ITEM 1. BUSINESS
General
We are a successor to a business that commenced operations in 1926, and are one of the largest national diversified commercial printers in North America with ten printing plants in eight states and Canada, ten prepress facilities located throughout the United States and one digital visual effects facility, that provides special effects services for the motion picture industry, located in California. We operate primarily in two business segments of the commercial printing industry: printing (which accounted for approximately 83% of total sales during the fiscal year ended March 31, 1999 ("Fiscal Year 1999")) and digital imaging and prepress services conducted through our American Color division (which accounted for approximately 16% of total sales in Fiscal Year 1999). Our printing business and American Color division are both headquartered in Nashville, Tennessee. Partnerships affiliated with Morgan Stanley Dean Witter & Co. ("MSDW") currently own 61.7% of the outstanding common stock and 72.7% of the outstanding preferred stock of Holdings.
Market data used throughout this Report was obtained from industry publications and internal company estimates. While we believe such information is reliable, the accuracy of such information has not been independently verified and cannot be guaranteed.
Financial Information About Industry Segments
See disclosure in note 17 of our consolidated financial statements appearing elsewhere in this Report.
Printing
Our printing business, which accounted for approximately 83%, 84% and 86% of our sales in the fiscal year ended March 31, 1999 (Fiscal Year 1999), the fiscal year ended March 31, 1998 ("Fiscal Year 1998") and the fiscal year ended March 31, 1997 ("Fiscal Year 1997"), respectively, produces retail advertising inserts, comics (newspaper Sunday comics, comic insert advertising and comic books), and other publications.
Retail Advertising Inserts (81% of printing sales in Fiscal Year 1999 and 80% in Fiscal Year 1998 and Fiscal Year 1997). We believe that we are one of the largest printers of retail advertising inserts in the United States. We printed advertising inserts for approximately 300 retailers in Fiscal Year 1999. Retail advertising inserts are preprinted advertisements, generally in color, that display products sold by a particular retailer or manufacturer. Advertising inserts are used extensively by many different retailers, including discount, department, supermarket, home center, drug and automotive stores. Inserts are an important and cost effective means of advertising for these merchants. Advertising inserts are primarily distributed through insertion in newspapers but are also distributed by direct mail or in-store by retailers. They generally advertise for a specific, limited sale period. As a result, advertising inserts are both time sensitive and seasonal.
Comics (13% of printing sales in Fiscal Year 1999, 14% in Fiscal Year 1998 and Fiscal Year 1997, includes newspaper Sunday comics, comic insert advertising and comic books). We believe that we are one of the largest printers of comics in the United States. We print Sunday comics for over 300 newspapers in the United States and Canada and print a significant share of the annual comic book requirements of Marvel Entertainment Group, Inc.
Other Publications (6% of printing sales in Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997). We print local newspapers, TV guide listings and other publications.
In January 1998, we approved a plan for our printing division which was designed to improve responsiveness to customer requirements, increase asset utilization and reduce overhead costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Restructuring Costs and Other Special Charges" and note 14 to our consolidated financial statements appearing elsewhere in this Report.
Printing Production
Our network of ten printing plants in the United States and Canada is strategically positioned to service major metropolitan centers and provide us with distribution efficiencies and shorter turnaround times, two factors instrumental in continuing our success in servicing large national and regional accounts. There are three printing processes used to produce advertising insert and newspaper supplements: offset lithography (heatset and cold), rotogravure and flexography. We principally use heatset offset and flexographic web printing equipment in our printing operations. We own a substantial majority of our printing equipment, which currently consists of 36 heatset offset presses, 5 coldset offset presses and 11 flexographic presses. Most of our advertising inserts and all of our other publications and comic books are printed using the offset process, while some advertising inserts and substantially all of our newspaper Sunday comics and comic advertising inserts are printed using the flexographic process.
In the heatset offset process, images are distinguished chemically from non-image areas of a metal plate and transferred from the plate to a rubber blanket and then to the paper surface. The printed web goes through an oven which dries the solvents from the ink, thereby setting the ink on the paper. In the cold offset process, inks are set by the absorption of solvents into the paper. Because the heatset offset process can be utilized on a wide variety of papers and produce sharper reproductions, heatset offset presses provide a more colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes raised image plates and rapid-drying, water-based (as opposed to solvent-based) inks. The flexographic image area results from application of ink to the raised surface on the plate, which is transferred directly to the paper surface. Our flexographic printing generally provides vibrant color reproduction at a lower cost than heatset offset printing. The strengths of flexography compared with the rotogravure and offset processes are faster press set up times, brighter colors, reduced paper waste, reduced energy use and maintenance costs, and environmental advantages due to the use of water-based inks. Faster press set up times make the process particularly attractive to commercial customers with shorter runs and extensive regional versioning.
In addition to advertising insert capacity, certain equipment parameters are critical to competing in the advertising insert market, including cut-off length, folding capabilities and in-line finishing. Cut-off length is one of the determinants of the size of the printed page. Folding capabilities for advertising inserts must include a wide variety of page sizes, page counts and special paper folding effects. Finally, many advertising inserts require gluing or stitching of the product, adding cards, trimming and numbering. These production activities generally are done in-line with the press to meet the expedited delivery schedules and pricing required by many customers. We believe that our mix and configuration of presses and press services allows for efficient tailoring of printing services to customers' product needs.
Digital Imaging and Prepress Services
Our digital imaging and prepress services business is conducted by our American Color division ("American Color") which accounted for approximately 16%, 15%, and 14% of our Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997 sales, respectively. We believe American Color is one of the largest full-service providers of digital imaging, prepress and color separation services in the United States and a technological leader in its industry. American Color commenced operations in 1975 and maintains ten full service locations nationwide.
American Color assists its customers in the capture, manipulation, transmission and distribution of images. The majority of this work leads to the production of four-color separations in a format appropriate for use by printers. American Color makes page changes, including typesetting, and combines digital page layout information with electronically captured and color-corrected four-color images. From these digital files, proofs, final corrections and, finally, four-color films or digital output are produced for each advertising or editorial page. The final four-color films or digital output enable printers to prepare plates for each color resulting in the appearance of full color in the printed page. American Color's revenue from these traditional services is being supplemented by new revenue sources from electronic prepress services such as digital image storage, facilities management (operating digital imaging and prepress service facilities at a customer location), computer-to-plate services, creative services, consulting and training services, multimedia and internet services, and software and data-base management. American Color has been a leader in implementing these new technologies, enabling it to reduce unit costs and effectively service the increasingly complex demands of its customers more quickly than many of its competitors. American Color has also been one of the leaders in the integration of electronic page make-up, microcomputer-based design and layout, and digital cameras into prepress production.
The digital imaging and prepress services industry is highly fragmented, primarily consisting of smaller local and regional companies, with only a few national full-service digital imaging and prepress companies such as American Color, none of which has a significant nationwide market share. Many smaller digital imaging and prepress companies have left the industry in recent years due to their inability to keep pace with technological advances in the industry.
In March 1999, we approved a plan for our American Color division designed to primarily:
1) Consolidate certain facilities in order to improve asset utilization and operational efficiency; 2) Modify the organizational structure as a result of facility consolidation and other changes; and 3) Reduce overhead and other costs.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restructuring Costs and Other Special Charges" and note 14 to our consolidated financial statements appearing elsewhere in this Report.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive advantages in our printing and digital imaging and prepress services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web printing equipment is among the most advanced in the industry and that the average age of our equipment is significantly less than the majority of our regional competitors and is comparable to our major national competitors. We are also committed to a comprehensive, long-term maintenance program, which enhances the reliability and extends the life of our presses and other production equipment. We also believe that our digital imaging and prepress equipment is significantly more advanced than many of our smaller regional competitors, many of whom have not incorporated digital prepress technologies and computer-to-plate services to the same extent as we have, nor adopted an open systems environment which allows greater flexibility and more efficient maintenance.
Strong Customer Base. We provide printing services to a diverse base of customers, including approximately 300 retailers and over 300 newspapers in the United States and Canada. Our printing services customer base includes a significant number of the major national retailers and larger newspaper chains as well as numerous smaller regional retailers. Our consistent focus on providing high quality printing products and strong customer service at competitive prices has resulted in long-term relationships with many of these customers. American Color's customer base includes large and medium-sized customers in the publishing, retail and catalog businesses, many of whom also have long-term relationships with us. Although the digital imaging and prepress services business has generally been on a spot bid basis in the past, we have been successful in continuing to increase the proportion of our business under long-term contracts.
Competitive Cost Structure. We have reduced the variable and fixed costs of production at our printing facilities over the past several years and believe we are well positioned to maintain our competitive cost structure in the future due to economies of scale. We have also reduced both labor and material costs (the principal variable production costs) in our digital imaging and prepress services business primarily through the adoption of new digital prepress production methodologies.
Strong Management Team. We have strengthened our printing management group by hiring experienced managers with a clear focus on growth, quality and continued cost reduction, resulting in an improved cost structure and a well-defined strategy for future expansion. We have also strengthened our management group in our digital imaging and prepress services business, filling a number of senior, regional and plant management positions with individuals who we believe will manage the digital imaging and prepress services business for growth and profitability and will continue to upgrade our capabilities.
National Presence. Our nine printing plants in the United States and one plant in Canada provide us with distribution efficiencies, strong customer service, flexibility and short turnaround times, all of which are instrumental in our continued success in servicing our large national and regional retail accounts. Our expanded sales and marketing groups provide greater customer coverage and enable us to more successfully penetrate regional markets. We believe that our ten digital imaging and prepress facilities provide us with contingency capabilities, increased capacity during peak periods, access to top quality internal technical personnel throughout the country, short turnaround time and other customer service advantages.
Strategy. Our objective is to increase shareholder value by growing our revenues, increasing our market share and reducing costs. Our strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that our level of national sales coverage, when coupled with our significant industry experience and customer-focused sales force, will result in unit growth. In an effort to stimulate unit volume growth, we have strengthened our printing sales group. Unit volume growth is also expected to result from continued capital expansion and selective printing acquisitions. In addition, in our digital imaging and prepress services business, we have strengthened our sales force, provided expanded training and, more closely focused our marketing efforts on new, larger customers.
Continue to Improve Product Mix. We intend to increase our share of the retail advertising insert market. In addition, we expect to continue to adjust the mix of our customers and products within the retail advertising insert market to those that are more profitable and less seasonable and to maximize the use of our equipment. We are also continuing expansion of our printing facilities' capabilities for in-plant prepress and postpress services. Our digital imaging and prepress services business will continue to focus on high value-added new business opportunities, particularly large-scale projects that will best utilize the breadth of services and technologies we have to offer. Additionally, we will continue to pursue large facilities management opportunities as well as national and large regional customers that require more sophisticated levels of service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. We intend to further reduce our production costs at our printing facilities through our Total Quality Management Process, an ongoing cost reduction and continuous quality improvement process. Additionally, we plan to continue to maximize scale advantages in the purchasing, technology and engineering areas. We also intend to continue to gain variable cost efficiencies in our digital imaging and prepress services business by using our technical resources to improve digital prepress workflows at our various facilities. In addition, we believe we will be able to reduce our per unit technical, sales and management costs as we increase sales in this business.
Continue to Make Opportunistic Acquisitions. An integral part of our long-term growth strategy includes a plan to selectively assess and acquire other printing and digital imaging and prepress services companies that we believe will enhance our leadership position in these industries.
Customers and Distribution
Customers. We sell our printing products and services to a large number of customers, primarily retailers and newspapers, and all of the products are produced in accordance with customer specifications. We perform a portion of our printing work, primarily the printing of Sunday comics and comic books, under long-term contracts with our customers. The contracts vary in length and many of the contracts automatically extend for one year unless there has been notice to the contrary from either of the contracting parties within a certain number of days before the end of any term. For the balance of our printing work, we obtain varying time commitments from our customers ranging from job to job to annual allocations. Printing prices are generally fixed during such commitments; however, our standard terms of trade call for the pass-through of changes in the cost of raw materials, primarily paper and ink.
American Color's customers consist of magazine and newspaper publishers, retailers, catalog sales organizations, printers, consumer products companies, advertising agencies and direct mail advertisers. Its customers typically have a need for high levels of technical expertise, short turnaround times and responsive customer service. In addition to its historical regional customer base, American Color is increasingly focused on larger, national accounts that have a need for a broad range of fully integrated services and communication capabilities requiring leading edge technology. This trend has resulted in an increasing amount of contractual business related to facilities management arrangements with customers over the past several years. These contracts typically extend from three to five years in length.
The printing and American Color divisions have historically had certain common customers and their ability to cross-market is an increasingly valuable tool as computer-to-plate, regional versioning, electronic digital imaging, facilities management and speed to market become more important to their customers. This enables us to provide more comprehensive solutions to customers' digital imaging and prepress and printing needs.
No single customer accounted for sales in excess of 10% of our consolidated sales in Fiscal Year 1999. Our top ten customers accounted for approximately 34% of consolidated sales in Fiscal Year 1999.
Distribution. We distribute our printing products primarily by truck to customer designated locations, primarily newspapers. Costs of distribution are generally paid by the customers, and most shipping is by common carrier. American Color generally distributes its products via electronic transmission, overnight express, or other methods of personal delivery or by courier.
Competition
Commercial printing in the United States is a large, highly fragmented, capital-intensive industry and we compete with numerous national, regional and local printers. A trend of industry consolidation in recent years can be attributed to (1) customer preferences for larger printers with a greater range of services, (2) capital requirements and (3) competitive pricing pressures. We believe that competition in the printing business is based primarily on quality and service at a competitive price.
American Color competes with numerous digital imaging and prepress service firms on both a national and regional basis. The industry is highly fragmented, primarily consisting of smaller local and regional companies, with only a few national full-service digital imaging and prepress companies such as American Color, none of which has a significant nationwide market share. Many smaller digital imaging and prepress companies have left the industry in recent years due to their
inability to keep pace with the technological advances required to service increasingly complex customer demands. We believe that the digital imaging and prepress services sector will continue to be subject to high levels of ongoing technological change and the need for capital expenditures to keep up with such change.
Raw Materials
The primary raw materials used in our printing business are paper and ink. We purchase substantially all of our ink and related products under long-term ink supply contracts. Throughout Fiscal Year 1997, the overall cost of paper declined. During Fiscal Year 1998, paper prices increased slightly through mid year and then declined to near beginning of the year levels. In Fiscal Year 1999, as most grades of paper became more plentiful, paper prices declined. Management expects that, as a result of our strong relationships with key suppliers, our material costs will remain competitive within the industry. In accordance with industry practice, we generally pass through increases in the cost of paper to customers in the costs of our printed products, while decreases in paper costs generally result in lower prices to customers. The primary inputs in prepress service processes are film and proofing materials.
In both of our business segments, there is an adequate supply of the necessary materials available from multiple vendors. We are not dependent on any single supplier and have had no significant problems in the past obtaining necessary raw materials.
Seasonality
Some of our printing and digital imaging and prepress services business is seasonal in nature, particularly those revenues derived from advertising inserts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality" appearing elsewhere in this Report.
Backlog
Because our printing, digital imaging and prepress services products are required to be delivered soon after final customer orders are received, we do not experience any backlog of unfilled customer orders.
Employees
As of May 31, 1999, we had a total of approximately 2,760 employees, of which approximately 220 employees are represented by a collective bargaining agreement that will expire on December 31, 2004. We consider our relations with our employees to be excellent.
Governmental and Environmental Regulations
We are subject to regulation under various federal, state and local laws relating to employee safety and health, and to the generation, storage, transportation, disposal and emission into the environment of hazardous substances. We believe that we are in material compliance with such laws and regulations. Although compliance with such laws and regulations in the future is likely to entail additional capital expenditures, we do not anticipate that such expenditures will be material. See "Legal Proceedings Environmental Matters" appearing elsewhere in this Report.
ITEM 2.
ITEM 2. PROPERTIES
We operate in 21 locations in 14 states and Canada. We own seven printing plants in the United States and one in Canada and lease two printing plants, one in California and one in Pennsylvania. The American Color division has ten production locations, all of which are leased by American Color. The American Color division also operates digital imaging and prepress facilities on the premises of several of its customers ("facilities management"). In addition, we maintain one small executive office in Connecticut, a digital visual effects facility in California and our headquarter facility in Nashville, Tennessee, all of which are leased. We believe that our plants and facilities are adequately equipped and maintained for present and planned operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in several legal actions arising from our normal business activities. In the opinion of management, any liabilities that may arise from such actions will not, individually or in the aggregate, have a material adverse effect on our financial condition or results of operations.
