As filed with the Securities and Exchange Commission on July 11, 2000
Registration No. 33-97090
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
POST-EFFECTIVE AMENDMENT NO. 6 to
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
----------------------
ACG Holdings, Inc.
American Color Graphics, Inc.
(Exact name of registrants as specified in their charters)
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Delaware 2750 62-1395968
New York 2750 16-1003976
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation of organization) classification code numbers) identification
numbers)
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ACG Holdings, Inc. American Color Graphics, Inc.
225 High Ridge Road 100 Winners Circle
Stamford, Connecticut 06905 Brentwood, Tennessee 37027
(203) 977-8101 (615) 377-0377
(Address, including zip code, and
telephone number, including
area code, of registrants'
principal executive
offices)
TIMOTHY M. DAVIS
Senior Vice President - Administration, General Counsel and Secretary
ACG Holdings, Inc.
American Color Graphics, Inc.
225 High Ridge Road
Stamford, Connecticut 06905
(203) 977-8101
(Name, address, including zip code,
and telephone number,
including area code, of agent
for service for both
registrants)
Copies to:
ANDREW R. SCHLEIDER
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
(212) 848-4000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
----------------------
This Post-Effective Amendment shall become effective in accordance with Section
8(c) of the Securities Act of 1933.
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Prospectus
American Color Graphics, Inc.
12 3/4% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2005
----------------
Unconditionally Guaranteed on a Senior Subordinated Basis by
ACG Holdings, Inc.
----------------
Interest on the 12 3/4% Senior Subordinated Exchange Notes Due 2005 is
payable semiannually on February 1 and August 1 of each year. American Color
Graphics may redeem any of the Notes beginning on August 1, 2000. The initial
redemption price is 106.375% of their principal amount, plus accrued interest.
The Notes rank junior to all existing and future senior indebtedness of
American Color Graphics, Inc. and to all liabilities of its subsidiaries. The
Notes will rank equally with any future senior subordinated indebtedness of
American Color Graphics and will rank senior to any future subordinated
indebtedness of American Color Graphics.
The Notes are fully and unconditionally guaranteed on an unsecured
senior subordinated basis by ACG Holdings. ACG Holdings has no significant
assets other than the capital stock of American Color Graphics, all of which is
pledged to secure senior indebtedness of ACG Holdings.
----------------
Investing in the Notes involves risks. See "Risk Factors" beginning on
page 8.
The Notes have received ratings from Moody's Investors Services Inc.
and Standard and Poor's Ratings Services which are below "investment grade" and
there is no required rating that must be maintained.
----------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------
Morgan Stanley & Co. Incorporated and Dean Witter Reynolds Inc.
(collectively, "Morgan Stanley Dean Witter") will use this prospectus in
connection with offers and sales of the Notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in the transactions.
American Color Graphics will receive no portion of the proceeds of the sales of
the Notes and will bear the expenses incident to the registration of the Notes.
If Morgan Stanley Dean Witter conducts any market-making activities, it may be
required to deliver a "market-making prospectus" when effecting offers and sales
of the Notes because of the equity ownership of ACG Holdings by certain private
investment partnerships, which are affiliates of Morgan Stanley Dean Witter. For
so long as a market-making prospectus is required to be delivered, the ability
of Morgan Stanley Dean Witter to make a market in the Notes may be dependent, in
part, on the ability of American Color Graphics and ACG Holdings to maintain a
current market-making prospectus.
July 11, 2000
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TABLE OF CONTENTS
Page
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Prospectus Summary......................................................... 1
Risk Factors............................................................... 8
Use of Proceeds............................................................ 13
Capitalization............................................................. 14
Selected Historical Financial Data......................................... 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 18
Business................................................................... 18
Management................................................................. 18
Certain Transactions....................................................... 18
Security Ownership of Certain Beneficial Owners and Management............. 18
Description of the Credit Agreement........................................ 19
Description of the Notes................................................... 21
Certain Federal Income Tax Considerations.................................. 52
Plan of Distribution....................................................... 54
Legal Matters.............................................................. 54
Experts.................................................................... 54
Available Information...................................................... 55
Forward-Looking Statements................................................. 55
Appendix 1: Holdings' and Graphics' Annual Report on
Form 10-K for the Fiscal Year Ended March 31, 2000
-----------------
You should rely only on information contained in this prospectus. We
have not authorized anyone else to provide you with different information.
Neither we nor Morgan Stanley Dean Witter are making an offer to sell or seeking
offers to buy Notes in any state where the offer or sale is not permitted. The
information in this prospectus is accurate only as of the date of this
prospectus.
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PROSPECTUS SUMMARY
The following summary highlights detailed information appearing
elsewhere in this prospectus. As used in this prospectus, unless the context
suggests otherwise, the terms "we," "us," "our" and "ours" refer to ACG
Holdings, Inc. and its subsidiaries, including its wholly-owned subsidiary,
American Color Graphics, Inc., the term "Graphics" refers to American Color
Graphics, Inc. and its subsidiaries and the term "Holdings" refers to ACG
Holdings, Inc. Our fiscal year ends on March 31 and references to our fiscal
years are to the years in which they end. For example, the term "Fiscal Year
2000" refers to the year ended March 31, 2000. Market data used throughout this
prospectus was obtained from industry publications and our internal company
estimates. While we believe the market data is reliable, the accuracy of the
data has not been independently verified and cannot be guaranteed.
We are a successor to a business that commenced operations in 1926, and
are one of the largest national diversified commercial printers in North America
with ten print plants in eight states and Canada, nine 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: print, which accounted for approximately 84% of total sales
during Fiscal Year 2000, and digital imaging and prepress services conducted
through our American Color division, which accounted for approximately 15% of
total sales in Fiscal Year 2000. Our print business produces retail advertising
inserts, comics (newspaper Sunday comics, comic insert advertising and comic
books), and other publications. Our digital imaging and prepress services
business assists customers in the capture, manipulation, transmission and
distribution of images. The majority of this work leads to the production of a
four-color image in a format appropriate for use by printers. Our print business
and our digital imaging and prepress services business are both headquartered in
Nashville, Tennessee. Partnerships affiliated with Morgan Stanley Dean Witter &
Co. currently own 57.7% of the outstanding common stock and 72.7% of the
outstanding preferred stock of Holdings.
Print. Our print business, which accounted for approximately 84% of our
sales in Fiscal Year 2000, produces retail advertising inserts, comics
(newspaper Sunday comics, comic insert advertising and comic books), and other
publications.
Retail Advertising Inserts (83% of print sales in Fiscal Year 2000). We
believe that we are one of the largest printers of retail advertising inserts in
the United States. We print advertising inserts for approximately 300 retailers.
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 (11% of print sales in Fiscal Year 2000). We believe that we are
one of the largest printers of comics in the United States. We print Sunday
comics for over 200 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 print sales in Fiscal Year 2000). We print
local newspapers, T.V. guide listings and other publications.
Digital Imaging and Prepress Services. Our digital imaging and prepress
services business, which is conducted by our American Color division, accounted
for approximately 15% of our sales in Fiscal Year 2000. We believe we are one of
the largest full-service providers of digital imaging, prepress and color
separation services in the United States and a technological leader in this
industry. Our digital imaging and prepress services business commenced
operations in 1975 and maintains nine full service locations nationwide.
We assist customers in the capture, manipulation, transmission and
distribution of images. The majority of this work leads to the production of a
four-color image in a format appropriate for use by printers. We make page
changes, including type changes, and combine 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
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files are produced for each advertising or editorial page. The final four-color
films or digital files enable printers to prepare plates for each color
resulting in the appearance of full color on the printed page.
Our 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. We have been a leader in implementing
these new technologies, which enables us to reduce unit costs and effectively
service the increasingly complex demands of our customers more quickly than many
of our competitors. We have 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 imagining and prepress service
companies such as American Color, none of which has a significant nationwide
market share. Many smaller digital imaging and prepress service companies have
left the industry in recent years due to their inability to keep pace with
technological advances in the industry.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following
competitive advantages in our print and digital imaging and prepress services
businesses:
Modern Equipment. We believe that our web heatset offset and
flexographic web printing equipment is generally among the most advanced in the
industry and that the average age of our equipment is significantly less than
the majority of our regional competitors and is comparable to our major national
competitors. We are also committed to a comprehensive, long-term maintenance
program, which enhances the reliability and extends the life of our presses and
other production equipment. We also believe that our digital imaging and
prepress equipment is significantly more advanced than many of our smaller
regional competitors, many of whom have not incorporated digital prepress
technologies and computer-to-plate services to the same extent as we have, nor
adopted an open systems environment which allows greater flexibility and more
efficient maintenance.
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 300 retailers and over 200 newspapers in the
United States and Canada. Our print 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 print products and strong customer service at competitive
prices has resulted in long-term relationships with many of these customers. Our
digital imaging and prepress services' customer base includes large and
medium-sized customers in the publishing, retail and catalog businesses, many of
whom also have long-term relationships with our print segment. 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 print 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) and selling, general and
administrative expenses in our digital imaging and prepress services business
primarily through the adoption of new digital prepress production methodologies
and continued cost containment focus.
Strong Management Team. We have strengthened our print 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.
2
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National Presence. Our nine print 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 nine digital imaging and prepress service facilities provide us
with contingency capabilities, increased capacity during peak periods, access to
top quality internal technical personnel throughout the country, short
turnaround time and other customer service advantages.
Strategy. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
o Grow unit volume using our national sales coverage,
significant industry experience and customer-focused sales
force and through continued capital expansion;
o Continue to improve our product mix and increase our share of
the retail advertising insert market and continue to adjust
the mix of our customers to those that are more profitable and
less seasonal, to maximize the use of our equipment and to
focus on high value-added new business opportunities;
o Continue to reduce manufacturing costs and improve quality;
and
o Continue to make opportunistic acquisitions.
3
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Summary Description of the Notes
The following summary is provided for your convenience. You should read
and consider carefully the more specific details contained elsewhere in this
prospectus prior to investing in the Notes. For more detailed information on the
Notes, see "Description of the Notes."
Issuer.................................... American Color Graphics, Inc.
Maturity Date............................. August 1, 2005.
Securities................................ $185 million aggregate principal
amount of 12 3/4% Senior
Subordinated Exchange Notes Due
2005.
Interest Payment Dates.................... February 1 and August 1.
Ranking................................... The Notes rank junior to all
existing and future senior
indebtedness of Graphics,
including indebtedness under our
credit agreement. The Notes will
rank equally with any future
senior subordinated indebtedness
of Graphics and will rank senior
to any future subordinated
indebtedness of Graphics.
At March 31, 2000, Graphics had
$92.3 million of senior
indebtedness, no senior
subordinated indebtedness other
than the Notes and no
subordinated indebtedness
outstanding. See "Risk Factors --
Our significant debt could
adversely affect our ability to
fulfill our obligations under the
Notes," and "-- The Notes rank
junior to all senior indebtedness
of Graphics and secured
indebtedness under the credit
agreement," and "-- Holdings'
guarantee of the Notes ranks
junior to the guarantee by
Holdings of Graphics' obligations
under the credit agreement."
Guaranty.................................. Holdings has fully and
unconditionally guaranteed the
payment of principal and interest
on the Notes on an unsecured
senior subordinated basis. The
guaranty by Holdings ranks junior
to all existing and future senior
indebtedness of Holdings,
including its guaranty of
Graphics' obligations under the
credit agreement. Holdings
conducts no business other than
as the sole shareholder of
Graphics and has no significant
assets other than the capital
stock of Graphics, all of which
is pledged to secure Holdings'
obligations under the credit
agreement.
Optional Redemption....................... Graphics may redeem any of the
Notes beginning on August 1,
2000. The initial redemption
price is 106.375% of their
principal amount, plus accrued
interest. The redemption price
will decline annually to 100% of
their principal amount, plus
accrued interest, on and after
August 1, 2002.
Change of Control Triggering
Event................................... Upon a change of control
triggering event (as defined
under "Description of the
Notes"), Graphics will be
required to make an offer to
purchase the Notes. The purchase
price will equal 101% of their
principal amount plus accrued
interest. The occurrence of a
change of control triggering
event will require Graphics to
repay all indebtedness then
outstanding which by its terms
would prohibit Graphics from
repurchasing the Notes or obtain
consents from the holders of such
4
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indebtedness, including
indebtedness outstanding under
the credit agreement. See "Risk
Factors-- Graphics may be
unable to repurchase Notes upon
a change of control triggering
event."
Covenants................................. The indenture relating to the
Notes contains covenants that,
among other things, limit the
ability of Graphics and its
subsidiaries to:
o incur indebtedness,
o pay dividends,
o redeem capital stock,
o make investments and make
other restricted
payments,
o issue capital stock of
subsidiaries,
o engage in transactions
with stockholders and
affiliates,
o sell assets or
o effect a merger and
consolidations.
However, these limitations are
subject to a number of important
qualifications and exceptions.
Credit Rating............................. The Notes have received ratings
from Moody's Investors Services,
Inc. and Standard and Poor's
Ratings Group which are below
"investment grade" and there is
no required rating that must be
maintained.
Settlement at DTC......................... Transfers of Notes between
participants in The Depository
Trust Company will be effected in
the ordinary way in accordance
with DTC's rules and will be
settled in same-day funds.
5
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SUMMARY HISTORICAL FINANCIAL DATA
The summary historical consolidated financial data and other data
presented as of and for the fiscal years ended March 31, 1996, 1997, 1998, 1999
and 2000 were derived from our audited consolidated financial statements. The
summary historical financial data should be read in conjunction with
"Capitalization," "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements appearing elsewhere in this prospectus.
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
print division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9 million
of costs under this plan in Fiscal Year 1998. In April 1995, we implemented a
restructuring plan for our American Color division, which was designed to
improve productivity, increase customer service and responsiveness and provide
increased growth in the business. We recognized $0.9 million and $4.1 million of
costs under this plan in Fiscal Year 1997 and Fiscal Year 1996, respectively. In
addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4 million
of other special charges related to asset write-offs and write-downs in our
print and American Color divisions in Fiscal Year 1999, Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996, respectively. See note 14 to our consolidated
financial statements appearing elsewhere in this prospectus.
In February of Fiscal Year 1997, we made a strategic decision to shut
down the operation of our wholly-owned subsidiary, Sullivan Media Corporation.
Sullivan Media's shut down has been accounted for as a discontinued operation,
and accordingly, Sullivan Media's operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and
administrative expenses attributable to Sullivan Media for Fiscal Years 1997 and
1996 have been reclassified to discontinued operations.
As part of a refinancing completed on May 8, 1998 (the "1998
Refinancing"), we recorded an extraordinary loss related to early extinguishment
of debt of $4.1 million, net of zero taxes. This extraordinary loss primarily
consisted of the write-off of deferred financing costs related to refinanced
indebtedness in the quarter ended June 30, 1998. In August 1995, as part of
Shakopee Valley Printing, Inc. merging with and into Graphics (the "Shakopee
Merger") and the refinancing transactions (the "1995 Refinancing"), we recorded
an extraordinary loss related to early extinguishment of debt of $4.5 million,
net of zero taxes. This extraordinary loss primarily consisted of the early
redemption premium on Graphics' 15% Senior Subordinated Notes Due 2000 (the "15%
Notes") and the write-off of deferred financing costs related to refinanced
indebtedness partially offset by the write-off of a bond premium associated with
the 15% Notes.
Our earnings to cover fixed charges were $11.7 million for Fiscal Year
2000. For Fiscal Years 1999, 1998, 1997 and 1996 we had a deficiency of earnings
to cover fixed charges. The earnings (deficiency of earnings) to cover fixed
charges is computed by subtracting earnings before fixed charges, income taxes,
discontinued operations and extraordinary items from fixed charges. Fixed
charges consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor. The
earnings (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):
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Fiscal Year Ended March 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
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Depreciation..................... $30,067 $29,651 $28,124 $25,282 $21,385
Amortization..................... 3,719 4,025 10,413 9,374 9,311
Non-cash charges (gain).......... 17 945 2,301 1,944 3,435
--------- --------- --------- --------- ---------
Total................... $33,803 $34,621 $40,838 $36,600 $34,131
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EBITDA is included in the summary historical financial data because we
believe that investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements. EBITDA is
defined as earnings before net interest expense, income tax expense,
depreciation, amortization, other special charges related to asset write-offs
and write-downs, other income (expense), discontinued operations and
extraordinary items. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash flows
from operating, investing or financing activities as an indicator of cash flows
or as a measure of liquidity. Certain covenants in the indenture relating to the
Notes and the credit agreement are based on EBITDA, subject to certain
adjustments.
EBITDA in Fiscal Year 2000 includes $0.5 million of non-recurring costs
associated with the consolidation of certain production facilities at our
American Color division. EBITDA in Fiscal Year 1999 includes $4.6 million in
restructuring costs related to our American Color division, $0.6 million of
non-recurring costs associated with the consolidation of certain production
facilities at our 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 our print 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 our American Color
division and non-recurring employee termination expenses of $2.5 million. EBITDA
in Fiscal Year 1996 includes $4.1 million of restructuring costs related to our
American Color division.
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Fiscal Year Ended March 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- ------- --------
(dollars in thousands)
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Statement of Operations Data:
Sales........................................... $546,710 $520,343 $533,335 $524,551 $529,523
Gross profit.................................... 90,265 81,252 71,928 64,671 64,413
Restructuring costs and other special charges .. -- 5,464 5,598 2,881 7,533
Operating income................................ 46,084 29,455 12,103 10,372 12,716
Interest expense, net........................... 33,798 36,077 38,813 36,132 32,425
Income (loss) from continuing operations before
extraordinary items......................... 9,470 (8,362) (29,228) (28,596) (26,305)
(Loss) income from discontinued operations, net
of tax ..................................... -- -- (667) (3,107) 1,504
Extraordinary loss on early extinguishment of
debt........................................ -- (4,106) -- -- (4,526)
Net income (loss)............................... $ 9,470 $(12,468) $(29,895) $(31,703) $(29,327)
Balance Sheet Data (at end of period):
Working capital (deficit)....................... $ (2,973) $ (5,451) $ 11,610 $ (8,598) $ 9,612
Total assets.................................... 303,812 299,000 329,958 333,975 351,181
Long-term debt and capitalized leases,
including current installments.............. 277,344 289,589 319,657 312,309 297,617
Other Data:
Net cash provided (used) by operating
activities ................................. $ 38,774 $ 48,137 $ 18,257 $ 24,313 $ (4,187)
Net cash used by investing activities........... (24,145) (10,364) (10,100) (10,997) (24,436)
Net cash (used) provided by financing
activities ................................. (14,576) (37,812) (8,143) (13,312) 23,982
Capital expenditures (including lease
obligations entered into)................... 22,724 16,238 23,713 37,767 28,022
Earnings (deficiency of earnings) to cover
fixed charges............................... 11,659 (7,839) (27,122) (26,005) (21,431)
EBITDA:
Print........................................ $ 72,543 $ 61,627 $ 46,838 $ 46,755 $ 46,597
American Color............................... 11,003 5,283 8,405 5,180 2,691
Other........................................ (3,539) (2,624) (2,876) (4,963) (2,441)
--------- ---------- --------- ---------- ---------
Total...................................... $ 80,007 $ 64,286 $ 52,367 $ 46,972 $ 46,847
========= ========== ========= ========== =========
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7
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RISK FACTORS
In addition to the other information and financial data contained in
this prospectus, you should carefully consider the following risk factors in
evaluating us, our business and an investment in the Notes.
Our significant debt could adversely affect our ability to fulfill our
obligations under the Notes.
We have had a negative net worth in each of the last ten fiscal years.
At March 31, 2000, our consolidated indebtedness including capital leases was
approximately $277.3 million (including $7.7 million of current installments)
and our negative net worth was $109.4 million. The level of our indebtedness
could have important consequences to holders of the Notes including the
following:
o our ability to obtain any necessary financing in the future
for working capital, capital expenditures, debt service
requirements or other purposes may be limited;
o a substantial portion of our cash flow from operations must be
used to pay the principal of and interest on our indebtedness
and will not be available for other purposes;
o our level of indebtedness could limit our flexibility in
planning for, or reacting to changes in, our business;
o we are more highly leveraged than some of our competitors,
which may place us at a competitive disadvantage; and
o our high level of indebtedness makes us more vulnerable in the
event of a downturn in our business.
If we are not able to satisfy our obligations, including our interest payment
obligations, we could default on our indebtedness, including the Notes. See
"--Prior to Fiscal Year 2000, our earnings were insufficient to cover fixed
charges; we may be unable to service our debt," "Selected Historical Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and "Description of the Credit
Agreement."
We may need additional financing in the future; however, we cannot
assure you that we will be able to obtain any financing on acceptable terms or
at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." In addition, the
indenture relating to the Notes permits us to incur additional indebtedness to
finance the acquisition of additional assets.
Prior to Fiscal Year 2000, our earnings were insufficient to cover fixed
charges; we may be unable to service our debt.
In Fiscal Year 2000, our earnings to cover fixed charges were $11.7
million. However, our earnings were insufficient to cover fixed charges for
Fiscal Years 1996, 1997, 1998 and 1999 by $21.4 million, $26 million, $27.1
million and $7.8 million, respectively. See "Selected Historical Financial
Data."
Although our earnings before fixed charges were positive in Fiscal Year
2000, we cannot assure you that we will be able to continue to improve our
earnings before fixed charges or that we will be able to meet our debt service
obligations, including our obligations on the Notes. Graphics must make
substantial principal and interest payments under the credit agreement during
the next several years. The term loan facilities under the credit agreement
require principal repayments in quarterly installments in the following
aggregate annual amounts:
8
<PAGE>
Fiscal Year Required Term Loan Principal Repayments
----------------------------------------------------------------------
2001 $ 0
2002 $ 160,172
2003 $ 5,160,172
2004 $ 24,356,003
2005 $ 19,608,639
If we do not generate sufficient cash flow to meet our debt service obligations,
we could face liquidity problems and if we cannot raise alternative financing,
we might be required to dispose of material assets or operations to meet our
obligations. We cannot assure you of the timing of any sales or the proceeds
which we could obtain from any sales. In addition, most of our indebtedness
(other than the Notes) bears interest at floating rates (8.3% weighted average
rate at March 31, 2000). If interest rates rise significantly, our ability to
meet our debt service obligations, including our obligations under the Notes,
may be adversely affected.
If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on our indebtedness or, if we
otherwise fail to comply with various covenants (including covenants in the
credit agreement), we would be in default under the terms of the indebtedness. A
default would permit the holders of our indebtedness to accelerate the maturity
of the indebtedness and could cause defaults under our other indebtedness or
result in our bankruptcy. A default or bankruptcy resulting from a default would
result in a default on the Notes and could delay or preclude payment of
principal of, or interest on, the Notes. Because the Notes rank junior in right
of payment to all senior indebtedness of Graphics and at March 31, 2000,
approximately 26% of our total assets were intangible assets, if holders of the
Notes accelerate the maturity of the Notes, we may not be able to pay all
amounts due on the Notes. Our ability to meet our obligations depends on our
future performance, which is subject to prevailing economic conditions and to
financial, business and other factors, including factors beyond our control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of the Credit
Agreement."
Restrictive covenants in our indenture and credit agreement may restrict our
ability to pursue our business strategies.
The indenture relating to the Notes and our credit agreement impose
significant operating and financial restrictions on us. These restrictions
affect, and in some cases significantly limit or prohibit our ability to, among
other things:
o incur additional indebtedness,
o create liens,
o sell assets,
o engage in mergers or acquisitions and
o make investments.
These restrictions could also limit our ability to:
o effect future financings,
o make needed capital expenditures,
o react to future industry trends,
o withstand downturns in our business or the economy or
o otherwise conduct necessary corporate activities.
9
<PAGE>
Our credit agreement contains covenants that require us to meet certain
financial ratios. See "Description of the Credit Agreement." Failure to comply
with any of the covenants could limit the availability of borrowings under the
credit agreement or result in a default. We cannot assure you that we will be
able to comply with the covenants. A default under the credit agreement could
result in an acceleration of the Notes. Upon acceleration, the holders of the
Notes may not be paid in full because under the indenture relating to the Notes,
senior indebtedness of Graphics (including indebtedness under the credit
agreement) would be entitled to be paid first. See "-- The Notes rank junior to
all senior indebtedness of Graphics and secured indebtedness under the credit
agreement."
The Notes rank junior to all senior indebtedness of Graphics and secured
indebtedness under the credit agreement.
The Notes rank junior to all senior indebtedness of Graphics, including
indebtedness under the credit agreement. If a bankruptcy, liquidation or
reorganization of Graphics occurs, the assets of Graphics will be available to
pay obligations on the Notes only after all senior indebtedness of Graphics has
been paid in full. We may not have sufficient assets remaining to pay amounts
due on the Notes. See "Description of the Notes -- Ranking." At March 31, 2000,
Graphics had $92.3 million of senior indebtedness outstanding. At that date,
Graphics' subsidiaries had approximately $0.2 million of liabilities (which were
effectively senior to the Notes). In addition, the indebtedness under the credit
agreement is secured by liens on substantially all of the assets of Graphics and
guaranteed by Holdings, which guarantee is secured by a pledge of all of the
capital stock of Graphics. See "Description of the Credit Agreement."
Accordingly, if an event of default occurs under the credit agreement and the
Notes, the lenders under the credit agreement will have a right before the
holders of the Notes to the assets constituting collateral and may foreclose on
the collateral to the exclusion of the holders of the Notes. In that event, the
collateral would first be used to repay in full all amounts outstanding under
the credit agreement. The assets of Graphics may not be available to satisfy the
claims of holders of the Notes.
Holdings' guarantee of the Notes ranks junior to the guarantee by Holdings of
Graphics' obligations under the credit agreement.
