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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 33-97090
ACG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1395968
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
AMERICAN COLOR GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
New York 16-1003976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Aggregate market value of the voting and non-voting Common Stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 134,812 shares outstanding of its Common Stock, $.01
Par Value, as of June 11, 1998 (all of which are privately owned and not
traded on a public market).
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page
Referenced
Form 10-K
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal proceedings........................................... 8
Item 4. Submission of matters to a vote of security holders......... 9
PART II
Item 5. Market for registrant's common equity and related stockholder
matters..................................................... 10
Item 6. Selected financial data..................................... 11
Item 7. Management's discussion and analysis of financial condition
and results of operations................................... 15
Item 8. Financial statements and supplementary data................. 28
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.................................... 60
PART III
Item 10. Directors and executive officers............................ 61
Item 11. Executive compensation...................................... 62
Item 12. Security ownership of certain beneficial owners and
management...................................................67
Item 13. Certain relationships and related transactions.............. 68
PART IV
Item 14. Exhibits, financial statement schedules and reports on
Form 8-K.................................................... 70
Signatures.................................................. 81
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (the "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Act of 1934.
Discussions containing such forward-looking statements may be found in Items 1,
3 and 7 hereof, as well as within this Report generally. In addition, when used
in this Report, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the forward-looking statements
as a result of many factors outside the control of ACG Holdings, Inc.
("Holdings") formerly Sullivan Communications, Inc. ("Communications"), together
with its wholly-owned subsidiary, American Color Graphics, Inc. ("Graphics")
formerly Sullivan Graphics, Inc., (collectively the "Company"), including
fluctuations in the cost of paper and other raw materials used by the Company,
changes in the advertising and printing markets, actions by the Company's
competitors particularly with respect to pricing, the financial condition of the
Company's customers, the financial condition and liquidity of the Company, the
general condition of the United States economy, demand for the Company's
products and services and the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as the
Company's current plans, estimates and beliefs. The Company does not
undertake and specifically declines any obligation to publicly release the
results of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 1. BUSINESS
General
The Company is a successor to a business that commenced operations in 1926, and
is one of the largest national diversified commercial printers in North America
with ten printing plants in eight states and Canada and fifteen prepress
facilities located throughout the United States. The Company operates primarily
in two business sectors of the commercial printing industry: printing (which
accounted for approximately 84% of total sales during the fiscal year ended
March 31, 1998 ("Fiscal Year 1998")) and digital imaging and prepress services
conducted through its American Color division (which accounted for approximately
16% of total sales in Fiscal Year 1998). The Company's printing business and
American Color division are both headquartered in Nashville, Tennessee.
Partnerships affiliated with Morgan Stanley Dean Witter & Co. currently own
61.4% of the outstanding common stock and 72.5% of the outstanding preferred
stock of Holdings.
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger dated March 12, 1993, as amended (the "Merger Agreement"),
between Communications and SGI Acquisition Corp. ("Acquisition Corp."),
Acquisition Corp. was merged with and into Communications (the "1993
Acquisition"). Acquisition Corp. was formed by The Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF II"), certain institutional
investors and certain members of management (the "Purchasing Group") for
the purpose of acquiring a majority interest in Communications.
Acquisition Corp. acquired a substantial and controlling majority interest
in Communications in exchange for $40 million in cash. In the 1993
Acquisition, Communications continued as the surviving corporation and the
separate corporate existence of Acquisition Corp. was terminated.
On August 15, 1995, the Company completed a merger transaction (the
"Shakopee Merger") with Shakopee Valley Printing, Inc. ("Shakopee").
Shakopee was formed to effect the purchase of certain assets and assumption
of certain liabilities of Shakopee Valley Printing, a division of Guy
Gannett Communications. On December 22, 1994, pursuant to an Agreement for
the Purchase of Assets between Guy Gannett Communications (the "Seller")
and Shakopee (the "Buyer"), the Seller agreed to sell (effective at the
close of business on December 22, 1994) certain assets and transfer certain
liabilities of Shakopee Valley Printing to the Buyer for a total purchase
price of approximately $42.6 million, primarily financed through the
issuance of 35,000 shares of common stock and bank borrowings. The 35,000
shares were purchased by Morgan Stanley Capital Partners III, L.P., Morgan
Stanley Capital Investors, L.P. and MSCP III 892 Investors, L.P.
(collectively, the "MSCP III Entities"), together with First Plaza Group
Trust and Leeway & Co. Each of the MSCP III Entities is affiliated with
Morgan Stanley Dean Witter & Co. In addition, the other stockholders of
Shakopee were also stockholders of the Company.
On March 11, 1996, Graphics sold its 51% interest in National Inserting
Systems, Inc. ("NIS"). The proceeds from the sale were used to repay
indebtedness under the Bank Credit Agreement (as defined below).
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio regional printer of newspapers, T.V. books and retail advertising
inserts and catalogs (the "Medina Facility") for cash and assumption of
certain liabilities of Gowe, Inc. (the "Medina Acquisition").
During March 1996, the Company completed the construction and start-up of a
plant in Hanover, Pennsylvania ("Flexi-Tech"). Flexi-Tech is dedicated to
the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In February of the fiscal year ended March 31, 1997 ("Fiscal Year 1997"),
the Company made a strategic decision to shut down the operations of its
wholly-owned subsidiary Sullivan Media Corporation ("SMC"). SMC's shut
down was accounted for as a discontinued operation, and accordingly, SMC's
operations are segregated in the Company's consolidated financial
statements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and note 5 of
the Company's consolidated financial statements.
Market data used throughout this report was obtained from industry
publications and internal Company estimates. While the Company believes
such information is reliable, the accuracy of such information has not been
independently verified and cannot be guaranteed.
Printing
The Company's printing business, which accounted for approximately 84%, 86%
and 85% of the Company's sales in Fiscal Year 1998, Fiscal Year 1997 and
the fiscal year ending March 31, 1996 ("Fiscal Year 1996"), respectively,
produces retail advertising inserts, comics (newspaper Sunday comics, comic
insert advertising and comic books), and other publications.
Retail Advertising Inserts (80% of printing sales in Fiscal Year 1998 and
Fiscal Year 1997 and 75% in Fiscal Year 1996). The Company believes that
it is one of the largest printers of retail advertising inserts in the
United States. Retail advertising inserts are preprinted advertisements,
generally in color, that display products sold by a particular retailer or
manufacturer. Advertising inserts are used extensively by many different
retailers, including discount, department, supermarket, home center, drug
and automotive stores. Inserts are an important and cost effective means
of advertising for these merchants. Advertising inserts are primarily
distributed through insertion in newspapers but are also distributed by
direct mail or in-store by retailers. They generally advertise for a
specific, limited sale period. As a result, advertising inserts are both
time sensitive and seasonal. The Company prints advertising inserts for
approximately 300 retailers.
Comics (14% of printing sales in Fiscal Year 1998 and Fiscal Year 1997 and
16% in Fiscal Year 1996, include newspaper Sunday comics, comic insert
advertising and comic books). The Company believes that it is one of the
largest printers of comics in the United States. The Company prints Sunday
comics for over 300 newspapers in the United States and Canada and prints a
significant share of the annual comic book requirements of Marvel
Entertainment Group, Inc. ("Marvel").
Other Publications (6% of printing sales in Fiscal Year 1998 and Fiscal
Year 1997 and 9% in Fiscal Year 1996). The Company prints local
newspapers, T.V. guide listings and other publications.
In January 1998, the Company approved a plan for its printing division
which was designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring Costs and Other Special Charges" and note 19 to the Company's
consolidated financial statements.
Printing Production
The Company's network of ten printing plants in the United States and
Canada is strategically positioned to service major metropolitan centers
and provide the Company with distribution efficiencies and shorter
turnaround times; two factors instrumental in continuing the Company's
success in servicing large national and regional accounts. There are three
printing processes used to produce advertising insert and newspaper
supplements: offset lithography (heatset and cold), rotogravure and
flexography. The Company principally uses heatset offset and flexographic
web printing equipment in its printing operations. The Company owns a
substantial majority of its printing equipment, which currently consists of
36 heatset offset presses, 5 coldset offset presses and 11 flexographic
presses. Most of the Company's advertising inserts and all of its other
publications and comic books are printed using the heatset offset process,
while some advertising inserts and substantially all of the Company's
newspaper Sunday comics and comic advertising inserts are printed using the
flexographic process.
In the offset process, images are distinguished chemically from non-image
areas of a metal plate and transferred from the plate to a rubber blanket
and then to the paper surface. The printed web goes through an oven which
dries the solvents from the ink, thereby setting the ink on the paper. In
the cold offset process, the ink solvents are absorbed into the paper.
Because heatset offset presses can print on a wide variety of papers and
produce sharper reproductions, the heatset offset process provides a more
colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes
flexible plates and rapid-drying, water-based (as opposed to solvent-based)
inks. The flexographic image area results from a raised surface on a
polymer plate which is transferred directly to the paper surface.
Flexography is used extensively in printing high quality consumer goods
packaging. The Company's flexographic printing generally provides vibrant
color reproduction at lower cost than heatset offset printing. The
strengths of flexography compared with the rotogravure and offset processes
are faster press set up times, brighter colors, reduced paper waste,
reduced energy use and maintenance costs, and environmental advantages due
to the use of water-based inks. Faster set up times make the process
suited to commercial customers with shorter runs and extensive regional
versioning.
In addition to advertising insert capacity, certain equipment parameters
are critical to competing in the advertising insert market, including cut-
off length, folding capabilities and in-line finishing. Cut-off length is
one of the determinants of the size of the printed page. Folding
capabilities for advertising inserts must include a wide variety of page
sizes, page counts and special paper folding effects. Finally, many
advertising inserts require gluing or stitching of the product, adding
cards, trimming and numbering. These production activities generally are
done in-line with the press to meet the expedited delivery schedules and
pricing required by many customers. The Company believes that its mix and
configuration of presses and press services allows for efficient tailoring
of printing services to customers' product needs.
Digital Imaging and Prepress Services
The Company's digital imaging and prepress services business is conducted
by its American Color division ("American Color") which accounted for
approximately 16%, 14% and 13% of the Company's Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 sales, respectively. The Company believes
American Color is one of the largest full-service providers of digital
imaging, prepress and color separation services in the United States and a
technological leader in its industry. American Color commenced operations
in 1975 and maintains 15 full service locations nationwide.
American Color assists its customers in the capture, manipulation,
transmission and distribution of images. The majority of its work leads to
the production of four-color separations in a format appropriate for use by
printers. In recent years, technological advances have made it possible to
replace largely manual and photography-based production methods with
computer-based, electronic means for producing four-color films faster and
at lower costs. American Color makes page changes, including typesetting,
and combines digital page layout information with electronically captured
and color-corrected four-color images. From these digital files, proofs,
final corrections and, finally, four-color films or digital output are
produced for each advertising or editorial page. The final four-color
films or digital output enable printers to prepare plates for each color
resulting in the appearance of full color in the printed page.
American Color's revenue from these traditional services is being
supplemented by new revenue sources from electronic prepress services such
as digital image storage, facilities management (operating digital imaging
and prepress service facilities at a customer location), computer-to-plate
services, creative services, consulting and training services and software
and data management. American Color has been a leader in implementing
these new technologies, enabling it to reduce unit costs and effectively
service the increasingly complex demands of its customers more quickly than
many of its competitors. American Color has also been one of the leaders
in the integration of electronic page make-up, microcomputer-based design
and layout, and digital cameras into prepress production.
The digital imaging and prepress services industry is highly fragmented,
primarily consisting of smaller local and regional companies, with only a
few national full-service digital imaging and prepress companies such as
American Color, none of which has a significant nationwide market share.
Many smaller digital imaging and prepress companies have left the industry
in recent years due to their inability to keep pace with technological
advances in the industry.
In April 1995, the Company implemented a plan for its American Color
division designed to improve productivity, increase customer service and
responsiveness, and provide increased growth in this business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring Costs and Other Special Charges" and note 19 to
the Company's consolidated financial statements.
Competitive Advantages and Strategy
Competitive Advantages. The Company believes that it has the following
competitive advantages in its printing and digital imaging and prepress
services businesses:
Modern Equipment. The Company believes that its web heatset
offset and flexographic web printing equipment is among the most advanced
in the industry and that the average age of its equipment is significantly
less than the majority of its regional competitors and is comparable to its
major national competitors. The Company is also committed to a
comprehensive, long-term maintenance program which enhances the reliability
and extends the life of its presses and other production equipment. It
also believes that its digital imaging and prepress equipment is
significantly more advanced than many of its smaller regional competitors,
many of whom have not incorporated digital prepress technologies to the
same extent as the Company, nor adopted an open systems environment which
allows greater flexibility and more efficient maintenance.
Strong Customer Base. The Company provides printing services to a
diverse base of customers, including approximately 300 retailers and over
300 newspapers in the United States and Canada. The customer base includes
a significant number of the major national retailers and larger newspaper
chains as well as numerous smaller regional retailers. The Company's
consistent focus on providing high quality printing products and strong
customer service at competitive prices has resulted in long-term
relationships with many of these customers. American Color's customer base
includes large and medium-sized customers in the retail, publishing and
catalog businesses, many of whom also have long-term relationships with the
Company. Although the digital imaging and prepress services business has
generally been on a spot bid basis in the past, the Company has been
successful in continuing to increase the proportion of its business under
long-term contracts.
Competitive Cost Structure. The Company has reduced the variable
and fixed costs of production at its printing facilities over the past
several years and believes it is well positioned to maintain its
competitive cost structure in the future due to economies of scale. The
Company has also reduced both labor and material costs (the principal
variable production costs) in its digital imaging and prepress services
business primarily through the adoption of new digital prepress production
methodologies.
Strong Management Team. Since the 1993 Acquisition, the Company
has strengthened its printing management group by hiring experienced
managers with a clear focus on growth and continued cost reduction,
resulting in an improved cost structure and a well-defined strategy for
future expansion. The Company also has strengthened its management group
in its digital imaging and prepress services business, filling a number of
senior, regional and plant management positions with individuals who the
Company believes will manage the digital imaging and prepress services
business for growth and profitability and will continue to upgrade its
capabilities.
National Presence. The Company's nine printing plants in the
United States and one plant in Canada provide the Company with distribution
efficiencies, strong customer service, flexibility and short turnaround
times, all of which are instrumental in the Company's continued success in
servicing its large national and regional retail accounts. The Company's
expanded sales and marketing groups provide greater customer coverage and
enable it to more successfully penetrate regional markets. The Company
believes that its 15 digital imaging and prepress facilities provide it
with contingency capabilities, increased capacity during peak periods,
access to top quality internal technical personnel throughout the country,
short turnaround time and other customer service advantages.
Strategy. The Company's objective is to increase shareholder value by
growing its revenues, increasing its market share and reducing costs. The
Company's strategy to achieve this objective is as follows:
Grow Unit Volume. Management believes that the Company's level of
national sales coverage, when coupled with its significant industry
experience and customer-focused sales force, will result in unit growth.
In an effort to stimulate unit volume growth, the Company has strengthened
its printing sales group. Unit volume growth is also expected to result
from continued capital expansion and selective printing acquisitions. In
addition, in its digital imaging and prepress services business, the
Company has expanded its sales force, strengthened training, more closely
focused its marketing efforts on new, larger customers and implemented a
revised incentive compensation program.
Continue to Improve Product Mix. The Company intends to increase
its share of the retail advertising insert market. In addition, the
Company expects to continue to adjust the mix of its customers and products
within the retail advertising insert market to those that are more
profitable and less seasonable and to maximize the use of the Company's
equipment. The Company is also continuing expansion of its printing
facilities' capabilities for in-plant prepress and postpress services. The
Company's digital imaging and prepress services business will continue to
focus on high value-added new business opportunities, particularly large-
scale projects that will best utilize the breadth of services and
technologies the Company has to offer. Additionally, the Company will
continue to pursue large facilities management opportunities as well as
national and large regional customers that require more sophisticated
levels of service and technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. The
Company intends to further reduce its production costs at its printing
facilities through its Total Quality Management Process, an ongoing cost
reduction and continuous quality improvement process. Additionally, the
Company plans to continue to maximize scale advantages in the purchasing,
technology and engineering areas. The Company also intends to continue to
gain variable cost efficiencies in its digital imaging and prepress
services business by using its technical resources to improve digital
prepress workflows at its various facilities. The Company also believes it
will be able to reduce its per unit technical, sales and management costs
as its sales volumes increase in this business.
Continue to Make Opportunistic Acquisitions. An integral part of
the Company's long-term growth strategy includes a plan to selectively
assess and acquire other printing and digital imaging and prepress services
companies that the Company believes will enhance its leadership position in
these industries.
Customers and Distribution
Customers. The Company sells its printing products and services to a large
number of customers, primarily retailers and newspapers, and all of the
products are produced in accordance with customer specifications. The
Company performs a portion of its printing work, primarily the printing of
Sunday comics and comic books, under long-term contracts with its
customers. The contracts vary in length and many of the contracts
automatically extend for one year unless there has been notice to the
contrary from either of the contracting parties within a certain number of
days before the end of any term. For the balance of its printing work, the
Company obtains varying time commitments from its customers ranging from
job to job to annual allocations. Printing prices are generally fixed
during such commitments; however, the Company's standard terms of trade
call for the pass-through of changes in the cost of raw materials,
primarily paper and ink.
American Color's customers consist of retailers, magazine publishers,
newspaper publishers, printers, catalog sales organizations, consumer
products companies, advertising agencies and direct mail advertisers. Its
customers typically have a need for high levels of technical expertise,
short turnaround times and responsive customer service. In addition to its
historical regional customer base, American Color is increasingly focused
on larger, national accounts that have a need for a broad range of fully
integrated services and communication capabilities requiring leading edge
technology. This trend results in an increasing amount of contractual
business related to facilities management arrangements with customers. The
Company's contracts typically extend from three to five years in length.
The printing and American Color divisions have historically had certain
common customers and their ability to cross-market is an increasingly
valuable tool as computer-to-plate, regional versioning, electronic digital
imaging, facilities management and speed to market become more important to
their customers. This enables the Company to provide more comprehensive
solutions to customers' digital imaging and prepress and printing needs
No single customer accounted for sales in excess of 10% of the Company's
consolidated sales in Fiscal Year 1998. The Company's top ten customers
accounted for approximately 34% of consolidated sales in Fiscal Year 1998.
Distribution. The Company distributes its printing products primarily by
truck to customer designated locations, primarily newspapers. Costs of
distribution are generally paid by the customers, and most shipping is by
common carrier. American Color generally distributes its products via
electronic transmission, overnight express, or other methods of personal
delivery or by courier.
Competition
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and the Company competes with numerous national,
regional and local printers. A trend of industry consolidation in recent
years can be attributed to (1) customer preferences for larger printers
with a greater range of services, (2) capital requirements and (3)
competitive pricing pressures.
The Company believes that competition in the printing business is based
primarily on quality and service at a competitive price. The advertising
insert business is a large, fragmented industry in which the Company
competes for national accounts with several large national printers,
several of whom are larger and better capitalized than the Company. In
addition, the Company also competes with numerous regional printers for the
printing of advertising inserts. Although the Company faces competition
principally from one other company (Big Flower Press Holdings, Inc.) in the
printing of Sunday newspaper comics in the United States, there are
numerous newspapers that print their own Sunday comics. The Company's
other publication business competes with many large national and regional
commercial printers.
American Color competes with numerous digital imaging and prepress service
firms on both a national and regional basis. The industry is highly
fragmented, primarily consisting of smaller local and regional companies,
with only a few national full-service digital imaging and prepress
companies such as American Color, none of which has a significant
nationwide market share. Many smaller digital imaging and prepress
companies have left the industry in recent years due to their inability to
keep pace with the technological advances required to service increasingly
complex customer demands. The Company believes that the digital imaging
and prepress services sector will continue to be subject to high levels of
ongoing technological change and the need for capital expenditures to keep
up with such change.
Raw Materials
The primary raw materials used in the Company's printing business are paper
and ink. The Company purchases substantially all of its ink and related
products under long-term ink supply contracts. Throughout the fiscal year
ended March 31, 1995 ("Fiscal Year 1995") and the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper declined. During Fiscal Year 1998,
paper prices remained relatively stable. Management expects that, as a
result of the Company's strong relationships with key suppliers, its
material costs will remain competitive within the industry. In accordance
with industry practice, the Company generally passes through changes in the
cost of paper to its customers. The primary inputs in prepress services
processes are film and proofing materials.
In both of the Company's business sectors, there is an adequate supply of
the necessary materials available from multiple vendors. The Company is
not dependent on any single supplier and has had no significant problems in
the past obtaining necessary materials.
Seasonality
Some of the Company's printing and digital imaging and prepress services
business is seasonal in nature, particularly those revenues derived from
advertising inserts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
Backlog
Because the Company's printing, digital imaging and prepress services
products are required to be delivered soon after final customer orders are
received, the Company does not experience any backlog of unfilled customer
orders.
Employees
As of May 31, 1998, the Company had a total of approximately 2,800
employees, of which approximately 200 employees are represented by a
collective bargaining agreement that will expire on December 31, 2001. The
Company considers its relations with its employees to be excellent.
Governmental and Environmental Regulations
The Company is subject to regulation under various federal, state and local
laws relating to employee safety and health, and to the generation,
storage, transportation, disposal and emission into the environment of
hazardous substances. The Company believes that it is in material
compliance with such laws and regulations. Although compliance with such
laws and regulations in the future is likely to entail additional capital
expenditures, the Company does not anticipate that such expenditures will
be material. See "Legal Proceedings - Environmental Matters."