Environmental Matters
Graphics, together with over 300 other persons, has been designated by the U.S. Environmental Protection Agency as a potentially responsible party (a "PRP") under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA," also known as "Superfund") at one Superfund site. Although liability under CERCLA may be imposed on a joint and several basis and our ultimate liability is not precisely determinable, the PRPs have agreed that Graphics' share of removal costs is approximately 0.46% and therefore Graphics believes that its share of the anticipated remediation costs at such site will not be material to its business or financial condition. Based upon an analysis of Graphics' volumetric share of waste contributed to the site and the agreement among the PRPs, we maintain a reserve of approximately $0.1 million in connection with this liability on our consolidated balance sheet at March 31, 1999. We believe this amount is adequate to cover such liability.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for the common stock of either Holdings or Graphics.
Holders
As of June 2, 1999, there were approximately 93 record holders of Holdings' common stock. Holdings is the sole shareholder of Graphics' common stock.
Dividends
There have been no cash dividends declared on any class of common equity for the two most recent fiscal years. See restrictions on Holdings' ability to pay dividends and Graphics' ability to transfer funds to Holdings in note 1 to our consolidated financial statements appearing elsewhere in this Report.
Recent Sales of Unregistered Securities
During the fourth quarter of Fiscal Year 1998, certain officers exercised options to purchase an aggregate of 8,254 shares of Holdings' common stock for $.01/share. The securities that were sold were exempt from registration on the basis that all such officers are "accredited investors" within the meaning of the Securities Act of 1933.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995. The balance sheet data as of March 31, 1999, 1998, 1997, 1996 and 1995 and the statement of operations data for the fiscal years ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from the audited consolidated financial statements for such periods and at such dates. The selected financial data below also reflects our discontinued wholly-owned subsidiary, Sullivan Media Corporation ("SMC") and our coupon free standing insert ("FSI") operation previously conducted by our discontinued wholly-owned subsidiary Sullivan Marketing, Inc. ("SMI"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discontinued Operations" and note 2 of our consolidated financial statements appearing elsewhere in this Report.
This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements appearing elsewhere in this Report.
Selected Financial Data ACG Holdings, Inc.
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, Shakopee Valley Printing, Inc. ("Shakopee") was merged with and into Graphics (the "Shakopee Merger"). The merger has been accounted for as a combination of entities under common control (similar to a pooling-of-interests), and accordingly, the consolidated financial statements give retroactive effect to the Shakopee Merger and include the combined operations of Holdings and Shakopee subsequent to December 22, 1994 (the date on which Shakopee became under our common control). Shakopee's financial results are not reflected in periods prior to December 22, 1994 as these periods were prior to common control ownership.
(b) Fiscal Year 1998 selling, general and administrative expense includes $1.5 million of non-recurring American Color charges associated with the relocation of American Color's corporate office and various severance related expenses and $0.6 million of non-cash charges associated with an employee benefit program.
Fiscal Year 1997 selling, general and administrative expense includes $2.5 million of non-recurring employee termination expenses. See note 15 to our consolidated financial statements appearing elsewhere in this Report.
(c) In March 1999, we approved a restructuring plan for our American Color division, which was designed to consolidate certain facilities in order to improve asset utilization and operational efficiency, modify the organizational structure as a result of facility consolidation and other changes and reduce overhead and other costs. We recorded $4.6 million of costs under this plan in Fiscal Year 1999.
In January 1998, we approved a restructuring plan for our printing division designed to improve responsiveness to customer requirements, increase asset utilization and reduce overhead costs. We recorded $3.9 million of costs under this plan in Fiscal Year 1998.
In April 1995, we implemented a restructuring plan for our American Color division, which was designed to improve productivity, increase customer service and responsiveness and provide increased growth in the business. We recorded $0.9 million and $4.1 million of costs under this plan in Fiscal Year 1997 and the fiscal year ended March 31, 1996 ("Fiscal Year 1996"), respectively.
In addition, we recorded $0.9 million, $1.7 million, $1.9 million and $3.4 million of other special charges related to asset write-offs and write-downs in our printing and American Color divisions in Fiscal Year 1999, Fiscal Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively. See note 14 to our consolidated financial statements appearing elsewhere in this Report.
(d) In October 1994, we amended our defined benefit pension plans, which resulted in the freezing of additional defined benefits for future services under the plans effective January 1, 1995. We recognized a curtailment gain of $3.7 million as a result of freezing such benefits. Also in October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan ("SERP"), which is a defined benefit plan, for certain key executives. We recognized a $0.4 million expense associated with the establishment of the SERP.
(e) In February of Fiscal Year 1997, we made a strategic decision to shut down the operation of our wholly-owned subsidiary SMC. SMC's shut down has been accounted for as a discontinued operation, and accordingly, SMC's operations are segregated in our consolidated financial statements. Sales, costs of sales and selling, general and administrative expenses attributable to SMC for Fiscal Years 1997, 1996 and 1995 have been reclassified to discontinued operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Discontinued Operations" and note 2 of our consolidated financial statements appearing elsewhere in this Report.
On February 16, 1994, we assigned the coupon FSI contracts of our subsidiary, SMI, to News America FSI, Inc. ("News America"). In June 1994, we recorded income from the settlement of a lawsuit entitled Sullivan Marketing, Inc. and Sullivan Graphics, Inc. v. Valassis Communications, Inc., News America FSI Inc. and David Brandon (the "SMI Settlement") of $18.5 million, net of taxes, and when coupled with settlement expenses which had previously been accrued, the net cash proceeds resulting from this settlement were approximately $16.7 million.
In Fiscal Year 1996, we recognized settlement of a complaint naming SMI, News America and two packaged goods companies as defendants (the "EPI lawsuit") and reversed certain accruals related to the estimated loss on shut down of SMI. The resulting effect reflected in the Fiscal Year 1996 consolidated statement of operations was $2.9 million income in discontinued operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Discontinued Operations" and note 2 of our consolidated financial statements appearing elsewhere in this Report.
(f) As part of a refinancing transaction entered into on May 8, 1998 (the "1998 Refinancing"), we recorded an extraordinary loss related to early extinguishment of debt of $4.1 million, net of zero taxes. This extraordinary loss primarily consisted of the write-off of deferred financing costs related to refinanced indebtedness in the quarter ended June 30, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources".
In August 1995, as part of the Shakopee Merger and the refinancing transactions (the "1995 Refinancing"), collectively (the "1995 Transactions"), we recorded an extraordinary loss related to early extinguishment of debt of $4.5 million, net of zero taxes. This extraordinary loss primarily consisted of the early redemption premium on Graphics' 15% Senior Subordinated Notes due 2000 (the "15% Notes") and the write-off of deferred financing costs related to refinanced indebtedness partially offset by the write-off of a bond premium associated with the 15% Notes.
(g) The balance of long-term debt outstanding at March 31, 1995 includes an additional $9.7 million relating to a purchase accounting adjustment to the 15% Notes resulting from the 1993 Acquisition. The principal amount payable at maturity of the 15% Notes remained at $100 million. The 15% Notes were redeemed in connection with the 1995 Refinancing.
(h) EBITDA is included in the Selected Financial Data because management believes that investors regard EBITDA as a key measure of a leveraged company's performance and ability to meet its future debt service requirements. EBITDA is defined as earnings before net interest expense, income tax expense, depreciation, amortization, other special charges related to asset write-offs and write-downs, other income (expense), discontinued operations and extraordinary items. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income (or any other measure of performance under generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Certain covenants in the Indenture dated as of August 15, 1995 and the bank credit agreement entered into in May 1998 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources") are based on EBITDA, subject to certain adjustments.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs related to the American Color division, $0.6 million of non-recurring costs associated with the consolidation of certain production facilities at the American Color division, $0.3 million of non-recurring employee termination expenses and $0.2 million of non-cash charges associated with an employee benefit program.
EBITDA in Fiscal Year 1998 includes $3.9 million in restructuring costs related to the printing division, $1.5 million of non-recurring charges associated with the relocation of American Color's corporate office and various severance related expenses, and $0.7 million of certain charges associated with employee benefit programs.
EBITDA in Fiscal Year 1997 includes $0.9 million of restructuring costs related to the American Color division and non-recurring employee termination expenses of $2.5 million (see note 15 to our consolidated financial statements appearing elsewhere in this Report).
EBITDA in Fiscal Year 1996 includes $4.1 million of restructuring costs related to the American Color division.
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to a change in our defined benefit pension plans (as discussed in note (d) above).
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998 Refinancing (see note 6 to our consolidated financial statements appearing elsewhere in this Report and "Liquidity and Capital Resources" below). The primary objectives of the refinancing were to gain greater financial and operating flexibility, to reduce our overall cost of capital and to provide greater opportunity for internal growth and growth through acquisitions.
Printing. Commercial printing in the United States is highly competitive. The significant capital required to keep pace with changing technology and competitive pricing trends has led to a trend of industry consolidation in recent years. In addition, customers' preference for larger printers, such as us, with a wider variety of services, greater distribution capabilities and more flexibility have also contributed to consolidation within the industry. The industry is expected to remain competitive in the near future and our sales will continue to be subject to changes in retailers' demands for printed products.
The cost of paper is a principal factor in our overall pricing to our customers. The level of paper costs also has a significant impact on our reported sales. Throughout Fiscal Year 1997, the overall cost of paper declined. During Fiscal Year 1998, paper prices increased slightly through mid year and then declined to near beginning of the year levels. In Fiscal Year 1999, as most grades of paper became more plentiful, paper prices declined. In accordance with industry practice, we generally pass through increases in the cost of paper to customers in the costs of our printed products, while decreases in paper costs generally result in lower prices to customers.
In recent years, comprehensive quality improvement and cost reduction programs have been implemented for all our printing processes. As a result of these measures, we have been successful in lowering our manufacturing costs within the printing sector, while improving product quality. Additionally, in order to grow sales and improve gross margins, we increased the geographic and industry scope of our sales force and shifted the mix of our business toward retail customers and away from the printing of certain lower margin publications. Furthermore, management believes that continued strong demand for the retail advertising insert product has resulted in less excess industry capacity and therefore an improved supply/demand position within the marketplace. This dynamic has resulted in a greater stabilization of printing prices which in conjunction with our cost reduction programs has had favorable impact on printing gross profit levels.
In January 1998, we approved a plan for our printing division which was designed to improve responsiveness to customer requirements, increase asset utilization and reduce overhead costs. The cost of this plan was accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") (see "Restructuring Costs and Other Special Charges" below).
American Color. The digital imaging and prepress services industry has experienced significant technological advances as electronic digital prepress systems have replaced the more manual and photography-based methods utilized in the past. This shift in technology, which improved process efficiencies and decreased processing costs, produced increased unit growth for American Color as the demand for color pages increased. However, American Color's selling price levels per page have declined because of greater efficiencies resulting from increased use of technology. American Color's revenue from traditional services are now supplemented by new revenue sources from electronic digital imaging and prepress services such as digital image storage, facilities management, computer-to-plate services, creative services, consulting and training services, multimedia and internet services, and software and data-base management.
In March 1999, we approved a plan for our American Color division, which was designed to consolidate certain facilities in order to improve asset utilization and operational efficiency, modify the organizational structure as a result of facility consolidation and other changes, and reduce overhead and other costs. The cost of this plan is being accounted for in accordance with the guidelines set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges" below).
The following table summarizes our historical results of continuing operations for Fiscal Years 1999, 1998 and 1997:
Fiscal Year Ended March 31, ---------------------------------- 1999 1998 1997 ---- ---- ---- (dollars in thousands)
Sales:
Printing $431,936 $446,350 $449,924
American Color 83,816 82,384 71,712
Other (a) 4,591 4,601 2,915 -------- -------- -------- Total $520,343 $533,335 $524,551 ======== ======== ======== Gross Profit:
Printing $ 62,025 $ 51,278 $ 49,469
American Color 19,128 19,249 15,062
Other (a) 99 1,401 140 -------- -------- -------- Total $ 81,252 $ 71,928 $ 64,671 ======== ======== ========
Gross Margin:
Printing 14.4% 11.5% 11.0%
American Color 22.8% 23.4% 21.0%
Total 15.6% 13.5% 12.3%
Operating Income (Loss):
Printing (b)(c) $ 38,994 $ 22,612 $ 25,858
American Color (b)(c) (2,542) 2,404 (1,315)
Other (a)(d)(e) (6,997) (12,913) (14,171) -------- -------- -------- Total $29,455 $12,103 $10,372 ======== ======== ========
(a) Other operations primarily include revenues and expenses associated with our digital visual effects business ("Digiscope").
(b) Printing operating income includes the impact of $1.7 million and $0.4 million in Fiscal Year 1998 and Fiscal Year 1997, respectively, of other special charges related to asset write-offs and write-downs. American Color's operating loss includes the impact of other special charges related to asset write-offs and write-downs of $0.9 million and $1.5 million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See "Restructuring Costs and Other Special Charges" below.
(c) Printing operating income includes the impact of $3.9 million of restructuring costs in Fiscal Year 1998. American Color's operating loss includes the impact of restructuring costs of $4.6 million and $0.9 million in Fiscal Year 1999 and Fiscal Year 1997, respectively. See "Restructuring Costs and Other Special Charges" below. American Color's operating (loss) income also includes $0.9 million of non-recurring charges in Fiscal Year 1999 associated with the consolidation of certain production facilities and $1.5 million of non-recurring charges in Fiscal Year 1998 associated with the relocation of its corporate office and various severance related expenses.
(d) Also includes corporate general and administrative expenses, and amortization expense.
(e) Other operations also reflects the impact of $0.3 million of non-recurring employee termination expenses and $0.2 million of non-cash charges associated with an employee benefit program in Fiscal Year 1999, certain charges associated with employee benefit programs of $0.7 million in Fiscal Year 1998 and non-recurring employee termination expenses of $2.5 million in Fiscal Year 1997 (see note 15 to our consolidated financial statements appearing elsewhere in this Report).
Historical Results of Operations Fiscal Year 1999 vs. Fiscal Year 1998
Our sales decreased 2.4% to $520.3 million in Fiscal Year 1999 from $533.3 million in Fiscal Year 1998. This decrease includes a decrease in printing sales of $14.5 million, or 3.2%, offset in part by an increase in American Color's sales of $1.4 million or 1.7%. Our gross profit increased to $81.3 million or 15.6% of sales in Fiscal Year 1999 from $71.9 million or 13.5% of sales in Fiscal Year 1998. Our operating income increased to $29.5 million or 5.7% of sales in Fiscal Year 1999 from $12.1 million or 2.3% of sales in Fiscal Year 1998. See the discussion of these changes by segment below.
Printing
Sales. Printing sales decreased $14.5 million to $431.9 million in Fiscal Year 1999 from $446.4 million in Fiscal Year 1998. Printing production volume increased approximately 4%. This increase was offset by an increase in sales to customers that supply their own paper and the impact of declining paper prices.
Gross Profit. Printing gross profit increased $10.7 million to $62.0 million in Fiscal Year 1999 from $51.3 million in Fiscal Year 1998. Printing gross margin increased to 14.4% in Fiscal Year 1999 from 11.5% in Fiscal Year 1998. The increase in gross profit is primarily the result of reduced manufacturing costs and increased production volume. The increase in gross margin includes the above mentioned factors coupled with the impact of an increase in sales to customers that supply their own paper and declining paper prices.
Selling, General and Administrative Expenses. Printing selling, general and administrative expenses decreased slightly to $23.0 million, or 5.3% of printing sales, in Fiscal Year 1999 compared to $23.1 million, or 5.2% of printing sales, in Fiscal Year 1998.
Operating Income. As a result of the above factors and the incurrence of both restructuring costs associated with the printing restructuring plan of $3.9 million in Fiscal Year 1998 and other special charges related to asset write-offs and write-downs of $1.7 million in Fiscal Year 1998 (see "Restructuring Costs and Other Special Charges" below), operating income from the printing business increased to $39.0 million in Fiscal Year 1999 from $22.6 million in Fiscal Year 1998.
American Color
Sales. American Color's sales increased $1.4 million, or 1.7%, to $83.8 million in Fiscal Year 1999 from $82.4 million in Fiscal Year 1998. The increase in Fiscal Year 1999 was primarily the result of higher packaging prepress sales and increased digital imaging and prepress production volume.
Gross Profit. American Color's gross profit decreased $0.1 million to $19.1 million in Fiscal Year 1999 from $19.2 million in Fiscal Year 1998. American Color's gross margin decreased to 22.8% in Fiscal Year 1999 from 23.4% in Fiscal Year 1998. Included were decreases resulting from increased costs associated with new operations servicing the packaging prepress industry and $0.9 million of non-recurring costs associated with the consolidation of certain production facilities, offset in part by an increase in volume and other material and payroll savings.
