained in
this prospectus, you should carefully consider the following risk factors in
evaluating us, our business and an investment in the Notes.
Our significant debt could adversely affect our ability to fulfill our
obligations under the Notes.
We have had a negative net worth in each of the last nine fiscal years.
At March 31, 1999, our consolidated indebtedness including capital leases was
approximately $289.6 million (including $8.0 million of current installments)
and our negative net worth was $119.3 million. The level of our indebtedness
could have important consequences to holders of the Notes including the
following:
o our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements
or other purposes may be limited;
o a substantial portion of our cash flow from operations must be
used to pay the principal of and interest on our indebtedness and
will not be available for other purposes;
o our level of indebtedness could limit our flexibility in planning
for, or reacting to changes in, our business;
o we are more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage and
o our high level of indebtedness makes us more vulnerable in the
event of a downturn in our business.
If we are not able to satisfy our obligations, including our interest payment
obligations, we could default on our indebtedness, including the Notes. See "--
Our earnings before fixed charges are insufficient to cover fixed charges; we
may be unable to service our debt," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Credit
Agreement."
We may need additional financing in the future; however, we cannot
assure you that we will be able to obtain any 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 relating to the Notes permits us to incur additional indebtedness to
finance the acquisition of additional assets.
Our earnings before fixed charges are insufficient to cover fixed charges; we
may be unable to service our debt.
Our earnings before fixed charges were insufficient to cover fixed
charges for Fiscal Year 1995, Fiscal Year 1996, Fiscal Year 1997, Fiscal Year
1998 and Fiscal Year 1999 by $1.9 million, $21.4 million, $26 million, $27.1
million and $7.8 million, respectively. See "Selected Historical Financial
Data."
We cannot assure you that we will be able to improve our earnings
before fixed charges or that we will be able to meet our debt service
obligations, including our obligations on the Notes. Graphics must make
substantial principal and interest payments under the credit agreement during
the next several years. The term loan facilities under the credit agreement
require principal repayments in quarterly installments in the following
aggregate annual amounts:
11
<PAGE>
Fiscal Year Required Term Loan Principal Repayments
----------- ---------------------------------------
2000 $ 5,000
2001 $ 5,580,296
2002 $ 5,580,296
2003 $ 5,580,296
2004 $26,338,988
2005 $21,205,112
If we do not generate sufficient cash flow to meet our debt service obligations,
we could face liquidity problems and if we cannot raise alternative financing,
we might be required to dispose of material assets or operations to meet our
obligations. We cannot assure you of the timing of any sales or the proceeds
which we could obtain from any sales. In addition, most of our indebtedness
(other than the Notes) bears interest at floating rates (7.1% weighted average
rate at March 31, 1999). If interest rates rise significantly, our ability to
meet our debt service obligations, including our obligations under the Notes,
may be adversely affected.
If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on our indebtedness or, if we
otherwise fail to comply with various covenants (including covenants in the
credit agreement), we would be in default under the terms of the indebtedness. A
default would permit the holders of our indebtedness to accelerate the maturity
of the indebtedness and could cause defaults under our other indebtedness or
result in our bankruptcy. A default or bankruptcy resulting from a default would
result in a default on the Notes and could delay or preclude payment of
principal of, or interest on, the Notes. Because the Notes rank junior in right
of payment to all senior indebtedness of Graphics and at March 31, 1999,
approximately 27% of our total assets were intangible assets, if holders of the
Notes accelerate the maturity of the Notes, we may not be able to pay all
amounts due on the Notes. Our ability to meet our obligations depends on our
future performance, which is subject to prevailing economic conditions and to
financial, business and other factors, including factors beyond our control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Credit
Agreement."
Restrictive covenants in our indenture and credit agreement may restrict our
ability to pursue our business strategies.
The indenture relating to the Notes and our credit agreement impose
significant operating and financial restrictions on us. These restrictions
affect, and in some cases significantly limit or prohibit our ability to, among
other things:
o incur additional indebtedness,
o create liens,
o sell assets,
o engage in mergers or acquisitions and
o make investments.
These restrictions could also limit our ability to:
o effect future financings,
12
<PAGE>
o make needed capital expenditures,
o react to future industry trends,
o withstand downturns in our business or the economy or
o otherwise conduct necessary corporate activities.
Our credit agreement contains covenants that require us to meet certain
financial ratios. See "Description of the Credit Agreement." Failure to comply
with any of the covenants could limit the availability of borrowings under the
credit agreement or result in a default. We cannot assure you that we will be
able to comply with the covenants. A default under the credit agreement could
result in an acceleration of the Notes. Upon acceleration, the holders of the
Notes may not be paid in full because under the indenture relating to the notes,
senior indebtedness of Graphics (including indebtedness under the credit
agreement) would be entitled to be paid first. See "-- The Notes rank junior to
all senior indebtedness of Graphics and secured indebtedness under the credit
agreement."
The Notes rank junior to all senior indebtedness of Graphics and secured
indebtedness under the credit agreement.
The Notes rank junior to all senior indebtedness of Graphics, including
indebtedness under the credit agreement. If a bankruptcy, liquidation or
reorganization of Graphics occurs, the assets of Graphics will be available to
pay obligations on the Notes only after all senior indebtedness of Graphics has
been paid in full. We may not have sufficient assets remaining to pay amounts
due on the Notes. See "Description of the Notes --Ranking." At March 31, 1999,
Graphics had $104.6 million of senior indebtedness outstanding. At that date,
Graphics' subsidiaries had approximately $0.2 million of liabilities (which were
effectively senior to the Notes). In addition, the indebtedness under the 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 Credit Agreement."
Accordingly, if an event of default occurs under the credit agreement and the
Notes, the lenders under the credit agreement will have a right before the
holders of the Notes to the assets constituting collateral and may foreclose on
the collateral to the exclusion of the holders of the Notes. In that event, the
collateral would first be used to repay in full all amounts outstanding under
the credit agreement. The assets of Graphics may not be available to satisfy the
claims of holders of the Notes.
Holdings' guarantee of the Notes ranks junior to the guarantee by Holdings of
Graphics' obligations under the credit agreement.
Holdings has fully and unconditionally guaranteed the Notes on an
unsecured, senior subordinated basis. Holdings' guarantee of the Notes ranks
junior in right of payment to the guarantee by Holdings of Graphics' obligations
under the credit agreement. Furthermore, 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 credit agreement. As a result, 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. Generally, the indenture contains no restrictions on the activities of
Holdings. See "Description of the Notes -- Guaranty."
Graphics may be unable to repurchase Notes upon a change of control triggering
event.
The 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 credit agreement, which is defined
to include a "Change of Control" under the Notes, would constitute an event of
default under the credit agreement. See "Description of the Credit Agreement."
Therefore, unless Graphics obtains a waiver,
13
<PAGE>
upon the occurrence of a change of control triggering event, the amounts
outstanding under the 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 Graphics' high level of indebtedness, we cannot assure you that we will
have sufficient funds at the time of any change of control triggering event to
pay any amounts due under the 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
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 -- 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.
We are subject to competitive pressures.
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and we compete with numerous national, regional and
local printers. A trend of industry consolidation in recent years can be
attributed to:
o customer preferences for larger printers with a greater range of
services,
o capital requirements and
o competitive pricing pressures.
We believe that competition in the printing business is based primarily on
quality and service at a competitive price.
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. We believe 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.
If we do not keep pace with technological changes, we will not be able to
maintain our competitive position.
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. We expect that further changes in technology will affect our
digital imaging and prepress services business and that we will need to adapt to
technological advances as they occur. As technology in this business continues
to improve and evolve, we will need to make capital expenditures to maintain our
competitive position. If we are unable to respond to future
14
<PAGE>
changes and advancements in digital imaging and prepress technology, our
American Color business could be adversely affected.
Because our business is sensitive to paper prices, if paper prices increase
severely and we are unable to pass through price increases, our business could
be adversely affected.
Our 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 we have no control. If we are unable to pass
through price increases, severe increases in paper prices could have a material
adverse effect on our profits and cash flow. 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 increased slightly through mid-year and then declined to near
beginning of the year levels. In Fiscal Year 1999, as most grades of paper
became more plentiful, paper prices declined. In accordance with industry
practice, we generally pass through increases in the cost of paper to customers
in the costs of our printed products, while decreases in paper costs generally
result in lower prices to customers. Although we have been successful in passing
through paper price increases to our customers, we cannot assure you that we
will be able to pass through future paper price increases. 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 our advertising customers to reduce their
print advertising programs, which could have a material adverse effect on us.
We may be unable to effectively integrate acquired businesses.
As part of our long-term strategy, we seek to acquire other commercial
printers and other digital imaging and prepress services businesses. This
strategy also entails the integration of new start-up ventures into our
operations. While management has experience acquiring companies and integrating
their operations into our existing operations, we may not be able to find
additional attractive acquisition candidates or succeed at effectively
integrating acquired business and start-up ventures into our existing business.
Our noncompliance with or liability for cleanup under environmental regulations
could adversely affect our business.
We are subject to federal, state and local laws, regulations and
ordinances that:
o govern activities or operations that may adversely affect the
environment, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes
and
o impose liability for the costs of cleaning up, and certain
damages resulting from, sites of past spills, disposals or other
releases of hazardous substances.
We believe that we currently conduct our operations, and in the past have
operated our business, in substantial compliance with applicable environmental
laws. Noncompliance with or liability for cleanup under the environmental laws
applicable to us could have a material adverse effect on our results of
operations or financial condition. See "Business -- Environmental Matters."
A court could avoid the Notes or the guarantee.
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 that is
15
<PAGE>
refinanced with the Notes and, at the time of the incurrence of the Notes (or
the guarantee) or such indebtedness, Graphics (or Holdings):
o was insolvent,
o was rendered insolvent by reason of such incurrence,
o engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital,
o intended to incur, or believed that it would incur, debts beyond
its ability to pay as such debts matured or
o intended to hinder, delay or defraud its creditors,
the court could avoid the Notes or the guarantee. If the indebtedness is
avoided, the indebtedness represented by the Notes (or the guarantee) would
likely be subordinated to existing and future indebtedness of Graphics (or
Holdings). Management 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. The measure of insolvency will vary depending
upon the law of the relevant jurisdiction. Generally, however, a company would
be considered insolvent for purposes of the above if the present fair saleable
value of its assets is less than the amount that will be required to pay its
probable liability on existing debts as they become absolute and matured.
Morgan Stanley Dean Witter & Co. controls us and its interests could be in
conflict with the interests of holders of the Notes.
Entities affiliated with Morgan Stanley Dean Witter & Co. own a substantial
majority of the outstanding shares of capital stock of Holdings. Two of the
current directors of Holdings, Messrs. Janson and Fry, are employees of a
subsidiary of Morgan Stanley Dean Witter & Co. As a result of these
relationships, Morgan Stanley Dean Witter & Co. may be deemed to control our
management and policies, 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 our certificate of incorporation and
the approval of mergers and sales of all or substantially all of our assets.
Circumstances could arise under which the interests of the entities affiliated
with Morgan Stanley Dean Witter & Co. could be in conflict with the interests of
holders of the Notes. See "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
There is no public market for the Notes.
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 Morgan Stanley Dean Witter that it intends to make a market in the
Notes. However, Morgan Stanley Dean Witter 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, Morgan Stanley Dean Witter will be required to
deliver a current prospectus in connection with any market-making activities and
may be prohibited from engaging in market-making activities during certain
distributions of securities by us. For so long as a market-making prospectus is
required to be delivered, the ability of Morgan Stanley Dean Witter 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, we cannot
assure you that
16
<PAGE>
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. Any market that
develops, if at all, 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, our
results of operations and the market for similar securities and other factors,
including our financial condition.
USE OF PROCEEDS
This prospectus is to be used by Morgan Stanley Dean Witter 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.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
We will not receive any portion of the proceeds of such sales.
17
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
March 31, 1999. This table should be read together with "Selected Historical
Financial Data," "Description of the Credit Agreement" and our consolidated
financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------
(dollars in thousands)
<S> <C>
Short-term debt:
Current installments of long-term debt and capitalized leases:
Term loan facilities....................................................... $ --
Other...................................................................... 7,994
--------
Total short-term debt................................................... $ 7,994
========
Long-term debt:
Revolving credit facility.................................................... $ --
Term loan facilities......................................................... 64,290
Senior Subordinated Notes Due 2005........................................... 185,000
Other........................................................................ 32,305
--------
Total long-term debt and capitalized leases,
excluding current installments......................................... 281,595
--------
Stockholders' deficit:
Common Stock, voting, $.01 par value, 5,852,223 shares
authorized, 134,250 shares issued and outstanding............................ 1
Preferred Stock, $.01 par value, 15,823 shares authorized,
3,622 shares Series AA convertible preferred stock issued and outstanding,
$40 million liquidation preference, and 1,606 shares Series BB convertible
preferred stock issued
and outstanding, $17.5 million liquidation preference........................ --
Additional paid-in capital...................................................... 58,286
Accumulated deficit............................................................. (174,905)
Other accumulated comprehensive loss, net of tax................................ (2,688)
--------
Total stockholders' deficit................................................ (119,306)
--------
Total long-term debt and stockholders' deficit.......................... $162,289
========
</TABLE>
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table shows selected historical financial data as of and
for the fiscal years ended March 31, 1995, 1996, 1997, 1998 and 1999. The
balance sheet data as of March 31, 1995, 1996, 1997, 1998 and 1999 and the
statement of operations data for the fiscal years ended March 31, 1995, 1996,
1997, 1998 and 1999 are derived from the audited consolidated financial
statements for such periods and at such dates. The selected historical financial
data below also reflects our discontinued wholly-owned subsidiary, Sullivan
Media, and our coupon free standing insert operation previously conducted by our
discontinued wholly-owned subsidiary, Sullivan Marketing. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
appearing elsewhere in this prospectus.
On August 15, 1995, we acquired Shakopee by merging Shakopee with and
into Graphics. 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 (the date on which Shakopee became under our
common control). Shakopee's financial results are not reflected in periods prior
to December 22, 1994 as these periods were prior to common control ownership.
Selling, general and administrative expenses included within the
following table include amortization of goodwill in each period presented. In
addition, Fiscal Year 1998 selling, general and administrative expenses includes
$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 $0.7 million of certain charges associated with employee benefit
programs. Fiscal Year 1997 selling, general and administrative expenses include
$2.5 million of non-recurring employee termination expenses. See note 15 to our
consolidated financial statements appearing elsewhere in this prospectus.
In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the organizational
structure as a result of facility consolidation and other changes and reduce
overhead and other costs. We recorded $4.6 million of costs under this plan in
Fiscal Year 1999. In January 1998, we approved a restructuring plan for our
printing division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9 million
of costs under this plan in Fiscal Year 1998. In April 1995, we implemented a
restructuring plan for our American Color division, which was designed to
improve productivity, increase customer service and responsiveness and provide
increased growth in the business. We recognized $0.9 million and $4.1 million of
costs under this plan in Fiscal Year 1997 and Fiscal Year 1996, respectively. In
addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4 million
of other special charges related to asset write-offs and write-downs in our
printing and American Color divisions in Fiscal Year 1999, Fiscal Year 1998,
Fiscal Year 1997 and Fiscal Year 1996, respectively. See note 14 to our
consolidated financial statements appearing elsewhere in this prospectus.
In February 1997, we made a strategic decision to shut down the
operation of our wholly-owned subsidiary, Sullivan Media Corporation. Sullivan
Media's shut down has been accounted for as a discontinued operation, and
accordingly, Sullivan Media's operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and
administrative expenses attributable to Sullivan Media for Fiscal Years 1997,
1996 and 1995 have been reclassified to discontinued operations (Sullivan Media
began operations in Fiscal Year 1995).
As part of a refinancing completed on May 8, 1998 (the "1998
Refinancing"), we recorded an extraordinary loss related to early extinguishment
of debt of $4.1 million, net of zero taxes. This extraordinary loss primarily
consisted of the write-off of deferred financing costs related to refinanced
indebtedness in the quarter ended June 30, 1998. In August 1995, as part of the
Shakopee Merger and the 1995 Refinancing, we
19
<PAGE>
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.
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):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Depreciation................. $ 29,651 $28,124 $25,282 $21,385 $18,327
Amortization................. 4,025 10,413 9,374 9,311 8,941
Non-cash charges (gain)...... 1,150 2,301 1,944 3,435 (3,311)
--------- --------- --------- --------- ---------
Total............... $34,826 $40,838 $36,600 $34,131 $23,957
======= ======= ======= ======= =======
</TABLE>
EBITDA is included in the selected historical financial data because we
believe 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 relating to the
Notes and the credit agreement are based on EBITDA, subject to certain
adjustments.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs
related to the American Color division, $0.6 million of non-recurring costs
associated with the consolidation of certain production facilities at the
American Color division, $0.3 million of non-recurring employee termination
expenses and $0.2 million of non-cash charges associated with an employee
benefit program. EBITDA in Fiscal Year 1998 includes $3.9 million in
restructuring costs related to the printing division, $1.5 million of
non-recurring charges associated with the relocation of American Color's
corporate office and various severance related expenses, and $0.7 million of
certain charges associated with employee benefit programs. EBITDA in Fiscal Year
1997 includes $0.9 million of restructuring costs related to the American Color
division and non-recurring employee termination expenses of $2.5 million. See
note 15 to our consolidated financial statements appearing elsewhere in this
prospectus, EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring
costs related to the American Color division. EBITDA in Fiscal Year 1995
includes a $3.3 million net gain related to a change in our defined benefit
pension plans (as discussed in note (a) below).
