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.
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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.
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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.
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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
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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
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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.
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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.
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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.
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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
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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.
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION
OF
ACG HOLDINGS, INC.
ARTICLE 1
NAME
SECTION 1.01. Name. The name of the corporation is ACG Holdings, Inc.
(the "Corporation").
ARTICLE 2
REGISTERED OFFICE AND REGISTERED AGENT
SECTION 2.01. Office and Agent. The address of the registered office of
the Corporation in the State of Delaware is Corporation Trust Center, 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of the
registered agent of the Corporation at such address is The Corporation Trust
Company.
ARTICLE 3
CORPORATE PURPOSE
SECTION 3.01. Purpose. The purpose of the Corporation is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware (the "General Corporation
Law").
<PAGE>
ARTICLE 4
CAPITALIZATION
SECTION 4.01. Authorized Capital. The total number of shares of capital
stock that the Corporation shall have authority to issue is five million eight
hundred sixty eight thousand forty six (5,868,046), of which five million eight
hundred fifty two thousand two hundred twenty three (5,852,223) shall be shares
of Common Stock, par value $.01 per share (the "Common Stock"), and fifteen
thousand eight hundred twenty three (15,823) shall be shares of preferred stock,
par value $.01 per share (the "Preferred Stock").
Shares of the Preferred Stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors of
the Corporation (the "Board of Directors") prior to the issuance of any shares
thereof. Each such class or series of the Preferred Stock shall have such voting
powers, full or limited, or no voting powers, and such other relative rights,
powers and preferences, including, without limitation, the dividend rate,
conversion rights, if any, redemption price and liquidation preference, and such
qualifications, limitations or restrictions thereof, as shall be stated in such
resolution or resolutions providing for the issuance of such class or series of
the Preferred Stock as may be adopted from time to time by the Board of
Directors prior to the issuance of any shares thereof pursuant to the authority
hereby expressly vested in the Board of Directors, all in accordance with the
laws of the State of Delaware. The number of authorized shares of Preferred
Stock may be increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of the holders of a majority of the
stock of the Corporation entitled to vote irrespective of the provisions of
Section 242(b)(2) of the General Corporation Law.
Effective upon filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware ("Effective
Time"):
(i) each outstanding share of Series A Preferred Stock, par value $.01
per share of the Corporation (the "Series A Preferred Stock"), shall,
without any action on the part of the holder thereof, be reclassified
as, and converted into, 0.9175131 fully paid and nonassessable shares
of Series AA Preferred Stock, par value $.01 of the Corporation; and
(ii) each outstanding share of Series B Preferred Stock, par value $.01
per share of the Corporation (the "Series B Preferred Stock"), shall,
without any action on the part of the holder thereof, be reclassified
as, and
2
<PAGE>
converted into, 0.9175131 fully paid and nonassessable shares
of Series BB Preferred Stock, par value $.01 of the Corporation.
For purposes of this Amended and Restated Certificate of Incorporation,
the Series A Preferred Stock and the Series B Preferred Stock are sometimes
hereafter collectively referred to as the "Previously Issued Preferred Stock".
As of the Effective Time, each holder of shares of Previously Issued
Preferred Stock shall, upon surrender to the Corporation of a certificate or
certificates representing such shares, be entitled to receive from the
Corporation that number of shares of Series AA Preferred Stock or Series BB
Preferred Stock (as the case may be) calculated as set forth in paragraphs (i)
and (ii) above. Until so surrendered, each such certificate shall, after the
date hereof, represent for all purposes, only the right to receive that number
of shares of Preferred Stock as so calculated. After the date hereof, there
shall be no further registration of transfers of shares of Previously Issued
Preferred Stock.
SECTION 4.02. Stock. The following is a description of each of the
classes of capital stock which the Corporation shall have authority to issue,
with the designations, preferences, voting powers and participating, optional or
other special rights and the qualifications, limitations or restrictions
thereof:
(a) Series AA Preferred Stock. Four thousand thirty eight (4,038)
shares of the Preferred Stock of the Corporation shall be designated "Series AA
Preferred Stock".
(i) Dividends.
(A) The holders of outstanding shares of Series AA
Preferred Stock, as a group, shall be entitled to receive,
when, as and if declared by the Board of Directors, at its
sole discretion, out of assets legally available for such
purpose, cash distributions equal, in the aggregate, to the
Series AA Initial Investment. Upon the payment of all
distributions required by this Section 4.02(a)(i)(A), the
holders of shares of Series AA Preferred Stock shall not be
entitled to receive any further dividends or distributions
from the Corporation.
(B) So long as any shares of Series AA Preferred Stock
are outstanding, the Corporation shall not pay or declare or
set aside for payment any dividend or distribution payable in
cash, evidences of indebtedness, assets or property other than
cash, or capital stock of the Corporation ranking equally with
or senior to
3
<PAGE>
the Series AA Preferred Stock in respect of dividends or
distributions, or make any other distribution on any Common
Stock or any other class or series of stock of the Corporation
ranking junior to the Series AA Preferred Stock in respect of
dividends or distributions, unless the Corporation has paid,
or at the same time pays or provides for the payment of, all
distributions on the outstanding shares of Series AA Preferred
Stock required by Section 4.02(a)(i)(A). Until all such
distributions have been paid in full, all dividends declared
and paid on the shares of Series AA Preferred Stock and
Series BB Preferred Stock shall be declared and paid pro
rata based on the then applicable Series AA Threshold Amount
and Series BB Threshold Amount.
(C) All distributions made to the holders of Series AA
Preferred Stock pursuant to this Section 4.02(a)(i) shall be
evenly divided among all outstanding shares of Series AA
Preferred Stock at the time each such distribution is made.
(ii) Conversion.
(A) Each outstanding share of Series AA Preferred Stock
may be converted, at the option of the holder thereof, into
fully paid and nonassessable shares of Common Stock, at the
times, using the conversion ratios and subject to the
conditions set forth in Sections 4.02(a)(ii)(B) and
4.02(a)(ii)(C), subject to, and upon compliance with, the
provisions of this Section 4.02(a)(ii).
(B) In the event the Corporation effects an Initial
Public Offering, the holders of the Series AA Preferred Stock
shall have the right, at any time and from time to time
thereafter, to convert any or all of their outstanding shares
of Series AA Preferred Stock into such number of shares of
Common Stock per share of Series AA Preferred Stock as is
obtained by dividing (x) the number obtained by dividing (I)
the then applicable Series AA Threshold Amount by (II) the
price per share of the Common Stock sold by the Corporation in
the Initial Public Offering as set forth in the final
amendment to the registration statement therefor by (y) the
number of shares of Series AA Preferred Stock outstanding
immediately prior to the Initial Public Offering.
(C) In the event that MSLEF II and the MSCP Entities
shall, collectively, exercise their rights under Section 3.08
of the Stockholders' Agreement, the holders of the Series AA
Preferred
4
<PAGE>
Stock shall have the right, at the time of the sale
contemplated by Section 3.08 of the Stockholders' Agreement,
to convert any or all of their outstanding shares of Series AA
Preferred Stock into such number of shares of Common Stock per
share of Series AA Preferred Stock as is obtained by dividing
(x) the number obtained by dividing (I) the then applicable
Series AA Threshold Amount by (II) the per share price
received by MSLEF II and the MSCP Entities for their Common
Stock in the sale contemplated by Section 3.08 of the
Stockholders' Agreement by (y) the number of shares of Series
AA Preferred Stock outstanding immediately prior to the sale
contemplated by Section 3.08 of the Stockholders' Agreement.