Selling, General and Administrative Expenses. American Color's selling, general and administrative expenses decreased to $16.2 million, or 19.3% of American Color's sales in Fiscal Year 1999 from $16.8 million, or 20.4% of American Color's sales in Fiscal Year 1998. This decrease is primarily a result of $1.5 million of non-recurring charges associated with the relocation of American Color's corporate office and various severance related expenses in Fiscal Year 1998, partially offset by increased selling expenses for packaging prepress and other operations in Fiscal Year 1999.
Operating (Loss) Income. As a result of the above factors and the incurrence of both restructuring costs associated with the American Color restructuring plan of $4.6 million in Fiscal Year 1999 and other special charges related to asset write-offs and write-downs of $0.9 million in Fiscal Year 1999 (see "Restructuring Costs and Other Special Charges" below), operating (loss) income at American Color decreased to a loss of $2.5 million in Fiscal Year 1999 from income of $2.4 million in Fiscal Year 1998.
Fiscal Year 1998 vs. Fiscal Year 1997
Our sales increased 1.7% to $533.3 million in Fiscal Year 1998 from $524.6 million in Fiscal Year 1997. This increase includes an increase in American Color sales of $10.7 million, or 14.9%, offset in part by a decrease in printing sales of $3.5 million, or 0.8%. Our gross profit increased to $71.9 million or 13.5% of sales in Fiscal Year 1998 from $64.7 million or 12.3% of sales in Fiscal Year 1997. Our operating income increased to $12.1 million or 2.3% of sales in Fiscal Year 1998 from $10.4 million or 2% of sales in Fiscal Year 1997. See the discussion of these changes by segment below.
Printing
Sales. Printing sales decreased $3.5 million to $446.4 million in Fiscal Year 1998 from $449.9 million in Fiscal Year 1997. This decrease is primarily the result of an increase in sales to customers that supply their own paper offset in part by an increase in production volume of approximately 2.5%.
Gross Profit. Printing gross profit increased $1.8 million to $51.3 million in Fiscal Year 1998 from $49.5 million in Fiscal Year 1997. Printing gross margin increased to 11.5% in Fiscal Year 1998 from 11.0% in Fiscal Year 1997. The increase in gross profit includes reduced manufacturing costs, improved mix and pricing, along with an increase in production volume. These gains were partially offset by an increase in depreciation and amortization expense. The increase in gross margin includes the above mentioned factors and the impact of an increase in sales to customers that supply their own paper.
Selling, General and Administrative Expenses. Printing selling, general and administrative expenses remained relatively unchanged at $23.1 million, or 5.2% of printing sales, in Fiscal Year 1998 compared to $23.1 million, or 5.1% of printing sales, in Fiscal Year 1997.
Operating Income. As a result of the above factors and the incurrence of both restructuring costs associated with the printing restructuring plan of $3.9 million in Fiscal Year 1998 and other special charges related to asset write-offs and write-downs of $1.7 million and $0.4 million in Fiscal Year 1998 and 1997, respectively (see "Restructuring Costs and Other Special Charges" below), operating income from the printing business decreased to $22.6 million in Fiscal Year 1998 from $25.9 million in Fiscal Year 1997.
American Color
Sales. American Color's sales increased $10.7 million, or 14.9%, to $82.4 million in Fiscal Year 1998 from $71.7 million in Fiscal Year 1997. The increase in Fiscal Year 1998 was primarily the result of higher digital imaging and prepress production volume due to American Color's implementation of various digital prepress technologies, including facilities management, packaging prepress, software and image management services.
Gross Profit. American Color's gross profit increased $4.1 million to $19.2 million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997. American Color's gross margin increased to 23.4% in Fiscal Year 1998 from 21.0% in Fiscal Year 1997. These improvements resulted from increased volume (primarily from increased facilities management sales) and material and payroll cost savings offset in part by costs associated with new operations servicing the packaging industry.
Selling, General and Administrative Expenses. American Color's selling, general and administrative expenses increased to $16.8 million, or 20.4% of American Color's sales in Fiscal Year 1998 from $14.0 million, or 19.5% of American Color's sales in Fiscal Year 1997. This increase includes relocation costs related to the move of American Color's corporate office from Phoenix to Nashville and various severance related expenses of $1.5 million in Fiscal Year 1998. In addition, the increase includes increased sales and marketing expenses, including the costs of the new packaging sales group.
Operating Income (Loss). As a result of the above factors and the incurrence of both restructuring costs associated with the American Color restructuring plan of $0.9 million in Fiscal Year 1997 and other special charges related to asset write-offs and write-downs of $1.5 million in Fiscal Year 1997 (see "Restructuring Costs and Other Special Charges" below), operating income (loss) at American Color increased to income of $2.4 million in Fiscal Year 1998 from a loss of $1.3 million in Fiscal Year 1997.
Other Operations (Fiscal Year 1999 vs. Fiscal Year 1998 and Fiscal Year 1998 vs. Fiscal Year 1997)
Other operations consist primarily of revenues and expenses associated with our digital visual effects business, corporate general and administrative expenses, other expenses and amortization expense. Amortization expenses for other operations, including goodwill amortization (see below), were $2.6 million, $8.7 million and $8.4 million in Fiscal Years 1999, 1998 and 1997, respectively.
Operating losses from other operations improved to a loss of $7.0 million in Fiscal Year 1999 from a loss of $12.9 million in Fiscal Year 1998. This decrease is primarily attributable to a $6.0 million reduction in goodwill amortization expense. This reduction results from full amortization of the original 1993 acquisition goodwill related to American Color as of March 31, 1998.
Operating losses from other operations improved to a loss of $12.9 million in Fiscal Year 1998 from a loss of $14.2 million in Fiscal Year 1997. This improvement includes non-recurring employee termination expenses of $2.5 million in Fiscal Year 1997 (see note 15 to our consolidated financial statements appearing elsewhere in this Report) and improved digital visual effects operating results in Fiscal Year 1998. These improvements were offset in part by $0.7 million of certain expenses associated with employee benefit programs in Fiscal Year 1998 and increases in amortization expenses and certain corporate general and administrative expenses during Fiscal Year 1998.
Goodwill Amortization
Amortization expense associated with goodwill was $2.5 million, $8.5 million and $8.3 million for Fiscal Years 1999, 1998 and 1997, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
American Color. In March 1999, we approved a plan for our American Color division, which was designed to consolidate certain facilities in order to improve asset utilization and operational efficiency, modify the organizational structure as a result of facility consolidation and other changes and reduce overhead and other costs. The cost of this plan is being accounted for in accordance with the guidance set forth in EITF 94-3. The pretax costs of $4.6 million which were incurred as a direct result of this plan (excluding other special charges related to asset write-offs and write-downs - see below) includes $2.5 million of employee termination costs, $1.2 million of lease settlement costs and $0.9 million of other transition and restructuring expenses. This restructuring charge was recorded in the quarter ended March 31, 1999. The majority of these costs will be paid or settled before March 31, 2000. In addition, approximately $0.9 million of restructuring costs (primarily relocation expenses) were recognized in Fiscal Year 1997. These costs were associated with a plan implemented in Fiscal Year 1996 for our American Color division.
Printing. In January 1998, we approved a plan for our printing division which was designed to improve responsiveness to customer requirements, increase asset utilization and reduce overhead costs. The cost of this plan was accounted for in accordance with the guidance set forth in EITF 94-3. The pretax costs of $3.9 million which were incurred as a direct result of this plan (excluding other special charges related to asset write-offs and write-downs - see below) includes $3.3 million of employee termination costs and $0.6 million of relocation and other transition expenses. This restructuring charge was recorded in the quarter ended March 31, 1998. These costs were paid or settled before March 31, 1999.
Other Special Charges:
During the quarter ended March 31, 1999, we recorded special charges totaling $0.9 million to adjust the carrying values of idle, disposed and under-performing assets of the American Color division to estimated fair values. The provision was based on a review of our long-lived assets in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Fair value was based on our estimate of held and used and idle assets based on current market conditions using the best information available.
During the quarter ended March 31, 1998, we recorded special charges totaling $1.7 million to adjust the carrying values of idle, disposed and under-performing assets of the printing segment to estimated fair values. The provision was based on a review of our long-lived assets in accordance with SFAS 121. Fair value was based on our estimate of held and used and idle assets based on current market conditions using the best information available.
During Fiscal Year 1997, we recorded special charges totaling $1.9 million, for impaired long-lived assets and to adjust the carrying values of idle, disposed and under-performing assets to estimated fair values. The provisions were based on a review of long-lived assets in connection with the initial adoption of SFAS 121. Of the Fiscal Year 1997 total of long-lived assets that were adjusted based on being idle, disposed of or under-performing, approximately $0.4 million and $1.5 million related to the printing and American Color divisions, respectively. Fair value was based on our estimate of held and used and idle assets based on current market conditions using the best information available.
These special charges are classified within restructuring costs and other special charges in the consolidated statements of operations.
Interest Expense
Interest expense decreased 7.0% to $36.2 million in Fiscal Year 1999 from $39.0 million in Fiscal Year 1998. This decrease includes the impact of both lower levels of indebtedness and reduced borrowing costs associated with our 1998 Refinancing. See note 6 to our consolidated financial statements appearing elsewhere in this Report.
Interest expense increased 7.3% to $39.0 million in Fiscal Year 1998 from $36.3 million in Fiscal Year 1997. This increase includes the impact of increased obligations under capital leases and incremental costs related to the $25 million term loan facility entered into on June 30, 1997 (the "Old Term Loan Facility"). See note 6 to our consolidated financial statements appearing elsewhere in this Report.
Other Expense (Income) and Taxes
Other expenses, net increased to $1.2 million in Fiscal Year 1999 from $0.4 million in Fiscal Year 1998. Other expenses, net in Fiscal Year 1999 include various non-recurring legal settlements and related fees of approximately $0.8 million.
Other expenses, net increased to $0.4 million in Fiscal Year 1998 from $0.2 million in Fiscal Year 1997.
Our effective tax rates for Fiscal Years 1999, 1998, and 1997 exceeded the federal statutory rate due primarily to increases in the valuation allowance, amortization of nondeductible goodwill, and foreign tax expense.
Discontinued Operations
Sullivan Media Corporation
Our Fiscal Year 1998 and Fiscal Year 1997 net loss includes the estimated net loss on shut down of approximately $0.4 million and $1.5 million, respectively, related to our discontinued wholly-owned subsidiary SMC. Our net loss in Fiscal Year 1997 includes the loss from operations of SMC of approximately $1.6 million. See note 2 to our consolidated financial statements appearing elsewhere in this Report.
Extraordinary Loss on Early Extinguishment of Debt
As part of the 1998 Refinancing which was consummated in Fiscal Year 1999 (see note 6 to our consolidated financial statements appearing elsewhere in this Report), we recorded an extraordinary loss related to early extinguishment of debt of $4.1 million, net of zero taxes. This extraordinary loss primarily consisted of the write-off of deferred financing costs related to refinanced indebtedness in the quarter ended June 30, 1998.
Net Loss
As a result of the factors discussed above, our net loss improved to a loss of $12.5 million in Fiscal Year 1999 from a loss of $29.9 million in Fiscal Year 1998. The Fiscal Year 1999 net loss includes the $4.1 million extraordinary loss related to early extinguishment of debt, $4.6 million of restructuring costs and $0.9 million of other special charges related to asset write-offs and write-downs associated with our American Color division. Our net loss decreased to a loss of $29.9 million in Fiscal Year 1998 from a loss of $31.7 million in Fiscal Year 1997. The Fiscal Year 1998 net loss includes $3.9 million of restructuring costs and $1.7 million of other special charges related to asset write-offs and write-downs associated with our printing division. In addition, Fiscal Year 1998 includes $1.5 million of non-recurring charges related to the relocation of American Color's corporate office and various severance related expenses, certain charges associated with employee benefit programs of $0.7 million and an approximate $0.7 million loss from discontinued operations related to SMC and SMI. The Fiscal Year 1997 net loss includes $0.9 million of expense related to the American Color restructuring, $1.9 million of other special charges related to asset write-offs and write-downs, $2.5 million of non-recurring employee termination expenses (see note 15 to our consolidated financial statements appearing elsewhere in this Report) and an approximate $3.1 million loss from discontinued operations related to SMC.
Liquidity and Capital Resources
On May 8, 1998, we refinanced all of our existing bank indebtedness in the 1998 Refinancing (see note 6 to our consolidated financial statements appearing elsewhere in this Report). The primary objectives of the refinancing were to gain greater financial and operating flexibility, to reduce our overall cost of capital and to provide greater opportunity for internal growth and growth through acquisitions.
The 1998 Refinancing transaction included the following:
(1) We entered into a $145 million credit facility with a syndicate of lenders (the "Bank Credit Agreement") providing for: - a $70 million revolving credit facility, which is not subject to a borrowing base limitation, maturing on March 31, 2004 (the "Revolving Credit Facility"), - a $25 million amortizing term loan facility maturing on March 31, 2004 (the "A Term Loan Facility"), and - a $50 million amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan Facility"); (2) The repayment of all $57.0 million of indebtedness outstanding under our previous credit agreement as amended (the "Old Bank Credit Agreement") (plus accrued interest to the date of repayment); (3) The repayment of all $25.0 million of indebtedness outstanding under the Old Term Loan Facility (plus accrued interest to the date of repayment); and (4) The payment of fees and expenses associated with the refinancing transaction.
The Revolving Credit Facility provides for a maximum of $70 million borrowing availability and includes a $40 million letter of credit sub-limit. At May 31, 1999, we had total borrowings and letters of credit outstanding under the Revolving Credit Facility of approximately $24.5 million, and therefore, additional borrowing availability of approximately $45.5 million.
At May 31, 1999, $20.5 million of the A Term Loan Facility and $43.8 million of the B Term Loan Facility remained outstanding. Scheduled A Term Loan Facility and B Term Loan Facility payments due in the fiscal year ending March 31, 2000 ("Fiscal Year 2000") are de minimus. Scheduled repayments of capital lease obligations and other senior indebtedness during Fiscal Year 2000 will approximate $7.4 million and $0.8 million, respectively.
In Fiscal Year 1999, net cash provided by operating activities of $48.1 million (see consolidated statements of cash flows appearing elsewhere in this Report), proceeds from sales of property, plant and equipment of $0.8 million and proceeds from the 1998 Refinancing of $84.8 million ($75 million from the A Term Loan and B Term Loan facilities and $9.8 million of initial net borrowings under the Revolving Credit Facility) were used to:
(1) Repay $84.2 million of indebtedness outstanding under the Old Bank Credit Agreement and Old Term Loan Facility (including related transaction fees), (2) Fund scheduled principal repayments of indebtedness and financing costs of $20.3 million (including capital lease obligations of $6.9 million and voluntary prepayments on the A Term Loan Facility and B Term Loan Facility of $4.4 million and $5.6 million, respectively), (3) Fund cash capital expenditures of $11.1 million, and (4) Further reduce outstanding revolver borrowings by $18.1 million.
We plan to continue our program of upgrading our printing and prepress equipment and currently anticipate that Fiscal Year 2000 cash capital expenditures will approximate $19.3 million and equipment acquired under capital leases will approximate $3.0 million. Our cash on hand of approximately $2.6 million is presented net of outstanding checks within trade accounts payable at March 31, 1999. Accordingly, cash is presented at a balance of $0 in the March 31, 1999 balance sheet.
Our primary sources of liquidity are cash provided by operating activities and borrowings under the Revolving Credit Facility. We anticipate that our primary needs for liquidity will be to conduct our business, meet our debt service requirements, make capital expenditures and, if we elect, redeem, repay or repurchase outstanding indebtedness.
At March 31, 1999, we had total indebtedness outstanding of $289.6 million, including capital lease obligations as compared to $319.7 million at March 31, 1998, representing a reduction of indebtedness during Fiscal Year 1999 of $30.1 million. Of the total debt outstanding at March 31, 1999, $64.3 million was outstanding under the Bank Credit Agreement at a weighted-average interest rate of 7.1%. Indebtedness under the Bank Credit Agreement bears interest at floating rates. At March 31, 1999, we had indebtedness other than obligations under the Bank Credit Agreement of $225.3 million (including $185 million of the Notes). We are currently in compliance with all financial covenants set forth in the Bank Credit Agreement. See note 6 to our consolidated financial statements appearing elsewhere in this Report.
