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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, 2001
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 (I.R.S. employer
of 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 (I.R.S. employer
of incorporation or organization) identification number)
100 Winners Circle
Brentwood, Tennessee 37027
(615) 377-0377
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Aggregate market value of the voting and non-voting common stock of ACG
Holdings, Inc. held by non-affiliates: Not applicable.
ACG Holdings, Inc. has 143,399 shares outstanding of its common stock, $.01 Par
Value, as of May 31, 2001 (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............................................................................................. 7
Item 3. Legal Proceedings...................................................................................... 8
Item 4. Submission of Matters to A Vote of Security Holders.................................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................................. 9
Item 6. Selected Financial Data................................................................................ 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................................. 22
Item 8. Financial Statements and Supplementary Data............................................................ 23
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure................... 50
PART III
Item 10. Directors and Executive Officers ...................................................................... 51
Item 11. Executive Compensation................................................................................. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 57
Item 13. Certain Relationships and Related Transactions......................................................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 60
Signatures............................................................................................. 68
PART I
Special Note Regarding Forward Looking Statements
This Annual Report on Form 10-K (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Act of 1934.
Discussions containing such forward-looking statements may be found in Items 1,
3, 7 and 7A hereof, as well as within this Report generally. In addition, when
used in this Report, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Forward-looking
statements are subject to a number of risks and uncertainties. Actual results in
the future could differ materially from those described in the forward-looking
statements as a result of many factors outside the control of ACG Holdings, Inc.
("Holdings"), together with its wholly-owned subsidiary, American Color
Graphics, Inc. ("Graphics"), including, but not limited to:
- fluctuations in the cost of paper and other raw materials used,
- changes in the advertising and print markets,
- actions by our competitors, particularly with respect to pricing,
- the financial condition of our customers,
- our financial condition and liquidity,
- the general condition of the United States economy,
- demand for our products and services, and
- the matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as our
current plans, estimates and beliefs. We do not undertake and specifically
decline any obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 1. BUSINESS
General
We are a successor to a business that commenced operations in 1926, and are one
of the largest national diversified commercial printers in North America with
ten print plants in eight states and Canada, nine premedia facilities located
throughout the United States and one digital visual effects facility located in
California that provides special effects services for the motion picture
industry. We operate primarily in two business segments of the commercial
printing industry: print, (which accounted for approximately 85% of total sales
during the fiscal year ended March 31, 2001 ("Fiscal Year 2001")) and premedia
services conducted through our American Color division (which accounted for
approximately 14% of total sales in Fiscal Year 2001). Our print business and
our premedia services business are both headquartered in Brentwood, Tennessee.
Partnerships affiliated with Morgan Stanley Dean Witter & Co. ("MSDW") currently
own 57.7% of the outstanding common stock and 72.7% of the outstanding preferred
stock of Holdings.
Market data used throughout this Report was obtained from industry publications
and internal company estimates. While we believe such information is reliable,
the accuracy of such information has not been independently verified and cannot
be guaranteed.
Financial Information About Industry Segments
See disclosure in note 15 of our consolidated financial statements appearing
elsewhere in this Report.
2
Print
Our print business, which accounted for approximately 85%, 84% and 83% of our
sales in Fiscal Year 2001, the fiscal year ended March 31, 2000 ("Fiscal Year
2000") and the fiscal year ended March 31, 1999 ("Fiscal Year 1999"),
respectively, produces retail advertising inserts, comics and other
publications.
Retail Advertising Inserts (85% of print sales in Fiscal Year 2001, 83% in
Fiscal Year 2000 and 81% in Fiscal Year 1999). We believe that we are one of the
largest printers of retail advertising inserts in the United States. We print
advertising inserts for approximately 275 retailers. Retail advertising inserts
are preprinted advertisements, generally in color, that display products sold by
a particular retailer or manufacturer. Advertising inserts are used extensively
by many different retailers; including discount, department, supermarket, home
center, drug and automotive stores. Inserts are an important and cost effective
means of advertising for these merchants. Advertising inserts are primarily
distributed through insertion in newspapers but are also distributed by direct
mail or in-store by retailers. They generally advertise for a specific, limited
sale period. As a result, advertising inserts are both time sensitive and
seasonal.
Comics (8% of print sales in Fiscal Year 2001, 11% in Fiscal Year 2000 and 13%
in Fiscal Year 1999). We believe that we are one of the largest printers of
comics in the United States. Comics consist of newspaper Sunday comics, comic
insert advertising and comic books. We print Sunday comics for over 200
newspapers in the United States and Canada and print a significant share of the
annual comic book requirements of Marvel Entertainment Group, Inc.
Other Publications (7% of print sales in Fiscal Year 2001 and 6% in both Fiscal
Year 2000 and Fiscal Year 1999). We print local newspapers, TV guide listings
and other publications.
Print Production
Our network of ten print plants in the United States and Canada is strategically
well positioned to service major metropolitan centers, providing us with
distribution efficiencies and shorter turnaround times, two factors that we
believe will allow our continuing success in servicing large national and
regional accounts. There are primarily three printing processes used to produce
advertising inserts and newspaper supplements: offset lithography (heatset and
cold), rotogravure and flexography. We principally use heatset offset and
flexographic web printing equipment in our print operations. We own the majority
of our printing equipment, which currently consists of 42 heatset offset
presses, 5 coldset offset presses and 11 flexographic presses. Most of our
advertising inserts, publications and comic books are printed using the offset
process, while substantially all of our newspaper Sunday comics and comic
advertising inserts are printed using the flexographic process.
In the heatset offset process, the desired printed images are distinguished
chemically from non-image areas of a metal plate which allows the image area to
attract the ink which is then transferred from the plate to a rubber blanket and
then to the paper surface. Once printed, the web goes through an oven that
evaporates the solvents from the ink, thereby setting the ink on the paper. In
the cold offset process, inks are set by the absorption of solvents into the
paper. Due to the drying process, the heatset offset process can be utilized on
a wide variety of papers. Generally, heatset offset presses have the ability to
provide a more colorful and attractive product than cold offset presses.
The flexographic process differs from offset printing in that it utilizes relief
image plates and rapid-drying, water-based (as opposed to solvent-based) inks.
The flexographic image area results from application of ink to the raised image
surface on the plate, which is transferred directly to the paper. Our
flexographic printing generally can provide vibrant color reproduction at a
lower cost than heatset offset printing. The strengths of flexography compared
with the rotogravure and offset processes are faster press set up times, reduced
paper waste, reduced energy use and maintenance costs, and environmental
advantages due to the use of water-based inks and the use of less paper. Faster
press set up times make the process particularly attractive to commercial
customers with shorter runs and extensive regional versioning.
3
In addition to press capacity, certain equipment parameters are critical to
competing in the advertising insert market, including cut-off length, folder
capabilities and certain in-line and off-line finishing capabilities. Cut-off
length is one of the determinants of the size of the printed page, the other
being web width. Folder capabilities for advertising inserts must include a wide
variety of page sizes, page counts and page layouts. Finally, some advertising
inserts require gluing or stitching of the product, adding cards, trimming and
numbering. These production activities generally are done in-line with the press
to meet the expedited delivery schedules required by many customers. We believe
that our mix and configuration of presses and press services allows for
efficient tailoring of printing services to customers' product needs.
We are one of the United States' largest mailers. In combination with our
national account status with the United States Postal Service and our experience
in such areas as list services, addressing accuracy and postal service, we are
able to offer distribution and mailing services that help to maximize the
advertising impact and financial return for our customers.
Premedia Services
Our premedia services business is conducted by our American Color division
("American Color") which accounted for approximately 14%, 15% and 16% of our
Fiscal Year 2001, Fiscal Year 2000 and Fiscal Year 1999 sales, respectively. We
believe we are one of the largest full-service providers of premedia services in
the United States and a technological leader in this industry. Premedia services
consist of digital imaging, digital asset management, prepress and color
separation services. Our premedia services business commenced operations in 1975
and maintains nine full service locations nationwide.
We assist customers in the capture, manipulation, transmission and distribution
of images. The majority of this work leads to the production of a four-color
image in a format appropriate for use by printers. We make page changes,
including type changes, and combine digital page layout information with
electronically captured and color-corrected four-color images. From these
digital files, proofs, final corrections, and finally, four-color films or
digital files are produced for each advertising or editorial page. The final
four-color films or digital files enable printers to prepare plates for each
color resulting in the appearance of full color on the printed page. Our revenue
from these traditional services is being supplemented by additional revenue
sources including digital asset management, facilities management (operating
premedia service facilities at a customer location), computer-to-plate services,
creative services, conventional and digital photography, consulting and training
services, multimedia and internet services, and software and data-base
management. We have been a leader in implementing these new technologies, which
enables us to reduce unit costs and effectively service the increasingly complex
demands of our customers more quickly than many of our competitors. We have also
been one of the leaders in the integration of electronic page make-up,
microcomputer-based design and layout, and digital cameras into premedia
production.
The premedia services industry is highly fragmented, primarily consisting of
smaller local and regional companies, with only a few national full-service
premedia service companies such as American Color, none of which has a
significant nationwide market share. Many smaller premedia service companies
have left the industry in recent years due to their inability to keep pace with
technological advances in the industry.
Competitive Advantages and Strategy
Competitive Advantages. We believe that we have the following competitive
advantages in our print and premedia services businesses:
Modern Equipment. We believe that our web heatset offset and flexographic web
printing equipment is generally among the most advanced in the industry and that
the average age of our equipment is significantly less than the majority of our
regional competitors and is comparable to our major national competitors. We are
also committed to a comprehensive, long-term maintenance program, which enhances
the reliability and extends the life of our presses and other production
equipment. We also believe that our premedia equipment is significantly more
advanced than many of our smaller regional competitors, many of whom have not
incorporated digital premedia technologies and computer-to-plate services to the
same extent as we have, nor adopted an open systems environment which allows
greater flexibility and more efficient maintenance.
4
Strong Customer Base. We provide printing services to a diverse base of
customers, including approximately 275 retailers and over 200 newspapers in the
United States and Canada. Our print services customer base includes a
significant number of the major national retailers and larger newspaper chains
as well as numerous smaller regional retailers. Our consistent focus on
providing high quality print products and strong customer service at competitive
prices has resulted in long-term relationships with many of these customers. Our
premedia services customer base includes large and medium-sized customers in the
retail, publishing, catalog and packaging businesses, many of whom also have
long-term relationships with our print segment. We have been successful in
continuing to increase the proportion of our business under long-term contracts.
Competitive Cost Structure. We have reduced the variable and fixed costs of
production at our print facilities over the past several years and believe we
are well positioned to maintain our competitive cost structure in the future due
to economies of scale. We have also reduced manufacturing costs and selling,
general and administrative expenses in our premedia services business primarily
through the adoption of new digital premedia production methodologies and
continued cost containment focus.
Strong Management Team. Our print management group maintains a clear focus on
growth, quality and continued cost reduction, resulting in an improved cost
structure and a well-defined strategy for future expansion. Our management group
in the premedia services business consists of individuals who we believe will
manage the premedia services business for growth and profitability and will
continue to upgrade our capabilities.
National Presence. Our nine print plants in the United States and one plant in
Canada provide us with distribution efficiencies, strong customer service,
flexibility and short turnaround times, all of which are instrumental in our
continued success in servicing our large national and regional retail accounts.
Our expanded sales and marketing groups provide greater customer coverage and
enable us to more successfully penetrate regional markets. We believe that our
nine premedia services facilities provide us with contingency capabilities,
increased capacity during peak periods, access to top quality internal technical
personnel throughout the country, short turnaround time and other customer
service advantages.
Strategy. Our objective is to increase shareholder value by growing our
revenues, increasing our market share and reducing costs. Our strategy to
achieve this objective is as follows:
Grow Unit Volume. Management believes that our level of national sales coverage,
when coupled with our significant industry experience and customer-focused sales
force, will result in continued unit growth. In an effort to stimulate unit
volume growth, we have strengthened our print sales group. Unit volume growth is
also expected to result from continued capital expansion and selective print
acquisitions. In addition, in our premedia services business, we have
strengthened our sales force, provided expanded training, and more closely
focused our marketing efforts on new, larger customers.
Continue to Improve Product Mix. We intend to increase our share of the retail
advertising insert market. In addition, we expect to continue to adjust the mix
of our customers and products within the retail advertising insert market to
those that are more profitable and less seasonal and to maximize the use of
our equipment. We are also continuing expansion of our print facilities'
capabilities for in-plant prepress and postpress services. Our premedia services
business will continue to focus on high value-added new business opportunities,
particularly large-scale projects that will best utilize the breadth of services
and technologies we have to offer. Additionally, we will continue to pursue
large scale facilities management opportunities as well as national and large
regional customers that require more sophisticated levels of service and
technologies.
Continue to Reduce Manufacturing Costs and Improve Quality. We intend to further
reduce our production costs at our print and premedia service facilities through
our Total Quality Management Process, an ongoing cost reduction and continuous
quality improvement process. Additionally, we plan to continue to maximize scale
advantages in the purchasing, technology and engineering areas. We also intend
to continue to gain variable cost efficiencies in our premedia services business
by using our technical resources to improve digital premedia workflows at our
various facilities. In addition, we believe we will be able to reduce our per
unit technical, sales and management costs as we increase sales in this
business.
Continue to Make Opportunistic Acquisitions. An integral part of our long-term
growth strategy includes a plan to selectively assess and acquire other print
and premedia services companies that we believe will enhance our leadership
position in these industries.