(D) Each conversion of a share or shares of Series AA
Preferred Stock into a share or shares of Common Stock shall
be effected by the surrender of the certificate or
certificates evidencing the share or shares of Series AA
Preferred Stock to be converted (for purposes of this Section
4.02(a)(ii)(D), the "Converting Shares"), duly assigned to the
Corporation or endorsed in blank, at the principal office of
the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by written notice
to the holders of Series AA Preferred Stock) at any time
during its usual business hours, together with written notice
by the holder of such Converting Shares, stating that such
holder desires to convert the Converting Shares, or a stated
number of the shares evidenced by such certificate or
certificates, into the number of shares of Common Stock into
which such shares may be converted (for purposes of this
Section 4.02(a)(ii)(D), the "Converted Shares"). Such notice
shall also state the name or names (with addresses) and
denominations in which the certificate or certificates
evidencing Converted Shares are to be issued and shall include
instructions for the delivery thereof. Promptly after such
surrender and the receipt of such written notice, the
Corporation shall issue and deliver, in accordance with the
surrendering holder's instructions, the certificate or
certificates evidencing the Converted Shares issuable upon
such conversion, and the Corporation shall deliver to the
converting holder a certificate (which shall bear such legends
as were set forth on the surrendered certificate or
certificates) evidencing any shares of Series AA Preferred
Stock which were evidenced by the certificate or certificates
that were delivered to the Corporation in connection with such
conversion, but which were not converted. Such conversion, to
the extent permitted by law, shall be deemed to have
5
<PAGE>
been effected as of the close of business on the date on
which such certificate or certificates shall have been
surrendered and such notice shall have been received by the
Corporation (for purposes of this Section 4.02(a)(ii), the
"Conversion Date"), and at such time the rights of the
holder of Converting Shares as such holder shall cease, and
the person or persons in whose name or names the certificate
or certificates evidencing the Converted Shares are to be
issued upon such conversion shall be deemed to have become
the holder or holders of record of the Converted Shares.
Upon issuance of Converted Shares in accordance with this
Section 4.02(a)(ii)(D), such Converted Shares shall be
deemed to be duly authorized, validly issued, fully paid and
nonassessable.
(E) Upon each conversion of shares of Series AA Preferred
Stock into shares of Common Stock pursuant to the provisions
of Sections 4.02(a)(ii)(B) and 4.02(a)(ii)(C) the following
adjustments shall also be made:
(1) The Series AA Initial Investment shall be
reduced by an amount equal to the product of (x) the
Series AA Initial Investment as of the applicable
Conversion Date and (y) a fraction, the numerator of
which shall be the total number of shares of Series
AA Preferred Stock which shall have been converted
into Common Stock on such Conversion Date and the
denominator of which shall be the total number of
shares of Series AA Preferred Stock outstanding
immediately prior to such conversion; and
(2) the Series AA Threshold Amount shall be
reduced by an amount equal to the product of (x) the
Series AA Threshold Amount as of the applicable
Conversion Date and (y) a fraction, the numerator of
which shall be the total number of shares of Series
AA Preferred Stock which shall have been converted
into Common Stock on such Conversion Date and the
denominator of which shall be the total number of
shares of Series AA Preferred Stock outstanding
immediately prior to such conversion.
(F) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock or its treasury shares, solely for the purpose of
issuance upon the conversion of shares of Series AA Preferred
Stock, four million thirty eight thousand (4,038,000) shares
of Common Stock. The
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Corporation shall take all such corporate and other actions
as from time to time may be necessary to insure that there
is an adequate number of shares of Common Stock authorized
but unissued or held as treasury shares to allow the
conversion of all outstanding shares of Series AA Preferred
Stock.
(iii) Liquidation. Until such time as the holders of shares of
Series AA Preferred Stock shall have received an amount equal to the
Series AA Initial Investment from the distributions provided for in
Section 4.02(a)(i)(A), upon the occurrence of a Liquidation Event, all
amounts available for payment or distribution to Stockholders shall,
subject to the right of the holders of shares of Series BB Preferred
Stock to the prior payment in full of an amount equal to the Series BB
Threshold Amount as of the date of such Liquidation Event, be paid to
the holders of shares of Series AA Preferred Stock in an amount equal
to the Series AA Threshold Amount as of the date of such Liquidation
Event. After payment in cash to holders of shares of Series AA
Preferred Stock of the full preferential amount as aforesaid, holders
of the shares of Series AA Preferred Stock shall, as such, have no
right or claim to any of the remaining assets of the Corporation.
(iv) Voting Rights. Except as otherwise required by law, the
shares of Series AA Preferred Stock shall not have any voting powers,
either general or special.
(v) Redemption.
(A) At such time as the Corporation shall have made all
of the distributions required by Section 4.02(a)(i)(A), the
Board of Directors may at any time thereafter and from time to
time thereafter, redeem, in whole or in part, the outstanding
shares of Series AA Preferred Stock at a redemption price per
share equal to the par value per share of the Series AA
Preferred Stock. In the event fewer than all the outstanding
shares of Series AA Preferred Stock are to be redeemed at any
one time pursuant to this Section 4.02(a)(v), the number of
shares of Series AA Preferred Stock to be redeemed shall be
determined by the Board of Directors and the shares to be
redeemed shall be selected pro rata or by lot, as may be
determined by the Board of Directors. From and after the date
fixed for each such redemption, the shares of Series AA
Preferred Stock so redeemed shall no longer be deemed to be
outstanding and all rights of the holders of such shares of
Series AA Preferred Stock as such holders shall cease, except
for the right to receive
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from the Corporation the amount payable upon redemption of the
shares to be redeemed, without interest.
(B) As soon as reasonably practicable after the date of
redemption of the Series AA Preferred Stock, the Corporation
shall provide each holder of record of certificates evidencing
shares of Series AA Preferred Stock to be redeemed (1) a
letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the certificates
formerly evidencing shares of Series AA Preferred Stock shall
pass, only upon proper delivery of such certificates to the
Corporation and shall be in customary form) and (2)
instructions for use in effecting the surrender of the
certificates formerly evidencing shares of Series AA Preferred
Stock in exchange for the redemption price. Each holder of
certificates evidencing shares of Series AA Preferred Stock to
be redeemed shall surrender such certificate or certificates,
duly assigned to the Corporation or endorsed in blank and
accompanied by the letter of transmittal, at the principal
office of the Corporation (or such other office or agency of
the Corporation as the Corporation may designate in the letter
of transmittal) at the times specified in the letter of
transmittal, together with written notice by the holder of
such certificate, stating the name or names (with addresses)
to whom payment for the shares of Series AA Preferred Stock to
be redeemed shall be made. Promptly after such surrender and
the receipt of such written notice, the Corporation shall pay
the redemption price for the shares of Series AA Preferred
Stock to be redeemed and, in the event that fewer than all of
the shares of Series AA Preferred Stock evidenced by any
certificate are redeemed, issue and deliver, in accordance
with the surrendering holder's instructions, a new certificate
or certificates evidencing the shares of Series AA Preferred
Stock not so redeemed.
(vi) Ranking. Until such time as the Corporation has made all
of the distributions required by Section 4.02(a)(i)(A), the Series AA
Preferred Stock shall rank (A) junior as to liquidation rights to the
Series BB Preferred Stock; (B) pari passu with the Series BB Preferred
Stock as to dividends and distributions; and (C) senior as to
dividends and distributions to any other class or series of capital
stock of the Corporation other than the Series BB Preferred Stock. At
such time as the Corporation has made all of the distributions
required by Section 4.02(a)(i)(A), the Series AA Preferred Stock shall
have no further preferences and shall rank pari passu with the Series
BB Preferred Stock and junior to all other classes and series of
capital stock of the Corporation.
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(vii) No Other Rights. The shares of the Series AA Preferred
Stock shall not have any relative, participating, optional or other
special rights other than as set forth in this Certificate of
Incorporation.
(b) Series BB Preferred Stock. One thousand seven hundred eighty five
(1,785) shares of the Preferred Stock of the Corporation shall be designated
"Series BB Preferred Stock".
(i) Dividends.
(A) The holders of outstanding shares of Series BB
Preferred Stock, as a group, shall be entitled to receive,
when, as and if declared by the Board of Directors, at its
sole discretion, out of assets legally available for such
purpose, cash distributions equal, in the aggregate, to the
Series BB Initial Investment. Upon the payment of all
distributions required by this Section 4.02(b)(i)(A), the
holders of shares of Series BB Preferred Stock shall not be
entitled to receive any further dividends or distributions
from the Corporation.
(B) So long as any shares of Series BB Preferred Stock
are outstanding, the Corporation shall not pay or declare or
set aside for payment any dividend or distribution payable in
cash, evidences of indebtedness, assets or property other than
cash, or capital stock of the Corporation ranking equally with
or senior to the Series BB Preferred Stock in respect of
dividends or distributions, or make any other distribution on
any Common Stock or any other class or series of stock of the
Corporation ranking junior to the Series BB Preferred Stock in
respect of dividends or distributions, unless the Corporation
has paid, or at the same time pays or provides for the payment
of, all distributions on the outstanding shares of Series BB
Preferred Stock required by Section 4.02(b)(i)(A). Until all
such distributions have been paid in full, all dividends
declared and paid on the shares of Series AA Preferred Stock
and Series BB Preferred Stock shall be declared and paid pro
rata based on the then applicable Series AA Threshold Amount
and Series BB Threshold Amount.