A significant portion of Graphics' long-term obligations, including indebtedness under the Bank Credit Agreement, has been fully and unconditionally guaranteed by Holdings. Holdings is subject to certain restrictions under its guarantee of indebtedness under the Bank Credit Agreement, including among other things, restrictions on mergers, acquisitions, incurrence of additional debt and payment of cash dividends. See note 1 to our consolidated financial statements appearing elsewhere in this Report.
EBITDA
Fiscal Year Ended March 31, ---------------------------------------------------------- 1999 1998 1997 ------------- ------------- ------------ (dollars in thousands)
EBITDA:
Printing (a) $ 61,627 $ 46,838 $ 46,755
American Color (a) 5,283 8,405 5,180
Other (b) (c) (2,624) (2,876) (4,963) =========== =========== ===========
Total $ 64,286 $ 52,367 $ 46,972 =========== =========== ===========
EBITDA Margin:
Printing 14.3% 10.5% 10.4%
American Color 6.3% 10.2% 7.2%
Total 12.4% 9.8% 9.0%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring costs in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1999 and Fiscal Year 1997 includes the impact of restructuring costs of $4.6 million and $0.9 million, respectively. See "Restructuring Costs and Other Special Charges" above. American Color EBITDA also includes $0.6 million of non-recurring charges in Fiscal Year 1999 associated with the consolidation of certain production facilities and $1.5 million of non-recurring charges in Fiscal Year 1998 associated with the relocation of American Color's corporate office and various severance related expenses.
(b) Other operations include revenues and expenses associated with our digital visual effects business and corporate general and administrative expenses.
(c) Other operations also reflects the impact of $0.3 million of non-recurring employee termination expenses and $0.2 million of non-cash charges associated with an employee benefit program in Fiscal Year 1999, certain charges associated with employee benefit programs of $0.7 million in Fiscal Year 1998 and non-recurring employee termination expenses of $2.5 million in Fiscal Year 1997 (see note 15 to our consolidated financial statements appearing elsewhere in this Report).
EBITDA is presented and discussed because we believe that investors regard EBITDA as a key measure of a leveraged company's performance and ability to meet its future debt service requirements. "EBITDA" is defined as earnings before net interest expense, income tax expense, depreciation, amortization, other special charges related to asset write-offs and write-downs, other income (expense), discontinued operations and extraordinary items. "EBITDA Margin" is defined as EBITDA as a percentage of net sales. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income (or any other measure of performance under generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Certain covenants in the Indenture and the Bank Credit Agreement are based on EBITDA, subject to certain adjustments.
Printing. As a result of the reasons previously described under "--Printing," (excluding changes in depreciation and amortization expense and other special charges related to asset write-offs and write-downs), printing EBITDA increased $14.8 million to $61.6 million in Fiscal Year 1999 from $46.8 million in Fiscal Year 1998. Printing EBITDA was $46.8 million in both Fiscal Year 1998 and Fiscal Year 1997. Printing EBITDA Margin increased to 14.3% in Fiscal Year 1999 from 10.5% in Fiscal Year 1998. Printing EBITDA Margin increased to 10.5% in Fiscal Year 1998 from 10.4% in Fiscal Year 1997. Included in the Fiscal Year 1998 EBITDA and EBITDA Margin is $3.9 million of restructuring costs related to the printing restructuring plan (see discussion above).
American Color. As a result of the reasons previously described under "--American Color," (excluding changes in depreciation, amortization expense, other non-cash expenses and other special charges related to asset write-offs and write-downs), American Color EBITDA decreased $3.1 million to $5.3 million in Fiscal Year 1999 from $8.4 million in Fiscal Year 1998. American Color EBITDA Margin decreased to 6.3% in Fiscal Year 1999 from 10.2% in Fiscal Year 1998. Included in the Fiscal Year 1999 EBITDA and EBITDA Margin is the impact of $0.6 million of non-recurring charges associated with the consolidation of certain production facilities and $4.6 million of restructuring costs (see discussion above). American Color EBITDA increased to $8.4 million in Fiscal Year 1998 from $5.2 million in Fiscal Year 1997, representing an increase of $3.2 million. EBITDA Margin increased to 10.2% in Fiscal Year 1998 from 7.2% in Fiscal Year 1997. American Color EBITDA and EBITDA Margin in Fiscal Year 1998 includes $1.5 million of non-recurring charges associated with the relocation of its corporate office and various severance related expenses. Included in the Fiscal Year 1997 EBITDA and EBITDA Margin is the impact of restructuring costs of $0.9 million (see discussion above).
Other Operations. As a result of the reasons previously described under "--Other Operations," (excluding changes in depreciation and amortization expense), other operations negative EBITDA improved to negative EBITDA of $2.6 million in Fiscal Year 1999 from negative EBITDA of $2.9 million in Fiscal Year 1998. EBITDA from other operations improved to negative EBITDA of $2.9 million in Fiscal Year 1998 from negative EBITDA of $5.0 million in Fiscal Year 1997. Other operations negative EBITDA for Fiscal Year 1999 includes the impact of $0.3 million of non-recurring employee termination expenses and $0.2 million of non-cash charges associated with an employee benefit program and negative EBITDA for Fiscal Year 1998 includes the impact of $0.7 million of certain charges associated with employee benefit programs. Negative EBITDA for Fiscal Year 1997 includes the impact of non-recurring employee termination expenses of $2.5 million (see note 15 to our consolidated financial statements appearing elsewhere in this Report).
Amortization of Goodwill
Our goodwill is amortized on a straight-line basis by business segment. Goodwill amortization expense will be approximately $2.5 million in Fiscal Year 2000.
Impact of Inflation
In accordance with industry practice, we generally pass through increases in our costs (primarily paper and ink) to customers in the costs of our printed products, while decreases in paper costs generally result in lower prices to customers. Throughout Fiscal Year 1997, the overall cost of paper declined. During Fiscal Year 1998, paper prices increased slightly through mid year and then declined to near beginning of the year levels. In Fiscal Year 1999, as most grades of paper became more plentiful, paper prices declined. Management expects that, as a result of our strong relationship with key suppliers, our material costs will remain competitive within the industry.
Seasonality
Some of our printing and digital imaging and prepress services business is seasonal in nature, particularly those revenues derived from advertising inserts. Generally, our sales from advertising inserts are highest during periods prior to the following advertising periods: Spring advertising season (March 15 -- May 15); Back-to-School (July 15 -- August 15); and Thanksgiving/Christmas (October 15 -- December 15). One of the reasons we chose to enter the comic book printing market is that it is not subject to significant seasonal fluctuations. Sales of newspaper Sunday comics are also not subject to significant seasonal fluctuations. Our strategy has been and will continue to include the mitigation of the seasonality of our printing business by increasing our sales to customers whose own sales are less seasonal (i.e., food and drug companies).
Environmental
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and which do not contribute to current or future period revenue generation are expensed. Environmental liabilities are recorded when assessments and/or remedial efforts are probable and the related costs can be reasonably estimated. We believe that environmental liabilities, currently and in the prior periods discussed herein, are not material. We maintain a reserve of approximately $0.1 million in connection with a Superfund site in our consolidated statement of financial position at March 31, 1999, which we believe to be adequate. See "Legal Proceedings -- Environmental Matters" appearing elsewhere in this Report. We do not anticipate receiving insurance proceeds related to this potential settlement. Management does not expect that any identified matters, individually or in the aggregate, will have a material adverse effect on our consolidated financial position or results of operations.
Accounting
There are no pending accounting pronouncements that, when adopted, are expected to have a material effect in our results of operations or its financial position.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the Year 2000 which could result in a system failure or miscalculations causing disruptions of operations. In the spring of 1997, we initiated our review of our Year 2000 information and manufacturing systems compliance ("Y2K Project"). Our Y2K Project includes four phases: assessment, remediation, testing, and implementation. Over the past year, we have made significant progress in each of these areas and believe we will complete the Y2K Project by October 1999.
Information Technology Systems. To date, we have fully completed our assessment of all information technology systems that could be significantly affected by the Year 2000. We have completed 85% of the remediation phase of our information technology systems and expect to complete software reprogramming and replacement by July 1999. To date, we have completed 85% of our testing and have implemented 65% of our remediated systems. Completion of the testing phase for all significant systems is expected by July 1999, all remediated systems are anticipated to be fully tested by August 1999, with 100% implementation targeted for September 1999.
Production and Manufacturing Systems. Our strategy includes an on-going program that focuses on the need to upgrade and maintain our production and manufacturing systems. As such, we believe our production and manufacturing systems to be reasonably current and do not anticipate significant Year 2000 issues in this area. We have completed the assessment phase in this area and are 90% complete in the remediation phase of our operating equipment. To date, the required remediation has been within planned expenditures, and has not been material to our consolidated financial results. We do not expect full remediation of our operating equipment to be costly or extensive. We are 70% complete with the testing of our remediated operating equipment. Once testing is complete, the operating equipment in most cases will be ready for immediate use. We expect to complete our remediation efforts by August 1999. Testing and implementation of affected equipment is expected to be completed by October 1999.
We have nearly completed the process of gathering information about the Year 2000 compliance of our significant suppliers and subcontractors (external agents). To date, we are not aware of any external agent with a Year 2000 issue that would materially impact our results of operations, liquidity, or capital resources. In addition, as a printer and graphics prepress supplier, our products and services are not generally impacted by the Year 2000 issue.
We are utilizing both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment necessary for Year 2000 compliance. The total cost of the Y2K Project is estimated at $4.0 million and is being funded through operating cash flows and our Revolving Credit Facility. To date, we have incurred costs of approximately $1.9 million, relating to all phases of the Y2K Project. Of the remaining project costs, approximately $1.9 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.2 million relates to repair of hardware and software and will be expensed as incurred.
Management believes they have an effective program in place to resolve the Year 2000 compliance issue in a timely manner and is monitoring the progress of the Y2K Project closely. As noted above, we have not yet completed all necessary phases of the Y2K Project. In the unlikely event that we do not complete any additional phases, (1) the printing segment would be forced to manually enter customer orders, pay its employees, order and track its paper needs, and collect certain cost, sales history and operating data of a non-critical nature, and (2) certain digital workflows in our American Color division would be diverted to existing, less efficient digital workflows, thereby reducing capacity in affected locations and the American Color division would have to pay its employees manually. In addition, disruption in services such as electrical power, telecommunications and banking, or disruption in the general retail economy environment could materially adversely affect us. Although there can be no assurance that our efforts will prevent a material adverse impact on the results of operations or financial conditions, we believe that none of these scenarios are likely. We plan to evaluate the completion status of all phases of the Y2K Project in September 1999 and determine if and when contingency plans are necessary.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Information. In the ordinary course of business, our exposure to market risks is limited as is described below. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest and foreign currency exchange rates. Currently, we do not utilize derivative financial instruments such as forward exchange contracts, future contracts, options and swap agreements.
Interest Rate Risk for us primarily relates to interest rate fluctuations on variable rate debt.
Foreign Currency Exchange Rate Risk is minimal as we have only one foreign printing facility (in Canada) and any fluctuations in net asset values as a result of changes in foreign currency exchange rates associated with activity at this one facility would be immaterial to the company as a whole.
Quantitative Information. At March 31, 1999 and March 31, 1998, we had both fixed rate and variable rate debt. The carrying value of our total variable rate debt approximated the fair value of such debt at March 31, 1999 and March 31, 1998. At our March 31, 1999 and March 31, 1998 borrowing levels, a hypothetical 10% adverse change in interest rates on the variable rate debt would have been immaterial. Approximately 75% and 68% of our long-term debt (excluding capitalized lease obligations) was fixed rate at March 31, 1999 and March 31, 1998, respectively.
The above market risk discussions are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
The following consolidated financial statements of ACG Holdings, Inc. are included in this Report:
Report of Independent Auditors......................................... 26 Consolidated balance sheets - March 31, 1999 and 1998.................. 27 For the Years Ended March 31, 1999, 1998 and 1997: Consolidated statements of operations............................. 29 Consolidated statements of stockholders' deficit.................. 30 Consolidated statements of cash flows............................. 31 Notes to Consolidated Financial Statements............................. 33
The following consolidated financial statement schedules of ACG Holdings, Inc. are included in Part IV, Item 14:
I. Condensed Financial Information of Registrant Condensed Consolidated Financial Statements (parent company only) for the years ended March 31, 1999, 1998, and 1997, and as of March 31, 1999 and 1998
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for ACG Holdings, Inc. have been omitted because they are either not applicable, not required, or because the information required is included in the financial statements or notes thereto.
Report of Independent Auditors
Board of Directors ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings, Inc. as of March 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three fiscal years in the period ended March 31, 1999. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACG Holdings, Inc. at March 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, in fiscal year 1998 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation."
Nashville, Tennessee May 25, 1999
ACG HOLDINGS, INC. Consolidated Balance Sheets (Dollars in thousands)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC. Consolidated Balance Sheets (Dollars in thousands, except par values)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC. Consolidated Statements of Operations (In thousands)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC. Consolidated Statements of Stockholders' Deficit (In thousands)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC. Consolidated Statements of Cash Flows (In thousands)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC. Consolidated Statements of Cash Flows (In thousands)
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
ACG Holdings, Inc. ("Holdings"), together with its wholly-owned subsidiary, American Color Graphics, Inc. ("Graphics"), (collectively the "Company"), was formed in April 1989 under the name GBP Holdings, Inc. to effect the purchase of all the capital stock of GBP Industries, Inc. from its stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings, Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc. changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan Holdings, Inc. changed its name to Sullivan Communications, Inc. Effective July 1997, Sullivan Communications, Inc. changed its name to ACG Holdings, Inc. and Sullivan Graphics, Inc. changed its name to American Color Graphics, Inc.
Holdings has no operations or significant assets other than its investment in Graphics. Holdings is dependent upon distributions from Graphics to fund its obligations. Under the terms of its debt agreements at March 31, 1999, Graphics' ability to pay dividends or lend to Holdings was either restricted or prohibited, except that Graphics may pay specified amounts to Holdings (i) to pay the repurchase price payable to any officer or employee (or their estates) of Holdings, Graphics or any of their respective subsidiaries in respect of their stock or options to purchase stock in Holdings upon the death, disability or termination of employment of such officers and employees (so long as no default, or event of default, as defined, has occurred under the terms of the Bank Credit Agreement, as defined below, and provided the aggregate amount of all such repurchases does not exceed $2 million) and (ii) to fund the payment of Holdings' operating expenses incurred in the ordinary course of business, other corporate overhead costs and expenses (so long as the aggregate amount of such payments does not exceed $250,000 in any fiscal year) and Holdings' obligations pursuant to a tax sharing agreement with Graphics. A significant portion of Graphics' long-term obligations has been fully and unconditionally guaranteed by Holdings.
The two business segments of the commercial printing industry in which the Company operates are (i) printing and (ii) digital imaging and prepress services conducted by its American Color division.
Significant accounting policies are as follows:
(a) Basis of Presentation
The consolidated financial statements include the accounts of Holdings and all greater than 50%-owned subsidiaries, which are consolidated under generally accepted accounting principles.
All significant intercompany transactions and balances have been eliminated in consolidation.
Earnings-per-share data has not been provided since Holdings' common stock is closely held.
(b) Revenue Recognition
In accordance with trade practices of the printing industry, printing revenues are recognized upon the completion of production. Shipment of printed material generally occurs upon completion of this production process. Materials are printed to unique customer specifications and are not returnable. Credits relating to specification variances and other customer adjustments are not significant.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(c) Inventories
Inventories are valued at the lower of first-in, first-out ("FIFO") cost or market (net realizable value).
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation, which includes amortization of assets under capital leases, is based on the straight-line method over the estimated useful lives of the assets or the remaining terms of the leases. Estimated useful lives used in computing depreciation and amortization expense are 3 to 15 years for furniture and fixtures, and machinery and equipment, and 15 to 40 years for buildings and improvements.
(e) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired (or "goodwill") is amortized on a straight-line basis over a range of 5 to 40 years for each of its principal business segments. The carrying value of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted future cash flows of the assets acquired, the Company's carrying amount of the goodwill is reduced by the estimated shortfall of such discounted cash flows or other measures of fair value. In addition, the Company assesses long-lived assets for impairment under Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under these rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when assets or circumstances exist that indicate the carrying amount of these assets may not be recoverable.
(f) Other Assets
Financing costs related to the Bank Credit Agreement (as defined herein) are deferred and amortized over the term of the agreement. Costs related to the Notes (as defined herein) are deferred and amortized over the ten-year term of the Notes.
The covenant not to compete is amortized over the five-year term of the underlying agreement.
(g) Income Taxes
Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
(h) Foreign Currency Translation
The assets and liabilities of the Company's Canadian facility, which include interdivisional balances, are translated at year-end rates of exchange while revenue and expense items are translated at average rates for the year.