ITEM 2. PROPERTIES
The Company operates in 25 locations in 16 states and Canada. The Company
owns seven printing plants in the United States and one in Canada and
leases two printing plants, one in California and one in Pennsylvania. The
American Color division of the Company has 15 production locations, all of
which are leased by American Color. The American Color division also
operates digital imaging and prepress facilities on the premises of several
of its customers ("facilities management"). In addition, the Company
maintains one small executive office and its Nashville headquarter
facility, both of which are leased. The Company believes that its plants
and facilities are adequately equipped and maintained for present and
planned operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in several legal actions arising
from its normal business activities. In the opinion of management, any
liability that may arise from such actions will not have a material adverse
effect on the financial condition or results of operations of the Company.
Environmental Matters
Graphics, together with over 300 other persons, has been designated by the
U.S. Environmental Protection Agency as a potentially responsible party (a
"PRP") under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA," also known as "Superfund") at one Superfund site.
Although liability under CERCLA may be imposed on a joint and several basis
and the Company's ultimate liability is not precisely determinable, the
PRPs have agreed that Graphics' share of removal costs is approximately
0.46% and therefore Graphics believes that its share of the anticipated
remediation costs at such site will not be material to its business or
financial condition. Based upon an analysis of Graphics' volumetric share
of waste contributed to the site and the agreement among the PRPs, the
Company has a reserve of approximately $0.1 million in connection with this
liability on its consolidated balance sheet at March 31, 1998. The Company
believes this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 16, 1998, a majority of the shareholders of Holdings approved a
recapitalization plan for Holdings (see note 14 to the Company's
consolidated financial statements) pursuant to Section 228 of the General
Corporation Law of the State of Delaware and the By-laws of Holdings. All
other shareholders were notified of the recapitalization plan.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for the common stock of either
Holdings or Graphics.
Holders
As of June 11, 1998, there were approximately 96 shareholders of
Holdings' common stock. Holdings is the sole shareholder of
Graphics' common stock.
Dividends
There have been no cash dividends declared on any class of common
equity for the two most recent fiscal years. See restrictions on
Holdings' ability to pay dividends and Graphics' ability to
transfer funds to Holdings in note 1 to the Company's consolidated
financial statements.
Recent Sales of Unregistered Securities
During the fourth quarter of Fiscal Year 1998, certain officers of
the Company exercised options to purchase Holdings' Common Stock
for $0.01/share. The sold securities were exempt from
registration on the basis that all such officers are "accredited
investors" within the meaning of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years
ended March 31, 1994, 1995, 1996, 1997 and 1998. The balance sheet data as
of March 31, 1994, 1995, 1996, 1997 and 1998 and the statement of
operations data for the fiscal years ended March 31, 1994, 1995, 1996, 1997
and 1998 are derived from the audited consolidated financial statements for
such periods and at such dates. The selected financial data below also
reflects the Company's discontinued wholly-owned subsidiary, SMC and its
coupon free standing insert ("FSI") operation previously conducted by its
discontinued wholly-owned subsidiary SMI. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operations" and note 5 of the Company's consolidated financial statements.
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements appearing elsewhere in this
annual report.
Selected Financial Data
ACG Holdings, Inc.
Fiscal Year Ended March 31,
----------------------------------------------------
1998 1997 1996 1995(a) 1994
----------------------------------------------------
Statement of Operations Data: (dollars in thousands)
Sales $ 533,335 524,551 529,523 433,198 414,673
Cost of Sales 461,407 459,880 465,110 370,267 369,520
------- ------- ------- ------- -------
Gross Profit 71,928 64,671 64,413 62,931 45,153
Selling, general and administrative expenses (b) 54,227 51,418 44,164 41,792 39,343
Restructuring costs and other special charges (c) 5,598 2,881 7,533 -- --
Gain from curtailment and establishment of defined benefit
pension plans, net (d) -- -- -- (3,311) --
------- ------- ------- ------- -------
Operating income 12,103 10,372 12,716 24,450 5,810
Interest expense, net 38,813 36,132 32,425 25,334 23,737
Other expense (income) 412 245 1,722 985 2,369
Income tax expense 2,106 2,591 4,874 2,552 2,380
------- ------- ------- ------- -------
Loss from continuing operations before extraordinary items (29,228) (28,596) (26,305) (4,421) (22,676)
------- ------- ------- ------- -------
Discontinued operations: (e)
Loss from operations, net of tax -- (1,557) (1,364) (912) (23,272)
Estimated (loss) on shut down and gain on settlement, net of tax (667) (1,550) 2,868 18,495 (38,412)
Loss on early extinguishment of debt (f) -- -- (4,526) -- --
------- ------- ------- ------- -------
Net (loss) income $ (29,895) (31,703) (29,327) 13,162 (84,360)
======= ======= ======= ======= =======
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 0 0 0 4,635 8,839
Working capital (deficit) 11,610 (8,598) 9,612 4,958 6,956
Total assets 329,958 333,975 351,181 328,368 305,521
Long-term debt and capitalized leases, including current installments (g) 319,657 312,309 297,617 258,201 250,439
Stockholders' deficit (106,085) (76,318) (44,396) (14,970) (45,485)
Other Data:
Net cash provided (used) by operating activities $ 18,625 24,313 (4,187) 30,510 (27,329)
Net cash used by investing activities (10,024) (10,997) (24,436) (17,580) (1,332)
Net cash (used) provided by financing activities (8,587) (13,312) 23,982 (17,527) 23,113
Capital expenditures (including lease obligations entered into) 23,713 37,767 28,022 20,415 15,722
EBITDA (h) $ 52,367 46,972 46,847 51,719 33,068
NOTES TO SELECTED FINANCIAL DATA
(a) On August 15, 1995, Shakopee was merged with and into Graphics (the
"Shakopee Merger"). The merger has been accounted for as a
combination of entities under common control (similar to a pooling-of-
interests), and accordingly, the consolidated financial statements
give retroactive effect to the Shakopee Merger and include the
combined operations of Holdings and Shakopee subsequent to December
22, 1994 (the date on which Shakopee became under common control with
the Company). Shakopee's financial results are not reflected in
periods prior to December 22, 1994 as these periods were prior to
common control ownership.
(b) Fiscal Year 1998 selling, general and administrative expenses include
(1) $1.5 million of non-recurring American Color charges associated
with the relocation of American Color's corporate office and various
severance related expenses, and (2) $0.6 million of non-cash charges
associated with an employee benefit program. Fiscal Year 1997
selling, general and administrative expense includes $2.5 million of
non-recurring employee termination expenses (including $1.9 million
related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial
statements).
(c) In January 1998, the Company approved a restructuring plan for its
printing division designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs.
The Company recognized $3.9 million of costs under such plan in Fiscal
Year 1998.
In April 1995, the Company implemented a restructuring plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness and provide increased
growth in the business. The Company recognized $0.9 million and $4.1
million of costs under such plan in Fiscal Year 1997 and Fiscal Year
1996, respectively.
In addition, the Company recorded $1.7 million, $1.9 million and $3.4
million of other special charges related to asset write-offs and
write-downs in its printing and American Color divisions in Fiscal
Year 1998, Fiscal Year 1997 and Fiscal Year 1996, respectively (see
note 19 to the Company's consolidated financial statements).
(d) In October 1994, the Company amended its defined benefit pension
plans, which resulted in the freezing of additional defined benefits
for future services under the plans effective January 1, 1995. The
Company recognized a curtailment gain of $3.7 million as a result of
freezing such benefits. Also in October 1994, the Board of Directors
approved a new Supplemental Executive Retirement Plan ("SERP"), which
is a defined benefit plan, for certain key executives. The Company
recognized a $0.4 million expense associated with the establishment of
the SERP.
(e) In February of Fiscal Year 1997, the Company made a strategic decision
to shut down the operation of its wholly-owned subsidiary SMC. SMC's
shut down has been accounted for as a discontinued operation, and
accordingly, SMC's operations are segregated in the Company's
consolidated financial statements. Sales, costs of sales and selling,
general and administrative expenses attributable to SMC for Fiscal
Years 1997, 1996 and 1995 have been reclassified to discontinued
operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and note
5 of the Company's consolidated financial statements.
On February 16, 1994, the Company assigned the coupon FSI contracts of
its subsidiary, Sullivan Marketing, Inc. ("SMI"), to News America
FSI, Inc. ("News America"). In June 1994, the Company recorded
income from the settlement of a lawsuit entitled Sullivan Marketing,
Inc. and Sullivan Graphics, Inc. v. Valassis Communications, Inc.,
News America FSI Inc. and David Brandon, (the "SMI Settlement") of
$18.5 million, net of taxes, and when coupled with settlement expenses
which had previously been accrued, the net cash proceeds resulting
from this settlement were approximately $16.7 million.
In Fiscal Year 1996, the Company recognized settlement of a complaint
naming SMI, News America and two packaged goods companies as
defendants (the "EPI lawsuit") and reversed certain accruals related
to the estimated loss on shut down of SMI. The resulting effect
reflected in the Fiscal Year 1996 consolidated statement of operations
was $2.9 million income in discontinued operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations" and note 5 of the Company's
consolidated financial statements.
(f) As part of the Shakopee Merger and the refinancing transactions (the
"Refinancing"), collectively (the "Transactions"), the Company
recorded an extraordinary loss related to early extinguishment of debt
of $4.5 million, net of zero taxes. This extraordinary loss primarily
consisted of the early redemption premium on Graphics' 15% Senior
Subordinated Notes due 2000 (the "15% Notes") and the write-off of
deferred financing costs related to refinanced indebtedness partially
offset by the write-off of a bond premium associated with the 15%
Notes.
(g) The balance of long-term debt outstanding at March 31, 1995 and 1994
includes an additional $9.7 million and $11.3 million, respectively,
relating to a purchase accounting adjustment to the 15% Notes
resulting from the 1993 Acquisition. The principal amount payable at
maturity of the 15% Notes remained at $100 million. The 15% Notes
were redeemed in connection with the Refinancing.
(h) EBITDA is included in the Selected Financial Data because management
believes that investors regard EBITDA as a key measure of a leveraged
company's performance and ability to meet its future debt service
requirements. EBITDA is defined as earnings before net interest
expense, income tax expense, depreciation, amortization, other special
charges related to asset write-offs and write-downs, other income
(expense), discontinued operations and extraordinary items. EBITDA is
not a measure of financial performance under generally accepted
accounting principles and should not be considered an alternative to
net income (or any other measure of performance under generally
accepted accounting principles) as a measure of performance or to cash
flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. Certain covenants in the
Indenture dated as of August 15, 1995 (the "Indenture") and the
Company's Credit Agreement with BT Commercial Corporation (the "Bank
Credit Agreement") are based on EBITDA, subject to certain adjustments.
EBITDA includes (1) $1.5 million of non-recurring charges associated
with the relocation of American Color's corporate office and various
severance related expenses, and (2) $0.6 million of non-cash charges
associated with an employee benefit program in Fiscal Year 1998.
EBITDA includes $3.9 million in restructuring costs related to its
printing division in Fiscal Year 1998 and $0.9 million and $4.1
million of restructuring costs related to its American Color division
in Fiscal Year 1997 and Fiscal Year 1996, respectively (see note 19 to
the Company's consolidated financial statements).
EBITDA includes non-recurring employee termination expenses of $2.5
million in Fiscal Year 1997 (including $1.9 million related to the
resignation of the Company's former Chief Executive Officer - see note
21 to the Company's consolidated financial statements).
EBITDA in Fiscal Year 1995 includes a $3.3 million net gain related to
a change in the Company's defined benefit pension plans (as discussed
in note (d) above).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On August 15, 1995, Shakopee was merged with and into Graphics (the
"Shakopee Merger"). The merger has been accounted for as a combination of
entities under common control (similar to a pooling-of-interests), and
accordingly, the consolidated financial statements give retroactive effect
to the Shakopee Merger and include the combined operations of Holdings and
Shakopee subsequent to December 22, 1994 (the date on which Shakopee became
under common control with the Company).
On March 11, 1996, the Company sold its 51% interest in NIS for
approximately $2.5 million in cash and a note for approximately $0.2
million. This transaction resulted in a net gain on disposal of
approximately $1.3 million, which is classified as Other, net in the
consolidated statement of operations. The proceeds of the sale were used
to repay indebtedness under the Bank Credit Agreement.
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a Medina,
Ohio based regional printer of newspapers, T.V. books and retail
advertising inserts and catalogs (the "Medina Facility") for cash and
assumption of certain liabilities of Gowe, Inc. (the "Medina
Acquisition"). The Medina Acquisition was accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"). The Medina Facility's results of operations are
included in the Company's consolidated financial statements subsequent to
March 11, 1996.
During March 1996, the Company completed the construction and start-up of
Flexi-Tech, a new plant in Hanover, Pennsylvania. Flexi-Tech is dedicated
to the production of commercial flexi books (a form of advertising inserts)
serving various segments of the retail advertising market and the
production of T.V. listing guides serving the newspaper market.
In Fiscal Year 1997, the Company began to present certain costs of its
American Color production facilities within cost of sales rather than as
selling, general and administrative expenses. This new presentation is
consistent with the Company's presentation of the printing sector's
financial information, and the Company believes that this is a more
accurate measure of the gross margin of the business. The financial
information for Fiscal Year 1996 has been reclassified to conform with this
presentation.
In February of Fiscal Year 1997, the Company made a strategic decision to
shut down the operations of its wholly-owned subsidiary SMC. SMC's shut
down has been accounted for as a discontinued operation, and accordingly,
SMC's operations are segregated in the Company's consolidated financial
statements. Sales, cost of sales and selling, general and administrative
expenses attributable to SMC for Fiscal Year 1996 have been reclassified to
discontinued operations.
Printing. In recent years, the Company has taken a number of steps which
have resulted in improved printing sector performance including the hiring
of several key managers in the manufacturing, purchasing, quality,
technical services, production planning and customer service departments
(see "EBITDA" below). Comprehensive quality improvement and cost reduction
programs have also been implemented for all the Company's printing
processes. As a result of these measures, the Company has been successful
in lowering its manufacturing costs within the printing sector, while
improving product quality.
Additionally, in order to grow sales and improve gross margins, the Company
increased the geographic and industry scope of its sales force and shifted
the mix of its business toward retail customers and away from the printing
of certain lower margin publications. The Shakopee Merger, Medina
Acquisition and Flexi-Tech operations (see "Business - Printing") are
consistent with the Company's overall strategy to continue to increase
profitability by growing its revenues, increasing its market share and
reducing costs.
Furthermore, management believes that continued strong demand for the
retail advertising insert product has resulted in less excess industry
capacity and therefore an improved supply/demand position within the
marketplace. This dynamic has resulted in a greater stabilization of
printing prices which in conjunction with the Company's cost reduction
programs has had favorable impact on printing gross profit levels.
Commercial Printing in the United States is highly competitive. The
significant capital required to keep pace with changing technology and
competitive pricing trends has led to a trend of industry consolidation in
recent years. In addition, customers' preference for larger printers, such
as the Company, with a wider variety of services, greater distribution
capabilities and more flexibility have also contributed to consolidation
within the industry. The industry is expected to remain competitive in the
near future and the Company's sales will continue to be subject to changes
in retailers' demands for printed products.
The cost of paper is a principal factor in the Company's overall pricing to
its customers. The level of paper costs also has a significant impact on
the Company's reported sales. Beginning in Fiscal Year 1994 and throughout
Fiscal Year 1995 and the majority of Fiscal Year 1996, the paper industry
experienced increased demand and high capacity utilization in various
grades of paper. This led to a global tightening of the paper supply, and
as a result, the printing industry experienced substantial increases in the
cost of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
the overall cost of paper declined. During Fiscal Year 1998, paper prices
remained relatively stable. In accordance with industry practice, the
Company generally passes through changes in the cost of paper to its
customers. Although the Company has been successful in passing through
paper price increases to its customers in the past, there can be no
assurances that the Company will be able to pass through future paper price
increases.
In January 1998, the Company approved a plan for its printing division
which was designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. The cost of this
plan was accounted for in accordance with the guidance set forth in
Emerging Issues Task Force Issue 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") (see
"Restructuring Costs and Other Special Charges" below).
American Color. The digital imaging and prepress services industry has
experienced significant technological advances as electronic digital
prepress systems have replaced the largely manual and photography-based
methods utilized in the past. This shift in technology (which improved
process efficiencies and decreased processing costs) produced increased
unit growth for American Color as the demand for color pages increased.
However, American Color's selling price levels per page have declined
because of greater efficiencies resulting from increased use of technology.
American Color's revenue from traditional services are now supplemented by
new revenue sources from electronic digital imaging and prepress services
such as digital image storage, facilities management, computer-to-plate
services, creative services, consulting and training services and software
and data-base management.
In April 1995, the Company implemented a plan for its American Color
division which was designed to improve productivity, increase customer
service and responsiveness, and provide increased growth in this business.
The cost of this plan was accounted for in accordance with the guidelines
set forth in EITF 94-3 (see "Restructuring Costs and Other Special Charges"
below).
The following table summarizes the Company's historical results of continuing
operations for Fiscal Year 1998, 1997 and 1996.
Fiscal Year Ended March 31,
-----------------------------------------------
1998 1997 1996
------------ ----------- -----------
(dollars in thousands)
Sales:
Printing $446,350 $449,924 $453,381
American Color 86,985 74,627 72,461
Other (a) -- -- 3,681
------- ------- -------
Total $533,335 $524,551 $529,523
======= ======= =======
Gross Profit:
Printing $51,278 $49,469 $49,015
American Color 20,628 15,133 13,687
Other (a) 22 69 1,711
------- ------- -------
Total $71,928 $64,671 $64,413
======= ======= =======
Gross Margin:
Printing 11.5% 11.0% 10.8%
American Color 23.7% 20.3% 18.9%
Total 13.5% 12.3% 12.2%
Operating Income (Loss):
Printing (b)(c) $22,612 $25,858 $28,239
American Color (b) (c) 2,509 (1,576) (3,975)
Other (a) (d) (13,018) (e) (13,910) (e) (11,548)
------- ------- -------
Total $12,103 $10,372 $12,716
======= ======= =======
(a) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996, see note 4 to the Company's consolidated financial
statements).
(b) Printing operating income includes the impact of $1.7 million, $0.4
million and $2 million in Fiscal Year 1998, Fiscal Year 1997 and
Fiscal Year 1996, respectively, of other special charges related to
asset write-offs and write-downs. American Color's operating loss
includes the impact of $1.5 million and $1.4 million in Fiscal Year
1997 and Fiscal Year 1996, respectively, of other special charges
related to asset write-offs and write-downs (see note 19 to the
Company's consolidated financial statements).
(c) Printing operating income includes the impact of $3.9 million of
restructuring costs in Fiscal Year 1998. American Color's operating
income (loss) includes the impact of restructuring costs of $0.9
million and $4.1 million in Fiscal Year 1997 and Fiscal Year 1996,
respectively (see note 19 to the Company's consolidated financial
statements) and $1.5 million of non-recurring charges in Fiscal Year
1998 associated with the relocation of its corporate office and
various severance related expenses.
(d) Also includes corporate general and administrative expenses, and
amortization expense.
(e) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer-see note 21 to the Company's consolidated financial statements).
Historical Results of Operations
Fiscal Year 1998 vs. Fiscal Year 1997
The Company's sales increased 1.7% to $533.3 million in Fiscal Year 1998
from $524.6 million in Fiscal Year 1997. This increase includes an
increase in American Color sales of $12.4 million, or 16.6%, offset in part
by a decrease in printing sales of $3.5 million, or 0.8%. The Company's
gross profit increased to $71.9 million or 13.5% of sales in Fiscal Year
1998 from $64.7 million or 12.3% of sales in Fiscal Year 1997. The
Company's operating income increased to $12.1 million or 2.3% of sales in
Fiscal Year 1998 from $10.4 million or 2% of sales in Fiscal Year 1997.
See the discussion of these changes by sector below.
Printing
Sales. Printing sales decreased $3.5 million to $446.4 million in Fiscal
Year 1998 from $449.9 million in Fiscal Year 1997. This decrease is
primarily the result of an increase in sales to customers that supply their
own paper offset in part by an increase in production volume of
approximately 2.5%.
Gross Profit. Printing gross profit increased $1.8 million to $51.3
million in Fiscal Year 1998 from $49.5 million in Fiscal Year 1997.
Printing gross margin increased to 11.5% in Fiscal Year 1998 from 11.0% in
Fiscal Year 1997. The increase in gross profit includes reduced
manufacturing costs, improved mix and pricing, along with an increase in
production volume. These gains were partially offset by an increase in
depreciation and amortization expense. The increase in gross margin
includes the above mentioned factors and the impact of an increase in sales
to customers that supply their own paper.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses remained relatively unchanged at $23.1 million,
or 5.2% of printing sales, in Fiscal Year 1998 compared to $23.1 million,
or 5.1% of printing sales, in Fiscal Year 1997.
Operating Income. As a result of the above factors and the incurrence of
both restructuring costs associated with the printing restructuring plan of
$3.9 million in Fiscal Year 1998 and other special charges related to asset
write-offs and write-downs of $1.7 million and $0.4 million in Fiscal Year
1998 and 1997, respectively (see "Restructuring Costs and Other Special
Charges" below), operating income from the printing business decreased to
$22.6 million in Fiscal Year 1998 from $25.9 million in Fiscal Year 1997.