(C) All distributions made to the holders of Series BB
Preferred Stock pursuant to this Section 4.02(b)(i) shall be
evenly divided among all outstanding shares of Series BB
Preferred Stock at the time each such distribution is made.
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(ii) Conversion.
(A) Each outstanding share of Series BB Preferred Stock
may be converted, at the option of the holder thereof, into
fully paid and nonassessable shares of Common Stock, at the
times, using the conversion ratios and subject to the
conditions set forth in Sections 4.02(b)(ii)(B) and
4.02(b)(ii)(C), subject to, and upon compliance with, the
provisions of this Section 4.02(b)(ii).
(B) In the event the Corporation effects an Initial
Public Offering, the holders of Series BB Preferred Stock
shall have the right, at any time and from time to time
thereafter, to convert any or all of their outstanding shares
of Series BB Preferred Stock into such number of shares of
Common Stock per share of Series BB Preferred Stock as is
obtained by dividing (x) the number obtained by dividing (I)
the then applicable Series BB Threshold Amount by (II) the
price per share of the Common Stock sold by the Corporation in
the Initial Public Offering as set forth in the final
amendment to the registration statement therefor by (y) the
number of shares of Series BB Preferred Stock outstanding
immediately prior to the Initial Public Offering.
(C) In the event that MSLEF II and the MSCP Entities
shall, collectively, exercise their rights under Section 3.08
of the Stockholders' Agreement, the holders of the Series BB
Preferred Stock shall have the right, at the time of the sale
contemplated by Section 3.08 of the Stockholders' Agreement,
to convert any or all of their outstanding shares of Series BB
Preferred Stock into such number of shares of Common Stock per
share of Series BB Preferred Stock as is obtained by dividing
(x) the number obtained by dividing (I) the then applicable
Series BB Threshold Amount by (II) the per share price
received by MSLEF II and the MSCP Entities for their Common
Stock in the sale contemplated by Section 3.08 of the
Stockholders' Agreement by (y) the number of shares of Series
BB Preferred Stock outstanding immediately prior to the sale
contemplated by Section 3.08 of the Stockholders' Agreement.
(D) Each conversion of a share or shares of Series BB
Preferred Stock into a share or shares of Common Stock shall
be effected by the surrender of the certificate or
certificates evidencing the share or shares of Series BB
Preferred Stock to be converted
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(for purposes of this Section 4.02(b)(ii)(D), the
"Converting Shares"), duly assigned to the Corporation or
endorsed in blank, at the principal office of the Corporation
(or such other office or agency of the Corporation as the
Corporation may designate by written notice to the holders of
Series BB Preferred Stock) at any time during its usual
business hours, together with written notice by the holder of
such Converting Shares, stating that such holder desires to
convert the Converting Shares, or a stated number of the
shares evidenced by such certificate or certificates, into the
number of shares of Common Stock into which such shares may be
converted (for purposes of this Section 4.02(b)(ii)(D), the
"Converted Shares"). Such notice shall also state the name or
names (with addresses) and denominations in which the
certificate or certificates evidencing Converted Shares are to
be issued and shall include instructions for the delivery
thereof. Promptly after such surrender and the receipt of such
written notice, the Corporation shall issue and deliver, in
accordance with the surrendering holder's instructions, the
certificate or certificates evidencing the Converted Shares
issuable upon such conversion, and the Corporation shall
deliver to the converting holder a certificate (which shall
bear such legends as were set forth on the surrendered
certificate or certificates) evidencing any shares of Series
BB Preferred Stock which were evidenced by the certificate or
certificates that were delivered to the Corporation in
connection with such conversion, but which were not converted.
Such conversion, to the extent permitted by law, shall be
deemed to have been effected as of the close of business on
the date on which such certificate or certificates shall have
been surrendered and such notice shall have been received by
the Corporation (for purposes of this Section 4.02(b)(ii), the
"Conversion Date"), and at such time the rights of the holder
of Converting Shares as such holder shall cease, and the
person or persons in whose name or names the certificate or
certificates evidencing the Converted Shares are to be issued
upon such conversion shall be deemed to have become the holder
or holders of record of the Converted Shares. Upon issuance of
Converted Shares in accordance with this Section
4.02(b)(ii)(D), such Converted Shares shall be deemed to be
duly authorized, validly issued, fully paid and nonassessable.
(E) Upon each conversion of shares of Series BB Preferred
Stock into shares of Common Stock pursuant to the provisions
of Sections 4.02(b)(ii)(B) and 4.02(b)(ii)(C) the following
adjustments shall also be made:
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(1) the Series BB Initial Investment shall be
reduced by an amount equal to the product of (x) the
Series BB Initial Investment as of the applicable
Conversion Date and (y) a fraction, the numerator of
which shall be the total number of shares of Series
BB Preferred Stock which shall have been converted
into Common Stock on such Conversion Date and the
denominator of which shall be the total number of
shares of Series BB Preferred Stock outstanding
immediately prior to such conversion; and
(2) the Series BB Threshold Amount shall be
reduced by an amount equal to the product of (x) the
Series BB Threshold Amount as of the applicable
Conversion Date and (y) a fraction, the numerator of
which shall be the total number of shares of Series
BB Preferred Stock which shall have been converted
into Common Stock on such Conversion Date and the
denominator of which shall be the total number of
shares of Series BB Preferred Stock outstanding
immediately prior to such conversion.
(F) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common
Stock or its treasury shares, solely for the purpose of
issuance upon the conversion of shares of Series BB Preferred
Stock, one million seven hundred eighty five thousand
(1,785,000) shares of Common Stock. The Corporation shall take
all such corporate and other actions as from time to time may
be necessary to insure that there is an adequate number of
shares of Common Stock authorized but unissued or held as
treasury shares to allow the conversion of all outstanding
shares of Series BB Preferred Stock.
(iii) Liquidation. Until such time as the holders of shares of
Series BB Preferred Stock shall have received an amount equal to the
Series BB Initial Investment from the distributions provided for in
Section 4.02(b)(i)(A), upon the occurrence of a Liquidation Event, all
amounts available for payment or distribution to Stockholders shall
first be paid to the holders of shares of Series BB Preferred Stock in
an amount equal to the Series BB Threshold Amount as of the date of
such Liquidation Event. After payment in cash to holders of shares of
Series BB Preferred Stock of the full preferential amount as
aforesaid, holders of the shares of Series BB Preferred Stock shall,
as such, have no right or claim to any of the remaining assets of the
Corporation.
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(iv) Voting Rights. Except as otherwise required by law, the
shares of Series BB Preferred Stock shall not have any voting powers,
either general or special.
(v) Redemption.
(A) At such time as the Corporation shall have made all
of the distributions required by Section 4.02(b)(i)(A), the
Board of Directors may at any time thereafter and from time to
time thereafter, redeem, in whole or in part, the outstanding
shares of Series BB Preferred Stock at a redemption price per
share equal to the par value per share of the Series BB
Preferred Stock. In the event fewer than all the outstanding
shares of Series BB Preferred Stock are to be redeemed at any
one time pursuant to this Section 4.02(b)(v), the number of
shares of Series BB Preferred Stock to be redeemed shall be
determined by the Board of Directors and the shares to be
redeemed shall be selected pro rata or by lot, as may be
determined by the Board of Directors. From and after the date
fixed for each such redemption, the shares of Series BB
Preferred Stock so redeemed shall no longer be deemed to be
outstanding and all rights of the holders of such shares of
Series BB Preferred Stock as such holders shall cease, except
for the right to receive from the Corporation the amount
payable upon redemption of the shares to be redeemed, without
interest.
(B) As soon as reasonably practicable after the date of
redemption of the Series BB Preferred Stock, the Corporation
shall provide each holder of record of certificates evidencing
shares of Series BB Preferred Stock to be redeemed (1) a
letter of transmittal (which shall specify that delivery shall
be effected, and risk of loss and title to the certificates
formerly evidencing shares of Series BB Preferred Stock shall
pass, only upon proper delivery of such certificates to the
Corporation and shall be in customary form) and (2)
instructions for use in effecting the surrender of the
certificates formerly evidencing shares of Series BB Preferred
Stock in exchange for the redemption price. Each holder of
certificates evidencing shares of Series BB Preferred Stock to
be redeemed shall surrender such certificate or certificates,
duly assigned to the Corporation or endorsed in blank and
accompanied by the letter of transmittal, at the principal
office of the Corporation (or such other office or agency of
the Corporation as the Corporation may designate in the letter
of transmittal) at the times specified in the
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<PAGE>
letter of transmittal, together with written notice by the
holder of such certificate, stating the name or names (with
addresses) to whom payment for the shares of Series BB
Preferred Stock to be redeemed shall be made. Promptly after
such surrender and the receipt of such written notice, the
Corporation shall pay the redemption price for the shares of
Series BB Preferred Stock to be redeemed and, in the event
that fewer than all of the shares of Series BB Preferred
Stock evidenced by any certificate are redeemed, issue and
deliver, in accordance with the surrendering holder's
instructions, a new certificate or certificates evidencing
the shares of Series BB Preferred Stock not so redeemed.