Translation adjustments are recorded as a separate component of stockholders' deficit. Since the transactions of the Canadian facility are denominated in its functional currency and the interdivisional accounts are of a long-term investment nature, no transaction adjustments are included in operations.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(i) Environmental
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future period revenue generation, are expensed. Environmental liabilities are provided when assessments and/or remedial efforts are probable and the related amounts can be reasonably estimated.
(j) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its financial instruments together with the related carrying amount. The Company is not a party to any financial instruments with material off-balance-sheet risk.
(k) Concentration of Credit Risk
Financial instruments, which subject the Company to credit risk, consist primarily of trade accounts receivable. Concentration of credit risk with respect to trade accounts receivable are generally diversified due to the large number of entities comprising the Company's customer base and their geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.
(l) Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
(m) Stock-Based Compensation
Effective April 1, 1997 the Company changed its method of accounting for stock-based compensation plans from the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") to the fair value method established by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Application of the recognition provisions of SFAS 123 is prospective (restatement of prior periods is prohibited). The Company believes that including the fair value of compensation plans in determining net income is consistent with accounting for the cost of all other forms of compensation.
(n) Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that companies report comprehensive income in either the Statement of Shareholders' Equity or in the Statement of Operations. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 130 during the fiscal year ended March 31, 1999 ("Fiscal Year 1999"). The adoption of this statement did not have a material impact on the financial position of the Company.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131, which supercedes Statement of Financial Accounting Standard No. 14 "Financial Reporting for Segments of a Business Enterprise," changes financial reporting requirements for business segments from an Industry Segment approach to an Operating Segment approach. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 131 during Fiscal Year 1999. See note 17. SFAS 131 requires the Company to provide disclosures regarding its segments which it has not previously been required to provide. The disclosures include certain financial and qualitative data about its operating segments. Management does not feel this disclosure will have a material effect upon a reader's assessment of the financial performance and the financial condition of the Company.
In February 1998, the Financial Accounting Standards Board issued Financial Accounting Standard No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"), which standardizes the disclosure requirements for pensions and other postretirement benefits. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The Company adopted this statement in Fiscal Year 1999 and as required by SFAS 132, restated the prior year disclosure for comparative purposes.
In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for fiscal years beginning after December 15, 1998 and requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use after the date of adoption. The Company adopted SOP 98-1 in Fiscal Year 1999. The adoption of SOP 98-1 did not have a material effect on the results of operations or financial position of the Company.
In May 1998, the AICPA issued Statement of Position No. 98-5 "Reporting on the Costs of Startup Activities" ("SOP 98-5"). SOP 98-5 requires companies to expense the costs of startup activities (including organization costs) as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-5 will not have a material effect on the results of operations or financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Earlier adoption is permitted. Management does not anticipate that the adoption of SFAS 133 will have a material effect on the Company's results of operations or financial position.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(2) Discontinued Operations
SMC
In February 1997, the Company made a strategic decision to shut down the operations of its wholly-owned subsidiary Sullivan Media Corporation ("SMC"). This resulted in an estimated net loss on shut down of approximately $1.5 million, which is net of zero income tax benefits. In the fiscal year ended March 31, 1998 ("Fiscal Year 1998"), the Company recorded an additional $0.4 million estimated net loss on shut down.
The shut down of SMC has been accounted for as a discontinued operation, and accordingly, its operating results are segregated and reported as a discontinued operation in the accompanying consolidated statements of operations. The assets of SMC and any resulting gain or loss on the disposal of those assets is immaterial to the results of operations and financial position of the Company.
The condensed consolidated statements of operations relating to the discontinued SMC operation follows:
Year Ended March 31, --------------------------------- 1999 1998 1997 --------- -------- --------
Sales $ -- -- 9,786
Cost and expenses -- -- 11,343 --------- -------- -------- Loss before income taxes -- -- (1,557)
Income taxes -- -- -- --------- -------- -------- Net loss $ -- -- (1,557) ========= ======== ========
(3) Inventories
The components of inventories are as follows (in thousands):
March 31, ----------------------- 1999 1998 -------- -------- Paper $ 6,525 9,161
Ink 232 227
Supplies and other 1,586 1,407 -------- -------- Total $ 8,343 10,795 ======== ========
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(4) Other Assets
The components of other assets are as follows (in thousands):
March 31, ----------------------- 1999 1998 -------- --------
Deferred financing costs, less accumulated amortization of $3,278 in 1999 and $5,185 in 1998 $ 7,194 10,104
Spare parts inventory, net of valuation allowance of $100 in 1999 and 1998 2,293 1,852
Other 2,278 3,650 -------- -------- Total $ 11,765 15,606 ======== ========
(5) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
March 31, ----------------------- 1999 1998 -------- --------
Compensation and related taxes $ 10,114 10,004
Employee benefits 8,814 8,755
Interest 4,264 5,028
Other 7,564 7,752 -------- -------- Total $ 30,756 31,539 ======== ========
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(6) Notes Payable, Long-Term Debt and Capitalized Leases
Long-term debt is summarized as follows (in thousands):
March 31, ----------------------- 1999 1998 -------- -------- Bank Credit Agreement:
Series A Term Loan $ 20,537 --
Series B Term Loan 43,753 --
Term Loan -- 35,979
Revolving Credit Facility Borrowings -- 29,257 -------- -------- 64,290 65,236
Old Term Loan Facility -- 25,000
12 3/4% Senior Subordinated Notes Due 2005 185,000 185,000
Capitalized leases 36,304 38,147
Other loans with varying maturities and interest rates 3,995 6,274 -------- -------- Total long-term debt 289,589 319,657
Less current installments 7,994 9,131 -------- -------- Long-term debt and capitalized leases, excluding current installments $281,595 310,526 ======== ========
Refinancing Transaction
On May 8, 1998, the Company completed a refinancing transaction (the "1998 Refinancing") which included the following: (1) the Company entered into a $145 million credit facility with a syndicate of lenders (the "Bank Credit Agreement") which included an $11.5 million participation by Morgan Stanley Senior Funding, Inc., a related party, providing for a $70 million revolving credit facility which is not subject to a borrowing base limitation (the "Revolving Credit Facility") maturing on March 31, 2004, a $25 million amortizing term loan facility maturing on March 31, 2004 (the "A Term Loan Facility") and a $50 million amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the repayment of all $57.0 million of indebtedness outstanding under the Company's previous credit agreement, as amended (the "Old Bank Credit Agreement") (plus accrued interest to the date of repayment); (3) the repayment of all $25.0 million of indebtedness outstanding under the $25 million term loan facility which included a $5 million participation by Morgan Stanley & Co., Incorporated, a related party, which was to mature on March 31, 2001 (the "Old Term Loan Facility") (plus accrued interest to the date of repayment) and (4) the payment of fees and expenses associated with the 1998 Refinancing. In addition, the Company recorded an extraordinary loss related to early extinguishment of debt of $4.1 million, net of zero taxes, associated with the write-off of deferred financing costs related to refinanced indebtedness in the quarter ended June 30, 1998.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The Senior Subordinated Notes (the "Notes") bear interest at 12 3/4% and mature August 1, 2005. Interest on the Notes is payable semi-annually on February 1 and August 1. The Notes are redeemable at the option of Graphics in whole or in part after August 1, 2000 at 106.375% of the principal amount, declining to 100% of the principal amount, plus accrued interest, on or after August 1, 2002. Upon the occurrence of a change of control triggering event, as defined, each holder of a Note will have the right to require Graphics to repurchase all or any portion of such holder's Note at 101% of the principal amount thereof, plus accrued interest. The Notes are subordinate to all existing and future senior indebtedness, as defined, of Graphics, and are guaranteed on a senior subordinated basis by Holdings.
Interest under the Bank Credit Agreement is floating based upon existing market rates plus agreed upon margin levels. In addition, the Company is obligated to pay specific commitment and letter of credit fees. Such margin levels and fees reduce over the term of the agreement subject to the achievement of certain Leverage Ratio measures. The weighted-average rate on outstanding indebtedness under the Bank Credit Agreement at March 31, 1999 was 7.1%.
Borrowings under the Bank Credit Agreement are secured by substantially all of the Company's assets. In addition, Holdings has guaranteed the indebtedness under the Bank Credit Agreement, which guarantee is secured by a pledge of all of Graphics' and its subsidiaries' stock. The agreement (1) requires satisfaction of certain financial covenants including Minimum Consolidated EBITDA, Consolidated Interest Coverage Ratio and Leverage Ratio requirements, (2) requires prepayments in certain circumstances including excess cash flows, proceeds from asset dispositions in excess of prescribed levels and certain capital structure transactions and (3) contains various restrictions and limitations on the following items: (a) the level of capital spending, (b) the incurrence of additional indebtedness, (c) mergers, acquisitions, investments and similar transactions and (d) dividends and other distributions. In addition, the agreement includes various other customary affirmative and negative covenants. The Senior Subordinated Notes Indenture's negative covenants are similar to, but in certain respects are less restrictive than, covenants under the Bank Credit Agreement. Graphics' ability to pay dividends or lend funds to Holdings is restricted (see note 1 for a discussion of those restrictions).
The amortization for total long-term debt and capitalized leases at March 31, 1999 is shown below (in thousands):
Long-Term Capitalized Fiscal year Debt Leases ----------- --------- ------ 2000 $ 778 $10,376 2001 6,483 8,862 2002 6,310 7,623 2003 7,166 6,812 2004 26,341 6,149 Thereafter 206,207 7,379 -------- ------- Total $253,285 47,201 ======== Imputed interest 10,897 ------- Present value of minimum lease payments $36,304 =======
Capital leases have varying maturity dates and implicit interest rates which generally approximate 8%-10%. The Company estimates that the carrying amounts of the Company's debt and other financial instruments approximate their fair values at March 31, 1999 and 1998.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts as measured by tax laws and regulations. Significant components of the Company's deferred tax liabilities and assets as of March 31, 1999 and 1998 are as follows (in thousands):
March 31, ----------------- 1999 1998 ---- ---- Deferred tax liabilities:
Book over tax basis in fixed assets $29,579 31,466
Foreign taxes 2,631 3,701
Accumulated amortization 861 766
Other, net 4,449 4,594 ------- ------- Total deferred tax liabilities 37,520 40,527
Deferred tax assets:
Bad debts 1,143 830
Accrued expenses and other liabilities 26,877 34,754
Accrued loss on discontinued operations 55 254
Net operating loss carryforwards 40,743 30,420
AMT credit carryforwards 1,262 1,262
Cumulative translation adjustment 984 786 ------- ------- Total deferred tax assets 71,064 68,306
Valuation allowance for deferred tax assets 41,460 37,222 ------- ------- Net deferred tax assets 29,604 31,084 ------- ------- Net deferred tax liabilities $ 7,916 9,443 ======= =======
Management has evaluated the need for a valuation allowance, and as such, a valuation allowance of $41.5 million has been recorded. The valuation allowance was increased by $4.2 million during the current fiscal year.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The components of income tax expense are as follows (in thousands):
Year ended March 31, ------------------------------- 1999 1998 1997 ----- ----- ----- Amount attributable to continuing operations $ 523 2,106 2,591
Amount attributable to discontinued operations -- -- -- ----- ----- -----
Total expense $ 523 2,106 2,591 ===== ===== =====
Income tax expense (benefit) attributable to loss from continuing operations consists of (in thousands):
Year ended March 31, ------------------------------- 1999 1998 1997 ----- ----- -----
Current
Federal $ -- -- --
State 237 230 145
Foreign 1,589 946 1,535 --------- -------- ------- Total current 1,826 1,176 1,680 --------- -------- -------
Deferred
Federal (132) (108) 354
State (102) (157) 120
Foreign (1,069) 1,195 437 --------- -------- ------- Total deferred (1,303) 930 911 --------- -------- -------
Provision for income taxes $ 523 2,106 2,591 ========= ======== =======
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The effective tax rates for Fiscal Year 1999, Fiscal Year 1998, and the fiscal year ending March 31, 1997 ("Fiscal Year 1997") were (6.7%), (7.8%), and (10.0%), respectively. The difference between these effective rates relating to continuing operations and the statutory federal income tax rate is composed of the following items:
Year ended March 31, ------------------------------- 1999 1998 1997 ----- ----- -----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less federal tax impact (1.1) (0.2) (0.7)
Foreign taxes, less federal tax impact (4.4) (5.2) (5.0)
Amortization (6.2) (9.9) (11.9)
Change in valuation allowance (34.4) (24.1) (28.3)
Other, net 4.4 (3.4) 0.9 ----- ----- -----
Effective income tax rate (6.7)% (7.8)% (10.0)% ===== ===== =====
As of March 31, 1999, the Company had available net operating loss carryforwards ("NOL's") for state purposes of $79.1 million, which can be used to offset future state taxable income. If these NOL's are not utilized, they will begin to expire in 2000 and will be totally expired in 2019.
As of March 31, 1999, the Company had available NOL's for federal purposes of $107.5 million, which can be used to offset future federal taxable income. If these NOL's are not utilized, they will begin to expire in 2006 and will be totally expired in 2019.
The Company also had available an alternative minimum tax credit carryforward of $1.3 million which can be used to offset future taxes in years in which the alternative minimum tax does not apply. This credit can be carried forward indefinitely.
The Company has alternative minimum tax NOL's in the amount of $89.9 million, which will begin to expire in 2007 and will be completely expired in 2019.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(8) Employee Benefit Plans
Defined Benefit Pension Plans
Pension Plans The Company sponsors defined benefit pension plans covering full-time employees of the Company who had at least one year of service at December 31, 1994. Benefits under these plans generally are based upon the employee's years of service and, in the case of salaried employees, compensation during the years immediately preceding retirement. The Company's general funding policy is to contribute amounts within the annually calculated actuarial range allowable as a deduction for federal income tax purposes. The plans' assets are maintained by trustees in separately managed portfolios consisting primarily of equity securities and fixed income securities. In October 1994, the Board of Directors approved an amendment to the Company's defined benefit pension plans, which resulted in the freezing of additional defined benefits for future services under the plans effective January 1, 1995.
Supplemental Executive Retirement Plan In October 1994, the Board of Directors approved a new Supplemental Executive Retirement Plan ("SERP"), which is a defined benefit plan, for certain key executives. Such benefits will be paid from the Company's assets. The aggregate accumulated projected benefit obligation under this plan was approximately $2.6 million and $2.1 million at March 31, 1999 and March 31, 1998, respectively.
Defined Benefit Postretirement Plans
Postretirement Benefits The Company provides certain other postretirement benefits for employees, primarily life and health insurance. Full-time employees who have attained age 55 and have at least five years of service are entitled to postretirement health care and life insurance coverage. Postretirement life insurance coverage is provided at no cost to eligible retirees. Special cost sharing arrangements for health care coverage are available to employees whose age plus years of service at the date of retirement equals or exceeds 85 ("Rule of 85"). Any eligible retiree not meeting the Rule of 85 must pay 100% of the required health care insurance premium.
Effective January 1, 1995, the Company amended the health care plan changing the health care benefit for all employees retiring on or after January 1, 2000. This amendment had the effect of reducing the accumulated postretirement benefit obligation by approximately $3 million. This reduction is reflected as unrecognized prior service cost and is being amortized on a straight line basis over 15.6 years, the average remaining years of service to full eligibility of active plan participants at the date of the amendment.
401(k) Defined Contribution Plan
Effective January 1, 1995, the Company amended its 401(k) defined contribution plan. Eligible participants may contribute up to 15% of their annual compensation subject to maximum amounts established by the Internal Revenue Service and receive a matching employer contribution on amounts contributed. The employer matching contribution is made bi-weekly and equals 2% of annual compensation for all plan participants plus 50% of the first 6% of annual compensation contributed to the plan by each employee, subject to maximum amounts established by the Internal Revenue Service. The Company's contribution under this Plan amounted to $3.8 million in Fiscal Year 1999, $3.3 million during Fiscal Year 1998 and $3.4 million during Fiscal Year 1997.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the changes in the defined benefit plans' benefit obligations and fair value of plan assets for the Fiscal Years 1999 and 1998 and a statement of the funded status of such plans as of March 31, 1999 and 1998:
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
For measurement purposes under the defined benefit postretirement plan, a 7.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for March 31, 1999. The rate was assumed to decrease gradually to 5 percent through fiscal year 2003 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the defined benefit postretirement plan. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
1% Point 1% Point Increase Decrease -------- -------- Effect on total of service and interest cost components of expense $ 168 158
Effect on postretirement benefit obligation $ 2,273 2,118
(9) Capital Stock
Effective January 16, 1998, the Company amended and restated its Certificate of Incorporation and approved a recapitalization plan resulting in the conversion of Series A and Series B convertible preferred stock (the "Previously Issued Preferred Stock") into Series AA and Series BB convertible Preferred Stock collectively, ("Preferred Stock"). At March 31, 1999, capital stock consists of Holdings' common stock ("Common Stock") and Preferred Stock. The Preferred Stock has rights on preferences substantially the same as the Previously Issued Preferred Stock. Each share of Common Stock is entitled to one vote on each matter common shareholders are entitled to vote on. The Preferred Stock has no voting rights. Dividends on the Common Stock and Preferred Stock are discretionary by the Board of Directors. Upon the occurrence of a Liquidation Event (as defined in the amended and restated
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Certificate of Incorporation), all amounts available for payment or distribution shall first be paid to holders of Series BB preferred stock, then holders of Series AA preferred stock and then to holders of Common Stock. Each share of the Preferred Stock may be converted, at the option of the holder, into shares of Common Stock using conversion ratios and subject to conditions set forth in the Company's Certificate of Incorporation.