Holdings has fully and unconditionally guaranteed the Notes on an
unsecured, senior subordinated basis. Holdings' guarantee of the Notes ranks
junior in right of payment to the guarantee by Holdings of Graphics' obligations
under the credit agreement. Furthermore, Holdings conducts no business other
than as sole shareholder of Graphics and has no significant assets other than
the capital stock of Graphics, all of which has been pledged to secure Holdings'
obligations under the credit agreement. As a result, currently there are no
resources supporting Holdings' guarantee of the Notes that are incremental to
those to which holders of the Notes already have access as direct creditors of
Graphics. Generally, the indenture contains no restrictions on the activities of
Holdings. See "Description of the Notes -- Guaranty."
Graphics may be unable to repurchase Notes upon a change of control triggering
event.
The credit agreement does not permit Graphics to repurchase Notes upon
the occurrence of a change of control triggering event. In addition, the
occurrence of a "Change of Control" under the credit agreement, which is defined
to include a "Change of Control" under the Notes, would constitute an event of
default under the credit agreement. See "Description of the Credit Agreement."
Therefore, unless Graphics obtains a waiver, upon the occurrence of a change of
control triggering event, the amounts outstanding under the credit agreement
(and any other indebtedness then outstanding which by its terms would prohibit
Graphics from repurchasing Notes) would have to be repaid before the holders of
Notes could receive any payment. Due to Graphics' high level of indebtedness, we
cannot assure you that we will have sufficient funds at the time of any change
of control triggering event to pay any amounts due under the credit agreement
or, thereafter, to make any required repurchases of the Notes.
The obligation of Graphics to offer to repurchase Notes upon the
occurrence of a change of control triggering event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Holdings and thus,
the removal of incumbent management. Graphics could in the future enter into
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a change of control triggering event under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or
10
<PAGE>
otherwise affect Graphics' capital structure or credit ratings. Except as
described under "Description of Notes -- Change of Control Triggering Event,"
there are no covenants or other provisions in the indenture providing for a put
or increased interest rate or otherwise that would afford holders of the Notes
additional protection in the event of a recapitalization transaction, a change
of control of Graphics and Holdings or a highly leveraged transaction.
We are subject to competitive pressures.
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and we compete with numerous national, regional and
local printers. A trend of industry consolidation in recent years can be
attributed to:
o customer preferences for larger printers with a greater range
of services,
o capital requirements and
o competitive pricing pressures.
We believe that competition in the print business is based primarily on quality
and service at a competitive price.
Our digital imaging and prepress services business competes with
numerous digital imaging and prepress service firms on both a national and
regional basis. The industry is highly fragmented, primarily consisting of
smaller local and regional companies, with only a few national full-service
digital imaging and prepress companies such as American Color, none of which has
a significant nationwide market share. Many smaller digital imaging and prepress
companies have left the industry in recent years due to their inability to keep
pace with technological advances required to service increasingly complex
customer demands. We believe that the digital imaging and prepress services
sector will continue to be subject to high levels of ongoing technological
change and the need for capital expenditures to keep up with such change.
If we do not keep pace with technological changes, we will not be able to
maintain our competitive position.
The digital imaging and prepress services business has experienced
rapid and substantial changes during the past few years primarily due to
advancements in available technology, including the evolution to electronic and
digital formats. Many smaller competitors have left the industry as a result of
their inability to keep pace with technological advances required to service
customer demands. We expect that further changes in technology will affect our
digital imaging and prepress services business and that we will need to adapt to
technological advances as they occur. As technology in this business continues
to improve and evolve, we will need to make capital expenditures to maintain our
competitive position. If we are unable to respond to future changes and
advancements in digital imaging and prepress technology, our digital imaging and
prepress services business could be adversely affected.
Because our business is sensitive to paper prices, if paper prices increase
severely and we are unable to pass through price increases, our business could
be adversely affected.
Our results of operations and financial condition are affected by the
cost of paper, which is determined by constantly changing market forces of
supply and demand over which we have no control. If we are unable to pass
through price increases, severe increases in paper prices could have a material
adverse effect on our profits and cash flow. Throughout the majority of Fiscal
Year 1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997, however, the
overall cost of paper declined. During Fiscal Year 1998, paper prices increased
slightly through mid-year and then declined to near beginning of the year
levels. In Fiscal Year 1999, as most grades of paper became more plentiful,
paper prices declined. During Fiscal Year 2000, paper prices were on average at
lower levels than comparable periods in Fiscal Year 1999.
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.
11
<PAGE>
Although we have been successful in passing through paper price increases to our
customers, we cannot assure you that we will be able to pass through future
paper price increases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, increases in the cost of
paper, and therefore the cost of printed advertisements, may cause some of our
advertising customers to reduce their print advertising programs, which could
have a material adverse effect on us.
We may be unable to effectively integrate acquired businesses.
As part of our long-term strategy, we seek to acquire other commercial
printers and other digital imaging and prepress services businesses. This
strategy also entails the integration of new start-up ventures into our
operations. While management has experience acquiring companies and integrating
their operations into our existing operations, we may not be able to find
additional attractive acquisition candidates or succeed at effectively
integrating acquired business and start-up ventures into our existing business.
Our noncompliance with or liability for cleanup under environmental regulations
could adversely affect our business.
We are subject to federal, state and local laws, regulations and
ordinances that:
o govern activities or operations that may adversely affect the
environment, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes
and
o impose liability for the costs of cleaning up, and certain
damages resulting from, sites of past spills, disposals or
other releases of hazardous substances.
We believe that we currently conduct our operations, and in the past have
operated our business, in substantial compliance with applicable environmental
laws. Noncompliance with or liability for cleanup under the environmental laws
applicable to us could have a material adverse effect on our results of
operations or financial condition. See "Business -- Environmental Matters."
A court could avoid the Notes or the guarantee.
If a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that Graphics (or Holdings) did not receive
fair consideration or reasonably equivalent value for incurring the Notes (or
the guarantee) or any debt that is refinanced with the Notes and, at the time of
the incurrence of the Notes (or the guarantee) or such indebtedness, Graphics
(or Holdings):
o was insolvent,
o was rendered insolvent by reason of such incurrence,
o engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital,
o intended to incur, or believed that it would incur, debts
beyond its ability to pay as such debts matured or
o intended to hinder, delay or defraud its creditors,
the court could avoid the Notes or the guarantee. If the indebtedness is
avoided, the indebtedness represented by the Notes (or the guarantee) would
likely be subordinated to existing and future indebtedness of Graphics (or
Holdings). Management believes that the indebtedness of Graphics represented by
the Notes, and the indebtedness of Holdings under its guarantee of the Notes,
were incurred for proper purposes and in good faith, and that, based on present
forecasts, asset valuations and other financial information at the time of
issuance of the Notes, Graphics and
12
<PAGE>
Holdings were and are solvent, had and will have sufficient capital for carrying
on their business and were and will be able to pay their debts as they mature.
The measure of insolvency will vary depending upon the law of the relevant
jurisdiction. Generally, however, a company would be considered insolvent for
purposes of the above if the present fair saleable value of its assets is less
than the amount that will be required to pay its probable liability on existing
debts as they become absolute and matured.
Morgan Stanley Dean Witter & Co. controls us and its interests could be in
conflict with the interests of holders of the Notes.
Entities affiliated with Morgan Stanley Dean Witter & Co. own a
substantial majority of the outstanding shares of capital stock of Holdings. Two
of the current directors of Holdings, Messrs. Janson and Fry, are employees of a
subsidiary of Morgan Stanley Dean Witter & Co. As a result of these
relationships, Morgan Stanley Dean Witter & Co. may be deemed to control our
management and policies, although such control is not exercised on a day-to-day
basis. In addition, Morgan Stanley Dean Witter & Co. may be deemed to control
all matters requiring stockholder approval, including the election of all
directors, the adoption of amendments to our certificate of incorporation and
the approval of mergers and sales of all or substantially all of our assets.
Circumstances could arise under which the interests of the entities affiliated
with Morgan Stanley Dean Witter & Co. could be in conflict with the interests of
holders of the Notes. See "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
There is no public market for the Notes.
There is currently no established public market for the Notes. Graphics
does not intend to list the Notes on any national securities exchange or to seek
approval for quotation through any automated quotation system. Graphics has been
advised by Morgan Stanley Dean Witter that it intends to make a market in the
Notes. However, Morgan Stanley Dean Witter is not obligated to do so and any
market-making activities with respect to the Notes may be discontinued at any
time without notice. In addition, Morgan Stanley Dean Witter will be required to
deliver a current prospectus in connection with any market-making activities and
may be prohibited from engaging in market-making activities during certain
distributions of securities by us. For so long as a market-making prospectus is
required to be delivered, the ability of Morgan Stanley Dean Witter to make a
market in the Notes may, in part, be dependent on the ability of Graphics and
Holdings to maintain a current market-making prospectus. Accordingly, we cannot
assure you that an active public or other market will develop for the Notes or
as to the liquidity of or the trading market for the Notes. If a trading market
does not develop or is not maintained, holders of the Notes may experience
difficulty in reselling the Notes or may be unable to sell them at all. Any
market that develops, if at all, may cease to continue at any time. If a public
trading market develops for the Notes, future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, our results of operations and the market for similar securities and other
factors, including our financial condition.
USE OF PROCEEDS
This prospectus is to be used by Morgan Stanley Dean Witter in
connection with offers and sales of the Notes in market-making transactions at
negotiated prices related to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
We will not receive any portion of the proceeds of such sales.
13
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
March 31, 2000. This table should be read together with "Selected Historical
Financial Data," "Description of the Credit Agreement" and our consolidated
financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
----------------------
(dollars in thousands)
<S> <C>
Short-term debt:
Current installments of long-term debt and capitalized leases:
Term loan facilities.................................................... $ --
Other................................................................... 7,727
---------
Total short-term debt................................................ $ 7,727
=========
Long-term debt:
Revolving credit facility................................................. $ 8,764
Term loan facilities...................................................... 49,285
Senior Subordinated Notes Due 2005........................................ 185,000
Other..................................................................... 26,568
---------
Total long-term debt and capitalized leases,
excluding current installments...................................... 269,617
---------
Stockholders' deficit:
Common Stock, voting, $.01 par value, 5,852,223 shares
authorized, 143,399 shares issued and outstanding...................... 1
Preferred Stock, $.01 par value, 15,823 shares authorized,
3,617 shares Series AA convertible preferred stock
issued and outstanding, $39.4 million liquidation preference, and
1,606 shares Series BB convertible preferred stock issued
and outstanding, $17.5 million liquidation preference.................. --
Additional paid-in capital................................................ 58,303
Accumulated deficit....................................................... (165,485)
Other accumulated comprehensive loss, net of tax.......................... (2,208)
---------
Total stockholders' deficit............................................. (109,389)
---------
Total long-term debt and stockholders' deficit....................... $160,228
=========
</TABLE>
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table shows selected historical financial data as of and
for the fiscal years ended March 31, 1996, 1997, 1998, 1999 and 2000. The
balance sheet data as of March 31, 1996, 1997, 1998, 1999 and 2000 and the
statement of operations data for the fiscal years ended March 31, 1996, 1997,
1998, 1999 and 2000 are derived from the audited consolidated financial
statements for such periods and at such dates. The selected historical financial
data below also reflects our discontinued wholly-owned subsidiary, Sullivan
Media, and our coupon free standing insert operation previously conducted by our
discontinued wholly-owned subsidiary, Sullivan Marketing, Inc. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
appearing elsewhere in this prospectus.
Selling, general and administrative expenses included within the
following table include amortization of goodwill in each period presented. In
addition, Fiscal Year 1998 selling, general and administrative expenses includes
$1.5 million of non-recurring American Color charges associated with the
relocation of American Color's corporate office and various severance related
expenses and $0.6 million of non-cash charges associated with an employee
benefit program. Fiscal Year 1997 selling, general and administrative expenses
include $2.5 million of non-recurring employee termination expenses.
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
print division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9 million
of costs under this plan in Fiscal Year 1998. In April 1995, we implemented a
restructuring plan for our American Color division, which was designed to
improve productivity, increase customer service and responsiveness and provide
increased growth in the business. We recognized $0.9 million and $4.1 million of
costs under this plan in Fiscal Year 1997 and Fiscal Year 1996, respectively. In
addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4 million
of other special charges related to asset write-offs and write-downs in our
print and American Color divisions in Fiscal Year 1999, Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996, respectively. See note 14 to our consolidated
financial statements appearing elsewhere in this prospectus.
In February of Fiscal Year 1997, we made a strategic decision to shut
down the operation of our wholly-owned subsidiary, Sullivan Media. Sullivan
Media's shutdown has been accounted for as a discontinued operation, and
accordingly, Sullivan Media's operations are segregated in our consolidated
financial statements. Sales, cost of sales and selling, general and
administrative expenses attributable to Sullivan Media for Fiscal Years 1997 and
1996 have been reclassified to discontinued operations.
As part of the 1998 Refinancing, we recorded an extraordinary loss
related to early extinguishment of debt of $4.1 million, net of zero taxes. This
extraordinary loss primarily consisted of the write-off of deferred financing
costs related to refinanced indebtedness in the quarter ended June 30, 1998. In
August 1995, as part of the Shakopee Merger and the 1995 Refinancing, we
recorded an extraordinary loss related to early extinguishment of debt of $4.5
million, net of zero taxes. This extraordinary loss primarily consisted of the
early redemption premium on the 15% Notes and the write-off of deferred
financing costs related to refinanced indebtedness partially offset by the
write-off of a bond premium associated with the 15% Notes.
Our earnings to cover fixed charges were $11.7 million for Fiscal Year
2000. For Fiscal Years 1999, 1998, 1997 and 1996 we had a deficiency of earnings
to cover fixed charges. The earnings (deficiency of earnings) to cover fixed
charges is computed by subtracting earnings before fixed charges, income taxes,
discontinued operations and extraordinary items from fixed charges. Fixed
charges consist of interest expense and one-third of operating lease rental
expense, which is deemed to be representative of the interest factor. The
earnings (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):
15
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Depreciation.......................... $30,067 $ 29,651 $ 28,124 $ 25,282 $ 21,385
Amortization.......................... 3,719 4,025 10,413 9,374 9,311
Non-cash charges (gain)............... 17 945 2,301 1,944 3,435
-------- -------- -------- -------- ---------
Total........................ $33,803 $ 34,621 $ 40,838 $ 36,600 $ 34,131
======== ======== ======== ======== =========
</TABLE>
EBITDA is included in the selected historical financial data because we
believe that investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements. EBITDA is
defined as earnings before net interest expense, income tax expense,
depreciation, amortization, other special charges related to asset write-offs
and write-downs, other income (expense), discontinued operations and
extraordinary items. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash flows
from operating, investing or financing activities as an indicator of cash flows
or as a measure of liquidity. Certain covenants in the indenture relating to the
Notes and the credit agreement are based on EBITDA, subject to certain
adjustments.
EBITDA in Fiscal Year 2000 includes $0.5 million of non-recurring costs
associated with the consolidation of certain production facilities at our
American Color division. EBITDA in Fiscal Year 1999 includes $4.6 million in
restructuring costs related to our American Color division, $0.6 million of
non-recurring costs associated with the consolidation of certain production
facilities at our 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 our print division, $1.5 million of
non-recurring charges associated with the relocation of our American Color
division'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 our
American Color division and non-recurring employee termination expenses of $2.5
million. EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring costs
related to our American Color divsion.
16
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales........................................... $546,710 $520,343 $533,335 $524,551 $529,523
Cost of Sales................................... 456,445 439,091 461,407 459,880 465,110
-------- -------- -------- -------- ---------
Gross Profit.................................. 90,265 81,252 71,928 64,671 64,413
Selling, general and administrative
expenses and amortization of goodwill......... 44,181 46,333 54,227 51,418 44,164
Restructuring costs and other
special charges .............................. -- 5,464 5,598 2,881 7,533
-------- -------- -------- -------- ---------
Operating income............................... 46,084 29,455 12,103 10,372 12,716
Interest expense, net........................... 33,798 36,077 38,813 36,132 32,425
Other expense................................... 627 1,217 412 245 1,722
Income tax expense ............................. 2,189 523 2,106 2,591 4,874
-------- -------- -------- -------- ---------
Income (loss) from continuing
operations before extraordinary items.. 9,470 (8,362) (29,228) (28,596) (26,305)
-------- -------- -------- -------- ---------
Discontinued operations:
Loss from operations, net of tax.............. -- -- -- (1,557) (1,364)
Estimated (loss) on shut down
and gain on settlement, net of tax.......... -- -- (667) (1,550) 2,868
Extraordinary loss on early extinguishment
of debt .................................... -- (4,106) -- -- (4,526)
-------- -------- -------- -------- ---------
Net income (loss)........................... $9,470 $(12,468) $(29,895) $(31,703) $ (29,327)
======== ======== ======== ======== =========
Balance Sheet Data (at end of period):
Working capital (deficit)....................... $ (2,973) $ (5,451) $ 11,610 $ (8,598) $ 9,612
Total assets.................................... 303,812 299,000 329,958 333,975 351,181
Long-term debt and capitalized
leases, including current installments ....... 277,344 289,589 319,657 312,309 297,617
Stockholders' deficit........................... (109,389) (119,306) (106,085) (76,318) (44,396)
Other Data:
Net cash provided (used) by
operating activities.......................... $ 38,774 $ 48,137 $ 18,257 $ 24,313 $ (4,187)
Net cash used by
investing activities.......................... (24,145) (10,364) (10,100) (10,997) (24,436)
Net cash (used) provided by
financing activities.......................... (14,576) (37,812) (8,143) (13,312) 23,982
Capital expenditures (including lease
obligations entered into)..................... 22,724 16,238 23,713 37,767 28,022
Earnings (deficiency of earnings) to cover
fixed charges ................................ 11,659 (7,839) (27,122) (26,005) (21,431)
EBITDA ......................................... 80,007 64,286 52,367 46,972 46,847
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Item 7 in Part II of the Annual Report attached as Appendix 1 hereto.
BUSINESS
See Items 1, 2 and 3 in Part I of the Annual Report attached as Appendix 1
hereto.
MANAGEMENT
See Items 10 and 11 in Part III of the Annual Report attached as Appendix 1
hereto.
CERTAIN TRANSACTIONS
See Item 13 in Part III of the Annual Report attached as Appendix 1 hereto.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
See Item 12 in Part III of the Annual Report attached as Appendix 1 hereto.
18
<PAGE>
DESCRIPTION OF THE CREDIT AGREEMENT
The following is a summary of the material provisions of the credit
agreement. The summary is not complete. We urge you to read the credit
agreement. A copy of the credit agreement is filed as an exhibit to the
registration statement of which this prospectus is a part. Defined terms that
are used but not defined in this section have the meanings given such terms in
the credit agreement.
On May 8, 1998, we entered into a $145 million credit agreement with a
syndicate of lenders. The credit agreement comprises:
o a $70 million revolving credit facility, which is not subject
to a borrowing base limitation, maturing on March 31, 2004;
o a $25 million amortizing term loan facility maturing on March
31, 2004; and
o a $50 million amortizing term loan facility maturing on March
31, 2005.
Interest under the credit agreement is floating, based upon existing
market rates plus agreed-upon margin levels. In addition, we are obligated to
pay specific commitment and letter of credit fees. The margin levels and fees
will decrease if we achieve specified leverage ratio measures.
Borrowings under the credit agreement are secured by substantially all
of Graphics' assets. In addition, Holdings has guaranteed the indebtedness under
the credit agreement, which guarantee is secured by a pledge of all of Graphics'
stock.
The credit agreement requires satisfaction of certain financial
covenants including minimum consolidated EBITDA, consolidated interest coverage
ratio and leverage ratio requirements.
The $25 million term loan facility must be repaid in quarterly
installments beginning March 31, 2002, with the first quarterly installment
equal to $147,358 and thereafter of approximately $1.2 million each quarter
through its maturity date of March 31, 2004. The $50 million term loan facility
must be repaid in quarterly installments beginning March 31, 2002, with the
first quarterly installment equal to $12,814 and thereafter of $103,204 each
quarter from June 30, 2002 through March 31, 2003 and approximately $4.9 million
each quarter from June 30, 2003 through its maturity date of March 31, 2005. We
are also required to prepay the loans under certain circumstances with excess
cash flows and proceeds from certain sales of assets, equity and incurrence of
indebtedness.
The credit agreement restricts our ability to, among other things:
o consummate mergers and acquisitions,
o make investments,
o pay dividends and other distributions,
o incur liens,
o incur additional indebtedness,
o make capital expenditures,
o enter into transactions with affiliates,
o issue stock of subsidiaries, and
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o enter into agreements that contain restrictions affecting
subsidiaries.
In addition, the agreement includes various other customary affirmative and
negative covenants.
The failure to satisfy any of the covenants will, after giving effect
to any applicable grace period, constitute an event of default under the credit
agreement, notwithstanding the ability of Graphics to meet its debt service
obligations. The credit agreement includes other customary events of default,
including cross defaults to other indebtedness, change of control provisions and
certain events including bankruptcy, reorganization and insolvency. An event of
default under the credit agreement would allow the lenders to accelerate or, in
certain cases, would automatically cause the acceleration of, the maturity of
the indebtedness under the credit agreement and would restrict the ability of
Graphics to meet its obligations on the Notes.
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DESCRIPTION OF THE NOTES
The Notes were issued under an indenture, dated as of August 15, 1995,
among Graphics, Holdings and NationsBank of Georgia, National Association, and
effective December 4, 1995, The Bank of New York, through the acquisition of the
corporate trust business of NationsBank of Georgia, National Association, as
trustee (the "Trustee"). The terms of the Notes include those stated in the
indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended, as in effect on the date of the indenture. A
copy of the indenture is filed with the Commission as an exhibit to the
Registration Statement of which this prospectus is a part. The following is a
summary. The summary is not complete. We urge you to read the indenture. In this
section, "Graphics" refers only to American Color Graphics, Inc. and not to any
of its subsidiaries.
General
The Notes are unsecured senior subordinated obligations of Graphics,
limited to $185 million aggregate principal amount. The Notes will mature on
August 1, 2005.
Each Note will bear interest at 12 3/4% per annum from the most recent
interest payment date to which interest has been paid. Interest on the Notes
will be payable semiannually on February 1 and August 1 of each year. Interest
will be paid to holders of record at the close of business on the January 15 or
July 15 immediately preceding the interest payment date. Interest is computed on
a 360-day year of twelve 30-day months.
Interest on overdue principal and (to the extent permitted by law) on
overdue installments of interest will accrue at the rate per annum borne by the
Notes.
Optional Redemption
On or after August 1, 2000, Graphics may redeem any of the Notes upon
not less than 30 nor more than 60 days' notice by paying the applicable
redemption price at the time of redemption, plus accrued interest to the date of
redemption. The redemption price that Graphics will have to pay to redeem Notes
on a redemption date that occurs during the 12-month period beginning on August
1 of the years indicated below will be the corresponding percentage of principal
amount set forth below opposite such year, plus accrued interest, if any, on
such Notes to the redemption date:
Year Redemption Price
----- ----------------
2000............................................ 106.375%
2001............................................ 103.188
2002 and thereafter............................. 100.000
Sinking Fund
There will be no mandatory sinking fund payments for the Notes.
Ranking
Summary
The Notes will be senior subordinated Indebtedness of Graphics. This
means that the payment of principal, premium and interest on the Notes is
subordinated to the prior payment in full of all of Graphics' existing and
future Senior Indebtedness. See "Risk Factors -- Our significant debt could
adversely affect our ability to fulfill our obligations under the Notes."
However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust described under "-- Defeasance" below
will not be subordinated in right of payment to any Senior Indebtedness or
subject to the restrictions described below.
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The Guaranty will be senior subordinated Indebtedness of Holdings. The
Indebtedness evidenced by the Guaranty will be subordinated on the same basis to
Senior Indebtedness of Holdings as the Notes are subordinated to Graphics'
Senior Indebtedness.
At March 31, 2000, Graphics had $92.3 million of Senior Indebtedness,
no senior subordinated indebtedness other than the Notes and no subordinated
indebtedness outstanding and Graphics' subsidiaries had approximately $0.2
million of liabilities (which were effectively senior to the Notes).
Terms of Subordination
Graphics may not make any payment with respect to any Senior
Subordinated Obligations if at such time there exists a default in the payment
of any Senior Indebtedness unless (x) the default has been cured or waived and
any acceleration of such Indebtedness has been rescinded or (y) such Senior
Indebtedness has been paid in full in cash or cash equivalents. However,
Graphics may make any payment with respect to the Notes without regard to the
foregoing if Graphics and the Trustee receive written notice approving such
payment from the Representative of such Senior Indebtedness. During the
continuance of any default (other than a payment default described in the second
preceding sentence) with respect to any Designated Senior Indebtedness pursuant
to which the maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such acceleration) or
after the expiration of any applicable grace periods, Graphics may not make any
payment with respect to the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by Graphics and the Trustee of written notice of
such default from the Representative of such Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period (a "Payment Blockage
Notice") and ending 179 days thereafter (or earlier (1) if such Payment Blockage
Period is terminated by written notice to the Trustee and Graphics from the
Person who gave such Payment Blockage Notice, (2) by repayment in full of the
Designated Senior Indebtedness on behalf of which the Payment Blockage Notice
was given or (3) if no default permitting acceleration of any Designated Senior
Indebtedness is continuing). Notwithstanding the provisions described in the
immediately preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders shall have accelerated the
maturity of such Designated Senior Indebtedness, Graphics may, subject to the
provisions contained in the first sentence of this paragraph, resume payments on
the Notes after such Payment Blockage Period. The Notes will not be subject to
more than one Payment Blockage Notice in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period; provided, however, that if any Payment Blockage
Notice within such 360-day period is given by or on behalf of any holders of
Designated Senior Indebtedness (other than by the Bank Agent in respect of the
Bank Credit Agreement), the Bank Agent may give another Payment Blockage Notice
in relation to the Bank Credit Agreement within such period; provided further,
however, that in no event may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any 360 consecutive day period. For purposes of the subordination provisions
described hereunder, no default or event of default (excluding defaults and
events of default arising under financial covenants) which existed or was
continuing (it being acknowledged that any subsequent action that would give
rise to an event of default pursuant to any provision under which an event of
default previously existed or was continuing shall constitute a new event of
default for this purpose) on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period shall be, or be made, the basis of the commencement
of a subsequent Payment Blockage Period by the Representative of such Designated
Senior Indebtedness, even if not within a period of 360 consecutive days, unless
such default or event of default shall have been cured or waived for a period of
not less than 90 consecutive days.