(vi) Ranking. Until such time as the Corporation has made all
of the distributions required by Section 4.02(b)(i)(A), the Series BB
Preferred Stock shall rank (A) senior as to liquidation rights to any
other class or series of capital stock of the Corporation; (B) pari
passu with the Series AA Preferred Stock as to dividends and
distributions; and (C) senior as to dividends and distributions to any
other class or series of capital stock of the Corporation other than
the Series AA Preferred Stock. At such time as the Corporation has
made all of the distributions required by Section 4.02(b)(i)(A), the
Series BB Preferred Stock shall have no further preferences and shall
rank pari passu with the Series AA Preferred Stock and junior to all
other classes and series of capital stock of the Corporation.
(vii) No Other Rights. The shares of the Series BB Preferred
Stock shall not have any relative, participating, optional or other
special rights other than as set forth in this Certificate of
Incorporation.
(c) Common Stock.
(i) Dividends. Subject to all the rights of the holders of
shares of Series AA Preferred Stock, Series BB Preferred Stock and the
rights, as determined by the Board of Directors, of any other series
or class of Preferred Stock that may hereafter be issued, such
dividends or distributions as may be determined by the Board of
Directors, at its sole discretion, may from time to time be declared
and paid or made upon the Common Stock out of assets legally available
for such purpose.
(ii) Liquidation. The holders of shares of the Common Stock
shall be entitled to share ratably upon the occurrence of a Liquidation
Event in all assets of the Corporation, if any, remaining after payment
in turn to the holders of shares of the Series BB Preferred Stock, the
Series
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AA Preferred Stock and of any other series or class of Preferred Stock
that may hereafter be issued of any preferential amounts to which they
may be entitled.
(iii) Voting. Except as otherwise required by law, each
outstanding share of Common Stock shall be entitled to one vote on
each matter on which Stockholders of the Corporation or the holders of
Common Stock shall be entitled to vote.
(d) No New Issuances. To the extent that shares of Series AA Preferred
Stock or Series BB Preferred Stock have been converted into shares of Common
Stock pursuant to Section 4.02(a)(ii) or 4.02(b)(ii), respectively, or redeemed
pursuant to Section 4.02(a)(v) or 4.02(b)(v), respectively, the Corporation
shall be prohibited from issuing additional shares of Series AA Preferred Stock
or Series BB Preferred Stock, as the case may be, without the consent of
Stockholders holding at least a majority of the then outstanding shares of
Common Stock.
(e) Definitions. For purposes of this Section 4.02:
(i) "Initial Public Offering" means an initial public offering
of Common Stock by the Corporation pursuant to an effective
registration statement under the Securities Act of 1933, as amended.
(ii) "Liquidation Event" means any payment or distribution of
assets or securities of the Corporation, as the case may be, of any
kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total or partial liquidation,
reorganization or marshalling of assets of the Corporation, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership or
other proceedings, except that neither the consolidation nor the
merger of the Corporation with or into any other corporation or
corporations, nor the sale or transfer by the Corporation of all or
any part of its assets, shall be deemed to be a Liquidation Event.
(iii) "Management Agreements" means the Management Equity
Agreements, dated as of April 8, 1993, as amended from time to time,
between the Corporation and each of the following individuals: James
T. Sullivan, Stephen Dyott, Bryan Richardson, Paul Moschetti, John
Hendrickson and Marshall Johns.
(iv) "MSCP Entities" means, collectively, Morgan Stanley
Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and
MSCP III 892 Investors, L.P., each a Delaware limited partnership.
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(v) "MSLEF II" means The Morgan Stanley Leveraged Equity Fund
II, L.P., a Delaware limited partnership.
(vi) "Preferred Stock Option Plan" means the Company's Preferred
Stock Option Plan.
(vii) "Series AA Initial Investment" means $40,000,000 plus
any amounts received by the Company upon the exercise of options on
Series AA Preferred Stock from time to time through the date of
determination of such amount less (i) the aggregate cash distributions
made on the shares of Series AA Preferred Stock in connection with
partial liquidations of the Corporation and (ii) the aggregate cash
amount of any repurchases of shares of Series AA Preferred Stock by the
Corporation pursuant to Section 4 of the Management Agreements or
Section 9 of the Preferred Stock Option Plan, as adjusted pursuant to
Section 4.02(a)(ii)(E).
(viii) "Series AA Threshold Amount" means $40,000,000 plus any
amounts received by the Company upon the exercise of options on Series
AA Preferred Stock from time to time through the date of determination
of such amount less an amount equal to (i) aggregate cash
distributions made on the shares of Series AA Preferred Stock pursuant
to Section 4.02(a)(i)(A), (ii) aggregate cash distributions made on
the shares of Series AA Preferred Stock in connection with partial
liquidations of the Corporation and (iii) the aggregate cash amount of
any repurchases of shares of Series AA Preferred Stock by the
Corporation pursuant to Section 4 of the Management Agreements or
Section 9 of the Preferred Stock Option Plan, as adjusted pursuant to
Section 4.02(a)(ii)(E); provided that the Series AA Threshold Amount
shall never be a negative amount.
(ix) "Series BB Initial Investment" means $17,500,000 plus any
amounts received by the Company upon the exercise of options on Series
BB Preferred Stock from time to time through the date of determination
of such amount less (i) the aggregate cash distributions made on the
shares of Series BB Preferred Stock in connection with partial
liquidations of the Corporation and (ii) the aggregate cash amount of
any repurchases of shares of Series BB Preferred Stock by the
Corporation pursuant to Section 9 of the Preferred Stock Option Plan,
as adjusted pursuant to Section 4.02(b)(ii)(E).
(x) "Series BB Threshold Amount" means $17,500,000 plus any
amounts received by the Company upon the exercise of options on
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Series BB Preferred Stock from time to time through the date of
determination of such amount less an amount equal to (i) aggregate
cash distributions made on the shares of Series BB Preferred Stock
pursuant to Section 4.02(b)(i)(A), (ii) aggregate cash distributions
made on the shares of Series BB Preferred Stock in connection with
partial liquidations of the Corporation and (iii) the aggregate cash
amount of any repurchases of shares of Series BB Preferred Stock by
the Corporation pursuant to Section 9 of the Preferred Stock Option
Plan, as adjusted pursuant to Section 4.02(b)(ii)(E); provided that
the Series BB Threshold Amount shall never be a negative amount.
(xi) "Stockholder" means any holder of record of any share of
Series AA Preferred Stock, Series BB Preferred Stock, Common Stock or
other class or series of common stock or Preferred Stock of the
Corporation.
(xii) "Stockholders' Agreement" means the Amended and Restated
Stockholders' Agreement, dated as of August 14, 1995, as amended from
time to time, among the Corporation and the stockholders named
therein.
ARTICLE 5
DIRECTORS
SECTION 5.01. Directors. (a) Elections of directors of the Corporation
need not be by written ballot, except and to the extent provided in the By-laws
of the Corporation.
(b) To the fullest extent permitted by the General Corporation Law as
it now exists and as it may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
ARTICLE 6
INDEMNIFICATION
SECTION 6.01. Indemnification. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or
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agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person seeking
indemnification did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to Sections 6.01(a) and 6.01(b), or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith. If such director, officer, employee or agent is not wholly
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 6.01(a) and 6.01(b), but is successful, on
the merits or otherwise, as to one or more but less than all claims, issues or
matters in such action, suit or proceeding, he shall be indemnified against
expenses (including attorneys' fees)
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actually and reasonably incurred by him in connection with each successfully
resolved claim, issue or matter. For purposes of this Section 6.01, and without
limitation, the termination of any claim, issue or matter in any action, suit or
proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such claim, action or matter.
(d) Any indemnification under Sections 6.01(a) and 6.01(b) (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in such Sections 6.01(a) and 6.01(b).