(10) Stock Option Plans
Effective April 1, 1997 the Company changed its method of accounting for stock-based compensation plans from the intrinsic value method of APB 25 to the fair value method established by SFAS 123. Application of the recognition provisions of SFAS 123 is prospective (restatement of prior periods is prohibited). However, SFAS 123 pro forma information for prior years is required. The effects of applying SFAS 123 for either recognizing compensation expense or providing pro forma disclosures are not likely to be representative of the effects on future years.
Common Stock Option Plan
In 1993, the Company established the ACG Holdings, Inc. Common Stock Option Plan. This plan, as amended, (the "1993 Common Stock Option Plan") is administered by a committee of the Board of Directors (the "Committee") and provides for granting up to 20,841 shares of Common Stock. On January 16, 1998, the Company established another common stock option plan (the "1998 Common Stock Option Plan"). This plan is administered by the Committee and provides for granting up to 36,939 shares of Common Stock. The 1993 Common Stock Option Plan and the 1998 Common Stock Option Plan are collectively referred to as the "Common Stock Option Plans". Stock options may be granted under the Common Stock Option Plans to officers and other key employees of the Company at the exercise price per share of Common Stock, as determined at the time of grant by the Committee in its sole discretion. All options are 25% exercisable on the first anniversary date of a grant and vest in additional 25% increments on each of the next three anniversary dates of each grant. All options expire 10 years from date of grant.
A summary of activity under the Common Stock Option Plans is as follows: Weighted- Average Exercise Options Price ($) ------- --------- Outstanding at March 31, 1996 16,499 50.00 Granted 6,015 50.00 Exercised -- -- Forfeited (3,214) 50.00 -------- Outstanding at March 31, 1997 19,300 50.00 Granted 30,014 .01 Exercised (11,773) 14.95 Forfeited (334) 50.00 -------- Outstanding at March 31, 1998 37,207 1.42(a) Granted 4,283 97.45 Exercised -- -- Forfeited (4,309) 12.23 -------- Outstanding at March 31, 1999 37,181 11.23 ========
(a) Reflects Fiscal Year 1998 option repricing discussed below.
The weighted-average grant-date fair value of options granted was $0 for fiscal years ending March 31, 1999, 1998 and 1997. The weighted-
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
average remaining contractual life of the options outstanding at March 31, 1999 was 7.5 years. The options outstanding at March 31, 1999, had exercise prices ranging from $.01 to $240. Of the options outstanding; 9,698; 1,147 and 9,004 were exercisable at March 31, 1999, 1998 and 1997, respectively. The weighted-average exercise price of the exercisable options was $.01 at March 31, 1999 and 1998, and $50 at March 31, 1997. During Fiscal Year 1998, certain common stock option agreements were modified to reprice options previously granted with a $50 exercise price to a $.01 exercise price. A total of 9,188 shares (including 362 previously exercised options that were subsequently cancelled) of Holdings Common Stock were reserved for issuance, but not granted under the Common Stock Option Plans at March 31, 1999. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for Fiscal Year 1999, Fiscal Year 1998 and Fiscal Year 1997: risk-free interest rates of 4.5 - 5.6%, 5.5% and 6.5%, respectively; no annual dividend yield; volatility factors of 0; and an expected option life of 5 years.
For the purposes of Fiscal Year 1997 SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Because the fair value of the Company's options equaled $0, earnings were the same for Fiscal Year 1997 under both APB 25 and SFAS 123.
Preferred Stock Option Plan
In Fiscal Year 1998, the Company established the ACG Holdings, Inc. Preferred Stock Option Plan (the "Preferred Stock Option Plan"). This plan is administered by the Committee and provides for granting up to 583 shares of Preferred Stock. Stock options may be granted under this Preferred Stock Option Plan to officers and other key employees of the Company at the exercise price per share of Preferred Stock, as determined at the time of grant by the Committee in its sole discretion. All options are fully vested and are 100% exercisable at the date of grant. All options expire 10 years from date of grant.
A summary of the Preferred Stock Option Plan is as follows:
Options ------- Outstanding at March 31, 1997 --
Granted 526
Exercised --
Forfeited -- ----- Outstanding at March 31, 1998 526
Granted 29
Exercised --
Forfeited -- ----- Outstanding at March 31, 1999 555 =====
All options were granted with a $1,909 exercise price. The weighted-average grant-date fair value of options granted was $1,288 and $1,091 for Fiscal Year 1999 and Fiscal Year 1998, respectively. The weighted-average remaining contractual life of the options outstanding at March 31, 1999 was 8.8 years. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. The following weighted-average assumptions were used for Fiscal Year 1999 and Fiscal Year 1998: risk free interest rate of 5.6% and 5.5%, respectively; no annual dividend yield; volatility factors of 0; and an expected option life of 2 years. All of the options outstanding were exercisable at March 31, 1999. A total of 28 shares of Holdings Preferred Stock was reserved for issuance, but not granted under the Preferred Stock Option Plan at March 31, 1999.
As a result of the SFAS 123 requirements, the Company recognized $0.0 million and $0.6 million of related compensation expense in Fiscal Year 1999 and Fiscal Year 1998, respectively.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
The Company incurred rent expense for Fiscal Year 1999, Fiscal Year 1998, and Fiscal Year 1997 of $6.9 million, $6.4 million, and $5.4 million, respectively, under various operating leases. Future minimum rental commitments under existing operating lease arrangements at March 31, 1999 are as follows (in thousands):
Fiscal Year ----------- 2000 $ 5,051
2001 4,106
2002 3,461
2003 2,216
2004 980
Thereafter 3,589 -------- Total $ 19,403 ========
The Company has employment agreements with one of its principal officers and four other employees. Such agreements provide for minimum salary levels as well as for incentive bonuses which are payable if specified management goals are attained. The aggregate commitment for future salaries at March 31, 1999, excluding bonuses, was approximately $2.7 million.
On December 21, 1989, Graphics sold to CPS Corp ("CPS"), its ink manufacturing operations and facilities. Graphics remains contingently liable under $1.5 million of industrial revenue bonds assumed by CPS. CPS assumed these liabilities and has agreed to indemnify Graphics for any resulting obligation and has also provided an irrevocable letter of credit in favor of the holders of such bonds. Accordingly, management believes that any obligation of Graphics under this contingency is unlikely.
Concurrent with the sale of its ink manufacturing facility, Graphics entered into a long-term ink supply contract with CPS. The supply contract requires Graphics to purchase a significant portion of its ink requirements, within certain limitations and minimums, from CPS. Graphics believes that prices for products under this contract approximate market prices at the time of purchase of such products.
In the quarter ended December 31, 1997, the Company entered into multi-year contracts to purchase a portion of the Company's raw materials to be used in its normal operations. In connection with such purchase agreements, pricing for a portion of the Company's raw materials is adjusted for certain movements in market prices, changes in raw material costs and other specific price increases. The Company is deferring certain contractual provisions over the life of the contracts, which are being recognized as the purchase commitments are achieved. The amount deferred at March 31, 1999 is $25.7 million and is included within Other liabilities in the Company's consolidated balance sheet.
Graphics, together with over 300 other persons, has been designated by the U.S. Environmental Protection Agency as a potentially responsible party (a "PRP") under the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA", also known as "Superfund") at one Superfund site. Although liability under CERCLA may be imposed on a joint and several basis and the Company's ultimate liability is not precisely determinable, the PRPs have agreed that Graphics' share of removal costs is 0.46% and therefore Graphics believes that its share of the
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
anticipated remediation costs at such site will not be material to its business or financial condition. Based upon an analysis of Graphics' volumetric share of waste contributed to the site and the agreement among the PRPs, the Company maintains a reserve of approximately $0.1 million in connection with this liability on its consolidated balance sheet at March 31, 1999. The Company believes this amount is adequate to cover such liability.
The Company has been named as a defendant in several legal actions arising from its normal business activities. In the opinion of management, any liabilities that may arise from such actions will not, individually or in the aggregate, have a material adverse effect on the consolidated financial statements of the Company.
(12) Significant Customers
No single customer represented 10% or more of total sales in the fiscal years ended March 31, 1999, 1998 and 1997.
(13) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(14) Restructuring Costs and Other Special Charges
Restructuring Costs:
American Color. In March 1999, the Company approved a plan for its American Color division which was designed to consolidate certain facilities in order to improve asset utilization and operational efficiency, modify the organizational structure as a result of facility consolidation and other changes and reduce overhead and other costs. The cost of this plan is being accounted for in accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The pretax costs of $4.6 million which were incurred as a direct result of this plan (excluding other special charges related to asset write-offs and write-downs - see below) includes $2.5 million of employee termination costs, $1.2 million of lease settlement costs and $0.9 million of other transition and restructuring expenses. This restructuring charge was recorded in the quarter ended March 31, 1999. The majority of these costs will be paid or settled before March 31, 2000.
In April 1995, the Company implemented a plan for its American Color division, which was designed to improve productivity, increase customer service and responsiveness, and provide increased growth in the digital imaging and prepress services business. The cost of this plan was accounted for in accordance with the guidance set forth in EITF 94-3. The pretax costs of $5 million which were incurred as a part of this plan (excluding other special charges related to asset write-offs and write-downs - see below) represent employee termination, goodwill write-down and other related costs that were incurred as a direct result of the plan. Approximately $0.9 million of restructuring costs primarily related to relocation expenses were recognized in Fiscal Year 1997.
Printing. In January 1998, the Company approved a plan for its printing division, which was designed to improve responsiveness to customer requirements, increase asset utilization and reduce overhead costs. The cost of this plan was accounted for in accordance with the guidance set forth in EITF 94-3. The pretax costs of $3.9 million which were incurred as a direct result of this plan (excluding other special charges related to asset write-offs and write-downs - see below) includes $3.3 million of employee termination costs and $0.6 million of relocation and other transition expenses. This restructuring charge was recorded in the quarter ended March 31, 1998. These costs were paid or settled before March 31, 1999.
Other Special Charges:
During the quarter ended March 31, 1999, the Company recorded special charges totaling $0.9 million to adjust the carrying values of idle, disposed and under-performing assets of the American Color division to estimated fair values. The provision was based on a review of the Company's long-lived assets in accordance with SFAS 121. Fair value was based on the Company's estimate of held and used and idle assets based on current market conditions using the best information available.
During the quarter ended March 31, 1998, the Company recorded special charges totaling $1.7 million to adjust the carrying values of idle, disposed and under-performing assets of the printing segment to estimated fair values. The provision was based on a review of the Company's long-lived assets in accordance with SFAS 121. Fair value was based on the Company's estimate of held and used and idle assets based on current market conditions using the best information available.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
During Fiscal Year 1997, the Company recorded special charges totaling $1.9 million, for impaired long-lived assets and to adjust the carrying values of idle, disposed and under-performing assets to estimated fair values. The provisions were based on a review of long-lived assets in connection with the initial adoption of SFAS 121. Of the Fiscal Year 1997 total of long-lived assets that were adjusted based on being idle, disposed of or under-performing, approximately $0.4 million and $1.5 million related to the printing and American Color divisions, respectively. Fair value was based on the Company's estimate of held and used and idle assets based on current market conditions using the best information available.
These special charges are classified within restructuring costs and other special charges in the consolidated statements of operations.
(15) Non-recurring Charge Related to Resignation of Former Chief Executive Officer
A non-recurring charge of $1.9 million relating to the resignation of the Company's former Chief Executive Officer was recorded in Fiscal Year 1997, and is classified as a selling, general and administrative expense. Payments under the related agreement continue through 2001, subject to certain requirements.
(16) Summarized Financial Information of American Color Graphics, Inc.
Summary financial information for Holdings' wholly-owned subsidiary, American Color Graphics, Inc., is as follows (in thousands):
March 31, -------------------------------- 1999 1998 ---------- --------- Balance sheet data:
Current assets $ 71,591 80,163
Noncurrent assets 227,409 249,795
Current liabilities 77,515 69,176
Noncurrent liabilities 341,264 367,490
Year ended March 31, ------------------------------------- 1999 1998 1997 ----------- --------- --------- Statement of operations data:
Sales $ 520,343 533,335 524,551
Operating income 29,455 12,103 10,372
Net loss (12,468) (29,895) (31,703)
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(17) Industry Segment Information
Effective March 31, 1999, the Company adopted the provisions of SFAS 131. The Company has restated its sector disclosures in prior years to conform to the requirements of SFAS 131. The Company has significant operations principally in two industry segments: (1) printing and (2) digital imaging and prepress services. All of the Company's printing business and assets are attributed to the printing division and all of the Company's digital imaging and prepress business and assets are attributed to the American Color division ("American Color"). The Company's digital visual effects operations and corporate expenses have been segregated and do not constitute a reportable segment of the Company as contemplated by SFAS 131.
The Company has two reportable segments: (1) printing and (2) digital imaging and prepress services. The printing business produces retail advertising inserts, comics (newspaper Sunday comics, comic insert advertising and comic books), and other publications. The Company's digital imaging and prepress services business assist customers in the capture, manipulation, transmission and distribution of images. The majority of its work leads to the production of four-color separations in a format appropriate for use by printers.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment EBITDA which is defined as earnings before net interest expense, income tax expense, depreciation, amortization, other special charges related to asset write-offs and write-downs, other income (expense), discontinued operations and extraordinary items. The Company generally accounts for intersegment revenues and transfers as if the revenues or transfers were to third parties, that is, at current market prices.
The Company's reportable segments are business units that offer different products and services. They are managed separately because each segment requires different technology and marketing strategies. A substantial portion of the revenue, long-lived assets and other assets of the Company's reportable segments are attributed to or located in the United States.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information about each of the current directors and executive officers of Holdings and Graphics (ages as of March 31, 1999). All directors hold office until their successors are duly elected and qualified.
Name Age Position with Graphics and Holdings - ---- --- ----------------------------------- Stephen M. Dyott 47 Chairman, President, Chief Executive Officer and Director Michael M. Janson 50 Director Eric T. Fry 32 Director Joseph M. Milano 46 Executive Vice President and Chief Financial Officer Larry R. Williams 58 Executive Vice President Purchasing of Graphics Timothy M. Davis 44 Senior Vice President-Administration, Secretary and General Counsel Malcolm J. Anderson 60 Executive Vice President Operations of Graphics Patrick W. Kellick 41 Senior Vice President/Corporate Controller and Assistant Secretary
Stephen M. Dyott - Chairman and Chief Executive Officer of Graphics and Holdings since September 1996; President of Holdings since February 1995; Director of Graphics and Holdings since September 1994; Chief Operating Officer of Holdings from February 1995 to September 1996 and Chief Operating Officer of Graphics from 1991 to September 1996; President of Graphics since 1991; Vice President and General Manager - Flexible Packaging, American National Can Company ("ANCC") from 1988 to 1991; Vice President and General Manager - Tube Packaging, ANCC from 1985 to 1987.
Michael M. Janson - Director of Holdings and Graphics since February 1998; Managing Director of the general partner of Morgan Stanley Dean Witter Capital Partners ("MSDWCP") and of Morgan Stanley & Co., Incorporated ("MS&Co."); 1987 joined MS&Co.; 1997 joined MSDWCP; Managing Director in MS&Co.'s High Yield Capital Markets Department before joining MSDWCP; Director of Choice One Communications Inc., Silgan Holdings Inc., and Renaissance Media Group.
Eric T. Fry - Director of Graphics and Holdings since March 1996; Vice President of the general partner of MSDWCP and MS&Co.; Joined MS&Co. in 1989, initially in the Mergers and Acquisitions Department and from 1991 to 1992 in MSDWCP; From 1992 to 1994 attended Harvard Business School and received an MBA; Rejoined MSDWCP in 1994; Director of Enterprise Reinsurance Holdings Corporation, Vanguard Health Systems, Inc. and LifeTrust America, L.L.C.