20
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales............................................ $520,343 $533,335 $524,551 $529,523 $433,198
Cost of Sales.................................... 439,091 461,407 459,880 465,110 370,267
---------- ---------- ---------- ---------- ----------
Gross Profit................................... 81,252 71,928 64,671 64,413 62,931
Selling, general and administrative
expenses....................................... 46,333 54,227 51,418 44,164 41,792
Restructuring costs and other
special charges ............................... 5,464 5,598 2,881 7,533 --
Gain from curtailment and establish-
ment of defined benefit pension
plans, net.................................... ---- ---- ---- ---- (3,311)(a)
---------- ---------- ---------- ---------- ----------
Operating income............................... 29,455 12,103 10,372 12,716 24,450
Interest expense, net............................ 36,077 38,813 36,132 32,425 25,334
Other expense.................................... 1,217 412 245 1,722 985
Income tax expense .............................. 523 2,106 2,591 4,874 2,552
---------- ---------- ---------- ---------- ----------
Loss from continuing
operations before extraordinary
items........................................ (8,362) (29,228) (28,596) (26,305) (4,421)
---------- ---------- ---------- ---------- ----------
Discontinued operations:
Loss from operations, net of tax............... ---- ---- (1,557) (1,364) (912)
Estimated (loss) on shut down
and gain on settlement, net of tax........... ---- (667) (1,550) 2,868 (b) 18,495(b)
Extraordinary loss on early extinguishment
of debt ..................................... (4,106) ---- ---- (4,526) --
----------- ---------- ---------- ---------- ----------
Net (loss) income............................ $(12,468) $(29,895) $(31,703) $(29,327) $ 13,162
=========== ========== ========== ========== ==========
Balance Sheet Data (at end of period):
Cash and cash equivalents........................ $ 0 $ 0 $ 0 $ 0 $ 4,635
Working capital (deficit)........................ (5,451) 11,610 (8,598) 9,612 4,958
Total assets..................................... 299,000 329,958 333,975 351,181 328,368
Long-term debt and capitalized
leases, including current
installments .................................. 289,589 319,657 312,309 297,617 258,201(c)
Stockholders' deficit............................ (119,306) (106,085) (76,318) (44,396) (14,970)
Other Data:
Net cash provided (used) by
operating activities........................... $ 48,137 $ 18,257 $ 24,313 $ (4,187) $ 30,510
Net cash used by
investing activities........................... (10,364) (10,100) (10,997) (24,436) (17,580)
Net cash (used) provided by
financing activities........................... (37,812) (8,143) (13,312) 23,982 (17,527)
Capital expenditures (including lease obligations
entered into).................................. 16,238 23,713 37,767 28,022 20,415
Deficiency of earnings to
cover fixed charges ........................... (7,839) (27,122) (26,005) (21,431) (1,869)
EBITDA .......................................... 64,286 52,367 46,972 46,847 51,719
<FN>
_______________
(a) In October 1994, we amended our defined benefit pension plans, which
resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. We 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. We recognized a
$0.4 million expense associated with the establishment of the SERP.
(b) On February 16, 1994, we assigned the coupon free-standing insert
contracts of our subsidiary, Sullivan Marketing, Inc. to News America
FSI, Inc. In June 1994, we 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
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, we recognized settlement of the lawsuit with EPI
Group Limited and reversed certain accruals related to the estimated
loss on shut down of Sullivan Marketing, Inc. The resulting effect
reflected in the Fiscal Year 1996 consolidated statement of operations
was $2.9 million income in discontinued operations.
(c) The balance of long-term debt outstanding at March 31, 1995 includes an
additional $9.7 million 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 transactions
in 1995.
</FN>
</TABLE>
21
<PAGE>
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.
BUSINESS
See Items 1, 2 and 3 in Part I 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.
CERTAIN TRANSACTIONS
See Item 13 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.
22
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
The following is a summary of the material provisions of the credit
agreement. The summary is not complete. We urge you to read the credit
agreement. A copy of the credit agreement is filed 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 credit agreement.
On May 8, 1998, we entered into a $145 million credit agreement with a
syndicate of lenders. The credit agreement comprises:
o a $70 million revolving credit facility, which is not subject to
a borrowing base limitation, maturing on March 31, 2004;
o a $25 million amortizing term loan facility maturing on March 31,
2004; and
o a $50 million amortizing term loan facility maturing on March 31,
2005.
Interest under the credit agreement is floating, based upon existing
market rates plus agreed-upon margin levels. In addition, we are obligated to
pay specific commitment and letter of credit fees. The margin levels and fees
will decrease if we achieve specified leverage ratio measures.
Borrowings under the credit agreement are secured by substantially all
of Graphics' assets. In addition, Holdings has guaranteed the indebtedness under
the credit agreement, which guarantee is secured by a pledge of all of Graphics'
stock.
The credit agreement requires satisfaction of certain financial
covenants including minimum consolidated EBITDA, consolidated interest coverage
ratio and leverage ratio requirements.
The $25 million term loan facility must be repaid in quarterly
installments of $0 million through March 31, 2000 and approximately $1.3 million
from June 30, 2000 through its maturity date. The $50 million term loan facility
must be repaid in quarterly installments of $0 million through March 31, 2000
and $111,606 from June 30, 2000 through March 31, 2003 and approximately $5.3
million from June 30, 2003 through its maturity date. We are also required to
prepay the loans under certain circumstances with excess cash flows and proceeds
from certain sales of assets, equity and incurrence of indebtedness.
The credit agreement restricts our ability to, among other things:
o consummate mergers and acquisitions,
o make investments,
o pay dividends and other distributions,
o incur liens,
o incur additional indebtedness,
o make capital expenditures,
o enter into transactions with affiliates,
o issue stock of subsidiaries, and
23
<PAGE>
o enter into agreements that contain 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 applicable grace period, constitute an event of default under the credit
agreement, notwithstanding the ability of Graphics to meet its debt service
obligations. The 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 credit agreement would allow the lenders to accelerate or, in
certain cases, would automatically cause the acceleration of, the maturity of
the indebtedness under the credit agreement and would restrict the ability of
Graphics to meet its obligations on the Notes.
24
<PAGE>
DESCRIPTION OF THE NOTES
The Notes were issued under an indenture, dated as of August 15, 1995,
among Graphics, Holdings and NationsBank of Georgia, National Association, and
effective December 4, 1995, The Bank of New York through acquisition of the
corporate trust business of 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, as in effect on the date of the indenture. 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 is a
summary. The summary is not complete. We urge you to read the indenture. In this
section, "Graphics" refers only to American Color Graphics, Inc. and not to any
of its subsidiaries.
General
The Notes are unsecured senior subordinated obligations of Graphics,
limited to $185 million aggregate principal amount. The Notes will mature on
August 1, 2005.
Each Note will bear interest at 12 3/4% per annum from the most recent
interest payment date to which interest has been paid. Interest on the Notes
will be payable semiannually on February 1 and August 1 of each year. Interest
will be paid to holders of record at the close of business on the January 15 or
July 15 immediately preceding the interest payment date. Interest is computed on
a 360-day year of twelve 30-day months.
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.
Optional Redemption
On or after August 1, 2000, Graphics may redeem any of the Notes upon
not less than 30 nor more than 60 days' notice by paying the applicable
redemption price at the time of redemption, plus accrued interest to the date of
redemption. The redemption price that Graphics will have to pay to redeem Notes
on a redemption date that occurs during the 12-month period beginning on August
1 of the years indicated below will be the corresponding percentage of principal
amount set forth below opposite such year, plus accrued interest, if any, on
such Notes to the redemption date:
Year Redemption Price
- ----- ----------------
2000.................................................... 106.375%
2001.................................................... 103.188
2002 and thereafter..................................... 100.000
Sinking Fund
There will be no mandatory sinking fund payments for the Notes.
Ranking
Summary
The Notes will be senior subordinated Indebtedness of Graphics. This
means that the payment of principal, premium and interest on the Notes is
subordinated to the prior payment in full of all of Graphics' existing and
future Senior Indebtedness. See "Risk Factors--Our significant debt could
adversely affect our ability to fulfill our obligations under the Notes."
25
<PAGE>
However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "--Defeasance" below
will not be subordinated in right of payment to any Senior Indebtedness or
subject to the restrictions described below.
The Guaranty will be senior subordinated Indebtedness of Holdings. The
Indebtedness evidenced by the Guaranty will be subordinated on the same basis to
Senior Indebtedness of Holdings as the Notes are subordinated to Graphics'
Senior Indebtedness.
At March 31, 1999, Graphics had $104.6 million of Senior Indebtedness,
no senior subordinated indebtedness other than the Notes and no subordinated
indebtedness outstanding and Graphics' subsidiaries had approximately $0.2
million of liabilities (which were effectively senior to the Notes).
Terms of Subordination
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 (1) if such Payment Blockage
Period is terminated by written notice to the Trustee and Graphics from the
Person who gave such Payment Blockage Notice, (2) by repayment in full of the
Designated Senior Indebtedness on behalf of which the Payment Blockage Notice
was given or (3) 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
Bank Credit Agreement), the Bank Agent may give another Payment Blockage Notice
in relation to the Bank 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.
26
<PAGE>
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, 1999,
Holdings had outstanding $104.6 million of Senior Indebtedness, including its
obligations under the Bank 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 Covenants
Overview
In the indenture, Graphics has agreed to certain covenants that limit
its ability and the ability of its Restricted Subsidiaries to, among other
things:
27
<PAGE>
o incur additional debt;
o pay dividends, acquire shares of Capital Stock, make payments on
subordinated debt or make investments;
o place limitations on distributions from Restricted Subsidiaries;
o sell assets;
o enter into transactions with shareholders and affiliates, and
o effect mergers.
In addition, if a Change of Control Triggering Event occurs, each
holder of Notes will have the right to require Graphics to repurchase all or a
part of the holder's Notes at a price equal to 101% of the principal amount of
those Notes, plus any accrued interest to the date of repurchase.
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 (a)
$60,000,000 less (b) 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";
28
<PAGE>
(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
29
<PAGE>
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 Bank 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);
30
<PAGE>
(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:
(1) 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;
(2) 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;
(3) 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;
(4) 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
31
<PAGE>
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
Indebtednes"; 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 (4), 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;
(5) 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;
(6) 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;
(7) 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;
(8) 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;
(9) 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
(10) 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.
32
<PAGE>
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:
(a) to pay dividends or make any other distributions on its
Capital Stock owned by, or pay any Indebtedness owed to, Graphics,
(b) to make any loans or advances to Graphics or
(c) 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 (c) 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 (A)
such encumbrances and
33
<PAGE>
restrictions are no more restrictive than the encumbrances and
restrictions imposed by the Bank Credit Agreement or (B) 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:
(a) 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
(b) apply an amount equal to the difference between such
excess Net Available Cash and the amount applied pursuant to clause (a)
as provided in the following paragraphs of this covenant. The amount of
such excess Net Available Cash required to be applied pursuant to
clause (b) 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,
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.
34
<PAGE>
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
(1) any Restricted Payment permitted to be paid pursuant to
the covenant described under "-- Limitation on Restricted Payments";
(2) 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;
(3) the grant of stock options or similar rights to employees
and directors of Graphics pursuant to plans approved by the Board of
Directors;
(4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of Graphics or its
Restricted Subsidiaries;
(5) the payment of reasonable fees to directors of Graphics
and its Restricted Subsidiaries who are not employees of Graphics or
its Restricted Subsidiaries;
(6) 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;
(7) any Affiliate Transaction between Graphics and a Wholly
Owned Subsidiary or between Wholly Owned Subsidiaries;
(8) the Transactions;
(9) 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;
(10) 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
35
<PAGE>
(11) 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 (1) repay in full all
Indebtedness under the Bank Credit Agreement (and terminate all commitments
thereunder) or offer to repay in full all Indebtedness under the Bank 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 (2) obtain the requisite consents under the Bank 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 (4) and not in clause
(2) under "Defaults" below.
Within 30 days following any Change of Triggering Event, Graphics will
mail a notice to each holder stating
(1) 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);
(2) 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);
(3) the repurchase date (which will be no earlier than 30 days
nor later than 60 days from the date such notice is mailed); and
(4) 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.
36
<PAGE>
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, (1) to Graphics or a Wholly
Owned Subsidiary or (2) 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 SEC 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.
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:
(1) 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 Graphics) 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;
(2) 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;
37
<PAGE>
(3) 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
(4) 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
(5) 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
(1) a default in the payment of interest on the Notes when
due, continued for 30 days;
(2) 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;
(3) the failure by Graphics to comply with its obligations
under "Successor Company" above;
(4) 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";
(5) the failure by Holdings or Graphics to comply for 60 days
after notice with its other agreements contained in the indenture;
(6) 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
38
<PAGE>
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");
(7) certain events of bankruptcy, insolvency or reorganization
of Holdings, Graphics or a Significant Subsidiary (the "bankruptcy
provisions");
(8) 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 Graphics
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
(9) 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 (4), (5), (6) and (8) 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 automatically 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
(1) such holder has previously given the Trustee notice that
an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60
days after the receipt thereof and the offer of security or indemnity;
and
(5) 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.
39
<PAGE>
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,
(1) reduce the amount of Notes whose holders must consent to
an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity of
any Note or reduce the principal amount of any Note;
(4) 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;
(5) make any Note payable in money other than that stated in
the Note;
(6) 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;
(7) make any change in the amendment provisions which require
each holder's consent or in the waiver provisions;
(8) make any change to the subordination provisions of the
indenture that would adversely affect the Noteholders; or
(9) 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
40
<PAGE>
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 (3) and (4) 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 (4), (6), (7) (with respect only to
Significant Subsidiaries) or (8) under "Defaults" above or because of the
failure of Graphics to comply with clause (3) or (4) 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).
41
<PAGE>
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.
Definitions
"Additional Assets" means (1) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (2) 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 (3) 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 (2) or (3) 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.
"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 (1) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (2) 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."
42
<PAGE>
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (1) 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 (2) the sum of all such payments.
"Bank Agent" is defined to mean BT Commercial Corporation, as agent for
the Banks pursuant to the Bank Credit Agreement, and any successor or successors
thereto.
"Bank Credit Agreement" is defined to mean the Credit Agreement, dated
as of August 15, 1995, 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.
"Banks" is defined to mean the lenders who are from time to time
parties to the Bank 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
(1) 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";
(2) 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
43
<PAGE>
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
(3) (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 (3).
"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.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (1) 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 (2) 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
44
<PAGE>
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,
45
<PAGE>
(1) interest expense attributable to capital leases;
(2) amortization of debt discount and premium and debt
issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(6) net costs under Interest Rate Protection Agreements
(including amortization of fees);
(7) 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;
(8) interest incurred in connection with Investments in
discontinued operations; and
(9) 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 (3) 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 (3) 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:
(1) 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
(3) 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;
(2) 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;
(3) 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
46
<PAGE>
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;
(4) 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;
(5) extraordinary gains or losses; and
(6) 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 (1) 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 (3) 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):
(1) minority interests in consolidated Restricted Subsidiaries
held by Persons other than Graphics or a Restricted Subsidiary;
(2) excess of cost over fair value of assets of businesses
acquired, as determined in good faith, by the Board of Directors;
(3) 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;
(4) 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
(5) 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
47
<PAGE>
least 45 days prior to the taking of any action for the purpose of which the
determination is being made, as (1) the par or stated value of all outstanding
Capital Stock of Graphics plus (2) paid-in capital or capital surplus relating
to such Capital Stock plus (3) 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 (1) Indebtedness
under the Bank Credit Agreement and (2) 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 (1) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (2)
is convertible or exchangeable for Indebtedness or Disqualified Stock or (3) 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 (1) the amortization of any expenses incurred in
connection with the Transactions and (2) 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 (1) 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
48
<PAGE>
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 (2) 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.
"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.
"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:
(1) 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);
(2) all Capital Lease Obligations of such Person;
(3) 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);
(4) 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 (1) through (3) 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);
(5) 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);
(6) all obligations of the type referred to in clauses (1)
through (5) 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
49
<PAGE>
(7) all obligations of the type referred to in clauses (1)
through (6) 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,
(1) 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 (2) 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," (1) "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 (2) 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 (1) BBB- (or its equivalent) or higher by S&P
or (2) Baa3 (or its equivalent) or higher by Moody's or (3) 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.
50
<PAGE>
"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
(1) 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;
(2) 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;
(3) a Temporary Cash Investment;
(4) 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;
51
<PAGE>
(5) 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;
(6) loans or advances to employees made in the ordinary course
of business in accordance with past practices of Graphics or of its
Restricted Subsidiaries;
(7) 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,
(8) Interest Rate Protection Agreements and Raw Material Hedge
Agreements and
(9) 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
(1) with respect to S&P, any of the following categories: BB,
B, CCC, CC, C and D (or equivalent successor categories);
(2) with respect to Moody's, any of the following categories:
Ba, B, Caa, Ca, C and D (or equivalent successor categories); and
(3) the equivalent of any such category of S&P or Moody's used
by a substitute Rating Agency.
52
<PAGE>
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
(1) a Change of Control and (2) 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
(1) such Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being Refinanced,
(2) 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
(3) 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
53
<PAGE>
(1) 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)),
(2) 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),
(3) 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
(4) 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
(1) all Indebtedness and other monetary obligations of such
Person under (A) the Bank Credit Agreement and all fees, expenses and
indemnities payable in connection therewith, (B) any Interest Rate
Agreement which Graphics has determined in good faith at the time of
the Incurrence thereof is related to indebtedness under the Bank 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
(2) 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;
54
<PAGE>
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 (1) 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
(2) 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
55
<PAGE>
or controlled, directly or indirectly, by (1) such Person, (2) such Person and
one or more Subsidiaries of such Person or (3) one or more Subsidiaries of such
Person.
"Temporary Cash Investments" means any of the following:
(1) 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;
(2) 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;
(3) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (1)
above entered into with a bank meeting the qualifications described in
clause (2) above;
(4) 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
(5) 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.
"Transactions" means the merger of Shakopee Valley Printing Inc. with
and into Graphics; the issuance of the Notes; the entering into of the Bank
Credit Agreement; the repayment by Graphics of all indebtedness outstanding
under its bank credit agreement existing prior to the date of the issuance of
the Notes; the redemption of all outstanding 15% Senior Subordinated Notes Due
2000 of Graphics; and the repayment of all of the outstanding indebtedness of
Shakopee Valley Printing Inc., in each case on the date of the issuance of the
Notes, except that the redemption of the 15% Senior Subordinated Notes Due 2000
of Graphics shall occur within 40 days after the Notes are issued.
"Unrestricted Subsidiary" means (1) 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 (2) 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
56
<PAGE>
and be continuing. Any such designation by the Board of Directors shall be
evidenced by Graphics 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.
57
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which represents the opinion of Shearman &
Sterling, our counsel, 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. This
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 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 such interest 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. 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 generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(reduced by an amount attributable to accrued stated interest, which is taxable
in the manner described above under "--Stated Interest") 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
market discount previously included in taxable income by the holder, and reduced
by any amortized bond premium and any principal 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.
Individuals and certain other holders are eligible for preferential rates of at
United States federal income tax in respect of long-term capital gain. The
deduction of capital losses are subject to limitations under the Code.