American Color
Sales. American Color's sales increased $12.4 million, or 16.6%, to $87.0
million in Fiscal Year 1998 from $74.6 million in Fiscal Year 1997. The
increase in Fiscal Year 1998 was primarily the result of higher digital
imaging and prepress production volume due to American Color's
implementation of various digital prepress technologies, including
facilities management, packaging prepress, software and image management
services and increases in digital visual effects work.
Gross Profit. American Color's gross profit increased $5.5 million to
$20.6 million in Fiscal Year 1998 from $15.1 million in Fiscal Year 1997.
American Color's gross margin increased to 23.7% in Fiscal Year 1998 from
20.3% in Fiscal Year 1997. These improvements resulted from increased
volume (primarily from increased facilities management sales) and material
and payroll cost savings offset in part by costs associated with new
operations servicing the packaging industry.
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased to $18.1 million, or 20.8% of
American Color's sales in Fiscal Year 1998 from $14.3 million, or 19.2% of
American Color's sales in Fiscal Year 1997. This increase includes
relocation costs related to the move of American Color's corporate office
from Phoenix to Nashville and various severance related expenses of $1.5
million in Fiscal Year 1998. In addition, the increase includes increased
sales and marketing expenses, including the costs of the new packaging
sales group.
Operating Income (Loss). As a result of the above factors and the
incurrence of both restructuring costs associated with the American Color
restructuring plan of $0.9 million in Fiscal Year 1997 and other special
charges related to asset write-offs and write-downs of $1.5 million in
Fiscal Year 1997 (see "Restructuring Costs and Other Special Charges"
below), operating income (loss) at American Color increased to income of
$2.5 million in Fiscal Year 1998 from a loss of $1.6 million in Fiscal Year
1997.
Fiscal Year 1997 vs. Fiscal Year 1996
The Company's sales decreased 0.9% to $524.6 million in Fiscal Year 1997
from $529.5 million in Fiscal Year 1996. This decrease includes a decrease
in printing sales of $3.5 million, or 0.8%, an increase in American Color
sales of $2.2 million, or 3% and a $3.7 million decrease in other sales.
The Company's gross profit increased to $64.7 million or 12.3% of sales in
Fiscal Year 1997 from $64.4 million or 12.2% of sales in Fiscal Year 1996.
The Company's operating income decreased to $10.4 million or 2% of sales in
Fiscal Year 1997 from $12.7 million or 2.4% of sales in Fiscal Year 1996.
See the discussion of these changes by sector below.
Printing
Sales. Printing sales decreased to $449.9 million in Fiscal Year 1997 from
$453.4 million in Fiscal Year 1996. This decrease includes a decrease in
paper prices and the effect of an increase in customer supplied paper.
These decreases were partially offset by $46.2 million of incremental sales
from the Medina Facility and Flexi-Tech and an increase in production
volume of approximately 3% (excluding the Medina Facility and Flexi-Tech).
Gross Profit. Printing gross profit increased $0.5 million, or 0.9%, to
$49.5 million in Fiscal Year 1997 from $49 million in Fiscal Year 1996.
Printing gross margin increased to 11% in Fiscal Year 1997 from 10.8% in
Fiscal Year 1996. The increase in gross profit primarily reflects
incremental gross profit from the Medina Facility and an increase in
production volume. In addition, the gross profit improvement includes
reduced variable production and certain other manufacturing costs due to
continued cost containment programs at the printing plants. These gains
were partially offset by an increase in depreciation expense, a reduction
in the price of scrap paper and incremental costs related to the start-up
of Flexi-Tech. The increase in gross margin as a percentage of sales is
due primarily to the impact of the above described items and the impact of
lower paper prices on sales in Fiscal Year 1997.
Selling, General and Administrative Expenses. Printing selling, general
and administrative expenses increased 23.2% to $23.1 million, or 5.1% of
printing sales, in Fiscal Year 1997 from $18.8 million, or 4.1% of printing
sales, in Fiscal Year 1996. The increase in Fiscal Year 1997 was primarily
the result of increased sales and marketing expenses and incremental
selling, general and administrative costs at the Medina Facility and Flexi-
Tech.
Operating Income. As a result of the above factors and the incurrence of
other special charges related to asset write-offs and write-downs of $0.4
million and $2 million in Fiscal Year 1997 and 1996, respectively (see
"Restructuring Costs and Other Special Charges" below), operating income
from the printing business decreased to $25.9 million in Fiscal Year 1997
from $28.2 million in Fiscal Year 1996.
American Color
Sales. American Color's sales increased 3% to $74.6 million in Fiscal Year
1997 from $72.5 million in Fiscal Year 1996. The increase in Fiscal Year
1997 was primarily the result of higher digital imaging and prepress
production volume due to American Color's implementation of various digital
prepress technologies, including facilities management and software and
image management services and increases in digital visual effects work
partially offset by lower equipment sales.
Gross Profit. American Color's gross profit increased $1.4 million to
$15.1 million in Fiscal Year 1997 from $13.7 million in Fiscal Year 1996.
American Color's gross margin was 20.3% in Fiscal Year 1997, up from 18.9%
in Fiscal Year 1996. These increases were primarily the result of
increased volume and material cost savings offset in part by increased
facilities management costs.
Selling, General and Administrative Expenses. American Color's selling,
general and administrative expenses increased 18% to $14.3 million or 19.2%
of American Color sales in Fiscal Year 1997 from $12.1 million or 16.7% of
American Color sales in Fiscal Year 1996, primarily as a result of the
addition of sales and marketing and administrative support personnel and
related expenses, including expenses related to its digital visual effects
group.
Operating Loss. As a result of the above factors and the incurrence of
both restructuring costs associated with the American Color restructuring
plan of $0.9 million in Fiscal Year 1997 and $4.1 million in Fiscal Year
1996 and other special charges related to asset write-offs and write-downs
of $1.5 million and $1.4 million in Fiscal Year 1997 and 1996, respectively
(see "Restructuring Costs and Other Special Charges" below), operating loss
at American Color decreased to $1.6 million in Fiscal Year 1997 from $4
million in Fiscal Year 1996.
Other Operations (Fiscal Year 1998 vs. Fiscal Year 1997 and Fiscal Year
1997 vs. Fiscal Year 1996)
Other operations primarily include corporate general and administrative
expenses, other expenses and amortization expense. Fiscal Year 1996 also
included revenues and expenses associated with the Company's 51% owned
subsidiary, NIS (sold on March 11, 1996). Amortization expenses for other
operations, including goodwill amortization (see below), were $8.6 million,
$8.4 million and $8.7 million in Fiscal Year 1998, 1997 and 1996,
respectively.
Operating losses from other operations decreased $0.9 million to a loss of
$13.0 million in Fiscal Year 1998 from a loss of $13.9 million in Fiscal
Year 1997. This decrease includes non-recurring employee termination
expenses of $2.5 million in Fiscal Year 1997 (including $1.9 million
related to the resignation of the Company's former Chief Executive Officer
- - see note 21 to the Company's consolidated financial statements) offset in
part by $0.6 million of non-cash expenses associated with an employee
benefit program in Fiscal Year 1998, a $0.2 million increase in
amortization expenses and increases in certain corporate general and
administrative expenses during Fiscal Year 1998.
Operating losses from other operations increased $2.4 million to a loss of
$13.9 million in Fiscal Year 1997 from a loss of $11.5 million in Fiscal
Year 1996. This increase primarily reflects non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including $1.9
million related to the resignation of the Company's former Chief Executive
Officer - see note 21 to the Company's consolidated financial statements).
Goodwill Amortization
Amortization expense associated with goodwill was $8.5 million, $8.3
million and $8.6 million for Fiscal Year 1998, 1997 and 1996, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs:
Printing In January 1998, the Company approved a plan for its printing
division which was designed to improve responsiveness to customer
requirements, increase asset utilization and reduce overhead costs. The
cost of this plan is being accounted for in accordance with the guidance
set forth in EITF 94-3. The pretax costs of $3.9 million which were
incurred as a direct result of this plan (excluding other special charges
related to asset write-offs and write-downs - see below) includes $3.3
million of employee termination costs and $0.6 million of relocation and
other transition expenses. This restructuring charge was recorded in the
quarter ended March 31, 1998. The majority of these costs will be paid or
settled before March 31, 1999.
American Color In April 1995, the Company implemented a plan for its
American Color division which was designed to improve productivity,
increase customer service and responsiveness, and provide increased growth
in the digital imaging and prepress services business. The cost of this
plan was accounted for in accordance with the guidance set forth in EITF
94-3. The pretax costs of $5 million which were incurred as a part of this
plan (excluding other special charges related to asset write-offs and write
downs - see below) represent employee termination, goodwill write-down and
other related costs that were incurred as a direct result of the plan.
Approximately $0.9 million of restructuring costs primarily related to
relocation expenses were recognized in Fiscal Year 1997. In Fiscal Year
1996 the Company recognized $4.1 million of such restructuring charges,
which included $0.9 million of goodwill write-down related to certain
facilities that were either shut down or relocated in conjunction with the
American Color restructuring and $3.2 million primarily for severance and
other personnel related costs.
Other Special Charges:
During the quarter ended March 31, 1998, the Company recorded special
charges totaling $1.7 million to adjust the carrying values of idle,
disposed and under-performing assets of the Company's printing sector to
estimated fair values. The provision was based on a review of Company
long-lived assets in accordance with Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("FASB 121"). Fair value was
based on the Company's estimate of held and used and idle assets based on
current market conditions using the best information available.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded special
charges totaling $1.9 million and $3.4 million, respectively, for impaired
long-lived assets and to adjust the carrying values of idle, disposed and
under performing assets to estimated fair values. The provisions were
based on a review of long-lived assets in connection with the adoption of
FASB 121. Of the Fiscal Year 1997 total of long-lived assets that were
adjusted based on being idle, disposed of or under performing,
approximately $0.4 million and $1.5 million related to the printing and
American Color divisions, respectively. Fair value was based on the
Company's estimate of held and used and idle assets based on current market
conditions using the best information available. Approximately $2 million
of the Fiscal Year 1996 total related to the printing sectors long-lived
assets that were adjusted based on being idle, disposed of or under
performing. The remaining $1.4 million of the Fiscal Year 1996 total
related to the American Color division. The estimated undiscounted future
cash flows attributable to certain American Color division identifiable
long-lived assets held and used was less than their carrying value
principally as a result of high levels of ongoing technological change.
The methodology used to assess the recoverability of the American Color
division long-lived assets involved projecting aggregate cash flows. Based
on this evaluation, the Company determined in Fiscal Year 1996 that long-
lived assets with a carrying amount of $2.2 million were impaired and such
assets were then written down by $1.4 million to their fair value. Fair
value was based on Company estimates and appraisals.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense increased 7.3% to $39.0 million in Fiscal Year 1998 from
$36.3 million in Fiscal Year 1997. This increase includes the impact of
increased obligations under capital leases and incremental costs related to
the $25 million term loan facility entered into on June 30, 1997 (the "Term
Loan Facility") (see note 9 to the Company's consolidated financial
statements).
Interest expense increased 11% to $36.3 million in Fiscal Year 1997 from
$32.7 million in Fiscal Year 1996. This increase includes the impact of
increased average indebtedness levels including indebtedness related to the
Transactions and obligations under capital leases. The increased
indebtedness includes the additional indebtedness related to the Shakopee
Merger and indebtedness incurred to fund the fees and expenses associated
with the Refinancing (see notes 2 and 9 to the Company's consolidated
financial statements).
Nonrecurring Charges Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a terminated
merger in Fiscal Year 1996.
Other Expense (Income) and Taxes
Other expenses net, increased to $0.4 million in Fiscal Year 1998 from $0.2
million in Fiscal Year 1997, which was relatively unchanged from Fiscal
Year 1996.
Income tax expense decreased to $2.1 million in Fiscal Year 1998 from $2.6
million in Fiscal Year 1997. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions and changes in the
deferred tax valuation allowance. During Fiscal Year 1998, the Company
increased its valuation allowance by $7.1 million to $37.2 million.
Income tax expense decreased to $2.6 million in Fiscal Year 1997 from $4.9
million in Fiscal Year 1996. This change is primarily due to smaller
amounts of taxable income in foreign jurisdictions, the Shakopee Merger and
the sale of NIS, partially offset by changes in the deferred tax valuation
allowance. During Fiscal Year 1997, the Company increased its valuation
allowance by $8.9 million to $30.1 million.
Discontinued Operations
SMC
The Company's Fiscal Year 1998 and Fiscal Year 1997 net loss includes the
estimated net loss on shut down of approximately $0.4 million and $1.5
million, respectively. See note 5 to the Company's consolidated financial
statements. The Company's net loss in Fiscal Year 1997 and Fiscal Year
1996 includes the loss from operations of its discontinued wholly-owned
subsidiary SMC of approximately $1.6 million and $1.4 million,
respectively.
SMI
In Fiscal Year 1998, the Company recorded an additional $0.3 million
estimated loss on shut down. In Fiscal Year 1996, the Company recognized
the settlement of the EPI lawsuit and reversed certain accruals related to
the estimated loss on shut down of SMI. The resulting effect reflected in
the Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations.
Loss on Early Extinguishment of Debt, Net of Tax
As part of the Shakopee Merger and the Refinancing in Fiscal Year 1996 (see
notes 2 and 9 to the Company's consolidated financial statements), the
Company recorded an extraordinary loss related to early extinguishment of
debt of $4.5 million, net of zero taxes. This extraordinary loss primarily
consisted of the early redemption premium on the 15% Notes and the write-
off of deferred financing costs related to refinanced indebtedness
partially offset by the write-off of a bond premium associated with the 15%
Notes.
Net Loss
As a result of the factors discussed above, the Company's net loss
decreased to a loss of $29.9 million in Fiscal Year 1998 from a loss of
$31.7 million in Fiscal Year 1997. As discussed above, Fiscal Year 1998
includes $3.9 million of restructuring costs and $1.7 million of other
special charges related to asset write-offs and write-downs associated with
the Company's printing division. In addition, Fiscal Year 1998 includes
$1.5 million of non-recurring charges related to the relocation of American
Color's corporate office and various severance related expenses, non-cash
charges of $0.6 million associated with an employee benefit program and an
approximate $0.7 million loss from discontinued operations related to SMC
and SMI. The Company's net loss increased to a loss of $31.7 million in
Fiscal Year 1997 from a loss of $29.3 million in Fiscal Year 1996. Fiscal
Year 1997 includes $0.9 million of expense related to the American Color
restructuring, $1.9 million of other special charges related to asset
write-offs and write-downs, $2.5 million of non-recurring employee
termination expenses (including $1.9 million related to the resignation of
the Company's former Chief Executive Officer - see note 21 to the Company's
consolidated financial statements) and an approximate $3.1 million loss
from discontinued operations related to SMC. The Company's net loss in
Fiscal Year 1996 includes $4.1 million of expense related to the American
Color restructuring, $3.4 million of other special charges related to asset
write-offs and write-downs, a $1.5 million non-recurring expense associated
with a terminated merger, a $4.5 million extraordinary loss on early
extinguishment of debt and approximately $2.9 million of income and a $1.4
million loss from discontinued operations related to SMI and SMC,
respectively.
Liquidity and Capital Resources
On May 8, 1998, the Company refinanced all of its existing bank
indebtedness (see notes 9 and 23 to the Company's consolidated financial
statements). The primary objectives of the refinancing were to gain
greater financial and operating flexibility, reduce the Company's overall
cost of capital and provide greater opportunity for internal growth and
growth through acquisitions.
The 1998 refinancing transaction included the following (1) the Company
entered into a $145 million credit facility with Bankers Trust Company,
Morgan Stanley Senior Funding, Inc., General Electric Capital Corporation,
and a syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not subject
to a borrowing base limitation (the "New Revolving Credit Facility")
maturing on March 31, 2004, a $25 million amortizing term loan facility
maturing on March 31, 2004 (the "A Term Loan Facility") and a $50 million
amortizing term loan facility maturing on March 31, 2005 (the "B Term Loan
Facility"); (2) the repayment of all $57.0 million of indebtedness
outstanding under the existing Bank Credit Agreement (plus $0.4 million of
accrued interest to the date of repayment); (3) the repayment of all $25.0
million of indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment) and (4)
the payment of approximately $2.2 million in fees and expenses associated
with the refinancing transaction.
The New Revolving Credit Facility provides for a maximum of $70 million
borrowing availability and includes a $40 million letter of credit sub-
limit. As of May 31, 1998, the Company had total borrowings and letters of
credit outstanding under the New Revolving Credit Facility of approximately
$33.3 million, and therefore, additional borrowing availability of
approximately $36.7 million.
At May 31, 1998, the $25 million of the A Term Loan Facility and $50
million of the B Term Loan Facility remained outstanding. Scheduled A Term
Loan Facility and B Term Loan Facility payments due over the remainder of
fiscal year ending March 31, 1999 ("Fiscal Year 1999") are $0 and $0.5
million, respectively. In addition, scheduled repayments of capital lease
obligations and other senior indebtedness during Fiscal Year 1999 are
approximately $7 million and $2.3 million, respectively.
In Fiscal Year 1998, cash flow from operations and proceeds from the Term
Loan Facility (see the consolidated statements of cash flows) were used to
reduce borrowings under the Revolving Credit Facility of $11.5 million and
to pay $19.8 million in scheduled principal payments on indebtedness
(including capital lease obligations). Additionally, these cash sources
were used to fund the Company's Fiscal Year 1998 cash capital expenditures
of $10.8 million and meet additional investing and financing needs of $1.5
million. The Company plans to continue its program of upgrading its
printing and prepress equipment and currently anticipates that cash capital
expenditures will approximate $8 million and equipment acquired under
capital leases will approximate $7 million during Fiscal Year 1999. The
Company had zero cash on hand at March 31, 1998 due to a requirement under
the Bank Credit Agreement that the Company's daily available funds be used
to reduce borrowings under the Revolving Credit Facility.
At March 31, 1998, the Company had total indebtedness outstanding of $319.7
million, including capital lease obligations. Of the total debt
outstanding at March 31, 1998, $65.2 million was outstanding under the Bank
Credit Agreement at a weighted average interest rate of 8.48% and $25
million was outstanding under the Term Loan Facility at a weighted average
interest rate of 10.63%. Indebtedness under the Amended and Restated
Credit Agreement (effective May 8, 1998) had interest at floating rates.
At March 31, 1998, the Company had indebtedness other than obligations
under the Bank Credit Agreement and Term Loan Facility of $229.5 million
(including $185 million of the Notes). The Company was in compliance with
all financial covenants set forth in the Bank Credit Agreement, as amended,
at March 31, 1998. The Company is currently in compliance with all
financial covenants set forth in the Amended and Restated Credit Agreement.
See notes 9 and 23 to the Company's consolidated financial statements.
A significant portion of Graphics long-term obligations, including
indebtedness under the Amended and Restated Credit Agreement, has been
fully and unconditionally guaranteed by Holdings. Holdings is subject to
certain restrictions under its guarantee of indebtedness under the Amended
and Restated Credit Agreement, including among other things, restrictions
on merges, acquisitions, incurrence of additional debt and payment of cash
dividends. See Notes 1 and 23 to the Company's consolidated financial
statements.
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------------
1998 1997 1996
-------- -------- --------
(dollars in thousands)
EBITDA:
Printing (a) $ 46,838 $ 46,755 $ 46,597
American Color (a) 9,927 5,770 2,907
Other (b) (c) (4,398) (d) (5,553) (d) (2,657)
--------- --------- ---------
Total $ 52,367 $ 46,972 $ 46,847
========= ========= =========
EBITDA Margin:
Printing 10.5% 10.4% 10.3%
American Color 11.4% 7.7% 4.0%
Total 9.8% 9.0% 8.8%
(a) Printing EBITDA includes the impact of $3.9 million of restructuring
costs in Fiscal Year 1998. American Color EBITDA for Fiscal Year 1997
and 1996 includes the impact of restructuring costs of $0.9 million
and $4.1 million, respectively (see note 19 to the Company's
consolidated financial statements and discussion above) and $1.5
million of non-recurring charges in Fiscal Year 1998 associated with
the relocation of its corporate office and various severance related
expenses.
(b) Other operations in Fiscal Year 1996 include revenues and expenses
associated with the Company's 51% owned subsidiary, NIS (sold on March
11, 1996; see note 4 to the Company's consolidated financial
statements).
(c) Also includes corporate general and administrative expenses.
(d) Also reflects non-cash charges associated with an employee benefit
program of $0.6 million in Fiscal Year 1998 and non-recurring employee
termination expenses of $2.5 million in Fiscal Year 1997 (including
$1.9 million related to the resignation of the Company's former Chief
Executive Officer - see note 21 to the Company's consolidated
financial statements).
EBITDA is presented and discussed because management believes that
investors regard EBITDA as a key measure of a leveraged company's
performance and ability to meet its future debt service requirements.
"EBITDA" is defined as earnings before net interest expense, income tax
expense (benefit), depreciation, amortization, other special charges
related to asset write-offs and write-downs, other income (expense),
discontinued operations and extraordinary items. "EBITDA Margin" is defined
as EBITDA as a percentage of net sales. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income (or any other measure
of performance under generally accepted accounting principles) as a measure
of performance or to cash flows from operating, investing or financing
activities as an indicator of cash flows or as a measure of liquidity.
Certain covenants in the Indenture, the Bank Credit Agreement and the
Amended and Restated Credit Agreement are based on EBITDA, subject to
certain adjustments.