Joseph M. Milano - Executive Vice President and Chief Financial Officer of Holdings and Graphics from 1997 to 1998; Senior Vice President and Chief Financial Officer of Holdings and Graphics from 1994 to 1997; Vice President - Finance of Holdings and Graphics from 1992 to 1994; Vice President and Chief Financial Officer, Farrel Corporation, 1989 to 1992; Vice President and Chief Financial Officer, Electronic Mail Corporation of America from 1984 to 1988.
Larry R. Williams - Executive Vice President, Purchasing of Graphics since 1997; Senior Vice President - Purchasing, Marketing and Newspaper Sales of Graphics from 1996 to 1997; Senior Vice President of Purchasing / Transportation of Graphics from 1993 to 1996; Independent Management Consultant from 1992 to 1993 and Senior Vice President, Operations Support for Ryder Systems from 1990 to 1992.
Timothy M. Davis - Senior Vice President - Administration, Secretary and General Counsel of Holdings and Graphics since 1989; Assistant General Counsel of MacMillan, Inc. and counsel to affiliates of Maxwell Communication Corporation North America, January 1989 to June 1989; Attorney in private practice from 1981 to 1989.
Malcolm J. Anderson - Executive Vice President Operations of Graphics since 1996; Senior Vice President Operations of Graphics from 1993 to 1996; President, Plastic Products Division of Kerr Group, Inc. from 1989 to 1993; Vice President Manufacturing - Flexible Packaging, American National Can Company from 1982 to 1989; Vice President, Eastern Division General Manager of Sinclair and Valentine Ink Company from 1980 to 1982.
Patrick W. Kellick - Senior Vice President/Corporate Controller of Holdings and Graphics from 1997 to 1998; Vice President/Corporate Controller of Holdings and Graphics from 1989 to 1997; Corporate Controller of Graphics since 1987, and Assistant Secretary of Holdings and Graphics since 1995; various financial positions with Williams Precious Metals (a division of Brush Wellman, Inc.) from 1984 to 1987, including CFO from 1986 to 1987; Auditor with KPMG from 1979 to 1984.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information concerning compensation for services to Holdings and Graphics during the fiscal years ended March 31, 1999, 1998 and 1997 to the Chief Executive Officers and the four other most highly compensated executive officers (the "Named Executive Officers") of Holdings and/or Graphics.
Summary Compensation Table
The following table presents information concerning the options granted to the Named Executive Officers during the last fiscal year. All outstanding options issued prior to April 8, 1993 were canceled in connection with the 1993 Acquisition.
Option/SAR Grants in Last Fiscal Year
- ---------- (a) Options granted to Joseph M. Milano on June 4, 1998 were granted pursuant to the ACG Holdings, Inc. Preferred Stock Option Plan at an exercise price of $1,908.76 and the underlying securities had a per share fair market value on the date of grant of $3,000. These options were fully vested and exercisable on the date of grant.
(b) The grant date present value shown in the table is based on calculations using a Black-Scholes option pricing model with the following weighted-average assumptions at the date of grant: risk free interest rate of 5.59%; no annual dividend yield; volatility factor of 0; and an expected option life of two years.
The following table presents information concerning the fiscal year-end value of unexercised stock options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values
(a) Holdings' common stock has not been registered or publicly traded and, therefore a public market price of the stock is not available. The values set forth in the table are based on our estimate of the fair market value of the common stock at March 31, 1999. Holdings believes the exercise price of the options held by the Named Executive Officers at March 31, 1999, was in each case greater than the fair market value of the underlying shares of Holdings' common stock as of such date.
(b) Holdings' preferred stock has not been registered or publicly traded and, therefore a public market price of the stock is not available. The values set forth in the table are based on our estimate of the fair market value of the preferred stock at March 31, 1999.
Pension Plan
Graphics sponsors the American Color Graphics, Inc. Salaried Employees' Pension Plan (the "Pension Plan"), a defined benefit pension plan covering full-time salaried employees of Graphics who had at least one year of service as of December 31, 1994.
In October 1994, the Board of Directors approved an amendment to the Pension Plan which resulted in the freezing of additional defined benefits for future services under such plan effective January 1, 1995 (see note 8 to our consolidated financial statements appearing elsewhere in this Report).
At March 31, 1999, all of the Named Executive Officers had vested in the pension plan. At March 31, 1999, the Named Executive Officers had the following amounts of credited service (original hire date through January 1, 1995) and annual benefit payable upon retirement at age 65 under the Pension Plan: Stephen M. Dyott (3 years, 3 months; $8,220), Joseph M. Milano (2 years, 7 months; $5,820), Larry R. Williams (1 year, 5 months; $3,192), Timothy M. Davis (5 years, 5 months; $11,700) and Malcolm J. Anderson (1 year, 3 months; $2,820).
The basic benefit payable under the Pension Plan is a five-year certain single life annuity equivalent to (a) 1% of a participant's "final average monthly compensation" plus (b) 0.6% of a participant's "final average monthly compensation" in excess of 40% of the monthly maximum Social Security wage base in the year of retirement multiplied by years of credited service (not to exceed 30 years of service). For purposes of the Pension Plan, "final average compensation" (which, for the Named Executive Officers, is reflected in the salary and bonus columns of the Summary Compensation Table) means the average of a participant's five highest consecutive calendar years of total earnings (which includes bonuses) from the last 10 years of service. The maximum monthly benefit payable from the Pension Plan is $5,000.
The basic benefit under the Pension Plan is payable upon completion of five years of vesting service and retirement on or after attaining age 65. Participants may elect early retirement under the Pension Plan upon completion of five years of vesting service and the attainment of age 55, and receive the basic benefit reduced by 0.4167% for each month that the benefit commencement date precedes the attainment of age 65. A deferred vested benefit is available to those participants who separate from service before retirement, provided the participant has at least five years of vesting service.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new SERP, which is a defined benefit plan, for the Named Executive Officers and five other key executives. The plan provides for a basic annual benefit payable upon completion of five years vesting service (April 1, 1994 through March 31, 1999 for Messrs. Dyott, Milano, Williams, Davis and Anderson) and retirement on or after attaining age 65 or the present value of such benefit at an earlier date under certain circumstances. The Named Executive Officers have the following basic annual benefit payable under this plan at age 65:
Stephen M. Dyott $100,000 Joseph M. Milano $100,000 Larry R. Williams $ 50,000 Timothy M. Davis $ 75,000 Malcolm J. Anderson $ 50,000
Such benefits will be paid from our assets (see note 8 to our consolidated financial statements appearing elsewhere in this Report).
Compensation of Directors
Directors of Holdings and Graphics do not receive a salary or an annual retainer for their services but are reimbursed for expenses incurred with respect to such services.
Employment Agreements
In connection with the 1993 Acquisition, Graphics entered into a new employment agreement with Stephen M. Dyott (the "Dyott Employment Agreement"). The Dyott Employment Agreement superseded previous employment agreements.
The Dyott Employment Agreement had an initial term of four years commencing as of the effective time Acquisition Corp. merged with and into Holdings. The term under the Dyott Employment Agreement is therefore automatically extended for one-year periods absent two year's written notice of an intent by either party not to renew. The Dyott Employment Agreement provides for the payment of an annual salary and an annual bonus pursuant to a plan adopted following the 1993 Acquisition. In addition, under the Dyott Employment Agreement, Mr. Dyott is eligible to receive all other employee benefits and perquisites made available to Graphics' senior executives generally.
Under the Dyott Employment Agreement, if the employee's employment is terminated by Graphics "without cause" ("cause", as defined in the Dyott Employment Agreement, means a material breach by the employee of his obligations under the Dyott Employment Agreement; continued failure or refusal of the employee to substantially perform his duties to Graphics; a willful and material violation of Federal or state law applicable to Graphics or the employee's conviction of a felony or perpetration of a common law fraud; or other willful misconduct that is injurious to Graphics) or by the employee for "good reason" (which, as defined in the Dyott Employment Agreement, means a decrease in base pay or a failure by Graphics to pay material compensation due and payable; a material diminution of the employee's responsibilities or title; a material change in the employee's principal employment location; or a material breach by Graphics of a material term of the Dyott Employment Agreement), the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and salary continuation payments (and certain other benefits) through the greater of the remainder of the scheduled term and a period of two years beginning on the date of termination. The Dyott Employment Agreement contains confidentiality obligations that survive indefinitely and non-solicitation and non-competition obligations that end on the second anniversary of the date employment has ceased.
On July 15, 1998 Graphics entered into severance agreements with Joseph M. Milano and Timothy M. Davis which provide that in the event the employee's employment is terminated by Graphics without "cause", as defined above (but also including as "cause" competition with Graphics), or by the employee for "good reason", as defined above, the employee will be entitled to a pro rata portion of the bonus for the year employment was terminated payable at the time bonuses are generally paid and salary and benefit continuation for three years following termination. The severance agreements contain confidentiality obligations that survive indefinitely and non-solicitation and non-competition obligations that end on the third anniversary of the date employment has ceased.
Graphics is also a party to letter agreements with Larry R. Williams and Malcolm J. Anderson which provide for a term of employment with an initial period of two years with one year automatic extensions. Such agreements also provide that in the event the employee's employment is terminated by Graphics without "cause", as defined in the severance agreements above, or by the employee for "good reason", as defined above, the employee will be entitled to base salary continuation for two years following termination. Such base salary payments will be reduced to the extent the employee receives compensation from another employer. The letter agreements contain confidentiality obligations that survive indefinitely and non-solicitation and non-competition obligations that end on the second anniversary of the date employment has ceased.
James T. Sullivan resigned as Chairman of the Board and Chief Executive Officer and as a director and employee of Holdings effective as of September 18, 1996 (the "Effective Date"). For the period commencing on the Effective Date and ending on April 8, 1999, Mr. Sullivan held the title of Vice Chairman of Holdings. Mr. Sullivan received salary continuation payments at an annual rate of $0.6 million through April 8, 1999. For two years thereafter, Mr. Sullivan will be engaged as a consultant to Holdings for which he will be paid an annual fee of $0.2 million. Under the terms of his resignation agreement, Mr. Sullivan was entitled, through April 8, 1999, to continue to participate in certain employee benefit plans provided by Holdings to its employees generally. Mr. Sullivan also received payment of his full supplemental retirement benefit under the American Color Graphics, Inc. Supplemental Executive Retirement Plan. Mr. Sullivan's resignation agreement also contains certain non-competition and non-solicitation obligations that end on April 8, 2001 as well as confidentiality obligations that continue indefinitely.
Compensation Committee Interlocks and Insider Participation
We have not maintained a formal compensation committee since the 1993 Acquisition. Mr. Dyott sets compensation in conjunction with the Board of Directors.
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
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1999, concerning the persons having beneficial ownership of more than five percent of the capital stock of Holdings and the beneficial ownership thereof by each director and Named Executive Officer of Holdings and by all directors and executive officers of Holdings as a group. Each holder below has sole voting power and sole investment power over the shares designated below.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of Merger dated March 12, 1993, as amended (the "Merger Agreement"), between Communications and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition Corp. was merged with and into Communications (the "1993 Acquisition"). Acquisition Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"), certain institutional investors and certain members of management (the "Purchasing Group") for the purpose of acquiring a majority interest in Communications. Acquisition Corp. acquired a substantial and controlling majority interest in Communications in exchange for $40 million in cash. In the 1993 Acquisition, Communications continued as the surviving corporation and the separate corporate existence of Acquisition Corp. was terminated.
Pursuant to the Merger Agreement, (i) MSLEF II and the Purchasing Group made a $40 million equity investment in Holdings and acquired (a) 90% of the outstanding Holdings' common stock and (b) all the outstanding shares of the preferred stock of Holdings, with a total preference of $40 million and which, under certain circumstances, is convertible into shares of Holdings' common stock; and (ii) Golder, Thoma, & Cressey, an Illinois limited partnership ("GTC") and its affiliates received 4,987 shares of Holdings' common stock.
MSLEF II is an investment fund affiliated with MSDW. MSDW is a holding company that, through its subsidiaries, is a major international financial services firm. In addition, two of the current directors of Holdings are employees of Morgan Stanley & Co. Incorporated, an affiliate of MSLEF II and also a subsidiary of MSDW. As a result of these relationships, MSDW may be deemed to control the management and policies of Graphics and Holdings. In addition, MSDW may be deemed to control matters requiring shareholders' approval, including the election of all directors, the adoption of amendments to the Certificates of Incorporation of Holdings and Graphics and the approval of mergers and sales of all or substantially all of Graphics' and Holdings' assets.
Management Equity Participation. In connection with the 1993 Acquisition, certain members of our management at that time, including James T. Sullivan and Stephen M. Dyott (collectively, the "Management Investors"), invested an aggregate of approximately $2.3 million in Holdings and received an aggregate of 3,700 shares of Holdings Common Stock and 185 shares of Holdings' preferred stock.
Each Management Investor also entered into a Management Equity Agreement, dated as of April 8, 1993, with Holdings (collectively, the "Management Agreements"), pursuant to which, if a Management Investor's employment with us terminates for any reason, Holdings has the right to repurchase any of the shares of Holdings' common stock and Holdings' preferred stock held by such Management Investor at a price per share equal to the "Series AA Threshold Amount" (as defined in section 4.02(e)(viii) of Holdings' Certificate of Incorporation) applicable to such shares at such time divided by the number of shares of Holdings' preferred stock outstanding at such time. In the case of shares of Holdings' common stock held by such Management Investor, the repurchase price will be equal to fair market value. The payment of the repurchase price may be deferred (with interest) if the making of such payment would cause Holdings to violate any debt covenant or provision of applicable law, or if the Board of Directors of Holdings determines that Holdings is not financially capable of making such payment.
Stockholders' Agreement. In connection with the Shakopee Merger, Holdings, MSLEF II, other entities affiliated with MSDW and the other stockholders of Holdings entered into an amended and restated stockholders' agreement, dated as of August 14, 1995. The stockholders' agreement includes provisions requiring the delivery of certain shares of Holdings' common stock from the "Purchasers", as defined in the stockholders' agreement, which includes MSLEF II, certain institutional investors and members of management, to Holdings, depending upon the return realized by the Purchasers on their investment, and thereafter from Holdings to the "Existing Holders," as defined in the stockholders' agreement, which includes the stockholders' of Holdings immediately prior to the 1993 Acquisition. Depending upon the returns realized by the Purchasers on their investment, their interest in the Holdings' common stock could be reduced and the interest of the Existing Holders could be increased. The stockholders' agreement gives the Existing Holders, the right to designate a director of Holdings and the entities affiliated with MSDW also the right to designate a director. The stockholders' agreement contains rights of first refusal with regard to the issuance by Holdings of equity securities and sales by the stockholders of equity securities of Holdings owned by them, specified tag along and drag along provisions and registration rights. The stockholders' agreement also restricts our ability to enter into affiliate transactions unless the transaction is fair and reasonable, with terms no less favorable to us than if the transaction was completed on an arm's length basis.
Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective July 27, 1989. Under the terms of the agreement, Graphics (whose income is consolidated with that of Holdings for federal income tax purposes) is liable to Holdings for amounts representing federal income taxes calculated on a "stand-alone basis". Each year Graphics pays to Holdings the lesser of (i) Graphics' federal tax liability computed on a stand-alone basis and (ii) its allocable share of the federal tax liability of the consolidated group. Accordingly, Holdings is not currently reimbursed for the separate tax liability of Graphics to the extent Holdings' losses reduce consolidated tax liability. Reimbursement for the use of such Holdings' losses will occur when the losses may be used to offset Holdings' income computed on a stand-alone basis. Graphics has also agreed to reimburse Holdings in the event of any adjustment (including interest or penalties) to consolidated income tax returns based upon Graphics' obligations with respect thereto. No reimbursement obligation currently exists between Graphics and Holdings. Also under the terms of the tax sharing agreement, Holdings has agreed to reimburse Graphics for refundable federal income tax equal to an amount which would be refundable to Graphics had Graphics filed separate federal income tax returns for all years under the agreement. Graphics and Holdings have also agreed to treat foreign, state and local income and franchise taxes for which there is consolidated or combined reporting in a manner consistent with the treatment of federal income taxes as described above.