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 (1) the holder's tax basis in such Note,
over (2) the amount payable at maturity (or on an earlier call date if it
results in a smaller amortizable bond premium).
58
<PAGE>
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 without
the consent of 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 (1) treat any gain realized with respect to such
Note as ordinary income to the extent of the market discount accrued during the
period such holder held the Note, (2) possibly treat any payment on such Note
(other than stated interest) as ordinary income to the extent of the market
discount accrued during the period such holder held such Note and (3) 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 a
holder disposes of a Note 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 United States
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 relating to
59
<PAGE>
the withholding of tax on interest payments, and some of the associated backup
withholding and information reporting rules described above, are subject to
modification under new Treasury regulation which generally will become effective
for payments made after December 31, 2000, subject to certain transition rules.
PLAN OF DISTRIBUTION
This prospectus is to be used by Morgan Stanley Dean Witter in
connection with offers and sales of the Notes in market-making transactions at
negotiated prices relating to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
Morgan Stanley Dean Witter 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. We have been advised by Morgan Stanley Dean Witter 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.
Morgan Stanley Dean Witter acted as placement agent in connection with
the original private placement of the Notes and received a placement fee of $5.6
million. Morgan Stanley Dean Witter is affiliated with entities that
beneficially own a substantial majority of the outstanding shares of capital
stock of Holdings. An affiliate of Morgan Stanley Dean Witter holds an $11.5
million participation in the 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. In addition, Messrs.
Janson and Fry, employees of Morgan Stanley & Co. Incorporated are members of
our board of directors.
Although there are no agreements to do so, Morgan Stanley Dean Witter,
as well as others, may act as broker or dealer in connection with the sale of
Notes contemplated by this prospectus and may receive fees or commissions in
connection with any sales.
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 II and the MSCP III Entities, companies controlled by MSLEF II and the
MSCP III Entities and Morgan Stanley Dean Witter.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at March 31, 1999 and 1998, and for each of
the three fiscal years in the period ended March 31, 1999, as set forth in their
reports (which contain an explanatory paragraph for the accounting change
mentioned in Note 10 to our consolidated financial statements). We have included
our financial statements and schedules in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
60
<PAGE>
AVAILABLE INFORMATION
Graphics and Holdings have filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, with respect to the Notes. In accordance with the rules and regulations
of the SEC, this prospectus does not contain all of the information contained in
the registration statement and related schedules and exhibits. Statements made
in this prospectus concerning a document filed as an exhibit to the registration
statement are not necessarily complete. You should refer to those documents
filed as exhibits to the registration statement for a complete description. For
further information pertaining to Graphics, Holdings and the Notes, you should
refer to the registration statement, including the exhibits and financial
statements, notes and schedules filed as a part of the registration statement.
The registration statement and its exhibits and schedules may be inspected and
copied at the public reference facilities maintained by the SEC at:
450 Fifth Street, N.W. Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
Washington, D.C. 20549 14th Floor New York, New York
Chicago, Illinois 60661 10048
Please call the SEC at 1-800-SEC-0330 for further information on public
reference rooms. Our filings with the SEC are also available to the public on
the SEC's Internet Website at http://www.sec.gov.
The indenture relating to the Notes requires Holdings and, in the
circumstances described below, Graphics to file with the SEC 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, 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 SEC, copies of the audited financial statements, quarterly reports
and other reports which Graphics and Holdings are required to file with the SEC
pursuant to Sections 13(a), 13(c) and 15(d) of the Exchange Act. If 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.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Discussions containing such
forward-looking statements may be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
within this prospectus generally. In addition, when used in this prospectus, the
words "believes," "anticipates," "expects" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include
without limitation, our expectation as to when we will complete the remediation
and testing phases of our Year 2000 program, as well as, any Year 2000
contingency plans, our estimated cost of achieving Year 2000 readiness and our
belief that internal systems and equipment will be Year 2000 compliant in a
timely manner. Forward-looking 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
of our control, including, but not limited to:
o fluctuations in the cost of paper and other raw materials used,
o changes in the advertising and printing markets,
o actions by our competitors particularly with respect to pricing,
61
<PAGE>
o the financial condition of our customers,
o our financial condition and liquidity,
o the general condition of the United States economy,
o demand for our products and services,
o the availability of qualified personnel and other information
technology resources,
o the ability to identify and remediate all date sensitive lines of
computer code,
o the ability to replace embedded computer chips in systems
affected by Year 2000 issues,
o the actions of government agencies or other third parties with
respect to Year 2000 issues, and
o the matters set forth in this prospectus generally.
Consequently, the forward-looking statements should be regarded solely
as our current plans, estimates and beliefs. We do not undertake and
specifically decline 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.
62
<PAGE>
APPENDIX 1
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, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 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 identification
incorporation or organization) 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 identification
incorporation or organization) 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 134,250 shares outstanding of its common stock, $.01 Par
Value, as of June 17, 1999 (all of which are privately owned and not traded on a
public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
INDEX
Page
Referenced
Form 10-K
----------
PART I
Item 1. Business........................................................ 2
Item 2. Properties...................................................... 7
Item 3. Legal Proceedings............................................... 8
Item 4. Submission of Matters to A Vote of Security Holders............. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 9
Item 6. Selected Financial Data......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 24
Item 8. Financial Statements and Supplementary Data..................... 25
Item 9. Changes In And Disagreements With Accountants on Accounting and
Financial Disclosure............................................ 54
PART III
Item 10. Directors and Executive Officers ............................... 55
Item 11. Executive Compensation ......................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 61
Item 13. Certain Relationships and Related Transactions.................. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ...................................................... 64
Signatures..................................................... 74
<PAGE>
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (this "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, 7 and 7A 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. Forward-looking
statements include without limitation, our expectation as to when we will
complete the remediation and testing phases of our Year 2000 program, as well
as, any Year 2000 contingency plans, our estimated cost of achieving Year 2000
readiness and our belief that internal systems and equipment will be Year 2000
compliant in a timely manner. Forward-looking 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., including, but not limited to:
- fluctuations in the cost of paper and other raw materials used,
- changes in the advertising and printing markets,
- actions by our competitors particularly with respect to pricing,
- the financial condition of our customers,
- our financial condition and liquidity,
- the general condition of the United States economy,
- demand for our products and services,
- the availability of qualified personnel and other information
technology resources,
- the ability to identify and remediate all date sensitive lines of
computer code,
- the ability to replace embedded computer chips in systems affected by
Year 2000 issues,
- the actions of government agencies or other third parties with respect
to Year 2000 issues, and
- the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as our
current plans, estimates and beliefs. We do not undertake and specifically
decline 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
We are a successor to a business that commenced operations in 1926, and are one
of the largest national diversified commercial printers in North America with
ten printing plants in eight states and Canada, ten prepress facilities located
throughout the United States and one digital visual effects facility, that
provides special effects services for the motion picture industry, located in
California. We operate primarily in two business segments of the commercial
printing industry: printing (which accounted for approximately 83% of total
sales during the fiscal year ended March 31, 1999 ("Fiscal Year 1999")) and
digital imaging and prepress services conducted through our American Color
division (which accounted for approximately 16% of total sales in Fiscal Year
1999). Our printing business and American Color division are both headquartered
in Nashville, Tennessee. Partnerships affiliated with Morgan Stanley Dean Witter
& Co. ("MSDW") currently own 61.7% of the outstanding common stock and 72.7% of
the outstanding preferred stock of Holdings.
Market data used throughout this Report was obtained from industry publications
and internal company estimates. While we believe such information is reliable,
the accuracy of such information has not been independently verified and cannot
be guaranteed.
Financial Information About Industry Segments
See disclosure in note 17 of our consolidated financial statements appearing
elsewhere in this Report.
2
<PAGE>
Printing
Our printing business, which accounted for approximately 83%, 84% and 86% of our
sales in the fiscal year ended March 31, 1999 (Fiscal Year 1999), the fiscal
year ended March 31, 1998 ("Fiscal Year 1998") and the fiscal year ended March
31, 1997 ("Fiscal Year 1997"), respectively, produces retail advertising
inserts, comics (newspaper Sunday comics, comic insert advertising and comic
books), and other publications.
Retail Advertising Inserts (81% of printing sales in Fiscal Year 1999 and 80% in
Fiscal Year 1998 and Fiscal Year 1997). We believe that we are one of the
largest printers of retail advertising inserts in the United States. We printed
advertising inserts for approximately 300 retailers in Fiscal Year 1999. 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.
Comics (13% of printing sales in Fiscal Year 1999, 14% in Fiscal Year 1998 and
Fiscal Year 1997, includes newspaper Sunday comics, comic insert advertising and
comic books). We believe that we are one of the largest printers of comics in
the United States. We print Sunday comics for over 300 newspapers in the United
States and Canada and print a significant share of the annual comic book
requirements of Marvel Entertainment Group, Inc.
Other Publications (6% of printing sales in Fiscal Year 1999, Fiscal Year 1998
and Fiscal Year 1997). We print local newspapers, TV guide listings and other
publications.
In January 1998, we approved a plan for our 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 14 to our consolidated financial statements appearing
elsewhere in this Report.
Printing Production
Our network of ten printing plants in the United States and Canada is
strategically positioned to service major metropolitan centers and provide us
with distribution efficiencies and shorter turnaround times, two factors
instrumental in continuing our 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. We principally use heatset offset and flexographic web printing
equipment in our printing operations. We own a substantial majority of our
printing equipment, which currently consists of 36 heatset offset presses, 5
coldset offset presses and 11 flexographic presses. Most of our advertising
inserts and all of our other publications and comic books are printed using the
offset process, while some advertising inserts and substantially all of our
newspaper Sunday comics and comic advertising inserts are printed using the
flexographic process.
In the heatset 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, inks are set by the absorption of solvents into the
paper. Because the heatset offset process can be utilized on a wide variety of
papers and produce sharper reproductions, heatset offset presses provide a more
colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes raised
image plates and rapid-drying, water-based (as opposed to solvent-based) inks.
The flexographic image area results from application of ink to the raised
surface on the plate, which is transferred directly to the paper surface. Our
flexographic printing generally provides vibrant color reproduction at a 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 press set up
times make the process particularly attractive to commercial customers with
shorter runs and extensive regional versioning.
3
<PAGE>
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. We believe
that our mix and configuration of presses and press services allows for
efficient tailoring of printing services to customers' product needs.
Digital Imaging and Prepress Services
Our digital imaging and prepress services business is conducted by our American
Color division ("American Color") which accounted for approximately 16%, 15%,
and 14% of our Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997 sales,
respectively. We believe 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 ten full service locations
nationwide.
American Color assists its customers in the capture, manipulation, transmission
and distribution of images. The majority of this work leads to the production of
four-color separations in a format appropriate for use by printers. 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, multimedia and internet
services, and software and data-base 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 March 1999, we approved a plan for our American Color division designed to
primarily:
1) Consolidate certain facilities in order to improve asset utilization
and operational efficiency;
2) Modify the organizational structure as a result of facility
consolidation and other changes; and
3) Reduce overhead and other costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring Costs and Other Special Charges" and note 14 to our
consolidated financial statements appearing elsewhere in this Report.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive
advantages in our printing and digital imaging and prepress services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web
printing equipment is among the most advanced in the industry and that the
average age of our equipment is significantly less than the majority of our
regional competitors and is comparable to our major national competitors. We are
also committed to a comprehensive, long-term maintenance program, which enhances
the reliability and extends the life of our presses and other production
equipment. We also believe that our digital imaging and prepress equipment is
significantly more advanced than many of our smaller regional competitors, many
of whom have not incorporated digital prepress technologies and
computer-to-plate services to the same extent as we have, nor adopted an open
systems environment which allows greater flexibility and more efficient
maintenance.
4
<PAGE>
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 300 retailers and over 300 newspapers in the
United States and Canada. Our printing services customer base includes a
significant number of the major national retailers and larger newspaper chains
as well as numerous smaller regional retailers. Our 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 publishing, retail and catalog businesses, many of whom also
have long-term relationships with us. Although the digital imaging and prepress
services business has generally been on a spot bid basis in the past, we have
been successful in continuing to increase the proportion of our business under
long-term contracts.
Competitive Cost Structure. We have reduced the variable and fixed costs of
production at our printing facilities over the past several years and believe we
are well positioned to maintain our competitive cost structure in the future due
to economies of scale. We have also reduced both labor and material costs (the
principal variable production costs) in our digital imaging and prepress
services business primarily through the adoption of new digital prepress
production methodologies.
Strong Management Team. We have strengthened our printing management group by
hiring experienced managers with a clear focus on growth, quality and continued
cost reduction, resulting in an improved cost structure and a well-defined
strategy for future expansion. We have also strengthened our management group in
our digital imaging and prepress services business, filling a number of senior,
regional and plant management positions with individuals who we believe will
manage the digital imaging and prepress services business for growth and
profitability and will continue to upgrade our capabilities.
National Presence. Our nine printing plants in the United States and one plant
in Canada provide us with distribution efficiencies, strong customer service,
flexibility and short turnaround times, all of which are instrumental in our
continued success in servicing our large national and regional retail accounts.
Our expanded sales and marketing groups provide greater customer coverage and
enable us to more successfully penetrate regional markets. We believe that our
ten digital imaging and prepress facilities provide us 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. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
Grow Unit Volume. Management believes that our level of national sales coverage,
when coupled with our significant industry experience and customer-focused sales
force, will result in unit growth. In an effort to stimulate unit volume growth,
we have strengthened our printing sales group. Unit volume growth is also
expected to result from continued capital expansion and selective printing
acquisitions. In addition, in our digital imaging and prepress services
business, we have strengthened our sales force, provided expanded training and,
more closely focused our marketing efforts on new, larger customers.
Continue to Improve Product Mix. We intend to increase our share of the retail
advertising insert market. In addition, we expect to continue to adjust the mix
of our customers and products within the retail advertising insert market to
those that are more profitable and less seasonable and to maximize the use of
our equipment. We are also continuing expansion of our printing facilities'
capabilities for in-plant prepress and postpress services. Our 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 we have to offer. Additionally, we 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. We intend to further
reduce our production costs at our printing facilities through our Total Quality
Management Process, an ongoing cost reduction and continuous quality improvement
process. Additionally, we plan to continue to maximize scale advantages in the
purchasing, technology and engineering areas. We also intend to continue to gain
variable cost efficiencies in our digital imaging and prepress services business
by using our technical resources to improve digital prepress workflows at our
various facilities. In addition, we believe we will be able to reduce our per
unit technical, sales and management costs as we increase sales in this
business.
5
<PAGE>
Continue to Make Opportunistic Acquisitions. An integral part of our long-term
growth strategy includes a plan to selectively assess and acquire other printing
and digital imaging and prepress services companies that we believe will enhance
our leadership position in these industries.
Customers and Distribution
Customers. We sell our 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. We perform a portion of our
printing work, primarily the printing of Sunday comics and comic books, under
long-term contracts with our 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 our printing work, we obtain
varying time commitments from our customers ranging from job to job to annual
allocations. Printing prices are generally fixed during such commitments;
however, our 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 magazine and newspaper publishers,
retailers, catalog sales organizations, printers, 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 has resulted in an
increasing amount of contractual business related to facilities management
arrangements with customers over the past several years. These 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 us 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 our consolidated
sales in Fiscal Year 1999. Our top ten customers accounted for approximately 34%
of consolidated sales in Fiscal Year 1999.
Distribution. We distribute our 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 we compete 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.
We believe that competition in the printing business is based primarily on
quality and service at a competitive price.
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
6
<PAGE>
inability to keep pace with the technological advances required to service
increasingly complex customer demands. We believe 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 our printing business are paper and ink. We
purchase substantially all of our ink and related products under long-term ink
supply contracts. Throughout Fiscal Year 1997, the overall cost of paper
declined. During Fiscal Year 1998, paper prices increased slightly through mid
year and then declined to near beginning of the year levels. In Fiscal Year
1999, as most grades of paper became more plentiful, paper prices declined.
Management expects that, as a result of our strong relationships with key
suppliers, our material costs will remain competitive within the industry. In
accordance with industry practice, we generally pass through increases in the
cost of paper to customers in the costs of our printed products, while decreases
in paper costs generally result in lower prices to customers. The primary inputs
in prepress service processes are film and proofing materials.
In both of our business segments, there is an adequate supply of the necessary
materials available from multiple vendors. We are not dependent on any single
supplier and have had no significant problems in the past obtaining necessary
raw materials.
Seasonality
Some of our 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" appearing elsewhere in this Report.
Backlog
Because our printing, digital imaging and prepress services products are
required to be delivered soon after final customer orders are received, we do
not experience any backlog of unfilled customer orders.
Employees
As of May 31, 1999, we had a total of approximately 2,760 employees, of which
approximately 220 employees are represented by a collective bargaining agreement
that will expire on December 31, 2004. We consider our relations with our
employees to be excellent.
Governmental and Environmental Regulations
We are 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. We believe that we are 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, we do not anticipate that such
expenditures will be material. See "Legal Proceedings Environmental Matters"
appearing elsewhere in this Report.
7
<PAGE>
ITEM 2. PROPERTIES
We operate in 21 locations in 14 states and Canada. We own seven printing plants
in the United States and one in Canada and lease two printing plants, one in
California and one in Pennsylvania. The American Color division has ten
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, we
maintain one small executive office in Connecticut, a digital visual effects
facility in California and our headquarter facility in Nashville, Tennessee, all
of which are leased. We believe that our plants and facilities are adequately
equipped and maintained for present and planned operations.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in several legal actions arising from our
normal business activities. In the opinion of management, any liabilities that
may arise from such actions will not, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.
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 our 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, we maintain a reserve of approximately $0.1 million in
connection with this liability on our consolidated balance sheet at March 31,
1999. We believe this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
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 2, 1999, there were approximately 93 record holders 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 our consolidated financial statements appearing elsewhere in this
Report.
Recent Sales of Unregistered Securities
During the fourth quarter of Fiscal Year 1998, certain officers exercised
options to purchase an aggregate of 8,254 shares of Holdings' common stock
for $.01/share. The securities that were sold 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, 1999, 1998, 1997, 1996 and 1995. The balance sheet data as of March
31, 1999, 1998, 1997, 1996 and 1995 and the statement of operations data for the
fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from
the audited consolidated financial statements for such periods and at such
dates. The selected financial data below also reflects our discontinued
wholly-owned subsidiary, Sullivan Media Corporation ("SMC") and our coupon free
standing insert ("FSI") operation previously conducted by our discontinued
wholly-owned subsidiary Sullivan Marketing, Inc. ("SMI"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Discontinued Operations" and note 2 of our consolidated financial statements
appearing elsewhere in this Report.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements appearing elsewhere in this Report.