5
Customers and Distribution
Customers. We sell our print products and services to a large number of
customers, primarily retailers and newspapers, and all of the products are
produced in accordance with customer specifications. We perform approximately
one-third of our print work, including the printing of retail advertising
inserts, Sunday comics and comic books, under contracts, ranging in term from
one year to ten years. The contracts vary in length and many of the contracts
automatically extend for one year unless there has been notice to the contrary
from either of the contracting parties within a certain number of days before
the end of any term. For the balance of our print work, we obtain varying time
commitments from our customers ranging from job to job to annual allocations.
Print prices are generally fixed during such commitments; however, our standard
terms of trade call for the pass-through of changes in the price of raw
materials, primarily paper and ink.
Our premedia services customers consist of magazine and newspaper publishers,
retailers, catalog sales organizations, printers, consumer products companies,
packaging manufacturers, advertising agencies and direct mail advertisers. Our
customers typically have a need for high levels of technical expertise, short
turnaround times and responsive customer service. In addition to our historical
regional customer base, our premedia services business is increasingly focused
on larger, national accounts that have a need for a broad range of fully
integrated services and communication capabilities requiring leading edge
technology. This trend has resulted in an increase in the volume related to
facilities management arrangements with customers over the past several years.
These contracts typically extend from three to five years in length.
The print and premedia services businesses have historically had certain common
customers and our ability to cross-market is an increasingly valuable tool as
computer-to-plate, regional versioning, electronic digital imaging, facilities
management and speed to market become more important to our customers. This
enables us to provide more comprehensive solutions for our customers' premedia
and printing needs.
No single customer accounted for sales in excess of 10% of our consolidated
sales in Fiscal Year 2001. Our top ten customers accounted for approximately 45%
of consolidated sales in Fiscal Year 2001.
Distribution. We distribute our print products primarily by truck to customer
designated locations, primarily newspapers, customer retail stores and via mail.
Distribution costs are generally paid by the customer, and most shipping is by
common carrier. Our premedia services business generally distributes its
products via electronic transmission, overnight express, or other methods of
personal delivery.
Competition
Commercial printing in the United States is a large, highly fragmented,
capital-intensive industry and we compete with numerous national, regional and
local printers. A trend of industry consolidation in recent years can be
attributed to (1) customer preferences for larger printers with a greater range
of services, (2) capital requirements and (3) competitive pricing pressures. We
believe that competition in the print business is based primarily on quality and
service at a competitive price.
American Color competes with numerous premedia services 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
premedia companies such as American Color, none of which has a significant
nationwide market share. Many smaller premedia companies have left the industry
in recent years due to their inability to keep pace with the technological
advances required to service increasingly complex customer demands. We believe
that the premedia services sector will continue to be subject to high levels of
ongoing technological change and the need for capital expenditures to keep up
with such change.
6
Raw Materials
The primary raw materials used in our print business are paper and ink. In
Fiscal Year 1999, as most grades of paper became more plentiful, paper prices
declined. During Fiscal Year 2000, paper prices were on average at lower levels
than comparable periods in Fiscal Year 1999. Throughout Fiscal Year 2001, the
cost of paper increased. Management expects that, as a result of our strong
relationships with key suppliers, our material costs will remain competitive
within the industry. In accordance with industry practice, we generally pass
through increases in the cost of paper to customers in the costs of our printed
products, while decreases in paper costs generally result in lower prices to
customers. We purchase substantially all of our ink and related products under
long-term ink supply contracts. The primary inputs in premedia service processes
are film and proofing materials.
In both of our business segments, there is an adequate supply of the necessary
materials available from multiple vendors. We are not dependent on any single
supplier and have had no significant problems in the past obtaining necessary
raw materials.
Seasonality
Some of our print and premedia services business is seasonal in nature,
particularly those revenues derived from advertising inserts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - -
Seasonality" appearing elsewhere in this Report.
Backlog
Because our print and premedia services products are required to be delivered
soon after final customer orders are received, we do not experience any backlog
of unfilled customer orders.
Employees
As of April 30, 2001, we had a total of approximately 2,810 employees, of which
approximately 240 employees are represented by a collective bargaining agreement
that will expire on December 31, 2004. We consider our relations with our
employees to be excellent.
Governmental and Environmental Regulations
We are subject to regulation under various federal, state and local laws
relating to employee safety and health, and to the generation, storage,
transportation, disposal and emission into the environment of hazardous
substances. We believe that we are in material compliance with such laws and
regulations. Although compliance with such laws and regulations in the future is
likely to entail additional capital expenditures, we do not anticipate that such
expenditures will be material. See "Legal Proceedings - Environmental Matters"
appearing elsewhere in this Report.
ITEM 2. PROPERTIES
We operate in 20 locations in 13 states and Canada. We own seven print plants in
the United States and one in Canada and lease two print plants, one in
California and one in Pennsylvania. Our American Color division has nine
production locations, all of which are leased. Our American Color division also
operates premedia services facilities on the premises of several of our
customers ("facilities management"). In addition, we maintain one small
executive office in Connecticut, a digital visual effects facility in California
and our headquarter facility in Brentwood, Tennessee, all of which are leased.
We believe that our plants and facilities are adequately equipped and maintained
for present and planned operations.
7
ITEM 3. LEGAL PROCEEDINGS
We have been named as a defendant in several legal actions arising from our
normal business activities. In the opinion of management, any liabilities that
may arise from such actions will not, individually or in the aggregate, have a
material adverse effect on our financial condition or results of operations.
Environmental Matters
Graphics, together with over 300 other persons, has been designated by the U.S.
Environmental Protection Agency as a potentially responsible party (a "PRP")
under the Comprehensive Environmental Response Compensation and Liability Act
("CERCLA," also known as "Superfund") at one Superfund site. Although liability
under CERCLA may be imposed on a joint and several basis and our ultimate
liability is not precisely determinable, the PRPs have agreed that Graphics'
share of removal costs is approximately 0.46% and therefore Graphics believes
that its share of the anticipated remediation costs at such site will not be
material to its business or financial condition. Based upon an analysis of
Graphics' volumetric share of waste contributed to the site and the agreement
among the PRPs, we maintain a reserve of approximately $0.1 million in
connection with this liability on our consolidated balance sheet at March 31,
2001. We believe this amount is adequate to cover such liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public market for the common stock of either
Holdings or Graphics.
Holders
As of May 31, 2001, there were approximately 98 record holders of
Holdings' common stock. Holdings is the sole shareholder of Graphics'
common stock.
Dividends
There have been no cash dividends declared on any class of common
equity for the two most recent fiscal years. See restrictions on
Holdings' ability to pay dividends and Graphics' ability to transfer
funds to Holdings in note 1 to our consolidated financial statements
appearing elsewhere in this Report.
Recent Sales of Unregistered Securities
During the first and third quarters of Fiscal Year 2000, certain
officers exercised options to purchase an aggregate of 8,143 and 1,106
shares of Holdings stock, respectively, for $.01/share. The securities
that were sold were exempt from registration on the basis that all such
officers are "accredited investors" as defined by the rules of the
Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data for and as of the fiscal years ended
March 31, 2001, 2000, 1999, 1998 and 1997. The balance sheet data as of March
31, 2001, 2000, 1999, 1998 and 1997 and the statement of operations data for the
fiscal years ended March 31, 2001, 2000, 1999, 1998 and 1997 are derived from
the audited consolidated financial statements for such periods and at such
dates. The selected financial data below, for the fiscal years ended March 31,
1998 and 1997, also reflects our discontinued wholly-owned subsidiary, Sullivan
Media Corporation ("SMC").
This data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements appearing elsewhere in this Report.
9
Selected Financial Data
ACG Holdings, Inc.
Fiscal Year Ended March 31,
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------------------
(dollars in thousands)
Statement of Operations Data:
Sales $ 587,389 546,710 520,343 533,335 524,551
Cost of Sales 489,538 456,445 439,091 461,407 459,880
------------ ------------ ------------ ------------- ------------
Gross Profit 97,851 90,265 81,252 71,928 64,671
Selling, general and administrative expenses (a) 44,232 44,181 46,333 54,227 51,418
Restructuring costs and other special charges (b) -- -- 5,464 5,598 2,881
------------ ------------ ------------ ------------- ------------
Operating income 53,619 46,084 29,455 12,103 10,372
Interest expense, net 32,929 33,798 36,077 38,813 36,132
Other expense 1,194 627 1,217 412 245
Income tax expense (benefit) (c) (4,927) 2,189 523 2,106 2,591
------------ ------------ ------------ ------------- ------------
Income (loss) from continuing operations
before extraordinary items 24,423 9,470 (8,362) (29,228) (28,596)
------------ ------------ ------------ ------------- ------------
Discontinued operations: (d)
Loss from operations, net of tax -- -- -- -- (1,557)
Estimated loss on shut down, net of tax -- -- -- (667) (1,550)
Extraordinary loss on early extinguishment of
debt (e) -- -- (4,106) -- --
------------ ------------ ------------ ------------- ------------
Net income (loss) $ 24,423 9,470 (12,468) (29,895) (31,703)
============ ============ ============ ============= ============
Balance Sheet Data (at end of period):
Working capital (deficit) $ 15,288 (2,973) (5,451) 11,610 (8,598)
Total assets $ 302,202 303,812 299,000 329,958 333,975
Long-term debt and capitalized leases, including
current installments $ 261,706 277,344 289,589 319,657 312,309
Stockholders' deficit $ (85,867) (109,389) (119,306) (106,085) (76,318)
Other Data:
Net cash provided by operating activities $ 40,913 38,774 48,137 18,257 24,313
Net cash used by investing activities $ (19,006) (24,145) (10,364) (10,100) (10,997)
Net cash used by financing activities $ (21,968) (14,576) (37,812) (8,143) (13,312)
Capital expenditures (including lease obligations
entered into) $ 25,271 22,724 16,238 23,713 37,767
Ratio of earnings to fixed charges 1.56x 1.32x (f) (f) (f)
EBITDA (g) $ 88,305 80,007 64,286 52,367 46,972
10
NOTES TO SELECTED FINANCIAL DATA
(a) For the fiscal year ended March 31, 1998 ("Fiscal Year 1998") selling,
general and administrative expense includes $1.5 million of
non-recurring American Color charges associated with the relocation of
American Color's corporate office and various severance related
expenses and $0.6 million of non-cash charges associated with an
employee benefit program.
For the fiscal year ended March 31, 1997 ("Fiscal Year 1997") selling,
general and administrative expense includes $2.5 million of
non-recurring employee termination expenses.
(b) In March 1999, we approved a restructuring plan for our American Color
division, which was designed to consolidate certain facilities in order
to improve asset utilization and operational efficiency, modify the
organizational structure as a result of facility consolidation and
other changes and reduce overhead and other costs. We recorded $4.6
million of costs under this plan in Fiscal Year 1999.
In January 1998, we approved a restructuring plan for our print
division designed to improve responsiveness to customer requirements,
increase asset utilization and reduce overhead costs. We recorded $3.9
million of costs under this plan in Fiscal Year 1998.
In April 1995, we implemented a restructuring plan for our American
Color division, which was designed to improve productivity, increase
customer service and responsiveness and provide increased growth in the
business. We recorded $0.9 million of costs under this plan in Fiscal
Year 1997.
In addition, we recorded $0.9 million, $1.7 million and $1.9 million of
other special charges related to asset write-offs and write-downs in
our print and American Color divisions in Fiscal Year 1999, Fiscal Year
1998 and Fiscal Year 1997, respectively. See note 13 to our
consolidated financial statements appearing elsewhere in this Report
for further support of Fiscal Year 1999.
(c) In the fourth quarter of Fiscal Year 2001, the valuation allowance for
deferred tax assets was reduced by $7.3 million, resulting in a
corresponding credit to deferred income tax expense. This adjustment
reflected a change in circumstances which resulted in a judgment that a
corresponding amount of our deferred tax assets will be realized in
future years. The valuation allowance decreased by $12.6 million
(including the $7.3 million decrease discussed above) during Fiscal
Year 2001 as a result of changes in the deferred tax items.
(d) In February of Fiscal Year 1997, we made a strategic decision to shut
down the operation of our wholly-owned subsidiary SMC. This resulted in
an estimated net loss on shut down of approximately $1.5 million, which
is net of zero income tax benefits. SMC's shut down has been accounted
for as a discontinued operation, and accordingly, SMC's operations are
segregated in our consolidated financial statements. Sales, costs of
sales and selling, general and administrative expenses attributable to
SMC for Fiscal Year 1997 have been reclassified to discontinued
operations.
(e) As part of a refinancing transaction entered into on May 8, 1998 (the
"1998 Refinancing"), we recorded an extraordinary loss related to early
extinguishment of debt of $4.1 million, net of zero taxes. This
extraordinary loss primarily consisted of the write-off of deferred
financing costs related to refinanced indebtedness in Fiscal Year 1999.
11
(f) The deficiency in earnings required to cover fixed charges for the
fiscal years ended March 31, 1999, 1998 and 1997 was $7,839, $27,122
and $26,005, respectively. The deficiency in earnings to cover fixed
charges is computed by subtracting earnings before fixed charges,
income taxes, discontinued operations and extraordinary items from
fixed charges. Fixed charges consist of interest expense and one-third
of operating lease rental expenses, which is deemed to be
representative of the interest factor. The deficiency in earnings
required to cover fixed charges includes depreciation of property,
plant and equipment and amortization of goodwill and other assets and
non-cash charges which are reflected in cost of sales and selling,
general and administrative expenses, in the following amounts (in
thousands):
Fiscal Year Ended March 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Depreciation $ 29,651 $ 28,124 $ 25,282
Amortization 4,025 10,413 9,374
Non-cash charges 945 2,301 1,944
------------ ------------- ------------
Total $ 34,621 $ 40,838 $ 36,600
============ ============= ============
(g) 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 (benefit), depreciation, amortization,
other non-cash expenses, other special charges related to asset
write-offs and write-downs, other expense (income), discontinued
operations and extraordinary items. EBITDA is not a measure of
financial performance under generally accepted accounting principles
and should not be considered an alternative to net income (or any other
measure of performance under generally accepted accounting principles)
as a measure of performance or to cash flows from operating, investing
or financing activities as an indicator of cash flows or as a measure
of liquidity. Certain covenants in the Indenture dated as of August 15,
1995 and the bank credit agreement entered into in May 1998 (see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources") are based on
EBITDA, subject to certain adjustments.