Upon any payment or distribution of assets or securities of Graphics of
any kind or character, whether in cash, property or securities, upon a total or
partial liquidation or a total or partial dissolution of Graphics or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to Graphics or its property, the holders of Senior Indebtedness shall
be entitled to receive payment in full of all Senior Indebtedness in cash or
cash equivalents before holders of the Notes shall be entitled to receive any
payment or distribution in respect of any Senior Subordinated Obligations.
If payment of the Notes is accelerated because of an Event of Default,
Graphics or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness (or their Representative) of the acceleration. If any Designated
Senior Indebtedness is outstanding, Graphics may not make any payment in respect
of Senior
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Subordinated Obligations until five Business Days after such notice is received
and, thereafter, may pay the Senior Subordinated Obligations only if the
subordination provisions of the indenture otherwise permit the payment at that
time.
By reason of the subordination provisions contained in the indenture,
in the event of insolvency, creditors of Graphics who are holders of Senior
Indebtedness may recover more, ratably, than the holders of the Notes, and
creditors of Graphics who are not holders of Senior Indebtedness or the Notes
may recover less, ratably, than holders of Senior Indebtedness and may recover
more, ratably, than the holders of the Notes.
Guaranty
Holdings, as primary obligor and not merely as surety, has irrevocably,
fully and unconditionally guaranteed on an unsecured senior subordinated basis,
the punctual payment when due, whether at Stated Maturity, by acceleration or
otherwise, of all obligations of Graphics under the indenture and the Notes,
whether for principal of or interest on the Notes, expenses, indemnification or
otherwise (all such obligations guaranteed by Holdings being herein called the
"Guaranteed Obligations"). Holdings agreed to pay, on a senior subordinated
basis and in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or the
Holders in enforcing any rights under the Guaranty with respect to Holdings.
The obligations of Holdings under the Guaranty are unsecured senior
subordinated obligations. As such, the rights of Noteholders to receive payment
by Holdings pursuant to the Guaranty will be subordinated in right of payment to
the rights of holders of Senior Indebtedness of Holdings. At March 31, 2000,
Holdings had outstanding $92.3 million of Senior Indebtedness, including its
obligations under the Bank Credit Agreement. The indenture does not limit the
incurrence of Indebtedness by Holdings.
The Guaranty is a continuing guarantee and shall (a) remain in full
force and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon Holdings and (c) enure to the benefit of and be enforceable by the
Trustee, the Holders and their successors, transferees and assigns.
Pursuant to the indenture, Holdings may consolidate with, merge with or
into, or transfer all or substantially all its assets to any other Person to the
same extent Graphics may consolidate with, merge with or into, or transfer all
or substantially all its assets to, any other Person; provided, however, that if
such other Person is not Graphics, Holdings' obligations under the indenture
must be expressly assumed by such other Person. See "Successor Company."
Certain Covenants
Overview
In the indenture, Graphics has agreed to certain covenants that limit
its ability and the ability of its Restricted Subsidiaries to, among other
things:
o incur additional debt;
o pay dividends, acquire shares of Capital Stock, make payments
on subordinated debt or make investments;
o place limitations on distributions from Restricted
Subsidiaries;
o sell assets;
o enter into transactions with shareholders and affiliates, and
o effect mergers.
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In addition, if a Change of Control Triggering Event occurs, each
holder of Notes will have the right to require Graphics to repurchase all or a
part of the holder's Notes at a price equal to 101% of the principal amount of
those Notes, plus any accrued interest to the date of repurchase.
Limitation on Indebtedness
(a) Graphics shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that Graphics may
Incur Indebtedness if on the date of such Incurrence the Consolidated Coverage
Ratio would be greater than 1.75 to 1.0, on or prior to August 1, 1998, and 2.0
to 1.0, thereafter.
(b) Notwithstanding the foregoing paragraph (a), Graphics and its
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to one or more credit
facilities (including related Guarantees and security agreements) in an
aggregate principal amount outstanding at any time not to exceed the
greater of:
(a) the sum of (x) 90% of the consolidated book value
of the accounts receivable of Graphics and its Restricted
Subsidiaries and (y) 60% of the consolidated book value of the
inventory of Graphics and its Restricted Subsidiaries, in each
case as determined at the time of the respective Incurrence in
accordance with GAAP and
(b) $75,000,000;
provided, however, that no Restricted Subsidiary shall Incur
Indebtedness pursuant to this clause (1) in an aggregate principal
amount outstanding at any time which exceeds the sum of (a) 90% of the
book value of its accounts receivable on a stand-alone basis and (b)
60% of the book value of its inventory on a stand-alone basis, in each
case as determined in accordance with GAAP;
(2) Indebtedness of Graphics (and any Guarantee or Liens with
respect thereto) originally Incurred pursuant to the term loan
provisions of the Bank Credit Agreement and any refinancing thereof in
an aggregate principal amount outstanding at any time not to exceed (a)
$60,000,000 less (b) the aggregate sum of all principal payments
actually made from time to time under the Bank Credit Agreement or such
refinancing as a result of the application of Net Available Cash
pursuant to the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock";
(3) Indebtedness owed to and held by Graphics or a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to Graphics or another Wholly
Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Indebtedness;
(4) the Notes;
(5) Indebtedness outstanding on the Issue Date after giving
effect to the Transactions (other than Indebtedness described in clause
(1), (2), (3) or (4) of the covenant described hereunder);
(6) Guarantees by Graphics or a Restricted Subsidiary of
Indebtedness of a Restricted Subsidiary otherwise permitted to be
Incurred by the Restricted Subsidiary (other than Indebtedness
permitted by clause (10) below) or Guarantees by a Restricted
Subsidiary of Senior Indebtedness of Graphics permitted to be Incurred
by Graphics under the indenture;
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(7) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a) of the covenant described hereunder
or pursuant to clause (4) or (5) above or clause (9) or (10) below;
provided, however, that Refinancing Indebtedness the proceeds of which
are used to Refinance the Notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (7) if (A) in case the Notes are Refinanced
in part or the Indebtedness to be Refinanced is pari passu with the
Notes, such Refinancing Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such Refinancing
Indebtedness is Incurred or is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes
and (B) in case the Indebtedness to be Refinanced is subordinated in
right of payment to the Notes, such Refinancing Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which
such Refinancing Indebtedness is Incurred or is outstanding, is
expressly made subordinate in right of payment to the Notes at least to
the extent that the Indebtedness to be Refinanced is subordinated to
the Notes; provided further, however, that Refinancing Indebtedness the
proceeds of which are used to Refinance Indebtedness Incurred pursuant
to clause (10) below shall only be permitted under this clause (7) if
such Refinancing Indebtedness is Incurred by Graphics or the Restricted
Subsidiary that originally Incurred the Indebtedness pursuant to clause
(10) below;
(8) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business or (B) arising
from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of Graphics
or any of its Restricted Subsidiaries pursuant to such agreements, in
any case Incurred in connection with the acquisition or disposition of
any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness or other obligations Incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary for
the purpose of financing such acquisition), in a principal amount not
to exceed the gross proceeds actually received by Graphics or any
Restricted Subsidiary in connection with such disposition;
(9) Indebtedness, in an aggregate principal amount outstanding
at any time not to exceed $5 million, Incurred by Graphics in
connection with the purchase, redemption, acquisition, cancellation or
other retirement for value of shares of Capital Stock of Graphics, any
of its Subsidiaries or Holdings, options on any such shares or related
stock appreciation rights or similar securities (including phantom
equity rights) held by employees, former employees, directors or former
directors of Holdings, Graphics or its Subsidiaries (or their estates
or beneficiaries under their estates), upon death, disability,
retirement, termination of employment or pursuant to any agreement
under which such shares of stock or related rights were issued;
provided, however, that (A) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, is expressly made subordinate in right of
payment to the Notes and (B) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, provides that no payments of principal of
such Indebtedness, including by way of sinking fund, mandatory
redemption or otherwise (including defeasance), may be made by Graphics
at any time while any of the Notes are outstanding;
(10) Indebtedness of any Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary
was acquired by Graphics (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary or was acquired by Graphics);
(11) Capital Lease Obligations;
(12) Indebtedness constituting purchase money obligations for
property acquired in the ordinary course of business or other similar
financing transactions;
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(13) Indebtedness Incurred to finance Capital Expenditures or
the acquisition of Additional Assets in any fiscal year in an principal
amount not to exceed 6% of Graphics' consolidated net sales aggregate
for the immediately preceding fiscal year and Refinancing Indebtedness
in respect thereof; and
(14) Indebtedness (which may, but need not, be incurred under
the Bank Credit Agreement), in addition to that described in clauses
(1) through (13), in an aggregate principal amount outstanding at any
time not in excess of the greater of (A) $25 million and (B) 10% of the
Consolidated Net Worth of Graphics as of the end of the most recent
fiscal quarter ending at least 45 days prior to the date of the
incurrence of such Indebtedness.
(c) Graphics shall not Incur any Indebtedness pursuant to paragraph (a)
or (b) above if such Indebtedness is subordinate in right of payment to
anySenior Indebtedness unless such Indebtedness is Senior Subordinated
Indebtedness or is expressly subordinated in right of payment to Senior
Subordinated Indebtedness. In addition, Graphics shall not Incur any Secured
Indebtedness which is not Senior Indebtedness unless contemporaneously therewith
effective provision is made to secure the Notes equally and ratably with such
Secured Indebtedness for so long as such Secured Indebtedness is secured by a
Lien.
Limitation on Restricted Payments
(a) Graphics shall not, and shall not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time Graphics or
such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would
result therefrom); or
(2) Graphics is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during
the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which the Old Notes were issued to the
end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit);
(B) the aggregate Net Cash Proceeds received by
Graphics as a capital contribution or from the issuance or
sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale
to a Subsidiary of Graphics and other than an issuance or sale
to an employee stock ownership plan or other trust established
by Graphics or any of its Subsidiaries for the benefit of
their employees to the extent the purchase by such plan or
trust is financed by Indebtedness of such plan or trust and
for which Graphics is liable as Guarantor or otherwise);
(C) the amount by which Indebtedness of Graphics is
reduced on Graphics' balance sheet upon the conversion or
exchange (other than by a Subsidiary of Graphics) subsequent
to the Issue Date, of any Indebtedness for Capital Stock
(other than Disqualified Stock) of Graphics (less the amount
of any cash, or other property, distributed by Graphics upon
such conversion or exchange);
(D) an amount equal to the net reduction in
Investments in any Person resulting from dividends, repayments
of loans or advances, or other transfers of assets, in each
case to Graphics or any Restricted Subsidiary from such
Person, or for the sale of such Investment by Graphics or a
Restricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Restricted
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Subsidiary; provided, however, that the foregoing sum shall
not exceed the amount of Investments previously made by
Graphics or any Restricted Subsidiary in such Person, which
amount was treated as a Restricted Payment; and
(E) $5 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(1) any purchase or redemption of Capital Stock or
Subordinated Obligations of Graphics made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital Stock of
Graphics (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of Graphics or an employee stock
ownership plan or similar trust established by Graphics or any of its
Subsidiaries for the benefit of their employees to the extent the
purchase by such plan or trust is financed by Indebtedness of such plan
or trust and for which Graphics is liable as Guarantor or otherwise);
provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and
(B) the Net Cash Proceeds from such sale (to the extent used for such
purchase or redemption) shall be excluded from the calculation of
amounts under clause (3)(b) of paragraph (a) above;
(2) any purchase or redemption of Subordinated Obligations
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of Graphics which is permitted to be
Incurred pursuant to the covenant described under "-- Limitation on
Indebtedness"; provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted
Payments;
(3) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
the payment of such dividend shall be included in the calculation of
the amount of Restricted Payments;
(4) the repurchase (or dividends to Holdings for the
repurchase) of shares of, or options to purchase shares of, Capital
Stock of Graphics or any of its Subsidiaries or of Holdings from
employees, former employees, directors or former directors of Holdings,
Graphics or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant
to the terms of the agreements (including employment agreements) or
plans (or amendments thereto) approved by the Board of Directors under
which such persons purchase or sell or are granted the option to
purchase or sell, shares of such stock; provided, however, that the
aggregate amount of such repurchases or dividends shall not exceed $2
million in cash consideration in any calendar year or $12 million in
cash consideration in the aggregate (unless such repurchases or
dividends are made with the proceeds of insurance policies and the
shares of Capital Stock are repurchased from the executors,
administrators, testamentary trustees, heirs, legatees or
beneficiaries) plus the aggregate Net Cash Proceeds from any reissuance
during such calendar year of Capital Stock to employees, officers or
directors of Graphics or its Subsidiaries (which Net Cash Proceeds
shall be excluded from the calculation of amounts under clause (3)(B)
of paragraph (a) above, and that any consideration in excess of such
amounts is in the form of Indebtedness that would be permitted to be
Incurred under clause (8) of paragraph (b) of the covenant described
under "-- Limitation on Indebtedness"; provided that to the extent less
than $2 million in cash consideration (plus the aggregate Net Cash
Proceeds from any such reissuance during such calendar year, as
described above) is paid in any single calendar year pursuant to this
clause (4), the unused portion may be carried forward and paid in any
subsequent calendar year; provided further, however, that such cash
repurchases or dividends, except to the extent made with the proceeds
of insurance policies, shall be included in the calculation of the
amount of Restricted Payments;
(5) the payment of dividends on the Capital Stock of Graphics
or Holdings following any Public Equity Offering, of up to 6% per annum
of the net proceeds received by Graphics in such Public
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Equity Offering (including proceeds received by Graphics as a capital
contribution from Holdings from the net proceeds received by Holdings
in such Public Equity Offering); provided, however, that any such
dividends shall be included in the calculation of the amount of
Restricted Payments;
(6) payments or distributions pursuant to appraisal rights
required by law in connection with a consolidation, merger or transfer
of assets that complies with the provisions of the indenture described
under "Successor Company" below; provided, however, that any such
payments or distributions shall be included in the calculation of the
amount of Restricted Payments;
(7) any payments pursuant to any tax-sharing agreement between
Graphics and any other Person with which Graphics is required or
permitted to file a consolidated tax return or with which Graphics is
or could be part of a consolidated group for tax purposes; provided,
however, that any such payment shall be excluded in the calculation of
the amount of Restricted Payments;
(8) payments to Holdings necessary for Holdings to pay
corporate overhead expenses, not to exceed $250,000 in any fiscal year;
provided, however, that any such payments shall be excluded in the
calculation of the amount of Restricted Payments;
(9) payments to Holdings sufficient to permit Holdings to pay
for the registration of its securities with the SEC (including all
reasonable professional fees and expenses); provided, however, that any
such payments shall be excluded in the calculation of the amount of
Restricted Payments; and
(10) Investments in Unrestricted Subsidiaries made either in
exchange for Capital Stock (other than Disqualified Stock) of Graphics
or with the Net Cash Proceeds of the sale (other than to a Restricted
Subsidiary) of Capital Stock (other than Disqualified Stock) of
Graphics received by Graphics not more than 12 months prior to the date
of such Investment (provided that such Net Cash Proceeds shall be
excluded from the calculation of amounts of clause (3)(B) of paragraph
(a) above); provided, however, that any such Investments shall be
excluded in the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries
Graphics shall not, and shall not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary:
(a) to pay dividends or make any other distributions on its
Capital Stock owned by, or pay any Indebtedness owed to, Graphics,
(b) to make any loans or advances to Graphics or
(c) transfer any of its property or assets to Graphics,
except:
(1) any encumbrance or restriction pursuant to the Bank Credit
Agreement or any other agreement in effect at or entered into on the
date of the indenture and any extensions, refinancings, renewals or
replacements of any such agreement; provided, however, that the
encumbrances and restrictions in any such extension, refinancing,
renewal or replacement are no less favorable in any material respect to
the Noteholders than those encumbrances or restrictions being extended,
refinanced, renewed or replaced;
(2) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by Graphics
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the
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transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by Graphics) and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (2) of this covenant or contained in
any amendment to an agreement referred to in clause (2) of this
covenant; provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such
refinancing agreement or amendment are no less favorable in any
material respect to the Noteholders than encumbrances and restrictions
with respect to such Restricted Subsidiary contained in the agreements
referred to in clause (2) of this covenant;
(4) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder.
(5) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the
property subject to such security agreements or mortgages;
(6) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition;
(7) encumbrances and restrictions contained in any
Indebtedness or any agreement relating to any Indebtedness of Graphics
or a Restricted Subsidiary permitted pursuant to the covenant described
under "Limitation on Indebtedness"; provided, however, that either (A)
such encumbrances and restrictions are no more restrictive than the
encumbrances and restrictions imposed by the Bank Credit Agreement or
(B) each Restricted Subsidiary subject to any such encumbrances or
restrictions after the Issue Date shall Guarantee the Notes on a senior
subordinated basis; and
(8) any encumbrance or restriction existing under or by reason
of applicable law.
Nothing contained in the covenant described hereunder shall prevent
Graphics or any Restricted Subsidiary from restricting the sale or other
disposition of property or assets of Graphics or any Restricted Subsidiary that
secure Indebtedness of Graphics or any of its Restricted Subsidiaries.
Limitation on Sales of Assets and Subsidiary Stock
In the event and to the extent that the Net Available Cash received by
Graphics or any Restricted Subsidiary from one or more Asset Dispositions
occurring on or after the Issue Date in any period of 12 consecutive months
exceeds 10% of Adjusted Consolidated Assets as of the beginning of such 12-month
period, then Graphics shall:
(a) within 12 months after the date such Net Available Cash so
received exceeds such 10% of Adjusted Consolidated Assets and to the
extent Graphics elects (or is required by the terms of any
Indebtedness)
(A) apply an amount equal to or less than such excess
Net Available Cash (1) to repay, or permanently reduce
commitments to make loans or advances resulting in, Senior
Indebtedness of Graphics or Indebtedness of any Restricted
Subsidiary, or (2) to acquire the Notes and any other Senior
Subordinated Indebtedness of Graphics (provided that the
percentage of such Senior Subordinated Indebtedness of
Graphics acquired (as a percent of the aggregate principal
amount thereof at such time) shall be no greater than the
percentage of the Notes so acquired (as a
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percent of the aggregate principal amount of the Notes at such
time) in each case owing to or held by a Person other than
Graphics or any Affiliate of Graphics or
(B) invest an amount, equal to or less than the
difference between such excess Net Available Cash and the
amount so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months
after the date of such agreement), in Additional Assets and
(b) apply an amount equal to the difference between such
excess Net Available Cash and the amount applied pursuant to clause (a)
as provided in the following paragraphs of this covenant. The amount of
such excess Net Available Cash required to be applied pursuant to
clause (b) of the preceding sentence shall constitute "Excess
Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, Graphics must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase Notes from the Holders in accordance with the indenture at a purchase
price equal to 100% of the principal amount of such Notes plus accrued interest
to the date of purchase (the "Excess Proceeds Payment").
Graphics will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations thereunder in the event that such Excess Proceeds are received by
Graphics under this covenant and Graphics is required to repurchase Notes as
described above. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
Graphics shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under the covenant
described hereunder by virtue thereof.
Limitation on Affiliate Transactions
Graphics shall not, and shall not permit any Restricted Subsidiary to,
enter into, renew or extend any transaction (including the purchase, sale, lease
or exchange of any property or the rendering of any service) with any Affiliate
of Graphics (an "Affiliate Transaction") unless the terms thereof (1) are no
less favorable to Graphics or such Restricted Subsidiary (or, in the case of an
Affiliate Transaction between Graphics and a Restricted Subsidiary, are no less
favorable to Graphics or are, in the good faith determination of the Board of
Directors, in the best interests of Graphics) than those which could be obtained
at the time of such transaction in arm's-length dealings with a Person who is
not such an Affiliate and (2) if such Affiliate Transaction involves an amount
in excess of $2.5 million, the terms thereof are set forth in writing and either
(A) have been approved by a majority of the disinterested members of the Board
of Directors or (B) for which Graphics or such Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to Graphics or such Restricted Subsidiary
from a financial point of view.
The provisions of the preceding paragraph shall not prohibit
(1) any Restricted Payment permitted to be paid pursuant to
the covenant described under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans
approved by the Board of Directors;
(3) the grant of stock options or similar rights to employees
and directors of Graphics pursuant to plans approved by the Board of
Directors;
(4) loans or advances to employees in the ordinary course of
business in accordance with the past practices of Graphics or its
Restricted Subsidiaries;
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(5) the payment of reasonable fees to directors of Graphics
and its Restricted Subsidiaries who are not employees of Graphics or
its Restricted Subsidiaries;
(6) any payments or other transactions pursuant to any
tax-sharing agreement between Graphics and any other Person with which
Graphics is required or permitted to file a consolidated tax return or
with which Graphics is or could be part of a consolidated group for tax
purposes;
(7) any Affiliate Transaction between Graphics and a Wholly
Owned Subsidiary or between Wholly Owned Subsidiaries;
(8) the Transactions;
(9) any employment or other agreement providing for
compensation between Graphics or any of its Restricted Subsidiaries and
James T. Sullivan or Stephen M. Dyott that is approved, in good faith,
by the Board of Directors;
(10) the payment of fees to Morgan Stanley & Co. Incorporated
or its Affiliates for financial, advisory, consulting or investment
banking services that the Board of Directors of Graphics deems to be
advisable or appropriate for Graphics or any Subsidiary to obtain (and
including the payment to Morgan Stanley & Co. Incorporated or its
Affiliates of any underwriting discounts or commissions or placement
agency fees in connection with the issuance and sale of any securities
by Graphics or any Subsidiary of Graphics); or
(11) sales of Capital Stock of Holdings or Graphics to Morgan
Stanley & Co. Incorporated or
its Affiliates.
Change of Control Triggering Event
Upon the occurrence of a Change of Control Triggering Event, each
holder of Notes will have the right to require Graphics to repurchase all or any
part of such holder's Notes at a repurchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date) in accordance with
the terms described below. The indenture will provide that, prior to the mailing
of the notice referred to below, but in any event within 30 days following any
Change of Control Triggering Event, Graphics covenants to (1) repay in full all
Indebtedness under the Bank Credit Agreement (and terminate all commitments
thereunder) or offer to repay in full all Indebtedness under the Bank Credit
Agreement (and terminate all commitments thereunder) and to repay the
Indebtedness owed to (and terminate the commitments of) each lender which has
accepted such offer or (2) obtain the requisite consents under the Bank Credit
Agreement to permit the repurchase of the Notes as provided below. Graphics
shall first comply with the covenant in the immediately preceding sentence
before it shall be required to repurchase Notes pursuant to the provisions
described below. Graphics' failure to comply with the covenant described in the
second preceding sentence resulting in a failure to mail the notice referred to
below shall constitute an Event of Default under clause (4) and not in clause
(2) under "Defaults" below.
Within 30 days following any Change of Triggering Event, Graphics will
mail a notice to each holder stating
(1) that a Change of Control Triggering Event has occurred and
that such holder has the right to require Graphics to repurchase all or
any part of such holder's Notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued and unpaid interest
to the date of repurchase (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant
interest payment date);
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(2) the circumstances and relevant facts regarding such Change
of Control Triggering Event (including, to the extent available,
information with respect to pro forma historical income, cash flow and
capitalization of Graphics after giving effect to such Change of
Control Triggering Event);
(3) the repurchase date (which will be no earlier than 30 days
nor later than 60 days from the date such notice is mailed); and
(4) the instructions, determined by Graphics consistent with
the indenture, that a holder must follow in order to have its Notes
repurchased.
The obligation of Graphics to offer to purchase Notes upon the
occurrence of a Change of Control Triggering Event may in certain circumstances
make more difficult or discourage a takeover of Graphics and Holdings, and,
thus, the removal of incumbent management. Subject to the limitations discussed
below, Graphics could, in the future, enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the indenture, but that could increase the amount of
Indebtedness outstanding at such time or otherwise affect Graphics' capital
structure or credit ratings.
Graphics' ability to pay cash to the Holders of Notes upon a repurchase
may be limited by Graphics' then existing financial resources.
Graphics will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any offer
required to be made by Graphics to repurchase the Notes as a result of a Change
of Control Triggering Event. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, Graphics shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under the
covenant described hereunder by virtue thereof.
The provisions relative to Graphics' obligation to make an offer to
repurchase the Notes as a result of a Change of Control Triggering Event may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
Limitation on the Issuance of Preferred Stock of Restricted
Subsidiaries
Graphics shall not sell or otherwise dispose of any shares of Preferred
Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue, sell or otherwise dispose of any
shares of its Preferred Stock, except, in each case, (1) to Graphics or a Wholly
Owned Subsidiary or (2) if, immediately after giving effect to such issuance,
sale or other disposition, such Restricted Subsidiary would no longer constitute
a Restricted Subsidiary.
SEC Reports
Notwithstanding that Graphics may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, Graphics shall file
with the SEC and provide the Trustee and Noteholders with such annual reports
and such information, documents and other reports which are specified in
Sections 13 and 15(d) of the Exchange Act and applicable to a Person subject to
such Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections; provided, however, that, so long as Holdings is
the Guarantor of the Notes, the reports, information and other documents
required to be filed and provided as described hereunder shall be those of
Holdings rather than Graphics.