9
<PAGE>
Selected Financial Data
ACG Holdings, Inc.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------
1999 1998 1997 1996 1995(a)
---------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $ 520,343 533,335 524,551 529,523 433,198
Cost of Sales 439,091 461,407 459,880 465,110 370,267
--------- --------- --------- --------- ---------
Gross Profit 81,252 71,928 64,671 64,413 62,931
Selling, general and administrative expenses (b) 46,333 54,227 51,418 44,164 41,792
Restructuring costs and other special charges (c) 5,464 5,598 2,881 7,533 --
Gain from curtailment and establishment of defined
benefit pension plans, net (d) -- -- -- -- (3,311)
--------- -------- -------- -------- --------
Operating income 29,455 12,103 10,372 12,716 24,450
Interest expense, net 36,077 38,813 36,132 32,425 25,334
Other expense 1,217 412 245 1,722 985
Income tax expense 523 2,106 2,591 4,874 2,552
--------- -------- -------- -------- --------
Loss from continuing operations before
extraordinary items (8,362) (29,228) (28,596) (26,305) (4,421)
--------- -------- -------- -------- --------
Discontinued operations: (e)
Loss from operations, net of tax -- -- (1,557) (1,364) (912)
Estimated (loss) on shut down and gain on
settlement, net of tax -- (667) (1,550) 2,868 18,495
Extraordinary loss on early extinguishment
of debt(f) (4,106) -- -- (4,526) --
--------- -------- -------- -------- --------
Net (loss) income $ (12,468) (29,895) (31,703) (29,327) 13,162
========= ======== ======== ========= ========
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 0 0 4,635
Working capital (deficit) $ (5,451) 11,610 (8,598) 9,612 4,958
Total assets $ 299,000 329,958 333,975 351,181 328,368
Long-term debt and capitalized leases, including
current installments (g) $ 289,589 319,657 312,309 297,617 258,201
Stockholders' deficit $(119,306) (106,085) (76,318) (44,396) (14,970)
Other Data:
Net cash provided (used) by operating activities $ 48,137 18,257 24,313 (4,187) 30,510
Net cash used by investing activities $ (10,364) (10,100) (10,997) (24,436) (17,580)
Net cash (used) provided by financing activities $ (37,812) (8,143) (13,312) 23,982 (17,527)
Capital expenditures (including lease obligations
entered into) $ 16,238 23,713 37,767 28,022 20,415
EBITDA (h) $ 64,286 52,367 46,972 46,847 51,719
</TABLE>
10
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, Shakopee Valley Printing, Inc. ("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 our common control).
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 expense includes $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 $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. See note 15 to our
consolidated financial statements appearing elsewhere in this Report.
(c) In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the
organizational structure as a result of facility consolidation and other
changes and reduce overhead and other costs. We recorded $4.6 million of
costs under this plan in Fiscal Year 1999.
In January 1998, we approved a restructuring plan for our printing
division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9
million of costs under this plan in Fiscal Year 1998.
In April 1995, we implemented a restructuring plan for our American Color
division, which was designed to improve productivity, increase customer
service and responsiveness and provide increased growth in the business.
We recorded $0.9 million and $4.1 million of costs under this plan in
Fiscal Year 1997 and the fiscal year ended March 31, 1996 ("Fiscal Year
1996"), respectively.
In addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in our printing and American Color divisions in Fiscal Year
1999, Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996,
respectively. See note 14 to our consolidated financial statements
appearing elsewhere in this Report.
(d) In October 1994, we amended our defined benefit pension plans, which
resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995. We 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. We recognized a $0.4 million expense associated
with the establishment of the SERP.
(e) In February of Fiscal Year 1997, we made a strategic decision to shut down
the operation of our wholly-owned subsidiary SMC. SMC's shut down has been
accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in our 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 2 of our consolidated financial statements appearing
elsewhere in this Report.
On February 16, 1994, we assigned the coupon FSI contracts of our
subsidiary, SMI, to News America FSI, Inc. ("News America"). In June 1994,
we 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.
11
<PAGE>
In Fiscal Year 1996, we 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 2 of our consolidated financial statements appearing elsewhere in
this Report.
(f) As part of a refinancing transaction entered into on May 8, 1998 (the
"1998 Refinancing"), we recorded an extraordinary loss related to early
extinguishment of debt of $4.1 million, net of zero taxes. This
extraordinary loss primarily consisted of the write-off of deferred
financing costs related to refinanced indebtedness in the quarter ended
June 30, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
In August 1995, as part of the Shakopee Merger and the refinancing
transactions (the "1995 Refinancing"), collectively (the "1995
Transactions"), we 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 includes an
additional $9.7 million 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 1995 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
and the bank credit agreement entered into in May 1998 (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources") are based on EBITDA, subject
to certain adjustments.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs
related to the American Color division, $0.6 million of non-recurring
costs associated with the consolidation of certain production facilities
at the American Color division, $0.3 million of non-recurring employee
termination expenses and $0.2 million of non-cash charges associated with
an employee benefit program.
EBITDA in Fiscal Year 1998 includes $3.9 million in restructuring costs
related to the printing division, $1.5 million of non-recurring charges
associated with the relocation of American Color's corporate office and
various severance related expenses, and $0.7 million of certain charges
associated with employee benefit programs.
EBITDA in Fiscal Year 1997 includes $0.9 million of restructuring costs
related to the American Color division and non-recurring employee
termination expenses of $2.5 million (see note 15 to our consolidated
financial statements appearing elsewhere in this Report).
EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring costs
related to the American Color division.
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to a
change in our defined benefit pension plans (as discussed in note (d)
above).
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998
Refinancing (see note 6 to our consolidated financial statements appearing
elsewhere in this Report and "Liquidity and Capital Resources" below). The
primary objectives of the refinancing were to gain greater financial and
operating flexibility, to reduce our overall cost of capital and to provide
greater opportunity for internal growth and growth through acquisitions.
Printing. 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
us, 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 our sales will
continue to be subject to changes in retailers' demands for printed products.
The cost of paper is a principal factor in our overall pricing to our customers.
The level of paper costs also has a significant impact on our reported sales.
Throughout Fiscal Year 1997, the overall cost of paper declined. During Fiscal
Year 1998, paper prices increased slightly through mid year and then declined to
near beginning of the year levels. In Fiscal Year 1999, as most grades of paper
became more plentiful, paper prices declined. In accordance with industry
practice, we generally pass through increases in the cost of paper to customers
in the costs of our printed products, while decreases in paper costs generally
result in lower prices to customers.
In recent years, comprehensive quality improvement and cost reduction programs
have been implemented for all our printing processes. As a result of these
measures, we have been successful in lowering our manufacturing costs within the
printing sector, while improving product quality. Additionally, in order to grow
sales and improve gross margins, we increased the geographic and industry scope
of our sales force and shifted the mix of our business toward retail customers
and away from the printing of certain lower margin publications. 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
our cost reduction programs has had favorable impact on printing gross profit
levels.
In January 1998, we approved a plan for our 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 more 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,
multimedia and internet services, and software and data-base management.
In March 1999, we approved a plan for our American Color division, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes, and reduce overhead and other costs.
The cost of this plan is being accounted for in accordance with the guidelines
set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges"
below).
13
<PAGE>
The following table summarizes our historical results of continuing operations
for Fiscal Years 1999, 1998 and 1997:
Fiscal Year Ended March 31,
----------------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
Sales:
Printing $431,936 $446,350 $449,924
American Color 83,816 82,384 71,712
Other (a) 4,591 4,601 2,915
-------- -------- --------
Total $520,343 $533,335 $524,551
======== ======== ========
Gross Profit:
Printing $ 62,025 $ 51,278 $ 49,469
American Color 19,128 19,249 15,062
Other (a) 99 1,401 140
-------- -------- --------
Total $ 81,252 $ 71,928 $ 64,671
======== ======== ========
Gross Margin:
Printing 14.4% 11.5% 11.0%
American Color 22.8% 23.4% 21.0%
Total 15.6% 13.5% 12.3%
Operating Income (Loss):
Printing (b)(c) $ 38,994 $ 22,612 $ 25,858
American Color (b)(c) (2,542) 2,404 (1,315)
Other (a)(d)(e) (6,997) (12,913) (14,171)
-------- -------- --------
Total $29,455 $12,103 $10,372
======== ======== ========
(a) Other operations primarily include revenues and expenses associated with
our digital visual effects business ("Digiscope").
(b) Printing operating income includes the impact of $1.7 million and $0.4
million in Fiscal Year 1998 and Fiscal Year 1997, respectively, of other
special charges related to asset write-offs and write-downs. American
Color's operating loss includes the impact of other special charges
related to asset write-offs and write-downs of $0.9 million and $1.5
million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See
"Restructuring Costs and Other Special Charges" below.
(c) Printing operating income includes the impact of $3.9 million of
restructuring costs in Fiscal Year 1998. American Color's operating loss
includes the impact of restructuring costs of $4.6 million and $0.9
million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See
"Restructuring Costs and Other Special Charges" below. American Color's
operating (loss) income also includes $0.9 million of non-recurring
charges in Fiscal Year 1999 associated with the consolidation of certain
production facilities 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) Other operations also reflects the impact of $0.3 million of non-recurring
employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1999, certain
charges associated with employee benefit programs of $0.7 million in
Fiscal Year 1998 and non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (see note 15 to our consolidated financial
statements appearing elsewhere in this Report).
14
<PAGE>
Historical Results of Operations
Fiscal Year 1999 vs. Fiscal Year 1998
Our sales decreased 2.4% to $520.3 million in Fiscal Year 1999 from $533.3
million in Fiscal Year 1998. This decrease includes a decrease in printing sales
of $14.5 million, or 3.2%, offset in part by an increase in American Color's
sales of $1.4 million or 1.7%. Our gross profit increased to $81.3 million or
15.6% of sales in Fiscal Year 1999 from $71.9 million or 13.5% of sales in
Fiscal Year 1998. Our operating income increased to $29.5 million or 5.7% of
sales in Fiscal Year 1999 from $12.1 million or 2.3% of sales in Fiscal Year
1998. See the discussion of these changes by segment below.
Printing
Sales. Printing sales decreased $14.5 million to $431.9 million in Fiscal Year
1999 from $446.4 million in Fiscal Year 1998. Printing production volume
increased approximately 4%. This increase was offset by an increase in sales to
customers that supply their own paper and the impact of declining paper prices.
Gross Profit. Printing gross profit increased $10.7 million to $62.0 million in
Fiscal Year 1999 from $51.3 million in Fiscal Year 1998. Printing gross margin
increased to 14.4% in Fiscal Year 1999 from 11.5% in Fiscal Year 1998. The
increase in gross profit is primarily the result of reduced manufacturing costs
and increased production volume. The increase in gross margin includes the above
mentioned factors coupled with the impact of an increase in sales to customers
that supply their own paper and declining paper prices.
Selling, General and Administrative Expenses. Printing selling, general and
administrative expenses decreased slightly to $23.0 million, or 5.3% of printing
sales, in Fiscal Year 1999 compared to $23.1 million, or 5.2% of printing sales,
in Fiscal Year 1998.
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 in Fiscal Year 1998 (see
"Restructuring Costs and Other Special Charges" below), operating income from
the printing business increased to $39.0 million in Fiscal Year 1999 from $22.6
million in Fiscal Year 1998.
American Color
Sales. American Color's sales increased $1.4 million, or 1.7%, to $83.8 million
in Fiscal Year 1999 from $82.4 million in Fiscal Year 1998. The increase in
Fiscal Year 1999 was primarily the result of higher packaging prepress sales and
increased digital imaging and prepress production volume.
Gross Profit. American Color's gross profit decreased $0.1 million to $19.1
million in Fiscal Year 1999 from $19.2 million in Fiscal Year 1998. American
Color's gross margin decreased to 22.8% in Fiscal Year 1999 from 23.4% in Fiscal
Year 1998. Included were decreases resulting from increased costs associated
with new operations servicing the packaging prepress industry and $0.9 million
of non-recurring costs associated with the consolidation of certain production
facilities, offset in part by an increase in volume and other material and
payroll savings.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $16.2 million, or 19.3% of American
Color's sales in Fiscal Year 1999 from $16.8 million, or 20.4% of American
Color's sales in Fiscal Year 1998. This decrease is primarily a result of $1.5
million of non-recurring charges associated with the relocation of American
Color's corporate office and various severance related expenses in Fiscal Year
1998, partially offset by increased selling expenses for packaging prepress and
other operations in Fiscal Year 1999.
Operating (Loss) Income. As a result of the above factors and the incurrence of
both restructuring costs associated with the American Color restructuring plan
of $4.6 million in Fiscal Year 1999 and other special charges related to asset
write-offs and write-downs of $0.9 million in Fiscal Year 1999 (see
"Restructuring Costs and Other Special Charges" below), operating (loss) income
at American Color decreased to a loss of $2.5 million in Fiscal Year 1999 from
income of $2.4 million in Fiscal Year 1998.
15
<PAGE>
Fiscal Year 1998 vs. Fiscal Year 1997
Our 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 $10.7 million, or 14.9%, offset in part by a decrease in printing
sales of $3.5 million, or 0.8%. Our 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. Our 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 segment 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 $10.7 million, or 14.9%, to $82.4
million in Fiscal Year 1998 from $71.7 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.
Gross Profit. American Color's gross profit increased $4.1 million to $19.2
million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997. American
Color's gross margin increased to 23.4% in Fiscal Year 1998 from 21.0% 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 $16.8 million, or 20.4% of American
Color's sales in Fiscal Year 1998 from $14.0 million, or 19.5% 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 $2.4 million in Fiscal Year 1998 from a
loss of $1.3 million in Fiscal Year 1997.
16
<PAGE>
Other Operations (Fiscal Year 1999 vs. Fiscal Year 1998 and Fiscal Year 1998 vs.
Fiscal Year 1997)
Other operations consist primarily of revenues and expenses associated with our
digital visual effects business, corporate general and administrative expenses,
other expenses and amortization expense. Amortization expenses for other
operations, including goodwill amortization (see below), were $2.6 million, $8.7
million and $8.4 million in Fiscal Years 1999, 1998 and 1997, respectively.
Operating losses from other operations improved to a loss of $7.0 million in
Fiscal Year 1999 from a loss of $12.9 million in Fiscal Year 1998. This decrease
is primarily attributable to a $6.0 million reduction in goodwill amortization
expense. This reduction results from full amortization of the original 1993
acquisition goodwill related to American Color as of March 31, 1998.
Operating losses from other operations improved to a loss of $12.9 million in
Fiscal Year 1998 from a loss of $14.2 million in Fiscal Year 1997. This
improvement includes non-recurring employee termination expenses of $2.5 million
in Fiscal Year 1997 (see note 15 to our consolidated financial statements
appearing elsewhere in this Report) and improved digital visual effects
operating results in Fiscal Year 1998. These improvements were offset in part by
$0.7 million of certain expenses associated with employee benefit programs in
Fiscal Year 1998 and increases in amortization expenses and certain corporate
general and administrative expenses during Fiscal Year 1998.
Goodwill Amortization
Amortization expense associated with goodwill was $2.5 million, $8.5 million and
$8.3 million for Fiscal Years 1999, 1998 and 1997, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
American Color. In March 1999, we approved a plan for our American Color
division, which was designed to consolidate certain facilities in order to
improve asset utilization and operational efficiency, modify the organizational
structure as a result of facility consolidation and other changes and reduce
overhead and other 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 $4.6
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 $2.5 million of employee termination costs, $1.2 million of lease
settlement costs and $0.9 million of other transition and restructuring
expenses. This restructuring charge was recorded in the quarter ended March 31,
1999. The majority of these costs will be paid or settled before March 31, 2000.
In addition, approximately $0.9 million of restructuring costs (primarily
relocation expenses) were recognized in Fiscal Year 1997. These costs were
associated with a plan implemented in Fiscal Year 1996 for our American Color
division.
Printing. In January 1998, we approved a plan for our 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 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. These costs were paid or settled before
March 31, 1999.
Other Special Charges:
During the quarter ended March 31, 1999, we recorded special charges totaling
$0.9 million to adjust the carrying values of idle, disposed and
under-performing assets of the American Color division to estimated fair values.
The provision was based on a review of our 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"
("SFAS 121"). Fair value was based on our estimate of held and used and idle
assets based on current market conditions using the best information available.
17
<PAGE>
During the quarter ended March 31, 1998, we recorded special charges totaling
$1.7 million to adjust the carrying values of idle, disposed and
under-performing assets of the printing segment to estimated fair values. The
provision was based on a review of our long-lived assets in accordance with SFAS
121. Fair value was based on our estimate of held and used and idle assets based
on current market conditions using the best information available.
During Fiscal Year 1997, we recorded special charges totaling $1.9 million, 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 initial adoption of SFAS
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 our estimate of held and used and idle assets based on
current market conditions using the best information available.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense decreased 7.0% to $36.2 million in Fiscal Year 1999 from $39.0
million in Fiscal Year 1998. This decrease includes the impact of both lower
levels of indebtedness and reduced borrowing costs associated with our 1998
Refinancing. See note 6 to our consolidated financial statements appearing
elsewhere in this Report.
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 "Old Term Loan
Facility"). See note 6 to our consolidated financial statements appearing
elsewhere in this Report.
Other Expense (Income) and Taxes
Other expenses, net increased to $1.2 million in Fiscal Year 1999 from $0.4
million in Fiscal Year 1998. Other expenses, net in Fiscal Year 1999 include
various non-recurring legal settlements and related fees of approximately $0.8
million.
Other expenses, net increased to $0.4 million in Fiscal Year 1998 from $0.2
million in Fiscal Year 1997.
Our effective tax rates for Fiscal Years 1999, 1998, and 1997 exceeded the
federal statutory rate due primarily to increases in the valuation allowance,
amortization of nondeductible goodwill, and foreign tax expense.
Discontinued Operations
Sullivan Media Corporation
Our 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,
related to our discontinued wholly-owned subsidiary SMC. Our net loss in Fiscal
Year 1997 includes the loss from operations of SMC of approximately $1.6
million. See note 2 to our consolidated financial statements appearing elsewhere
in this Report.