EBITDA in Fiscal Year 2000 includes $0.5 million of non-recurring costs
associated with the consolidation of certain production facilities at
the American Color division.
EBITDA in Fiscal Year 1999 includes $4.6 million in restructuring costs
related to the American Color division, $0.6 million of non-recurring
costs associated with the consolidation of certain production
facilities at the American Color division, $0.3 million of
non-recurring employee termination expenses and $0.2 million of
non-cash charges associated with an employee benefit program.
EBITDA in Fiscal Year 1998 includes $3.9 million in restructuring costs
related to the print division, $1.5 million of non-recurring charges
associated with the relocation of American Color's corporate office and
various severance related expenses, and $0.7 million of certain charges
associated with employee benefit programs.
EBITDA in Fiscal Year 1997 includes $0.9 million of restructuring costs
related to the American Color division and non-recurring employee
termination expenses of $2.5 million.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Print. Commercial printing in the United States is highly competitive. The
significant capital required to keep pace with changing technology and
competitive pricing trends has led to a trend of industry consolidation in
recent years. In addition, customers' preferences for larger printers, such as
our company, with a wider variety of services, greater distribution
capabilities, critical scale and more flexibility have also contributed to
consolidation within the industry. The industry is expected to remain
competitive in the near future and our sales will continue to be subject to
changes in retailers' demands for printed products.
The cost of paper is a principal factor in our overall pricing to our customers.
The level of paper costs also has a significant impact on our reported sales. In
Fiscal Year 1999, as most grades of paper became more plentiful, paper prices
declined. During Fiscal Year 2000, paper prices were on average at lower levels
than comparable periods in Fiscal Year 1999. Throughout Fiscal Year 2001, the
cost of paper increased. In accordance with industry practice, we generally pass
through increases in the cost of paper to customers in the costs of our printed
products, while decreases in paper costs generally result in lower prices to
customers.
In recent years, comprehensive quality improvement and cost reduction programs
have been implemented for all our printing processes. As a result of these
measures, we have been successful in lowering our manufacturing costs within the
print sector, while improving product quality. 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 that in conjunction with our cost
reduction programs and increased unit volume has had a favorable impact on print
gross profit levels.
American Color (Premedia Services). The premedia services industry has
experienced significant technological advances as electronic digital premedia
systems have replaced the more manual and photography-based methods utilized in
the past. This shift in technology, which improved process efficiencies and
reduced processing costs, produced increased unit growth for American Color as
the demand for color pages increased. Selling price levels per page, however,
have declined because of greater efficiencies resulting from technological
advancements. Revenue from traditional services is being supplemented by
additional revenue sources including digital asset management, facilities
management, computer-to-plate services, creative services, conventional and
digital photography, consulting and training services, multimedia and internet
services, and software and data-base management.
In March 1999, we approved a plan for our premedia services business, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes, and reduce overhead and other costs.
The cost of this plan has been accounted for in accordance with the guidelines
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).
13
The following table summarizes our historical results of continuing operations
for Fiscal Years 2001, 2000 and 1999:
Fiscal Year Ended March 31,
-----------------------------------------------------
2001 2000 1999
---------- ---------- ----------
(dollars in thousands)
Sales
Print $ 501,311 462,886 431,936
American Color 80,060 80,240 83,816
Other (a) 6,018 3,584 4,591
---------- ---------- ----------
Total $ 587,389 546,710 520,343
========== ========== ==========
Gross Profit
Print $ 74,745 73,572 62,025
American Color 22,856 17,971 19,128
Other (a) 250 (1,278) 99
---------- ---------- ----------
Total $ 97,851 90,265 81,252
========== ========== ==========
Gross Margin
Print 14.9% 15.9% 14.4%
American Color 28.6% 22.4% 22.8%
Total 16.7% 16.5% 15.6%
Operating Income (Loss)
Print $ 49,918 49,446 38,994
American Color (b) 11,409 4,883 (2,542)
Other (a) (c) (d) (7,708) (8,245) (6,997)
---------- ---------- ----------
Total $ 53,619 46,084 29,455
========== ========== ==========
(a) Other operations primarily include revenues and expenses associated
with our digital visual effects business ("Digiscope").
(b) American Color's operating loss includes the impact of restructuring
costs of $4.6 million, and other special charges related to asset
write-offs and write-downs of $0.9 million in Fiscal Year 1999. See
"Restructuring Costs and Other Special Charges" below. American Color's
operating income (loss) also includes $0.6 million and $0.9 million of
non-recurring charges in Fiscal Year 2000 and Fiscal Year 1999,
respectively, associated with the consolidation of certain production
facilities.
(c) Also includes corporate general and administrative expenses, and
amortization expense.
(d) Other operations also reflects the impact of $0.3 million of
non-recurring employee termination expenses and $0.2 million of
non-cash charges associated with an employee benefit program in Fiscal
Year 1999.
14
Historical Results of Operations
Fiscal Year 2001 vs. Fiscal Year 2000
Total sales increased 7.4% to $587.4 million in Fiscal Year 2001 from $546.7
million in Fiscal Year 2000. This increase is primarily attributable to an
increase in print sales of $38.4 million, or 8.3%. Total gross profit increased
to $97.9 million, or 16.7% of sales, in Fiscal Year 2001 from $90.3 million, or
16.5% of sales, in Fiscal Year 2000. Total operating income increased to $53.6
million, or 9.1% of sales, in Fiscal Year 2001 from $46.1 million, or 8.4% of
sales, in Fiscal Year 2000. See the discussion of these changes by segment
below.
Print
Sales. Print sales increased $38.4 million to $501.3 million in Fiscal Year 2001
from $462.9 million in Fiscal Year 2000. The increase in Fiscal Year 2001
primarily includes the impact of increased paper prices and a slight increase in
production volume.
Gross Profit. Print gross profit increased $1.1 million to $74.7 million in
Fiscal Year 2001 from $73.6 million in Fiscal Year 2000. Print gross margin
decreased to 14.9% in Fiscal Year 2001 from 15.9% in Fiscal Year 2000. The
increase in gross profit includes the impact of reduced manufacturing costs and
increased production volume. The decrease in gross margin is attributable to the
impact of increased paper prices reflected in sales.
Selling, General and Administrative Expenses. Print selling, general and
administrative expenses increased to $24.8 million, or 5.0% of print sales, in
Fiscal Year 2001 from $24.1 million, or 5.2% of print sales, in Fiscal Year
2000. This increase includes increases in certain selling and employee related
expenses, offset in part by a reduction in pension costs.
Operating Income. As a result of the above factors, operating income from the
print business increased to $49.9 million in Fiscal Year 2001 from $49.4 million
in Fiscal Year 2000.
American Color (Premedia Services)
Sales. American Color's sales of $80.1 million in Fiscal Year 2001 approximated
sales of $80.2 million in Fiscal Year 2000.
Gross Profit. American Color's gross profit increased $4.9 million to $22.9
million in Fiscal Year 2001 from $18.0 million in Fiscal Year 2000. American
Color's gross margin increased to 28.6% in Fiscal Year 2001 from 22.4% in Fiscal
Year 2000. These increases are primarily the result of reduced manufacturing
costs related to various cost containment programs and the consolidation of
certain production sites. Fiscal Year 2000 included $0.6 million of
non-recurring costs associated with the consolidation of certain production
sites.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $11.4 million, or 14.3% of American
Color's sales in Fiscal Year 2001 from $13.1 million, or 16.3% of American
Color's sales in Fiscal Year 2000. These decreases include the impact of various
cost containment programs implemented during Fiscal Year 2000.
Operating Income. As a result of the above factors, operating income at American
Color increased $6.5 million to $11.4 million in Fiscal Year 2001 from $4.9
million in Fiscal Year 2000.
15
Historical Results of Operations
Fiscal Year 2000 vs. Fiscal Year 1999
Total sales increased 5.1% to $546.7 million in Fiscal Year 2000 from $520.3
million in Fiscal Year 1999. This increase includes an increase in print sales
of $31.0 million, or 7.2%, offset in part by a decrease in American Color sales
of $3.6 million, or 4.3%. Total gross profit increased to $90.3 million, or
16.5% of sales, in Fiscal Year 2000 from $81.3 million, or 15.6% of sales, in
Fiscal Year 1999. Total operating income increased to $46.1 million, or 8.4% of
sales, in Fiscal Year 2000 from $29.5 million, or 5.7% of sales, in Fiscal Year
1999. See the discussion of these changes by segment below.
Print
Sales. Print sales increased $31.0 million to $462.9 million in Fiscal Year 2000
from $431.9 million in Fiscal Year 1999. The increase in Fiscal Year 2000
includes the impact of an approximate 5% increase in production volume,
favorable changes in customer and product mix and an increase in paper sales to
customers. These increases were offset in part by declining paper prices.
Gross Profit. Print gross profit increased $11.6 million to $73.6 million in
Fiscal Year 2000 from $62.0 million in Fiscal Year 1999. Print gross margin
increased to 15.9% in Fiscal Year 2000 from 14.4% in Fiscal Year 1999. The
increase in gross profit was primarily the result of increased production
volume, reduced manufacturing costs and favorable changes in customer and
product mix. The increase in gross margin includes the above mentioned factors
and declining paper prices, offset in part by an increase in paper sales to
customers.
Selling, General and Administrative Expenses. Print selling, general and
administrative expenses increased to $24.1 million, or 5.2% of print sales, in
Fiscal Year 2000 from $23.0 million, or 5.3% of print sales, in Fiscal Year
1999. This increase includes increases in employee related expenses, offset in
part by decreases in certain selling expenses.
Operating Income. As a result of the above factors, operating income from the
print business increased to $49.4 million in Fiscal Year 2000 from $39.0 million
in Fiscal Year 1999.
American Color (Premedia Services)
Sales. American Color's sales decreased $3.6 million, or 4.3%, to $80.2 million
in Fiscal Year 2000 from $83.8 million in Fiscal Year 1999. The decrease in
Fiscal Year 2000 was primarily the result of reduced premedia production volume.
Gross Profit. American Color's gross profit decreased $1.1 million to $18.0
million in Fiscal Year 2000 from $19.1 million in Fiscal Year 1999. American
Color's gross margin decreased to 22.4% in Fiscal Year 2000 from 22.8% in Fiscal
Year 1999. These decreases are primarily the result of reduced sales volume and
related margins, offset in part by material and payroll savings associated with
various cost containment measures implemented during Fiscal Year 2000. Fiscal
Year 2000 and Fiscal Year 1999 included $0.6 million and $0.9 million,
respectively, of non-recurring costs associated with the consolidation of
certain production sites.
Selling, General and Administrative Expenses. American Color's selling, general
and administrative expenses decreased to $13.1 million, or 16.3% of American
Color's sales in Fiscal Year 2000 from $16.2 million, or 19.3% of American
Color's sales in Fiscal Year 1999. This decrease is attributable to various cost
containment measures implemented during Fiscal Year 2000.
Operating Income (Loss). As a result of the above factors and the incurrence of
restructuring costs associated with the American Color restructuring plan of
$4.6 million in Fiscal Year 1999 and other special charges related to asset
write-offs and write-downs of $0.9 million in Fiscal Year 1999 (see
"Restructuring Costs and Other Special Charges" below), operating income (loss)
at American Color increased to income of $4.9 million in Fiscal Year 2000 from a
loss of $2.5 million in Fiscal Year 1999.
16
Other Operations (Fiscal Year 2001 vs. Fiscal Year 2000 and Fiscal Year 2000 vs.
Fiscal Year 1999)
Other operations consist primarily of revenues and expenses associated with
Digiscope, corporate general, administrative and other expenses, including
amortization expense.
Operating losses from other operations improved to a loss of $7.7 million in
Fiscal Year 2001 from a loss of $8.2 million in Fiscal Year 2000. This change
includes a $1.4 million decrease in operating losses at Digiscope due primarily
to higher digital visual effects production volume, offset in part by increases
in certain corporate general and administrative expenses and increased
amortization expense.
Operating losses from other operations increased to a loss of $8.2 million in
Fiscal Year 2000 from a loss of $7.0 million in Fiscal Year 1999. This change
includes $0.9 million of increased operating losses at Digiscope due primarily
to lower digital visual effects sales volume in Fiscal Year 2000.
Non-cash amortization expenses (which primarily includes goodwill amortization)
within other operations, were $3.2 million, $2.8 million and $2.6 million in
Fiscal Years 2001, 2000 and 1999, respectively.
Restructuring Costs and Other Special Charges
Restructuring Costs
In March 1999, we approved a plan for our American Color division, which was
designed to consolidate certain facilities in order to improve asset utilization
and operational efficiency, modify the organizational structure as a result of
facility consolidation and other changes and reduce overhead and other costs.
The cost of this plan has been accounted for in accordance with the guidance set
forth in EITF 94-3. The pretax costs of $4.6 million, which were incurred as a
direct result of this plan (excluding other special charges related to asset
write-offs and write-downs - see below) included $2.5 million of employee
termination costs, $1.2 million of lease settlement costs and $0.9 million of
other transition and restructuring expenses. This restructuring charge was
recorded in the quarter ended March 31, 1999. The majority of these costs were
paid or settled before March 31, 2000. During Fiscal Year 2001, $1.1 million of
these costs were paid. The remaining $0.4 million balance in the restructuring
reserve at March 31, 2001 includes remaining payouts of involuntary employee
termination and lease commitment costs.