Such determination shall be made (i) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders of the Corporation.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation authorized in this Article 6. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other sections of this Article 6 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(g) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of Section 145 of the General Corporation
Law. The Corporation shall not be liable under this Article 6 to make any
payment of amounts otherwise indemnifiable
19
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hereunder if and to the extent that a person indemnified hereunder has otherwise
actually received any payment under any such insurance policy.
(h) Notwithstanding any other provision of this Article 6, to the
extent that any director, officer, employee or agent of the Corporation is, by
reason of his being a director, officer, employee or agent of the Corporation or
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise and is serving in such capacity at the
request of the Corporation, a witness in any action, suit or proceeding, he
shall be indemnified against all expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
(i) For purposes of this Article 6, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article 6 with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(j) For purposes of this Article 6, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
services as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
6.
(k) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article 6 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
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(l) In the event of any payment by the Corporation under this Article
6, the Corporation shall be subrogated to the extent of such payment to all of
the rights of recovery of any person indemnified hereunder, who shall execute
all papers required and take all action necessary to secure such rights,
including, without limitation, execution of such documents as are necessary to
enable the Corporation to bring suit to enforce such rights.
(m) The rights of indemnification and for any person indemnified
hereunder to receive advancement of any expenses as provided by this Article 6
shall not be deemed exclusive of any other rights to which such indemnified
person may at any time be entitled under applicable law, this Certificate of
Incorporation, the By-laws of the Corporation, any agreement, a vote of the
stockholders of the Corporation, a resolution of the Board of Directors or
otherwise. No amendment, alteration or repeal of this Article 6 or of any
provision hereof shall be effective as to any person indemnified hereunder with
respect to any action taken or omitted to be taken by such indemnified person in
his capacity as a director, officer, employee or agent of the Corporation, or as
a director, officer, employee or agent of any other corporation, partnership,
joint venture, trust or other enterprise that he is serving at the request of
the Corporation, prior to such amendment, alteration or repeal.
(n) If any provision of this Article 6 shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Article 6 (including,
without limitation, each portion of any Section of this Article 6 containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby; and (b) to the fullest extent possible, the provisions of this Article
6 (including, without limitation, each portion of any Section of this Article 6
containing any such provision held to be invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
(o) Notwithstanding any provision of this Article 6 to the contrary, no
person shall be entitled to indemnification or advancement of expenses under
this Article 6 with respect to any action, suit or proceeding, or any claim
therein, brought or made by him against the Corporation.
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ARTICLE 7
REORGANIZATION
SECTION 7.01. Compromise or Arrangement. Whenever a compromise or
arrangement is proposed between this Corporation and its creditors or any class
of them and/or between this Corporation and its stockholders or any class of
them, any court of equitable jurisdiction within the State of Delaware may, on
the application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for this Corporation under the provisions of section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
ARTICLE 8
AMENDMENT
SECTION 8.01. Amendment. The Corporation reserves the right to amend,
alter, change or repeal any provision of this Certificate of Incorporation, in
the manner now or hereafter prescribed by law, and all rights conferred on
stockholders in this Certificate of Incorporation are subject to this
reservation.
This Amended and Restated Certificate of Incorporation was duly adopted
in accordance with the provisions of Section 242 and 245 of the General
Corporation Law of the State of Delaware.
The Board of Directors of the Corporation approved the Corporation's
Amended and Restated Certificate of Incorporation as set forth herein pursuant
to resolutions of the Board of Directors effective as of December 15, 1997.
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The holders of the outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Common Stock, voting together and each such class
voting separately as a class, having at least a majority of all votes
attributable to such shares and entitled to be voted, acting by written consent
pursuant to Section 228(a) of the General Corporation Law of the State of
Delaware, approved the Amended and Restated Certificate of Incorporation as set
forth herein as of January 16, 1998 and prompt notice of the taking of such
corporate action without a meeting by less than unanimous written consent was
given to those stockholders that did not consent in writing as required by
Section 228(d) of the General Corporation Law of the State of Delaware.
ACG HOLDINGS, INC.
By: /s/ Timothy M. Davis
---------------------------------
Name: Timothy M. Davis
Title: Senior Vice President and
General Counsel
23
EMPLOYMENT AGREEMENT dated as of April 1, 1997 (the "Agreement"),
between AMERICAN COLOR GRAPHICS, INC., a New York corporation (the "Company")
and LARRY R. WILLIAMS (the "Executive").
WHEREAS, the Executive is currently employed by the Company under an
employment agreement dated as of September 1, 1995 (the "Prior Agreement");
WHEREAS, the parties hereto desire to replace the Prior Agreement with
this Agreement, to be effective as of the date set forth above;
NOW, THEREFORE, in consideration of the covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. EFFECTIVENESS OF AGREEMENT
This Agreement shall become effective, and shall supersede the Prior
Agreement, as of April 1, 1997 (the "Effective Time").
2. EMPLOYMENT AND DUTIES
2.1. General. The Company hereby employs the Executive, and the
Executive agrees to serve, as Executive Vice President,
Purchasing/Transportation of the American Color Graphics Division ("ACG") of the
Company, upon the terms and conditions contained herein. In addition, the
Executive shall serve as General Manager of the Company's Materials Management
Division and as General Manager of the Company's Paper Sales Division
(collectively, the "Divisions"). With respect to his duties as Executive Vice
President, the Executive shall report directly to the President of ACG. With
respect to his duties as General Manager of the Divisions, the Executive shall
report directly to the Chief Executive Officer of ACG. The Executive shall
perform such other duties and services for the Company, commensurate with the
Executive's position, as may be designated from time to time by the President of
ACG. The Executive agrees to serve the Company faithfully and to the best of his
ability under the direction of the Chief Executive Officer and President of ACG
as provided above.
2.2. Exclusive Services. Except as may otherwise be approved in
advance by the Chief Executive Officer of the Company, and except during
vacation periods and reasonable periods of absence due to sickness, personal
injury or other disability, the Executive shall devote his full working time
throughout the Employment Term (as defined in Section 2.3) to the services
required of him hereunder. The Executive shall render his services exclusively
to the Company during the Employment Term, and shall use his best efforts,
judgment and energy to improve and advance the business and interests of the
Company in a manner consistent with the duties of his position.
2.3. Term of Employment. The Executive's employment under this
Agreement shall commence as of the Effective Time and shall terminate on the
earlier of (i) the fifth anniversary of the Effective Time, or (ii) termination
of the Executive's employment pursuant to this Agreement; provided, however,
that the term of the Executive's employment shall be automatically extended
without further action of either party for additional one year periods, unless
written notice of either party's intention not to extend has been given to the
other party hereto at least two years prior to the expiration of the then
effective term. The period commencing as of the Effective Time and ending on the
fifth anniversary of the Effective Time or such later date to which the term of
the Executive's employment under this Agreement shall have been extended is
hereinafter referred to as the "Employment Term".
<PAGE>
2
2.4. Reimbursement of Expenses. The Company shall reimburse the
Executive for reasonable travel and other business expenses incurred by him in
the fulfillment of his duties hereunder upon presentation by the Executive of an
itemized account of such expenditures, in accordance with Company practices
consistently applied.
3. SALARY
3.1. Base Salary. From the Effective Time, the Executive shall be
entitled to receive a base salary ("Base Salary") as follows, payable in arrears
in equal installments not less frequently than biweekly in accordance with the
Company's payroll practices, with such increases as may be provided in
accordance with the terms hereof:
Per Annum
Title Base Salary
----- -----------
Executive Vice President $ 230,000
General Manager, Materials Management 35,000
General Manager, Paper Sales 35,000
3.2 Division Change. In the event that one or both of the Divisions
ceases operations, either by mutual agreement or because they fail to meet
budgeted earnings targets two years in a row, the Executive's Base Salary will
be reduced by the then current portion of his Base Salary allocated to such
Division(s).
3.3 Annual Review. The Executive's Base Salary shall be reviewed by
the Chief Executive Officer with regard to his role with the Divisions and by
the President with regard to his role as Executive Vice President of the Company
based upon the Executive's performance, not less often than annually, and may be
increased but not decreased.
3.4 Bonus. During his employment under this Agreement, the Executive
shall be entitled to participate in the Company's bonus plan for senior
executives, under which the Executive shall be entitled to receive a bonus of up
to 45% of his Base Salary as Executive Vice President if the budget performance
criteria are satisfied.