Extraordinary Loss on Early Extinguishment of Debt
As part of the 1998 Refinancing which was consummated in Fiscal Year 1999 (see
note 6 to our consolidated financial statements appearing elsewhere in this
Report), we recorded an extraordinary loss related to early extinguishment of
debt of $4.1 million, net of zero taxes. This extraordinary loss primarily
consisted of the write-off of deferred financing costs related to refinanced
indebtedness in the quarter ended June 30, 1998.
18
<PAGE>
Net Loss
As a result of the factors discussed above, our net loss improved to a loss of
$12.5 million in Fiscal Year 1999 from a loss of $29.9 million in Fiscal Year
1998. The Fiscal Year 1999 net loss includes the $4.1 million extraordinary loss
related to early extinguishment of debt, $4.6 million of restructuring costs and
$0.9 million of other special charges related to asset write-offs and
write-downs associated with our American Color division. Our 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. The Fiscal Year 1998 net loss 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 our 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, certain charges associated with employee benefit programs of $0.7
million and an approximate $0.7 million loss from discontinued operations
related to SMC and SMI. The Fiscal Year 1997 net loss 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 (see note 15 to our consolidated
financial statements appearing elsewhere in this Report) and an approximate $3.1
million loss from discontinued operations related to SMC.
Liquidity and Capital Resources
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998
Refinancing (see note 6 to our consolidated financial statements appearing
elsewhere in this Report). The primary objectives of the refinancing were to
gain greater financial and operating flexibility, to reduce our overall cost of
capital and to provide greater opportunity for internal growth and growth
through acquisitions.
The 1998 Refinancing transaction included the following:
(1) We entered into a $145 million credit facility with a syndicate of
lenders (the "Bank Credit Agreement") providing for:
- a $70 million revolving credit facility, which is not subject to a
borrowing base limitation, maturing on March 31, 2004 (the
"Revolving Credit Facility"),
- 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
our previous credit agreement as amended (the "Old Bank Credit
Agreement") (plus accrued interest to the date of repayment);
(3) The repayment of all $25.0 million of indebtedness outstanding under
the Old Term Loan Facility (plus accrued interest to the date of
repayment); and
(4) The payment of fees and expenses associated with the refinancing
transaction.
The Revolving Credit Facility provides for a maximum of $70 million borrowing
availability and includes a $40 million letter of credit sub-limit. At May 31,
1999, we had total borrowings and letters of credit outstanding under the
Revolving Credit Facility of approximately $24.5 million, and therefore,
additional borrowing availability of approximately $45.5 million.
At May 31, 1999, $20.5 million of the A Term Loan Facility and $43.8 million of
the B Term Loan Facility remained outstanding. Scheduled A Term Loan Facility
and B Term Loan Facility payments due in the fiscal year ending March 31, 2000
("Fiscal Year 2000") are de minimus. Scheduled repayments of capital lease
obligations and other senior indebtedness during Fiscal Year 2000 will
approximate $7.4 million and $0.8 million, respectively.
19
<PAGE>
In Fiscal Year 1999, net cash provided by operating activities of $48.1 million
(see consolidated statements of cash flows appearing elsewhere in this Report),
proceeds from sales of property, plant and equipment of $0.8 million and
proceeds from the 1998 Refinancing of $84.8 million ($75 million from the A Term
Loan and B Term Loan facilities and $9.8 million of initial net borrowings under
the Revolving Credit Facility) were used to:
(1) Repay $84.2 million of indebtedness outstanding under the Old Bank
Credit Agreement and Old Term Loan Facility (including related
transaction fees),
(2) Fund scheduled principal repayments of indebtedness and financing costs
of $20.3 million (including capital lease obligations of $6.9 million
and voluntary prepayments on the A Term Loan Facility and B Term Loan
Facility of $4.4 million and $5.6 million, respectively),
(3) Fund cash capital expenditures of $11.1 million, and
(4) Further reduce outstanding revolver borrowings by $18.1 million.
We plan to continue our program of upgrading our printing and prepress equipment
and currently anticipate that Fiscal Year 2000 cash capital expenditures will
approximate $19.3 million and equipment acquired under capital leases will
approximate $3.0 million. Our cash on hand of approximately $2.6 million is
presented net of outstanding checks within trade accounts payable at March 31,
1999. Accordingly, cash is presented at a balance of $0 in the March 31, 1999
balance sheet.
Our primary sources of liquidity are cash provided by operating activities and
borrowings under the Revolving Credit Facility. We anticipate that our primary
needs for liquidity will be to conduct our business, meet our debt service
requirements, make capital expenditures and, if we elect, redeem, repay or
repurchase outstanding indebtedness.
At March 31, 1999, we had total indebtedness outstanding of $289.6 million,
including capital lease obligations as compared to $319.7 million at March 31,
1998, representing a reduction of indebtedness during Fiscal Year 1999 of $30.1
million. Of the total debt outstanding at March 31, 1999, $64.3 million was
outstanding under the Bank Credit Agreement at a weighted-average interest rate
of 7.1%. Indebtedness under the Bank Credit Agreement bears interest at floating
rates. At March 31, 1999, we had indebtedness other than obligations under the
Bank Credit Agreement of $225.3 million (including $185 million of the Notes).
We are currently in compliance with all financial covenants set forth in the
Bank Credit Agreement. See note 6 to our consolidated financial statements
appearing elsewhere in this Report.
A significant portion of Graphics' long-term obligations, including indebtedness
under the Bank Credit Agreement, has been fully and unconditionally guaranteed
by Holdings. Holdings is subject to certain restrictions under its guarantee of
indebtedness under the Bank Credit Agreement, including among other things,
restrictions on mergers, acquisitions, incurrence of additional debt and payment
of cash dividends. See note 1 to our consolidated financial statements appearing
elsewhere in this Report.
20
<PAGE>
EBITDA
Fiscal Year Ended March 31,
----------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
(dollars in thousands)
EBITDA:
Printing (a) $ 61,627 $ 46,838 $ 46,755
American Color (a) 5,283 8,405 5,180
Other (b) (c) (2,624) (2,876) (4,963)
=========== =========== ===========
Total $ 64,286 $ 52,367 $ 46,972
=========== =========== ===========
EBITDA Margin:
Printing 14.3% 10.5% 10.4%
American Color 6.3% 10.2% 7.2%
Total 12.4% 9.8% 9.0%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring costs
in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1999 and Fiscal
Year 1997 includes the impact of restructuring costs of $4.6 million and
$0.9 million, respectively. See "Restructuring Costs and Other Special
Charges" above. American Color EBITDA also includes $0.6 million of
non-recurring charges in Fiscal Year 1999 associated with the consolidation
of certain production facilities and $1.5 million of non-recurring charges
in Fiscal Year 1998 associated with the relocation of American Color's
corporate office and various severance related expenses.
(b) Other operations include revenues and expenses associated with our digital
visual effects business and corporate general and administrative expenses.
(c) Other operations also reflects the impact of $0.3 million of non-recurring
employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1999, certain
charges associated with employee benefit programs of $0.7 million in Fiscal
Year 1998 and non-recurring employee termination expenses of $2.5 million
in Fiscal Year 1997 (see note 15 to our consolidated financial statements
appearing elsewhere in this Report).
EBITDA is presented and discussed because we believe 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 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
and the Bank 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 increased
$14.8 million to $61.6 million in Fiscal Year 1999 from $46.8 million in Fiscal
Year 1998. Printing EBITDA was $46.8 million in both Fiscal Year 1998 and Fiscal
Year 1997. Printing EBITDA Margin increased to 14.3% in Fiscal Year 1999 from
10.5% in Fiscal Year 1998. Printing EBITDA Margin increased to 10.5% in Fiscal
Year 1998 from 10.4% in Fiscal Year 1997. 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).
21
<PAGE>
American Color. As a result of the reasons previously described under
"--American Color," (excluding changes in depreciation, amortization expense,
other non-cash expenses and other special charges related to asset write-offs
and write-downs), American Color EBITDA decreased $3.1 million to $5.3 million
in Fiscal Year 1999 from $8.4 million in Fiscal Year 1998. American Color EBITDA
Margin decreased to 6.3% in Fiscal Year 1999 from 10.2% in Fiscal Year 1998.
Included in the Fiscal Year 1999 EBITDA and EBITDA Margin is the impact of $0.6
million of non-recurring charges associated with the consolidation of certain
production facilities and $4.6 million of restructuring costs (see discussion
above). American Color EBITDA increased to $8.4 million in Fiscal Year 1998 from
$5.2 million in Fiscal Year 1997, representing an increase of $3.2 million.
EBITDA Margin increased to 10.2% in Fiscal Year 1998 from 7.2% in Fiscal Year
1997. 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
EBITDA and EBITDA Margin is the impact of restructuring costs of $0.9 million
(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 improved to negative EBITDA of $2.6 million in Fiscal
Year 1999 from negative EBITDA of $2.9 million in Fiscal Year 1998. EBITDA from
other operations improved to negative EBITDA of $2.9 million in Fiscal Year 1998
from negative EBITDA of $5.0 million in Fiscal Year 1997. Other operations
negative EBITDA for Fiscal Year 1999 includes the impact of $0.3 million of
non-recurring employee termination expenses and $0.2 million of non-cash charges
associated with an employee benefit program and negative EBITDA for Fiscal Year
1998 includes the impact of $0.7 million of certain charges associated with
employee benefit programs. Negative EBITDA for Fiscal Year 1997 includes the
impact of non-recurring employee termination expenses of $2.5 million (see note
15 to our consolidated financial statements appearing elsewhere in this Report).
Amortization of Goodwill
Our goodwill is amortized on a straight-line basis by business segment. Goodwill
amortization expense will be approximately $2.5 million in Fiscal Year 2000.
Impact of Inflation
In accordance with industry practice, we generally pass through increases in our
costs (primarily paper and ink) to customers in the costs of our printed
products, while decreases in paper costs generally result in lower prices to
customers. Throughout Fiscal Year 1997, the overall cost of paper declined.
During Fiscal Year 1998, paper prices increased slightly through mid year and
then declined to near beginning of the year levels. In Fiscal Year 1999, as most
grades of paper became more plentiful, paper prices declined. Management expects
that, as a result of our strong relationship with key suppliers, our material
costs will remain competitive within the industry.
Seasonality
Some of our printing and digital imaging and prepress services business is
seasonal in nature, particularly those revenues derived from advertising
inserts. Generally, our 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 we 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. Our strategy has been and will continue to
include the mitigation of the seasonality of our printing business by increasing
our 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. We believe that environmental liabilities, currently
and in the prior periods discussed herein, are not material. We maintain a
reserve of approximately $0.1 million in connection with a Superfund site in our
consolidated statement of financial position at March 31, 1999, which we believe
to be adequate. See "Legal Proceedings -- Environmental Matters" appearing
elsewhere in this Report. We do 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 our consolidated financial position or results of operations.
22
<PAGE>
Accounting
There are no pending accounting pronouncements that, when adopted, are expected
to have a material effect in our results of operations or its financial
position.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the Year 2000 which could result in
a system failure or miscalculations causing disruptions of operations. In the
spring of 1997, we initiated our review of our Year 2000 information and
manufacturing systems compliance ("Y2K Project"). Our Y2K Project includes four
phases: assessment, remediation, testing, and implementation. Over the past
year, we have made significant progress in each of these areas and believe we
will complete the Y2K Project by October 1999.
Information Technology Systems. To date, we have fully completed our assessment
of all information technology systems that could be significantly affected by
the Year 2000. We have completed 85% of the remediation phase of our information
technology systems and expect to complete software reprogramming and replacement
by July 1999. To date, we have completed 85% of our testing and have implemented
65% of our remediated systems. Completion of the testing phase for all
significant systems is expected by July 1999, all remediated systems are
anticipated to be fully tested by August 1999, with 100% implementation targeted
for September 1999.
Production and Manufacturing Systems. Our strategy includes an on-going program
that focuses on the need to upgrade and maintain our production and
manufacturing systems. As such, we believe our production and manufacturing
systems to be reasonably current and do not anticipate significant Year 2000
issues in this area. We have completed the assessment phase in this area and are
90% complete in the remediation phase of our operating equipment. To date, the
required remediation has been within planned expenditures, and has not been
material to our consolidated financial results. We do not expect full
remediation of our operating equipment to be costly or extensive. We are 70%
complete with the testing of our remediated operating equipment. Once testing is
complete, the operating equipment in most cases will be ready for immediate use.
We expect to complete our remediation efforts by August 1999. Testing and
implementation of affected equipment is expected to be completed by October
1999.
We have nearly completed the process of gathering information about the Year
2000 compliance of our significant suppliers and subcontractors (external
agents). To date, we are not aware of any external agent with a Year 2000 issue
that would materially impact our results of operations, liquidity, or capital
resources. In addition, as a printer and graphics prepress supplier, our
products and services are not generally impacted by the Year 2000 issue.
We are utilizing both internal and external resources to reprogram, or replace,
test, and implement the software and operating equipment necessary for Year 2000
compliance. The total cost of the Y2K Project is estimated at $4.0 million and
is being funded through operating cash flows and our Revolving Credit Facility.
To date, we have incurred costs of approximately $1.9 million, relating to all
phases of the Y2K Project. Of the remaining project costs, approximately $1.9
million is attributable to the purchase of new software and operating equipment,
which will be capitalized. The remaining $0.2 million relates to repair of
hardware and software and will be expensed as incurred.
Management believes they have an effective program in place to resolve the Year
2000 compliance issue in a timely manner and is monitoring the progress of the
Y2K Project closely. As noted above, we have not yet completed all necessary
phases of the Y2K Project. In the unlikely event that we do not complete any
additional phases, (1) the printing segment would be forced to manually enter
customer orders, pay its employees, order and track its paper needs, and collect
certain cost, sales history and operating data of a non-critical nature, and (2)
certain digital workflows in our American Color division would be diverted to
existing, less efficient digital workflows, thereby reducing capacity in
affected locations and the American Color division would have to pay its
employees manually. In addition, disruption in services such as electrical
power, telecommunications and banking, or disruption in the general retail
economy environment could materially adversely affect us. Although there can be
no assurance that our efforts will prevent a material adverse impact on the
results of operations or financial conditions, we believe that none of these
scenarios are likely. We plan to evaluate the completion status of all phases of
the Y2K Project in September 1999 and determine if and when contingency plans
are necessary.
23
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Information. In the ordinary course of business, our exposure to
market risks is limited as is described below. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currency exchange rates. Currently, we do not utilize derivative
financial instruments such as forward exchange contracts, future contracts,
options and swap agreements.
Interest Rate Risk for us primarily relates to interest rate fluctuations on
variable rate debt.
Foreign Currency Exchange Rate Risk is minimal as we have only one foreign
printing facility (in Canada) and any fluctuations in net asset values as a
result of changes in foreign currency exchange rates associated with activity at
this one facility would be immaterial to the company as a whole.
Quantitative Information. At March 31, 1999 and March 31, 1998, we had both
fixed rate and variable rate debt. The carrying value of our total variable rate
debt approximated the fair value of such debt at March 31, 1999 and March 31,
1998. At our March 31, 1999 and March 31, 1998 borrowing levels, a
hypothetical 10% adverse change in interest rates on the variable rate debt
would have been immaterial. Approximately 75% and 68% of our long-term debt
(excluding capitalized lease obligations) was fixed rate at March 31, 1999 and
March 31, 1998, respectively.
The above market risk discussions are forward-looking statements of market risk
assuming the occurrence of certain adverse market conditions. Actual results in
the future may differ materially from those projected as a result of actual
developments in the market.
24
<PAGE>
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......................................... 26
Consolidated balance sheets - March 31, 1999 and 1998.................. 27
For the Years Ended March 31, 1999, 1998 and 1997:
Consolidated statements of operations............................. 29
Consolidated statements of stockholders' deficit.................. 30
Consolidated statements of cash flows............................. 31
Notes to Consolidated Financial Statements............................. 33
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, 1999, 1998, and 1997, and as of
March 31, 1999 and 1998
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.
25
<PAGE>
Report of Independent Auditors
Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. as of March 31, 1999 and 1998, 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, 1999. 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 statement 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, 1999 and 1998, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 1999, 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 10 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."