Other Special Charges
During the quarter ended March 31, 1999, we recorded special charges totaling
$0.9 million to adjust the carrying values of idle, disposed and
under-performing assets of the American Color division to estimated fair values.
The provision was based on a review of our long-lived assets in accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). Fair value was based on our estimate of held and used and idle
assets based on current market conditions using the best information available.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
Interest Expense
Interest expense decreased 2.7% to $33.0 million in Fiscal Year 2001 from $34.0
million in Fiscal Year 2000. This decrease reflects lower levels of
indebtedness, offset in part by increased borrowing costs. See note 5 to our
consolidated financial statements appearing elsewhere in this Report.
Interest expense decreased 6.3% to $34.0 million in Fiscal Year 2000 from $36.2
million in Fiscal Year 1999. This decrease includes the impact of both lower
levels of indebtedness and lower weighted average interest rates.
17
Other, Net
Other, net increased to an expense of $1.2 million in Fiscal Year 2001 from an
expense of $0.6 million in Fiscal Year 2000. Included in Fiscal Year 2001 is a
$0.4 million non-cash write-off of certain fixed assets. Other, net decreased to
an expense of $0.6 million in Fiscal Year 2000 from an expense of $1.2 million
in Fiscal Year 1999. Other, net in Fiscal Year 1999 includes various
non-recurring legal settlements and related fees of approximately $0.8 million.
Income Taxes
Our effective tax rates for Fiscal Years 2001 and 2000 were less than the
federal statutory rate due primarily to decreases in the valuation allowance,
partially offset by amortization of nondeductible goodwill and foreign tax
expense. In the fourth quarter of Fiscal Year 2001, the valuation allowance for
deferred tax assets was reduced by $7.3 million, resulting in a corresponding
credit to deferred income tax expense. This adjustment reflected a change in
circumstances which resulted in a judgment that a corresponding amount of our
deferred tax assets will be realized in future years. The valuation allowance
decreased by $12.6 million (including the $7.3 million decrease discussed above)
during Fiscal Year 2001 as a result of changes in the deferred tax items. Our
effective tax rate for Fiscal Year 1999 exceeded the federal statutory rate due
primarily to increases in the valuation allowance, amortization of nondeductible
goodwill, and foreign tax expense.
Extraordinary Loss on Early Extinguishment of Debt
As part of the 1998 Refinancing, which was completed in Fiscal Year 1999, we
recorded an extraordinary loss related to early extinguishment of debt of $4.1
million, net of zero taxes. This extraordinary loss primarily consisted of the
write-off of deferred financing costs related to refinanced indebtedness.
Net Income (Loss)
As a result of the factors discussed above, our net income increased to $24.4
million in Fiscal Year 2001 from $9.5 million in Fiscal Year 2000. Our net
income (loss) improved to income of $9.5 million in Fiscal Year 2000 from a loss
of $12.5 million in Fiscal Year 1999. The Fiscal Year 1999 net loss includes the
$4.1 million extraordinary loss related to early extinguishment of debt, $4.6
million of restructuring costs and $0.9 million of other special charges related
to asset write-offs and write-downs associated with our American Color division.
Liquidity and Capital Resources
We have a $145 million credit facility with a syndicate of lenders (the "Bank
Credit Agreement") that provides for:
(1) a $25 million amortizing term loan facility maturing on March 31,
2004 (the "A Term Loan Facility"),
(2) a $50 million amortizing term loan facility maturing on March 31,
2005 (the "B Term Loan Facility"), and
(3) a revolving credit facility providing for a maximum of $70
million borrowing availability, subject to certain customary
conditions, maturing on March 31, 2004, including up to $40
million for letters of credit, (the "Revolving Credit
Facility").
At March 31, 2001, we had total borrowings and letters of credit outstanding
under the Revolving Credit Facility of approximately $27.4 million, and,
therefore, additional borrowing availability of approximately $42.6 million.
On November 21, 2000, we repurchased, in the open market, an aggregate principal
amount of $5.0 million of our 12 3/4 % Senior Subordinated Notes Due 2005 (the
"Notes") for $4.9 million.
During Fiscal Year 2000, we voluntarily prepaid $15 million of our bank
indebtedness, reducing the A Term Loan Facility by $10.9 million and the B Term
Loan Facility by $4.1 million. At March 31, 2001, $9.6 million of the A Term
Loan Facility and $39.6 million of the B Term Loan Facility remained
outstanding. As a result of the voluntary prepayments, we have no scheduled
maturities due under either the A Term Loan Facility or B Term Loan Facility
until March 31, 2002. The scheduled A Term Loan and B Term Loan payments due on
March 31, 2002 will be approximately $0.2 million in total. Scheduled repayments
of existing capital lease obligations and other senior indebtedness during the
fiscal year ending March 31, 2002 ("Fiscal Year 2002") will approximate $6.8
million and $0.8 million, respectively.
18
In Fiscal Year 2001, net cash provided by operating activities of $40.9 million
(see consolidated statements of cash flows appearing elsewhere in this Report)
and proceeds from the sale of property, plant and equipment of $0.2 million were
primarily used to fund the following expenditures:
(1) $8.8 million in net revolver repayments,
(2) $13.1 million in principal repayments of indebtedness and
financing costs (including capital lease obligations of $7.0
million and repurchase of the Notes for $4.9 million), and
(3) $19.2 million in cash capital expenditures.
We plan to continue our program of upgrading our print and premedia equipment
and currently anticipate that Fiscal Year 2002 cash capital expenditures will
approximate $12.4 million and equipment acquired under capital leases will
approximate $8.9 million. Our cash on hand of approximately $8.7 million is
presented net of outstanding checks within trade accounts payable at March 31,
2001. Accordingly, cash is presented at a balance of $0 in the March 31, 2001
balance sheet.
Our primary sources of liquidity are cash provided by operating activities and
borrowings under the Revolving Credit Facility. We anticipate that our primary
needs for liquidity will be to conduct our business, meet our debt service
requirements, make capital expenditures and, if we elect, redeem, repay or
repurchase outstanding indebtedness, including repurchases of Notes in privately
negotiated transactions or in open market purchases to the extent permitted by
our Bank Credit Agreement.
At March 31, 2001, we had total indebtedness outstanding of $261.7 million,
including capital lease obligations, as compared to $277.3 million at March 31,
2000, representing a net reduction in total indebtedness during Fiscal Year 2001
of $15.6 million. Of the total debt outstanding at March 31, 2001, $49.3 million
(excluding letters of credit) was outstanding under the Bank Credit Agreement at
a weighted-average interest rate of 6.8%. Indebtedness under the Bank Credit
Agreement bears interest at floating rates. At March 31, 2001, we had
indebtedness other than obligations under the Bank Credit Agreement of $212.4
million (including $180 million of the Notes). We are currently in compliance
with all financial covenants set forth in the Bank Credit Agreement. See note 5
to our consolidated financial statements appearing elsewhere in this Report.
A significant portion of Graphics' long-term obligations, including indebtedness
under the Bank Credit Agreement and the Notes, has been fully and
unconditionally guaranteed by Holdings. Holdings is subject to certain
restrictions under its guarantee of indebtedness under the Bank Credit
Agreement, including among other things, restrictions on mergers, acquisitions,
incurrence of additional debt and payment of cash dividends. See note 1 to our
consolidated financial statements appearing elsewhere in this Report.
19
EBITDA
Fiscal Year Ended March 31,
--------------------------------------------------------------------------------------
2001 2000 1999
------------------- ------------------ ------------------
(dollars in thousands)
EBITDA
Print $ 74,298 72,543 61,627
American Color (a) 17,075 11,003 5,283
Other (b) (c) (3,068) (3,539) (2,624)
------------------- ------------------ ------------------
Total $ 88,305 80,007 64,286
=================== ================== ==================
EBITDA Margin
Print 14.8% 15.7% 14.3%
American Color 21.3% 13.7% 6.3%
Total 15.0% 14.6% 12.4%
(a) American Color EBITDA for Fiscal Year 1999 includes the impact of
restructuring costs of $4.6 million. See "Restructuring Costs and Other
Special Charges" above. American Color EBITDA also includes $0.5
million and $0.6 million of non-recurring charges in Fiscal Year 2000
and Fiscal Year 1999, respectively, associated with the consolidation
of certain production facilities.
(b) Other operations include revenues and expenses associated with our
digital visual effects business and corporate general and
administrative expenses.
(c) Other operations also reflects the impact of $0.3 million of
non-recurring employee termination expenses and $0.2 million of
non-cash charges associated with an employee benefit program in Fiscal
Year 1999.
EBITDA is presented and discussed because we believe that investors regard
EBITDA as a key measure of a leveraged company's performance and ability to meet
its future debt service requirements. "EBITDA" is defined as earnings before net
interest expense, income tax expense (benefit), depreciation, amortization,
other non-cash expenses, other special charges related to asset write-offs and
write-downs, other expense (income) and extraordinary items. "EBITDA Margin" is
defined as EBITDA as a percentage of net sales. EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered an alternative to net income (or any other measure of
performance under generally accepted accounting principles) as a measure of
performance or to cash flows from operating, investing or financing activities
as an indicator of cash flows or as a measure of liquidity. Certain covenants in
the Indenture and the Bank Credit Agreement are based on EBITDA, subject to
certain adjustments.
Print. As a result of the reasons previously described under "--Print,"
(excluding changes in depreciation and amortization expense), print EBITDA
increased $1.8 million to $74.3 million in Fiscal Year 2001 from $72.5 million
in Fiscal Year 2000. Print EBITDA increased $10.9 million to $72.5 million in
Fiscal Year 2000 from $61.6 million in Fiscal Year 1999. Print EBITDA Margin
decreased to 14.8% in Fiscal Year 2001 from 15.7% in Fiscal Year 2000. Print
EBITDA Margin increased to 15.7% in Fiscal Year 2000 from 14.3% in Fiscal Year
1999. The decrease in EBITDA Margin in Fiscal Year 2001 is attributable to the
impact of increased paper prices reflected in sales.
20
American Color (Premedia Services). As a result of the reasons previously
described under "--American Color," (excluding changes in depreciation,
amortization, other non-cash expenses and other special charges related to asset
write-offs and write-downs), American Color EBITDA increased $6.1 million to
$17.1 million in Fiscal Year 2001 from $11.0 million in Fiscal Year 2000.
American Color EBITDA increased $5.7 million to $11.0 million in Fiscal Year
2000 from $5.3 million in Fiscal Year 1999. American Color EBITDA Margin
increased to 21.3% in Fiscal Year 2001 from 13.7% in Fiscal Year 2000. American
Color EBITDA Margin increased to 13.7% in Fiscal Year 2000 from 6.3% in Fiscal
Year 1999. Included in the Fiscal Year 2000 and Fiscal Year 1999 EBITDA and
EBITDA Margin is the impact of $0.5 million and $0.6 million of non-recurring
charges associated with the consolidation of certain production facilities,
respectively, and $4.6 million of restructuring costs in Fiscal Year 1999 (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 $3.1 million in
Fiscal Year 2001 from negative EBITDA of $3.5 million in Fiscal Year 2000. Other
operations negative EBITDA increased to negative EBITDA of $3.5 million in
Fiscal Year 2000 from negative EBITDA of $2.6 million in Fiscal Year 1999. Other
operations negative EBITDA for Fiscal Year 1999 includes the impact of $0.3
million of non-recurring employee termination expenses and $0.2 million of
non-cash charges associated with an employee benefit program.
Amortization of Goodwill
Our goodwill is amortized on a straight-line basis by business segment. Goodwill
amortization expense will be approximately $3.0 million in Fiscal Year 2002.
Impact of Inflation
In accordance with industry practice, we generally pass through increases in our
costs (primarily paper and ink) to customers in the costs of our printed
products, while decreases in paper costs generally result in lower prices to
customers. In Fiscal Year 1999, as most grades of paper became more plentiful,
paper prices declined. During Fiscal Year 2000, paper prices were on average at
lower levels than comparable periods in Fiscal Year 1999. Throughout Fiscal Year
2001, the cost of paper increased. Management expects that, as a result of our
strong relationship with key suppliers, our material costs will remain
competitive within the industry.
Seasonality
Some of our print and premedia services business is seasonal in nature,
particularly those revenues derived from advertising inserts. Generally, our
sales from advertising inserts are highest during periods prior to the following
advertising periods: Spring advertising season (March - May); Back-to-School
(July - August); and Thanksgiving/Christmas (October - December). Sales of
newspaper Sunday comics are not subject to significant seasonal fluctuations.
Our strategy has been and will continue to include the mitigation of the
seasonality of our print business by increasing our sales to customers whose own
sales are less seasonal (i.e., food and drug companies) and who utilize
advertising inserts on a higher frequency basis.
Environmental
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and which do not contribute to current or future
period revenue generation are expensed. Environmental liabilities are recorded
when assessments and/or remedial efforts are probable and the related costs can
be reasonably estimated. We believe that environmental liabilities, currently
and in the prior periods discussed herein, are not material. We maintain a
reserve of approximately $0.1 million in connection with a Superfund site in our
consolidated statement of financial position at March 31, 2001, which we believe
to be adequate. See "Legal Proceedings - Environmental Matters" appearing
elsewhere in this Report. We do not anticipate receiving insurance proceeds
related to this potential settlement. Management does not expect that any
identified matters, individually or in the aggregate, will have a material
adverse effect on our consolidated financial position or results of operations.