Successor Company
Neither Holdings nor Graphics may consolidate with or merge with or
into, or convey, transfer or lease all or substantially all its assets to, any
Person (other than Graphics or Holdings, respectively, or a Wholly Owned
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Subsidiary with a positive net worth immediately prior to such consolidation,
merger or transfer of assets; provided, however, that in connection with any
such consolidation, merger or transfer, no consideration (other than Capital
Stock (excluding Disqualified Stock) of the surviving Person, Holdings or
Graphics) shall be issued or distributed to the stockholders of Graphics)
unless:
(1) the resulting, surviving or transferee Person (the
"Successor Company") is organized and existing under the laws of the
United States of America or any State thereof or the District of
Columbia and such entity (if not Graphics) expressly assumes by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of Holdings or
Graphics, as the case may be, under the indenture and the Notes;
(2) immediately prior to and after giving effect to such
transaction (and treating any Indebtedness which becomes an obligation
of the Successor Company or any Subsidiary of the Successor Company as
a result of such transaction as having been Incurred by the Successor
Company or such Subsidiary at the time of such transaction), no Default
has happened and is continuing;
(3) in the case of a transaction involving Graphics,
immediately after giving effect to such transaction, the Consolidated
Coverage Ratio of the Successor Company is at least 1:1; provided,
however, that, if the Consolidated Coverage Ratio of Graphics before
giving effect to such transaction is within the range set forth in
column (A) below, then the Consolidated Coverage Ratio of the Successor
Company shall be at least equal to the lesser of (1) the ratio
determined by multiplying the percentage set forth in column (B) below
by the Consolidated Coverage Ratio of Graphics prior to such
transaction and (2) the ratio set forth in column (C) below:
(A) (B) (C)
--- --- ---
1.11:1 to 1.99:1........................... 90% 1.50:1
2.00:1 to 2.99:1........................... 80% 2.10:1
3.00:1 to 3.99:1........................... 70% 2.40:1
4.00:1 or more............................. 60% 2.50:1
(4) in the case of a transaction involving Graphics,
immediately after giving effect to such transaction, the Successor
Company has Consolidated Net Worth in an amount which is not less than
the Consolidated Net Worth of Graphics prior to such transaction and
(5) Holdings or Graphics, as the case may be, delivers to the
Trustee an officers' certificate and an opinion of counsel, each
stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the indenture.
The Successor Company will be the successor to Holdings or Graphics, as the case
may be, and shall succeed to, and be substituted for, and may exercise every
right and power of, Holdings or Graphics, as the case may be, under the
indenture but the predecessor company, in the case of a lease, shall not be
released from the obligation to pay the principal of and interest on the Notes.
Defaults
An Event of Default is defined in the indenture as
(1) a default in the payment of interest on the Notes when
due, continued for 30 days;
(2) a default in the payment of principal of any Note when due
at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration or otherwise;
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(3) the failure by Graphics to comply with its obligations
under "Successor Company" above;
(4) the failure by Graphics to comply for 30 days after notice
with any of its obligations under the covenants described above in
"Certain Covenants" under "Limitation on Indebtedness," "Limitation on
Restricted Payments," "Limitation on Restrictions on Distributions from
Subsidiaries," "Limitation on Sales of Assets and Subsidiary Stock"
(other than a failure to repurchase Notes), "Limitation on Affiliate
Transactions," "Change of Control Triggering Event" (other than a
failure to repurchase Notes), or "SEC Reports";
(5) the failure by Holdings or Graphics to comply for 60 days
after notice with its other agreements contained in the indenture;
(6) Indebtedness of Holdings, Graphics or any Significant
Subsidiary is not paid within any applicable grace period after final
maturity thereof or becomes, or is declared by the holders thereof to
be, immediately and unconditionally due and payable because of a
default and the total amount of such Indebtedness unpaid or becoming or
declared to be due and payable exceeds $10 million and such failure
continues (or such payment shall not have been waived or extended or
such Indebtedness shall continue to be due and payable) for 30 days
after notice (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization
of Holdings, Graphics or a Significant Subsidiary (the "bankruptcy
provisions");
(8) any judgment or decree for the payment of money in excess
of $10 million (provided that the amount of such money judgment or
decree shall be calculated net of any insurance coverage that Graphics
has determined in good faith is available in whole or in part with
respect to such money judgment or decree) is rendered against Holdings,
Graphics or a Significant Subsidiary, remains outstanding for a period
of 60 days following such judgment and is not discharged, waived or
stayed within 10 days after notice (the "judgment default provision");
or
(9) the Guaranty ceases to be in full force and effect (other
than in accordance with the terms of such Guaranty) or Holdings denies
or disaffirms its obligations under the Guaranty.
However, a default under clauses (4), (5), (6) and (8) will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding Notes notify Graphics of the default and Graphics does not cure
such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% of principal amount of the outstanding Notes may declare
the principal amount of and accrued but unpaid interest on all the Notes as of
the date of such declaration to be due and payable. Upon such a declaration,
such amounts shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of
Graphics occurs and is continuing, the principal amount of and any accrued but
unpaid interest on all the Notes will automatically become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any holders of the Notes. Under certain circumstances, the holders of a
majority in principal amount of the outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the indenture or the Notes unless
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(1) such holder has previously given the Trustee notice that
an Event of Default is continuing;
(2) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60
days after the receipt thereof and the offer of security or indemnity;
and
(5) the holders of a majority in principal amount of the
outstanding Notes have not given the Trustee a direction inconsistent
with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
The indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is in the interest of the holders of the Notes. In
addition, Graphics is required to deliver to the Trustee, within 120 days after
the end of the fiscal year, a certificate indicating whether the signers thereof
know of any Default that occurred during the previous year. Graphics also is
required to deliver to the Trustee, within 30 days after the occurrence thereof,
written notice of any events which would constitute certain Defaults, their
status and what action Graphics is taking or proposes to take in respect
thereof.
Amendments and Waivers
Subject to certain exceptions, the indenture may be amended or
supplemented with the consent of the holders of a majority in principal amount
of the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note, no amendment may, among other things,
(1) reduce the amount of Notes whose holders must consent to
an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity of
any Note or reduce the principal amount of any Note;
(4) reduce the premium payable upon the redemption of any Note
or change the time at which any Note may be redeemed as described under
"Optional Redemption" above;
(5) make any Note payable in money other than that stated in
the Note;
(6) impair the right of any holder of the Notes to receive
payment of principal of and interest on such holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Notes;
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(7) make any change in the amendment provisions which require
each holder's consent or in the waiver provisions;
(8) make any change to the subordination provisions of the
indenture that would adversely affect the Noteholders; or
(9) make any change in the Guaranty that would adversely
affect the Noteholders.
Without the consent of any holder of the Notes, Graphics and the
Trustee may amend or supplement the indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of Graphics under the indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add additional guarantees
with respect to the Notes, to secure the Notes, to add to the covenants of
Graphics or Holdings for the benefit of the holders of the Notes or to surrender
any right or power conferred upon Graphics or Holdings, to provide for the
issuance of the Notes, to make any change that does not adversely affect the
rights of any holder of the Notes or to comply with any requirement of the
Commission in connection with the qualification of the indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness (or
their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the
indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, Graphics is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
Defeasance
Graphics at any time may terminate all its obligations under the Notes
and the indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. Graphics at any time may terminate its obligations under the covenants
described under "Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision described under "Defaults" above and the
limitations contained in clauses (3) and (4) under "Successor Company" above
("covenant defeasance").
Graphics may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Graphics exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If Graphics exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (6), (7) (with respect only to
Significant Subsidiaries) or (8) under "Defaults" above or because of the
failure of Graphics to comply with clause (3) or (4) under "Successor Company"
above. If Graphics exercises its legal defeasance option or its covenant
defeasance option, Holdings will be released from all its obligations with
respect to the Guaranty.
In order to exercise either defeasance option, Graphics must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal of and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivering to the Trustee an opinion of
counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
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deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such opinion of counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
Concerning the Trustee
On December 4, 1995, The Bank of New York purchased the corporate trust
business of NationsBank of Georgia, National Association, and became the Trustee
under the indenture and the Registrar and Paying Agent with regard to the Notes.
Governing Law
The indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York applicable to
contracts executed and to be performed entirely in such State.
Definitions
"Additional Assets" means (1) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (2) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by Graphics or another Restricted Subsidiary; or (3) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clauses (2) or (3) above is primarily engaged in a Related
Business.
"Adjusted Consolidated Assets" means at any time the total amount of
assets of Graphics and its consolidated Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), after deducting
therefrom all current liabilities of Graphics and its consolidated Restricted
Subsidiaries (excluding intercompany items), all as set forth on the
consolidated balance sheet of Graphics and its consolidated Restricted
Subsidiaries as of the end of the most recent fiscal quarter ended at least 45
days prior to the date of determination.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "-- Limitation on Restricted
Payments," "-- Limitation on Sales of Assets and Subsidiary Stock" and "--
Limitation on Affiliate Transactions," "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of Graphics or of rights or warrants
to purchase such stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
Graphics or any Restricted Subsidiary, including any disposition by means of a
merger, consolidation or similar transaction (each referred to for the purposes
of this definition as a "disposition"), of (1) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares) or (2) any
assets of Graphics or any Restricted Subsidiary outside the ordinary course of
business of Graphics or such Restricted Subsidiary (other than (y) a disposition
by a Restricted Subsidiary to Graphics or by Graphics or a Subsidiary to a
Wholly Owned Subsidiary and (z) for purposes of the covenant described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only,
a Restricted Payment permitted by the covenant described under "Certain
Covenants -- Limitation on Restricted Payments"); provided, however, that for
purposes of the covenant described under "Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock" only, the term "Asset Disposition" shall
not include any disposition of assets if such disposition is governed by the
provisions of the indenture described under "Successor Company."
"Average Life" means, as of the date of determination, with respect to
any Indebtedness, the quotient obtained by dividing (1) the sum of the products
of numbers of years from the date of determination to the dates of
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each successive scheduled principal payment of such Indebtedness multiplied by
the amount of such payment by (2) the sum of all such payments.
"Bank Agent" is defined to mean BT Commercial Corporation, as agent for
the Banks pursuant to the Bank Credit Agreement, and any successor or successors
thereto.
"Bank Credit Agreement" is defined to mean the Credit Agreement, dated
as of August 15, 1995, among Holdings, Graphics, the Banks party thereto and the
Bank Agent, together with the related documents thereto (including, without
limitation, any Guarantees and security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented, replaced or otherwise modified from time to time, including any
agreement extending the maturity of, refinancing or otherwise restructuring
(including, but not limited to, the inclusion of additional borrowers or
guarantors thereunder that are Subsidiaries of Holdings or Graphics and whose
obligations are guaranteed by Holdings or Graphics thereunder) all or a portion
of the Indebtedness under such agreement or any successor agreement.
"Banks" is defined to mean the lenders who are from time to time
parties to the Bank Credit Agreement.
"Board of Directors" means the Board of Directors of Graphics or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Expenditures" means expenditures (whether paid in cash or
accrued as liabilities and including Capital Lease Obligations) of Graphics and
its Restricted Subsidiaries relating to the acquisition of equipment used or
useful in the business of Graphics or any Restricted Subsidiary or in a Related
Business.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent of any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means such time as
(1) a "person" or "group" (within the meaning of Sections
13(d) and 14(d) of the Exchange Act), other than the Permitted Holders
and their respective Affiliates, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than (A) forty
percent (40%) of the total voting power of the then outstanding Voting
Stock of Graphics or Holdings and (B) the total voting power of the
then outstanding Voting Stock of Graphics or Holdings, as the case may
be, beneficially owned by the Permitted Holders and their respective
Affiliates, treating the Permitted Holders and their respective
Affiliates as a "group";
(2) during any period of two consecutive calendar years,
individuals who at the beginning of such period constituted the Board
of Directors of (A) Graphics (together with any new directors whose
election by Graphics's Board of Directors or whose nomination for
election by Graphics's Board of Directors or whose nomination for
election by Graphics's shareholders was approved by a vote of at least
two-thirds of the directors then still in office who either were
directors at the beginning of such period or whose election or
nomination for election was previously so approved) or (B) Holdings
(together with any new directors whose election by Holdings' Board of
Directors or whose nomination for election by Holdings' shareholders
was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of such
period or whose election or nomination for election was
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previously so approved), in either case, cease for any reason to
constitute a majority of the directors of Graphics or Holdings, as the
case may be, then in office; or
(3) (A) Graphics or Holdings consolidates with or merges into
any other Person or conveys, transfers or leases all or substantially
all its assets to any Person or (B) any Person merges into Graphics or
Holdings, in either event pursuant to a transaction in which any Voting
Stock of Graphics or Holdings, as the case may be, outstanding
immediately prior to the effectiveness thereof is reclassified or
changed into or exchanged for cash, securities or other property;
provided, however, that any consolidation, conveyance, transfer or
lease (x) between Graphics and any of its Subsidiaries, between
Holdings and any Holdings Subsidiaries, between Subsidiaries of
Graphics or between Holdings Subsidiaries (including the
reincorporation of Graphics or Holdings in another jurisdiction) or (y)
for the purpose of creating a public holding company for Graphics or
Holdings in another jurisdiction or (z) for the purpose of creating a
public holding company for Graphics or Holdings in which all holders of
the capital stock of Graphics or Holdings, as the case may be, would be
entitled to receive (other than cash in lieu of fractional shares)
solely capital stock of the holding company in amounts proportionate to
their holdings of such capital stock of Graphics or Holdings
immediately prior to such transaction, shall be excluded from the
operation of this clause (3).
"Change of Control Triggering Event" means the occurrence of both a
Change of Control and a Rating Decline.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (1) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (2) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that
(1) if Graphics or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains
outstanding (other than Indebtedness Incurred under a revolving credit
or similar arrangement Incurred after the end of such four consecutive
fiscal quarters to the extent of the commitment thereunder) or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the
discharge of any other Indebtedness repaid, repurchased, defeased or
otherwise discharged with the proceeds of such new Indebtedness as if
such discharge had occurred on the first day of such period;
(2) if Graphics or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness (other
than Indebtedness under a revolving credit or similar arrangement
unless such revolving credit Indebtedness has been permanently repaid)
since the beginning of such period or if any Indebtedness is to be
repaid, repurchased, defeased or otherwise discharged on the date of
the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such
period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period (except for Consolidated
Interest Expense accrued (as adjusted pursuant to clause (1)) since the
end of such period under a revolving credit or similar arrangement to
the extent of the commitment thereunder in effect on the date of the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio) and as if Graphics or such Restricted Subsidiary has
not earned the interest income actually earned during such period in
respect of cash or Temporary Cash Investments used to repay,
repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period Graphics or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA
for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are the subject of
such Asset Disposition for such period, or increased by an amount equal
to the EBITDA (if negative), directly attributable thereto for
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such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of Graphics or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to Graphics and its continuing Restricted Subsidiaries in
connection with such Asset Dispositions for such period (or, if the
Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent Graphics and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if since the beginning of such period Graphics or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Subsidiary (or any Person which becomes a Restricted
Subsidiary) or any acquisition of assets, including any acquisition of
assets occurring in connection with a transaction causing a calculation
to be made hereunder, which constitutes all or substantially all of an
operating unit of a business, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect
thereto as if such Investment or acquisition occurred on the first day
of such period, excluding, in the case of an acquisition of assets or
Capital Stock, any operating expense or cost reduction of such Person
or the Person to be acquired which, in the good faith estimate of a
responsible financial or accounting officer of such Person, will be
eliminated or realized, as the case may be, during the 12 month period
following the date of determination, as a result of such acquisition as
if such elimination of such operating expense or the realization of
such cost reductions were achieved on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
Graphics or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, Investment or
acquisition of assets that would have required an adjustment pursuant
to clause (3) or (4) above if made by Graphics or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition of
assets occurred on the first day of such period and excluding any
operating expenses or cost reductions as provided in clause (4).
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto, and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting officer of Graphics. If
any Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Protection Agreement applicable to
such Indebtedness if such Interest Rate Protection Agreement has a remaining
term in excess of 12 months or, if shorter, the remaining term of the
Indebtedness to which it relates).
"Consolidated Interest Expense" means, for any period, the total
interest expense of Graphics and its consolidated Restricted Subsidiaries, plus,
to the extent not included in such total interest expense, and to the extent
incurred by Graphics or any Restricted Subsidiary,
(1) interest expense attributable to capital leases;
(2) amortization of debt discount and premium and debt
issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(6) net costs under Interest Rate Protection Agreements
(including amortization of fees);
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(7) Preferred Stock dividends paid in respect of all Preferred
Stock of Graphics or a Restricted Subsidiary held by Persons other than
Graphics or a Restricted Subsidiary;
(8) interest incurred in connection with Investments in
discontinued operations; and
(9) interest actually paid by Graphics or any consolidated
Restricted Subsidiary under any Guarantee of Indebtedness of any
Person;
excluding, however, (A) any amount of such interest expense of any Restricted
Subsidiary if the net income (or loss) of such Restricted Subsidiary is excluded
in the calculation of Consolidated Net Income pursuant to clause (3) of the
definition thereof (but only in the same proportion as the net income (or loss)
of such Restricted Subsidiary is excluded from the calculation of Consolidated
Net Income pursuant to clause (3) of the definition thereof) and (B) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the Transactions, all as determined on a consolidated basis in conformity
with GAAP.
"Consolidated Net Income" means, for any period, the net income (or
loss) of Graphics and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(1) any net income or loss of any Person if such Person is not
a Restricted Subsidiary, except that subject to the limitations
contained in clause (iv) below, Graphics' equity in the net income or
loss of any such Person for such period shall be included in such
Consolidated Net Income up to, in the case of net income, the aggregate
amount of cash actually distributed by such Person during such period
to Graphics or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(3) below) and, in the case of a net loss, the aggregate amount of cash
actually contributed by Graphics or a Restricted Subsidiary to such
Person during such period;
(2) solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph (a) of the
covenant described under "Certain Covenants -- Limitation on Restricted
Payments" (and in such case, except to the extent includable pursuant
to the foregoing clause (i) above), any net income (or loss) of any
Person acquired by Graphics or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition;
(3) any net income or loss of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to Graphics,
except that subject to the limitations contained in clause (iv) below,
Graphics' equity in the net income or loss of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to, in the case of net income, the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period
to Graphics or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to another Restricted Subsidiary, to the limitation contained in
this clause) and, in the case of a net loss, the aggregate amount of
cash actually contributed by Graphics or another Restricted Subsidiary
to such Restricted Subsidiary during such period;
(4) any gain or loss realized upon the sale or other
disposition of any assets of Graphics or its consolidated Subsidiaries
(including pursuant to any sale-and-leaseback arrangement) which is not
sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any
Capital Stock of any Person;
(5) extraordinary gains or losses; and
(6) the cumulative effect of a change in accounting
principles;
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provided, however, that solely for the purposes of calculating the Consolidated
Coverage Ratio (and in such case, except to the extent it is already included
pursuant to clause (1) above), "Consolidated Net Income" shall include the
amount of all cash dividends received by Graphics or any Restricted Subsidiary
from an Unrestricted Subsidiary (subject, in the case of a dividend paid to a
Restricted Subsidiary, to the limitation contained in clause (3) above);
provided further, however, that solely for purposes of calculating the amount of
Restricted Payments that may be made pursuant to paragraph (a) of the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments," any
amortization, depreciation or other non-cash charge relating to the Transactions
or any acquisitions subsequent to the Issue Date, including goodwill,
non-compete agreements, the stepped-up basis on assets acquired and deferred
financing costs, to the extent such items reduced Consolidated Net Income, shall
not be included.
"Consolidated Net Tangible Assets" as of any date of determination,
means the total amount of assets (less accumulated depreciation or amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet of
Graphics and its consolidated Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, and after giving effect to purchase
accounting and after deducting therefrom all current liabilities of Graphics and
its consolidated Restricted Subsidiaries as well as, to the extent otherwise
included, the amounts of (without duplication):
(1) minority interests in consolidated Restricted Subsidiaries
held by Persons other than Graphics or a Restricted Subsidiary;
(2) excess of cost over fair value of assets of businesses
acquired, as determined in good faith, by the Board of Directors;
(3) any revaluation or other write-up in book value of assets
subsequent to the Issue Date as a result of a change in the method of
valuation in accordance with GAAP consistently applied;
(4) unamortized debt discount and expenses and other
unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, licenses, organization or developmental
expenses and other intangible items; and
(5) treasury stock.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Graphics and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP (excluding the
effects of foreign currency exchange adjustments under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 52), as of the
end of the most recent fiscal quarter of Graphics ending at least 45 days prior
to the taking of any action for the purpose of which the determination is being
made, as (1) the par or stated value of all outstanding Capital Stock of
Graphics plus (2) paid-in capital or capital surplus relating to such Capital
Stock plus (3) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Designated Senior Indebtedness" is defined to mean (1) Indebtedness
under the Bank Credit Agreement and (2) any other Indebtedness constituting
Senior Indebtedness that, at any date of determination, has an aggregate
principal amount of at least $25 million and is specifically designated by
Graphics in the instrument creating or evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms or upon the happening of any event (1) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (2)
is convertible or exchangeable for Indebtedness or Disqualified Stock or (3) is
redeemable at the option of the holder thereof, in whole or in part, in each
case on or prior to the first anniversary of the Stated Maturity of the Notes;
provided, however, that any Capital Stock that would not constitute Disqualified
Stock but for provisions
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thereof giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of any "asset sale" or "change of
control" occurring prior to the first anniversary of the Stated Maturity of the
Notes shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the covenants
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" and "-- Change of Control Triggering Event" and such Capital
Stock specifically provides that such Person will not repurchase or redeem any
such Capital Stock pursuant to such provision prior to such Person's repurchase
of such Notes as are required to be repurchased pursuant to the covenants
described under "Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" and "-- Change of Control Triggering Event."
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense, plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense, (b)
depreciation expense, (c) amortization expense and (d) all other non-cash
charges, less all non-cash items increasing Consolidated Net Income, in each
case for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the indenture shall be
made without giving effect to (1) the amortization of any expenses incurred in
connection with the Transactions and (2) except as otherwise expressly provided,
the amortization of any amount required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17 in connection with the 1993 Acquisition, the
Transactions or any acquisitions after the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or other financial
obligation of any other Person and any obligation, direct or indirect,
contingent or otherwise, of such Person (1) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or other
financial obligation of such other Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (2) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness or other financial
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing
any Indebtedness or financial obligation.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Holdings Subsidiary" means a corporation a majority of the equity
ownership or the Voting Stock of which is at the time owned, directly or
indirectly, by Holdings or by one or more other Subsidiaries of Holdings, or by
Holdings and one or more other Subsidiaries of Holdings.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. The term "Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" of any Person means, without duplication:
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(1) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable (other than
Interest Rate Protection Agreements);
(2) all Capital Lease Obligations of such Person;
(3) all obligations of such Person issued or assumed as the
deferred purchase price of property which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto, all conditional sale obligations of
such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(4) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (1) through (3) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third Business Day following receipt by
such Person of a demand for reimbursement following payment on the
letter of credit);
(5) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock, and in respect of a Restricted Subsidiary, all obligations of
such Subsidiary with respect to the redemption, repayment or other
repurchase of any Preferred Stock (but excluding, in each case, any
accrued dividends);
(6) all obligations of the type referred to in clauses (1)
through (5) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise, including
by means of any Guarantee; and
(7) all obligations of the type referred to in clauses (1)
through (6) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets (as determined by the
Board of Directors) or the amount of the obligation so secured.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided, however,
(1) that the amount outstanding at any time of any Indebtedness Incurred with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (2) that
Indebtedness shall not include (A) any liability for Federal, state, local or
other taxes, (B) any obligations under Interest Rate Protection Agreements or
Raw Material Hedge Agreements or (C) any liability arising from the honoring by
a bank or other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business.
"Interest Rate Protection Agreement" means any interest rate or
currency swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect Graphics or any Restricted
Subsidiary against fluctuations in interest rates or currency values.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable) or other extension of credit (including by way
of Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services of the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary," the definition of
"Restricted Payment," and the covenant described under
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"Certain Covenants -- Limitation on Restricted Payments," (1) "Investment" shall
include the portion (proportionate to Graphics' equity interest in such
Subsidiary) of the fair market value of the net assets of any Subsidiary of
Graphics at the time that such Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, Graphics shall be deemed to continue to have a permanent
"Investment" in such Subsidiary at the time of such redesignation equal to the
amount (if positive) equal to (x) Graphics' "Investment" in such Subsidiary at
the time of such redesignation less (y) the portion (proportionate to Graphics'
equity interest in such Subsidiary) of the fair market value of the net assets
of such Subsidiary at the time of such redesignation; and (2) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Investment Grade" means (1) BBB- (or its equivalent) or higher by S&P
or (2) Baa3 (or its equivalent) or higher by Moody's or (3) the equivalent of
such rating by a substitute Rating Agency.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"MSCP Entities" means, collectively, Morgan Stanley Capital Partners
III, L.P., a Delaware limited partnership, Morgan Stanley Capital Investors,
L.P., a Delaware limited partnership, and MSCP III 892 Investors, L.P., a
Delaware limited partnership.
"MSLEF" means The Morgan Stanley Leveraged Equity Fund II, L.P., a
Delaware limited partnership.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal (but not interest) pursuant to a note or installment
receivable or otherwise, including upon release to Graphics or a Restricted
Subsidiary from any reserve established by Graphics or such Restricted
Subsidiary against any liabilities associated with such Asset Disposition, but
only as and when received, but excluding any other consideration received in the
form of assumption by the acquiring person of Indebtedness or other obligations
relating to such properties or assets or received in any other noncash form) in
each case net of all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial, foreign
and local taxes required to be accrued as a liability under GAAP, as a
consequence of such Asset Disposition (without regard to the consolidated
results of operations of Graphics and its Subsidiaries, taken as whole), and in
each case net of all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law be repaid out of the proceeds from such
Asset Disposition, and, until released to Graphics or a Restricted Subsidiary,
net of appropriate amounts to be provided by Graphics or any Restricted
Subsidiary of Graphics as a reserve against any liabilities associated with such
Asset Disposition, including pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Disposition, all as
determined in accordance with GAAP, and net of all distributions and other
payments required to be made to minority interest holders in Subsidiaries or
joint ventures as a result of such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means, collectively, MSLEF, the MSCP Entities and
the other investors, including the officers and directors of Graphics or
Holdings, who beneficially own Voting Stock of Holdings on the Issue Date
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after giving effect to the Transactions, or, upon the death of such an
individual investor, such person's executors, administrators, testamentary
trustees, heirs, legatees or beneficiaries.