Preferred Stock Option Plan
In Fiscal Year 1998, we established the ACG Holdings, Inc. Preferred Stock Option Plan (the "Preferred Stock Option Plan"). This plan is administered by the Committee and provides for granting up to 583 shares of Holdings' preferred stock. Stock options may be granted under this Preferred Stock Option Plan to officers and other key employees at the exercise price per share of preferred stock, as determined at the time of grant by the Committee in its sole discretion. All options are fully vested and are 100% exercisable at the date of grant. All options expire 10 years from date of grant. In Fiscal Year 1999 and Fiscal Year 1998, we granted options to purchase 29 shares and 526 shares, respectively, of preferred stock to certain key executives, at an exercise price of $1,909/share. See note 10 to our consolidated financial statements appearing elsewhere in this Report.
Other
MS&Co. acted as placement agent in connection with the original private placement of the Notes and received a placement fee of $5.6 million in connection therewith. MS&Co. is affiliated with entities that beneficially own a substantial majority of the outstanding shares of capital stock of Holdings. MS&Co. had a $5 million participation in the Old Term Loan Facility and received fees of approximately $0.3 million in connection therewith. In addition, Morgan Stanley Senior Funding, Inc. originally had a participation of approximately $35 million in the Bank Credit Agreement and received gross fees of approximately $0.5 million in connection therewith. On June 8, 1998, Morgan Stanley Senior Funding, Inc. reduced its participation in such credit facility to $11.5 million.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
Reports of Independent Auditors
1 and 2. Financial Statements: The following Consolidated Financial Statements of Holdings are included in Part II, Item 8:
Consolidated balance sheets - March 31, 1999 and 1998
For the Years Ended March 31, 1999, 1998 and 1997:
Consolidated statements of operations Consolidated statements of stockholders' deficit Consolidated statements of cash flows
Notes to Consolidated Financial Statements
Financial Statement Schedules: The following financial statement schedules of Holdings are filed as a part of this Report.
Schedules Page No.
I. Condensed Financial Information of Registrant............. 67 Condensed Financial Statements (parent company only) for the years ended March 31, 1999, 1998, and 1997 and as of March 31, 1999 and 1998
II. Valuation and qualifying accounts........................ 74
Schedules not listed above have been omitted because they are not applicable or are not required, or the information required to be set-forth therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits: The exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report.
Exhibit No. Description - ---------- ------------ 3.1 Certificate of Incorporation of Graphics, as amended to date* 3.2 By-laws of Graphics, as amended to date* 3.3 Restated Certificate of Incorporation of Holdings, as amended to date 3.4 By-laws of Holdings, as amended to date* 4.1 Indenture (including the form of Note), dated as of August 15, 1995, among Graphics, Holdings and NationsBank of Georgia, National Association, as Trustee** 10.1 Credit Agreement, dated as of August 15, 1995 and Amended and Restated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties signatory thereto++++ 10.1(a) June 8, 1998, First Amendment to Amended and Restated Credit Agreement dated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties Signatory thereto++++ 10.1(b) February 3, 1999, Second Amendment to Amended and Restated Credit Agreement dated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties Signatory thereto****
Exhibit No. Description - ----------- ----------- 10.2 Resignation letter, dated as of September 18, 1996, between Graphics and James T. Sullivan*** 10.3(a) Employment Agreement, dated as of April 8, 1993, between Graphics and Stephen M. Dyott* 10.3(b) Amendment to Employment Agreement, dated December 1, 1994, between Graphics and Stephen M. Dyott++ 10.3(c) Amendment to Employment Agreement, dated February 15, 1995, between Graphics and Stephen M. Dyott++ 10.3(d) Amendment to Employment Agreement, dated September 18, 1996, between Graphics and Stephen M. Dyott*** 10.4 Severance Letter, dated September 1, 1995, between Graphics and Larry R. Williams 10.5 Severance Letter, dated July 15, 1998, between Graphics and Joseph M. Milano 10.6 Severance Letter, dated July 15, 1998, between Graphics and Timothy M. Davis 10.7 Severance Letter, dated September 8, 1995, between Graphics and M. J. Anderson++++ 10.8 Amended and Restated Stockholders' Agreement, dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the additional parties named therein** 10.8(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated Stockholders' Agreement dated as of August 14, 1995 among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., and the additional parties named herein++++ 10.9 Stock Option Plan of Holdings++ 10.10 Term Loan Agreement, dated as of June 30, 1997, among Holdings, Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and the parties signatory thereto++++ 10.11 Holdings Common Stock Option Plan++++ 10.12 Holdings Preferred Stock Option Plan++++ 12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges 21.1 List of Subsidiaries 27.0 Financial Data Schedule
- ----------- * Incorporated by reference from Amendment No. 2 to Form S-1 filed on October 4, 1993 - Registration number 33-65702. ** Incorporated by reference from Form S-4 filed on September 19, 1995 - Registration number 33-97090. ++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on November 22, 1995 - Registration number 33-97090. *** Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 - Commission file number 33-97090. ++++ Incorporated by reference from the Annual Report on Form 10-K for fiscal year ended March 31, 1998 - Commission file number 33-97090. **** Incorporated by reference from the Quarterly Report on Form 10-Q for the quarter ended December 31, 1998 - Commission file number 33-97090.
(b)Reports on Form 8-K:
The following report on Form 8-K was filed during the fourth quarter of Fiscal Year 1999:
1. Form 8-K filed with the Securities and Exchange Commission on February 4, 1999 under Item 5 to announce ACG's EBITDA for the three months ended December 31, 1998.
ACG did not file any other reports on Form 8-K during the three months ended March 31, 1999.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACG HOLDINGS, INC. Parent Company Only Condensed Balance Sheets (Dollars in thousands, except par values)
March 31, ------------------------------- 1999 1998 -------------- -------------- Assets Current assets:
Receivable from subsidiary $ 601 676 -------------- --------------
Total assets $ 601 676 ============== ==============
See accompanying notes to condensed financial statements.
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACG HOLDINGS, INC. Parent Company Only Condensed Statements of Operations (In thousands)
Year Ended March 31, -------------------------------------------- 1999 1998 1997 -------------- ------------ ------------
Equity in loss of subsidiary $ (12,468) (29,895) (31,703) -------------- ------------ ------------ Net loss $ (12,468) (29,895) (31,703) ============== ============ ============
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACG HOLDINGS, INC. Parent Company Only Condensed Statements of Cash Flows (In thousands)
Year Ended March 31, --------------------------------------- 1999 1998 1997 ----------- ---------- ----------
Cash flows from operating activities -- -- --
Cash flows from investing activities -- -- --
Cash flows from financing activities -- -- -- ----------- ---------- ----------
Net change in cash -- -- -- =========== ========== ==========
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACG HOLDINGS, INC. Parent Company Only Notes to Condensed Financial Statements
Description of ACG Holdings, Inc.
Sullivan Communications, Inc. ("Communications"), together with its wholly-owned subsidiary, Sullivan Graphics, Inc., collectively the ("Company"), was formed in April 1989 under the name GBP Holdings, Inc. to effect the purchase of all the capital stock of GBP Industries, Inc. from its stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings, Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc. changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan Holdings, Inc. changed its name to Sullivan Communications, Inc. Effective July 1997, Sullivan Communications, Inc. changed its name to ACG Holdings, Inc. ("Holdings") and Sullivan Graphics, Inc. changed its name to American Color Graphics, Inc. ("Graphics").
Holdings has no operations or significant assets other than its investment in Graphics. Holdings is dependent upon distributions from Graphics to fund its obligations. Under the terms of its debt agreements at March 31, 1999, Graphics' ability to pay dividends or lend to Holdings is either restricted or prohibited, except that Graphics may pay specified amounts to Holdings to fund the payment of Holdings' obligations pursuant to a tax sharing agreement (see note 4).
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of Merger dated as of March 12, 1993, as amended (the "Merger Agreement"), between Holdings and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition Corp. was merged with and into Holdings (the "Acquisition"). Acquisition Corp. was formed by The Morgan Stanley Leveraged Equity Fund II, L.P., certain institutional investors and certain members of management (the "Purchasing Group") for the purpose of acquiring a majority interest in Holdings. Acquisition Corp. acquired a substantial and controlling majority interest in Holdings in exchange for $40 million in cash. In the Acquisition, Holdings continued as the surviving corporation and the separate corporate existence of Acquisition Corp. was terminated.
In connection with the Acquisition, the existing consulting agreement with the managing general partner of Holdings' majority stockholder was terminated and the related liabilities of Holdings were canceled. The agreement required Holdings to make minimum annual payments of $1 million for management advisory services subject to limitations in Graphics' debt agreements. No amounts were paid during the periods presented in these condensed financial statements.
1. Basis of Presentation
The accompanying condensed financial statements (parent company only) include the accounts of Holdings and its investments in Graphics accounted for in accordance with the equity method, and do not present the financial statements of Holdings and its subsidiary on a consolidated basis. These parent company only financial statements should be read in conjunction with ACG's consolidated financial statements. The Acquisition was accounted for under the purchase method of accounting applying the provisions on Accounting Principles Boards Opinion No. 16 ("APB 16").
2. Guarantees
As set forth in ACG's consolidated financial statements, a substantial portion of Graphics' long-term obligations has been guaranteed by Holdings.
Holdings has guaranteed Graphics' indebtedness under the Bank Credit Agreement, which guarantee is secured by a pledge of all of Graphics' stock. Borrowings under the Bank Credit Agreement are secured by substantially all assets of Graphics. Holdings is restricted under its guarantee of the Bank Credit Agreement from, among other things, entering into mergers, acquisitions, incurring additional debt, or paying cash dividends.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ACG HOLDINGS, INC. Parent Company Only Notes to Condensed Financial Statements
On August 15, 1995, Graphics issued $185 million of Senior Subordinated Notes (the "Notes") bearing interest at 12 3/4% and maturing August 1, 2005. The Notes are guaranteed on a senior subordinated basis by Holdings and are subordinate to all existing and future senior indebtedness, as defined, of Graphics.
On May 8, 1998, ACG refinanced all outstanding indebtedness under the Old Bank Credit Agreement and the Old Term Loan Facility (see note 5 below for a discussion of the terms of this refinancing transaction).
3. Dividends from Subsidiaries and Investees
No cash dividends were paid to Holdings from any consolidated subsidiaries, unconsolidated subsidiaries or investees accounted for by the equity method during the periods reflected in these condensed financial statements.
4. Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective July 27, 1989. Under the terms of the agreement, Graphics (whose income is consolidated with that of Holdings for federal income tax purposes) is liable to Holdings for amounts representing federal income taxes calculated on a "stand-alone basis". Each year Graphics pays to Holdings the lesser of (i) Graphics' federal tax liability computed on a stand-alone basis and (ii) its allocable share of the federal tax liability of the consolidated group. Accordingly, Holdings is not currently reimbursed for the separate tax liability of Graphics to the extent Holdings' losses reduce consolidated tax liability. Reimbursement for the use of such Holdings' losses will occur when the losses may be used to offset Holdings' income computed on a stand-alone basis. Graphics has also agreed to reimburse Holdings in the event of any adjustment (including interest or penalties) to consolidated income tax returns based upon Graphics' obligations with respect thereto. Also, under the terms of the tax sharing agreement, Holdings has agreed to reimburse Graphics for refundable federal income taxes equal to an amount which would be refundable to Graphics had Graphics filed separate federal income tax returns for all years under the agreement. Graphics and Holdings have also agreed to treat foreign, state and local income and franchise taxes for which there is consolidated or combined reporting in a manner consistent with the treatment of federal income taxes as described above.
5. Refinancing Transaction
On May 8, 1998, ACG completed a refinancing transaction (the "1998 Refinancing") which included the following: (1) ACG entered into a $145 million credit facility with a syndicate of lenders (the "Bank Credit Agreement") which includes an $11.5 million participation by Morgan Stanley Senior Funding, Inc., a related party, providing for a $70 million revolving credit facility which is not subject to a borrowing base limitation (the "Revolving Credit Facility") maturing on March 31, 2004, a $25 million amortizing term loan facility maturing on March 31, 2004 (the "A Term Loan Facility") and a $50 million amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the repayment of all $57.0 million of indebtedness outstanding under ACG's previous credit agreement, as amended (the "Old Bank Credit Agreement") (plus accrued interest to the date of repayment); (3) the repayment of all $25.0 million of indebtedness outstanding under the $25 million term loan facility which included a $5 million participation by Morgan Stanley Senior Funding, Inc., a related party, which was to mature on March 31, 2001 (the "Old Term Loan Facility") (plus accrued interest to the date of repayment) and (4) the payment of fees and expenses associated with the 1998 Refinancing. In addition, ACG recorded an extraordinary loss related to early extinguishment of debt of $4.1 million, net of zero taxes, associated with the write-off of deferred financing costs related to refinanced indebtedness in the quarter ended June 30, 1998.
Interest under the Bank Credit Agreement is floating based upon existing market rates plus agreed upon margin levels. In addition, ACG is obligated to pay specific commitment and letter of credit fees. Such margin levels and fees reduce over the term of the agreement subject to the achievement of certain Leverage Ratio measures.
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.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ACG HOLDINGS, INC.
(a) The increase in the valuation allowance primarily relates to current year losses for which no tax benefit has been recorded.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on their behalf by the undersigned thereunto duly authorized.
ACG Holdings, Inc.
American Color Graphics, Inc.
Date
/s/ Stephen M. Dyott June 29, 1999 ----------------------------------- Stephen M. Dyott Chairman, President and Chief Executive Officer ACG Holdings, Inc. Chairman, President and Chief Executive Officer American Color Graphics, Inc. Director of ACG Holdings, Inc. and American Color Graphics, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Joseph M. Milano - --------------------------- Executive Vice President June 29, 1999 (Joseph M. Milano) Chief Financial Officer
/s/ Patrick W. Kellick - --------------------------- Senior Vice President June 29, 1999 (Patrick W. Kellick) Corporate Controller Assistant Secretary (Principal Accounting Officer)
/s/ Michael M. Janson - --------------------------- Director June 29, 1999 (Michael M. Janson)
/s/ Eric T. Fry - --------------------------- Director June 29, 1999 (Eric T. Fry)
ACG HOLDINGS, INC. Annual Report on Form 10-K Fiscal Year Ended March 31, 1999
Index to Exhibits
Exhibit No. Description - ---------- ------------ 3.1 Certificate of Incorporation of Graphics, as amended to date* 3.2 By-laws of Graphics, as amended to date* 3.3 Restated Certificate of Incorporation of Holdings, as amended to date 3.4 By-laws of Holdings, as amended to date* 4.1 Indenture (including the form of Note), dated as of August 15, 1995, among Graphics, Holdings and NationsBank of Georgia, National Association, as Trustee** 10.1 Credit Agreement, dated as of August 15, 1995 and Amended and Restated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties signatory thereto++++ 10.1(a) June 8, 1998, First Amendment to Amended and Restated Credit Agreement dated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties signatory thereto++++ 10.1(b) February 3, 1999, Second Amendment to Amended and Restated Credit Agreement dated as of May 8, 1998, among Holdings, Graphics, GE Capital Corporation as Documentation Agent, Morgan Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust Company as Administrative Agent and the parties Signatory thereto**** 10.2 Resignation letter, dated as of September 18, 1996, between Graphics and James T. Sullivan*** 10.3(a) Employment Agreement, dated as of April 8, 1993, between Graphics and Stephen M. Dyott* 10.3(b) Amendment to Employment Agreement, dated December 1, 1994, between Graphics and Stephen M. Dyott++ 10.3(c) Amendment to Employment Agreement, dated February 15, 1995, between Graphics and Stephen M. Dyott++ 10.3(d) Amendment to Employment Agreement, dated September 18, 1996, between Graphics and Stephen M. Dyott*** 10.4 Severance Letter, dated September 1, 1995, between Graphics and Larry R. Williams 10.5 Severance Letter, dated July 15, 1998, between Graphics and Joseph M. Milano 10.6 Severance Letter, dated July 15, 1998, between Graphics and Timothy M. Davis 10.7 Severance Letter, dated September 8, 1995, between Graphics and M. J. Anderson++++ 10.8 Amended and Restated Stockholders' Agreement, dated as of August 14, 1995, among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the additional parties named therein** 10.8(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated Stockholders' Agreement dated as of August 14, 1995 among Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., and the additional parties named herein++++ 10.9 Stock Option Plan of Holdings++ 10.10 Term Loan Agreement, dated as of June 30, 1997, among Holdings, Graphics, BT Commercial Corporation, as Agent, Bankers Trust Company, as Issuing Bank, and the parties signatory thereto++++ 10.11 Holdings Common Stock Option Plan++++ 10.12 Holdings Preferred Stock Option Plan++++ 12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges 21.1 List of Subsidiaries 27.0 Financial Data Schedule
- ----------- * 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.