Accounting
There are no pending accounting pronouncements that, when adopted, are expected
to have a material effect on our results of operations or financial position.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Information. In the ordinary course of business, our exposure to
market risks is limited as is described below. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as interest and
foreign currency exchange rates. Currently, we do not utilize derivative
financial instruments such as forward exchange contracts, future contracts,
options and swap agreements.
Interest Rate Risk for us primarily relates to interest rate fluctuations on
variable rate debt.
Foreign Currency Exchange Rate Risk is minimal as we have only one print
facility outside the United States (in Canada) and any fluctuations in net asset
values as a result of changes in foreign currency exchange rates associated with
activity at this one facility would be immaterial to the company as a whole.
Quantitative Information. At March 31, 2001 and March 31, 2000, we had both
fixed rate and variable rate debt. The carrying value of our total variable rate
debt approximated the fair value of such debt at March 31, 2001 and March 31,
2000. At our March 31, 2001 and March 31, 2000 borrowing levels, a hypothetical
10% adverse change in interest rates on the variable rate debt would have been
immaterial. Approximately 79% and 76% of our long-term debt (excluding
capitalized lease obligations) was fixed rate at March 31, 2001 and March 31,
2000, respectively.
The above market risk discussions are forward-looking statements of market risk
assuming the occurrence of certain adverse market conditions. Actual results in
the future may differ materially from those projected as a result of actual
developments in the market.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
The following consolidated financial statements of ACG Holdings, Inc.
are included in this Report:
Report of Independent Auditors................................................24
Consolidated balance sheets - March 31, 2001 and 2000.........................25
For the Years Ended March 31, 2001, 2000 and 1999:
Consolidated statements of operations.........................27
Consolidated statements of stockholders' deficit..............28
Consolidated statements of cash flows.........................29
Notes to Consolidated Financial Statements....................................31
The following consolidated financial statement schedules of ACG Holdings, Inc.
are included in Part IV, Item 14:
I. Condensed Financial Information:
Condensed Consolidated Financial Statements (parent company
only) for the years ended March 31, 2001, 2000 and 1999, and
as of March 31, 2001 and 2000
II. Valuation and qualifying accounts
All other schedules specified under Regulation S-X for ACG Holdings, Inc. have
been omitted because they are either not applicable, not required, or because
the information required is included in the financial statements or notes
thereto.
23
Report of Independent Auditors
Board of Directors
ACG Holdings, Inc.
We have audited the accompanying consolidated balance sheets of ACG Holdings,
Inc. as of March 31, 2001 and 2000, 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, 2001. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACG
Holdings, Inc. at March 31, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
May 25, 2001
24
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands)
March 31,
----------------------------------------
2001 2000
------------- -------------
Assets
- ------
Current assets:
Cash $ 0 $ 0
Receivables:
Trade accounts, less allowance for
doubtful accounts of $3,905 and $2,945
at March 31, 2001 and 2000, respectively 62,585 65,432
Other 2,049 2,447
------------- -------------
Total receivables 64,634 67,879
Inventories 12,864 11,062
Deferred income taxes 9,817 --
Prepaid expenses and other current assets 3,740 3,329
------------- -------------
Total current assets 91,055 82,270
Property, plant and equipment:
Land and improvements 2,926 2,923
Buildings and improvements 20,333 19,464
Machinery and equipment 200,770 191,378
Furniture and fixtures 10,533 9,265
Leased assets under capital leases 52,762 53,640
Equipment installations in process 9,598 5,815
------------- -------------
296,922 282,485
Less accumulated depreciation (167,014) (145,993)
------------- -------------
Net property, plant and equipment 129,908 136,492
Excess of cost over net assets acquired, less
accumulated amortization of $50,262 and $47,206
at March 31, 2001 and 2000, respectively 69,560 72,781
Other assets 11,679 12,269
------------- -------------
Total assets $ 302,202 303,812
============= =============
See accompanying notes to consolidated financial statements.
25
ACG HOLDINGS, INC.
Consolidated Balance Sheets
(Dollars in thousands, except par values)
March 31,
----------------------------------------
2001 2000
------------- -------------
Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Current installments of long-term debt and capitalized leases $ 7,809 7,727
Trade accounts payable 36,310 45,802
Accrued expenses 31,474 31,658
Income taxes 174 56
------------- -------------
Total current liabilities 75,767 85,243
Long-term debt and capitalized leases, excluding current installments 253,897 269,617
Deferred income taxes 10,546 8,031
Other liabilities 47,859 50,310
------------- -------------
Total liabilities 388,069 413,201
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223 shares authorized,
143,399 shares issued and outstanding 1 1
Preferred stock, $.01 par value, 15,823 shares authorized, 3,617 shares Series
AA convertible preferred stock issued and outstanding, $39,442,551
liquidation preference, and 1,606 shares Series BB convertible preferred
stock issued and outstanding, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,370 58,303
Accumulated deficit (141,062) (165,485)
Other accumulated comprehensive loss, net of tax (3,176) (2,208)
------------- -------------
Total stockholders' deficit (85,867) (109,389)
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 302,202 303,812
============= =============
See accompanying notes to consolidated financial statements.
26
ACG HOLDINGS, INC.
Consolidated Statements of Operations
(In thousands)
Year ended March 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Sales $ 587,389 546,710 520,343
Cost of sales 489,538 456,445 439,091
------------ ------------ ------------
Gross profit 97,851 90,265 81,252
Selling, general and administrative expenses 41,176 41,562 43,806
Amortization of goodwill 3,056 2,619 2,527
Restructuring costs and other special charges -- -- 5,464
------------ ------------ ------------
Operating income 53,619 46,084 29,455
------------ ------------ ------------
Other expense (income):
Interest expense 33,042 33,963 36,242
Interest income (113) (165) (165)
Other, net 1,194 627 1,217
------------ ------------ ------------
Total other expense 34,123 34,425 37,294
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item 19,496 11,659 (7,839)
Income tax expense (benefit) (4,927) 2,189 523
------------ ------------ ------------
Income (loss) before extraordinary item 24,423 9,470 (8,362)
Extraordinary loss on early extinguishment of debt -- -- (4,106)
------------ ------------ ------------
Net income (loss) $ 24,423 9,470 (12,468)
============ ============ ============
See accompanying notes to consolidated financial statements.
27
ACG HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
(In thousands)
Series AA
and BB Other
Voting convertible Additional accumulated
common preferred paid-in Accumulated comprehensive
stock stock capital deficit income (loss) Total
---------- ------------ ------------ -------------- ----------------- ------------
Balances, March 31, 1998 $ 1 -- 58,249 (162,250) (2,085) $(106,085)
------------
Net loss -- -- -- (12,468) -- (12,468)
Other comprehensive loss,
net of tax:
Change in cumulative
translation adjustment -- -- -- -- (504) (504)
Unfunded pension liability -- -- -- (99) (99)
------------
Comprehensive loss (13,071)
Treasury stock -- -- -- (187) -- (187)
Executive stock compensation -- -- 37 -- -- 37
---------- ------------ ------------ -------------- ----------------- ------------
Balances, March 31, 1999 $ 1 -- 58,286 (174,905) (2,688) $ (119,306)
------------
Net income -- -- -- 9,470 -- 9,470
Other comprehensive income, net of tax:
Change in cumulative
translation adjustment -- -- -- -- 296 296
Unfunded pension liability -- -- -- -- 184 184
------------
Comprehensive income 9,950
Treasury stock -- -- -- (50) -- (50)
Executive stock compensation -- -- 17 -- -- 17
---------- ------------ ------------ -------------- ----------------- ------------
Balances, March 31, 2000 $ 1 -- 58,303 (165,485) (2,208) $ (109,389)
------------
Net income -- -- -- 24,423 24,423
Other comprehensive income
(loss), net of tax:
Change in cumulative
translation adjustment -- -- -- -- (968) (968)
------------
Comprehensive income 23,455
Executive stock compensation -- -- 67 -- -- 67
---------- ------------ ------------ -------------- ----------------- ------------
Balances, March 31, 2001 $ 1 -- 58,370 (141,062) (3,176) $ (85,867)
========== ============ ============ ============== ================= ============
See accompanying notes to consolidated financial statements.
28
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 24,423 9,470 (12,468)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary item - non-cash -- -- 4,106
Other special charges - non-cash -- -- 908
Depreciation 30,579 30,067 29,651
Amortization of goodwill 3,056 2,619 2,527
Amortization of other assets 1,051 1,100 1,498
Amortization of deferred financing costs 1,389 1,326 1,412
Loss on disposals of property, plant and equipment 403 286 501
Deferred income tax expense (benefit) (7,302) 115 (1,303)
Changes in assets and liabilities, net of effects of
acquisition of business:
Decrease (increase) in receivables 3,118 (7,832) 4,108
Decrease (increase) in inventories (1,920) (2,676) 2,388
Increase (decrease) in trade accounts payable (9,246) 8,611 9,846
Decrease in accrued expenses (122) (178) (753)
Increase (decrease) in current income taxes payable 118 (1,140) 694
Increase (decrease) in other liabilities (2,451) (1,459) 4,133
Other (2,183) (1,535) 889
------------ ------------ ------------
Total adjustments 16,490 29,304 60,605
------------ ------------ ------------
Net cash provided by operating activities 40,913 38,774 48,137
------------ ------------ ------------
29
ACG HOLDINGS, INC.
Consolidated Statements of Cash Flows - Continued
(In thousands)
Year ended March 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (19,161) (21,462) (11,143)
Acquisition of business -- (2,829) --
Proceeds from sales of property, plant and equipment 180 169 765
Other (25) (23) 14
------------ ------------ ------------
Net cash used by investing activities (19,006) (24,145) (10,364)
------------ ------------ ------------
Cash flows from financing activities:
Debt:
Proceeds -- 9,215 75,000
Payments (14,787) (15,893) (103,185)
Increase in deferred financing costs (198) (371) (2,608)
Repayment of capital lease obligations (6,961) (7,504) (6,938)
Other (22) (23) (81)
------------ ------------ ------------
Net cash used by financing activities (21,968) (14,576) (37,812)
------------ ------------ ------------
Effect of exchange rates on cash 61 (53) 39
------------ ------------ ------------
Change in cash 0 0 0
Cash:
Beginning of period 0 0 0
------------ ------------ ------------
End of period $ 0 0 0
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 31,873 32,639 35,546
Income taxes, net of refunds $ 2,418 3,111 1,201
Exchange rate adjustment to long-term debt $ (22) (23) (81)
Non-cash investing activities:
Lease obligations $ 6,110 1,262 5,095
See accompanying notes to consolidated financial statements.
30
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
ACG Holdings, Inc. ("Holdings") has no operations or significant assets
other than its investment in American Color Graphics, Inc. ("Graphics").
Holdings and Graphics are collectively referred to as (the "Company").
Holdings is dependent upon distributions from Graphics to fund its
obligations. Under the terms of its debt agreements at March 31, 2001,
Graphics' ability to pay dividends or lend to Holdings was either
restricted or prohibited, except that Graphics may pay specified amounts to
Holdings (i) to pay the repurchase price payable to any officer or employee
(or their estates) of Holdings, Graphics or any of their respective
subsidiaries in respect of their stock or options to purchase stock in
Holdings upon the death, disability or termination of employment of such
officers and employees (so long as no default, or event of default, as
defined, has occurred under the terms of the Bank Credit Agreement, as
defined below, and provided the aggregate amount of all such repurchases
does not exceed $2 million) and (ii) to fund the payment of Holdings'
operating expenses incurred in the ordinary course of business, other
corporate overhead costs and expenses (so long as the aggregate amount of
such payments does not exceed $250,000 in any fiscal year) and Holdings'
obligations pursuant to a tax sharing agreement with Graphics. A
significant portion of Graphics' long-term obligations has been fully and
unconditionally guaranteed by Holdings.
The two business segments of the commercial printing industry in which the
Company operates are (i) print and (ii) premedia services conducted by its
American Color division.
Significant accounting policies are as follows:
(a) Basis of Presentation
The consolidated financial statements include the accounts of Holdings
and all greater than 50% - owned subsidiaries, which are consolidated
under accounting principles generally accepted in the United States.
All significant intercompany transactions and balances have been
eliminated in consolidation.
Earnings-per-share data has not been provided since Holdings' common
stock is closely held.
(b) Revenue Recognition
Print revenues are recognized upon the completion of production.
Shipment of printed material generally occurs upon completion of this
production process. Materials are printed to unique customer
specifications and are not returnable. Credits relating to
specification variances and other customer adjustments are not
significant.
(c) Inventories
Inventories are valued at the lower of first-in, first-out ("FIFO")
cost or market (net realizable value).
(d) Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation, which
includes amortization of assets under capital leases, is based on the
straight-line method over the estimated useful lives of the assets or
the remaining terms of the leases. Estimated useful lives used in
computing depreciation and amortization expense are 3 to 15 years for
furniture and fixtures and machinery and equipment, and 15 to 40 years
for buildings and improvements.
31
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(e) Excess of Cost Over Net Assets Acquired
The excess of cost over net assets acquired (or "goodwill") is
amortized on a straight-line basis over a range of 5 to 40 years for
each of its principal business segments. The carrying value of
goodwill is reviewed if facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the estimated undiscounted future
cash flows of the assets acquired, the Company's carrying amount of
the goodwill is reduced by the estimated shortfall of such discounted
cash flows or other measures of fair value.
(f) Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires periodic
assessment of certain long-lived assets for possible impairment when
events or circumstances indicate that the carrying amounts may not be
recoverable. Long-lived assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash
flows that are independent of the cash flows of other groups of
assets. If it is determined that the carrying amounts of such
long-lived assets are not recoverable, the assets are written down to
their fair value.