"Permitted Investment" means
(1) an Investment in Graphics or in a Restricted Subsidiary or
a Person which will, upon the making of such Investment, become a
Restricted Subsidiary; provided, however, that the primary business of
such Restricted Subsidiary or such Person is a Related Business;
(2) an Investment by Graphics or any Restricted Subsidiary in
another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Graphics or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(3) a Temporary Cash Investment;
(4) receivables owing to Graphics or any Restricted
Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary
trade terms as Graphics or any such Restricted Subsidiary deems
reasonable under the circumstances;
(5) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(6) loans or advances to employees made in the ordinary course
of business in accordance with past practices of Graphics or of its
Restricted Subsidiaries;
(7) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to Graphics
or any Restricted Subsidiary or in satisfaction of judgments;
(8) Interest Rate Protection Agreements and Raw Material Hedge
Agreements; and
(9) Investments at any time not exceeding $12 million (valued
at the fair market value at the time any such Investment was made).
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"principal" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering
of common stock of Graphics or Holdings pursuant to an effective registration
statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has
been consummated and (y) at least 15% of the total issued and outstanding common
stock of Graphics or Holdings has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
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"Rating Agencies" means S&P and Moody's; provided, however, that if S&P
or Moody's or both shall not make a rating of the Notes publicly available, the
term Rating Agencies shall refer to a nationally recognized securities rating
agency or agencies, as the case may be, selected by Graphics to substitute for
S&P or Moody's or both, as the case may be.
"Rating Category" means
(1) with respect to S&P, any of the following categories: BB,
B, CCC, CC, C and D (or equivalent successor categories);
(2) with respect to Moody's, any of the following categories:
Ba, B, Caa, Ca, C and D (or equivalent successor categories); and
(3) the equivalent of any such category of S&P or Moody's used
by a substitute Rating Agency.
In determining whether the rating of the Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for S&P; 1, 2 and 3 for
Moody's; or the equivalent gradations for another Rating Agency) shall be taken
into account (e.g., with respect to S&P, a decline in rating from BB+ to BB, as
well as from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date that is 90 days prior to the earlier of
(1) a Change of Control and (2) public notice of the occurrence of a Change of
Control or of the intention by Graphics or Holdings to effect a Change of
Control.
"Rating Decline" means the occurrence of the following on, or within 90
days after, the date of public notice of the occurrence of a Change of Control
or of the intention by Graphics to effect a Change of Control (which period
shall be extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by any Rating Agency): (a) in the event the
Notes are rated by any Rating Agency on the Rating Date as Investment Grade, the
rating of such Notes by both Rating Agencies shall be below Investment Grade, or
(b) in the event the Notes are rated below Investment Grade by both Rating
Agencies on the Rating Date, the rating of the Notes by either Rating Agency
shall be decreased by one or more gradations.
"Raw Material Hedge Agreement" means an agreement designed to hedge
against fluctuations in the cost of raw materials entered into by Graphics or
its Restricted Subsidiaries in the ordinary course of business in connection
with their business operations.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
Indebtedness in exchange, substitution or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of Graphics or any Restricted Subsidiary existing on the Issue Date
or Incurred in compliance with the indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that
(1) such Refinancing Indebtedness has a Stated Maturity no
earlier than the Stated Maturity of the Indebtedness being Refinanced,
(2) such Refinancing Indebtedness has an Average Life at the
time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced and
(3) such Refinancing Indebtedness has an aggregate principal
amount (or if Incurred with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount
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(or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees, accrued interest and
expenses, including any premium and defeasance costs) under the
Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of
Graphics.
"Registration Agreement" means the Registration Agreement dated August
10, 1995, among Graphics, Holdings and Morgan Stanley & Co. Incorporated.
"Related Business" means as of any date the businesses of Graphics and
its Restricted Subsidiaries on such date and any business related, ancillary or
complementary thereto.
"Restricted Payment" with respect to any Person means
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including
any payment in connection with any merger or consolidation involving
such Person) or similar payment to the direct or indirect holders of
its Capital Stock (other than dividends or distributions payable solely
in its Capital Stock (other than Disqualified Stock) or options,
warrants or other rights to acquire its Capital Stock (other than
Disqualified Stock) and dividends or distributions payable solely to
Graphics or a Restricted Subsidiary, and other than pro rata dividends
or other distributions made by a Subsidiary of Graphics that is not a
Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other
than a corporation)),
(2) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of Graphics held by any
Person or of any Capital Stock of a Subsidiary of Graphics held by any
Affiliate of Graphics (other than a Restricted Subsidiary), including
the exercise of any option to exchange any Capital Stock (other than
into Capital Stock of Graphics that is not Disqualified Stock),
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition)
or
(4) the making of any Investment, other than a Permitted
Investment, in any Person;
provided, however, that the purchase or redemption of Subordinated Obligations
(or dividends to Holdings for the purchase or redemption of Indebtedness of
Holdings) upon the occurrence of an "asset sale" or "change of control" shall
not constitute a "Restricted Payment" if, prior to such purchase or redemption
(or dividend), Graphics shall have purchased all Notes tendered pursuant to an
Excess Proceeds Offer or an offer to purchase the Notes upon the occurrence of a
Change of Control Triggering Event with respect to such "asset sale" or "change
of control."
"Restricted Subsidiary" means any Subsidiary of Graphics that is not an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group and its successors.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of Graphics secured by a
Lien.
"Securities Act" means the Securities Act of 1933.
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"Senior Indebtedness" of any Person means the following obligations of
such Person, whether outstanding on the Issue Date or thereafter Incurred
(1) all Indebtedness and other monetary obligations of such
Person under (A) the Bank Credit Agreement and all fees, expenses and
indemnities payable in connection therewith, (B) any Interest Rate
Agreement which Graphics has determined in good faith at the time of
the Incurrence thereof is related to indebtedness under the Bank Credit
Agreement (which determination shall be conclusive) and all fees,
expenses and indemnities payable in connection therewith or (C) any
Guarantee of Indebtedness or monetary obligations described in clauses
(A) and (B), and
(2) all other Indebtedness of such Person (other than the
Notes), unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Notes or the
Guaranty, as the case may be;
provided, however, that Senior Indebtedness of such Person shall not include
(1) any obligation of such Person to any Subsidiary of such
Person,
(2) any liability for Federal, state, local or other taxes
owned or owing by such Person,
(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities),
(4) any Indebtedness of such Person (and any accrued and
unpaid interest in respect thereof) which is expressly subordinated in
right of payment to any other Indebtedness or other obligation of such
Person or
(5) that portion of any Indebtedness which at the time of
Incurrence is Incurred in violation of the indenture.
Senior Indebtedness will also include interest accruing subsequent to events of
bankruptcy of Graphics, Holdings and their respective Subsidiaries at the rate
provided for in the documentation governing such Senior Indebtedness, whether or
not such interest is an allowed claim enforceable against the debtor in a
bankruptcy case under relevant bankruptcy law.
"Senior Subordinated Indebtedness" means (1) with respect to Graphics,
the Notes and any other Indebtedness of Graphics that specifically provides that
such Indebtedness is to rank pari passu with the Notes in right of payment and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of Graphics which is not Senior Indebtedness of Graphics and
(2) with respect to Holdings, the Guaranty and any other Indebtedness of
Holdings that specifically provides that such Indebtedness is to rank pari passu
with the Guaranty in right of payment and is not subordinated by its terms in
right of payment to any Indebtedness or other obligation of Holdings which is
not Senior Indebtedness of Holdings.
"Senior Subordinated Obligations" means any principal, premium, if any,
and interest on the Notes payable pursuant to the terms of the Notes or upon
acceleration, including any amounts received on the exercise of rights of
rescission or other rights of action (including claims for damages) or
otherwise, to the extent relating to the purchase price of the Notes or amounts
corresponding to such principal, premium, if any, or interest on the Notes.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of Graphics within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory
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redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of Graphics (whether
outstanding on the Issue Date or thereafter incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by (1) such Person, (2) such Person and one or more
Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States
of America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (1)
above entered into with a bank meeting the qualifications described in
clause (2) above;
(4) investments in commercial paper, maturing not more than 90
days after the date of acquisition, issued by a corporation (other than
an Affiliate of Graphics) organized and in existence under the laws of
the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P; and
(5) investments in securities with maturities of six months or
less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at
least "A" by S&P or "A" by Moody's.
"Transactions" means the merger of Shakopee Valley Printing Inc. with
and into Graphics; the issuance of the Notes; the entering into of the Bank
Credit Agreement; the repayment by Graphics of all indebtedness outstanding
under its bank credit agreement existing prior to the date of the issuance of
the Notes; the redemption of all outstanding 15% Senior Subordinated Notes Due
2000 of Graphics; and the repayment of all of the outstanding indebtedness of
Shakopee Valley Printing Inc., in each case on the date of the issuance of the
Notes, except that the redemption of the 15% Senior Subordinated Notes Due 2000
of Graphics shall occur within 40 days after the Notes are issued.
"Unrestricted Subsidiary" means (1) any Subsidiary of Graphics that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (2) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) of Graphics to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock or
Indebtedness of, or holds any Lien on any property of, Graphics or any
Restricted Subsidiary of Graphics that is not a Subsidiary of the Subsidiary to
be so designated; provided, however, that either
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(A) the Subsidiary to be so designated has total assets of $1,000 or less or (B)
if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the covenant described under "-- Certain Covenants -- Limitation
on Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) Graphics could Incur $1.00 of
additional Indebtedness under the first paragraph of the covenant described
under "-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced by Graphics to the Trustee by promptly filing with
the Trustee a copy of the board resolution giving effect to such designation and
an officers' certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Graphics or
one or more Wholly Owned Subsidiaries.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary, which represents the opinion of Shearman &
Sterling, our counsel, describes the material United States federal income tax
consequences of the acquisition, ownership and disposition of the Notes. This
discussion is based on currently existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion assumes that all of the Notes will be held as
capital assets (i.e., generally assets that are held for investment), within the
meaning of Section 1221 of the Code, and will not be part of a straddle, a hedge
or a conversion transaction within the meaning of Section 1258 of the Code. This
discussion is for general information only, and does not address all of the tax
consequences that may be relevant to particular purchasers in light of their
personal circumstances, or to certain types of purchasers (such as financial
institutions, insurance companies, tax-exempt entities, dealers in securities or
foreign persons). Persons considering the purchase of Notes should consult their
tax advisors with regard to the applications of the United States federal income
tax laws to their particular situations, as well as any tax consequences arising
under the laws of any state, local, or foreign taxing jurisdictions.
The Notes
Stated Interest. Each holder of Notes must include as ordinary interest
income the interest attributable to such Notes at the time such interest accrues
or is received, in accordance with the holder's accounting method for United
States federal income tax purposes.
The Notes were not issued with original issue discount ("OID"), unless
the existence of Graphics' obligation to offer to repurchase such Notes upon a
Change of Control Triggering Event affects the yield or maturity date of the
Notes. Based on the applicable regulations, the right of holders of the Notes to
require repurchase upon the occurrence of a Change of Control Triggering Event
will not affect the yield or maturity date of the Notes unless, based on all the
facts and circumstances as of the issue date, it is more likely than not that
such an event giving rise to the repurchase will occur. Graphics has not treated
the Change of Control Triggering Event provisions as affecting the computation
of the yield to maturity. If the Change of Control Triggering Event provisions
were to affect the computation of the yield to maturity, the Notes could be
treated as having been issued with OID in the amount of the premium payable upon
exercise of the holder's rights under such provisions.
A holder may elect to include all of the interest income on the Note in
gross income as such income accrues (including stated interest and market
discount, as adjusted by any amortizable bond premium, as described below) by
applying the constant yield method and treating the Note as if issued on the
holder's acquisition date for the holder's adjusted basis immediately after its
acquisition.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of
a Note, a holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement
(reduced by an amount attributable to accrued stated interest, which is taxable
in the manner described above under "-- Stated Interest") and such holder's
adjusted tax basis in such Note. A holder's adjusted tax basis in a Note will
generally equal the cost of such Note to such holder, increased by any accrued
market discount previously included in taxable income by the holder, and reduced
by any amortized bond premium and any principal payments received by the holder,
all with respect to such Note.
Subject to the exception discussed below for market discount, gain or
loss recognized on the sale, exchange or retirement of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if at the time
of sale, exchange or retirement such Note has been held for more than one year.
Individuals and certain other holders are eligible for preferential rates of
United States federal income tax in respect of long-term capital gain. The
deduction of capital losses are subject to limitations under the Code.
Amortizable Bond Premium and Market Discount. If a holder purchased a
Note for an amount that is greater than the amount payable at maturity, such
holder will be considered to have purchased such Note with "bond
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premium." The amount of bond premium is the excess of (1) the holder's tax basis
in such Note, over (2) the amount payable at maturity (or on an earlier call
date if it results in a smaller amortizable bond premium). Such holder may elect
(in accordance with applicable Code provisions) to amortize such premium using a
constant yield method over the remaining term of such Note (or until an earlier
call date if it resulted in a smaller amount of bond premium) and to offset
interest otherwise required to be included in income in respect of such Note
during any taxable year by the amortized amount of such excess for such taxable
year. Such election, once made, is irrevocable without the consent of the
Internal Revenue Service (the "IRS") and applies to all taxable bonds held
during the taxable year for which the election is made or subsequently acquired.
If a holder purchased a Note for an amount that is less than the stated
redemption price at maturity, such holder will generally be considered to have
purchased such Note with "market discount." For this purpose, the stated
redemption price at maturity of a Note will equal its principal amount. Market
discount with respect to a Note is the excess of the stated redemption price at
maturity over the amount paid by the holder for such Note. However, the amount
of market discount will be considered zero if it would otherwise be less than
1/4 of 1 percent of the stated redemption price of such Note at maturity
multiplied by the number of complete years to maturity (after the holder
acquired such Note). If a Note is subject to the market discount rules, a holder
will generally be required to (1) treat any gain realized with respect to such
Note as ordinary income to the extent of the market discount accrued and not
previously included in income during the period such holder held the Note, (2)
possibly treat any payment on such Note (other than stated interest) as ordinary
income to the extent of the market discount accrued and not previously included
in income during the period such holder held such Note and (3) defer the
deduction of all or a portion of the interest expense on any indebtedness
incurred or maintained by such holder to purchase or carry such Note. If a
holder disposes of a Note in a nontaxable transaction (other than a
nonrecognition transaction described in Section 1276(c) of the Code), accrued
market discount will be includable as ordinary income to the holder as if such
holder had sold such Note at its then fair market value. Market discount will be
considered to accrue ratably during the period from the date of acquisition to
the maturity date of such Note, unless the holder irrevocably elects (on an
instrument-by-instrument basis) to accrue market discount on the basis of a
constant interest rate. A holder may elect to include market discount in income
currently as it accrues (on either a ratable or constant yield basis), in which
case the rule described above regarding deferral of interest deductions will not
apply. An election to include market discount currently, once made, will apply
to all market discount obligations acquired by the holder on or after the first
day of the first taxable year to which the election applies, and may not be
revoked without the consent of the IRS.
Because of the complexity of the rules relating to bond premium and
market discount, holders should consult their tax advisors as to the application
of these rules to their particular circumstances and as to the merit of making
any elections in connection therewith.
Backup Withholding and Information Reporting
The information reporting requirements of the Code and Treasury
Regulations apply to certain payments of principal, premium, if any, and
interest (including OID) on a Note, and to proceeds of the sale or redemption of
a Note. Certain holders may also be subject to backup withholding at a rate of
31% on any payments made with respect to, and proceeds of disposition of, the
Notes. Backup withholding will apply to such payments if the holder fails to
furnish a correct taxpayer identification number (social security number or
employer identification number). Backup withholding may also apply to payments
of interest to a holder if such holder has failed to report interest or dividend
income to the IRS and the IRS has so notified the payor or, in certain
circumstances, if a holder has failed to certify that such holder is not subject
to such backup withholding, or failed to otherwise comply with the applicable
requirements of the backup withholding rules. Any amount withheld under these
backup withholding rules will be creditable against the holder's United States
federal income tax liability provided that the required information is furnished
to the IRS. Certain holders (including, among others, corporations) are not
subject to the backup withholding requirements. The procedures relating to the
withholding of tax on interest payments, and some of the associated backup
withholding and information reporting rules described above, are subject to
modification under new Treasury regulation which generally will become effective
for payments made after December 31, 2000, subject to certain transition rules.
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PLAN OF DISTRIBUTION
This prospectus is to be used by Morgan Stanley Dean Witter in
connection with offers and sales of the Notes in market-making transactions at
negotiated prices relating to prevailing market prices at the time of sale.
Morgan Stanley Dean Witter may act as principal or agent in such transactions.
Morgan Stanley Dean Witter has no obligation to make a market in the Notes and
may discontinue its market-making activities at any time without notice, at its
sole discretion.
There is currently no established public market for the Notes. Graphics
does not currently intend to apply for listing of the Notes on any securities
exchange or approval for quotation through any automated quotation system.
Therefore, any trading that does develop will occur on the over-the-counter
market. We have been advised by Morgan Stanley Dean Witter that it intends to
make a market in the Notes but it has no obligation to do so and any
market-making may be discontinued at any time without notice. No assurance can
be given that an active public market for the Notes will develop.
Morgan Stanley Dean Witter acted as placement agent in connection with
the original private placement of the Notes and received a placement fee of $5.6
million. Morgan Stanley Dean Witter is affiliated with entities that
beneficially own a substantial majority of the outstanding shares of capital
stock of Holdings. As of the date hereof, an affiliate of Morgan Stanley Dean
Witter holds a $9.6 million participation in the credit agreement and collects
customary fees in connection with its lending role thereunder. Such affiliate
also collected $0.5 million in fees in connection with the 1998 Refinancing. In
addition, Messrs. Janson and Fry, employees of Morgan Stanley & Co. Incorporated
are members of our board of directors.
Although there are no agreements to do so, Morgan Stanley Dean Witter,
as well as others, may act as broker or dealer in connection with the sale of
Notes contemplated by this prospectus and may receive fees or commissions in
connection with any sales.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby were
passed on for Graphics and Holdings by Shearman & Sterling, New York, New York.
Shearman & Sterling has performed, and will continue to perform, legal services
for MSLEF II and the MSCP III Entities, companies controlled by MSLEF II and the
MSCP III Entities and Morgan Stanley Dean Witter.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules at March 31, 2000 and 1999, and for each of
the three fiscal years in the period ended March 31, 2000, as set forth in their
reports. We have included our financial statements and schedules in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports, given on their authority as experts in accounting and
auditing.
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AVAILABLE INFORMATION
Graphics and Holdings have filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, with respect to the Notes. In accordance with the rules and regulations
of the SEC, this prospectus does not contain all of the information contained in
the registration statement and related schedules and exhibits. Statements made
in this prospectus concerning a document filed as an exhibit to the registration
statement are not necessarily complete. You should refer to those documents
filed as exhibits to the registration statement for a complete description. For
further information pertaining to Graphics, Holdings and the Notes, you should
refer to the registration statement, including the exhibits and financial
statements, notes and schedules filed as a part of the registration statement.
The registration statement and its exhibits and schedules may be inspected and
copied at the public reference facilities maintained by the SEC at:
<TABLE>
<CAPTION>
<S> <C> <C>
450 Fifth Street, N.W. Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
Washington, D.C. 20549 14th Floor New York, New York 10048
Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on public
reference rooms. Our filings with the SEC are also available to the public on
the SEC's Internet Website at http://www.sec.gov.
The indenture relating to the Notes requires Holdings and, in the
circumstances described below, Graphics to file with the SEC the annual,
quarterly and other reports required by Sections 13(a), 13(c) and 15(d) of the
Securities Exchange Act of 1934, as amended, regardless of whether such Sections
are applicable to Graphics or Holdings. Holdings or Graphics, as the case may
be, will supply without cost to each holder of Notes, and file with the trustee
under the indenture, within fifteen days after Holdings is required to file the
same with the SEC, copies of the audited financial statements, quarterly reports
and other reports which Graphics and Holdings are required to file with the SEC
pursuant to Sections 13(a), 13(c) and 15(d) of the Exchange Act. If Holdings is
no longer the guarantor on the Notes, Holdings shall no longer be required to
file such reports and Graphics will be required to file such reports, in each
case as of the date and time that Holdings is no longer the guarantor on the
Notes.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933. Discussions containing such
forward-looking statements may be found in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," as well as
within this prospectus generally. In addition, when used in this prospectus, the
words "believes," "anticipates," "expects" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are subject
to a number of risks and uncertainties. Actual results in the future could
differ materially from those described in the forward-looking statements as a
result of many factors outside of our control, including, but not limited to:
o fluctuations in the cost of paper and other raw materials
used,
o changes in the advertising and print markets,
o actions by our competitors, particularly with respect to
pricing,
o the financial condition of our customers,
o our financial condition and liquidity,
o the general condition of the United States economy,
55
<PAGE>
o demand for our products and services, and
o the matters set forth in this prospectus generally.
Consequently, the forward-looking statements should be regarded solely
as our current plans, estimates and beliefs. We do not undertake and
specifically decline any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
56
<PAGE>
APPENDIX 1
<PAGE>
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, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value of the voting and non-voting common stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 143,399 shares outstanding of its common stock, $.01 Par
Value, as of May 31, 2000 (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.... 22
Item 8. Financial Statements and Supplementary Data................... 23
Item 9. Changes In And Disagreements With Accountants on
Accounting and Financial Disclosure........................... 51
PART III
Item 10. Directors and Executive Officers ............................ 52
Item 11. Executive Compensation....................................... 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 58
Item 13. Certain Relationships and Related Transactions............... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................... 61
Signatures.................................................... 70
<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 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 print 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, 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 print plants in eight states and Canada, nine 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: print, (which accounted for approximately 84% of total sales
during the fiscal year ended March 31, 2000 ("Fiscal Year 2000")) and digital
imaging and prepress services conducted through our American Color division
(which accounted for approximately 15% of total sales in Fiscal Year 2000). Our
print business and our digital imaging and prepress services business are both
headquartered in Nashville, Tennessee. Partnerships affiliated with Morgan
Stanley Dean Witter & Co. ("MSDW") currently own 57.7% 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 16 of our consolidated financial statements appearing
elsewhere in this Report.
2
<PAGE>
Print
Our print business, which accounted for approximately 84%, 83% and 84% of our
sales in Fiscal Year 2000, the fiscal year ended March 31, 1999 ("Fiscal Year
1999") and the fiscal year ended March 31, 1998 ("Fiscal Year 1998"),
respectively, produces retail advertising inserts, comics (newspaper Sunday
comics, comic insert advertising and comic books), and other publications.
Retail Advertising Inserts (83% of print sales in Fiscal Year 2000, 81% in
Fiscal Year 1999 and 80% in Fiscal Year 1998). We believe that we are one of the
largest printers of retail advertising inserts in the United States. We print
advertising inserts for approximately 300 retailers. 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 (11% of print sales in Fiscal Year 2000, 13% in Fiscal Year 1999 and 14%
in Fiscal Year 1998, 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 200 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 print sales in Fiscal Year 2000, Fiscal Year 1999 and
Fiscal Year 1998). We print local newspapers, TV guide listings and other
publications.
Print Production
Our network of ten print plants in the United States and Canada are
strategically well positioned to service major metropolitan centers, providing
us with distribution efficiencies and shorter turnaround times, two factors that
we believe will allow our continuing success in servicing large national and
regional accounts. There are primarily three printing processes used to produce
advertising inserts and newspaper supplements: offset lithography (heatset and
cold), rotogravure and flexography. We principally use heatset offset and
flexographic web printing equipment in our print operations. We own a
substantial majority of our printing equipment, which currently consists of 40
heatset offset presses, 5 coldset offset presses and 11 flexographic presses.
Most of our advertising inserts, publications and comic books are printed using
the offset process, while substantially all of our newspaper Sunday comics and
comic advertising inserts are printed using the flexographic process.
In the heatset offset process, the desired printed images are distinguished
chemically from non-image areas of a metal plate which allow the image area to
attract the ink which is then transferred from the plate to a rubber blanket and
then to the paper surface. Once printed, the web goes through an oven which
evaporates the solvents from the ink, thereby setting the ink on the paper. In
the cold offset process, inks are set by the absorption and oxidation of
solvents into the paper. Due to the drying process, the heatset offset process
can be utilized on a wide variety of papers. Generally, heatset offset presses
have the ability to provide a more colorful and attractive product than cold
offset presses.
The flexographic process differs from offset printing in that it utilizes relief
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 image
surface on the plate, which is transferred directly to the paper. Our
flexographic printing generally can provide 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, reduced
paper waste, reduced energy use and maintenance costs, and environmental
advantages due to the use of water-based inks and the use of less paper. Faster
press set up times make the process particularly attractive to commercial
customers with shorter runs and extensive regional versioning. Recent
technological advancements have greatly reduced the gap in reproduction quality
between flexography and heatset offset.
3
<PAGE>
In addition to press capacity, certain equipment parameters are critical to
competing in the advertising insert market, including cut-off size, folder
capabilities and certain in-line and off-line finishing capabilities. Cut-off
size is one of the determinants of the size of the printed page, the other being
web width. Folder capabilities for advertising inserts must include a wide
variety of page sizes, page counts and page layouts. Finally, some 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 15%, 16% and
15% of our Fiscal Year 2000, Fiscal Year 1999 and Fiscal Year 1998 sales,
respectively. We believe we are one of the largest full-service providers of
digital imaging, prepress and color separation services in the United States and
a technological leader in this industry. Our digital imaging and prepress
services business commenced operations in 1975 and maintains nine full service
locations nationwide.