Nashville, Tennessee
May 25, 1999
26
<PAGE>
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,860 and $2,112 at March 31, 1999 and 1998,
respectively 57,895 63,185
Other 2,082 2,605
--------- ---------
Total receivables 59,977 65,790
Inventories 8,343 10,795
Prepaid expenses and other current assets 3,271 3,578
--------- ---------
Total current assets 71,591 80,163
Property, plant and equipment:
Land and improvements 2,907 3,148
Buildings and improvements 18,895 19,426
Machinery and equipment 177,851 178,713
Furniture and fixtures 6,549 5,379
Leased assets under capital leases 52,843 48,039
Equipment installations in process 4,146 1,612
--------- ---------
263,191 256,317
Less accumulated depreciation (119,576) (96,684)
--------- ---------
Net property, plant and equipment 143,615 159,633
Excess of cost over net assets acquired,
less accumulated amortization of $44,587
and $42,060 at March 31, 1999
and 1998, respectively 72,029 74,556
Other assets 11,765 15,606
--------- ---------
Total assets $ 299,000 329,958
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and
capitalized leases $ 7,994 9,131
Trade accounts payable 37,096 27,381
Accrued expenses 30,756 31,539
Income taxes 1,196 502
--------- --------
Total current liabilities 77,042 68,553
Long-term debt and capitalized leases, excluding
current installments 281,595 310,526
Deferred income taxes 7,916 9,443
Other liabilities 51,753 47,521
--------- --------
Total liabilities 418,306 436,043
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 134,250 shares and 134,812
shares issued and outstanding at March 31, 1999
and 1998, respectively 1 1
Preferred Stock, $.01 par value, 15,823 shares
authorized, 3,622 shares and 3,631 shares
Series AA convertible preferred stock issued
and outstanding at March 31, 1999 and
1998, respectively, $40,000,000 liquidation
preference, 1,606 shares Series BB convertible
preferred stock issued and outstanding at March 31,
1999 and 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,286 58,249
Accumulated deficit (174,905) (162,250)
Other accumulated comprehensive loss, net of tax (2,688) (2,085)
--------- --------
Total stockholders' deficit (119,306) (106,085)
--------- --------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 299,000 329,958
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Sales $ 520,343 533,335 524,551
Cost of sales 439,091 461,407 459,880
---------- ---------- --------
Gross profit 81,252 71,928 64,671
Selling, general and
administrative expenses 43,806 45,690 43,164
Amortization of goodwill 2,527 8,537 8,254
Restructuring costs and other
special charges 5,464 5,598 2,881
---------- ---------- --------
Operating income 29,455 12,103 10,372
---------- ---------- --------
Other expense (income):
Interest expense 36,242 38,956 36,289
Interest income (165) (143) (157)
Other, net 1,217 412 245
---------- ---------- --------
Total other expense 37,294 39,225 36,377
---------- ---------- --------
Loss from continuing operations before
income taxes and extraordinary item (7,839) (27,122) (26,005)
Income tax expense (523) (2,106) (2,591)
---------- ---------- --------
Loss from continuing operations
before extraordinary item (8,362) (29,228) (28,596)
Discontinued operations:
Loss from operations, net of tax -- -- (1,557)
Estimated loss on shut down, net of tax -- (667) (1,550)
---------- ---------- --------
Loss before extraordinary item (8,362) (29,895) (31,703)
Extraordinary loss on early
extinguishment of debt (4,106) -- --
---------- ---------- --------
Net loss $ (12,468) (29,895) (31,703)
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
<TABLE>
<CAPTION>
Series AA
and BB Other
Voting convertible Additional accumulated
common preferred paid-in Accumulated comprehensive
stock stock capital deficit loss Total
---------- ----------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, March 31, 1996 $ 1 -- 57,499 (100,525) (1,371) $ (44,396)
---------
Net loss -- -- -- (31,703) -- (31,703)
Change in cumulative
translation adjustment,
net of tax -- -- -- -- (219) (219)
---------
Comprehensive loss (31,922)
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1997 $ 1 -- 57,499 (132,228) (1,590) $ (76,318)
---------
Net loss -- -- -- (29,895) -- (29,895)
Other comprehensive loss,
net of tax:
Change in cumulative
translation adjustment -- -- -- -- (410) (410)
Unfunded pension liability -- -- -- -- (85) (85)
---------
Comprehensive loss (30,390)
Treasury stock -- -- -- (127) -- (127)
Exercise of stock options -- -- 176 -- -- 176
Executive stock compensation -- -- 574 -- -- 574
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1998 $ 1 -- 58,249 (162,250) (2,085) $(106,085)
---------
Net loss -- -- -- (12,468) -- (12,468)
Other comprehensive loss,
net of tax:
Change in cumulative
translation adjustment -- -- -- -- (504) (504)
Unfunded pension liability -- -- -- -- (99) (99)
---------
Comprehensive loss (13,071)
Treasury stock -- -- -- (187) -- (187)
Executive stock compensation -- -- 37 -- -- 37
--------- ----------- ---------- ----------- ------------- ---------
Balances, March 31, 1999 $ 1 -- 58,286 (174,905) (2,688) $ (119,306)
========= =========== ========== =========== ============= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (12,468) (29,895) (31,703)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary item - non-cash 4,106 -- --
Other special charges - non-cash 908 1,727 1,944
Depreciation 29,651 28,124 25,282
Depreciation and amortization related to SMC -- -- 251
Amortization of goodwill 2,527 8,537 8,254
Amortization of other assets 1,498 1,876 1,120
Amortization of deferred financing costs 1,412 2,292 1,784
Loss on shut down -- 667 1,550
Loss (gain) on disposals of property, plant and
equipment 501 (37) 6
Deferred income tax (benefit) expense (1,303) 930 911
Changes in assets and liabilities, net of
effects of shut down of SMI and SMC:
Decrease (increase) in receivables 4,108 (9,079) 11,262
Decrease (increase) in inventories 2,388 (1,122) 3,453
Increase (decrease) in trade accounts payable 9,846 (1,887) (6,528)
(Decrease) increase in accrued expenses (753) 1,172 1,226
Increase (decrease) in current income taxes
payable 694 (520) (193)
Increase in other liabilities 4,133 18,588 3,106
Other 889 (3,116) 2,588
-------- --------- --------
Total adjustments 60,605 48,152 56,016
-------- --------- --------
Net cash provided by operating activities 48,137 18,257 24,313
-------- --------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (11,143) (10,902) (10,810)
Proceeds from sales of property, plant and
equipment 765 1,067 63
Other 14 (265) (250)
----------- ---------- ---------
Net cash used by investing activities (10,364) (10,100) (10,997)
----------- ---------- ---------
Cash flows from financing activities:
Debt:
Proceeds 75,000 25,000 1,162
Payments (103,185) (24,899) (10,374)
Increase in deferred financing costs (2,608) (2,467) (827)
Repayment of capital lease obligations (6,938) (6,349) (3,212)
Other (81) 572 (61)
----------- ---------- ---------
Net cash used by financing activities (37,812) (8,143) (13,312)
----------- ---------- ---------
Effect of exchange rates on cash 39 (14) (4)
----------- ---------- ---------
Decrease in cash 0 0 0
Cash:
Beginning of period 0 0 0
----------- ---------- ---------
End of period $ 0 0 0
=========== ========== =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 35,546 35,931 34,284
Income taxes, net of refunds 1,201 1,751 1,863
Exchange rate adjustment to long-term debt (81) (67) (61)
Non-cash investing activities:
Lease obligations $ 5,095 12,811 26,957
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
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.
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, 1999,
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, 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 has been fully and
unconditionally guaranteed by Holdings.
The two business segments 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.
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.
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.
33
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(c) Inventories
Inventories are valued at the lower of first-in, first-out ("FIFO")
cost or market (net realizable value).
(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. Estimated useful lives used in
computing depreciation and amortization expense are 3 to 15 years for
furniture and fixtures, and machinery and equipment, and 15 to 40
years for buildings and improvements.
(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 segments. 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 discounted
cash flows or other measures of fair value. 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" ("SFAS
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 (as defined
herein) are deferred and amortized over the term of the agreement.
Costs related to the Notes (as defined herein) are deferred and
amortized over the ten-year term of the Notes.
The covenant not to compete is amortized over the five-year term of
the underlying agreement.
(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 interdivisional
accounts are of a long-term investment nature, no transaction
adjustments are included in operations.
34
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(i) 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.
(j) 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.
(k) 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.
(l) 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.
(m) 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.
(n) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 130 "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires that companies
report comprehensive income in either the Statement of Shareholders'
Equity or in the Statement of Operations. Comprehensive income
includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS 130 during the fiscal year ended March 31, 1999
("Fiscal Year 1999"). The adoption of this statement did not have a
material impact on the financial position of the Company.
35
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS
131, which supercedes Statement of Financial Accounting Standard No.
14 "Financial Reporting for Segments of a Business Enterprise,"
changes financial reporting requirements for business segments from an
Industry Segment approach to an Operating Segment approach. Operating
segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources
and in assessing performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company adopted SFAS 131 during
Fiscal Year 1999. See note 17. SFAS 131 requires the Company to
provide disclosures regarding its segments which it has not previously
been required to provide. The disclosures include certain financial
and qualitative data about its operating segments. Management does not
feel this disclosure will have a material effect upon a reader's
assessment of the financial performance and the financial condition of
the Company.
In February 1998, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"), which
standardizes the disclosure requirements for pensions and other
postretirement benefits. SFAS 132 is effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement
in Fiscal Year 1999 and as required by SFAS 132, restated the prior
year disclosure for comparative purposes.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). SOP 98-1 is effective for fiscal years beginning after
December 15, 1998 and requires the capitalization of certain costs
incurred in connection with developing or obtaining software for
internal use after the date of adoption. The Company adopted SOP 98-1
in Fiscal Year 1999. The adoption of SOP 98-1 did not have a material
effect on the results of operations or financial position of the
Company.
In May 1998, the AICPA issued Statement of Position No. 98-5
"Reporting on the Costs of Startup Activities" ("SOP 98-5"). SOP 98-5
requires companies to expense the costs of startup activities
(including organization costs) as incurred. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. The adoption of SOP
98-5 will not have a material effect on the results of operations or
financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). This
statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Earlier adoption is permitted.
Management does not anticipate that the adoption of SFAS 133 will have
a material effect on the Company's results of operations or financial
position.
36
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(2) 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 shut down.
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:
Year Ended March 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Sales $ -- -- 9,786
Cost and expenses -- -- 11,343
--------- -------- --------
Loss before income
taxes -- -- (1,557)
Income taxes -- -- --
--------- -------- --------
Net loss $ -- -- (1,557)
========= ======== ========
(3) Inventories
The components of inventories are as follows (in thousands):
March 31,
-----------------------
1999 1998
-------- --------
Paper $ 6,525 9,161
Ink 232 227
Supplies and other 1,586 1,407
-------- --------
Total $ 8,343 10,795
======== ========
37
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(4) Other Assets
The components of other assets are as follows (in thousands):
March 31,
-----------------------
1999 1998
-------- --------
Deferred financing costs, less accumulated
amortization of $3,278 in 1999 and $5,185
in 1998 $ 7,194 10,104
Spare parts inventory, net of valuation
allowance of $100 in 1999 and 1998 2,293 1,852
Other 2,278 3,650
-------- --------
Total $ 11,765 15,606
======== ========
(5) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
March 31,
-----------------------
1999 1998
-------- --------
Compensation and related taxes $ 10,114 10,004
Employee benefits 8,814 8,755
Interest 4,264 5,028
Other 7,564 7,752
-------- --------
Total $ 30,756 31,539
======== ========
38
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(6) Notes Payable, Long-Term Debt and Capitalized Leases
Long-term debt is summarized as follows (in thousands):
March 31,
-----------------------
1999 1998
-------- --------
Bank Credit Agreement:
Series A Term Loan $ 20,537 --
Series B Term Loan 43,753 --
Term Loan -- 35,979
Revolving Credit Facility Borrowings -- 29,257
-------- --------
64,290 65,236
Old Term Loan Facility -- 25,000
12 3/4% Senior Subordinated Notes
Due 2005 185,000 185,000
Capitalized leases 36,304 38,147
Other loans with varying maturities
and interest rates 3,995 6,274
-------- --------
Total long-term debt 289,589 319,657
Less current installments 7,994 9,131
-------- --------
Long-term debt and capitalized
leases, excluding current
installments $281,595 310,526
======== ========
Refinancing Transaction
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 a syndicate of lenders (the "Bank Credit
Agreement") which included an $11.5 million participation by Morgan Stanley
Senior Funding, Inc., a related party, providing for a $70 million revolving
credit facility which is not subject to a borrowing base limitation (the
"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 Company's previous credit agreement, as
amended (the "Old Bank Credit Agreement") (plus accrued interest to the date of
repayment); (3) the repayment of all $25.0 million of indebtedness outstanding
under the $25 million term loan facility which included a $5 million
participation by Morgan Stanley & Co., Incorporated, a related party, which was
to mature on March 31, 2001 (the "Old Term Loan Facility") (plus accrued
interest to the date of repayment) and (4) the payment of fees and expenses
associated with the 1998 Refinancing. In addition, the Company recorded an
extraordinary loss related to early extinguishment of debt of $4.1 million, net
of zero taxes, associated with the write-off of deferred financing costs related
to refinanced indebtedness in the quarter ended June 30, 1998.
39
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The Senior Subordinated 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.
Interest under the Bank 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. The weighted-average rate on outstanding indebtedness
under the Bank Credit Agreement at March 31, 1999 was 7.1%.
Borrowings under the Bank Credit Agreement are secured by substantially all of
the Company's assets. In addition, Holdings has guaranteed the indebtedness
under the Bank Credit Agreement, which guarantee is secured by a pledge of all
of Graphics' and its subsidiaries' stock. The 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. The Senior Subordinated Notes Indenture's negative covenants are
similar to, but in certain respects are less restrictive than, covenants under
the Bank Credit Agreement. Graphics' ability to pay dividends or lend funds to
Holdings is restricted (see note 1 for a discussion of those restrictions).
The amortization for total long-term debt and capitalized leases at March 31,
1999 is shown below (in thousands):
Long-Term Capitalized
Fiscal year Debt Leases
----------- --------- ------
2000 $ 778 $10,376
2001 6,483 8,862
2002 6,310 7,623
2003 7,166 6,812
2004 26,341 6,149
Thereafter 206,207 7,379
-------- -------
Total $253,285 47,201
========
Imputed interest 10,897
-------
Present value of minimum lease payments $36,304
=======
Capital leases have varying maturity dates and implicit interest rates which
generally approximate 8%-10%. The Company estimates that the carrying amounts of
the Company's debt and other financial instruments approximate their fair values
at March 31, 1999 and 1998.
40
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(7) 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, 1999 and 1998 are as follows (in
thousands):
March 31,
-----------------
1999 1998
---- ----
Deferred tax liabilities:
Book over tax basis in fixed assets $29,579 31,466
Foreign taxes 2,631 3,701
Accumulated amortization 861 766
Other, net 4,449 4,594
------- -------
Total deferred tax liabilities 37,520 40,527
Deferred tax assets:
Bad debts 1,143 830
Accrued expenses and other liabilities 26,877 34,754
Accrued loss on discontinued operations 55 254
Net operating loss carryforwards 40,743 30,420
AMT credit carryforwards 1,262 1,262
Cumulative translation adjustment 984 786
------- -------
Total deferred tax assets 71,064 68,306
Valuation allowance for deferred tax assets 41,460 37,222
------- -------
Net deferred tax assets 29,604 31,084
------- -------
Net deferred tax liabilities $ 7,916 9,443
======= =======
Management has evaluated the need for a valuation allowance, and as
such, a valuation allowance of $41.5 million has been recorded. The
valuation allowance was increased by $4.2 million during the current
fiscal year.
41
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The components of income tax expense are as follows (in thousands):
Year ended March 31,
-------------------------------
1999 1998 1997
----- ----- -----
Amount attributable to
continuing operations $ 523 2,106 2,591
Amount attributable to
discontinued operations -- -- --
----- ----- -----
Total expense $ 523 2,106 2,591
===== ===== =====
Income tax expense (benefit) attributable to loss from continuing
operations consists of (in thousands):
Year ended March 31,
-------------------------------
1999 1998 1997
----- ----- -----
Current
Federal $ -- -- --
State 237 230 145
Foreign 1,589 946 1,535
--------- -------- -------
Total current 1,826 1,176 1,680
--------- -------- -------
Deferred
Federal (132) (108) 354
State (102) (157) 120
Foreign (1,069) 1,195 437
--------- -------- -------
Total deferred (1,303) 930 911
--------- -------- -------
Provision for income taxes $ 523 2,106 2,591
========= ======== =======
42
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The effective tax rates for Fiscal Year 1999, Fiscal Year 1998, and the
fiscal year ending March 31, 1997 ("Fiscal Year 1997") were (6.7%),
(7.8%), and (10.0%), respectively. The difference between these
effective rates relating to continuing operations and the statutory
federal income tax rate is composed of the following items:
Year ended March 31,
-------------------------------
1999 1998 1997
----- ----- -----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
federal tax impact (1.1) (0.2) (0.7)
Foreign taxes, less federal
tax impact (4.4) (5.2) (5.0)
Amortization (6.2) (9.9) (11.9)
Change in valuation
allowance (34.4) (24.1) (28.3)
Other, net 4.4 (3.4) 0.9
----- ----- -----
Effective income tax rate (6.7)% (7.8)% (10.0)%
===== ===== =====
As of March 31, 1999, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $79.1 million, which can
be used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 2000 and will be totally expired
in 2019.
As of March 31, 1999, the Company had available NOL's for federal
purposes of $107.5 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 2019.
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 $89.9
million, which will begin to expire in 2007 and will be completely
expired in 2019.
43
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans
Defined Benefit Pension Plans
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
and fixed income securities. 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.
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 aggregate accumulated projected benefit obligation under this
plan was approximately $2.6 million and $2.1 million at March 31, 1999
and March 31, 1998, respectively.
Defined Benefit Postretirement Plans
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.
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 $3.8
million in Fiscal Year 1999, $3.3 million during Fiscal Year 1998 and
$3.4 million during Fiscal Year 1997.
44
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the changes in the defined
benefit plans' benefit obligations and fair value of plan assets for the Fiscal
Years 1999 and 1998 and a statement of the funded status of such plans as of
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Defined Benefit Defined Benefit
Pension Plans Postretirement Plan
-------------------- -------------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 55,064 49,707 3,766 3,393
Service cost 680 769 30 46
Interest cost 3,901 3,762 181 265
Plan participants' contributions -- -- 148 128
Actuarial loss (gain) 1,468 3,541 (980) 508
Benefits paid (2,649) (2,727) (499) (574)
Curtailment gain (63) 12 -- --
Settlement gain (69) -- -- --
-------- -------- ------- -------
Benefit obligation at end of year $ 58,332 55,064 2,646 3,766
======== ======== ======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ 45,306 41,391 -- --
Actual return on plan assets 6,462 5,984 -- --
Employer contributions 693 780 351 446
Plan participants' contributions -- -- 148 128
Benefits paid (2,978) (2,849) (499) (574)
-------- -------- ------- -------
Fair value of plan assets at end of year $ 49,483 45,306 -- --
======== ======== ======= =======
Funded status $ (8,849) (9,758) (2,646) (3,766)
Unrecognized net actuarial (gain) loss (2,501) 85 (1,537) (1,145)
Unrecognized net transition obligation -- (2,142) -- --
Unrecognized prior service cost (350) (371) (2,522) (2,391)
-------- -------- ------- -------
Accrued benefit cost $(11,700) (12,186) (6,705) (7,302)
======== ======== ======= =======
</TABLE>
45
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Defined Benefit Pension Plans Defined Benefit Postretirement Plan
----------------------------- -----------------------------------
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Weighted - average assumptions:
Discount rate - benefit obligation 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets 10.00% 9.25% N/A N/A
Rate of compensation increase N/A N/A N/A N/A
</TABLE>
For measurement purposes under the defined benefit postretirement plan,
a 7.0 percent annual rate of increase in the per capita cost of covered
health care benefits was assumed for March 31, 1999. The rate was
assumed to decrease gradually to 5 percent through fiscal year 2003 and
remain at that level thereafter.