(g) Other Assets
Financing costs related to the Bank Credit Agreement (as defined
herein) are deferred and amortized over the term of the agreement.
Costs related to the Notes (as defined herein) are deferred and
amortized over the ten-year term of the Notes.
Covenants not to compete are amortized over the terms of the
underlying agreements, which are generally 5 years.
(h) Income Taxes
Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109").
(i) Foreign Currency Translation
The assets and liabilities of the Company's Canadian facility, which
include interdivisional balances, are translated at year-end rates of
exchange while revenue and expense items are translated at average
rates for the year.
Translation adjustments are recorded as a separate component of
stockholders' deficit. Since the transactions of the Canadian facility
are denominated in its functional currency and the interdivisional
accounts are of a long-term investment nature, no transaction
adjustments are included in operations.
(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.
32
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(k) Fair Value of Financial Instruments
The Company discloses the estimated fair values of its financial
instruments together with the related carrying amount. The Company is
not a party to any financial instruments with material
off-balance-sheet risk.
(l) Concentration of Credit Risk
Financial instruments, which subject the Company to credit risk,
consist primarily of trade accounts receivable. Concentration of
credit risk with respect to trade accounts receivable are generally
diversified due to the large number of entities comprising the
Company's customer base and their geographic dispersion. The Company
performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses.
(m) Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
(n) Stock-Based Compensation
The Company has elected to follow Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") in accounting for its stock-based compensation plan. The Company
believes that including the fair value of compensation plans in
determining net income is consistent with accounting for the cost of
all other forms of compensation.
(o) Impact of Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers for one
year the implementation date of Statement of Financial Accounting
Standard No. 133 ("SFAS 133") which addressed a comprehensive and
consistent standard for the recognition and measurement of derivatives
and hedging activities. As amended, SFAS 133 is effective for all
quarters of all fiscal years beginning after June 15, 2000. Earlier
adoption is permitted. Management does not anticipate that the
adoption of SFAS 137 will have a material effect on the Company's
results of operations or financial position.
(p) Shipping and Handling Costs
The Company's shipping and handling costs are reflected within Cost of
Sales in the Consolidated Statements of Operations.
33
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(2) Inventories
-----------
The components of inventories are as follows (in thousands):
March 31,
----------------------------------------
2001 2000
------------- -------------
Paper $ 10,805 9,025
Ink 234 275
Supplies and other 1,825 1,762
------------- -------------
Total % 12,864 11,062
============= =============
(3) Other Assets
------------
The components of other assets are as follows (in thousands):
March 31,
----------------------------------------
2001 2000
------------- -------------
Deferred financing costs, less accumulated
amortization of $5,851 in 2001 and $4,462
in 2000 $ 5,048 6,239
Spare parts inventory, net of valuation allowance
of $100 in 2001 and 2000 4,434 3,664
Other 2,197 2,366
------------- -------------
Total $ 11,679 12,269
============= =============
(4) Accrued Expenses
----------------
The components of accrued expenses are as follows (in thousands):
March 31,
----------------------------------------
2001 2000
------------- -------------
Compensation and related taxes $ 13,132 12,078
Employee benefits 9,527 9,347
Interest 4,033 4,262
Other 4,782 5,971
------------- -------------
Total $ 31,474 31,658
============= =============
34
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(5) Notes Payable, Long-Term Debt and Capitalized Leases
----------------------------------------------------
Long-term debt is summarized as follows (in thousands):
March 31,
----------------------------------------
2001 2000
------------- -------------
Bank Credit Agreement:
Series A Term Loan $ 9,642 9,642
Series B Term Loan 39,643 39,643
Revolving Credit Facility Borrowings -- 8,764
------------- -------------
49,285 58,049
12 3/4% Senior Subordinated Notes Due 2005 180,000 185,000
Capitalized leases 29,882 30,733
Other loans with varying maturities and
interest rates 2,539 3,562
------------- -------------
Total long-term debt 261,706 277,344
Less current installments 7,809 7,727
------------- -------------
Long-term debt and capitalized leases,
excluding current installments $ 253,897 269,617
============= =============
The Company has a $145 million credit facility with a syndicate of
lenders (the "Bank Credit Agreement"), providing for a $70 million
revolving credit facility which is not subject to a borrowing base
limitation (the "Revolving Credit Facility") maturing on March 31,
2004, a $25 million amortizing term loan facility maturing on March
31, 2004 (the "A Term Loan Facility") and a $50 million amortizing
term loan facility maturing on March 31, 2005 (the "B Term Loan
Facility"). In addition, the Company recorded an extraordinary loss
related to early extinguishment of debt of $4.1 million, net of zero
taxes, associated with the write-off of deferred financing costs
related to refinanced indebtedness in the fiscal year ended March 31,
1999.
As noted above, the Revolving Credit Facility provides for a maximum
of $70 million borrowing availability, subject to certain customary
conditions. This availability includes a provision for up to $40
million of letters of credit. At March 31, 2001, the Company had total
borrowings and letters of credit outstanding under the Revolving
Credit Facility of approximately $27.4 million, and therefore,
additional borrowing availability of approximately $42.6 million.
Interest under the Bank Credit Agreement is floating based upon
existing market rates plus agreed upon margin levels. In addition, the
Company is obligated to pay commitment and letter of credit fees. Such
margin levels and fees reduce over the term of the agreement subject
to the achievement of certain Leverage Ratio measures. The
weighted-average rate on outstanding indebtedness under the Bank
Credit Agreement at March 31, 2001 was 6.8%.
35
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The Senior Subordinated Notes (the "Notes") bear interest at 12 3/4%
and mature August 1, 2005. Interest on the Notes is payable
semi-annually on February 1 and August 1. The Notes are redeemable at
the option of Graphics in whole or in part after August 1, 2000 at
106.375% of the principal amount, declining to 100% of the principal
amount, plus accrued interest, on or after August 1, 2002. Upon the
occurrence of a change of control triggering event, as defined, each
holder of a Note will have the right to require Graphics to repurchase
all or any portion of such holder's Note at 101% of the principal
amount thereof, plus accrued interest. The Notes are subordinate to
all existing and future senior indebtedness, as defined, of Graphics,
and are guaranteed on a senior subordinated basis by Holdings.
Borrowings under the Bank Credit Agreement are secured by
substantially all of the Company's assets. In addition, Holdings has
fully and unconditionally guaranteed the indebtedness under the Bank
Credit Agreement, which guarantee is secured by a pledge of all of
Graphics' and its subsidiaries' stock. The agreement (1) requires
satisfaction of certain financial covenants including Minimum
Consolidated EBITDA, Consolidated Interest Coverage Ratio and Leverage
Ratio requirements, (2) requires prepayments in certain circumstances
including excess cash flows, proceeds from asset dispositions in
excess of prescribed levels and certain capital structure transactions
and (3) contains various restrictions and limitations on the following
items: (a) the level of capital spending, (b) the incurrence of
additional indebtedness, (c) mergers, acquisitions, investments and
similar transactions and (d) dividends and other distributions. In
addition, the agreement includes various other customary affirmative
and negative covenants. The Senior Subordinated Notes Indenture's
negative covenants are similar to, but in certain respects are less
restrictive than, covenants under the Bank Credit Agreement. Graphics'
ability to pay dividends or lend funds to Holdings is restricted (see
note 1 for a discussion of those restrictions).
The amortization for total long-term debt and capitalized leases at
March 31, 2001 is shown below (in thousands):
Long-Term Capitalized
Fiscal year Debt Leases
----------------- ---------------- -----------------
2002 $ 993 $ 9,266
2003 6,857 8,388
2004 24,365 7,517
2005 19,609 5,079
2006 180,000 2,904
Thereafter -- 4,162
---------------- -----------------
Total $ 231,824 37,316
================
Imputed interest (7,434)
-----------------
Present value of minimum lease payments $ 29,882
=================
Capital leases have varying maturity dates and implicit interest rates
which generally approximate 7%-10%. The Company estimates that the
carrying amounts of the Company's debt and other financial instruments
approximate their fair values at March 31, 2001 and 2000.
36
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(6) 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, 2001 and 2000 are as follows (in thousands):
March 31,
----------------------------------------
2001 2000
------------- -------------
Deferred tax liabilities:
Book over tax basis in fixed assets $ 22,508 25,294
Foreign taxes 3,626 3,069
Accumulated amortization 1,758 1,712
Other, net 3,315 4,233
------------- -------------
Total deferred tax liabilities 31,207 34,308
Deferred tax assets:
Bad debts 1,545 1,174
Accrued expenses and other liabilities 23,468 24,474
Net operating loss carryforwards 25,766 34,314
AMT credit carryforwards 1,922 1,500
Cumulative translation adjustment 1,246 896
------------- -------------
Total deferred tax assets 53,947 62,358
Valuation allowance for deferred tax assets 23,469 36,081
------------- -------------
Net deferred tax assets 30,478 26,277
------------- -------------
Net deferred tax liabilities $ 729 8,031
============= =============
Management has evaluated the need for a valuation allowance for deferred
tax assets and believes that certain deferred tax assets will more likely
than not be realized through the future reversal of existing taxable
temporary differences and future earnings of the Company. In the fourth
quarter of fiscal 2001, the valuation allowance was reduced by $7.3
million, resulting in a corresponding credit to deferred income tax
expense. This adjustment reflected a change in circumstances which resulted
in a judgment that a corresponding amount of the Company's deferred tax
assets will be realized in future years. The valuation allowance decreased
by $12.6 million (including the $7.3 million decrease discussed above)
during fiscal 2001 as a result of changes in the deferred tax items.
37
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) attributable to income (loss) from continuing
operations consists of (in thousands):
Year ended March 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Current
Federal $ 457 169 --
State 343 251 237
Foreign 1,575 1,654 1,589
------------ ------------ ------------
Total current 2,375 2,074 1,826
------------ ------------ ------------
Deferred
Federal (6,344) (133) (132)
State (1,515) (15) (102)
Foreign 557 263 (1,069)
------------ ------------ ------------
Total deferred (7,302) 115 (1,303)
------------ ------------ ------------
Provision (benefit) for income taxes $ (4,927) 2,189 523
============ ============ ============
38
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The effective tax rates for the fiscal years ending March 31, 2001, 2000
and 1999 were (25.3%), 18.8% and (6.7%), respectively. The difference
between these effective tax rates relating to continuing operations and
the statutory federal income tax rate is composed of the following items:
Year ended March 31,
------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes, less
federal tax impact (3.9) 1.3 (1.1)
Foreign taxes, less federal
tax impact 7.1 10.9 (4.4)
Amortization 3.2 5.1 (6.2)
Change in valuation
allowance (59.1) (37.7) (34.4)
Other, net (7.6) 4.2 4.4
------------ ------------ ------------
Effective income tax rate (25.3%) 18.8% (6.7%)
============ ============ ============
As of March 31, 2001, the Company had available net operating loss
carryforwards ("NOL's") for state purposes of $37.4 million, which can be
used to offset future state taxable income. If these NOL's are not
utilized, they will begin to expire in 2002 and will be totally expired
in 2019.
As of March 31, 2001, the Company had available NOL's for federal
purposes of $69.0 million, which can be used to offset future federal
taxable income. If these NOL's are not utilized, they will begin to
expire in 2011 and will be totally expired in 2019.
The Company also had available an alternative minimum tax credit
carryforward of $1.9 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 $57.8
million, which will begin to expire in 2011 and will be completely
expired in 2019.
39
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(7) Employee Benefit Plans
Defined Benefit Pension Plans
Pension Plans
The Company sponsors defined benefit pension plans covering full-time
employees of the Company who had at least one year of service at December
31, 1994. Benefits under these plans generally are based upon the
employee's years of service and, in the case of salaried employees,
compensation during the years immediately preceding retirement. The
Company's general funding policy is to contribute amounts within the
annually calculated actuarial range allowable as a deduction for federal
income tax purposes. The plans' assets are maintained by trustees in
separately managed portfolios consisting primarily of equity securities
and fixed income securities. In October 1994, the Board of Directors
approved an amendment to the Company's defined benefit pension plans,
which resulted in the freezing of additional defined benefits for future
services under the plans effective January 1, 1995.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new Supplemental
Executive Retirement Plan ("SERP"), which is a defined benefit plan, for
certain key executives. Such benefits will be paid from the Company's
assets. The aggregate accumulated projected benefit obligation under this
plan was approximately $2.8 million and $2.6 million at March 31, 2001
and March 31, 2000, respectively.
Defined Benefit Postretirement Plans
Postretirement Benefits
The Company provides certain other postretirement benefits for employees,
primarily life and health insurance. Full-time employees who have
attained age 55 and have at least five years of service are entitled to
postretirement health care and life insurance coverage. Postretirement
life insurance coverage is provided at no cost to eligible retirees.
Special cost sharing arrangements for health care coverage are available
to employees whose age plus years of service at the date of retirement
equals or exceeds 85 ("Rule of 85"). Any eligible retiree not meeting the
Rule of 85 must pay 100% of the required health care insurance premium.
Effective January 1, 1995, the Company amended the health care plan
changing the health care benefit for all employees retiring on or after
January 1, 2000. This amendment had the effect of reducing the
accumulated postretirement benefit obligation by approximately $3
million. This reduction is reflected as unrecognized prior service cost
and is being amortized on a straight line basis over 15.6 years, the
average remaining years of service to full eligibility of active plan
participants at the date of the amendment.
401(k) Defined Contribution Plan
Effective January 1, 1995, the Company amended its 401(k) defined
contribution plan. Eligible participants may contribute up to 15% of
their annual compensation subject to maximum amounts established by the
Internal Revenue Service and receive a matching employer contribution on
amounts contributed. The employer matching contribution is made bi-weekly
and equals 2% of annual compensation for all plan participants plus 50%
of the first 6% of annual compensation contributed to the plan by each
employee, subject to maximum amounts established by the Internal Revenue
Service. The Company's contribution under this Plan amounted to $4.2
million during the fiscal year ended March 31, 2001, $4.1 million during
the fiscal year ended March 31, 2000 and $3.8 million during the fiscal
year ended March 31, 1999.