Printing. As a result of the reasons previously described under
"--Printing," (excluding changes in depreciation and amortization expense
and other special charges related to asset write-offs and write-downs),
printing EBITDA was $46.8 million in both Fiscal Year 1998 and Fiscal Year
1997 and printing EBITDA increased to $46.8 million in Fiscal Year 1997
from $46.6 million in Fiscal Year 1996, representing an increase of $0.2
million. Printing EBITDA Margin increased to 10.5% in Fiscal Year 1998
from 10.4% in Fiscal Year 1997 and printing EBITDA Margin increased to
10.4% in Fiscal Year 1997 from 10.3% in Fiscal Year 1996. Included in the
Fiscal Year 1998 EBITDA and EBITDA Margin is $3.9 million of restructuring
costs related to the printing restructuring plan (see discussion above).
American Color. As a result of the reasons previously described
under "--American Color," (excluding changes in depreciation and
amortization expense and other special charges related to asset write-offs
and write-downs), American Color EBITDA increased to $9.9 million in Fiscal
Year 1998 from $5.8 million in Fiscal Year 1997, representing an increase
of $4.1 million. EBITDA Margin increased to 11.4% in Fiscal Year 1998 from
7.7% in Fiscal Year 1997. American Color EBITDA increased to $5.8 million
in Fiscal Year 1997 from $2.9 million in Fiscal Year 1996, representing an
increase of $2.9 million. EBITDA Margin increased to 7.7% in Fiscal Year
1997 from 4% in Fiscal Year 1996. American Color EBITDA and EBITDA Margin
in Fiscal Year 1998 includes $1.5 million of non-recurring charges
associated with the relocation of its corporate office and various
severance related expenses. Included in the Fiscal Year 1997 and Fiscal
Year 1996 EBITDA and EBITDA Margin is the impact of restructuring costs of
$0.9 million and $4.1 million, respectively (see discussion above).
Other Operations. As a result of the reasons previously described
under "--Other Operations," (excluding changes in depreciation and
amortization expense), other operations negative EBITDA decreased to
negative EBITDA of $4.4 million in Fiscal Year 1998 from negative EBITDA of
$5.6 million in Fiscal Year 1997. EBITDA from other operations increased
to negative EBITDA of $5.6 million in Fiscal Year 1997 from negative EBITDA
of $2.7 million in Fiscal Year 1996. Negative EBITDA for Fiscal Year 1998
includes the impact of non-cash charges of $0.6 million associated with an
employee benefit program. Negative EBITDA for Fiscal Year 1997 includes
the impact of non-recurring employee termination expenses of $2.5 million
(including $1.9 million related to the resignation of the Company's former
Chief Executive Officer - see note 21 to the Company's consolidated
financial statements).
Amortization of Goodwill
The goodwill is amortized on a straight-line basis by business sector.
Goodwill amortization expense will be approximately $2.5 million in Fiscal
Year 1999.
Impact of Inflation
Generally, the Company believes it has been able to pass along increases in
its costs to its customers (primarily paper and ink) through increased
prices of its printed products. Throughout the majority of Fiscal Year
1996, the printing industry experienced substantial increases in the cost
of paper. In late Fiscal Year 1996 and throughout Fiscal Year 1997,
however, the overall cost of paper began to decline. During Fiscal Year
1998, paper prices remained relatively stable. Management expects that, as
a result of the Company's strong relationship with key suppliers, its
material costs will remain competitive within the industry.
Seasonality
Some of the Company's printing and digital imaging and prepress services
business is seasonal in nature, particularly those revenues derived from
advertising inserts. Generally, the Company's sales from advertising
inserts are highest during periods prior to the following advertising
periods: Spring advertising season (March 15 -- May 15); Back-to-School
(July 15 -- August 15); and Thanksgiving/Christmas (October 15 -- December
15). One of the reasons the Company chose to enter the comic book printing
market is that it is not subject to significant seasonal fluctuations.
Sales of newspaper Sunday comics are also not subject to significant
seasonal fluctuations. The Company's strategy has been and will continue
to include the mitigation of the seasonality of its printing business by
increasing its sales to customers whose own sales are less seasonal (i.e.,
food and drug companies).
Environmental
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and which do not contribute to current
or future period revenue generation are expensed. Environmental
liabilities are recorded when assessments and/or remedial efforts are
probable and the related costs can be reasonably estimated.
The Company believes that environmental liabilities, currently and in the
prior periods discussed herein, are not material. The Company has recorded
an environmental reserve of approximately $0.1 million in connection with a
Superfund site in its consolidated statement of financial position at March
31, 1998 which the Company believes to be adequate. See "Legal Proceedings
- - Environmental Matters". The Company does not anticipate receiving
insurance proceeds related to this potential settlement. Management does
not expect that any identified matters, individually or in the aggregate,
will have a material adverse effect on the consolidated financial position
or results of operations of the Company.
Accounting
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect in the Company's results of operations
or its financial position.
Year 2000 Compliance
The Year 2000 issue is the result of certain computer programs being
written using two digits rather than four digits to define the applicable
year. Software that is not Year 2000 compliant recognizes a date using
"00" as the year 1900 rather than 2000, which could result in system
failures, miscalculations or temporary inability to engage in normal
business activity. The Company is currently working to resolve the
potential impact of this issue. The Company has determined that certain
software programs and computer hardware will need to be modified or
replaced. Although there can be no assurance, the Company believes such
modification or replacement will mitigate the potential impact of this
issue. The Company will utilize both internal and external resources to
accomplish this task. Based upon management's best estimate, the cost
associated with these modifications and/or replacement is not expected to
be material to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
The following consolidated financial statements of ACG Holdings, Inc.
are included in this report:
Report of Independent Auditors........................................... 29
Consolidated balance sheets - March 31, 1998 and 1997.................... 30
For the Years Ended March 31, 1998, 1997 and 1996:
Consolidated statements of operations.......................... 32
Consolidated statements of stockholders' deficit............... 33
Consolidated statements of cash flows.......................... 34
Notes to Consolidated Financial Statements............................... 36
The following consolidated financial statement schedules of ACG Holdings,
Inc. are included in Part IV, Item 14:
I. Condensed Financial Information of Registrant
Condensed Consolidated Financial Statements (parent
company only) for the years ended March 31, 1998, 1997,
and 1996, and as of March 31, 1998 and 1997
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for ACG Holdings, Inc.
have been omitted because they are either not applicable, not required, or
because the information required is included in the financial statements or
notes thereto.
Report of Independent Auditors
The Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. (formerly Sullivan Communications, Inc.) as of March 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' deficit, and
cash flows for each of the three fiscal years in the period ended March 31,
1998. Our audits also included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACG
Holdings, Inc. at March 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, in fiscal year
1998 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation."
ERNST & YOUNG LLP
Nashville, Tennessee
May 22, 1998
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Assets
Current assets:
Cash $ 0 0
Receivables:
Trade accounts, less allowance for doubtful accounts of
$2,112 and $5,879 at March 31, 1998 and 1997, respectively 63,185 53,510
Other 2,605 3,252
----------------- -----------------
Total receivables 65,790 56,762
Inventories 10,795 9,711
Prepaid expenses and other current assets 3,578 3,604
----------------- -----------------
Total current assets 80,163 70,077
Property, plant and equipment:
Land and improvements 3,148 3,278
Buildings and improvements 19,426 17,837
Machinery and equipment 178,713 175,196
Furniture and fixtures 5,379 3,625
Leased assets under capital leases 48,039 35,113
Equipment installations in process 1,612 3,118
----------------- -----------------
256,317 238,167
Less accumulated depreciation (96,684) (71,270)
----------------- -----------------
Net property, plant and equipment 159,633 166,897
Excess of cost over net assets acquired, less accumulated
amortization of $42,060 and $33,523 at March 31, 1998 and 1997, respectively 74,556 81,964
Other assets 15,606 15,037
----------------- -----------------
Total assets $ 329,958 333,975
================= =================
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
--------------------------------------------
1998 1997
----------------- -----------------
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt and capitalized leases $ 9,131 18,252
Trade accounts payable 27,381 29,364
Accrued expenses 31,539 30,037
Income taxes 502 1,022
------------------- ------------------
Total current liabilities 68,553 78,675
Long-term debt and capitalized leases, excluding current installments 310,526 294,057
Deferred income taxes 9,443 8,713
Other liabilities 47,521 28,848
------------------- ------------------
Total liabilities 436,043 410,293
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
134,812 shares issued and outstanding at March 31, 1998 and
123,889 shares issued and outstanding at March 31, 1997 1 1
Preferred Stock, $.01 par value, 5,750 shares authorized, 4,000 shares
Series A convertible preferred stock issued and outstanding at
March 31, 1997, $40,000,000 liquidation preference, 1,750 shares
Series B convertible preferred stock issued and outstanding at
March 31, 1997, $17,500,000 liquidation preference -- --
Preferred Stock, $.01 par value, 15,823 shares authorized, 3,631 shares
Series AA convertible preferred stock issued and outstanding at
March 31, 1998, $40,000,000 liquidation preference, 1,606 shares
Series BB convertible preferred stock issued and outstanding at March
31, 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,249 57,499
Accumulated deficit (162,250) (132,228)
Cumulative translation adjustment (2,000) (1,590)
Unfunded pension liability (85) --
------------------- ------------------
Total stockholders' deficit (106,085) (76,318)
------------------- ------------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 329,958 333,975
=================== ==================
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
Year ended March 31,
-------------------------------------------------------
1998 1997 1996
----------- ------------ ------------
Sales $ 533,335 524,551 529,523
Cost of sales 461,407 459,880 465,110
--------- --------- ---------
Gross profit 71,928 64,671 64,413
Selling, general and administrative expenses 45,690 43,164 35,533
Amortization of goodwill 8,537 8,254 8,631
Restructuring costs and other special charges 5,598 2,881 7,533
--------- --------- ---------
Operating income 12,103 10,372 12,716
--------- --------- ---------
Other expense (income):
Interest expense 38,956 36,289 32,688
Interest income (143) (157) (263)
Nonrecurring charge related to terminated merger -- -- 1,534
Other, net 412 245 188
--------- --------- ---------
Total other expense 39,225 36,377 34,147
--------- --------- ---------
Loss from continuing operations before income
taxes and extraordinary item (27,122) (26,005) (21,431)
Income tax expense (2,106) (2,591) (4,874)
--------- --------- ---------
Loss from continuing operations before
extraordinary item (29,228) (28,596) (26,305)
Discontinued operations:
Loss from operations, net of tax -- (1,557) (1,364)
Estimated (loss) on shut down and gain
on SMI settlement, net of tax (667) (1,550) 2,868
--------- --------- ---------
Loss before extraordinary item (29,895) (31,703) (24,801)
Loss on early extinguishment of debt, net of tax -- -- (4,526)
--------- --------- ---------
Net loss $ (29,895) (31,703) (29,327)
========= ========= =========
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
Series AA Series A
and BB and B
Voting Convertible Convertible Additional Cumulative Unfunded
common preferred preferred paid-in Accumulated translation Pension
stock stock stock capital deficit adjustment Liability Total
------ ----------- ----------- ---------- ----------- ----------- --------- -----
Balances, April 1, 1995 $ 1 -- -- 57,499 (71,198) (1,272) -- (14,970)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (99) -- (99)
Net loss -- -- -- -- (29,327) -- -- (29,327)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1996 $ 1 -- -- 57,499 (100,525) (1,371) -- (44,396)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (219) -- (219)
Net loss -- -- -- -- (31,703) -- -- (31,703)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1997 $ 1 -- -- 57,499 (132,228) (1,590) -- (76,318)
Change in cumulative
translation adjustment -
exchange rate fluctuations -- -- -- -- -- (410) -- (410)
Treasury stock -- -- -- -- (127) -- -- (127)
Exercise of stock options -- -- -- 176 -- -- -- 176
Executive stock compensation -- -- -- 574 -- -- -- 574
Unfunded pension liability -- -- -- -- -- -- (85) (85)
Net loss -- -- -- -- (29,895) -- -- (29,895)
------ ------ ------- ------ ------- ------ ------ -------
Balances, March 31, 1998 $ 1 -- -- 58,249 (162,250) (2,000) (85) (106,085)
====== ====== ======= ====== ======= ====== ====== =======
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31,
------------------------------------------------
1998 1997 1996
-------------- ------------ --------------
Cash flows from operating activities:
Net loss $ (29,895) (31,703) (29,327)
Adjustments to reconcile net loss to cash provided (used)
by operating activities:
Extraordinary item - non cash -- -- (1,912)
Other special charges - non cash 1,727 1,944 4,306
Depreciation 28,124 25,282 21,385
Depreciation and amortization related to SMC -- 251 932
Amortization of goodwill 8,537 8,254 8,631
Amortization of other assets 1,876 1,120 680
Amortization of deferred financing costs and bond premium 2,292 1,784 1,469
Gain on shut down of SMI, net of tax -- -- (1,480)
Loss on shut down 667 1,550 --
(Gain) loss on disposals of property, plant and equipment (37) 6 350
Deferred income tax expense 930 911 595
Changes in assets and liabilities, net of effects of shut down of SMI
and SMC and acquisition of the Medina Facility:
(Increase) decrease in receivables (9,079) 11,262 (12,870)
(Increase) decrease in inventories (1,122) 3,453 (1,744)
(Decrease) increase in trade accounts payable (1,887) (6,528) 11,571
Increase (decrease) in accrued expenses 1,172 1,226 981
(Decrease) increase in current income taxes payable (520) (193) 195
Increase (decrease) in other liabilities 18,588 3,106 (2,722)
Other (2,748) 2,588 (5,227)
------- ------- -------
Total adjustments 48,520 56,016 25,140
------- ------- -------
Net cash provided (used) by operating activities 18,625 24,313 (4,187)
------- ------- -------
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31,
------------------------------------------------
1998 1997 1996
-------------- ------------ --------------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,826) (10,810) (20,276)
Proceeds from sales of property, plant and equipment 1,067 63 36
Medina acquisition -- -- (6,682)
Proceeds from sale of NIS -- -- 2,550
Other (265) (250) (64)
------- ------- -------
Net cash used by investing activities (10,024) (10,997) (24,436)
------- ------- -------
Cash flows from financing activities:
Debt:
Proceeds 25,000 1,162 280,451
Payments (24,899) (10,374) (242,970)
Increase in deferred financing costs (2,467) (827) (12,095)
Repayment of capital lease obligations (6,349) (3,212) (591)
Other 128 (61) (813)
------- ------- -------
Net cash (used) provided by financing activities (8,587) (13,312) 23,982
------- ------- -------
Effect of exchange rates on cash (14) (4) 6
------- ------- -------
Decrease in cash 0 0 (4,635)
Cash:
Beginning of period 0 0 4,635
------- ------- -------
End of period $ 0 0 0
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 35,931 34,284 30,581
Income taxes, net of refunds 1,751 1,863 3,964
Exchange rate adjustment to long-term debt (67) (61) 53
Non cash investing activities:
Lease obligations $ 12,887 26,957 7,746
See accompanying notes to consolidated financial statements.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
ACG Holdings, Inc. ("Holdings"), together with its wholly-owned
subsidiary, American Color Graphics, Inc. ("Graphics"),
(collectively the "Company"), was formed in April 1989 under the
name GBP Holdings, Inc. to effect the purchase of all the capital
stock of GBP Industries, Inc. from its stockholders in a
leveraged buyout transaction. In October 1989, GBP Holdings,
Inc. changed its name to Sullivan Holdings, Inc. and GBP
Industries, Inc. changed its name to Sullivan Graphics, Inc.
Effective June 1993, Sullivan Holdings, Inc. changed its name to
Sullivan Communications, Inc. Effective July 1997, Sullivan
Communications, Inc. changed its name to ACG Holdings, Inc. and
Sullivan Graphics, Inc. changed its name to American Color
Graphics, Inc.
On August 15, 1995, the Company completed a merger transaction
with Shakopee Valley Printing Inc. ("Shakopee") (the "Shakopee
Merger"). Shakopee was formed to effect the purchase of certain
assets and assumption of certain liabilities of Shakopee Valley
Printing, a Guy Gannett Communications division. On December 22,
1994, Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(collectively the "MSCP III Entities"), together with First Plaza
Group Trust and Leeway & Co. purchased 35,000 shares of common
stock of Shakopee. On December 22, 1994, pursuant to an
Agreement for the Purchase of Assets between Guy Gannett
Communications (the "Seller") and Shakopee (the "Buyer"), the
Seller agreed to sell (effective at the close of business on
December 22, 1994) certain assets and transfer certain
liabilities of Shakopee Valley Printing to the Buyer for a total
purchase price of approximately $42.6 million, primarily financed
through the issuance of 35,000 shares of Common Stock and bank
borrowings. Each of the MSCP III Entities is affiliated with
Morgan Stanley Dean Witter & Co., the parent company of the
general partner of the Company's majority stockholder. In
addition, the other stockholders of Shakopee were also
stockholders of the Company. See note 2 for a description of the
specific terms of the Shakopee Merger.
Holdings has no operations or significant assets other than its
investment in Graphics. Holdings is dependent upon distributions
from Graphics to fund its obligations. Under the terms of its
debt agreements at March 31, 1998, Graphics' ability to pay
dividends or lend to Holdings was either restricted or
prohibited, except that Graphics may pay specified amounts to
Holdings (i) to pay the repurchase price payable to any officer
or employee (or their estates) of Holdings, Graphics or any of
their respective subsidiaries in respect of their stock or
options to purchase stock in Holdings upon the death, disability
or termination of employment of such officers and employees (so
long as no default, or event of default, as defined, has occurred
under the terms of the Bank Credit Agreement and the Amended and
restated Credit Agreement, as defined below, and provided the
aggregate amount of all such repurchases does not exceed $2
million) and (ii) to fund the payment of Holdings' operating
expenses incurred in the ordinary course of business, other
corporate overhead costs and expenses (so long as the aggregate
amount of such payments does not exceed $250,000 in any fiscal
year) and Holdings' obligations pursuant to a tax sharing
agreement with Graphics. A significant portion of Graphics'
long-term obligations have been fully and unconditionally
guaranteed by Holdings.
The two business sectors of the commercial printing industry in
which the Company operates are (i) printing and (ii) digital
imaging and prepress services conducted by its American Color
division.
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Significant accounting policies are as follows:
(a) Basis of Presentation
The consolidated financial statements include the accounts
of Holdings and all greater than 50% - owned subsidiaries
which are consolidated under generally accepted accounting
principles.
All significant intercompany transactions and balances have
been eliminated in consolidation.
The Shakopee Merger has been accounted for as a combination
of entities under common control (similar to a pooling-of-
interests). The consolidated financial statements give
retroactive effect to the merger of the Company and Shakopee
and include the combined operations of the Company and
Shakopee for the fiscal year ended March 31, 1995. Shakopee
was not under common control until December 22, 1994, and,
accordingly, the consolidated financial statements reflect
Shakopee as under common control subsequent to such date.
Earnings per share data has not been provided since
Holdings' common stock is closely held.
(b) Revenue Recognition
In accordance with trade practices of the printing industry,
printing revenues are recognized upon the completion of
production. Shipment of printed material generally occurs
upon completion of this production process. Materials are
printed to unique customer specifications and are not
returnable. Credits relating to specification variances and
other customer adjustments are not significant.
(c) Inventories
Inventories are valued at the lower of first-in, first-out
("FIFO") cost or market (net realizable value) (see note
6).
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost.
Depreciation, which includes amortization of assets under
capital leases, is based on the straight-line method over
the estimated useful lives of the assets or the remaining
terms of the leases.
(e) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired (or "goodwill")
is amortized on a straight-line basis over a range of 5 to
40 years for each of its principal business sectors. The
carrying value of goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted future cash
flows of the assets acquired, the Company's carrying amount
of the goodwill is reduced by the estimated shortfall of
such cash flows. In addition, the Company assesses long-
lived assets for impairment under Financial Accounting
Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("FASB 121"). Under these rules, goodwill
associated with assets acquired in a purchase business
combination is included in impairment evaluations when
assets or circumstances exist that indicate the carrying
amount of these assets may not be recoverable.
(f) Other Assets
Financing costs related to the Bank Credit Agreement and
Term Loan Facility (as defined herein) are deferred and
amortized over the term of the respective agreements. Costs
related to the Notes (as defined herein) are deferred and
amortized over the ten-year term of the Notes.
The covenants not to compete are amortized over the three
and five year terms of the respective underlying agreements.
(g) Income Taxes
Income taxes have been provided using the liability method
in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS
109").
(h) Foreign Currency Translation
The assets and liabilities of the Company's Canadian
facility, which include interdivisional balances, are
translated at year-end rates of exchange while revenue and
expense items are translated at average rates for the year.
Translation adjustments are recorded as a separate component
of stockholders' deficit. Since the transactions of the
Canadian facility are denominated in its functional currency
and the interdivision accounts are of a long-term investment
nature, no transaction adjustments are included in
operations.
(i) Reclassifications
Certain prior period amounts have been reclassified to
conform with the most recent period presentation.
(j) Environmental
Environmental expenditures that relate to current operations
are expensed or capitalized as appropriate. Expenditures
that relate to an existing condition caused by past
operations, and which do not contribute to current or future
period revenue generation, are expensed. Environmental
liabilities are provided when assessments and/or remedial
efforts are probable and the related amounts can be
reasonably estimated.
(k) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its
financial instruments together with the related carrying
amount. The Company is not a party to any financial
instruments with material off-balance-sheet risk.
(l) Concentration of Credit Risk
Financial instruments which subject the Company to credit
risk consist primarily of trade accounts receivable.
Concentration of credit risk with respect to trade accounts
receivable are generally diversified due to the large number
of entities comprising the Company's customer base and their
geographic dispersion. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for
potential credit losses.