<TABLE>
<CAPTION>
Defined Benefit Pension Plans Defined Benefit Postretirement Plan
----------------------------- -----------------------------------
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 680 769 30 46
Interest cost 3,876 3,656 181 265
Expected return on plan assets (4,410) (3,715) -- --
Amortization of prior service cost 55 76 (315) (193)
Recognized net actuarial (gain) loss -- (103) (142) (79)
---------- ------- ------ -----
Net periodic benefit cost $ 201 683 (246) 39
========== ======= ====== =====
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the defined benefit postretirement plan. A
one-percentage point change in the assumed health care cost trend rates
would have the following effects:
1% Point 1% Point
Increase Decrease
-------- --------
Effect on total of service and interest
cost components of expense $ 168 158
Effect on postretirement benefit obligation $ 2,273 2,118
(9) 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, 1999, 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
46
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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.
(10) 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
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:
Weighted-
Average
Exercise
Options Price ($)
------- ---------
Outstanding at March 31, 1996 16,499 50.00
Granted 6,015 50.00
Exercised -- --
Forfeited (3,214) 50.00
--------
Outstanding at March 31, 1997 19,300 50.00
Granted 30,014 .01
Exercised (11,773) 14.95
Forfeited (334) 50.00
--------
Outstanding at March 31, 1998 37,207 1.42(a)
Granted 4,283 97.45
Exercised -- --
Forfeited (4,309) 12.23
--------
Outstanding at March 31, 1999 37,181 11.23
========
(a) Reflects Fiscal Year 1998 option repricing discussed below.
The weighted-average grant-date fair value of options granted was $0 for
fiscal years ending March 31, 1999, 1998 and 1997. The weighted-
47
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
average remaining contractual life of the options outstanding at March
31, 1999 was 7.5 years. The options outstanding at March 31, 1999, had
exercise prices ranging from $.01 to $240. Of the options outstanding;
9,698; 1,147 and 9,004 were exercisable at March 31, 1999, 1998 and
1997, respectively. The weighted-average exercise price of the
exercisable options was $.01 at March 31, 1999 and 1998, and $50 at
March 31, 1997. 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. A total of 9,188 shares
(including 362 previously exercised options that were subsequently
cancelled) of Holdings Common Stock were reserved for issuance, but not
granted under the Common Stock Option Plans at March 31, 1999. 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 1999, Fiscal Year 1998 and Fiscal Year
1997: risk-free interest rates of 4.5 - 5.6%, 5.5% and 6.5%,
respectively; no annual dividend yield; volatility factors of 0; and an
expected option life of 5 years.
For the purposes of Fiscal Year 1997 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 equaled $0, earnings were the same for Fiscal Year 1997
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 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 --
Forfeited --
-----
Outstanding at March 31, 1998 526
Granted 29
Exercised --
Forfeited --
-----
Outstanding at March 31, 1999 555
=====
All options were granted with a $1,909 exercise price. The
weighted-average grant-date fair value of options granted was $1,288
and $1,091 for Fiscal Year 1999 and Fiscal Year 1998, respectively. The
weighted-average remaining contractual life of the options outstanding
at March 31, 1999 was 8.8 years. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model. The following weighted-average assumptions were used for Fiscal
Year 1999 and Fiscal Year 1998: risk free interest rate of 5.6% and
5.5%, respectively; 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, 1999. A total of 28 shares of Holdings
Preferred Stock was reserved for issuance, but not granted under the
Preferred Stock Option Plan at March 31, 1999.
As a result of the SFAS 123 requirements, the Company recognized $0.0
million and $0.6 million of related compensation expense in Fiscal Year
1999 and Fiscal Year 1998, respectively.
48
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
The Company incurred rent expense for Fiscal Year 1999, Fiscal Year
1998, and Fiscal Year 1997 of $6.9 million, $6.4 million, and $5.4
million, respectively, under various operating leases. Future minimum
rental commitments under existing operating lease arrangements at March
31, 1999 are as follows (in thousands):
Fiscal Year
-----------
2000 $ 5,051
2001 4,106
2002 3,461
2003 2,216
2004 980
Thereafter 3,589
--------
Total $ 19,403
========
The Company has employment agreements with one of its principal officers
and four 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, 1999, excluding bonuses, was approximately $2.7
million.
On December 21, 1989, Graphics sold to CPS Corp ("CPS"), its ink
manufacturing operations and facilities. Graphics remains contingently
liable under $1.5 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 ended 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, 1999 is $25.7 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
49
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 maintains a reserve of approximately $0.1
million in connection with this liability on its consolidated balance
sheet at March 31, 1999. 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 liabilities that may arise from such actions will not,
individually or in the aggregate, have a material adverse effect on the
consolidated financial statements of the Company.
(12) Significant Customers
No single customer represented 10% or more of total sales in the fiscal
years ended March 31, 1999, 1998 and 1997.
(13) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
Loss
Before
Gross Extraordinary Extraordinary Net Income
Net Sales Profit Item Item (Loss)
------------- ---------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1999:
Quarter Ended
June 30 $ 127,813 18,562 (1,423) (4,020) (5,443)
September 30 126,965 20,014 (1,572) -- (1,572)
December 31 144,296 26,000 3,557 -- 3,557
March 31 121,269 16,676 (8,924) (86) (9,010)
----------- --------- --------- -------- ---------
Total $ 520,343 81,252 (8,362) (4,106) (12,468)
=========== ========= ========= ======== =========
Fiscal Year 1998:
Quarter Ended
June 30 $ 126,128 17,028 (4,950) -- (4,950)
September 30 135,609 17,863 (6,404) -- (6,404)
December 31 145,748 20,370 (2,285) -- (2,285)
March 31 125,850 16,667 (16,256) -- (16,256)
----------- --------- --------- -------- ---------
Total $ 533,335 71,928 (29,895) -- (29,895)
=========== ========= ========= ======== =========
</TABLE>
50
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(14) Restructuring Costs and Other Special Charges
Restructuring Costs:
American Color. In March 1999, the Company approved a plan for its
American Color division which was designed to consolidate certain
facilities in order to improve asset utilization and operational
efficiency, modify the organizational structure as a result of facility
consolidation and other changes and reduce overhead and other 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 $4.6 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 $2.5 million of
employee termination costs, $1.2 million of lease settlement costs and
$0.9 million of other transition and restructuring expenses. This
restructuring charge was recorded in the quarter ended March 31, 1999.
The majority of these costs will be paid or settled before March 31,
2000.
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.
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 was 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. These costs were paid or settled before
March 31, 1999.
Other Special Charges:
During the quarter ended March 31, 1999, the Company recorded special
charges totaling $0.9 million to adjust the carrying values of idle,
disposed and under-performing assets of the American Color division to
estimated fair values. The provision was based on a review of the
Company's long-lived assets in accordance with SFAS 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 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 printing segment to
estimated fair values. The provision was based on a review of the
Company's long-lived assets in accordance with SFAS 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.
51
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
During Fiscal Year 1997, the Company recorded special charges totaling
$1.9 million, 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 initial adoption of SFAS 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.
These special charges are classified within restructuring costs and
other special charges in the consolidated statements of operations.
(15) 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.
(16) 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):
March 31,
--------------------------------
1999 1998
---------- ---------
Balance sheet data:
Current assets $ 71,591 80,163
Noncurrent assets 227,409 249,795
Current liabilities 77,515 69,176
Noncurrent liabilities 341,264 367,490
Year ended March 31,
-------------------------------------
1999 1998 1997
----------- --------- ---------
Statement of operations data:
Sales $ 520,343 533,335 524,551
Operating income 29,455 12,103 10,372
Net loss (12,468) (29,895) (31,703)
52
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(17) Industry Segment Information
Effective March 31, 1999, the Company adopted the provisions of SFAS
131. The Company has restated its sector disclosures in prior years to
conform to the requirements of SFAS 131. The Company has significant
operations principally in two industry segments: (1) printing and (2)
digital imaging and prepress services. All of the Company's printing
business and assets are attributed to the printing division and all of
the Company's digital imaging and prepress business and assets are
attributed to the American Color division ("American Color"). The
Company's digital visual effects operations and corporate expenses have
been segregated and do not constitute a reportable segment of the
Company as contemplated by SFAS 131.
The Company has two reportable segments: (1) printing and (2) digital
imaging and prepress services. The printing business produces retail
advertising inserts, comics (newspaper Sunday comics, comic insert
advertising and comic books), and other publications. The Company's
digital imaging and prepress services business assist 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.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on segment EBITDA which 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. The
Company generally accounts for intersegment revenues and transfers as if
the revenues or transfers were to third parties, that is, at current
market prices.
The Company's reportable segments are business units that offer
different products and services. They are managed separately because
each segment requires different technology and marketing strategies. A
substantial portion of the revenue, long-lived assets and other assets
of the Company's reportable segments are attributed to or located in the
United States.
<TABLE>
<CAPTION>
Digital
Imaging & Corporate and
(In Thousands of Dollars) Printing Prepress Other Total
------------------------------------------------------ ----------- ----------- ------------- ----------
1999
<S> <C> <C> <C> <C>
Segment revenues $ 431,936 83,816 4,591 520,343
EBITDA $ 61,627 5,283 (2,624) 64,286
Depreciation and amortization 22,633 6,670 4,373 33,676
Interest expense -- -- 36,242 36,242
Interest income -- -- (165) (165)
Other charges, net -- 1,155 -- 1,155
Other, net 24 819 374 1,217
----------- -------- -------- ---------
Income (loss) from continuing operations before
income taxes and extraordinary items $ 38,970 (3,361) (43,448) (7,839)
Total assets $ 256,641 30,451 11,908 299,000
Total capital expenditures $ 9,369 6,051 818 16,238
</TABLE>
53
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Digital
Imaging & Corporate and
(In Thousands of Dollars) Printing Prepress Other Total
- ------------------------- -------- -------- ------------- -----
<S> <C> <C> <C> <C>
1998
Segment revenues $446,350 82,384 4,601 533,335
EBITDA $ 46,838 8,405 (2,876) 52,367
Depreciation and amortization 22,499 6,001 10,037 38,537
Interest expense -- -- 38,956 38,956
Interest income -- -- (143) (143)
Other special charges - SFAS 121 1,727 -- -- 1,727
Other, net 207 (206) 411 412
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes $ 22,405 2,610 (52,137) (27,122)
Total assets $278,965 33,351 17,642 329,958
Total capital expenditures $ 14,438 7,291 1,984 23,713
- ---------------------------------------------------------------------------------------------------
1997
Segment revenues $449,924 71,712 2,915 524,551
EBITDA $ 46,755 5,180 (4,963) 46,972
Depreciation and amortization 20,431 5,017 9,208 34,656
Interest expense -- -- 36,289 36,289
Interest income -- -- (157) (157)
Other special charges - SFAS 121 466 1,478 -- 1,944
Other, net 179 93 (27) 245
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes $ 25,679 (1,408) (50,276) (26,005)
Total assets $282,519 34,208 17,248 333,975
Total capital expenditures $ 27,844 5,681 4,242 37,767
</TABLE>
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
<PAGE>
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,
1999). All directors hold office until their successors are duly elected and
qualified.
Name Age Position with Graphics and Holdings
- ---- --- -----------------------------------
Stephen M. Dyott 47 Chairman, President, Chief Executive Officer
and Director
Michael M. Janson 50 Director
Eric T. Fry 32 Director
Joseph M. Milano 46 Executive Vice President and Chief Financial
Officer
Larry R. Williams 58 Executive Vice President Purchasing of Graphics
Timothy M. Davis 44 Senior Vice President-Administration, Secretary
and General Counsel
Malcolm J. Anderson 60 Executive Vice President Operations of Graphics
Patrick W. Kellick 41 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 Dean Witter Capital
Partners ("MSDWCP") and of Morgan Stanley & Co., Incorporated ("MS&Co."); 1987
joined MS&Co.; 1997 joined MSDWCP; Managing Director in MS&Co.'s High Yield
Capital Markets Department before joining MSDWCP; Director of Choice One
Communications Inc., Silgan Holdings Inc., and Renaissance Media Group.
Eric T. Fry - Director of Graphics and Holdings since March 1996; Vice President
of the general partner of MSDWCP and MS&Co.; Joined MS&Co. in 1989, initially in
the Mergers and Acquisitions Department and from 1991 to 1992 in MSDWCP; From
1992 to 1994 attended Harvard Business School and received an MBA; Rejoined
MSDWCP 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.
Larry R. Williams - Executive Vice President, Purchasing of Graphics since 1997;
Senior Vice President - Purchasing, Marketing and Newspaper Sales of Graphics
from 1996 to 1997; Senior Vice President of Purchasing / Transportation of
Graphics from 1993 to 1996; Independent Management Consultant from 1992 to 1993
and Senior Vice President, Operations Support for Ryder Systems from 1990 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.
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 Packaging, American National Can Company from 1982 to
1989; Vice President, Eastern Division General Manager of Sinclair and Valentine
Ink Company from 1980 to 1982.
56
<PAGE>
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 for services to
Holdings and Graphics during the fiscal years ended March 31, 1999, 1998 and
1997 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>
Long-Term Compensation
---------------------------------
Annual 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 1999 $517,311 $800,000 -- -- -- -- --
Chairman, President and Fiscal Year 1998 $475,000 $525,000 -- -- 9,462 -- --
Chief Executive Officer Fiscal Year 1997 $463,462 $350,000 -- -- 1,761 -- --
& Director
Joseph M. Milano Fiscal Year 1999 $287,981 $325,000 -- -- 29 -- --
Executive Vice President Fiscal Year 1998 $275,000 $290,000 -- -- 5,217 -- --
& Chief Financial Officer Fiscal Year 1997 $260,097 $150,000 -- -- 760 -- --
Larry R. Williams Fiscal Year 1999 $300,000 $200,000 -- -- -- -- --
Executive Vice President Fiscal Year 1998 $300,000 $200,000 -- -- 1,158 -- --
Purchasing of Graphics Fiscal Year 1997 $230,000 $105,000 -- -- 125 -- --
Timothy M. Davis Fiscal Year 1999 $252,308 $225,000 -- -- -- -- --
Senior Vice Fiscal Year 1998 $233,200 $160,000 -- -- 2,538 -- --
President-Administration, Fiscal Year 1997 $220,562 $110,000 -- -- 290 -- --
Secretary & General
Counsel
Malcolm J. Anderson Fiscal Year 1999 $240,385 $225,000 -- -- -- -- --
Executive Vice President Fiscal Year 1998 $230,000 $200,000 -- -- 1,158 -- --
Operations of Graphics Fiscal Year 1997 $230,000 $105,000 -- -- 125 -- --
</TABLE>
57
<PAGE>
The following table presents information concerning the options granted to the
Named Executive Officers during the last fiscal year. All outstanding options
issued prior to April 8, 1993 were canceled in connection with the 1993
Acquisition.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Alternative
To (f) and (g)
Grant Date
Individual Grants Value
- ------------------------------------------------------------------------------------------------------ ---------------
% of Total
Options/
Number of SAR's
Securities Granted to Grant
Underlying Employees Exercise or Date
Options/SAR's in Fiscal Base Price Expiration Present
Name Granted (#) Year 1999 ($/sh) Date Value ($)
---- ----------- --------- ------ ---- ---------
<S> <C> <C> <C> <C> <C>
Preferred Plan
Joseph M. Milano 29(a) 100% 1,908.76 06/04/2008 37,352(b)
</TABLE>
- ----------
(a) Options granted to Joseph M. Milano on June 4, 1998 were granted
pursuant to the ACG Holdings, Inc. Preferred Stock Option Plan at an
exercise price of $1,908.76 and the underlying securities had a per
share fair market value on the date of grant of $3,000. These options
were fully vested and exercisable on the date of grant.
(b) The grant date present value shown in the table is based on
calculations using a Black-Scholes option pricing model with the
following weighted-average assumptions at the date of grant: risk free
interest rate of 5.59%; no annual dividend yield; volatility factor of
0; and an expected option life of two years.
The following table presents information concerning the fiscal year-end value of
unexercised stock options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Shares Acquired Value Options/SAR's at 3/31/99 SAR's at 3/31/99
on Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable($)
---------------- --------------- ------------------------- ---------------------------
<S> <C> <C> <C> <C>
Common Plan (a)
Stephen M. Dyott -- -- 3,042.50 / 7,853 (a)
Joseph M. Milano -- -- 1,783.25 / 4,336.75 (a)
Larry R. Williams -- -- 452.25 / 931 (a)
Timothy M. Davis -- -- 840.75 / 2,048.50 (a)
Malcolm J. Anderson -- -- 452.25 / 931 (a)
Preferred Plan (b)
Stephen M. Dyott -- -- 292 / 0 318,642 / 0 (b)
Joseph M. Milano -- -- 175 / 0 190,967 / 0 (b)
Timothy M. Davis -- -- 88 / 0 96,029 / 0 (b)
</TABLE>
(a) Holdings' common stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. The values
set forth in the table are based on our estimate of the fair market value
of the common stock at March 31, 1999. Holdings believes the exercise price
of the options held by the Named Executive Officers at March 31, 1999, was
in each case greater than the fair market value of the underlying shares of
Holdings' common stock as of such date.
(b) Holdings' preferred stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. The values
set forth in the table are based on our estimate of the fair market value
of the preferred stock at March 31, 1999.
58
<PAGE>
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.
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 8 to our
consolidated financial statements appearing elsewhere in this Report).
At March 31, 1999, all of the Named Executive Officers had vested in the pension
plan. At March 31, 1999, 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),
Larry R. Williams (1 year, 5 months; $3,192), Timothy M. Davis (5 years, 5
months; $11,700) and Malcolm J. Anderson (1 year, 3 months; $2,820).
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.
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 five 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, Williams, Davis and Anderson) and retirement on or after attaining age
65 or the present value of such benefit at an earlier date under certain
circumstances. 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
Larry R. Williams $ 50,000
Timothy M. Davis $ 75,000
Malcolm J. Anderson $ 50,000
Such benefits will be paid from our assets (see note 8 to our consolidated
financial statements appearing elsewhere in this Report).
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 "Dyott Employment Agreement"). The Dyott
Employment Agreement superseded previous employment agreements.
59
<PAGE>
The Dyott Employment Agreement had an initial term of four years commencing as
of the effective time Acquisition Corp. merged with and into Holdings. The term
under the Dyott Employment Agreement is therefore automatically extended for
one-year periods absent two year's written notice of an intent by either party
not to renew. The Dyott 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 Dyott Employment Agreement, Mr. Dyott is
eligible to receive all other employee benefits and perquisites made available
to Graphics' senior executives generally.