On each anniversary of the Effective Time during the term of this
Agreement, the Executive shall receive additional incentive payments equal to
the following:
(A) 10% of the net income for the preceding fiscal year of the
Paper Sales Division.
(B) 20% of the net income for the preceding fiscal year of the
Materials Management Division, provided that such percentage shall
be increased to 25% of such net income on the fourth and fifth
anniversaries and 30% on each anniversary thereafter.
A copy of the 1998 Budget for ACGPaper Sales and ACG Materials
Management is attached as Exhibit A hereto.
<PAGE>
3
4. EMPLOYEE BENEFITS
The Executive shall, during his employment under this Agreement, be
included to the extent eligible thereunder in employee benefit plans, programs
or arrangements providing for retirement benefits, incentive compensation,
profit sharing, bonuses, disability benefits, life insurance, vacation and paid
holidays.
5. TERMINATION OF EMPLOYMENT
5.1. Termination without Cause; Resignation for Good Reason.
5.1.1. General. Subject to the provisions of Sections 5.1.2 and 5.1.3,
if, prior to the expiration of the Employment Term, the Executive's employment
is terminated by the Company without Cause (as defined in Section 5.3), or if
the Executive terminates his employment hereunder for Good Reason (as defined in
Section 5.4), the Company shall (x) continue to pay the Executive the Base
Salary (at the rate in effect on the date of such termination) for the greater
of (i) the remainder of the Employment Term and (ii) a period of two years
beginning as of the date of termination (such period being referred to
hereinafter as the "Severance Period"), at such intervals as the same would have
been paid had the Executive remained in the active service of the Company, and
(y) pay the Executive a pro rata portion of the bonus to which the Executive
would have been entitled for the year of termination pursuant to Section 3.3 had
the Executive remained employed for the entire year, which bonus shall be
payable at the time bonuses under the applicable bonus plan are paid to the
Company's executives generally. In addition, the Executive shall be entitled to
continue to participate during the Severance Period in employee benefit plans
specified in Section 4 (other than equity-based plans, except to the extent
otherwise provided therein, or bonus plans), provided that the Executive is
entitled to continue to participate in such plans under the terms thereof. The
Executive shall have no further right to receive any other compensation or
benefits after such termination or resignation of employment except as
determined in accordance with the terms of the employee benefit plans or
programs of the Company.
5.1.2. Conditions Applicable to the Severance Period. If, during the
Severance Period, the Executive materially breaches his obligations under
Section 8 of this Agreement, the Company may, upon written notice to the
Executive, terminate the Severance Period and cease to make any further payments
or provide any benefits described in Section 5.1.1.
5.1.3. Death During Severance Period. In the event of the Executive's
death during the Severance Period, payments of Base Salary under this Section 5
shall continue to be made during the remainder of the Severance Period to the
beneficiary designated in writing for this purpose by the Executive or, if no
such beneficiary is specifically designated, to the Executive's estate.
5.1.4. Date of Termination. The date of termination of employment
without Cause shall be the date specified in a written notice of termination to
the Executive. The date of resignation for Good Reason shall be the date
specified in the written notice of resignation from the Executive to the
Company; provided, however, that no such written notice shall be effective
unless the cure period specified in Section 5.4 has expired without the Company
having corrected, to the reasonable satisfaction of the Executive, the event or
events subject to cure. If no date of resignation is specified in the written
notice from the Executive to the Company, the date of termination shall be the
first day following such expiration of such cure period.
<PAGE>
4
5.2. Termination for Cause; Resignation Without Good Reason.
5.2.1. General. If, prior to the expiration of the Employment Term,
the Executive's employment is terminated by the Company for Cause, or the
Executive resigns from his employment hereunder other than for Good Reason, the
Executive shall be entitled only to payment of his Base Salary as then in effect
through and including the date of termination or resignation. The Executive
shall have no further right to receive any other compensation or benefits after
such termination or resignation of employment, except as determined in
accordance with the terms of the employee benefit plans or programs of the
Company.
5.2.2. Date of Termination. Subject to the proviso to Section 5.3, the
date of termination for Cause shall be the date specified in a written notice of
termination to the Executive. The date of resignation without Good Reason shall
be the date specified in the written notice of resignation from the Executive to
the Company, or if no date is specified therein, 10 business days after receipt
by the Company of written notice of resignation from the Executive.
5.3. Cause. Termination for "Cause" shall mean termination of the
Executive's employment because of:
(i) any act or omission that constitutes a material breach by the
Executive of any of his obligations under this Agreement;
(ii) the continued failure or refusal of the Executive to
substantially perform the duties reasonably required of him as an
employee of the Company;
(iii)any willful and material violation by the Executive of any
Federal or state law or regulation applicable to the business of the
Company, Parent or any of their respective subsidiaries, or the
Executive's conviction of a felony, or any willful perpetration by the
Executive of a common law fraud; or
(iv) any other willful misconduct by the Executive which is
materially injurious to the financial condition or business reputation
of, or is otherwise materially injurious to, the Company, Parent or
any of their respective subsidiaries or affiliates (it being
understood that the good faith performance by the Executive of the
duties required of him pursuant to Section 2.1 shall not constitute
"misconduct" for purposes of this clause (iv)); provided, however,
that if any such Cause relates to the Executive's obligations under
this Agreement, the Company shall not terminate the Executive's
employment hereunder unless the Company first gives the Executive
notice of its intention to terminate and of the grounds for such
termination, and the Executive has not, within 20 business days
following receipt of the notice, cured such Cause, or in the event
such Cause is not susceptible to cure within such 20 business day
period, the Executive has not taken all reasonable steps within such
20 business day period to cure such Cause as promptly as practicable
thereafter.
<PAGE>
5
5.4. Good Reason. For purposes of this Agreement, "Good Reason" shall
mean any of the following (without the Executive's prior written consent):
(i) a decrease in the Executive's base rate of compensation or a
failure by the Company to pay material compensation due and payable to
the Executive in connection with his employment;
(ii) a material diminution of the responsibilities or title of the
Executive with the Company;
(iii)the Company's requiring the Executive to be based at any
office or location more than 20 miles from either Nashville, Tennessee
or Boca Raton, Florida;
(iv) a material breach by the Company of any term or provision of
this Agreement; provided, however, that no event or condition
described in clauses (i) through (iv) of this Section 5.4 shall
constitute Good Reason unless (X) the Executive gives the Company
written notice of his objection to such event or condition, (Y) such
event or condition is not corrected by the Company within 20 business
days of its receipt of such notice (or in the event that such event or
condition is not susceptible to correction within such 20 business day
period, the Company has not taken all reasonable steps within such 20
business day period to correct such event or condition as promptly as
practicable thereafter) and (Z) the Executive resigns his employment
with the Company and its subsidiaries not more than 60 days following
the expiration of the 20 business day period described in the
foregoing clause (Y); or
(v) a change in control of the Company, other than in connection
with an ESOP or management led purchase of the Company, provided that
the Executive notify the Company, as provided in Section 5.1.4 above,
within 90 days after such change of control and provided further that
in no event shall the effective date of such resignation under this
subsection be earlier than the third anniversary of the Effective
Time.
6. DEATH, DISABILITY OR RETIREMENT
In the event of termination of employment by reason of death,
Permanent Disability (as hereinafter defined) or retirement, the Executive (or
his estate, as applicable) shall be entitled to Base Salary and benefits
determined under Sections 3 and 4 hereof through the date of termination. Other
benefits shall be determined in accordance with the benefit plans maintained by
the Company, and the Company shall have no further obligation hereunder. For
purposes of this Agreement, "Permanent Disability" means a physical or mental
disability or infirmity of the Executive that prevents the normal performance of
substantially all his duties as an employee of the Company, which disability or
infirmity shall exist for any continuous period of 180 days.
7. MITIGATION OF DAMAGES
The Executive shall mitigate the amount of any payment provided for in
Section 5.1 by seeking other employment, and any such payment will be reduced in
the event such other employment is obtained. The Executive acknowledges it is
his duty to seek other employment permitted by the terms of this Agreement.