(m) Use of Estimates
The preparation of the financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
(n) Stock Based Compensation
Effective April 1, 1997 the Company changed its method of
accounting for stock based compensation plans from the
intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") to the fair value method established by Statement
of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Application of the
recognition provisions of SFAS 123 is prospective
(restatement of prior periods is prohibited). The Company
believes that including the fair value of compensation plans
in determining net income is consistent with accounting for
the cost of all other forms of compensation.
(2) The Shakopee Merger
On August 15, 1995, the Shakopee Merger was consummated and each
outstanding share of the Common Stock of Shakopee was converted
into one share of the New Common Stock of the Company and 1/20 of
one share of Series B Preferred Stock of the Company. Also on
August 15, 1995, concurrent with the Shakopee Merger, the Company
also refinanced its then existing indebtedness (the
"Refinancing") (see note 9).
The Shakopee Merger was accounted for under the purchase method
of accounting applying the provisions of Accounting Principles
Board Opinion No. 16 ("APB 16"). The purchase price of $42.6
million, was allocated to the tangible assets and identifiable
intangible assets and liabilities assumed based upon their
respective fair values. The resulting excess of cost over net
assets acquired was $12.2 million.
The Shakopee Merger has been accounted for as a combination of
entities under common control (similar to a pooling-of-
interests), and accordingly the consolidated financial statements
give retroactive effect to the Shakopee Merger and include the
combined operations of Holdings and Shakopee subsequent to
December 22, 1994.
(3) The Medina Acquisition
On March 12, 1996, Graphics acquired the assets of Gowe, Inc., a
Medina, Ohio based regional printer of newspapers, T.V. books and
retail advertising inserts and catalogs (the "Medina Facility"),
for cash and assumption of certain liabilities of Gowe, Inc.,
pursuant to an Asset Purchase Agreement, among Graphics, Gowe,
Inc. and ComCorp, Inc., the parent company of Gowe, Inc. (the
"Medina Acquisition"). The Medina Acquisition was accounted for
under the purchase method of accounting applying the provisions
of APB 16. The Medina Facility's results of operations are
included in the Company's consolidated financial statements
subsequent to March 11, 1996.
The Company's pro forma unaudited results of operations for the
fiscal year ended March 31, 1996 ("Fiscal Year 1996"), assuming
that the Medina Acquisition occurred as of April 1, 1995, were
$561.6 million in sales, a $25.9 million loss from continuing
operations before extraordinary item and a $28.9 million net
loss.
(4) Disposal of 51% Interest in National Inserting Systems, Inc.
On March 11, 1996, the Company sold its 51% interest in National
Inserting Systems, Inc. ("NIS") for approximately $2.5 million
in cash and a note for approximately $0.2 million under the terms
of a Stock Redemption Agreement between NIS and Graphics. This
transaction resulted in a net gain on disposal of approximately
$1.3 million, which is classified as other, net in the
consolidated statement of operations. The proceeds of the sale
were used to repay indebtedness under Graphics' Bank Credit
Agreement (as defined herein).
(5) Discontinued Operations
SMC
In February 1997, the Company made a strategic decision to shut
down the operations of its wholly-owned subsidiary Sullivan Media
Corporation ("SMC"). This resulted in an estimated net loss on
shut down of approximately $1.5 million, which is net of zero
income tax benefits. In the fiscal year ended March 31, 1998
("Fiscal Year 1998") the Company recorded an additional $0.4
million estimated net loss on shutdown.
The shut down of SMC has been accounted for as a discontinued
operation, and accordingly, its operating results are segregated
and reported as a discontinued operation in the accompanying
consolidated statements of operations. The assets of SMC and any
resulting gain or loss on the disposal of those assets, is
immaterial to the results of operations and financial position of
the Company.
The condensed consolidated statements of operations relating to
the discontinued SMC operation follows:
Year Ended March 31,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Sales $ -- 9,786 6,819
Cost and expenses -- 11,343 8,183
------------------ ------------------ ------------------
Loss before income taxes -- (1,557) (1,364)
Income taxes -- -- --
------------------ ------------------ ------------------
Net loss $ -- (1,557) (1,364)
================== ================== ==================
SMI
In Fiscal Year 1996, the Company recognized settlement of the EPI Group
Limited ("EPI") complaint naming Sullivan Marketing, Inc. ("SMI"), News
America FSI, Inc. ("News America") and two packaged goods companies as
defendants ("EPI Lawsuit") and reversed certain accruals related to the
estimated loss on shut down of SMI. The resulting effect reflected in the
Fiscal Year 1996 consolidated statement of operations was $2.9 million
income in discontinued operations. In Fiscal Year 1998, the Company
recorded an additional $0.3 million estimated net loss on shut down.
(6) Inventories
The components of inventories are as follows (in thousands):
March 31,
-------------------------------------------------
1998 1997
--------------------- ---------------------
Paper $ 9,161 7,831
Ink 227 324
Supplies and other 1,407 1,556
-------------------- --------------------
Total $ 10,795 9,711
==================== ====================
In the third quarter of Fiscal Year 1996, the Company changed
to the FIFO method of accounting from the last-in, first-out
("LIFO") method of accounting as the principal method of
accounting for inventories. The change results in a balance
sheet which (1) reflects inventories at a value that more
closely represents current costs which the Company believes
are the primary concern of its constituents (bank lenders,
financial markets, customers, trade creditors, etc.) and (2)
enhances the comparability of the Company's financial
statements by changing to the predominant method used by key
competitors in the printing industry. The effect
(approximately $0.8 million) of the change for the six months
ended September 30, 1995 resulted in the retroactive
restatement of the first and second quarters of Fiscal Year
1996 of approximately $0.5 million and $0.3 million,
respectively, as a decrease of cost of sales and a decrease to
net loss.
(7) Other Assets
The components of other assets are as follows (in thousands):
March 31,
-------------------------------------------
1998 1997
------------------ ------------------
Deferred financing costs, less accumulated
amortization of $5,185 in 1998 and $2,893
in 1997 $ 10,104 9,996
Spare parts inventory, net of valuation allowance
of $100 in 1998 and 1997 1,852 1,699
Other 3,650 3,342
-------------- -------------
Total $ 15,606 15,037
============== =============
(8) Accrued Expenses
The components of accrued expenses are as follows (in thousands):
March 31,
---------------------------------------------
1998 1997
------------------ --------------------
Compensation and related taxes $ 10,004 9,206
Employee benefits 8,755 8,353
Interest 5,028 4,445
Accrued costs related to shut down of SMC 163 1,046
Other 7,589 6,987
------------------ --------------------
Total $ 31,539 30,037
================== ====================
(9) Notes Payable, Long-term Debt and Capitalized Leases
Long-term debt is summarized as follows (in thousands):
March 31,
---------------------------------------------
1998 1997
------------------ -----------------
Bank Credit Agreement:
Term Loan $ 35,979 47,088
Revolving Credit Facility Borrowings 29,257 40,710
------------------ --------------------
65,236 87,798
Term Loan Facility 25,000 --
12 3/4% Senior Subordinated Notes Due 2005 185,000 185,000
Capitalized leases 38,147 31,607
Other loans with varying maturities and
interest rates 6,274 7,904
------------------ --------------------
Total long-term debt 319,657 312,309
Less current installments 9,131 18,252
------------------ --------------------
Long-term debt and capitalized leases,
excluding current installments $ 310,526 294,057
================== ====================
August 15, 1995 Refinancing
On August 15, 1995 the Company sold $185 million of 12 3/4% Senior
Subordinated Notes Due 2005 (the "Notes"). Concurrently with the closing
of the sale of the Notes, the Company entered into a series of
transactions, (the "Refinancing," and together with the Shakopee Merger,
the "Transactions") including the following: (i) the Company entered into
a Credit Agreement with BT Commercial Corporation ("BTCC") (the "BTCC
Agreement"), providing for a $75 million revolving credit facility maturing
in 2000 (the "Revolving Credit Facility") and a $60 million amortizing term
loan with a final maturity in 2000 (the "Term Loan"); (ii) the repayment
of all $126.5 million of indebtedness outstanding under Graphics' old bank
credit agreement (the "Old Bank Credit Agreement") (plus $2.3 million of
accrued interest to the date of repayment); (iii) the redemption of all
outstanding 15% Senior Subordinated Notes due 2000 ("the 15% Notes") at an
aggregate redemption price of $105.6 million (plus $1.8 million of accrued
interest to the redemption date); (iv) the repayment of all $24.6 million
of indebtedness, including the Shakopee bank credit agreement, assumed in
the Shakopee Merger (plus $0.1 million of accrued interest to the date of
repayment) and (v) the payment of approximately $11.8 million of fees and
expenses incurred in connection with the Transactions. As a result of the
Transactions, the Company recorded an extraordinary loss related to early
extinguishment of debt of $4.5 million, net of zero taxes. This
extraordinary loss consisted primarily of the early redemption premium on
the 15% Notes and the write-off of deferred financing costs related to
refinanced indebtedness partially offset by the write-off of a bond premium
associated with the 15% Notes.
The Notes bear interest at 12 3/4% and mature August 1, 2005. Interest on
the Notes is payable semi-annually on February 1 and August 1. The Notes
are redeemable at the option of Graphics in whole or in part after August
1, 2000 at 106.375% of the principal amount, declining to 100% of the
principal amount, plus accrued interest, on or after August 1, 2002. Upon
the occurrence of a change of control triggering event, as defined, each
holder of a Note will have the right to require Graphics to repurchase all
or any portion of such holder's Note at 101% of the principal amount
thereof, plus accrued interest. The Notes are subordinate to all existing
and future senior indebtedness, as defined, of Graphics, and are guaranteed
on a senior subordinated basis by Holdings.
The BTCC Agreement as amended (the "Bank Credit Agreement"), required the
Company to meet certain financial covenants which as of March 31, 1998 were
met. The Bank Credit Agreement required prepayments in certain
circumstances including: excess cash flows, proceeds from asset
dispositions totaling prescribed levels, and changes in ownership.
Borrowings under the Revolving Credit Facility were subject to a borrowing
base requirement including accounts receivable and inventory. Graphics had
outstanding borrowings under the Revolving Credit Facility of $29.3 million
at March 31, 1998.
Interest under the Bank Credit Agreement was floating based on prevailing
market rates . The weighted average rate on outstanding indebtedness under
the Bank Credit Agreement at March 31, 1998 was 8.48%.
Holdings guaranteed Graphics' indebtedness under the Bank Credit Agreement,
which guarantee was secured by a pledge of all of Graphics' and its
subsidiaries' stock. In addition, borrowings under the Bank Credit
Agreement were secured by substantially all of the assets of Graphics.
Holdings was restricted under its guarantee of indebtedness under the Bank
Credit Agreement from, among other things, entering into mergers,
acquisitions, incurring additional debt, or paying cash dividends.
June 30, 1997 Term Loan Facility
On June 30, 1997, the Company entered into a $25 million term loan facility
which included a $5 million participation by Morgan Stanley Senior Funding,
Inc., a related party, which matures on March 31, 2001 (the "Term Loan
Facility"). Net proceeds of approximately $23.5 million (after loan fees
and other transaction costs) were received and used to reduce outstanding
borrowings under the existing Revolving Credit Facility. Interest under
the Term Loan Facility was floating based upon existing market rates plus
agreed upon margin levels which escalated over the initial 24 months of the
facility. The obligations under this facility were guaranteed on the same
basis and by the same guarantors as the Company's Bank Credit Agreement
although such guarantees were secured by second priority security interests
in the tangible and intangible assets of the Company and such guarantors.
Covenants under this agreement were substantially similar to, but in
certain respects are more restrictive than, existing covenants under the
Senior Subordinated Notes Indenture. Morgan Stanley Senior Funding, Inc.
received transaction fees of approximately $0.3 million. In connection
with the Term Loan Facility, the Company obtained amendments to the Bank
Credit Agreement with respect to certain financial covenants and an
amendment that decreased the Borrowing Base through March 30, 1998.
May 8, 1998 Refinancing
On May 8, 1998, the Company refinanced all outstanding indebtedness under
the BTCC Agreement and the Term Loan Facility (see note 23 for a discussion
of the terms of this refinancing transaction).
The amortization for total long-term debt and capitalized leases at March
31, 1998 as adjusted to reflect the scheduled payments due under the terms
of the Company's senior debt structure as refinanced on May 8, 1998 (see
note 23), is shown below (in thousands):
Long-Term Capitalized
Fiscal year Debt Leases
---------------------- --------------------- -----------------------
1999 $ 2,779 $ 9,728
2000 3,278 9,054
2001 7,152 7,527
2002 6,980 6,290
2003 7,835 5,709
Thereafter 253,486 13,077
--------------------- -----------------------
Total $ 281,510 51,385
=====================
Imputed interest (13,238)
-----------------------
Present value of minimum $
lease payments 38,147
=======================
Capital leases have varying maturity dates and interest rates which
generally approximate 9%-10%. The Company estimates that the carrying
amounts of the Company's debt and other financial instruments approximate
their fair values at March 31, 1998 and 1997.
(10) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts as
measured by tax laws and regulations. Significant components of
the Company's deferred tax liabilities and assets as of March 31,
1998 and 1997 are as follows (in thousands):
March 31,
----------------------------------------------------
1998 1997
-------------------- ---------------------
Deferred tax liabilities:
Book over tax basis in fixed assets $ 31,466 31,402
Foreign taxes 3,701 2,505
Accumulated amortization 766 483
Other, net 4,594 4,459
-------------------- ---------------------
Total deferred tax liabilities 40,527 38,849
Deferred tax assets:
Bad debts 830 2,197
Accrued expenses and other liabilities 34,754 24,953
Accrued loss on discontinued operations 254 722
Net operating loss carryforwards 30,420 30,515
AMT credit carryforwards 1,262 1,262
Cumulative translation adjustment 786 625
-------------------- ---------------------
Total deferred tax assets 68,306 60,274
Valuation allowance for deferred tax assets 37,222 30,138
-------------------- ---------------------
Net deferred tax assets 31,084 30,136
-------------------- ---------------------
Net deferred tax liabilities $ 9,443 8,713
==================== =====================
Management has evaluated the need for a valuation allowance and as such, a
valuation allowance of $37.2 million has been recorded . The valuation
allowance was increased by $7.1 million during the current fiscal year.
The components of income tax expense are as follows (in thousands):
Year ended March 31,
---------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amount attributable to
continuing operations $ 2,106 2,591 4,874
Amount attributable to
discontinued operations -- -- 75
-------------------- -------------------- --------------------
Total expense $ 2,106 2,591 4,949
==================== ==================== ====================
Income tax expense attributable to loss from continuing operations consists
of (in thousands):
Year ended March 31,
-------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ------------------
Current
Federal $ -- -- 689
State 230 145 618
Foreign 946 1,535 3,047
-------------------- ------------------- ------------------
Total current 1,176 1,680 4,354
-------------------- ------------------- ------------------
Deferred
Federal (108) 354 513
State (157) 120 7
Foreign 1,195 437 --
-------------------- ------------------- ------------------
Total deferred 930 911 520
-------------------- ------------------- ------------------
Provision for income taxes $ 2,106 2,591 4,874
==================== =================== ==================
The effective tax rates for Fiscal Year 1998, the fiscal year ending March
31, 1997 ("Fiscal Year 1997") and Fiscal Year 1996 were (7.8%), (10.0%),
and (22.7%), respectively. The difference between these effective rates
relating to continuing operations and the statutory federal income tax rate
is composed of the following items:
Year ended March 31,
----------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ------------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
federal tax impact (0.2) (0.7) (1.9)
Foreign taxes, less Federal
tax impact (5.2) (5.0) (9.4)
Amortization (9.9) (11.9) (16.1)
Change in valuation
allowance (24.1) (28.3) (26.7)
Other, net (3.4) 0.9 (3.6)
------------------- -------------------- ------------------
Effective income tax rate (7.8)% (10.0)% (22.7)%
=================== ==================== ==================
As of March 31, 1998, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $63.1 million which can be
used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 1999 and will be totally expired in
2013.
As of March 31, 1998, the Company had available NOL's for federal purposes
of $79.7 million which can be used to offset future federal taxable income.
If these NOL's are not utilized, they will begin to expire in 2006 and will
be totally expired in 2013.
The Company also had available an alternative minimum tax credit
carryforward of $1.3 million which can be used to offset future taxes in
years in which the alternative minimum tax does not apply. This credit can
be carried forward indefinitely.
The Company has alternative minimum tax NOL's in the amount of $60.3
million which will begin to expire in 2007 and will be completely expired
in 2013.
(11) Pension Plans
The Company sponsors defined benefit pension plans covering full-
time employees of the Company who had at least one year of
service at December 31, 1994. Benefits under these plans
generally are based upon the employee's years of service and, in
the case of salaried employees, compensation during the years
immediately preceding retirement. The Company's general funding
policy is to contribute amounts within the annually calculated
actuarial range allowable as a deduction for federal income tax
purposes. The plans' assets are maintained by trustees in
separately managed portfolios consisting primarily of equity
securities, bonds and guaranteed investment contracts.
In October 1994, the Board of Directors approved an amendment to
the Company's defined benefit pension plans which resulted in the
freezing of additional defined benefits for future services under
the plans effective January 1, 1995.
Total net periodic pension expense and its components for these
plans during the periods indicated is as follows (in thousands):
Year ended March 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- ---------------------
Service cost $ 499 446 318
Interest cost 3,533 3,546 3,428
Actual return on assets (6,046) (4,349) (6,404)
Net amortization and deferral 2,071 725 3,076
-------------------- -------------------- ---------------------
Total pension expense $ 57 368 418
==================== ==================== =====================
Funded status of the four plans sponsored by the Company is as follows (in
thousands):
March 31,
-----------------------------------------
1998 1997
-------------------- ------------
Actuarial present value of accumulated benefit obligations:
Vested $ 52,759 47,756
Non-Vested 179 829
--------------- --------------
$ 52,938 48,585
=============== ==============
March 31,
-----------------------------------------
1998 1997
-------------------- ------------
Projected benefit obligations $ 52,938 48,585
Plan assets on deposit with trustees at fair value 45,306 41,436
--------------- --------------
Projected benefit obligations in excess of plan assets (7,632) (7,149)
Unrecognized:
Net gain (2,142) (3,146)
Prior Service Cost (627) (784)
--------------- --------------
Pension liability recognized in consolidated balance sheets $ (10,401) (11,079)
=============== ==============
The above pension liability balance is recorded in the consolidated balance
sheets as follows (in thousands):
March 31,
--------------------------------------------------
1998 1997
---------------------- ---------------------
Accrued expenses - employee benefits $ 938 771
Other liabilities 9,463 10,308
---------------------- ---------------------
$ 10,401 11,079
====================== =====================
The pension liability at March 31, 1998 and 1997 reflects the impact of
changes in certain assumptions effective during such times as follows:
March 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Discount rate:
Pension expense 7.75% 7.50% 8.75%
Funded status 7.25% 7.75% 7.50%
Rate of increase in compensation levels N/A N/A N/A
The expected long-term rate of return on plan assets was 9.25% in
the Fiscal Years 1998, 1997 and 1996.
(12) Other Postretirement Benefits
The Company provides certain other postretirement benefits for
employees, primarily life and health insurance. Full-time
employees who have attained age 55 and have at least five years
of service are entitled to postretirement health care and life
insurance coverage. Postretirement life insurance coverage is
provided at no cost to eligible retirees. Special cost sharing
arrangements for health care coverage are available to employees
whose age plus years of service at the date of retirement equals
or exceeds 85 ("Rule of 85"). Any eligible retiree not meeting
the Rule of 85 must pay 100% of the required health care
insurance premium.
Effective January 1, 1995, the Company amended the health care
plan changing the health care benefit for all employees retiring
on or after January 1, 2000. This amendment had the effect of
reducing the accumulated postretirement benefit obligation by
approximately $3 million. This reduction is reflected as
unrecognized prior service cost and is being amortized on a
straight line basis over 15.6 years, the average remaining years
of service to full eligibility of active plan participants at the
date of the amendment.
The following table sets forth the plan's funded status,
reconciled with amounts recognized in the Company's consolidated
balance sheets at March 31, 1998 and 1997 (in thousands):
March 31,
--------------------------------------------------
1998 1997
-------------------- ---------------------
Accumulated postretirement benefit obligation:
Retirees $ 2,506 2,371
Active plan participants 1,260 1,022
-------------------- ---------------------
Total 3,766 3,393
Plan assets at fair value -- --
-------------------- ---------------------
Accumulated postretirement benefit obligation in
excess of plan assets 3,766 3,393
Unrecognized prior service cost 2,391 2,584
Unrecognized net gain 1,145 1,694
-------------------- ---------------------
Accrued postretirement benefit cost $ 7,302 7,671
==================== =====================
The estimated current portion of the above accrued postretirement
benefit cost is $0.3 million and is included in accrued expenses
in the accompanying consolidated balance sheet at March 31, 1998.
The remaining $7.0 million is included in the other liabilities
section of the consolidated balance sheet.
Net periodic postretirement benefit cost for the periods
indicated included the following components (in thousands):
Year ended March 31,
-------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
Service cost attributed to service during the period $ 46 40 35
Interest cost in accumulated postretirement benefit
obligation 266 250 317
Amortization of net gain from earlier periods (79) (92) (67)
Amortization of prior service cost (194) (194) (194)
-------------------- -------------------- -------------------
Net periodic postretirement benefit cost $ 39 4 91
==================== ==================== ===================
The significant assumptions used in determining postretirement
benefit cost and the accumulated postretirement benefit
obligation were as follows:
March 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Discount rate - expense 7.75% 7.50% 8.75%
Discount rate - APBO 7.25% 7.75% 7.50%
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation at March 31, 1998
was 9.95% gradually declining to 5.75% in the year 2005 and
forward. The effect of a one percentage point increase in the
assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of March 31,
1998 by approximately 8%, and the aggregate of the service and
interest cost components of net annual postretirement benefit
cost by approximately 8%.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new
Supplemental Executive Retirement Plan ("SERP"), which is a
defined benefit plan, for certain key executives. Such benefits
will be paid from the Company's assets. The unfunded accumulated
benefit obligation under this plan is approximately $2.1 million.