We assist customers in the capture, manipulation, transmission and distribution
of images. The majority of this work leads to the production of a four-color
image in a format appropriate for use by printers. We make page changes,
including type changes, and combine 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 files are produced for each advertising or editorial page. The final
four-color films or digital files enable printers to prepare plates for each
color resulting in the appearance of full color on the printed page. Our 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. We have been a leader in implementing these new
technologies, which enables us to reduce unit costs and effectively service the
increasingly complex demands of our customers more quickly than many of our
competitors. We have 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 service companies such as
American Color, none of which has a significant nationwide market share. Many
smaller digital imaging and prepress service companies have left the industry in
recent years due to their inability to keep pace with technological advances in
the industry.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive
advantages in our print and digital imaging and prepress services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web
printing equipment is generally among the most advanced in the industry and that
the average age of our equipment is significantly less than the majority of our
regional competitors and is comparable to our major national competitors. We are
also committed to a comprehensive, long-term maintenance program, which enhances
the reliability and extends the life of our presses and other production
equipment. We also believe that our digital imaging and prepress equipment is
significantly more advanced than many of our smaller regional competitors, many
of whom have not incorporated digital prepress technologies and
computer-to-plate services to the same extent as we have, nor adopted an open
systems environment which allows greater flexibility and more efficient
maintenance.
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 300 retailers and over 200 newspapers in the
United States and Canada. Our print 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 print products and strong customer service at competitive
prices has resulted in long-term relationships with many of these customers. Our
digital imaging and prepress services' customer base includes large and
medium-sized customers in the publishing, retail and catalog businesses, many of
whom also have long-term relationships with our print segment. 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.
4
<PAGE>
Competitive Cost Structure. We have reduced the variable and fixed costs of
production at our print 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) and selling, general and administrative
expenses in our digital imaging and prepress services business primarily through
the adoption of new digital prepress production methodologies and continued cost
containment focus.
Strong Management Team. We have strengthened our print 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 print 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
nine digital imaging and prepress service 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 continued unit growth. In an effort to stimulate unit
volume growth, we have strengthened our print sales group. Unit volume growth is
also expected to result from continued capital expansion and selective print
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 print 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 print 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.
Continue to Make Opportunistic Acquisitions. An integral part of our long-term
growth strategy includes a plan to selectively assess and acquire other print
and digital imaging and prepress services companies that we believe will enhance
our leadership position in these industries.
5
<PAGE>
Customers and Distribution
Customers. We sell our print 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
print 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 print work, we obtain
varying time commitments from our customers ranging from job to job to annual
allocations. Print prices are generally fixed during such commitments; however,
our standard terms of trade call for the pass-through of changes in the price of
raw materials, primarily paper and ink.
Our digital imaging and prepress services' customers consist of magazine and
newspaper publishers, retailers, catalog sales organizations, printers, consumer
products companies, advertising agencies and direct mail advertisers. Our
customers typically have a need for high levels of technical expertise, short
turnaround times and responsive customer service. In addition to our historical
regional customer base, our digital imaging and prepress services business 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 increase in the volume
related to facilities management arrangements with customers over the past
several years. These contracts typically extend from three to five years in
length.
The print and digital imaging and prepress services businesses have historically
had certain common customers and our 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 our
customers. This enables us to provide more comprehensive solutions to our
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 2000. Our top ten customers accounted for approximately 40%
of consolidated sales in Fiscal Year 2000.
Distribution. We distribute our print products primarily by truck to customer
designated locations, primarily newspapers, customer retail stores and via mail.
Costs of distribution are generally paid by the customers, and most shipping is
by common carrier. Our digital imaging and prepress services business generally
distributes its products via electronic transmission, overnight express, or
other methods of personal delivery.
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 print business is based primarily on quality and
service at a competitive price.
American Color competes with numerous digital imaging and prepress service firms
on both a national and regional basis. The industry is highly fragmented,
primarily consisting of smaller local and regional companies, with only a few
national full-service digital imaging and prepress companies such as American
Color, none of which has a significant nationwide market share. Many smaller
digital imaging and prepress companies have left the industry in recent years
due to their inability to keep pace with 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.
6
<PAGE>
Raw Materials
The primary raw materials used in our print business are paper and ink. 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. During Fiscal Year
2000, paper prices were on average at lower levels than comparable periods in
Fiscal Year 1999. 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. We purchase substantially all of our ink and related products under
long-term ink supply contracts. 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 print 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 print, 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 April 30, 2000, we had a total of approximately 2,835 employees, of which
approximately 240 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.
ITEM 2. PROPERTIES
We operate in 20 locations in 13 states and Canada. We own seven print plants in
the United States and one in Canada and lease two print plants, one in
California and one in Pennsylvania. Our American Color division has nine
production locations, all of which are leased. Our American Color division also
operates digital imaging and prepress facilities on the premises of several of
our 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.
7
<PAGE>
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,
2000. We believe this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for the common stock of either
Holdings or Graphics.
Holders
As of May 31, 2000, there were approximately 96 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 first and third quarters of Fiscal Year 2000, certain
officers exercised options to purchase an aggregate of 8,143 and 1,106
shares of Holdings stock, respectively, for $.01/share. The securities
that were sold were exempt from registration on the basis that all such
officers are "accredited investors" as defined by the rules of the
Securities Act of 1933, as amended.
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" as defined by the rules of the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended
March 31, 2000, 1999, 1998, 1997 and 1996. The balance sheet data as of March
31, 2000, 1999, 1998, 1997 and 1996 and the statement of operations data for the
fiscal years ended March 31, 2000, 1999, 1998, 1997 and 1996 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").
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements appearing elsewhere in this Report.
9
<PAGE>
Selected Financial Data
ACG Holdings, Inc.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (dollars in thousands)
Sales $ 546,710 520,343 533,335 524,551 529,523
Cost of Sales 456,445 439,091 461,407 459,880 465,110
--------- --------- --------- --------- ---------
Gross Profit 90,265 81,252 71,928 64,671 64,413
Selling, general and administrative expenses (a) 44,181 46,333 54,227 51,418 44,164
Restructuring costs and other special charges (b) -- 5,464 5,598 2,881 7,533
--------- --------- --------- --------- ---------
Operating income 46,084 29,455 12,103 10,372 12,716
Interest expense, net 33,798 36,077 38,813 36,132 32,425
Other expense 627 1,217 412 245 1,722
Income tax expense 2,189 523 2,106 2,591 4,874
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary items 9,470 (8,362) (29,228) (28,596) (26,305)
--------- --------- --------- --------- ---------
Discontinued operations: (c)
Loss from operations, net of tax -- -- -- (1,557) (1,364)
Estimated (loss) gain on shut down, net of tax -- -- (667) (1,550) 2,868
Extraordinary loss on early extinguishment of debt (d) -- (4,106) -- -- (4,526)
--------- --------- --------- --------- ---------
Net income (loss) $ 9,470 (12,468) (29,895) (31,703) (29,327)
========= ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital (deficit) $ (2,973) (5,451) 11,610 (8,598) 9,612
Total assets $ 303,812 299,000 329,958 333,975 351,181
Long-term debt and capitalized leases, including
current installments $ 277,344 289,589 319,657 312,309 297,617
Stockholders' deficit $(109,389) (119,306) (106,085) (76,318) (44,396)
Other Data:
Net cash provided (used) by operating activities $ 38,774 48,137 18,257 24,313 (4,187)
Net cash used by investing activities $ (24,145) (10,364) (10,100) (10,997) (24,436)
Net cash (used) provided by financing activities $ (14,576) (37,812) (8,143) (13,312) 23,982
Capital expenditures (including lease obligations
entered into) $ 22,724 16,238 23,713 37,767 28,022
EBITDA (e) $ 80,007 64,286 52,367 46,972 46,847
</TABLE>
10
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(a) 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.
The fiscal year ended March 31, 1997 ("Fiscal Year 1997") selling,
general and administrative expense includes $2.5 million of
non-recurring employee termination expenses.
(b) 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 print
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 print 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.
(c) In February of Fiscal Year 1997, we made a strategic decision to shut
down the operation of our wholly-owned subsidiary SMC. This resulted in
an estimated net loss on shut down of approximately $1.5 million, which
is net of zero income tax benefits. 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 and 1996 have been reclassified to
discontinued operations.
In Fiscal Year 1996, we recognized settlement of a complaint naming our
subsidiary, SMI, News America FSI, Inc. 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.
(d) 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 Shakopee Valley Printing, Inc. merging with
and into Graphics (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.
11
<PAGE>
(e) 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 2000 includes $0.5 million of non-recurring costs
associated with the consolidation of certain production facilities at
the American Color division.
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 print 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.
EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring costs
related to the American Color division.
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.
Print. 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
our company, with a wider variety of services, greater distribution
capabilities, critical scale 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.
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. During Fiscal Year
2000, paper prices were on average at lower levels than comparable periods in
Fiscal Year 1999. 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
print 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 and increased unit volume has had a favorable impact
on print gross profit levels.
In January 1998, we approved a plan for our print 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 (Digital Imaging and Prepress Services). 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. American
Color's selling price levels per page, however, have declined because of greater
efficiencies resulting from technological advancements. American Color's revenue
from traditional services are now supplemented by new revenue sources 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 digital imaging and prepress services
business, 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 2000, 1999 and 1998:
Fiscal Year Ended March 31,
------------------------------------------
2000 1999 1998
--------- --------- ---------
(dollars in thousands)
Sales
Print $ 462,886 431,936 446,350
American Color 80,240 83,816 82,384
Other (a) 3,584 4,591 4,601
--------- --------- ---------
Total $ 546,710 520,343 533,335
========= ========= =========
Gross Profit
Print $ 73,572 62,025 51,278
American Color 17,971 19,128 19,249
Other (a) (1,278) 99 1,401
--------- --------- ---------
Total $ 90,265 81,252 71,928
========= ========= =========
Gross Margin
Print 15.9% 14.4% 11.5%
American Color 22.4% 22.8% 23.4%
Total 16.5% 15.6% 13.5%
Operating Income (Loss)
Print (b) (c) $ 49,446 38,994 22,612
American Color (b) (c) 4,883 (2,542) 2,404
Other (a) (d) (e) (8,245) (6,997) (12,913)
--------- --------- ---------
Total $ 46,084 29,455 12,103
========= ========= =========
(a) Other operations primarily include revenues and expenses associated
with our digital visual effects business ("Digiscope").
(b) Print operating income includes the impact of $1.7 million in Fiscal
Year 1998 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 in Fiscal Year 1999. See "Restructuring Costs and Other
Special Charges" below.
(c) Print 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 in
Fiscal Year 1999. See "Restructuring Costs and Other Special Charges"
below. American Color's operating income (loss) also includes $0.6
million and $0.9 million of non-recurring charges in Fiscal Year 2000
and Fiscal Year 1999, respectively, 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 and certain charges associated with employee benefit programs
of $0.7 million in Fiscal Year 1998.
14
<PAGE>
Historical Results of Operations
Fiscal Year 2000 vs. Fiscal Year 1999
Total sales increased 5.1% to $546.7 million in Fiscal Year 2000 from $520.3
million in Fiscal Year 1999. This increase includes an increase in print sales
of $31.0 million, or 7.2%, offset in part by a decrease in American Color sales
of $3.6 million, or 4.3%. Total gross profit increased to $90.3 million or 16.5%
of sales in Fiscal Year 2000 from $81.3 million or 15.6% of sales in Fiscal Year
1999. Total operating income increased to $46.1 million or 8.4% of sales in
Fiscal Year 2000 from $29.5 million or 5.7% of sales in Fiscal Year 1999. See
the discussion of these changes by segment below.
Print
Sales. Print sales increased $31.0 million to $462.9 million in Fiscal Year 2000
from $431.9 million in Fiscal Year 1999. The increase in Fiscal Year 2000
includes the impact of an approximate 5% increase in production volume,
favorable changes in customer and product mix and an increase in paper sales to
customers. These increases were offset in part by declining paper prices.
Gross Profit. Print gross profit increased $11.6 million to $73.6 million in
Fiscal Year 2000 from $62.0 million in Fiscal Year 1999. Print gross margin
increased to 15.9% in Fiscal Year 2000 from 14.4% in Fiscal Year 1999. The
increase in gross profit was primarily the result of increased production
volume, reduced manufacturing costs and favorable changes in customer and
product mix. The increase in gross margin includes the above mentioned factors
and declining paper prices, offset in part by an increase in paper sales to
customers.
Selling, General and Administrative Expenses. Print selling, general and
administrative expenses increased to $24.1 million, or 5.2% of print sales, in
Fiscal Year 2000 from $23.0 million, or 5.3% of print sales, in Fiscal Year
1999. This increase includes increases in employee related expenses, offset in
part by decreases in certain selling expenses.
Operating Income. As a result of the above factors, operating income from the
print business increased to $49.4 million in Fiscal Year 2000 from $39.0 million
in Fiscal Year 1999.
American Color (Digital Imaging and Prepress Services)
Sales. American Color's sales decreased $3.6 million, or 4.3%, to $80.2 million
in Fiscal Year 2000 from $83.8 million in Fiscal Year 1999. The decrease in
Fiscal Year 2000 was primarily the result of reduced prepress production volume.
Gross Profit. American Color's gross profit decreased $1.1 million to $18.0
million in Fiscal Year 2000 from $19.1 million in Fiscal Year 1999. American
Color's gross margin decreased to 22.4% in Fiscal Year 2000 from 22.8% in Fiscal
Year 1999. These decreases are primarily the result of reduced sales volume and
related margins, offset in part by material and payroll savings associated with
various cost containment measures implemented during Fiscal Year 2000. Fiscal
Year 2000 and Fiscal Year 1999 included $0.6 million and $0.9 million,
respectively, of non-recurring costs associated with the consolidation of
certain production facilities.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $13.1 million, or 16.3% of American
Color's sales in Fiscal Year 2000 from $16.2 million, or 19.3% of American
Color's sales in Fiscal Year 1999. This decrease is attributable to various cost
containment measures implemented during Fiscal Year 2000.
Operating Income (Loss). As a result of the above factors and the incurrence of
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 income (loss)
at American Color increased to income of $4.9 million in Fiscal Year 2000 from a
loss of $2.5 million in Fiscal Year 1999.
15
<PAGE>
Fiscal Year 1999 vs. Fiscal Year 1998
Total 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 print 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%. Total 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. Total 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.
Print
Sales. Print sales decreased $14.5 million to $431.9 million in Fiscal Year 1999
from $446.4 million in Fiscal Year 1998. Print 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. Print gross profit increased $10.7 million to $62.0 million in
Fiscal Year 1999 from $51.3 million in Fiscal Year 1998. Print 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. Print selling, general and
administrative expenses decreased slightly to $23.0 million, or 5.3% of print
sales, in Fiscal Year 1999 compared to $23.1 million, or 5.2% of print sales, in
Fiscal Year 1998.
Operating Income. As a result of the above factors and the incurrence of costs
associated with the print 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 print business increased to $39.0 million in
Fiscal Year 1999 from $22.6 million in Fiscal Year 1998.
American Color (Digital Imaging and Prepress Services)
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. The decreases resulted 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
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.
16
<PAGE>
Other Operations (Fiscal Year 2000 vs. Fiscal Year 1999 and Fiscal Year 1999 vs.
Fiscal Year 1998)
Other operations consist primarily of revenues and expenses associated with
Digiscope, corporate general and administrative expenses, other expenses and
amortization expense. Amortization expenses for other operations, including
goodwill amortization (see below), were $2.8 million, $2.6 million and $8.7
million in Fiscal Years 2000, 1999 and 1998, respectively.
Operating losses from other operations increased to a loss of $8.2 million in
Fiscal Year 2000 from a loss of $7.0 million in Fiscal Year 1999. This change
includes $0.9 million of increased operating losses at Digiscope due primarily
to lower digital visual effects sales volume in Fiscal Year 2000.
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.
Goodwill Amortization
Amortization expense associated with goodwill was $2.6 million, $2.5 million and
$8.5 million for Fiscal Years 2000, 1999 and 1998, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs
American Color (Digital Imaging and Prepress Services). 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) included $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 were
paid or settled before March 31, 2000. The $1.5 million balance in the related
restructuring reserve at March 31, 2000 primarily includes remaining payouts of
involuntary employee termination costs and remaining payouts under lease
commitments.
Print. In January 1998, we approved a plan for our print 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)
included $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 print 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.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense decreased 6.3% to $34.0 million in Fiscal Year 2000 from $36.2
million in Fiscal Year 1999. This decrease includes the impact of both lower
levels of indebtedness and lower weighted average interest rates. See note 6 to
our consolidated financial statements appearing elsewhere in this Report.
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 lower weighted average interest rates. See note 6 to
our consolidated financial statements appearing elsewhere in this Report.
Other Expense (Income) and Taxes
Other expenses, net decreased to $0.6 million in Fiscal Year 2000 from $1.2
million in Fiscal Year 1999. 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.
Our effective tax rate for Fiscal Year 2000 was less than the federal statutory
rate due primarily to decreases in the valuation allowance, partially offset by
amortization of nondeductible goodwill and foreign tax expense. Our effective
tax rates for Fiscal Years 1999 and 1998 exceeded the federal statutory rate due
primarily to increases in the valuation allowance, amortization of nondeductible
goodwill, and foreign tax expense.
Discontinued Operations
Our Fiscal Year 1998 net loss includes the estimated net loss on shut down of
approximately $0.4 million, related to our discontinued wholly-owned subsidiary
SMC. 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 completed 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.
Net Income (Loss)
As a result of the factors discussed above, our net income (loss) improved to
income of $9.5 million in Fiscal Year 2000 from a loss of $12.5 million in
Fiscal Year 1999. 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 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 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 print 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.
18
<PAGE>
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. This availability includes a provision for up to $40 million of
letters of credit. At March 31, 2000, we had total borrowings and letters of
credit outstanding under the Revolving Credit Facility of approximately $33.8
million, and therefore, additional borrowing availability of approximately $36.2
million.
During Fiscal Year 2000, we voluntarily prepaid $15 million of our
bank indebtedness, reducing the A Term Loan Facility by $10.9 million and
the B Term Loan Facility by $4.1 million. At March 31, 2000, $9.6 million of the
A Term Loan Facility and $39.6 million of the B Term Loan Facility remained
outstanding. As a result of the voluntary prepayments, we have no scheduled
maturities due under either the A Term Loan Facility or B Term Loan Facility
until March 31, 2002. Scheduled repayments of existing capital lease obligations
and other senior indebtedness during the fiscal year ending March 31, 2001
("Fiscal Year 2001") will approximate $6.7 million and $1.0 million,
respectively.
In Fiscal Year 2000, net cash provided by operating activities of $38.8 million
(see consolidated statements of cash flows appearing elsewhere in this Report),
net revolver borrowings of $8.8 million, proceeds from long-term debt of $0.4
million and $0.1 million of proceeds from sales of property, plant and equipment
were primarily used to fund the following expenditures:
(1) $23.8 million in principal repayments of indebtedness and financing
costs (including capital lease obligations of $7.5 million and
voluntary prepayments of $10.9 million on our A Term Loan Facility and
$4.1 million on our B Term Loan Facility),
(2) $21.5 million in cash capital expenditures, and
(3) $2.8 million for the acquisition of business.
We plan to continue our program of upgrading our print and prepress equipment
and currently anticipate that Fiscal Year 2001 cash capital expenditures will
approximate $18.2 million and equipment acquired under capital leases will
approximate $8.5 million. Our cash on hand of approximately $2.8 million is
presented net of outstanding checks within trade accounts payable at March 31,
2000. Accordingly, cash is presented at a balance of $0 in the March 31, 2000
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 and make capital expenditures, including repurchases of Notes in
privately negotiated transactions or in open market purchases to the extent
permitted by our Bank Credit Agreement.
19
<PAGE>
At March 31, 2000, we had total indebtedness outstanding of $277.3 million,
including capital lease obligations, as compared to $289.6 million at March 31,
1999, representing a net reduction of indebtedness during Fiscal Year 2000 of
$12.3 million. Of the total debt outstanding at March 31, 2000, $58.0 million
was outstanding under the Bank Credit Agreement at a weighted-average interest
rate of 8.3%. Indebtedness under the Bank Credit Agreement bears interest at
floating rates. At March 31, 2000, we had indebtedness other than obligations
under the Bank Credit Agreement of $219.3 million (including $185 million of the
Senior Subordinated Notes (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.
<TABLE>
<CAPTION>
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------------------------------------------------
2000 1999 1998
------------------- ------------------ -----------------
(dollars in thousands)
EBITDA
<S> <C> <C> <C>
Print (a) $ 72,543 61,627 46,838
American Color (a) 11,003 5,283 8,405
Other (b) (c) (3,539) (2,624) (2,876)
------------------- ------------------ ------------------
Total $ 80,007 64,286 52,367
=================== ================== ==================
EBITDA Margin
Print 15.7% 14.3% 10.5%
American Color 13.7% 6.3% 10.2%
Total 14.6% 12.4% 9.8%
</TABLE>
(a) Print EBITDA includes the impact of $3.9 million of restructuring costs
in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1999
includes the impact of restructuring costs of $4.6 million. See
"Restructuring Costs and Other Special Charges" above. American Color
EBITDA also includes $0.5 million and $0.6 million of non-recurring
charges in Fiscal Year 2000 and Fiscal Year 1999, respectively,
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, and certain charges associated with employee benefit
programs of $0.7 million in Fiscal Year 1998.
20
<PAGE>
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.
Print. As a result of the reasons previously described under "--Print,"
(excluding changes in depreciation and amortization expense and other special
charges related to asset write-offs and write-downs), print EBITDA increased
$10.9 million to $72.5 million in Fiscal Year 2000 from $61.6 million in Fiscal
Year 1999. Print EBITDA increased $14.8 million to $61.6 million in Fiscal Year
1999 from $46.8 million in Fiscal Year 1998. Print EBITDA Margin increased to
15.7% in Fiscal Year 2000 from 14.3% in Fiscal Year 1999. Print EBITDA Margin
increased to 14.3% in Fiscal Year 1999 from 10.5% in Fiscal Year 1998. Included
in the Fiscal Year 1998 EBITDA and EBITDA Margin is $3.9 million of
restructuring costs related to the print restructuring plan (see discussion
above).
American Color (Digital Imaging and Prepress Services). 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
increased $5.7 million to $11.0 million in Fiscal Year 2000 from $5.3 million in
Fiscal Year 1999. 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 increased to 13.7% in Fiscal Year 2000 from 6.3% in Fiscal Year 1999.
American Color EBITDA Margin decreased to 6.3% in Fiscal Year 1999 from 10.2% in
Fiscal Year 1998. Included in the Fiscal Year 2000 and Fiscal Year 1999 EBITDA
and EBITDA Margin is the impact of $0.5 million and $0.6 million of
non-recurring charges associated with the consolidation of certain production
facilities and $4.6 million of restructuring costs in Fiscal Year 1999 (see
discussion above). 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.
Other Operations. As a result of the reasons previously described under "--Other
Operations," (excluding changes in depreciation and amortization expense), other
operations negative EBITDA increased to negative EBITDA of $3.5 million in
Fiscal Year 2000 from negative EBITDA of $2.6 million in Fiscal Year 1999. 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. 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.
Amortization of Goodwill
Our goodwill is amortized on a straight-line basis by business segment. Goodwill
amortization expense will be approximately $3.1 million in Fiscal Year 2001.
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. 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.
During Fiscal Year 2000, paper prices were on average at lower levels than
comparable periods in Fiscal Year 1999. Management expects that, as a result of
our strong relationship with key suppliers, our material costs will remain
competitive within the industry.
21
<PAGE>
Seasonality
Some of our print 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 - May);
Back-to-School (July - August); and Thanksgiving/Christmas (October - December).
Sales of newspaper Sunday comics are not subject to significant seasonal
fluctuations. Our strategy has been and will continue to include the mitigation
of the seasonality of our print business by increasing our sales to customers
whose own sales are less seasonal (i.e., food and drug companies) and who
utilize advertising inserts on a higher frequency basis.
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, 2000, 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.
Accounting
There are no pending accounting pronouncements that, when adopted, are expected
to have a material effect in our results of operations or financial position.
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 print
facility outside the United States (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, 2000 and March 31, 1999, 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, 2000 and March 31,
1999. At our March 31, 2000 and March 31, 1999 borrowing levels, a hypothetical
10% adverse change in interest rates on the variable rate debt would have been
immaterial. Approximately 76% and 75% of our long-term debt (excluding
capitalized lease obligations) was fixed rate at March 31, 2000 and March 31,
1999, 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.
22
<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...............................................24
Consolidated balance sheets - March 31, 2000 and 1999........................25
For the Years Ended March 31, 2000, 1999 and 1998:
Consolidated statements of operations......................27
Consolidated statements of stockholders' deficit...........28
Consolidated statements of cash flows......................29
Notes to Consolidated Financial Statements...................................31
The following consolidated financial statement schedules of ACG Holdings, Inc.
are included in Part IV, Item 14:
I. Condensed Financial Information:
Condensed Consolidated Financial Statements (parent company only)
for the years ended March 31, 2000, 1999, and 1998, and as of March
31, 2000 and 1999
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.
23
<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, 2000 and 1999, 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, 2000. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States. 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.
/s/ Ernst & Young LLP
Nashville, Tennessee
May 15, 2000
24
<PAGE>
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
-----------------------------------
March 31,
-----------------------------------
2000 1999
------------- ------------
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance
for doubtful accounts of $2,945
and $2,860 at March 31, 2000
and 1999, respectively 65,432 57,895
Other 2,447 2,082
------------- ------------
Total receivables 67,879 59,977
Inventories 11,062 8,343
Prepaid expenses and other current assets 3,329 3,271
------------- ------------
Total current assets 82,270 71,591
Property, plant and equipment:
Land and improvements 2,923 2,907
Buildings and improvements 19,464 18,895
Machinery and equipment 191,378 177,851
Furniture and fixtures 9,265 6,549
Leased assets under capital leases 53,640 52,843
Equipment installations in process 5,815 4,146
------------- ------------
282,485 263,191
Less accumulated depreciation (145,993) (119,576)
------------- ------------
Net property, plant and equipment 136,492 143,615
Excess of cost over net assets acquired,
less accumulated amortization of
$47,206 and $44,587 at March 31, 2000
and 1999, respectively 72,781 72,029
Other assets 12,269 11,765
------------- ------------
Total assets $ 303,812 299,000
============= ============
See accompanying notes to consolidated financial statements.