40
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
The following table provides a reconciliation of the changes in the defined
benefit plans' benefit obligations and fair value of plan assets for the fiscal
years ended March 31, 2001 and 2000 and a statement of the funded status of such
plans as of March 31, 2001 and 2000:
Defined Benefit Defined Benefit
Pension Plans Postretirement Plan
------------------------------ ------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 53,198 58,332 2,617 2,646
Service cost 438 425 14 26
Interest cost 4,102 3,945 196 178
Plan participants' contributions -- -- 222 186
Actuarial loss (gain) 1,106 (6,516) 272 79
Expected benefit payments (3,481) (2,868) (582) (498)
Curtailment gain (2) (56) -- --
Settlement gain (34) (64) -- --
--------- --------- --------- ---------
Benefit obligation at end of year $ 55,327 53,198 2,739 2,617
========= ========= ========= =========
Change in Plan Assets
Fair value of plan assets at beginning of year $ 56,098 49,483 -- --
Actual return on plan assets (4,681) 9,313 -- --
Employer contributions 639 544 360 313
Plan participants' contributions -- -- 222 186
Benefits paid (3,385) (3,242) (582) (499)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 48,671 56,098 -- --
========= ========= ========= =========
Funded Status $ (6,656) 2,900 (2,739) (2,617)
Unrecognized net actuarial gain (1,285) (13,220) (954) (1,348)
Unrecognized prior service cost (gain) (102) (290) (2,078) (2,299)
--------- --------- --------- ---------
Accrued benefit liability $ (8,043) (10,610) (5,771) (6,264)
========= ========= ========= =========
41
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Defined Benefit Defined Benefit
Pension Plans Postretirement Plan
------------------------------ ------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Weighted - Average Assumptions
Discount rate - benefit obligation 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets 10.00% 10.00% N/A N/A
Rate of compensation increase N/A N/A N/A N/A
For measurement purposes under the defined benefit postretirement plan, a
6.5 percent annual rate of increase in the per capita cost of covered
health care benefits, excluding prescription drugs, was assumed for March
31, 2001. This rate was assumed to decrease gradually to 5 percent through
fiscal year 2004 and remain at that level thereafter. A 12 percent annual
rate of increase in the per capita cost of covered prescription drugs was
assumed for March 31, 2001. This rate was assumed to decrease gradually to
5 percent through fiscal year 2008 and remain at that level thereafter.
Defined Benefit Defined Benefit
Pension Plans Postretirement Plan
------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
--------- --------- --------- --------- --------- ---------
Components of Net Periodic Benefit Cost
Service cost $ 438 425 680 14 26 30
Interest cost 4,102 3,945 3,876 196 178 181
Expected return on plan assets (5,468) (4,815) (4,410) -- -- --
Amortization of prior service cost (112) (89) 55 (222) (222) (315)
Recognized net actuarial gain (885) (5) -- (123) (110) (142)
--------- --------- --------- --------- --------- ---------
Net periodic benefit (income) cost $ (1,925) (539) 201 (135) (128) (246)
========= ========= ========= ========= ========= =========
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical component of the defined benefit
postretirement plan. A one-percentage point change in the assumed health
care cost trend rates would have the following effects:
1% Point 1% Point
Increase Decrease
-------------- --------------
Effect on total of service and interest
cost components of expense $ 6 (5)
Effect on postretirement benefit obligation $ 82 (75)
42
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(8) Capital Stock
At March 31, 2001, capital stock consists of Holdings' common stock
("Common Stock") and Series AA and Series BB convertible preferred stock
collectively, ("Preferred Stock"). Each share of Common Stock is entitled
to one vote on each matter common shareholders are entitled to vote on. The
Preferred Stock has no voting rights. Dividends on the Common Stock and
Preferred Stock are discretionary by the Board of Directors. Upon the
occurrence of a Liquidation Event (as defined in the amended and restated
Certificate of Incorporation), all amounts available for payment or
distribution shall first be paid to holders of Series BB preferred stock,
then holders of Series AA preferred stock and then to holders of Common
Stock. Each share of the Preferred Stock may be converted, at the option of
the holder, into shares of Common Stock using conversion ratios and subject
to conditions set forth in the Company's Certificate of Incorporation.
(9) Stock Option Plans
Common Stock Option Plan
In 1993, the Company established the ACG Holdings, Inc. Common Stock Option
Plan. This plan, as amended, (the "1993 Common Stock Option Plan") is
administered by a committee of the Board of Directors (the "Committee") and
currently provides for granting up to 17,322 shares of Common Stock. On
January 16, 1998, the Company established another common stock option plan
(the "1998 Common Stock Option Plan"). This plan is administered by the
Committee and provides for granting up to 36,939 shares of Common Stock.
The 1993 Common Stock Option Plan and the 1998 Common Stock Option Plan are
collectively referred to as the "Common Stock Option Plans". Stock options
may be granted under the Common Stock Option Plans to officers and other
key employees of the Company at the exercise price per share of Common
Stock, as determined at the time of grant by the Committee in its sole
discretion. All options are 25% exercisable on the first anniversary date
of a grant and vest in additional 25% increments on each of the next three
anniversary dates of each grant. All options expire 10 years from date of
grant.
A summary of activity under the Common Stock Option Plans is as follows:
Weighted-
Average
Exercise Exercisable
Options Price ($) Options (b)
---------- ------------ -----------
Outstanding at March 31, 1998 37,207 1.42 (a) 1,147
Granted 4,283 97.45
Exercised -- --
Forfeited (4,309) 12.23
----------
Outstanding at March 31, 1999 37,181 11.23 9,698
Granted 2,665 18.02
Exercised (9,249) .01
Forfeited (757) 88.72
----------
Outstanding at March 31, 2000 29,840 13.35 9,536
Granted -- --
Exercised -- --
Forfeited -- --
----------
Outstanding at March 31, 2001 29,840 13.35 19,087
==========
(a) Reflects Fiscal Year 1998 option repricing discussed below.
(b) 365 and 780 of the exercisable options at March 31, 2000 and March 31,
2001, respectively, have a $240/option exercise price, all other
exercisable options, in all periods, have a $.01/option exercise price.
43
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
No options were granted in the fiscal year ended March 31, 2001. The
weighted-average grant-date fair value of options granted was $0 for fiscal
years ending March 31, 1999 and 1998. In the fiscal year ended March 31,
2000, 1,970 options were granted with weighted-average grant-date fair
value of approximately $.01/option and 495 options were granted with
weighted-average grant-date fair value of $539/option. These options were
granted with a weighted-average exercise price of $.01/option. Also, in the
fiscal year ended March 31, 2000, 200 options were granted with a
weighted-average grant-date fair value of approximately $.01/option and a
weighted-average exercise price of $240/option. The fair value for all
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the
fiscal years ended March 31, 2000 and 1999: risk-free interest rates of 5.3
- 6.4% and 4.5 - 5.6%, respectively; no annual dividend yield; volatility
factors of 0; and an expected option life of 5 years. The weighted-average
remaining contractual life of the options outstanding at March 31, 2001 was
6.3 years. During the fiscal year ended March 31, 1998, certain common
stock option agreements were modified to reprice options previously granted
with a $50 exercise price to a $.01 exercise price. A total of 7,281 shares
(including 362 previously exercised options that were subsequently
cancelled) of Holdings Common Stock were reserved for issuance, but not
granted under the Common Stock Option Plans at March 31, 2001.
As a result of the SFAS 123 requirements, the Company recognized related
stock compensation expense of less than $0.1 million in the fiscal year
ended March 31, 2001 and the fiscal year ended March 31, 2000, and no
compensation expense in the fiscal year ended March 31, 1999.
Preferred Stock Option Plan
In the fiscal year ended March 31, 1998, the Company established the ACG
Holdings, Inc. Preferred Stock Option Plan (the "Preferred Stock Option
Plan"). This plan is administered by the Committee and provides for
granting up to 583 shares of Preferred Stock. Stock options may be granted
under this Preferred Stock Option Plan to officers and other key employees
of the Company at the exercise price per share of Preferred Stock, as
determined at the time of grant by the Committee in its sole discretion.
All options are fully vested and are 100% exercisable at the date of grant.
All options expire 10 years from date of grant.
A summary of the Preferred Stock Option Plan is as follows:
Options
-----------
Outstanding at March 31, 1998 526
Granted 29
Exercised --
Forfeited --
-----------
Outstanding at March 31, 1999 555
Granted --
Exercised --
Forfeited --
-----------
Outstanding at March 31, 2000 555
Granted --
Exercised --
Forfeited --
-----------
Outstanding at March 31, 2001 555
===========
44
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
All options were granted with a $1,909 exercise price. The weighted-average
grant-date fair value of options granted was $1,288 and $1,091 for the
fiscal year ended March 31, 1999 and for the fiscal year ended March 31,
1998, respectively. The weighted-average remaining contractual life of the
options outstanding at March 31, 2001 was 6.8 years. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option pricing model. The following weighted-average assumptions were used
for the fiscal year ended March 31, 1999 and the fiscal year ended March
31, 1998: risk free interest rate of 5.6% and 5.5%, respectively; no annual
dividend yield; volatility factors of 0; and an expected option life of 2
years. All of the options outstanding were exercisable at March 31, 2001. A
total of 28 shares of Holdings Preferred Stock was reserved for issuance,
but not granted under the Preferred Stock Option Plan at March 31, 2001.
As a result of the SFAS 123 requirements, the Company recognized related
stock compensation expense of less than $0.1 million in the fiscal year
ended March 31, 1999. No grants of preferred options in the fiscal years
ended March 31, 2000 and March 31, 2001 resulted in zero stock compensation
expense for those years.
(10) Commitments and Contingencies
The Company incurred rent expense for the fiscal years ended March 31,
2001, 2000 and 1999 of $5.9 million, $6.0 million and $6.9 million,
respectively, under various operating leases. Future minimum rental
commitments under existing operating lease arrangements at March 31, 2001
are as follows (in thousands):
Fiscal Year
-----------
2002 $ 4,431
2003 3,530
2004 2,285
2005 1,657
2006 1,424
Thereafter 3,764
---------
Total $ 17,091
=========
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. In addition, the Company has consulting agreements with
two former employees. The aggregate commitment for future salaries at March
31, 2001, excluding bonuses, was approximately $3.2 million.
On December 21, 1989, Graphics sold to CPS Corp. ("CPS"), its ink
manufacturing operations and facilities. Concurrent with the sale of its
ink manufacturing facility, Graphics entered into a long-term ink supply
contract with CPS. The supply contract requires Graphics to purchase a
significant portion of its ink requirements, within certain limitations and
minimums, from CPS. Graphics believes that prices for products under this
contract approximate market prices at the time of purchase of such
products.
In the quarter ended December 31, 1997, the Company entered into multi-year
contracts to purchase a portion of the Company's raw materials to be used
in its normal operations. In connection with such purchase agreements,
pricing for a portion of the Company's raw materials is adjusted for
certain movements in market prices, changes in raw material costs and other
specific price increases. The Company is deferring certain contractual
provisions over the life of the contracts, which are being recognized as
the purchase commitments are achieved. The amount deferred at March 31,
2001 is $27.3 million and is included within Other liabilities in the
Company's consolidated balance sheet.
45
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Graphics, together with over 300 other persons, has been designated by the
U.S. Environmental Protection Agency as a potentially responsible party (a
"PRP") under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA", also known as "Superfund") at one Superfund site.
Although liability under CERCLA may be imposed on a joint and several basis
and the Company's ultimate liability is not precisely determinable, the
PRPs have agreed that Graphics' share of removal costs is 0.46% and
therefore Graphics believes that its share of the anticipated remediation
costs at such site will not be material to its business or financial
condition. Based upon an analysis of Graphics' volumetric share of waste
contributed to the site and the agreement among the PRPs, the Company
maintains a reserve of approximately $0.1 million in connection with this
liability on its consolidated balance sheet at March 31, 2001. The Company
believes this amount is adequate to cover such liability.
The Company has been named as a defendant in several legal actions arising
from its normal business activities. In the opinion of management, any
liabilities that may arise from such actions will not, individually or in
the aggregate, have a material adverse effect on the consolidated financial
statements of the Company.
(11) Significant Customers
No single customer represented 10% or more of total sales in the fiscal
years ended March 31, 2001, 2000, and 1999.
(12) Interim Financial Information (Unaudited)
Quarterly financial information follows (in thousands):
Gross Net Income
Net Sales Profit (Loss)
------------- ------------- -------------
Fiscal Year 2001
Quarter Ended
June 30 $ 141,527 24,915 6,936
September 30 138,844 24,280 4,547
December 31 162,871 27,999 7,699
March 31 144,147 20,657 5,241
------------- ------------- -------------
Total $ 587,389 97,851 24,423
============= ============= =============
Fiscal Year 2000
Quarter Ended
June 30 $ 123,608 21,263 4,266
September 30 134,211 22,297 1,964
December 31 152,213 25,808 5,286
March 31 136,678 20,897 (2,046)
------------- ------------- -------------
Total $ 546,710 90,265 9,470
============= ============= =============
46
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(13) Restructuring Costs and Other Special Charges
Restructuring Costs
In March 1999, the Company approved a plan for its American Color division
which was designed to consolidate certain facilities in order to improve
asset utilization and operational efficiency, modify the organizational
structure as a result of facility consolidation and other changes and
reduce overhead and other costs. The cost of this plan has been accounted
for in accordance with the guidance set forth in Emerging Issues Task Force
Issue 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). The pretax costs of $4.6 million, which were
incurred as a direct result of this plan (excluding other special charges
related to asset write-offs and write-downs - see below) included $2.5
million of employee termination costs, $1.2 million of lease settlement
costs and $0.9 million of other transition and restructuring expenses. This
restructuring charge was recorded in the quarter ended March 31, 1999. The
majority of these costs were paid or settled before March 31, 2000. During
the fiscal year ended March 31, 2001, $1.1 million of these costs were
paid. The remaining $0.4 million balance in the restructuring reserve at
March 31, 2001 includes remaining payouts of involuntary employee
termination and lease commitment costs.