(13) 401(k) Defined Contribution Plan
Effective January 1, 1995, the Company amended its 401(k) defined
contribution plan. Eligible participants may contribute up to
15% of their annual compensation subject to maximum amounts
established by the Internal Revenue Service and receive a
matching employer contribution on amounts contributed. The
employer matching contribution is made bi-weekly and equals 2% of
annual compensation for all plan participants plus 50% of the
first 6% of annual compensation contributed to the plan by each
employee, subject to maximum amounts established by the Internal
Revenue Service. The Company's contribution under this Plan
amounted to $3.3 million during Fiscal Year 1998, $3.4 million
during Fiscal Year 1997 and $2.8 million during the Fiscal Year
1996.
(14) Capital Stock
Effective January 16, 1998, the Company amended and restated its
Certificate of Incorporation and approved a recapitalization plan
resulting in the conversion of Series A and Series B convertible
preferred stock (the "Previously Issued Preferred Stock") into
Series AA and Series BB convertible Preferred Stock collectively,
("Preferred Stock"). At March 31, 1998, capital stock consists
of Holdings Common Stock ("Common Stock") and Preferred Stock.
The Preferred Stock has rights on preferences substantially the
same as the Previously Issued Preferred Stock. Each share of
Common Stock is entitled to one vote on each matter common
shareholders are entitled to vote on. The Preferred Stock has no
voting rights. Dividends on the Common Stock and Preferred Stock
are discretionary by the Board of Directors. Upon the occurrence
of a Liquidation Event (as defined in the amended and restated
Certificate of Incorporation), all amounts available for payment
or distribution shall first be paid to holders of Series BB
preferred stock, then holders of Series AA preferred stock and
then to holders of Common Stock. Each share of the Preferred
Stock may be converted, at the option of the holder, into shares
of Common Stock using conversion ratios and subject to conditions
set forth in the Company's Certificate of Incorporation.
(15) Stock Option Plans
Effective April 1, 1997 the Company changed its method of
accounting for stock based compensation plans from the intrinsic
value method of APB 25 to the fair value method established by
SFAS 123. Application of the recognition provisions of SFAS 123
is prospective (restatement of prior periods is prohibited).
However, SFAS 123 pro forma information for prior years is
required. The effects of applying SFAS 123 for either
recognizing compensation expense or providing pro forma
disclosures are not likely to be representative of the effects on
future years.
Common Stock Option Plan
In 1993, the Company established the ACG Holdings, Inc. Common
Stock Option Plan. This plan, as amended, (the "1993 Common
Stock Option Plan") is administered by a committee of the Board
of Directors (the "Committee") and provides for granting up to
20,841 shares of Common Stock. On January 16, 1998, the Company
established another common stock option plan (the "1998 Common
Stock Option Plan"). This plan is administered by the Committee
and provides for granting up to 36,939 shares of Common Stock.
The 1993 Common Stock Option Plan and the 1998 Common Stock
Option Plan are collectively referred to as the "Common Stock
Option Plans". Stock options may be granted under the Common
Stock Option Plans to officers and other key employees of the
Company (the "Participants") at the exercise price per share of
Common Stock, as determined at the time of grant by the Committee
in its sole discretion. All options are 25% exercisable on the
first anniversary date of a grant and vest in additional 25%
increments on each of the next three anniversary dates of each
grant. All options expire 10 years from date of grant.
A summary of activity under the Common Stock Option Plans is as
follows:
Options
--------------
Outstanding at April 1, 1995 15,264
Granted 2,497
Exercised --
Canceled (1,262)
-------------
Outstanding at March 31, 1996 16,499
Granted 6,015
Exercised --
Canceled (3,108)
-------------
Outstanding at March 31, 1997 19,406
Granted 30,014
Exercised (11,774)
Canceled (105)
-------------
Outstanding at March 31, 1998 37,541
=============
During Fiscal Year 1998, certain common stock option agreements
were modified to reprice options previously granted with a $50
exercise price to a $.01 exercise price. Based upon the Board of
Directors determination, the new exercise price was not less than
the fair market value of such options. Additionally, the options
granted in Fiscal Year 1998 were with a $.01 exercise price. The
weighted average fair value of options granted at the grant date
was $0 for fiscal years ending March 31, 1998, 1997 and 1996. The
weighted average remaining contractual life of the options
outstanding at March 31, 1998, 1997 and 1996, is 8.5 years, 7.6
years and 7.9 years, respectively. Of the options outstanding;
1,147, 9,004 and 5,507 were exercisable at March 31, 1998, 1997
and 1996, respectively. A total of 8,466 shares of Holdings
Common Stock were reserved for issuance, but not granted under the
Common Stock Option Plans at March 31, 1998. The fair value for
these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average
assumptions for Fiscal Year 1998 and Fiscal Year 1997,
respectively: risk-free interest rates of 5.5% and 6.5%; no annual
dividend yield; volatility factors of 0; and an expected option
life of 5 years.
For the purposes of Fiscal Year 1997 and Fiscal Year 1996 SFAS 123
pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. Because
the fair value of the Company's options equals $0, earnings were
the same for Fiscal Year 1997 and Fiscal Year 1996 under both APB
25 and SFAS 123.
Preferred Stock Option Plan
In Fiscal Year 1998, the Company established the ACG Holdings,
Inc. Preferred Stock Option Plan (the "Preferred Stock Option
Plan"). This plan is administered by the Committee and provides
for granting up to 583 shares of Holdings Preferred Stock
("Preferred Stock"). Stock options may be granted under this
Preferred Stock Option Plan to officers and other key employees of
the Company at the exercise price per share of Preferred Stock, as
determined at the time of grant by the Committee in its sole
discretion. All options are fully vested and are 100% exercisable
at the date of grant. All options expire 10 years from date of
grant.
A summary of the Preferred Stock Option Plan is as follows:
Options
-------------
Outstanding at March 31, 1997 --
Granted 526
Exercised --
Canceled --
----------
Outstanding at March 31, 1998 526
==========
All options were granted with a $1,909 exercise price. The
weighted average fair value of options granted at the grant date
was $1,091 for Fiscal Year 1998. The weighted average remaining
contractual life of the options outstanding at March 31, 1998 is
9.8 years. The fair value for these options was estimated at the
date of grant using a Black- Scholes option pricing model with the
following weighted average assumptions for Fiscal Year 1998: risk
free interest rate of 5.5%; no annual dividend yield; volatility
factors of 0; and an expected option life of 2 years. All of the
options outstanding were exercisable at March 31, 1998. A total
of 57 shares of Holdings Preferred Stock were reserved for
issuance, but not granted under the Preferred Stock Option Plan at
March 31, 1998.
The Company recognized $0.6 million of related compensation expense
within Fiscal Year 1998 selling, general and administrative
expenses as a result of the SFAS 123 requirements.
(16) Commitments and Contingencies
The Company incurred rent expense for Fiscal Year 1998, Fiscal
Year 1997 and Fiscal Year 1996 of $6.4 million, $5.4 million and
$4.9 million, respectively, under various operating leases.
Future minimum rental commitments under existing operating lease
arrangements at March 31, 1998 are as follows (in thousands):
Fiscal Year
-----------
1999 $ 6,824
2000 6,152
2001 4,786
2002 2,667
2003 1,377
Thereafter 4,995
-----------------
Total $ 26,801
=================
The Company has employment agreements with two of its principal
officers and five other employees. Such agreements provide for
minimum salary levels as well as for incentive bonuses which are
payable if specified management goals are attained. The aggregate
commitment for future salaries at March 31, 1998, excluding
bonuses, was approximately $3.3 million.
On December 21, 1989, Graphics sold CPS, its ink manufacturing
operations and facilities. Graphics remains contingently liable
under $2.7 million of industrial revenue bonds assumed by CPS.
CPS assumed these liabilities and has agreed to indemnify Graphics
for any resulting obligation and has also provided an irrevocable
letter of credit in favor of the holders of such bonds.
Accordingly, management believes that any obligation of Graphics
under this contingency is unlikely.
Concurrent with the sale of its ink manufacturing facility,
Graphics entered into a long-term ink supply contract with CPS.
The supply contract requires Graphics to purchase a significant
portion of its ink requirements, within certain limitations and
minimums, from CPS. Graphics believes that prices for products
under this contract approximate market prices at the time of
purchase of such products.
In the quarter ending December 31, 1997, the Company entered into
multi-year contracts to purchase a portion of the Company's raw
materials to be used in its normal operations. In connection with
such purchase agreements, pricing for a portion of the Company's
raw materials is adjusted for certain movements in market prices,
changes in raw material costs and other specific price increases.
The Company is deferring certain contractual provisions over the
life of the contracts which are being recognized as the purchase
commitments are achieved. The amount deferred at March 31, 1998
is $19.2 million and is included within other liabilities in the
Company's consolidated balance sheet .
Graphics, together with over 300 other persons, has been
designated by the U.S. Environmental Protection Agency as a
potentially responsible party (a "PRP") under the Comprehensive
Environmental Response Compensation and Liability Act ("CERCLA",
also known as "Superfund") at one Superfund site. Although
liability under CERCLA may be imposed on a joint and several basis
and the Company's ultimate liability is not precisely
determinable, the PRPs have agreed that Graphics' share of removal
costs is 0.46% and therefore Graphics believes that its share of
the anticipated remediation costs at such site will not be
material to its business or financial condition. Based upon an
analysis of Graphics' volumetric share of waste contributed to the
site and the agreement among the PRPs, the Company has a reserve
of approximately $0.1 million in connection with this liability on
its consolidated balance sheet at March 31, 1998. The Company
believes this amount is adequate to cover such liability.
The Company has been named as a defendant in several legal actions
arising from its normal business activities. In the opinion of
management, any liability that may arise from such actions will
not have a material adverse effect on the consolidated financial
statements of the Company.
(17) Significant Customers
No single customer represented 10% or more of total sales in the
fiscal year ended March 31, 1998 and 1997. Sales to Best Buy Co.
for Fiscal Year 1996 amounted to approximately 12.7% of the
Company's consolidated sales. Receivables outstanding from these
sales were approximately $5.9 million at March 31, 1996.
(18) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
(a)
SMC
Quarter as Discontinued Revised
Issued Operations Quarter
--------------- --------------- --------------
Fiscal Year 1998:
Quarter Ended June 30, 1997:
Net Sales $ 126,128 -- 126,128
Gross Profit $ 17,028 -- 17,028
Net Loss $ (4,950) -- (4,950)
Quarter Ended September 30, 1997:
Net Sales 135,609 -- 135,609
Gross Profit 17,863 -- 17,863
Net Loss (6,404) -- (6,404)
Quarter Ended December 31, 1997:
Net Sales 145,748 -- 145,748
Gross Profit 20,370 -- 20,370
Net Loss (2,285) -- (2,285)
Quarter Ended March 31, 1998:
Net Sales 125,850 -- 125,850
Gross Profit 16,667 -- 16,667
Net Loss (16,256) -- (16,256)
Totals:
Net Sales $ 533,335 -- 533,335
Gross Profit $ 71,928 -- 71,928
Net Loss $ (29,895) -- (29,895)
Fiscal Year 1997:
Quarter Ended June 30, 1996:
Net Sales $ 139,704 (1,603) 138,101
Gross Profit $ 15,393 (624) 14,769
Net Loss $ (7,604) -- (7,604)
Quarter Ended September 30, 1996:
Net Sales 138,495 (2,705) 135,790
Gross Profit 17,490 (1,167) 16,323
Net Loss (7,548) -- (7,548)
Quarter Ended December 31, 1996:
Net Sales 136,472 (1,153) 135,319
Gross Profit 19,719 (159) 19,560
Net Income (4,339) -- (4,339)
Quarter Ended March 31, 1997:
Net Sales 119,666 (4,325) 115,341
Gross Profit 15,915 (1,896) 14,019
Net Loss (12,212) -- (12,212)
Totals:
Net Sales $ 534,337 (9,786) 524,551
Gross Profit $ 68,517 (3,846) 64,671
Net Loss $ (31,703) -- (31,703)
(a) In February 1997, the Company shut down the operations of its wholly-
owned subsidiary SMC. The resulting effect of this change is a
retroactive restatement of Fiscal Year 1997, reclassifying SMC's
results of operations to Discontinued Operations (see note 5).
(19) Restructuring Costs and Other Special Charges
Restructuring Costs:
Printing In January 1998, the Company approved a plan for its
printing division which was designed to improve responsiveness to
customer requirements, increase asset utilization and reduce
overhead costs. The cost of this plan is being accounted for in
accordance with the guidance set forth in Emerging Issues Task
Force Issue 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"). The pretax costs of $3.9 million which were incurred as a
direct result of this plan (excluding other special charges
related to asset write-offs and write-downs - see below) includes
$3.3 million of employee termination costs and $0.6 million of
relocation and other transition expenses. This restructuring
charge was recorded in the quarter March 31, 1998. The majority
of these costs will be paid or settled before March 31, 1999.
American Color In April 1995, the Company implemented a plan for
its American Color division which was designed to improve
productivity, increase customer service and responsiveness, and
provide increased growth in the digital imaging and prepress
services business. The cost of this plan was accounted for in
accordance with the guidance set forth in EITF 94-3. The pretax
costs of $5 million which were incurred as a part of this plan
(excluding other special charges related to asset write-offs and
write-downs - see below) represent employee termination, goodwill
write-down and other related costs that were incurred as a direct
result of the plan. Approximately $0.9 million of restructuring
costs primarily related to relocation expenses were recognized in
Fiscal Year 1997. In Fiscal Year 1996 the Company recognized $4.1
million of such restructuring charges, which included $0.9 million
of goodwill write-down related to certain facilities that were
either shut down or relocated in conjunction with the American
Color restructuring and $3.2 million primarily for severance and
other personnel related costs.
Other Special Charges:
During the quarter ended March 31, 1998, the Company recorded
special charges totaling $1.7 million to adjust the carrying
values of idle, disposed and under-performing assets of the
Company's printing sector to estimated fair values. The provision
was based on a review of Company long-lived assets in accordance
with FASB 121. Fair value was based on the Company's estimate of
held and used and idle assets based on current market conditions
using the best information available.
During Fiscal Year 1997 and Fiscal Year 1996, the Company recorded
special charges totaling $1.9 million and $3.4 million,
respectively, for impaired long-lived assets and to adjust the
carrying values of idle, disposed and under performing assets to
estimated fair values. The provisions were based on a review of
long-lived assets in connection with the adoption of FASB 121. Of
the Fiscal Year 1997 total long-lived assets that were adjusted
based on being idle, disposed of or under performing,
approximately $0.4 million and $1.5 million related to the
printing and American Color sectors, respectively. Fair value was
based on the Company's estimate of held and used and idle assets
based on current market conditions using the best information
available. Approximately $2 million of the Fiscal Year 1996 total
related to the printing sector's long-lived assets, respectively
that were adjusted based on being idle, disposed of or under
performing. The remaining $1.4 million of the Fiscal Year 1996
total related to the American Color sector. The estimated
undiscounted future cash flows attributable to certain American
Color division identifiable long-lived assets held and used was
less than their carrying value principally as a result of high
levels of ongoing technological change. The methodology used to
assess the recoverability of the American Color sector long-lived
assets involved projecting aggregate cash flows. Based on this
evaluation, the Company determined in Fiscal Year 1996 that long-
lived assets with a carrying amount of $2.2 million were impaired
and such assets were then written down by $1.4 million to their
fair value. Fair value was based on Company estimates and
appraisals.
These special charges are classified within restructuring costs and
other special charges in the consolidated statements of
operations.
(20) Non-recurring Charge Related to Terminated Merger
The Company recognized $1.5 million of expenses related to a
terminated merger in Fiscal Year 1996.
(21) Non-recurring Charge Related to Resignation of Former Chief Executive
Officer
A non-recurring charge of $1.9 million relating to the resignation
of the Company's former Chief Executive Officer was recorded in
Fiscal Year 1997, and is classified as a selling, general and
administrative expense. Payments under the related agreement
continue through 2001, subject to certain requirements.
(22) Summarized Financial Information of American Color Graphics, Inc.
Summary financial information for Holdings' wholly-owned subsidiary,
American Color Graphics, Inc., is as follows (in thousands):
March 31,
------------------------------------------------
1998 1997
--------------------- ---------------------
Balance sheet data:
Current assets $ 80,163 70,077
Noncurrent assets 249,795 263,898
Current liabilities 69,176 78,675
Noncurrent liabilities 367,490 331,618
Year ended March 31,
----------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- ------------------
Statement of operations data:
Sales $ 533,335 524,551 529,523
Operating income 12,103 10,372 12,716
Net loss (29,895) (31,703) (29,327)
(23) Subsequent Events
On May 8, 1998, the Company completed a refinancing transaction
which included the following: (1) the Company entered into a $145
million credit facility with Bankers Trust Company, Morgan Stanley
Senior Funding, Inc., General Electric Capital Corporation and a
syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not
subject to a borrowing base limitation (the "New Revolving Credit
Facility") maturing on March 31, 2004, a $25 million amortizing
term loan facility maturing on March 31, 2004 (the "A Term Loan
Facility") and a $50 million amortizing term loan facility
maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the
repayment of all $57.0 million of indebtedness outstanding under
the existing Bank Credit Agreement ($65.2 million was outstanding
at March 31, 1998) (plus $0.4 million of accrued interest to the
date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment)
and (4) the payment of approximately $2.2 million in fees and
expenses associated with the refinancing transaction. In
addition, the Company will record an extraordinary loss related to
early extinguishment of debt of $4.0 million, net of taxes
associated with the write-off of refinanced indebtedness deferred
financing costs in the first quarter of the fiscal year ending
March 31, 1999.
Interest under the Amended and Restated Credit Agreement is
floating based upon existing market rates plus agreed upon margin
levels. In addition, the Company is obligated to pay specific
commitment and letter of credit fees. Such margin levels and fees
reduce over the term of the agreement subject to the achievement
of certain Leverage Ratio measures.
Borrowings under the Amended and Restated Credit Agreement are
secured by substantially all of the Company's assets. In
addition, Holdings has guaranteed the indebtedness under the
Amended and Restated Credit Agreement, which guarantee is secured
by a pledge of all of Graphics' and its subsidiaries' stock. The
new agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated
Interest Coverage Ratio and Leverage Ratio requirements, (2)
requires prepayments in certain circumstances including excess
cash flows, proceeds from asset dispositions in excess of
prescribed levels and certain capital structure transactions and
(3) contains various restrictions and limitations on the following
items: (a) the level of capital spending, (b) the incurrence of
additional indebtedness, (c) mergers, acquisitions, investments
and similar transactions and (d) dividends and other
distributions. In addition, the agreement includes various other
customary affirmative and negative covenants. Graphics' ability
to pay dividends or lend funds to Holdings is restricted
substantially to the same extent as under the Bank Credit
Agreement (see note 1 for a discussion of those restrictions).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information about each of the current
directors and executive officers of Holdings and Graphics (ages as of March
31, 1998). All directors hold office until their successors are duly
elected and qualified.
Name Age Position with Graphics and Holdings
---- --- -----------------------------------
Stephen M. Dyott 46 Chairman, President, Chief Executive
Officer and Director
Michael M. Janson 49 Director
Eric T. Fry 31 Director
Joseph M. Milano 45 Executive Vice President and Chief
Financial Officer
Malcolm J. Anderson 59 Executive Vice President Operations of
Graphics
Terrence M. Ray 45 President/Chief Operating Officer of
American Color
Timothy M. Davis 43 Senior Vice President-Administration,
Secretary and General Counsel
Patrick W. Kellick 40 Senior Vice President/Corporate
Controller and Assistant Secretary
Stephen M. Dyott - Chairman and Chief Executive Officer of Graphics and
Holdings since September 1996; President of Holdings since February 1995;
Director of Graphics and Holdings since September 1994; Chief Operating
Officer of Holdings from February 1995 to September 1996 and Chief
Operating Officer of Graphics from 1991 to September 1996; President of
Graphics since 1991; Vice President and General Manager - Flexible
Packaging, American National Can Company ("ANCC") from 1988 to 1991; Vice
President and General Manager - Tube Packaging, ANCC from 1985 to 1987.
Michael M. Janson - Director of Holdings and Graphics since February 1998;
Managing Director of the general partner of Morgan Stanley Capital Partners
("MSCP") and of Morgan Stanley Dean Witter & Co. ("MWD"); 1987 joined
Morgan Stanley & Co., Incorporated ("MS&Co."); 1997 joined the Private
Equity Group of MWD; Managing Director in MS&Co.'s High Yield Capital
Markets Department before joining the Private Equity Group; Director of
Jefferson Smurfit Corporation and Renaissance Media Group.
Eric T. Fry - Director of Graphics and Holdings since March 1996. Vice
President of the general partner of MSCP and MWD. Joined MS&Co. in 1989,
initially in the Mergers and Acquisitions Department and from 1991 to 1992
in the Private Equity Group. From 1992 to 1994 attended Harvard Business
School and received an MBA. Rejoined MS&Co.'s Private Equity Group in
1994. Director of Enterprise Reinsurance Holdings Corporation, Vanguard
Health Systems, Inc. and LifeTrust America, L.L.C.