25
<PAGE>
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
<TABLE>
<CAPTION>
------------------------------------
March 31,
------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and capitalized leases $ 7,727 7,994
Trade accounts payable 45,802 37,096
Accrued expenses 31,658 30,756
Income taxes 56 1,196
------------ ------------
Total current liabilities 85,243 77,042
Long-term debt and capitalized leases, excluding current installments 269,617 281,595
Deferred income taxes 8,031 7,916
Other liabilities 50,310 51,753
------------ ------------
Total liabilities 413,201 418,306
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 143,399 shares and 134,250 shares issued and
outstanding at March 31, 2000 and 1999, respectively 1 1
Preferred stock, $.01 par value, 15,823 shares
authorized, 3,617 shares and 3,622 shares Series AA
convertible preferred stock issued and outstanding at
March 31, 2000 and 1999, respectively, $39,425,000 and
$39,475,000 liquidation preference at March 31, 2000
and 1999, respectively, 1,606 shares Series BB convertible
preferred stock issued and outstanding at March 31, 2000 and
1999, $17,500,000 liquidation preference at March 31, 2000 and 1999 -- --
Additional paid-in capital 58,303 58,286
Accumulated deficit (165,485) (174,905)
Other accumulated comprehensive loss, net of tax (2,208) (2,688)
------------ ------------
Total stockholders' deficit (109,389) (119,306)
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 303,812 299,000
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
26
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------
2000 1999 1998
---------------- --------------- -----------------
<S> <C> <C> <C>
Sales $ 546,710 520,343 533,335
Cost of sales 456,445 439,091 461,407
---------------- --------------- -----------------
Gross profit 90,265 81,252 71,928
Selling, general and administrative expenses 41,562 43,806 45,690
Amortization of goodwill 2,619 2,527 8,537
Restructuring costs and other special charges -- 5,464 5,598
---------------- --------------- -----------------
Operating income 46,084 29,455 12,103
---------------- --------------- -----------------
Other expense (income):
Interest expense 33,963 36,242 38,956
Interest income (165) (165) (143)
Other, net 627 1,217 412
---------------- --------------- -----------------
Total other expense 34,425 37,294 39,225
---------------- --------------- -----------------
Income (loss) from continuing operations
before income taxes and extraordinary item 11,659 (7,839) (27,122)
Income tax expense (2,189) (523) (2,106)
---------------- --------------- -----------------
Income (loss) from continuing operations
before extraordinary item 9,470 (8,362) (29,228)
Discontinued operations:
Estimated loss on shut down, net of tax -- -- (667)
---------------- --------------- -----------------
Income (loss) before extraordinary item 9,470 (8,362) (29,895)
Extraordinary loss on early extinguishment of debt -- (4,106) --
---------------- --------------- -----------------
Net income (loss) $ 9,470 (12,468) (29,895)
================ =============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<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 income (loss) Total
---------- ------------- ------------ ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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)
-------------
Net income -- -- -- 9,470 -- 9,470
Other comprehensive income, net of tax:
Change in cumulative
translation adjustment -- -- -- -- 296 296
Unfunded pension liability -- -- -- -- 184 184
-------------
Comprehensive income 9,950
Treasury stock -- -- -- (50) -- (50)
Executive stock compensation -- -- 17 -- -- 17
---------- ------------- ------------ ------------- ---------------- -------------
Balances, March 31, 2000 $ 1 -- 58,303 (165,485) (2,208) $ (109,389)
========== ============= ============ ============= ================ =============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------
2000 1999 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,470 (12,468) (29,895)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Extraordinary item - non-cash -- 4,106 --
Other special charges - non-cash -- 908 1,727
Depreciation 30,067 29,651 28,124
Amortization of goodwill 2,619 2,527 8,537
Amortization of other assets 1,100 1,498 1,876
Amortization of deferred financing costs 1,326 1,412 2,292
Loss on shut down -- -- 667
Loss (gain) on disposals of property, plant and equipment 286 501 (37)
Deferred income tax expense (benefit) 115 (1,303) 930
Changes in assets and liabilities, net of effects of shut down of SMC and
acquisition of business:
(Increase) decrease in receivables (7,832) 4,108 (9,079)
(Increase) decrease in inventories (2,676) 2,388 (1,122)
Increase (decrease) in trade accounts payable 8,611 9,846 (1,887)
(Decrease) increase in accrued expenses (178) (753) 1,172
(Decrease) increase in current income taxes payable (1,140) 694 (520)
(Decrease) increase in other liabilities (1,459) 4,133 18,588
Other (1,535) 889 (3,116)
-------------- ------------- --------------
Total adjustments 29,304 60,605 48,152
-------------- ------------- --------------
Net cash provided by operating activities 38,774 48,137 18,257
-------------- ------------- --------------
</TABLE>
29
<PAGE>
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------
2000 1999 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of property, plant and equipment (21,462) (11,143) (10,902)
Acquisition of business (2,829) -- --
Proceeds from sales of property, plant and equipment 169 765 1,067
Other (23) 14 (265)
-------------- ------------- --------------
Net cash used by investing activities (24,145) (10,364) (10,100)
-------------- ------------- --------------
Cash flows from financing activities:
Debt:
Proceeds 9,215 75,000 25,000
Payments (15,893) (103,185) (24,899)
Increase in deferred financing costs (371) (2,608) (2,467)
Repayment of capital lease obligations (7,504) (6,938) (6,349)
Other (23) (81) 572
-------------- ------------- --------------
Net cash used by financing activities (14,576) (37,812) (8,143)
-------------- ------------- --------------
Effect of exchange rates on cash (53) 39 (14)
-------------- ------------- --------------
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 $ 32,639 35,546 35,931
Income taxes, net of refunds $ 3,111 1,201 1,751
Exchange rate adjustment to long-term debt $ (23) (81) (67)
Non-cash investing activities:
Lease obligations $ 1,262 5,095 12,811
</TABLE>
See accompanying notes to consolidated financial statements.
30
<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, 2000, 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) print 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 accounting principles
generally accepted in the United States.
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
Print revenues are recognized upon the completion of
production. Shipment of printed material generally occurs
upon completion of this production process. Materials are
printed to unique customer specifications and are not
returnable. Credits relating to specification variances
and other customer adjustments are not significant.
(c) Inventories
Inventories are valued at the lower of first-in, first-out
("FIFO") cost or market (net realizable value).
31
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(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.
(f) Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived
assets in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of" ("SFAS 121"). SFAS 121 requires periodic
assessment of certain long-lived assets for possible
impairment when events or circumstances indicate that the
carrying amounts may not be recoverable. Long-lived assets
are grouped and evaluated for impairment at the lowest
level for which there are identifiable cash flows that are
independent of the cash flows of other groups of assets.
If it is determined that the carrying amounts of such
long-lived assets are not recoverable, the assets are
written down to their fair value.
(g) 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.
Covenants not to compete are amortized over the terms of
the underlying agreements, which are generally 5 years.
(h) 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").
(i) 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.
32
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(j) Environmental
Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused
by past operations, and which do not contribute to current
or future period revenue generation, are expensed.
Environmental liabilities are provided when assessments
and/or remedial efforts are probable and the related
amounts can be reasonably estimated.
(k) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its
financial instruments together with the related carrying
amount. The Company is not a party to any financial
instruments with material off-balance-sheet risk.
(l) Concentration of Credit Risk
Financial instruments, which subject the Company to credit
risk, consist primarily of trade accounts receivable.
Concentration of credit risk with respect to trade
accounts receivable are generally diversified due to the
large number of entities comprising the Company's customer
base and their geographic dispersion. The Company performs
ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses.
(m) Use of Estimates
The preparation of the financial statements in conformity
with accounting principles generally accepted in the United
States requires management to make estimates and
assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
(n) Stock-Based Compensation
The Company has elected to follow Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") in accounting for its
stock-based compensation plan. 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.
(o) Impact of Recently Issued Accounting Standards
In December 1999, the SEC staff issued Staff Accounting
Bulletin No. 101 on "Revenue Recognition" ("SAB 101"). SAB
101 explains how the SEC staff applies by analogy the
existing rules on revenue recognition to other transactions
not covered by such rules and also addresses whether
revenue should be presented on a gross or net basis for
certain transactions. In addition, SAB 101 provides
guidance on the disclosures registrants should make about
their revenue recognition policies and the impact of events
and trends on revenue. SAB 101 is effective for the first
fiscal quarter beginning after December 15, 1999. The
adoption of SAB 101 is not expected to have a material
effect on the results of operations or financial position
of the Company.
33
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
In June 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 137
"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No.
133" ("SFAS 137"). SFAS 137 defers for one year the
implementation date of Statement of Financial Accounting
Standard No. 133 ("SFAS 133") which addressed a
comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. As
amended, SFAS 133 is effective for all quarters of all
fiscal years beginning after June 15, 2000. Earlier
adoption is permitted. Management does not anticipate that
the adoption of SFAS 137 will have a material effect on the
Company's results of operations or financial position.
In March 2000, the Financial Accounting Standards Board
issued interpretation 44 "Accounting for Certain
Transactions Involving Stock Compensation" ("Interpretation
44"). Interpretation 44 answers questions dealing with
Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") implementation
practice issues. The Company has elected to follow SFAS 123
in accounting for its stock-based compensation plans. This
Interpretation does not address issues related to the
application of the fair value method of accounting for
stock-based compensation under SFAS 123.
(2) Discontinued Operations
In February 1997, the Company made a strategic decision to shut
down the operations of its wholly-owned subsidiary Sullivan Media
Corporation ("SMC"). 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.
(3) Inventories
The components of inventories are as follows (in thousands):
March 31,
-----------------------------------
2000 1999
----------------- ----------------
Paper $ 9,025 6,525
Ink 275 232
Supplies and other 1,762 1,586
----------------- ----------------
Total $ 11,062 8,343
================= ================
34
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(4) Other Assets
The components of other assets are as follows (in thousands):
March 31,
-----------------------------------
2000 1999
----------------- ----------------
Deferred financing costs,
less accumulated amortization
of $4,462 in 2000 and $3,278
in 1999 $ 6,239 7,194
Spare parts inventory, net
of valuation allowance of
$100 in 2000 and 1999 3,664 2,293
Other 2,366 2,278
----------------- ----------------
Total $ 12,269 11,765
================= ================
(5) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
March 31,
-----------------------------------
2000 1999
----------------- ----------------
Compensation and related
taxes $ 11,870 10,114
Employee benefits 9,347 8,814
Interest 4,262 4,264
Other 6,179 7,564
----------------- ----------------
Total $ 31,658 30,756
================= ================
35
<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):
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Bank Credit Agreement:
Series A Term Loan $ 9,642 20,537
Series B Term Loan 39,643 43,753
Revolving Credit Facility Borrowings 8,764 --
------------ -----------
58,049 64,290
12 3/4% Senior Subordinated Notes Due 2005 185,000 185,000
Capitalized leases 30,733 36,304
Other loans with varying maturities and
interest rates 3,562 3,995
------------ -----------
Total long-term debt 277,344 289,589
Less current installments 7,727 7,994
------------ -----------
Long-term debt and capitalized leases,
excluding current installments $ 269,617 281,595
============ ===========
</TABLE>
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
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, 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.
As noted above, the Revolving Credit Facility provides for a maximum of
$70 million borrowing availability. This availability includes a
provision for up to $40 million of letters of credit. At March 31,
2000, the Company had total borrowings and letters of credit
outstanding under the Revolving Credit Facility of approximately $33.8
million, and therefore, additional borrowing availability of
approximately $36.2 million.
36
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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 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, 2000 was 8.3%.
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.
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, 2000 is shown below (in thousands):
Long-Term Capitalized
Fiscal year Debt Leases
------------------- ----------- ------------
2001 $ 1,006 9,340
2002 1,001 8,149
2003 6,865 7,348
2004 33,130 6,488
2005 19,609 4,059
Thereafter 185,000 3,450
----------- ------------
Total $ 246,611 38,834
===========
Imputed interest 8,101
------------
Present value of
minimum lease payments 30,733
============
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, 2000 and 1999.
37
<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, 2000 and 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Book over tax basis in fixed assets $ 25,294 $ 29,579
Foreign taxes 3,069 2,631
Accumulated amortization 1,712 861
Other, net 4,233 4,449
----------- ----------
Total deferred tax liabilities 34,308 37,520
Deferred tax assets:
Bad debts 1,174 1,143
Accrued expenses and other liabilities 24,415 26,877
Accrued loss on discontinued operations 59 55
Net operating loss carryforwards 34,314 40,743
AMT credit carryforwards 1,500 1,262
Cumulative translation adjustment 896 984
----------- ----------
Total deferred tax assets 62,358 71,064
Valuation allowance for deferred tax assets 36,081 41,460
----------- -----------
Net deferred tax assets 26,277 29,604
----------- -----------
Net deferred tax liabilities $ 8,031 $ 7,916
=========== ===========
</TABLE>
Management has evaluated the need for a valuation allowance, and as
such, a valuation allowance of $36.1 million has been recorded. The
valuation allowance was decreased by $5.4 million during the fiscal
year ended March 31, 2000.
38
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The components of income tax expense are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Amount attributable to
continuing operations $ 2,189 523 2,106
Amount attributable to
discontinued operations -- -- --
----------------- ----------------- -----------------
Total expense $ 2,189 523 2,106
================= ================= =================
</TABLE>
Income tax expense (benefit) attributable to income (loss) from
continuing operations consists of (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 169 -- --
State 251 237 230
Foreign 1,654 1,589 946
----------------- ----------------- -----------------
Total current 2,074 1,826 1,176
----------------- ----------------- -----------------
Deferred
Federal (133) (132) (108)
State (15) (102) (157)
Foreign 263 (1,069) 1,195
----------------- ----------------- -----------------
Total deferred 115 (1,303) 930
----------------- ----------------- -----------------
Provision for income taxes $ 2,189 523 2,106
================= ================= =================
</TABLE>
39
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The effective tax rates for Fiscal Year 2000, Fiscal Year 1999 and Fiscal
Year 1998 were 18.8%, (6.7%) and (7.8%), respectively. The difference
between these effective rates relating to continuing operations and the
statutory federal income tax rate is composed of the following items:
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
federal tax impact 1.3 (1.1) (0.2)
Foreign taxes, less federal
tax impact 10.9 (4.4) (5.2)
Amortization 5.1 (6.2) (9.9)
Change in valuation
allowance (37.7) (34.4) (24.1)
Other, net 4.2 4.4 (3.4)
----------------- ----------------- -----------------
Effective income tax rate 18.8% (6.7)% (7.8)%
================= ================= =================
</TABLE>
As of March 31, 2000, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $59.6 million, which can be
used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 2001 and will be totally expired
in 2019.
As of March 31, 2000, the Company had available NOL's for federal
purposes of $91.7 million, which can be used to offset future federal
taxable income. If these NOL's are not utilized, they will begin to
expire in 2006 and will be totally expired in 2019.
The Company also had available an alternative minimum tax credit
carryforward of $1.5 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 $76.1
million, which will begin to expire in 2007 and will be completely
expired in 2019.
40
<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 at March 31, 2000 and March 31, 1999.
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 $4.1
million in Fiscal Year 2000, $3.8 million during Fiscal Year 1999 and
$3.3 million during Fiscal Year 1998.
41
<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 2000 and 1999 and a statement of the funded status of such plans
as of March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Defined Benefit Defined Benefit
Pension Plans Postretirement Plan
----------------------------------- ----------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 58,332 55,064 2,646 3,766
Service cost 425 680 26 30
Interest cost 3,946 3,901 178 181
Plan participants' contributions -- -- 186 148
Actuarial (gain) loss (6,517) 1,468 79 (980)
Benefits paid (2,868) (2,649) (498) (499)
Curtailment gain (56) (63) -- --
Settlement gain (64) (69) -- --
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 53,198 58,332 2,617 2,646
============ ============ ============ ============
Change in Plan Assets
Fair value of plan assets at beginning of year $ 49,483 45,306 -- --
Actual return on plan assets 9,313 6,462 -- --
Employer contributions 544 693 313 351
Plan participants' contributions -- -- 186 148
Benefits paid (3,242) (2,978) (499) (499)
------------ ------------ ------------ ------------
Fair value of plan assets at end of year $ 56,098 49,483 -- --
============ ============ ============ ============
Funded status $ 2,900 (8,849) (2,617) (2,646)
Unrecognized net actuarial gain (13,220) (2,501) (1,348) (1,537)
Unrecognized prior service cost (290) (350) (2,299) (2,522)
------------ ------------ ------------ ------------
Accrued benefit liability $ (10,610) (11,700) (6,264) (6,705)
============ ============ ============ ============
</TABLE>
42
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Defined Benefit Pension Plans Defined Benefit Postretirement Plan
---------------------------------- -----------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted - average assumptions
Discount rate - benefit obligation 7.75% 7.00% 7.75% 7.00%
Expected return on plan assets 10.00% 10.00% 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
6.5 percent annual rate of increase in the per capita cost of covered
health care benefits was assumed for March 31, 2000. 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
------------------------------------ ---------------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 425 680 769 26 30 46
Interest cost 3,945 3,876 3,656 178 181 265
Expected return on plan assets (4,815) (4,410) (3,715) -- -- --
Amortization of prior service cost (89) 55 76 (222) (315) (193)
Recognized net actuarial gain (5) -- (103) (110) (142) (79)
---------- ---------- ----------- ----------- ----------- ---------
Net periodic benefit (income) cost $ (539) 201 683 (128) (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:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on total of service and interest cost
components of expense $ 171 155
Effect on postretirement benefit obligation $ 2,337 2,100
</TABLE>
43
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(9) Capital Stock
At March 31, 2000, capital stock consists of Holdings' common stock
("Common Stock") and Series AA and Series BB convertible preferred
stock collectively, ("Preferred Stock"). Each share of Common Stock is
entitled to one vote on each matter common shareholders are entitled to
vote on. The Preferred Stock has no voting rights. Dividends on the
Common Stock and Preferred Stock are discretionary by the Board of
Directors. Upon the occurrence of a Liquidation Event (as defined in
the amended and restated Certificate of Incorporation), all amounts
available for payment or distribution shall first be paid to holders of
Series BB preferred stock, then holders of Series AA preferred stock
and then to holders of Common Stock. Each share of the Preferred Stock
may be converted, at the option of the holder, into shares of Common
Stock using conversion ratios and subject to conditions set forth in
the Company's Certificate of Incorporation.
(10) Stock Option Plans
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 currently provides for granting up to 17,322 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:
<TABLE>
<CAPTION>
Weighted-Average
Exercise Exercisable
Options Price ($) Options (b)
----------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at March 31, 1997 19,300 50.00
Granted 30,014 .01
Exercised (11,773) 14.95
Forfeited (334) .01
----------
Outstanding at March 31, 1998 37,207 1.42(a) 1,147
Granted 4,283 97.45
Exercised -- --
Forfeited (4,309) 12.23
----------
Outstanding at March 31, 1999 37,181 11.23 9,698
Granted 2,665 18.02
Exercised (9,249) .01
Forfeited (757) 88.72
----------
Outstanding at March 31, 2000 29,840 13.35 9,536
==========
</TABLE>
(a) Reflects Fiscal Year 1998 option repricing discussed below.
(b) 365 of the exercisable options at March 31, 2000 have a $240/option
exercise price, all other exercisable options, in all periods, have a
$.01/option exercise price.
44
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The weighted-average grant-date fair value of options granted was $0
for fiscal years ending March 31, 1999 and 1998. In Fiscal Year 2000,
1,970 options were granted with weighted-average grant-date fair value
of approximately $.01/option and 495 options were granted with
weighted-average grant-date fair value of $539/option. These options
were granted with a weighted-average exercise price of $.01/option.
Also, in Fiscal Year 2000, 200 options were granted with a
weighted-average grant-date fair value of approximately $.01/option and
a weighted-average exercise price of $240/option. The fair value for
all options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions
for Fiscal Year 2000, Fiscal Year 1999 and Fiscal Year 1998: risk-free
interest rates of 5.3 - 6.4%, 4.5 - 5.6%, and 5.5%, respectively; no
annual dividend yield; volatility factors of 0; and an expected option
life of 5 years. The weighted-average remaining contractual life of the
options outstanding at March 31, 2000 was 7.3 years. 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 7,281 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, 2000.
As a result of the SFAS 123 requirements, the Company recognized
related stock compensation expense of less than $0.1 million in Fiscal
Year 2000, and no compensation expense in Fiscal Year 1999 and Fiscal
Year 1998.
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
Granted --
Exercised --
Forfeited --
--------------
Outstanding at March 31, 2000 555
==============
45
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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, 2000 was 7.8 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, 2000. 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, 2000.
As a result of the SFAS 123 requirements, the Company recognized
related stock compensation expense of less than $0.1 million in Fiscal
Year 1999 and $0.6 million in Fiscal Year 1998. No grants of preferred
options in Fiscal Year 2000 resulted in zero stock compensation expense
for the year.
(11) Commitments and Contingencies
The Company incurred rent expense for Fiscal Year 2000, Fiscal Year
1999, and Fiscal Year 1998 of $6.4 million, $6.9 million, and $6.4
million, respectively, under various operating leases. Future minimum
rental commitments under existing operating lease arrangements at
March 31, 2000 are as follows (in thousands):
Fiscal Year
-----------
2001 $ 5,157
2002 4,603
2003 3,344
2004 1,885
2005 1,294
Thereafter 4,070
-----------
Total $ 20,353
===========
The Company has employment agreements with three of its principal
officers and eleven other employees. Such agreements provide for
minimum salary levels as well as for incentive bonuses which are
payable if specified management goals are attained. In addition, the
Company has consulting agreements with two former employees. The
aggregate commitment for future salaries at March 31, 2000, excluding
bonuses, was approximately $5.0 million.
On December 21, 1989, Graphics sold to CPS Corp ("CPS"), its ink
manufacturing operations and facilities. 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, 2000 is $27.1 million and is
included within Other liabilities in the Company's consolidated balance
sheet.
46
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Graphics, together with over 300 other persons, has been designated by
the U.S. Environmental Protection Agency as a potentially responsible
party (a "PRP") under the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA", also known as "Superfund") at
one Superfund site. Although liability under CERCLA may be imposed on a
joint and several basis and the Company's ultimate liability is not
precisely determinable, the PRPs have agreed that Graphics' share of
removal costs is 0.46% and therefore Graphics believes that its share
of the anticipated remediation costs at such site will not be material
to its business or financial condition. Based upon an analysis of
Graphics' volumetric share of waste contributed to the site and the
agreement among the PRPs, the Company maintains a reserve of
approximately $0.1 million in connection with this liability on its
consolidated balance sheet at March 31, 2000. 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, 2000, 1999, and 1998.
(13) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
<TABLE>
<CAPTION>
Income
(Loss)
Before
Extraordinary Extraordinary Net Income
Net Sales Gross Profit Item Item (Loss)
------------- ------------- ------------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Fiscal Year 2000
Quarter Ended
June 30 $ 123,608 21,263 4,266 -- 4,266
September 30 134,211 22,297 1,964 -- 1,964
December 31 152,213 25,808 5,286 -- 5,286
March 31 136,678 20,897 (2,046) -- (2,046)
------------- ------------- ------------------ ----------------- ---------------
Total $ 546,710 90,265 9,470 -- 9,470
============= ============= ================== ================= ===============
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)
============= ============= ================== ================= ===============
</TABLE>
47
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(14) Restructuring Costs and Other Special Charges
Restructuring Costs
American Color (Digital Imaging and Prepress Services). 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) included $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 were paid or settled before March 31, 2000.
The $1.5 million balance in the related restructuring reserve at March
31, 2000 primarily includes remaining payouts of involuntary employee
termination costs and remaining payouts under lease commitments.
Print. In January 1998, the Company approved a plan for its print
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 print 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.
These special charges are classified within restructuring costs and
other special charges in the consolidated statements of operations.
48
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(15) 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,
------------------------
2000 1999
----------- -----------
Balance sheet data
Current assets $ 82,270 71,591
Noncurrent assets $ 221,542 227,409
Current liabilities $ 85,683 77,515
Noncurrent liabilities $ 327,958 341,264
Year ended March 31,
----------------------------------
2000 1999 1998
--------- --------- ---------
Statement of operations data
Sales $ 546,710 520,343 533,335
Operating income $ 46,084 29,455 12,103
Net income (loss) $ 9,470 (12,468) (29,895)
(16) Industry Segment Information
Effective March 31, 1999, the Company adopted the provisions of
Financial Accounting Standards Board Statement of Financial Accounting
Standard No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). The Company has significant
operations principally in two industry segments: (1) print and (2)
digital imaging and prepress services. All of the Company's print
business and assets are attributed to the print division and all of the
Company's digital imaging and prepress services 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) print and (2) digital
imaging and prepress services. The print 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 assists customers in the
capture, manipulation, transmission and distribution of images. The
majority of the digital imaging and prepress services 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.