<PAGE>
6
8. NON-SOLICITATION; CONFIDENTIALITY; NON-COMPETITION
8.1. Non-solicitation. For so long as the Executive is employed by the
Company and continuing for two years thereafter (or if the Executive is entitled
to a continuation of his Base Salary under Section 5.1.1, the period during
which such Base Salary is continued), the Executive shall not, without the prior
written consent of the Company, directly or indirectly, as a sole proprietor,
member of a partnership, stockholder or investor, officer or director of a
corporation, or as an employee, associate, consultant or agent of any person,
partnership, corporation or other business organization or entity other than the
Company: (x) solicit or endeavor to entice away from the Company, Parent or any
of their respective subsidiaries any person or entity who is, or, during the
then most recent 12-month period, was employed by, or had served as an agent or
key consultant of, the Company, Parent or any of their respective subsidiaries;
or (y) solicit or endeavor to entice away from the Company, Parent or any of
their respective subsidiaries any person or entity who is, or was within the
then most recent 12-month period, a customer or client (or reasonably
anticipated (to the general knowledge of the Executive or the public) to become
a customer or client) of the Company, Parent or any of their respective
subsidiaries.
8.2. Confidentiality. The Executive covenants and agrees with the
Company that he will not at any time, except in performance of his obligations
to the Company hereunder or with the prior written consent of the Company,
directly or indirectly, disclose any secret or confidential information that he
may learn or has learned by reason of his association with the Company, Parent
or any of their respective subsidiaries and affiliates. The term "confidential
information" includes information not previously disclosed to the public or to
the trade by the Company's management, or otherwise in the public domain, with
respect to the Company's, Parent's or any of their respective affiliates' or
subsidiaries' products, facilities, applications and methods, trade secrets and
other intellectual property, systems, procedures, manuals, confidential reports,
product price lists, customer lists, technical information, financial
information (including the revenues, costs or profits associated with any of the
Company's products), business plans, prospects or opportunities, but shall
exclude any information which (i) is or becomes available to the public or is
generally known in the industry or industries in which the Company operates
other than as a result of disclosure by the Executive in violation of his
agreements under this Section 8.2 or (ii) the Executive is required to disclose
under any applicable laws, regulations or directives of any government agency,
tribunal or authority having jurisdiction in the matter or under subpoena or
other process of law.
8.3. No Competing Employment. For so long as the Executive is employed
by the Company and continuing for two years thereafter (or, if the Executive is
entitled to a continuation of his Base Salary under Section 5.1.1, the period
during which such Base Salary is continued), the Executive shall not, directly
or indirectly, as a sole proprietor, member of a partnership, stockholder or
investor (other than a stockholder or investor owning not more than a 5%
interest), officer or director of a corporation, or as an employee, associate,
consultant or agent of any person, partnership, corporation or other business
organization or entity other than the Company, Parent, or any of their
respective subsidiaries, render any service to or in any way be affiliated with
a competitor (or any person or entity that is reasonably anticipated (to the
general knowledge of the Executive or the public) to become a competitor) of the
Company, Parent or any of their respective subsidiaries; provided, however, that
if (x) the Company exercises its right not to extend the Employment Term
pursuant to Section 2.3 and (y) the Executive's employment is terminated for any
reason following the expiration of the Employment Term, the Executive's
obligations under this Section 8.3 shall terminate as of the date of termination
of employment.
8.4. Exclusive Property. The Executive confirms that all confidential
information is and shall remain the exclusive property of the Company. All
business records, papers and documents kept or made by the Executive relating to
the business of the Company shall be and remain the property of the Company,
except for such papers customarily deemed to be the personal copies of the
Executive.
<PAGE>
7
8.5. Injunctive Relief. Without intending to limit the remedies
available to the Company, the Executive acknowledges that a breach of any of the
covenants contained in this Section 8 may result in material and irreparable
injury to the Company, Parent or their respective affiliates or subsidiaries for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach or threat thereof, the Company shall be entitled to seek a temporary
restraining order and/or a preliminary or permanent injunction restraining the
Executive from engaging in activities prohibited by this Section 8 or such other
relief as may be required specifically to enforce any of the covenants in this
Section 8. If for any reason, it is held that the restrictions under this
Section 8 are not reasonable or that consideration therefor is inadequate, such
restrictions shall be interpreted or modified to include as much of the duration
and scope identified in this Section 8 as will render such restrictions valid
and enforceable.
9. ENFORCEMENT OF AGREEMENT
In the event that legal action is undertaken by either party to
enforce any provision of this Agreement, the Company shall reimburse the
Executive for any related reasonable legal fees and out-of-pocket expenses
directly attributable to such action, provided that such legal fees are
calculated on an hourly, and not on a contingency fee, basis and provided,
further, that the Executive shall bear all such fees and out-of-pocket expenses
(and reimburse the Company for its portion of such expenses) if the relevant
trier-of-fact determines that the Executive's claim or position was frivolous
and without reasonable foundation.
10. MISCELLANEOUS
10.1. Notices. All notices or communications hereunder shall be in
writing, addressed as follows:
To the Company: American Color Graphics, Inc.
100 Winner's Circle
Brentwood, Tennessee 37027
Telecopier No.: (615) 377-0372
Attention: Timothy M. Davis
Senior Vice President,
General Counsel & Secretary
To the Executive: Larry R. Williams
2664 N.W. 63rd Street
Boca Raton, FL 33496
All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy
or facsimile transmission, upon confirmation of receipt by the sender of such
transmission or (iii) if sent by registered or certified mail, on the fifth day
after the day on which such notice is mailed.
10.2. Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
<PAGE>
8
10.3. Assignment. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive.
10.4. Entire Agreement. Except as expressly set forth in Section 1,
this Agreement represents the entire agreement of the parties and shall
supersede any and all previous contracts, arrangements or understandings between
the Company and the Executive including, without limitation, the Prior
Agreement. This Agreement may be amended at any time by mutual written agreement
of the parties hereto.
10.5. Withholding. The payment of any amount pursuant to this
Agreement shall be subject to applicable withholding and payroll taxes, and such
other deductions as may be required under the Company's employee benefit plans,
if any.
10.6. Governing Law. This Agreement shall be construed, interpreted,
and governed in accordance with the laws of New York without reference to rules
relating to conflict of law.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above written.
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Stephen M. Dyott
--------------------------------
Name (printed): Stephen M. Dyott
Title:
EXECUTIVE
/s/ Larry R. Williams
-----------------------------------
Larry R. Williams
July 15, 1998
Mr. Joseph M. Milano
253 Thornwood Drive
Stamford, CT 06903
Dear Joe:
This will confirm that if American Color Graphics, Inc. ("ACG") terminates your
employment without cause, ACG shall continue to pay you your then current base
salary and maintain all your then current benefits (to the extent allowed under
the applicable benefit plans) for a period of three years following your
termination. In such event, ACG shall also pay you a pro rata portion of the
bonus to which you would have been entitled for the year of termination had you
been employed for the entire year, which bonus shall be payable at the time
bonuses are paid to ACG executives generally. You shall not be required to
mitigate the amount of any payment provided for above and such payments will not
be reduced in the event you obtain other employment The term "Cause" shall mean
the termination of your employment hereunder in the event of your (i) conviction
of any crime or offense involving money or other property of ACG or any felony,
(ii) willful and unreasonable refusal to substantially perform your duties
hereunder, (iii) competition with ACG, or (iv) gross negligence in the conduct
of your duties; provided, however, no termination shall be deemed for "Cause"
under clauses (ii), (iii) or (iv) unless you shall have first received written
notice from ACG advising you of the acts or omissions that constitute the basis
for termination and you fail to correct the acts or omissions complained of
within 20 business days following receipt of such notice. Your employment shall
be deemed to have been terminated "without cause" if you terminate your
employment after ACG causes any of the following events to occur: (i) a decrease
in your base salary or a failure to pay you material compensation due and
payable to you in connection with your employment; (ii) a material diminution of
your responsibilities or title; or (iii) you are required to be based at any
office or location more than 25 miles from your current principal employment
location.
For so long as you are employed by ACG, and continuing for three years
thereafter, you shall not, without the prior written consent of ACG, directly or
indirectly, as a sole proprietor, member of a partnership, stockholder or
investor, officer or director of a corporation, or as an employee, associate,
consultant or agent of any person, partnership, corporation or other business
organization or entity other than ACG: (i) render any service to or in any way
be affiliated with a competitor (or any person or entity that is reasonably
anticipated (to the general knowledge of you or the public) to become a
competitor) of ACG; (ii) solicit or endeavor to entice away from ACG any person
or entity who is, or, during the then most recent 12-month period, was employed
by, or had served as an agent or key consultant of, ACG; or (iii) solicit or
endeavor to entice away from ACG any person or entity who is, or was within the
then most recent 12-month period, a customer or client (or reasonably
anticipated (to the general knowledge of you or the public) to become a customer
or client) of ACG.