Joseph M. Milano - Executive Vice President and Chief Financial Officer of
Holdings and Graphics from 1997 to 1998; Senior Vice President and Chief
Financial Officer of Holdings and Graphics from 1994 to 1997; Vice
President - Finance of Holdings and Graphics from 1992 to 1994; Vice
President and Chief Financial Officer, Farrel Corporation, 1989 to 1992;
Vice President and Chief Financial Officer, Electronic Mail Corporation of
America from 1984 to 1988.
Malcolm J. Anderson - Executive Vice President Operations of Graphics since
1996; Senior Vice President Operations of Graphics from 1993 to 1996;
President, Plastic Products Division of Kerr Group, Inc. from 1989 to 1993;
Vice President Manufacturing - Flexible Packing, American National Can
Company from 1982 to 1989; Vice President, Eastern Division General
Manager of Sinclair and Valentine Ink Company from 1980 to 1982.
Terrence M. Ray - President and Chief Operating Officer of American Color
since August 1996; Executive Vice President of American Color from March
1996 to July 1996; Executive Vice President of Wace USA, Inc. from April
1994 to February 1996; Group Vice President, Chicago Group of Wace USA,
Inc. from January 1992 to March 1994; Vice President, Secretary and Chief
Financial Officer of Wace USA, Inc., 1988 to 1992.
Timothy M. Davis - Senior Vice President - Administration, Secretary and
General Counsel of Holdings and Graphics since 1989; Assistant General
Counsel of MacMillan, Inc. and counsel to affiliates of Maxwell
Communication Corporation North America, January 1989 to June 1989.
Attorney in private practice from 1981 to 1989.
Patrick W. Kellick - Senior Vice President/Corporate Controller of
Holdings and Graphics from 1997 to 1998; Vice President/Corporate
Controller of Holdings and Graphics from 1989 to 1997; Corporate
Controller of Graphics since 1987, and Assistant Secretary of Holdings and
Graphics since 1995; various financial positions with Williams Precious
Metals (a division of Brush Wellman, Inc.) from 1984 to 1987, including CFO
from 1986 to 1987; Auditor with KPMG from 1979 to 1984.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information concerning compensation paid for
services to Holdings and Graphics during the fiscal years ended March 31,
1998, 1997 and 1996 to the Chief Executive Officers and the four other most
highly compensated executive officers (the "Named Executive Officers") of
Holdings and/or Graphics.
Summary Compensation Table
Annual Compensation Long-Term Compensation
---------------------------- ------------------------------------
Awards Payouts
----------------------- -----------
Securities
Other Under-
Annual Restricted lying All Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation Award(s) SAR's (#) Payouts sation
- --------------------------- ------------------ -------- -------- ------- ---------- ---------- ----------- ---------
Stephen M. Dyott Fiscal Year 1998 $475,000 $525,000 -- -- 14,762 -- --
President, Chief Operating Fiscal Year 1997 $463,462 $350,000 -- -- 1,761 -- --
Officer & Director Fiscal Year 1996 $450,000 $250,000 -- -- 380 -- --
thru 09/96
Chairman, President and
Chief Executive Officer &
Director 09/96 forward
Joseph M. Milano Fiscal Year 1998 $275,000 $290,000 -- -- 7,381 -- --
Senior Vice President & Fiscal Year 1997 $260,097 $150,000 -- -- 760 -- --
Chief Financial Officer Fiscal Year 1996 $228,923 $125,000 -- -- 614 -- --
Malcolm J. Anderson Fiscal Year 1998 $230,000 $200,000 -- -- 1,809 -- --
Executive Vice President Fiscal Year 1997 $230,000 $105,000 -- -- 125 -- --
Operations Graphics Fiscal Year 1996 $212,693 $ 70,000 -- -- -- -- $38,504 (a)
Timothy M. Davis Fiscal Year 1998 $233,200 $160,000 -- -- 3,706 -- --
Senior Vice President Fiscal Year 1997 $220,562 $110,000 -- -- 290 -- --
Administration, Fiscal Year 1996 $209,923 $106,000 -- -- -- -- --
Secretary & General Counsel
Terrence M. Ray Fiscal Year 1998 $246,490 $ 35,000 -- -- 3,618 -- $50,000 (a)
President/Chief Fiscal Year 1997 $230,000 $ 50,000 -- -- 1,447 -- $14,550 (a)
Operating Officer Fiscal Year 1996 $ 20,962 $ 6,000 -- -- -- -- --
American Color
- -------------------------
(a) Represents relocation expense reimbursements.
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
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------------- -----------------------------
% of Total
Options/
Number of SAR's
Securities Granted to
Underlying Employees Exercise or
Options/SAR's in Fiscal Base Price Expiration 0%($) 5%($) 10%($)
Name Granted (#) Year 1998 ($/sh) Date (h) (h)* (h)*
- --------------------- ------------- ---------- ----------- ---------- -------- ------- --------
Common Plan (a)
Stephen M. Dyott 14,470 (b) 32% .01 (b) -- -- --
Joseph M. Milano 7,235 (c) 16% .01 (c) -- -- --
Malcolm J. Anderson 1,809 (d) 4% .01 (d) -- -- --
Timothy M. Davis 3,618 (e) 8% .01 (e) -- -- --
Terrence M. Ray 3,618 (f) 8% .01 (f) -- -- --
* The Common Stock had no value at the date of grant and as such, the
potential realizable value is zero.
Preferred Plan (g)
Stephen M. Dyott 292 55% 1,908.76 01/19/2008 318,642 870,522 1,711,482
Joseph M. Milano 146 28% 1,908.76 01/19/2008 159,321 435,261 855,741
Timothy M. Davis 88 17% 1,908.76 01/19/2008 96,029 262,349 515,789
- ------------
(a) All options will become 25 percent exercisable on the first
anniversary date from each option's respective date of grant and are
scheduled to vest in additional 25 percent increments on each of the
next three anniversary dates from each option's date of grant.
(b) 14,470 options consists of: 9,170 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 1,761 options granted 10/01/96 with an expiration of
10/01/2006; 380 options granted 10/01/95 with an expiration of 10/01/2005;
859 options granted 09/01/94 with an expiration of 09/01/2004 and 2,300
options granted 04/01/93 with an expiration of 04/01/2003.
(c) 7,235 options consists of 5,071 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 760 options granted 10/01/96 with an expiration of
10/01/2006; 614 options granted 10/01/95 with an expiration of
10/01/2005; 688 options granted 09/01/94 with an expiration of
09/01/2004 and 102 options granted 04/01/93 with an expiration of
04/01/2003.
(d) 1,809 options consists of: 1,158 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01
exercise price per option: 125 options granted 10/01/96 with an
expiration of 10/01/2006 and 526 options granted 09/01/94 with an
expiration of 09/01/2004.
(e) 3,618 options consists of: 2,538 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01 exercise
price per option: 290 options granted 10/01/96 with an expiration of
10/01/2006; 535 options granted 09/01/94 with an expiration of 09/01/2004
and 255 options granted 04/01/93 with an expiration of 04/01/2003.
(f) 3,618 options consists of: 2,171 options granted 01/19/98 with an
expiration of 01/19/2008 and the following options granted with a $50
exercise price per option, repriced January 16, 1998 to a $.01
exercise price per option: 1,447 options granted 10/01/96 with an
expiration of 10/01/2006.
(g) All options vested and were exercisable at the date of grant.
(h) The potential realizable value shown in the table is based on
hypothetical increases in the estimated fair market value of the
common and preferred stock of Holdings ("Holdings Common Stock") over
the terms of the options, assuming 0%, 5% and 10% growth in such fair
market value. These estimates of potential realizable value have been
prepared pursuant to the rules of the Commission and are not
necessarily indicative of the amount that would have been utilized
upon exercise of the options had such options remained outstanding.
The following table presents information concerning the fiscal year-end
value of unexercised stock options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Shares Acquired Value Options/SAR's at 3/31/98 SAR's at 3/31/98
on Exercise (#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
--------------------- --------------- ----------------------------- -------------------------
Common Plan (a)
Stephen M. Dyott 3,574.50 35.75 0 / 10,896 (a)
Joseph M. Milano 1,115.00 11.15 0 / 6,120 (a)
Malcolm J. Anderson 425.75 4.26 0 / 1,383 (a)
Timothy M. Davis 728.75 7.28 0 / 2,889 (a)
Terrence M. Ray 361.75 3.62 0 / 3,256 (a)
Preferred Plan (b)
Stephen M. Dyott -- -- 292 / 0 (b)
Joseph M. Milano -- -- 146 / 0 (b)
Timothy M. Davis -- -- 88 / 0 (b)
(a) Holdings Common Stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. At
March 31, 1998, the Company believes fair market value to be $0 per
share of Common Stock.
(b) Holdings Preferred Stock has not been registered or publicly traded
and, therefore a public market price of the stock is not available. At
March 31, 1998, the Company believes fair market value to be $3,000 per
share of Preferred Stock.
Pension Plan
Graphics sponsors the American Color Graphics, Inc. Salaried Employees'
Pension Plan (the "Pension Plan"), a defined benefit pension plan covering
full-time salaried employees of Graphics who had at least one year of
service as of December 31, 1994. The basic benefit payable under the
Pension Plan is a five-year certain single life annuity equivalent to (a)
1% of a participant's "final average monthly compensation" plus (b) 0.6% of
a participant's "final average monthly compensation" in excess of 40% of
the monthly maximum Social Security wage base in the year of retirement
multiplied by years of credited service (not to exceed 30 years of
service). For purposes of the Pension Plan, "final average compensation"
(which, for the Named Executive Officers, is reflected in the salary and
bonus columns of the Summary Compensation Table) means the average of a
participant's five highest consecutive calendar years of total earnings
(which includes bonuses) from the last 10 years of service. The maximum
monthly benefit payable from the Pension Plan is $5,000.
The basic benefit under the Pension Plan is payable upon completion of five
years of vesting service and retirement on or after attaining age 65.
Participants may elect early retirement under the Pension Plan upon
completion of five years of vesting service and the attainment of age 55,
and receive the basic benefit reduced by 0.4167% for each month that the
benefit commencement date precedes the attainment of age 65. A deferred
vested benefit is available to those participants who separate from service
before retirement, provided the participant has at least five years of
vesting service.
In October 1994, the Board of Directors approved an amendment to the
Pension Plan which resulted in the freezing of additional defined benefits
for future services under such plan effective January 1, 1995 (see note 11
to the Company's consolidated financial statements).
At March 31, 1998, all of the Named Executive Officers with the exception
of Malcolm J. Anderson and Terrence M. Ray had vested in the pension
plan. At March 31, 1998, the Named Executive Officers had the following
amounts of credited service (original hire date through January 1, 1995)
and annual benefit payable upon retirement at age 65 under the Pension
Plan: Stephen M. Dyott (3 years, 3 months; $8,220), Joseph M. Milano (2
years, 7 months; $5,820), Malcolm J. Anderson (1 year, 3 months; $2,820),
and Timothy M. Davis (5 years, 5 months; $11,700).
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new SERP, which is a
defined benefit plan, for the Named Executive Officers and certain other
key executives. The plan provides for a basic annual benefit payable upon
completion of five years vesting service (April 1, 1994 through March 31,
1999 for Messrs. Dyott, Milano, Anderson and Davis and April 1, 1996,
through March 31, 2001 for Mr. Ray) and retirement on or after attaining
age 65 or the present value of such benefit at an earlier date under
certain circumstances, if elected. The Named Executive Officers have the
following basic annual benefit payable under this plan at age 65:
Stephen M. Dyott $100,000
Joseph M. Milano $100,000
Malcolm J. Anderson $ 50,000
Timothy M. Davis $ 75,000
Terrence M. Ray $ 50,000
Such benefits will be paid from the Company's assets (see note 12 to the
Company's consolidated financial statements).
Compensation of Directors
Directors of Holdings and Graphics do not receive a salary or an annual
retainer for their services but are reimbursed for expenses incurred with
respect to such services.
Employment Agreements
In connection with the 1993 Acquisition, Graphics entered into a new
employment agreement with Stephen M. Dyott (the "New Employment
Agreement"). The New Employment Agreement for Mr. Dyott superseded
previous employment agreements.
The New Employment Agreement has been amended so that it has a term of four
years commencing as of the effective time Acquisition Corp. merged with and
into Holdings (the "Effective Time"). The term under the New Employment
Agreement is automatically extended at the end of the then current term for
one-year periods absent two year's notice of an intent not to renew. The
New Employment Agreement provides for the payment of an annual salary and
an annual bonus pursuant to a plan adopted following the 1993 Acquisition.
In addition, under the New Employment Agreement, Mr. Dyott is eligible to
receive all other employee benefits and perquisites made available to
Graphics' senior executives generally.
Under the New Employment Agreement, if the employee's employment is
terminated by Graphics "without cause" ("cause", as defined in the New
Employment Agreement, means a material breach by the employee of his
obligations under the New Employment Agreement; continued failure or
refusal of the employee to substantially perform his duties to Graphics; a
willful and material violation of Federal or state law applicable to
Graphics or the employee's conviction of a felony or perpetration of a
common law fraud; or other willful misconduct that is injurious to
Graphics) or by the employee for "good reason" (which, as defined in the
New Employment Agreement, means a decrease in base pay or a failure by
Graphics to pay material compensation due and payable; a material
diminution of the employee's responsibilities or title; a material change
in the employee's principal employment location; or a material breach by
Graphics of a material term of the New Employment Agreement), the employee
will be entitled to salary continuation payments (and certain other
benefits) through the greater of the remainder of the scheduled term and a
period of two years beginning on the date of termination. The New
Employment Agreement also provides for post-employment non-solicitation,
non-competition and confidentiality covenants.
Graphics entered into an employment agreement with Terrence M. Ray on
August 18, 1997, (the "Agreement"). The Agreement has a term of three
years commencing with the date of the Agreement and that term shall be
automatically extended for one year periods absent one year's notice of an
intent not to renew. The Agreement provides for the payment of an annual
salary and an annual bonus pursuant to an executive bonus plan adopted by
American Color. In addition, under the Agreement, Mr. Ray is eligible to
receive all other employee benefits and prerequisites made available to
Graphics' senior executives generally.
In addition, Graphics has entered into severance agreements with Joseph M.
Milano, Malcolm J. Anderson and Timothy M. Davis. These agreements
provide that if the employee's employment is terminated by Graphics
"without cause", as defined above, or by the employee for "good reason", as
defined above, the employee will be entitled to salary continuation
payments (and certain other benefits) for up to two years beginning on the
date of termination.
James T. Sullivan resigned as Chairman of the Board and Chief Executive
Officer and as a director and employee of Holdings effective as of
September 18, 1996 (the "Effective Date"). For the period commencing on
the Effective Date and ending on April 8, 1999, Mr. Sullivan will hold the
title of Vice Chairman of Holdings. Mr. Sullivan will receive salary
continuation payments at an annual rate of $0.6 million through April 8,
1999. For two years thereafter, Mr. Sullivan will be engaged as a
consultant to Holdings for which he will be paid an annual fee of $0.2
million. Under the terms of his resignation agreement, Mr. Sullivan will
be entitled, through April 8, 1999, to continue to participate in certain
employee benefit plans provided by Holdings to its employees generally.
Mr. Sullivan also received payment of his full supplemental retirement
benefit under the American Color Graphics, Inc. Supplement Executive
Retirement Plan. Mr. Sullivan's resignation agreement also contains
certain noncompetition and other restrictive covenants.
Compensation Committee Interlocks and Insider Participation
The Company has not maintained a formal compensation committee since the
1993 Acquisition. Mr. Dyott sets compensation in conjunction with the
Board of Directors.
Repriced Options
During 1998, certain common stock option agreements were modified to reprice
options previously granted with a $50 exercise price to a $.01 exercise price.
Based upon the Board of Directors determination, the new exercise price was
not less than the fair market value of such options. See note 15 to the
Company's consolidated financial Statements.
The following table presents information concerning all repricing of
options and SARs held by any executive officer during the last ten
completed fiscal years.
Ten Year Option / SAR Repricings
Number of
Securities Market Length of
Underlying Price of Original Option
Options/ Stock at Exercise Term
SARs Time of Price at New Remaining at
Repriced or Repricing or Time of Exercise Date of
Amended Amendment Repricing Price Repricing or
Name Date (#) ($) ($) ($) Amendment
- --------------------- -------- ----------- ------------ --------- -------- ---------------
Stephen M. Dyott 01/16/98 1,761 -- 50 .01 8 yrs. 6 mo.
Chairman, President, 01/16/98 380 -- 50 .01 7 yrs. 6 mo.
Chief Executive 01/16/98 859 -- 50 .01 6 yrs. 5 mo.
Officer and Director 01/16/98 2,300 -- 50 .01 5 yrs. 0 mo.
Joseph M. Milano 01/16/98 760 -- 50 .01 8 yrs. 6 mo.
Executive Vice 01/16/98 614 -- 50 .01 7 yrs. 6 mo.
President and Chief 01/16/98 688 -- 50 .01 6 yrs. 5 mo.
Financial Officer 01/16/98 102 -- 50 .01 5 yrs. 0 mo.
Malcolm J. Anderson 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
Executive Vice 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
President Operations
of Graphics
Timothy M. Davis 01/16/98 290 -- 50 .01 8 yrs. 6 mo.
Senior Vice 01/16/98 535 -- 50 .01 6 yrs. 5 mo.
President- 01/16/98 255 -- 50 .01 5 yrs. 0 mo.
Administration,
Secretary and
General Counsel
Terrence M. Ray 01/16/98 1,447 -- 50 .01 8 yrs. 6 mo.
President/Chief
Operating Officer
of American Color
Patrick W. Kellick 01/16/98 257 -- 50 .01 8 yrs. 6 mo.
Senior Vice 01/16/98 105 -- 50 .01 6 yrs. 5 mo.
President/Corporate
Controller and
Assistant Secretary
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 1998,
concerning the persons having beneficial ownership of more than five
percent of the capital stock of Holdings and the ownership thereof by each
director of Holdings and by all current officers of Holdings as a group.
Each holder below has sole voting power and sole investment power over the
shares designated below.
Shares of Holdings Percent Shares of Holdings Percent
Name Common Stock of Class Preferred Stock of Class
- ---- ------------------ -------- ------------------ --------
The Morgan Stanley Leveraged Equity
Fund II, L.P.
1221 Ave. of the Americas
New York, NY 10020 59,450 44.1 2,727 52.0
MSCP Entities
1221 Ave. of the Americas
New York, NY 10020 23,333 17.3 1,070 20.4
First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 12.6 780 14.8
Leeway & Co.
c/o State Street
Master Trust Div. W6
One Enterprise Drive
North Quincy, MA 02171 10,667 7.9 489 9.3
Stephen M. Dyott 4,075 3.0 315 (1) 5.7 (1)
Michael M. Janson -- -- -- --
Eric T. Fry -- -- -- --
All current directors and
officers as a group 8,854 6.6 554 (2) 9.6 (2)
- ------------
(1) Includes 292 preferred stock options exercisable within 60 days.
(2) Includes 526 preferred stock options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
On the Acquisition Date, MSLEF II and the Purchasing Group invested $40
million in Holdings and acquired control of Holdings and Graphics.
Pursuant to the Merger Agreement, (i) MSLEF II and the Purchasing Group
made a $40 million equity investment in Holdings and acquired (a) 90% of
the outstanding Holdings Common Stock and (b) all the outstanding shares of
the preferred stock of Holdings (the "Holdings Preferred Stock"), with a
total preference of $40 million and which, under certain circumstances, is
convertible into shares of Holdings Common Stock; and (ii) Golder, Thoma,
& Cressey, an Illinois limited partnership ("GTC") and its affiliates
received 4,987 shares of Holdings Common Stock.
MSLEF II is an investment fund affiliated with MWD. MWD is a holding
company that, through its subsidiaries, is a major international financial
services firm. In addition, two of the current directors of Holdings are
employees of Morgan Stanley & Co. Incorporated, an affiliate of MSLEF II
and also a subsidiary of MWD. As a result of these relationships, MWD may
be deemed to control the management and policies of Graphics and Holdings.
In addition, MWD may be deemed to control matters requiring shareholders'
approval, including the election of all directors, the adoption of
amendments to the Certificates of Incorporation of Holdings and Graphics
and the approval of mergers and sales of all or substantially all of
Graphics' and Holdings' assets.
Management Equity Participation. In connection with the 1993 Acquisition,
certain members of the Company's management at that time, including James
T. Sullivan and Stephen M. Dyott (collectively, the "Management
Investors"), invested an aggregate of approximately $2.3 million in
Holdings and received an aggregate of 3,700 shares of Holdings Common Stock
and 185 shares of Holdings Preferred Stock.
Each Management Investor also entered into a Management Equity Agreement,
dated as of April 8, 1993, with Holdings (collectively, the "Management
Agreements"), pursuant to which, if a Management Investor's employment with
the Company terminates for any reason, Holdings has the right to repurchase
any of the shares of Holdings Common Stock and Holdings Preferred Stock
held by such Management Investor at a price per share equal to the
"Threshold Amount" (as defined in section 4.2(d)(ix) of Holdings'
Certificate of Incorporation) applicable to such shares at such time
divided by the number of shares of Holdings Preferred Stock outstanding at
such time. In the case of shares of Holdings Common Stock held by such
Management Investor, the repurchase price will be equal to fair market
value. The payment of the repurchase price may be deferred (with interest)
if the making of such payment would cause Holdings to violate any debt
covenant or provision of applicable law, or if the Board of Directors of
Holdings determines that Holdings is not financially capable of making such
payment.