49
<PAGE>
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
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) Print Prepress Other Total
-------------------------------------------------------- -------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
2000
Segment revenues $ 462,886 80,240 3,584 546,710
EBITDA $ 72,543 11,003 (3,539) 80,007
Depreciation and amortization 23,097 5,983 4,706 33,786
Interest expense -- -- 33,963 33,963
Interest income -- -- (165) (165)
Other charges, net -- 137 -- 137
Other, net 98 208 321 627
-------------- ------------- --------------- -----------
Income (loss) from continuing operations before
income taxes $ 49,348 4,675 (42,364) 11,659
Total assets $ 262,761 31,333 9,718 303,812
Total capital expenditures $ 17,977 4,419 328 22,724
-----------------------------------------------------------------------------------------------------------------------------
1999
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
-----------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
<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,
2000). All directors hold office until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
Name Age Position with Graphics and Holdings
------------------ --- -----------------------------------
<S> <C> <C>
Stephen M. Dyott 48 Chairman, President of Holdings, Chief Executive Officer and Director
Michael M. Janson 52 Director
Eric T. Fry 33 Director
Joseph M. Milano 47 Executive Vice President and Chief Financial Officer
Malcolm J. Anderson 61 President of Graphics
Timothy M. Davis 45 Senior Vice President-Administration, Secretary and General Counsel
Stuart R. Reeve 36 Executive Vice President, Operations of Graphics
Larry R. Williams 59 Executive Vice President, Purchasing of Graphics
Patrick W. Kellick 42 Senior Vice President/Corporate Controller and Assistant Secretary
</TABLE>
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 from 1991 to 1999; 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 partners of The Morgan Stanley Leveraged Equity
Fund II, L.P. ("MSLEFII") and Morgan Stanley Capital Partners III, L.P.
("MSCPIII" and together with MSLEFII "MSDWCP") and of Morgan Stanley & Co.,
Incorporated ("MS&Co."); Joined MS&Co. in 1987; Joined MSDWCP in 1997; Managing
Director in MS&Co.'s High Yield Capital Markets Department before joining
MSDWCP; Director of Choice One Communications Inc., Silgan Holdings Inc., and
other private companies.
Eric T. Fry - Director of Graphics and Holdings since March 1996; Principal
of the general partners of MSDWCP and MS&Co. in 1987; 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., The Underwriter Holdings Company
Limited and LifeTrust America, L.L.C.
Joseph M. Milano - Executive Vice President and Chief Financial Officer of
Holdings and Graphics since 1997; Senior Vice President and Chief Financial
Officer of Holdings and Graphics from 1994 to 1997; Vice President - Finance of
Holdings and Graphics from 1992 to 1994; Vice President and Chief Financial
Officer, Farrel Corporation, 1989 to 1992; Vice President and Chief Financial
Officer, Electronic Mail Corporation of America from 1984 to 1988.
Malcolm J. Anderson - President of Graphics since 1999; Executive Vice
President, Operations of Graphics from 1996 to 1999; 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.
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.
52
<PAGE>
Stuart R. Reeve - Executive Vice President, Operations of Graphics since 1999;
Executive Vice President Sales and Marketing of Graphics from 1997 to 1999;
Senior Vice President Commercial Sales of Graphics 1995 to 1997; Vice President
Sales - Midwest of Graphics 1994 to 1995; Vice President Sales - West of
Graphics 1991 to 1994; Sales Executive of Graphics 1989 to 1991.
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.
Patrick W. Kellick - Senior Vice President/Corporate Controller of Holdings and
Graphics since 1997; 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, 2000, 1999, and
1998 to the Chief Executive Officer 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- All
Annual Restricted lying 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 2000 $ 575,000 $ 1,000,000 -- -- -- -- --
Chairman, President of Fiscal Year 1999 $ 517,311 $ 800,000 -- -- -- -- --
Holdings and Chief Fiscal Year 1998 $ 475,000 $ 525,000 -- -- 9,462 -- --
Executive Officer &
Director
Joseph M. Milano Fiscal Year 2000 $ 309,231 $ 375,000 -- -- -- -- --
Executive Vice President Fiscal Year 1999 $ 287,981 $ 325,000 -- -- 29 -- --
& Chief Financial Officer Fiscal Year 1998 $ 275,000 $ 290,000 -- -- 5,217 -- --
Malcolm J. Anderson Fiscal Year 2000 $ 319,231 $ 325,000 -- -- 691 -- --
President of Graphics Fiscal Year 1999 $ 240,385 $ 225,000 -- -- -- -- --
Fiscal Year 1998 $ 230,000 $ 200,000 -- -- 1,158 -- --
Timothy M. Davis Fiscal Year 2000 $ 277,692 $ 275,000 -- -- -- -- --
Senior Vice Fiscal Year 1999 $ 252,308 $ 225,000 -- -- -- -- --
President-Administration, Fiscal Year 1998 $ 233,200 $ 160,000 -- -- 2,626 -- --
Secretary & General
Counsel
Stuart R. Reeve Fiscal Year 2000 $ 284,616 $ 260,000 -- -- 441 -- --
Executive Vice President, Fiscal Year 1999 $ 234,134 $ 225,000 -- -- -- -- --
Operations of Graphics Fiscal Year 1998 $ 225,000 $ 200,000 -- -- 1,158 -- --
</TABLE>
53
<PAGE>
The following table presents information concerning the options granted to the
Named Executive Officers during the last fiscal year.
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 2000 ($/sh) Date Value ($)(b)
------------------------- ----------------- -------------- --------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Common Stock Option
Plans (a)
Malcolm J. Anderson 691 26% .01 07/27/09 --
Stuart R. Reeve 441 17% .01 07/27/09 --
Preferred Stock
Option Plan
None
</TABLE>
---------------
(a) All options granted pursuant to the Common Stock Option Plans have a
vesting schedule providing for 25% vesting on the first anniversary of
the date of grant and an additional 25% vesting on each of the next three
anniversaries of the date of grant.
(b) Holdings' common stock has not been registered or publicly traded and,
therefore a public market price of the stock at the date of grant was not
available. Holdings' believes the exercise price of the options ($.01) held
by the Named Executive Officers at the date of grant, was in each case
greater than the fair market value of the underlying shares of Holdings'
common stock as of each date, and as such the Grant Date Present Value is
zero.
The following table presents information concerning the fiscal year-end value of
unexercised stock options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Shares Acquired Value Options/SAR's at 3/31/00 SAR's at 3/31/00
on Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable ($)
---------------- --------------- ------------------------- ------------------------------
<S> <C> <C> <C> <C>
Common Stock Option Plans (a)
Stephen M. Dyott 3,577.75 $ 36 2,292.50 / 5,025.25 1,926,181 / 4,222,265 (a)
Joseph M. Milano 2,126.75 $ 21 1,267.75 / 2,725.50 1,065,176 / 2,289,992 (a)
Malcolm J. Anderson 452.25 $ 5 320.75 / 1,301.25 269,497 / 1,093,323 (a)
Timothy M. Davis 913.25 $ 9 634.50 / 1,341.50 533,113 / 1,127,142 (a)
Stuart R. Reeve 452.25 $ 5 347.25 / 1,042.75 291,763 / 876,129 (a)
Preferred Stock Option Plan (b)
Stephen M. Dyott -- -- 292 / 0 2,326,037 / 0 (b)
Joseph M. Milano -- -- 175 / 0 1,394,029 / 0 (b)
Timothy M. Davis -- -- 88 / 0 700,997 / 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, 2000.
(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, 2000.
54
<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, 2000, all of the Named Executive Officers had vested in the pension
plan. At March 31, 2000, the Named Executive Officers had the following amounts
of credited service (original hire date through January 1, 1995) and annual
benefit payable upon retirement at age 65 under the Pension Plan: Stephen M.
Dyott (3 years, 3 months; $8,220), Joseph M. Milano (2 years, 7 months; $5,820),
Malcolm J. Anderson (1 year, 3 months; $2,820), Timothy M. Davis (5 years, 5
months; $11,700) and Stuart R. Reeve (5 years, 4 months; $9,185).
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 six other executives. The
plan provides for a basic annual benefit payable upon completion of five years
vesting service (April 1, 1994 through March 31, 1999 for Messrs. Dyott, Milano,
Anderson, and Davis and July 1, 1997 through June 30, 2002 for Messr. Reeve) 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
Malcolm J. Anderson $ 50,000
Timothy M. Davis $ 75,000
Stuart R. Reeve $ 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
On October 19, 1998, Graphics entered into an employment agreement with Stephen
M. Dyott (the "Dyott Employment Agreement"), which replaced the agreement
entered into by Graphics and Mr. Dyott on April 3, 1993.
55
<PAGE>
The Dyott Employment Agreement has an initial term of three years. The term
under the Dyott Employment Agreement is automatically extended for one-year
periods absent at least one 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, annual bonus and 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) for a period of three years beginning on the date
of termination. The Dyott Employment Agreement contains confidentiality
obligations that survive indefinitely, non-solicitation obligations that end on
the second anniversary of the date employment has ceased and non-competition
obligations that end on the third 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 party to an employment agreement with Malcolm J. Anderson which
provides for an annual salary, annual bonus and all other employee benefits and
perquisites made available to Graphics' senior executives generally. The term of
Mr. Anderson's agreement shall terminate on the earlier of (i) March 31, 2002 or
(ii) termination of his employment pursuant to the employment agreement. Such
agreement also provides that in the event the employee's employment is
terminated by Graphics without "cause", as defined above, or by the employee for
"good reason", as defined above, the employee will be entitled to 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) for a period of two years beginning on the date of termination. The
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. Effective April 1,
2002, Mr. Anderson will be engaged as a consultant to the Company. Under the
terms of Mr. Anderson's consulting agreement, he will be paid an annual fee of
$125,000 for a two year period.
On August 1, 1999, Graphics also entered into a severance agreement with Stuart
Reeve which provides 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 two years following termination. The
severance 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.
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.
56
<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 $.01 exercise
price. Based upon the Board of Directors determination, the new exercise price
was not less than the fair market value of such options. See note 10 to our
consolidated financial statements appearing elsewhere in this Report. The
following table presents information concerning all repricing of options and
SARs held by any executive officer during the last ten completed fiscal years.
Ten Year Option / SAR Repricings
<TABLE>
<CAPTION>
Number of
Securities Market Price Exercise Length of
Underlying of Stock at Price at New Original Option
Options/SARs Time of Time of Exercise Term Remaining at
Repricing Repriced or Repricing or Repricing Price Date of Repricing
Name Date Amended (#) Amendment ($) ($) ($) 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.
of Holdings, Chief 01/16/98 859 -- 50 .01 6 yrs. 5 mo.
Executive Officer 01/16/98 2,300 -- 50 .01 5 yrs. 0 mo.
and Director
Joseph M. Milano 01/16/98 760 -- 50 .01 8 yrs. 6 mo.
Executive Vice President 01/16/98 614 -- 50 .01 7 yrs. 6 mo.
and Chief Financial 01/16/98 688 -- 50 .01 6 yrs. 5 mo.
Officer 01/16/98 102 -- 50 .01 5 yrs. 0 mo.
Malcolm J. Anderson 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
President of Graphics 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
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
Stuart R. Reeve 01/16/98 91 -- 50 .01 8 yrs. 6 mo.
Executive Vice President, 01/16/98 140 -- 50 .01 7 yrs. 6 mo.
Operations of Graphics 01/16/98 420 -- 50 .01 6 yrs. 5 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
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>
57
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 2000, 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 41.5 2,727 52.2
MSCP III Entities (a)
1221 Ave. of the Americas
New York, NY 10020 23,332 16.3 1,070 20.5
First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 11.9 780 14.9
Leeway & Co.
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171 10,667 7.4 489 9.4
Directors and Named Executive Officers:
Stephen M. Dyott (b) 9,945 6.8 315 5.7
Joseph M. Milano (c) 4,510 3.1 175 3.2
Malcolm J. Anderson (d) 1,199 0.8 -- --
Timothy M. Davis (e) 2,277 1.6 88 1.7
Stuart R. Reeve (f) 1,207 0.8 -- --
Michael M. Janson -- -- -- --
Eric T. Fry -- -- -- --
All current directors and executive officers
as a group (g) 21,357 14.3 578 10.0
</TABLE>
(a) Includes Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(b) Includes 2,293 common stock options and 292 preferred stock options
exercisable within 60 days.
(c) Includes 1,268 common stock options and 175 preferred stock options
exercisable within 60 days.
(d) Includes 321 common stock options exercisable within 60 days.
(e) Includes 635 common stock options and 88 preferred stock options
exercisable within 60 days.
(f) Includes 347 common stock options exercisable within 60 days.
(g) Includes 5,545 common stock options and 555 preferred stock options
exercisable within 60 days.
58
<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 Morgan Stanley Dean Witter & Co.
("MSDW"). MSDW is a preeminent global 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.
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.
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.
59
<PAGE>
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. Currently, Morgan Stanley Senior Funding, Inc. has a $9.6 million
participation in such credit facility.
60
<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, 2000 and 1999
For the Years Ended March 31, 2000, 1999 and 1998:
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.
<TABLE>
<CAPTION>
Schedules Page No.
--------- --------
<S> <C> <C>
I. Condensed Financial Information of Registrant:
Condensed Financial Statements (parent company only) for the years ended
March 31, 2000, 1999, and 1998 and as of March 31, 2000 and 1999 .........................................63
II. Valuation and qualifying accounts ........................................................................69
</TABLE>
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++++
61
<PAGE>
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****
10.1(c) November 9, 1999, Third 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 Employment Agreement, dated as of October 19, 1998, between
Graphics and Stephen M. Dyott
10.4 Severance Letter, dated August 1, 1999, between Graphics and
Stuart Reeve
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 Employment Agreement dated as of August 1, 1999, 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 the Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 - Commission file number 33-97090.
** 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 Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998 - Commission file number 33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for the
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 September 30, 1999 - 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 2000:
1. Form 8-K filed with the Securities and Exchange Commission on
February 2, 2000 under Item 5 to announce ACG's net income and EBITDA
for the three months ended December 31, 1999.
ACG did not file any other reports on Form 8-K during the three months
ended March 31, 2000.
62
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------
March 31,
----------------------------------------
2000 1999
---------------- --------------
Assets
------
<S> <C> <C>
Current assets:
Receivable from subsidiary $ 377 601
---------------- --------------
Total assets $ 377 601
================ ==============
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Income taxes payable $ (63) 128
---------------- --------------
Total current liabilities (63) 128
Liabilities of subsidiary in excess of assets 109,829 119,779
---------------- --------------
Total liabilities 109,766 119,907
---------------- --------------
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 143,399 shares and 134,250
shares issued and outstanding at March 31, 2000
and 1999, respectively 1 1
Preferred Stock, $.01 par value, 15,823 shares
authorized, 3,617 shares and 3,622 shares
series AA convertible preferred stock issued
and outstanding at March 31, 2000 and 1999,
respectively, $39,425,000 and $39,475,000
liquidation preference at March 31, 2000 and 1999,
respectively, 1,606 shares Series BB convertible
preferred stock issued and outstanding at March 31,
2000 and 1999, $17,500,000 liquidation preference
at March 31, 2000 and 1999 -- --
Additional paid-in capital 58,303 58,286
Accumulated deficit (165,485) (174,905)
Other accumulated comprehensive loss, net of tax (2,208) (2,688)
---------------- --------------
Total stockholders' deficit (109,389) (119,306)
---------------- --------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 377 601
================ ==============
See accompanying notes to condensed financial statements.
</TABLE>
63
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------
2000 1999 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Equity in income (loss) of subsidiary $ 9,470 (12,468) (29,895)
-------------- -------------- ------------
Net income (loss) $ 9,470 (12,468) (29,895)
============== ============== ============
</TABLE>
See accompanying notes to condensed financial statements.
64
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------
2000 1999 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities $ -- -- --
Cash flows from investing activities $ -- -- --
Cash flows from financing activities $ -- -- --
-------------- -------------- ------------
Net change in cash -- -- --
============== ============== ============
</TABLE>
See accompanying notes to condensed financial statements.
65
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
Description of ACG Holdings, Inc.
Our 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, 2000, 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 of Accounting Principles Board
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.
66
<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 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 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.
67
<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.
68
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged to Other at End of
of Period Expense Write-offs Adjustments Period
------------- --------------- -------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Fiscal Year ended March 31, 2000
Allowance for doubtful accounts $ 2,860 783 (698) -- $ 2,945
Reserve for inventory obsolescence $ 588 (99) -- -- $ 489
Income tax valuation allowance $ 41,460 -- -- (a) (5,379) $ 36,081
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 -- -- (b) 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 -- -- (b) 7,084 $ 37,222
(a) The decrease in the valuation allowance primarily relates to current year income for which no tax expense has been recorded.
(b) The increase in the valuation allowance primarily relates to current year losses for which no tax benefit has been recorded.
</TABLE>
69
<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 13, 2000
------------------------------------- --------------
Stephen M. Dyott
Chairman, President and Chief Executive Officer
ACG Holdings, Inc.
Chairman 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.
<TABLE>
<CAPTION>
Signature Title Date
------------ ------------ --------
<S> <C> <C>
/s/ Joseph M. Milano Executive Vice President June 13, 2000
----------------------------------- --------------
(Joseph M. Milano) Chief Financial Officer
/s/ Patrick W. Kellick Senior Vice President June 13, 2000
------------------------------------ --------------
(Patrick W. Kellick) Corporate Controller
Assistant Secretary
(Principal Accounting Officer)
/s/ Michael M. Janson Director June 13, 2000
----------------------------------- --------------
(Michael M. Janson)
/s/ Eric T. Fry Director June 13, 2000
------------------------------------ --------------
(Eric T. Fry)
</TABLE>
70
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Indemnification of Directors and Officers.
Graphics
The Business Corporation Law of the State of New York (the "New York
Law") permits indemnification of directors, employees and agents of corporations
under certain conditions and subject to certain limitations. Pursuant to the New
York Law, Graphics has included in its Certificate of Incorporation and bylaws a
provision to eliminate the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care to the fullest extent
permitted by the New York Law and to provide that Graphics shall indemnify its
directors and officers to the fullest extent permitted by the New York Law.
Holdings
The General Corporation Law of the State of Delaware (the "Delaware
Law") permits indemnification of directors, employees and agents of corporations
under certain conditions and subject to certain limitations. Pursuant to the
Delaware Law, Holdings has included in its Restated Certificate of Incorporation
and bylaws a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their duty of care to the
fullest extent permitted by the Delaware Law and to provide that Holdings shall
indemnify its directors and officers to the fullest extent permitted by the
Delaware Law.
Each party to the Stockholders' Agreement has agreed that no past,
current or future director or officer of Holdings shall have any liability
(whether direct or indirect, in contract, tort or otherwise) to such party
arising out of or relating to any action or omission of such director or officer
in his or her capacity as a director or officer of Holdings, except to the
extent that any loss, claim, damage or liability is found in a final judgment of
a court to have resulted from such director's or officer's bad faith, willful
misconduct or gross negligence. Furthermore, each party to the Stockholders'
Agreement will discharge and release each such director and officer from, and
waive and relinquish any and all rights to, any and all claims, demands, rights
of action or causes of action arising out of or relating to any action or
omission of such director or officer in his or her capacity as a director or
officer of Holdings, except to the extent that any loss, claim, damage or
liability is found in a final judgment of a court to have resulted from such
director's or officer's bad faith, willful misconduct or gross negligence.
Item 15. Recent Sales of Unregistered Securities.
See Item 5 of Part II of the Annual Report attached as
Appendix 1 to the Prospectus.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as amended
to date**
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of New Note), dated as of August
15, 1995, among Graphics, Holdings and NationsBank of Georgia,
National Association, as Trustee**
5.1 Opinion of Shearman & Sterling regarding the legality of the
securities being registered++
8.1 Opinion of Shearman & Sterling regarding tax matters++
10.1 Credit Agreement, dated as of August 15, 1995 and Amended and
Restated as of May 8, 1998, among Holdings, Graphics, GE
Capital Corporation as Documentation Agent, Morgan Stanley
II-1
<PAGE>
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****
10.1(c) November 9, 1999, Third 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 Employment Agreement, dated as of October 19, 1998, between
Graphics and Stephen M. Dyott+
10.4 Severance Letter, dated August 1, 1999, between Graphics and
Stuart Reeve+
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 Employment Agreement, dated as of August 1, 1999, between
Graphics and M.J. Anderson++
10.8 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.8(a) Amendment No. 1, dated January 16, 1998, to Stockholders'
Agreement, dated as of August 14, 1995, among Holdings, the
Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P. and the additional parties named
therein++++
10.9 Stock Option Plan of Holdings++
10.10 Term Loan Agreement, dated as of June 30, 1997, among
Holdings, Graphics, BT Commercial Corporation, as Agent,
Bankers Trust Company as Issuing Bank, and the parties
signatory thereto++++
10.11 Common Stock Option Plan of Holdings++++
10.12 Preferred Stock Option Plan of Holdings++++
12.1 Statements re: computation of ratio of earnings to fixed
charges+
21.1 List of Subsidiaries of Holdings+
23.1 Consent of Ernst & Young LLP
23.2 Consent of Shearman & Sterling (included in its opinion filed
as Exhibit 5.1)++
24.1 Powers of Attorney**
25.1 Statement of Eligibility of NationsBank of Georgia, National
Association on Form T-1 (bound separately)**
* Incorporated by reference from Amendment No. 2 to Form S-1 filed
on October 4, 1993 - Registration number 33-65702.
** Incorporated by reference from Form S-4 filed on September 19,
1995 - Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 -- Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 -- Commission file number
33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1998 -- Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998 -- Commission file number
33-97090.
***** Incorporated by reference from Annual Report on Form 10-K for fiscal
year ended March 31, 1999 -- Commission file number 33-97090.
II-2
<PAGE>
++ Incorporated by reference from Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 -- Commission file number
33-97090.
+++ Incorporated by reference from Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 -- Commission file number 33-97090.
+ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 2000 -- Commission file
number 33-97090.
(b) Financial Statement Schedules.
See Part IV of the Annual Report attached as Appendix 1 to the
Prospectus.
Item 17. Undertakings.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the Registration Statement or any material change to such
information in the Registration Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the provisions described above, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the paying by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, American Color
Graphics, Inc. has duly caused this Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Stamford, State of Connecticut, on July 11, 2000.
AMERICAN COLOR GRAPHICS, INC.
By: /s/ Joseph M. Milano
----------------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 11, 2000.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
* Chairman, Chief Executive Officer, President and
---------------------------------------- Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano
---------------------------------------- Executive Vice President and Chief Financial Officer
Joseph M. Milano (Principal Financial Officer)
* Senior Vice President, Corporate Controller
---------------------------------------- and Assistant Secretary
Patrick W. Kellick (Principal Accounting Officer)
/s/ Michael M. Janson Director
----------------------------------------
Michael M. Janson
/s/ Eric T. Fry Director
----------------------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano
Joseph M. Milano
Attorney-in-fact
</TABLE>
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, ACG Holdings, Inc. has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Stamford,
State of Connecticut, on July 11, 2000.
ACG HOLDINGS, INC.
By: /s/ Joseph M. Milano
--------------------------
Joseph M. Milano
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities indicated on July 11, 2000.
<TABLE>
<CAPTION>
<S> <C>
Signature Title
* Chairman, Chief Executive Officer, President and
---------------------------------------- Director
Stephen M. Dyott (Principal Executive Officer)
/s/ Joseph M. Milano
---------------------------------------- Executive Vice President and Chief Financial Officer
Joseph M. Milano (Principal Financial Officer)
* Senior Vice President, Corporate Controller
---------------------------------------- and Assistant Secretary
Patrick W. Kellick (Principal Accounting Officer)
/s/ Michael M. Janson Director
----------------------------------------
Michael M. Janson
/s/ Eric T. Fry Director
----------------------------------------
Eric T. Fry
*By: /s/ Joseph M. Milano
Joseph M. Milano
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as amended to
date**
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of New Note), dated as of August
15, 1995, among Graphics, Holdings and NationsBank of Georgia,
National Association, as Trustee**
5.1 Opinion of Shearman & Sterling regarding the legality of the
securities being registered++
8.1 Opinion of Shearman & Sterling regarding tax matters++
10.1 Credit Agreement, dated as of August 15, 1995 and 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****
10.1(c) November 9, 1999, Third 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 Employment Agreement, dated as of October 19, 1998, between
Graphics and Stephen M. Dyott+
10.4 Severance Letter, dated August 1, 1999, between Graphics and
Stuart Reeve+
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 Employment Agreement, dated as of August 1, 1999,
between Graphics and M.J. Anderson++
10.8 Amended and Restated Stockholders' Agreement, dated as of August
14, 1995, among Holdings, the Morgan Stanley Leveraged Equity
Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the
additional parties named therein**
10.8(a) Amendment No. 1, dated January 16, 1998, to Stockholders'
Agreement, dated as of August 14, 1995, among Holdings, the
Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P. and the additional parties named
therein++++
10.9 Stock Option Plan of Holdings++
10.10 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company as Issuing Bank, and the parties signatory thereto++++
10.11 Common Stock Option Plan of Holdings++++
10.12 Preferred Stock Option Plan of Holdings++++
12.1 Statements re: computation of ratio of earnings to fixed charges+
21.1 List of Subsidiaries of Holdings+
23.1 Consent of Ernst & Young LLP
<PAGE>
23.2 Consent of Shearman & Sterling (included in its opinion filed as
Exhibit 5.1)++
24.1 Powers of Attorney**
25.1 Statement of Eligibility of NationsBank of Georgia, National
Association on Form T-1 (bound separately)**
---------------
* Incorporated by reference from Amendment No. 2 to Form S-1 filed
on October 4, 1993-- Registration number 33-65702.
** Incorporated by reference from Form S-4 filed on September 19,
1995 - Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed
on November 22, 1995--
Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 -- Commission file
number 33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1998 -- Commission file number
33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 -- Commission file number
33-97090.
***** Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1999 -- Commission file number
33-97090.
++ Incorporated by reference from Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 -- Commission file number
33-97090.
+++ Incorporated by reference from Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 -- Commission file number
33-97090.
+ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 2000 -- Commission file number
33-97090.
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated May 15, 2000, included in the Annual Report
(Form 10-K) of ACG Holdings, Inc. and American Color Graphics, Inc. that is made
a part of the Post-Effective Amendment No. 6 to the Registration Statement (Form
S-1, No. 33-97090) and related Prospectus of ACG Holdings, Inc. and American
Color Graphics, Inc. for the registration of $185,000,000 of 12 3/4% Senior
Subordinated Exchange Notes Due 2005 of American Color Graphics, Inc.
/s/ Ernst & Young LLP
Nashville, Tennessee
July 10, 2000