<PAGE>
July 15, 1998
Page 2
You covenant and agree with ACG that you will not at any time, except in
performance of your obligations to ACG hereunder or with the prior written
consent of ACG, directly or indirectly, disclose any secret or confidential
information that you may learn or have learned by reason of your association
with ACG. The term "confidential information" includes information not
previously disclosed to the public or to the trade by ACG's management, or
otherwise in the public domain, with respect to ACG's products, facilities,
applications and methods, trade secrets and other intellectual property,
systems, procedures manuals, confidential reports, product price lists, customer
lists, technical information, financial information (including the revenues,
costs or profits associated with any of ACG's products), business plans,
prospects or opportunities, but shall exclude any information which (i) is or
becomes available to the public or is generally known in the industry or
industries in which ACG operates other than as a result of disclosure by you in
violation of your agreements under this paragraph or (ii) you are required to
disclose under any applicable laws, regulations or directives of any government
agency, tribunal or authority having jurisdiction in the matter or under
subpoena or other process of law.
All references to "ACG" include its divisions, subsidiaries and affiliates.
If the foregoing meets with your approval, please sign and return the enclosed
copy of this letter to the undersigned.
Sincerely,
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Stephen M. Dyott
---------------------------------------------
Stephen M. Dyott
Chairman & Chief Executive Officer & President
ACCEPTED AND AGREED TO:
/s/ Joseph M. Milano
- -------------------------------
Joseph M. Milano
July 15, 1998
Mr. Timothy M. Davis
334 Pine Creek Avenue
Fairfield, CT 06430
Dear Tim:
This will confirm that if American Color Graphics, Inc. ("ACG") terminates your
employment without cause, ACG shall continue to pay you your then current base
salary and maintain all your then current benefits (to the extent allowed under
the applicable benefit plans) for a period of three years following your
termination. In such event, ACG shall also pay you a pro rata portion of the
bonus to which you would have been entitled for the year of termination had you
been employed for the entire year, which bonus shall be payable at the time
bonuses are paid to ACG executives generally. You shall not be required to
mitigate the amount of any payment provided for above and such payments will not
be reduced in the event you obtain other employment The term "Cause" shall mean
the termination of your employment hereunder in the event of your (i) conviction
of any crime or offense involving money or other property of ACG or any felony,
(ii) willful and unreasonable refusal to substantially perform your duties
hereunder, (iii) competition with ACG, or (iv) gross negligence in the conduct
of your duties; provided, however, no termination shall be deemed for "Cause"
under clauses (ii), (iii) or (iv) unless you shall have first received written
notice from ACG advising you of the acts or omissions that constitute the basis
for termination and you fail to correct the acts or omissions complained of
within 20 business days following receipt of such notice. Your employment shall
be deemed to have been terminated "without cause" if you terminate your
employment after ACG causes any of the following events to occur: (i) a decrease
in your base salary or a failure to pay you material compensation due and
payable to you in connection with your employment; (ii) a material diminution of
your responsibilities or title; or (iii) you are required to be based at any
office or location more than 25 miles from your current principal employment
location.
For so long as you are employed by ACG, and continuing for three years
thereafter, you shall not, without the prior written consent of ACG, directly or
indirectly, as a sole proprietor, member of a partnership, stockholder or
investor, officer or director of a corporation, or as an employee, associate,
consultant or agent of any person, partnership, corporation or other business
organization or entity other than ACG: (i) render any service to or in any way
be affiliated with a competitor (or any person or entity that is reasonably
anticipated (to the general knowledge of you or the public) to become a
competitor) of ACG; (ii) solicit or endeavor to entice away from ACG any person
or entity who is, or, during the then most recent 12-month period, was employed
by, or had served as an agent or key consultant of, ACG; or (iii) solicit or
endeavor to entice away from ACG any person or entity who is, or was within the
then most recent 12-month period, a customer or client (or reasonably
anticipated (to the general knowledge of you or the public) to become a customer
or client) of ACG.
<PAGE>
July 15, 1998
Page 2
You covenant and agree with ACG that you will not at any time, except in
performance of your obligations to ACG hereunder or with the prior written
consent of ACG, directly or indirectly, disclose any secret or confidential
information that you may learn or have learned by reason of your association
with ACG. The term "confidential information" includes information not
previously disclosed to the public or to the trade by ACG's management, or
otherwise in the public domain, with respect to ACG's products, facilities,
applications and methods, trade secrets and other intellectual property,
systems, procedures manuals, confidential reports, product price lists, customer
lists, technical information, financial information (including the revenues,
costs or profits associated with any of ACG's products), business plans,
prospects or opportunities, but shall exclude any information which (i) is or
becomes available to the public or is generally known in the industry or
industries in which ACG operates other than as a result of disclosure by you in
violation of your agreements under this paragraph or (ii) you are required to
disclose under any applicable laws, regulations or directives of any government
agency, tribunal or authority having jurisdiction in the matter or under
subpoena or other process of law.
All references to "ACG" include its divisions, subsidiaries and affiliates.
If the foregoing meets with your approval, please sign and return the enclosed
copy of this letter to the undersigned.
Sincerely,
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Stephen M. Dyott
---------------------------------------------
Stephen M. Dyott
Chairman & Chief Executive Officer & President
ACCEPTED AND AGREED TO:
/s/ Timothy M. Davis
- --------------------------------
Timothy M. Davis
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated pretax loss from
continuing operations $ (7,839) (27,122) (26,005) (21,431) (1,869)
Net amortization of debt
issuance expense 1,412 2,292 1,784 2,139 2,174
Interest expense 34,830 36,664 34,505 30,549 23,578
Interest portion of rental
expense 2,301 2,130 1,799 1,618 1,392
------------ ------------ ------------ ------------ ------------
Earnings $ 30,704 13,964 12,083 12,875 25,275
============ ============ ============ ============ ============
Interest expense $ 34,830 36,664 34,505 30,549 23,578
Net amortization of debt
issuance expense 1,412 2,292 1,784 2,139 2,174
Interest portion of rental
expense 2,301 2,130 1,799 1,618 1,392
------------ ------------ ------------ ------------ ------------
Fixed Charges $ 38,543 41,086 38,088 34,306 27,144
============ ============ ============ ============ ============
Ratio of Earnings to Fixed
Charges (a) (a) (a) (a) (a)
============ ============ ============ ============ ============
</TABLE>
(a) The deficiency in earnings required to cover fixed charges for the fiscal
years ended March 31, 1999, 1998, 1997, 1996, and 1995 was $7,839,
$27,122, $26,005, $21,431 and $1,869, respectively. The deficiency in
earnings to cover fixed charges is computed by subtracting earnings
before fixed charges, income taxes, discounted operations and
extraordinary items from fixed charges. Fixed charges consist of interest
expense and one-third of operating lease rental expense, which is deemed
to be representative of the interest factor. The deficiency in earnings
required to cover fixed charges includes depreciation of property, plant
and equipment and amortization of goodwill and other assets and non-cash
charges which are reflected in cost of sales and selling, general and
administrative expenses, in the following amounts (in thousands):
Fiscal Year Ended March 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- ------- ---------
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
======== ======= ======== ======= ========
LIST OF SUBSIDIARIES
Subsidiary of ACG Holdings, Inc.: State of Incorporation:
- --------------------------------- -----------------------
American Color Graphics, Inc. New York
Subsidiaries of American Color Graphics, Inc.:
- ----------------------------------------------
Sullivan Marketing, Inc. Delaware
American Images of North America, Inc. New York
Sullivan Media Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ACG
HOLDINGS, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTH
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000856710
<NAME> ACG Holdings, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 62,837
<ALLOWANCES> 2,860
<INVENTORY> 8,343
<CURRENT-ASSETS> 71,591
<PP&E> 263,191
<DEPRECIATION> 119,576
<TOTAL-ASSETS> 299,000
<CURRENT-LIABILITIES> 77,042
<BONDS> 185,000
0
0
<COMMON> 1
<OTHER-SE> (119,307)
<TOTAL-LIABILITY-AND-EQUITY> 299,000
<SALES> 520,343
<TOTAL-REVENUES> 520,343
<CGS> 439,091
<TOTAL-COSTS> 439,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,510
<INTEREST-EXPENSE> 36,242
<INCOME-PRETAX> (7,839)
<INCOME-TAX> 523
<INCOME-CONTINUING> (8,362)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,106)
<CHANGES> 0
<NET-INCOME> (12,468)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