Under the Dyott Employment Agreement, if the employee's employment is terminated
by Graphics "without cause" ("cause", as defined in the Dyott Employment
Agreement, means a material breach by the employee of his obligations under the
Dyott 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 Dyott 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 Dyott Employment Agreement), the employee will be entitled
to a pro rata portion of the bonus for the year employment was terminated
payable at the time bonuses are generally paid and 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 Dyott Employment Agreement contains confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the second anniversary of the date employment has ceased.
On July 15, 1998 Graphics entered into severance agreements with Joseph M.
Milano and Timothy M. Davis which provide that in the event the employee's
employment is terminated by Graphics without "cause", as defined above (but also
including as "cause" competition with Graphics), or by the employee for "good
reason", as defined above, the employee will be entitled to a pro rata portion
of the bonus for the year employment was terminated payable at the time bonuses
are generally paid and salary and benefit continuation for three years following
termination. The severance agreements contain confidentiality obligations that
survive indefinitely and non-solicitation and non-competition obligations that
end on the third anniversary of the date employment has ceased.
Graphics is also a party to letter agreements with Larry R. Williams and Malcolm
J. Anderson which provide for a term of employment with an initial period of two
years with one year automatic extensions. Such agreements also provide that in
the event the employee's employment is terminated by Graphics without "cause",
as defined in the severance agreements above, or by the employee for "good
reason", as defined above, the employee will be entitled to base salary
continuation for two years following termination. Such base salary payments will
be reduced to the extent the employee receives compensation from another
employer. The letter agreements contain confidentiality obligations that survive
indefinitely and non-solicitation and non-competition obligations that end on
the second anniversary of the date employment has ceased.
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 held the title of Vice Chairman of
Holdings. Mr. Sullivan received 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
was 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. Supplemental Executive Retirement Plan. Mr.
Sullivan's resignation agreement also contains certain non-competition and
non-solicitation obligations that end on April 8, 2001 as well as
confidentiality obligations that continue indefinitely.
Compensation Committee Interlocks and Insider Participation
We have not maintained a formal compensation committee since the 1993
Acquisition. Mr. Dyott sets compensation in conjunction with the Board of
Directors.
60
<PAGE>
Repriced Options
During Fiscal Year 1998, certain common stock option agreements were modified to
reprice options previously granted with a $50 exercise price to a $.01 exercise
price. Based upon the Board of Directors determination, the new exercise price
was not less than the fair market value of such options. See note 10 to our
consolidated financial statements appearing elsewhere in this Report. The
following table presents information concerning all repricing of options and
SARs held by any executive officer during the last ten completed fiscal years.
Ten Year Option / SAR Repricings
<TABLE>
<CAPTION>
Number of Market Price
Securities of Stock at Exercise Length of
Underlying Time of Price at New Original Option
Options/SARs Repricing or Time of Exercise Term Remaining at
Repriced or Amendment Repricing Price Date of Repricing
Name Date Amended (#) ($) ($) ($) or 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 Officer 01/16/98 859 -- 50 .01 6 yrs. 5 mo.
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 President and 01/16/98 614 -- 50 .01 7 yrs. 6 mo.
Chief Financial Officer 01/16/98 688 -- 50 .01 6 yrs. 5 mo.
01/16/98 102 -- 50 .01 5 yrs. 0 mo.
Larry R. Williams 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
Executive Vice President 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
Purchasing of Graphics
Timothy M. Davis 01/16/98 290 -- 50 .01 8 yrs. 6 mo.
Senior Vice President - 01/16/98 535 -- 50 .01 6 yrs. 5 mo.
Administration, Secretary 01/16/98 255 -- 50 .01 5 yrs. 0 mo.
and General Counsel
Malcolm J. Anderson 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
Executive Vice President 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
Operations of Graphics
Patrick W. Kellick 01/16/98 257 -- 50 .01 8 yrs. 6 mo.
Senior Vice President/ 01/16/98 105 -- 50 .01 6 yrs. 5 mo.
Corporate Controller and
Assistant Secretary
</TABLE>
61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1999, concerning the
persons having beneficial ownership of more than five percent of the capital
stock of Holdings and the beneficial ownership thereof by each director and
Named Executive Officer of Holdings and by all directors and executive 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 44.3 2,727 52.2
MSCP III Entities (a)
1221 Ave. of the Americas
New York, NY 10020 23,332 17.4 1,070 20.5
First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 12.7 780 14.9
Leeway & Co.
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171 10,667 8.0 489 9.4
Directors and Named Executive Officers:
Stephen M. Dyott (b) 7,117 5.2 315 5.7
Joseph M. Milano (c) 2,898 2.1 175 3.2
Larry R. Williams (d) 878 0.7 -- --
Timothy M. Davis (e) 1,570 1.2 88 1.7
Malcolm J. Anderson (f) 878 0.7 -- --
Michael M. Janson -- -- -- --
Eric T. Fry -- -- -- --
All current directors and
executive officers as a group (g) 16,492 11.6 583 10.1
<FN>
(a) Includes Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III
892 Investors, L.P.
(b) Includes 3,042 common stock options and 292 preferred stock options exercisable within 60 days.
(c) Includes 1,783 common stock options and 175 preferred stock options exercisable within 60 days.
(d) Includes 452 common stock options exercisable within 60 days.
(e) Includes 841 common stock options and 88 preferred stock options exercisable within 60 days.
(f) Includes 452 common stock options exercisable within 60 days.
(g) Includes 7,999 common stock options and 555 preferred stock options exercisable within 60 days.
</FN>
</TABLE>
62
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
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.
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, 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 MSDW. MSDW 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 MSDW. As a result of these relationships, MSDW may be deemed to
control the management and policies of Graphics and Holdings. In addition, MSDW
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 our 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 us 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 "Series AA Threshold Amount" (as defined in section
4.02(e)(viii) 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 Shakopee Merger, Holdings, MSLEF
II, other entities affiliated with MSDW and the other stockholders of Holdings
entered into an amended and restated stockholders' agreement, dated as of August
14, 1995. The stockholders' agreement includes provisions requiring the delivery
of certain shares of Holdings' common stock from the "Purchasers", as defined in
the stockholders' agreement, which includes MSLEF II, certain institutional
investors and members of management, to Holdings, depending upon the return
realized by the Purchasers on their investment, and thereafter from Holdings to
the "Existing Holders," as defined in the stockholders' agreement, which
includes the stockholders' of Holdings immediately prior to the 1993
Acquisition. Depending upon the returns realized by the Purchasers on their
investment, their interest in the Holdings' common stock could be reduced and
the interest of the Existing Holders could be increased. The stockholders'
agreement gives the Existing Holders, the right to designate a director of
Holdings and the entities affiliated with MSDW also the right to designate a
director. The stockholders' agreement contains rights of first refusal with
regard to the issuance by Holdings of equity securities and sales by the
stockholders of equity securities of Holdings owned by them, specified tag along
and drag along provisions and registration rights. The stockholders' agreement
also restricts our ability to enter into affiliate transactions unless the
transaction is fair and reasonable, with terms no less favorable to us than if
the transaction was completed on an arm's length basis.
63
<PAGE>
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.
Preferred Stock Option Plan
In Fiscal Year 1998, we 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 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 1999 and
Fiscal Year 1998, we granted options to purchase 29 shares and 526 shares,
respectively, of preferred stock to certain key executives, at an exercise price
of $1,909/share. See note 10 to our consolidated financial statements appearing
elsewhere in this Report.
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 Old 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 Bank 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.
64
<PAGE>
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, 1999 and 1998
For the Years Ended March 31, 1999, 1998 and 1997:
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............. 67
Condensed Financial Statements (parent company only)
for the years ended March 31, 1999, 1998, and 1997
and as of March 31, 1999 and 1998
II. Valuation and qualifying accounts........................ 74
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**
10.1 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++++
10.1(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(b) February 3, 1999, Second 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****
65
<PAGE>
Exhibit No. Description
- ----------- -----------
10.2 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.3(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.3(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.3(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott***
10.4 Severance Letter, dated September 1, 1995, between Graphics
and Larry R. Williams
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis
10.7 Severance Letter, dated September 8, 1995, between Graphics
and M. J. Anderson++++
10.8 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**
10.8(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 herein++++
10.9 Stock Option Plan of Holdings++
10.10 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++++
10.11 Holdings Common Stock Option Plan++++
10.12 Holdings Preferred Stock Option Plan++++
12.1 Statement Re: Computation of Ratio of Earnings to Fixed
Charges
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 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 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, 1998 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 - 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 1999:
1. Form 8-K filed with the Securities and Exchange Commission on February
4, 1999 under Item 5 to announce ACG's EBITDA for the three months ended
December 31, 1998.
ACG did not file any other reports on Form 8-K during the three months ended
March 31, 1999.
66
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
-------------------------------
1999 1998
-------------- --------------
Assets
Current assets:
Receivable from subsidiary $ 601 676
-------------- --------------
Total assets $ 601 676
============== ==============
See accompanying notes to condensed financial statements.
67
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Income taxes payable $ 128 53
------------- -----------
Total current liabilities 128 53
Liabilities of subsidiary in excess of assets 119,779 106,708
------------- -----------
Total liabilities 119,907 106,761
------------- -----------
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 134,250 shares and 134,812
shares issued and outstanding at March 31, 1999
and 1998, respectively 1 1
Preferred Stock, $.01 par value, 15,823 shares
authorized, 3,622 shares and 3,631 shares
series AA convertible preferred stock issued and
outstanding at March 31, 1999 and 1998, respectively,
$40,000,000 liquidation preference, 1,606 shares
Series BB convertible preferred stock issued and
outstanding at March 31, 1999 and 1998, $17,500,000
liquidation preference -- --
Additional paid-in capital 58,286 58,249
Accumulated deficit (174,905) (162,250)
Other accumulated comprehensive loss, net of tax (2,688) (2,085)
------------- -----------
Total stockholders' deficit (119,306) (106,085)
------------- -----------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 601 676
============= ===========
</TABLE>
See accompanying notes to condensed financial statements.
68
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(In thousands)
Year Ended March 31,
--------------------------------------------
1999 1998 1997
-------------- ------------ ------------
Equity in loss of subsidiary $ (12,468) (29,895) (31,703)
-------------- ------------ ------------
Net loss $ (12,468) (29,895) (31,703)
============== ============ ============
See accompanying notes to condensed financial statements.
69
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(In thousands)
Year Ended March 31,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
Cash flows from operating activities -- -- --
Cash flows from investing activities -- -- --
Cash flows from financing activities -- -- --
----------- ---------- ----------
Net change in cash -- -- --
=========== ========== ==========
See accompanying notes to condensed financial statements.
70
<PAGE>
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, 1999, 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 ACG's consolidated financial statements. The Acquisition was
accounted for under the purchase method of accounting applying the
provisions on Accounting Principles Boards Opinion No. 16 ("APB 16").
2. Guarantees
As set forth in ACG's consolidated financial statements, a substantial
portion of Graphics' long-term obligations has 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.
71
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
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, ACG refinanced all outstanding indebtedness under the Old
Bank Credit Agreement and the Old 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. Refinancing Transaction
On May 8, 1998, ACG completed a refinancing transaction (the "1998
Refinancing") which included the following: (1) ACG entered into a $145
million credit facility with a syndicate of lenders (the "Bank Credit
Agreement") which includes an $11.5 million participation by Morgan
Stanley Senior Funding, Inc., a related party, providing for a $70 million
revolving credit facility which is not subject to a borrowing base
limitation (the "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 ACG's previous
credit agreement, as amended (the "Old Bank Credit Agreement") (plus
accrued interest to the date of repayment); (3) the repayment of all $25.0
million of indebtedness outstanding under the $25 million term loan
facility which included a $5 million participation by Morgan Stanley
Senior Funding, Inc., a related party, which was to mature on March 31,
2001 (the "Old Term Loan Facility") (plus accrued interest to the date of
repayment) and (4) the payment of fees and expenses associated with the
1998 Refinancing. In addition, ACG recorded an extraordinary loss related
to early extinguishment of debt of $4.1 million, net of zero taxes,
associated with the write-off of deferred financing costs related to
refinanced indebtedness in the quarter ended June 30, 1998.
Interest under the Bank Credit Agreement is floating based upon existing
market rates plus agreed upon margin levels. In addition, ACG 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.
72
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
Borrowings under the Bank Credit Agreement are secured by substantially
all of ACG's assets. In addition, Holdings has guaranteed the indebtedness
under the Bank 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.
73
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
<TABLE>
<CAPTION>
Balance Additions Balance
at Charged at
Beginning to Other End of
of Period Expense Write-offs Adjustments Period
--------- -------- ---------- ----------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year ended March 31, 1999
Allowance for doubtful
accounts $ 2,112 2,510 (1,762) -- $ 2,860
Reserve for inventory
obsolescence $ 265 374 (51) -- $ 588
Income tax valuation
allowance $37,222 -- -- (a) 4,238 $ 41,460
Fiscal Year ended March 31, 1998
Allowance for doubtful
accounts $ 5,879 908 (4,675) -- $ 2,112
Reserve for inventory
obsolescence $ 169 184 (47) (41) $ 265
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 $ 711 318 (45) (815) $ 169
Income tax valuation
allowance $ 21,210 -- -- (a) 8,928 $ 30,138
</TABLE>
(a) The increase in the valuation allowance primarily relates to current year
losses for which no tax benefit has been recorded.
74
<PAGE>
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, 1999
-----------------------------------
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, 1999
(Joseph M. Milano) Chief Financial Officer
/s/ Patrick W. Kellick
- --------------------------- Senior Vice President June 29, 1999
(Patrick W. Kellick) Corporate Controller
Assistant Secretary
(Principal Accounting Officer)
/s/ Michael M. Janson
- --------------------------- Director June 29, 1999
(Michael M. Janson)
/s/ Eric T. Fry
- --------------------------- Director June 29, 1999
(Eric T. Fry)
75
<PAGE>
ACG HOLDINGS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 1999
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**
10.1 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++++
10.1(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(b) February 3, 1999, Second 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****
10.2 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.3(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.3(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.3(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott***
10.4 Severance Letter, dated September 1, 1995, between Graphics
and Larry R. Williams
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis
10.7 Severance Letter, dated September 8, 1995, between Graphics
and M. J. Anderson++++
10.8 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**
10.8(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 herein++++
10.9 Stock Option Plan of Holdings++
10.10 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++++
10.11 Holdings Common Stock Option Plan++++
10.12 Holdings Preferred Stock Option Plan++++
12.1 Statement Re: Computation of Ratio of Earnings to Fixed
Charges
21.1 List of Subsidiaries
27.0 Financial Data Schedule
<PAGE>
- -----------
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
** 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 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, 1998 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 - Commission file number 33-97090.
<PAGE>
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 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 from 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.
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 New 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++
10.1 Credit Agreement, dated as of August 15, 1995 and 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++++
II-1
<PAGE>
10.1(a) June 8, 1998, First Amendment to 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(b) February 3, 1999, Second Amendment to 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****
10.2 Resignation Letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.3(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.3(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.3(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott***
10.4 Severance Letter, dated September 1, 1995, between Graphics
and Larry Williams*****
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano*****
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis*****
10.7 Severance Letter, dated September 8, 1995, between Graphics
and M.J. Anderson++++
10.8 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**
10.8(a) Amendment No. 1, dated January 16, 1998, to 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 Stock Option Plan of Holdings++
10.10 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++++
10.11 Common Stock Option Plan of Holdings++++
10.12 Preferred Stock Option Plan of Holdings++++
12.1 Statements re computation of ratio of earnings to fixed
charges*****
21.1 List of Subsidiaries of Holdings*****
23.1 Consent of Ernst & Young LLP
23.2 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)**
_________________
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on October
4, 1993 - Registration number 33-65702.
** 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 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, 1998 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 - Commission file number 33-97090.
II-2
<PAGE>
***** Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1999 - 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 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 paying 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 their 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.
II-3
<PAGE>
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 9, 1999.
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Joseph M. Milano
-------------------------------
Joseph M. Milano
Executive Vice President and
Chief 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 9, 1999.
Signature Title
- --------- -----
Chairman, Chief Executive Officer, President and
* Director
- ------------------------- (Principal Executive Officer)
Stephen M. Dyott
/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
-------------------------
Joseph M. Milano
Attorney-in-fact
II-4
<PAGE>
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 9, 1999.
ACG HOLDINGS, INC.
By: /s/ Joseph M. Milano
-------------------------------
Joseph M. Milano
Executive Vice President and
Chief 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 9, 1999.
Signature Title
- --------- -----
Chairman, Chief Executive Officer, President and
* Director
- ------------------------- (Principal Executive Officer)
Stephen M. Dyott
/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
-------------------------
Joseph M. Milano
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
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 New 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++
10.1 Credit Agreement, dated as of August 15, 1995 and 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(a) June 8, 1998, First Amendment to 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(b) February 3, 1999, Second Amendment to 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****
10.2 Resignation Letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.3(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.3(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.3(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott***
10.4 Severance Letter, dated September 1, 1995, between Graphics
and Larry Williams*****
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano*****
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis*****
10.7 Severance Letter, dated September 8, 1995, between Graphics
and M.J. Anderson++++
10.8 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**
10.8(a) Amendment No. 1, dated January 16, 1998, to 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
<PAGE>
additional parties named therein++++
10.9 Stock Option Plan of Holdings++
10.10 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++++
10.11 Common Stock Option Plan of Holdings++++
10.12 Preferred Stock Option Plan of Holdings++++
12.1 Statements re computation of ratio of earnings to fixed
charges*****
21.1 List of Subsidiaries of Holdings*****
23.1 Consent of Ernst & Young LLP
23.2 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)**
____________________
* Incorporated by reference from Amendment No. 2 to Form S-1 filed
on October 4, 1993 - Registration number 33-65702.
** 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 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, 1998 - Commission file number
33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 - Commission file number
33-97090.
***** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1999 - Commission file number
33-97090.
EXHIBIT 23.1
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 25, 1999, included in the Annual Report (Form 10-K)
of ACG Holdings, Inc. and American Color Graphics, Inc. that is made a part of
the Post-Effective Amendment No. 5 to the Registration Statement (Form S-1, No.
33-97090) and related Prospectus of ACG Holdings, Inc. and American Color
Graphics, Inc. for the registration of $185,000,000 of 12 3/4% Senior
Subordinated Exchange Notes Due 2005 of American Color Graphics, Inc.
/s/ Ernst & Young LLP
Nashville, Tennessee
July 7, 1999