Stockholders' Agreement. In connection with the 1993 Acquisition,
Holdings, MSLEF II, each of the members of the Purchasing Group, the GTC
Funds, certain other stockholders of Holdings who were stockholders of
Holdings immediately prior to the Merger Agreement (such stockholders,
together with the GTC Funds, being referred to as the "Existing Holders")
and GTC entered into a Stockholders' Agreement, dated as of April 8, 1993
(the "Stockholders' Agreement"). The Stockholders' Agreement includes
provisions requiring the delivery of certain shares of Holdings Common
Stock from the Purchasing Group to Holdings, depending upon the return
realized by the members of the Purchasing Group on their investment, and
thereafter from Holdings to the Existing Holders. Depending upon the
returns realized by the members of the Purchasing Group on their
investment, their interest in the Holdings Common Stock could be reduced
and the interest of the Existing Holders could be increased as set forth in
the Stockholders' Agreement.
Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective July
27, 1989. Under the terms of the agreement, Graphics (whose income is
consolidated with that of Holdings for federal income tax purposes) is
liable to Holdings for amounts representing federal income taxes calculated
on a "stand-alone basis". Each year Graphics pays to Holdings the lesser
of (i) Graphics' federal tax liability computed on a stand-alone basis and
(ii) its allocable share of the federal tax liability of the consolidated
group. Accordingly, Holdings is not currently reimbursed for the separate
tax liability of Graphics to the extent Holdings' losses reduce
consolidated tax liability. Reimbursement for the use of such Holdings'
losses will occur when the losses may be used to offset Holdings' income
computed on a stand-alone basis. Graphics has also agreed to reimburse
Holdings in the event of any adjustment (including interest or penalties)
to consolidated income tax returns based upon Graphics' obligations with
respect thereto. No reimbursement obligation currently exists between
Graphics and Holdings. Also under the terms of the tax sharing agreement,
Holdings has agreed to reimburse Graphics for refundable federal income tax
equal to an amount which would be refundable to Graphics had Graphics filed
separate federal income tax returns for all years under the agreement.
Graphics and Holdings have also agreed to treat foreign, state and local
income and franchise taxes for which there is consolidated or combined
reporting in a manner consistent with the treatment of federal income taxes
as described above.
Shakopee Merger
In December 1994, Graphics and Shakopee entered into an agreement pursuant
to which they agreed in principle to the terms of the Shakopee Merger and
to negotiate definitive agreements with respect thereto. Prior to the
consummation of the Shakopee Merger, the MSCP III Entities owned a majority
of Shakopee's outstanding stock and the Company provided general
management, supervisory and administrative services to Shakopee, pursuant
to a management agreement entered into in December 1994, in exchange for an
annual service fee of $0.5 million. The Shakopee Merger was consummated
and the management agreement was terminated simultaneously with the
consummation of the offering of the Notes.
In 1998, the Company established the ACG Holdings, Inc. Preferred Stock Option
Plan (the "Preferred Stock Option Plan"). This plan is administered by the
Committee and provides for granting up to 583 shares of Holdings Preferred
Stock. Stock options may be granted under this Preferred Stock Option Plan
to officers and other key employees of the Company at the exercise price
per share of Preferred Stock, as determined at the time of grant by the
Committee in its sole discretion. All options are fully vested and are
100% exercisable at the date of grant. All options expire 10 years from
date of grant. In Fiscal Year 1998, the Company granted options to
purchase 526 shares of Preferred Stock to certain key executives, at an
exercise price of $1,909/share. See note 15 to the Company's consolidated
financial statements.
Other
MS&Co. acted as placement agent in connection with the original private
placement of the Notes and received a placement fee of $5.6 million in
connection therewith. MS&Co. is affiliated with entities that beneficially
own a substantial majority of the outstanding shares of capital stock of
Holdings. MS&Co. had a $5 million participation in the Term Loan Facility
and received fees of approximately $0.3 million in connection therewith.
In addition, Morgan Stanley Senior Funding, Inc. originally had a
participation of approximately $35 million in the Amended and Restated
Credit Agreement and received gross fees of approximately $0.5 million in
connection therewith. On June 8, 1998, Morgan Stanley Senior Funding Inc.
reduced its participation in such credit facility to $11.5 million.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
Reports of Independent Auditors
1 and 2. Financial Statements: The following Consolidated
Financial Statements of Holdings are included in
Part II, Item 8:
Consolidated balance sheets - March 31, 1998 and 1997
For the Years Ended March 31, 1998, 1997 and 1996:
Consolidated statements of operations
Consolidated statements of stockholders' deficit
Consolidated statements of cash flows
Notes to Consolidated Financial Statements
Financial Statement Schedules: The following
financial statement schedules of Holdings
are filed as a part of this report.
Schedules Page No.
I. Condensed Financial Information of Registrant................. 73
Condensed Financial Statements (parent company only)
for the years ended March 31, 1998, 1997, and 1996
and as of March 31, 1998 and 1997
II. Valuation and qualifying accounts............................. 80
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or notes thereto.
3. Exhibits: The exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement schedules are
filed as part of, or incorporated by reference into, this report.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as
amended to date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of
August 15, 1995, among Graphics, Holdings and
NationsBank of Georgia, National Association, as
Trustee**
10.0 Credit Agreement, dated as of August 15, 1995 and Amended
and Restated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan
Stanley Senior Funding, Inc. as Syndication Agent, Bankers
Trust Company as Administrative Agent and the parties
signatory thereto
10.0(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust Company
as Administrative Agent and the parties signatory thereto
10.1 Credit Agreement, dated as of August 15, 1995, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto**
10.1(a) January 10, 1996, First Amendment to Credit Agreement,
dated as of August 15, 1995, among Holdings, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto****
10.1(e) February 27, 1997, Fifth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto++++
10.1(f) June 30, 1997, Sixth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.1(g) March 13, 1998, Seventh Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.2 Agreement and Plan of Merger, dated as of August 14, 1995, among
Holdings, Graphics and Shakopee**
10.3 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan****
10.4(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.4(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.4(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of August 18, 1997, between
Graphics and Terrence M. Ray
10.6 Severance Letter, dated April 8, 1993, between Graphics and
Joseph M. Milano+
10.6(a) October 12, 1995, Amendment to Severance Letter, dated
April 8, 1993, between Graphics and Joseph M. Milano***
10.7 Severance Letter, dated April 8, 1993, between Graphics and
Timothy M. Davis+
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Timothy M. Davis***
10.8 Severance Letter dated September 8, 1995, between
Graphics and M.J. Anderson
10.9 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.9(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement dated as of August 14, 1995 among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein
10.10 Purchase Agreement between Guy Gannett, Holdings and Shakopee,
dated November 23, 1994+
10.11 First Amendment Agreement, dated as of December 22, 1994,
between Guy Gannett, Holdings and Shakopee**
10.12 Second Amendment Agreement, dated as of March 27,
1995, between Guy Gannett, Holdings and Shakopee**
10.13 Stock Option Plan of Holdings++
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe
Inc., dated March 12, 1996+++
10.15 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto
10.16 Holdings Common Stock Option Plan
10.17 Holdings Preferred Stock Option Plan
21.1 List of Subsidiaries
27.0 Financial Data Schedule
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number 33-31706-
01.
+++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-
97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the fourth quarter of
Fiscal Year 1998:
1. Form 8-K filed with the Securities and Exchange Commission on
January 29, 1998 under Item 5 to announce the Company's EBITDA for the
three months ended December 31, 1997.
The Company did not file any other reports on Form 8-K during the three
months ended March 31, 1998.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
---------------------------
1998 1997
---------- ----------
Assets
Current assets:
Receivable from subsidiary $ 359 128
---------- --------
Total assets $ 359 128
========= ========
See accompanying notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands, except par values)
March 31,
-----------------------------------
1998 1997
---------------- ----------------
Liabilities and Stockholders' Deficit
Current liabilities:
Income taxes payable $ 53 128
--------------- ---------------
Total current liabilities 53 128
Liabilities of subsidiary in excess of assets 106,391 76,318
--------------- ---------------
Total liabilities 106,444 76,446
--------------- ---------------
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares
authorized, 134,812 shares issued and outstanding at
March 31, 1998 and 123,889 shares issued and outstanding
at March 31, 1997 1 1
Preferred Stock, $.01 par value, 5,750 shares authorized,
4,000 shares Series A convertible preferred stock issued
and outstanding at March 31, 1997, $40,000,000 liquidation
preference, 1,750 shares Series B convertible preferred
stock issued and outstanding at March 31, 1997, $17,500,000
liquidation preference -- --
Preferred Stock, $.01 par value, 15,823 shares authorized, 3,631
shares series AA convertible preferred stock issued and
outstanding at March 31, 1998, $40,000,000 liquidation preference,
1,606 shares Series BB convertible preferred stock issued and
outstanding at March 31, 1998, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,249 57,499
Accumulated deficit (162,250) (132,228)
Cumulative translation adjustment (2,000) (1,590)
Unfunded pension liability (85) --
--------------- ---------------
Total stockholders' deficit (106,085) (76,318)
--------------- ---------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 359 128
=============== ===============
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,
------------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
Equity in loss of subsidiary $ (29,895) (31,703) (29,327)
---------------------- -------------------- --------------------
Net loss $ (29,895) (31,703) (29,327)
====================== ==================== ====================
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,
-------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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,
1998, Graphics' ability to pay dividends or lend to Holdings is either
restricted or prohibited, except that Graphics may pay specified amounts to
Holdings to fund the payment of Holdings' obligations pursuant to a tax
sharing agreement (see note 4).
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and
Plan of Merger dated as of March 12, 1993, as amended (the "Merger
Agreement"), between Holdings and SGI Acquisition Corp. ("Acquisition
Corp."), Acquisition Corp. was merged with and into Holdings (the
"Acquisition"). Acquisition Corp. was formed by The Morgan Stanley
Leveraged Equity Fund II, L.P., certain institutional investors and certain
members of management (the "Purchasing Group") for the purpose of acquiring
a majority interest in Holdings. Acquisition Corp. acquired a substantial
and controlling majority interest in Holdings in exchange for $40 million
in cash. In the Acquisition, Holdings continued as the surviving
corporation and the separate corporate existence of Acquisition Corp. was
terminated.
In connection with the Acquisition, the existing consulting agreement with
the managing general partner of Holdings' majority stockholder was
terminated and the related liabilities of Holdings were canceled. The
agreement required Holdings to make minimum annual payments of $1 million
for management advisory services subject to limitations in Graphics' debt
agreements. No amounts were paid during the periods presented in these
condensed financial statements.
1. Basis of Presentation
The accompanying condensed financial statements (parent company
only) include the accounts of Holdings and its investments in
Graphics accounted for in accordance with the equity method, and
do not present the financial statements of Holdings and its
subsidiary on a consolidated basis. These parent company only
financial statements should be read in conjunction with the
Company's consolidated financial statements. The Acquisition was
accounted for under the purchase method of accounting applying the
provisions of Accounting Principles Board Opinion No. 16 ("APB
16").
2. Guarantees
As set forth in the Company's consolidated financial statements, a
substantial portion of Graphics' long-term obligations have been
guaranteed by Holdings.
Holdings has guaranteed Graphics' indebtedness under the Bank
Credit Agreement, which guarantee is secured by a pledge of all of
Graphics' stock. Borrowings under the Bank Credit Agreement are
secured by substantially all assets of Graphics. Holdings is
restricted under its guarantee of the Bank Credit Agreement from,
among other things, entering into mergers, acquisitions, incurring
additional debt, or paying cash dividends.
On August 15, 1995, Graphics issued $185 million of Senior
Subordinated Notes (the "Notes") bearing interest at 12 3/4% and
maturing August 1, 2005. The Notes are guaranteed on a senior
subordinated basis by Holdings and are subordinate to all existing
and future senior indebtedness, as defined, of Graphics.
On May 8, 1998, the Company refinanced all outstanding indebtedness
under the Bank Credit Agreement and the Term Loan Facility (see
note 5 below for a discussion of the terms of this refinancing
transaction).
3. Dividends from Subsidiaries and Investees
No cash dividends were paid to Holdings from any consolidated
subsidiaries, unconsolidated subsidiaries or investees accounted
for by the equity method during the periods reflected in these
condensed financial statements.
4. Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement
effective July 27, 1989. Under the terms of the agreement,
Graphics (whose income is consolidated with that of Holdings for
federal income tax purposes) is liable to Holdings for amounts
representing federal income taxes calculated on a "stand-alone
basis". Each year Graphics pays to Holdings the lesser of (i)
Graphics' federal tax liability computed on a stand-alone basis
and (ii) its allocable share of the federal tax liability of the
consolidated group. Accordingly, Holdings is not currently
reimbursed for the separate tax liability of Graphics to the
extent Holdings' losses reduce consolidated tax liability.
Reimbursement for the use of such Holdings' losses will occur when
the losses may be used to offset Holdings' income computed on a
stand-alone basis. Graphics has also agreed to reimburse Holdings
in the event of any adjustment (including interest or penalties)
to consolidated income tax returns based upon Graphics'
obligations with respect thereto. Also, under the terms of the
tax sharing agreement, Holdings has agreed to reimburse Graphics
for refundable federal income taxes equal to an amount which would
be refundable to Graphics had Graphics filed separate federal
income tax returns for all years under the agreement. Graphics
and Holdings have also agreed to treat foreign, state and local
income and franchise taxes for which there is consolidated or
combined reporting in a manner consistent with the treatment of
federal income taxes as described above.
5. Subsequent Events
On May 8, 1998, the Company completed a refinancing transaction
which included the following: (1) the Company entered into a $145
million credit facility with Bankers Trust Company, Morgan Stanley
Senior Funding, Inc., General Electric Capital Corporation and a
syndicate of lenders (the "Amended and Restated Credit Agreement")
providing for a $70 million revolving credit facility which is not
subject to a borrowing base limitation (the "New Revolving Credit
Facility") maturing on March 31, 2004, a $25 million amortizing
term loan facility maturing on March 31, 2004 (the "A Term Loan
Facility") and a $50 million amortizing term loan facility
maturing on March 31, 2005 (the "B Term Loan Facility"); (2) the
repayment of all $57.0 million of indebtedness outstanding under
the existing Bank Credit Agreement ($65.2 million was outstanding
at March 31, 1998) (plus $0.4 million of accrued interest to the
date of repayment); (3) the repayment of all $25.0 million of
indebtedness outstanding under the existing Term Loan Facility
(plus $0.6 million of accrued interest to the date of repayment)
and (4) the payment of approximately $2.2 million in fees and
expenses associated with the refinancing transaction. In
addition, the Company recorded an extraordinary loss related to
early extinguishment of debt of $4.0 million, net of taxes
associated with the write-off of refinanced indebtedness deferred
financing costs in the first quarter of the fiscal year ending
March 31, 1999.
Interest under the Amended and Restated Credit Agreement is
floating based upon existing market rates plus agreed upon margin
levels. In addition, the Company is obligated to pay specific
commitment and letter of credit fees. Such margin levels and fees
reduce over the term of the agreement subject to the achievement
of certain Leverage Ratio measures.
Borrowings under the Amended and Restated Credit Agreement are
secured by substantially all of the Company's assets. In
addition, Holdings has guaranteed the indebtedness under the
Amended and Restated Credit Agreement, which guarantee is secured
by a pledge of all of Graphics' and its subsidiaries' stock. The
new agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated
Interest Coverage Ratio and Leverage Ratio requirements, (2)
requires prepayments in certain circumstances including excess
cash flows, proceeds from asset dispositions in excess of
prescribed levels and certain capital structure transactions and
(3) contains various restrictions and limitations on the following
items: (a) the level of capital spending, (b) the incurrence of
additional indebtedness, (c) mergers, acquisitions, investments
and similar transactions and (d) dividends and other
distributions. In addition, the agreement includes various other
customary affirmative and negative covenants.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
Balance
Balance at Additions at
Beginning of Charged to Other End of
Period Expense Write-offs Adjustments Period
------------ ---------- ---------- ----------- -------
(in thousands)
Fiscal Year ended March 31, 1998
Allowance for doubtful accounts $ 5,879 908 (4,675) -- $ 2,112
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 69 184 (47) (41) $ 165
Income tax valuation allowance $ 30,138 -- -- (a) 7,084 $37,222
Fiscal Year ended March 31, 1997
Allowance for doubtful accounts $ 4,830 4,847 (3,798) -- $ 5,879
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 611 318 (45) (815) $ 69
Income tax valuation allowance $ 21,210 -- -- (a) 8,928 $30,138
Fiscal Year ended March 31, 1996
Allowance for doubtful accounts $ 3,174 3,619 (1,963) -- $ 4,830
Reserve for inventory obsolescence -
spare parts $ 100 -- -- -- $ 100
Reserve for inventory obsolescence -
paper & ink $ 50 -- -- 561 $ 611
Income tax valuation allowance $ 13,808 -- -- (a) 7,402 $21,210
(a) The increase in the valuation allowance primarily relates to current
year losses for which no tax benefit has been recorded.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on their behalf by the undersigned thereunto duly authorized.
ACG Holdings, Inc.
American Color Graphics, Inc.
Date
----
/s/ Stephen M. Dyott June 29, 1998
------------------------------------- -------------
Stephen M. Dyott
Chairman, President and Chief Executive Officer
ACG Holdings, Inc.
Chairman, President and Chief Executive Officer
American Color Graphics, Inc.
Director of ACG Holdings, Inc. and American Color Graphics, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph M. Milano
- ---------------------------- Executive Vice President June 29, 1998
(Joseph M. Milano) Chief Financial Officer -------------
/s/ Patrick W. Kellick
- ---------------------------- Senior Vice President June 29, 1998
(Patrick W. Kellick) Corporate Controller -------------
Assistant Secretary
(Principal Accounting Officer)
/s/ Michael M. Janson Director June 29, 1998
- ---------------------------- -------------
(Michael M. Janson)
/s/ Eric T. Fry Director June 29, 1998
- ---------------------------- -------------
(Eric T. Fry)
ACG HOLDINGS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 1998
Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as
amended to date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of
August 15, 1995, among Graphics, Holdings and
NationsBank of Georgia, National Association, as
Trustee**
10.0 Credit Agreement, dated as of August 15, 1995 and Amended
and Restated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan
Stanley Senior Funding, Inc. as Syndication Agent, Bankers
Trust Company as Administrative Agent and the parties
signatory thereto
10.0(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust Company
as Administrative Agent and the parties signatory thereto
10.1 Credit Agreement, dated as of August 15, 1995, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto**
10.1(a) January 10, 1996, First Amendment to Credit Agreement,
dated as of August 15, 1995, among Holdings, Graphics, BT
Commercial Corporation, as Agent, Bankers Trust Company, as
Issuing Bank, and the parties signatory thereto***
10.1(b) March 6, 1996, Second Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(c) June 6, 1996, Third Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto+++
10.1(d) August 13, 1996, Fourth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto****
10.1(e) February 27, 1997, Fifth Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto++++
10.1(f) June 30, 1997, Sixth Amendment to Credit Agreement, dated as of
August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.1(g) March 13, 1998, Seventh Amendment to Credit Agreement, dated as
of August 15, 1995, among Holdings, Graphics, BT Commercial
Corporation, as Agent, Bankers Trust Company, as Issuing
Bank, and the parties signatory thereto
10.2 Agreement and Plan of Merger, dated as of August 14, 1995, among
Holdings, Graphics and Shakopee**
10.3 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan****
10.4(a) Employment Agreement, dated as of April 8, 1993, between
Graphics and Stephen M. Dyott*
10.4(b) Amendment to Employment Agreement, dated December 1, 1994,
between Graphics and Stephen M. Dyott++
10.4(c) Amendment to Employment Agreement, dated February 15, 1995,
between Graphics and Stephen M. Dyott++
10.4(d) Amendment to Employment Agreement, dated September 18, 1996,
between Graphics and Stephen M. Dyott****
10.5 Employment Agreement, dated as of August 18, 1997, between
Graphics and Terrence M. Ray
10.6 Severance Letter, dated April 8, 1993, between Graphics and
Joseph M. Milano+
10.6(a) October 12, 1995, Amendment to Severance Letter, dated
April 8, 1993, between Graphics and Joseph M. Milano***
10.7 Severance Letter, dated April 8, 1993, between Graphics and
Timothy M. Davis+
10.7(a) October 12, 1995, Amendment to Severance Letter, dated April 8,
1993, between Graphics and Timothy M. Davis***
10.8 Severance Letter dated September 8, 1995, between
Graphics and M.J. Anderson
10.9 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.9(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement dated as of August 14, 1995 among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P. and the additional
parties named therein
10.10 Purchase Agreement between Guy Gannett, Holdings and Shakopee,
dated November 23, 1994+
10.11 First Amendment Agreement, dated as of December 22, 1994,
between Guy Gannett, Holdings and Shakopee**
10.12 Second Amendment Agreement, dated as of March 27,
1995, between Guy Gannett, Holdings and Shakopee**
10.13 Stock Option Plan of Holdings++
10.14 Purchase Agreement between ComCorp, Inc., Graphics and Gowe
Inc., dated March 12, 1996+++
10.15 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto
10.16 Holdings Common Stock Option Plan
10.17 Holdings Preferred Stock Option Plan
21.1 List of Subsidiaries
27.0 Financial Data Schedule
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for fiscal
year ended March 31, 1995 - Commission file number 33-31706-01.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1995 - Commission file number 33-31706-
01.
+++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1996 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-
97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for
fiscal year ended March 31, 1997 - Commission file number 33-97090.