Other Special Charges
During the quarter ended March 31, 1999, the Company recorded special
charges totaling $0.9 million to adjust the carrying values of idle,
disposed and under-performing assets of the American Color division to
estimated fair values. The provision was based on a review of the Company's
long-lived assets in accordance with SFAS 121. Fair value was based on the
Company's estimate of held and used and idle assets based on current market
conditions using the best information available.
These special charges are classified within restructuring costs and other
special charges in the consolidated statements of operations.
(14) Parent Guarantee of Subsidiary Debt
Graphics, the issuer of the Notes, is a wholly-owned subsidiary of
Holdings. Holdings has no other subsidiaries. Holdings has fully and
unconditionally guaranteed the payment of principal and interest on the
Notes on an unsecured senior subordinated basis. The guaranty by Holdings
ranks junior to all existing and future senior indebtedness of Holdings,
including its full and unconditional guaranty of Graphics obligations under
the Bank Credit Agreement. Holdings conducts no business other than as the
sole shareholder of Graphics and has no significant assets other than the
capital stock of Graphics, all of which is pledged to secure Holdings'
obligations under the Bank Credit Agreement. Holdings is dependent upon
distributions from Graphics to fund its obligations. Graphics' ability to
pay dividends or lend funds to Holdings is restricted (see note 1 for a
discussion of those restrictions).
47
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
(15) Industry Segment Information
Effective March 31, 1999, the Company adopted the provisions of Financial
Accounting Standards Board Statement of Financial Accounting Standard No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The Company has significant operations principally in two
industry segments: (1) print and (2) premedia services. All of the
Company's print business and assets are attributed to the print division
and all of the Company's premedia services business and assets are
attributed to the American Color division ("American Color"). The Company's
digital visual effects operations and corporate expenses have been
segregated and do not constitute a reportable segment of the Company as
contemplated by SFAS 131.
The Company has two reportable segments: (1) print and (2) premedia
services. The print business produces retail advertising inserts, comics
(newspaper Sunday comics, comic insert advertising and comic books), and
other publications. The Company's premedia services business assists
customers in the capture, manipulation, transmission and distribution of
images. The majority of the premedia services work leads to the production
of four-color separations in a format appropriate for use by printers.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on segment EBITDA which is defined as earnings before net
interest expense, income tax expense (benefit), depreciation, amortization,
other non-cash expenses, other special charges related to asset write-offs
and write-downs, other expense (income) and extraordinary items. The
Company generally accounts for intersegment revenues and transfers as if
the revenues or transfers were to third parties, that is, at current market
prices.
The Company's reportable segments are business units that offer different
products and services. They are managed separately because each segment
requires different technology and marketing strategies. A substantial
portion of the revenue, long-lived assets and other assets of the Company's
reportable segments are attributed to or located in the United States.
Corporate
(In Thousands of Dollars) Print Premedia and Other Total
------------------------------------------ -------------- -------------- -------------- --------------
2001
Segment revenues $ 501,311 80,060 6,018 587,389
EBITDA $ 74,298 17,075 (3,068) 88,305
Depreciation and amortization 24,380 5,666 4,640 34,686
Interest expense -- -- 33,042 33,042
Interest income -- -- (113) (113)
Other, net (33) 856 371 1,194
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ 49,951 10,553 (41,008) 19,496
Total assets $ 256,786 28,457 16,959 302,202
Total capital expenditures $ 19,492 5,539 240 25,271
48
ACG HOLDINGS, INC.
Notes to Consolidated Financial Statements
Corporate
(In Thousands of Dollars) Print Premedia and Other Total
------------------------------------------ -------------- -------------- -------------- --------------
2000
Segment revenues $ 462,886 80,240 3,584 546,710
EBITDA $ 72,543 11,003 (3,539) 80,007
Depreciation and amortization 23,097 5,983 4,706 33,786
Interest expense -- -- 33,963 33,963
Interest income -- -- (165) (165)
Other charges, net -- 137 -- 137
Other, net 98 208 321 627
-------------- -------------- -------------- --------------
Income (loss) before income taxes $ 49,348 4,675 (42,364) 11,659
Total assets $ 262,761 31,333 9,718 303,812
Total capital expenditures $ 17,977 4,419 328 22,724
-------------------------------------------------------------------------------------------------------------------------------
1999
Segment revenues $ 431,936 83,816 4,591 520,343
EBITDA $ 61,627 5,283 (2,624) 64,286
Depreciation and amortization 22,633 6,670 4,373 33,676
Interest expense -- -- 36,242 36,242
Interest income -- -- (165) (165)
Other charges,net -- 1,155 -- 1,155
Other, net 24 819 374 1,217
-------------- -------------- -------------- --------------
Income (loss) before income taxes
and extraordinary items $ 38,970 (3,361) (43,448) (7,839)
Total assets $ 256,641 30,451 11,908 299,000
Total capital expenditures $ 9,369 6,051 818 16,238
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
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,
2001). All directors hold office until their successors are duly elected and
qualified.
Name Age Position with Graphics and Holdings
---- --- -----------------------------------
Stephen M. Dyott 49 Chairman, President of Holdings, Chief Executive Officer and Director
James S. Hoch 41 Director
Eric T. Fry 34 Director
Joseph M. Milano 48 Executive Vice President and Chief Financial Officer
Malcolm J. Anderson 62 President of Graphics
Timothy M. Davis 46 Senior Vice President/Administration, Secretary and General Counsel
Stuart R. Reeve 37 Executive Vice President, Operations of Graphics
Larry R. Williams 60 Executive Vice President, Purchasing of Graphics
Patrick W. Kellick 43 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 from 1991 to 1999; Vice
President and General Manager - Flexible Packaging, American National Can
Company ("ANCC") from 1988 to 1991; Vice President and General Manager - Tube
Packaging, ANCC from 1985 to 1987.
James S. Hoch - Director of Graphics and Holdings since February of 2001;
Managing Director of Morgan Stanley & Co. ("MS&Co.") and the general partner of
Morgan Stanley Capital Partners III, L.P. ("MSCP III") and Morgan Stanley
Leveraged Equity Fund II, L.P. ("MSLEF II"); joined MS&Co. in 1982; Currently a
Director of Silgan Holdings, Choice One Communications, Netscalibur Ltd of the
UK, Primacom AG of Germany, and Xtempus of the UK.
Eric T. Fry - Director of Graphics and Holdings since March 1996; Principal of
MS&Co. and the general partner of MSCP III and MSLEF II; joined MS&Co. in 1989;
Director of EnerSys Inc., Direct Response Corporation, Homesite Group, LifeTrust
America, Vanguard Health Systems and The Underwriter Holdings Company Limited.
Joseph M. Milano - Executive Vice President and Chief Financial Officer of
Holdings and Graphics since 1997; Senior Vice President and Chief Financial
Officer of Holdings and Graphics from 1994 to 1997; Vice President - Finance of
Holdings and Graphics from 1992 to 1994; Vice President and Chief Financial
Officer, Farrel Corporation, 1989 to 1992; Vice President and Chief Financial
Officer, Electronic Mail Corporation of America from 1984 to 1988.
Malcolm J. Anderson - President of Graphics since 1999; Executive Vice
President, Operations of Graphics from 1996 to 1999; Senior Vice President,
Operations of Graphics from 1993 to 1996; President, Plastic Products Division
of Kerr Group, Inc. from 1989 to 1993; Vice President Manufacturing - Flexible
Packaging, American National Can Company from 1982 to 1989; Vice President,
Eastern Division General Manager of Sinclair and Valentine Ink Company from 1980
to 1982.
Timothy M. Davis - Senior Vice President/Administration, Secretary and General
Counsel of Holdings and Graphics since 1989; Assistant General Counsel of
MacMillan, Inc. and counsel to affiliates of Maxwell Communication Corporation
North America, January 1989 to June 1989; Attorney in private practice from 1981
to 1989.
51
Stuart R. Reeve - Executive Vice President, Operations of Graphics since 1999;
Executive Vice President Sales and Marketing of Graphics from 1997 to 1999;
Senior Vice President Commercial Sales of Graphics 1995 to 1997; Vice President
Sales - Midwest of Graphics 1994 to 1995; Vice President Sales - West of
Graphics 1991 to 1994; Sales Executive of Graphics 1989 to 1991.
Larry R. Williams - Executive Vice President, Purchasing of Graphics since 1997;
Senior Vice President - Purchasing, Marketing and Newspaper Sales of Graphics
from 1996 to 1997; Senior Vice President of Purchasing / Transportation of
Graphics from 1993 to 1996; Independent Management Consultant from 1992 to 1993
and Senior Vice President, Operations Support for Ryder Systems from 1990 to
1992.
Patrick W. Kellick - Senior Vice President/Corporate Controller of Holdings and
Graphics since 1997; Vice President/Corporate Controller of Holdings and
Graphics from 1989 to 1997; Corporate Controller of Graphics since 1987, and
Assistant Secretary of Holdings and Graphics since 1995; various financial
positions with Williams Precious Metals (a division of Brush Wellman, Inc.) from
1984 to 1987, including CFO from 1986 to 1987; Auditor with KPMG from 1979 to
1984.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents information concerning compensation for services to
Holdings and Graphics during the fiscal years ended March 31, 2001, 2000 and
1999 to the Chief Executive Officer and the four other most highly compensated
executive officers (the "Named Executive Officers") of Holdings and/or Graphics.
Summary Compensation Table
Long-Term Compensation
------------------------------------
Annual Compensation Awards Payouts
------------------------------------ ------------------------- ---------
Securities
Other Under- All
Annual Restricted lying Other
Name and Principal Compen- Stock Options/ LTIP Compen-
Position Period Salary Bonus sation Award(s) SAR's (#) Payouts sation
- ------------------------- ------------------ ------------ ------------- --------- -------------- ------------ --------- --------
Stephen M. Dyott Fiscal Year 2001 $ 575,000 $1,425,000 -- -- -- -- --
Chairman, President of Fiscal Year 2000 $ 575,000 $1,000,000 -- -- -- -- --
Holdings and Chief Fiscal Year 1999 $ 517,311 $ 800,000 -- -- -- -- --
Executive Officer & Director
Joseph M. Milano Fiscal Year 2001 $ 330,000 $ 425,000 -- -- -- -- --
Executive Vice President Fiscal Year 2000 $ 309,231 $ 375,000 -- -- -- -- --
& Chief Financial Officer Fiscal Year 1999 $ 287,981 $ 325,000 -- -- 29 -- --
Malcolm J. Anderson Fiscal Year 2001 $ 350,000 $ 325,000 -- -- -- -- --
President of Graphics Fiscal Year 2000 $ 319,231 $ 325,000 -- -- 691 -- --
Fiscal Year 1999 $ 240,385 $ 225,000 -- -- -- -- --
Timothy M. Davis Fiscal Year 2001 $ 295,000 $ 325,000 -- -- -- -- --
Senior VicePresident/ Fiscal Year 2000 $ 277,692 $ 275,000 -- -- -- -- --
Administration, Fiscal Year 1999 $ 252,308 $ 225,000 -- -- -- -- --
Secretary & General Counsel
Stuart R. Reeve Fiscal Year 2001 $ 300,000 $ 260,000 -- -- -- -- --
Executive Vice President, Fiscal Year 2000 $ 284,616 $ 260,000 -- -- 441 -- --
Operations of Graphics Fiscal Year 1999 $ 234,134 $ 225,000 -- -- -- -- --
52
The following table presents information concerning the options granted to the
Named Executive Officers during the last fiscal year.
Option/SAR Grants in Last Fiscal Year
Alternative
To (f) and (g)
Grant Date
Individual Grants Value
----------------------------------------------------------------------------------------------------- -----------------------
% of Total
Options/
Number of SAR's
Securities Granted to Grant
Underlying Employees Exercise or Date
Options/SAR's in Fiscal Base Price Expiration Present
Name Granted (#) Year 2001 ($/sh) Date Value ($)
---------------------- ----------------- -------------- --------------- -------------- -----------------------
Common Stock Option Plans
None
Preferred Stock Option Plan
None
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 3/31/01 SAR's at 3/31/01
on Exercise (#) Realized($) Exercisable/Unexercisable(#) Exercisable/Unexercisable ($)
---------------- -------------- ---------------------------- -----------------------------
Common Stock Option Plans (a)
Stephen M. Dyott -- -- 5,025.25 / 2,292.50 6,122,564 / 2,793,090 (a)
Joseph M. Milano -- -- 2,725.50 / 1,267.75 3,320,640 / 1,544,576 (a)
Malcolm J. Anderson -- -- 814.25 / 807.75 992,050 / 984,130 (a)
Timothy M. Davis -- -- 1,341.50 / 634.50 1,634,430 / 773,049 (a)
Stuart R. Reeve -- -- 769.75 / 620.25 937,833 / 755,688 (a)
Preferred Stock Option
Plan (b)
Stephen M. Dyott -- -- 292 / 0 2,326,037 / 0 (b)
Joseph M. Milano -- -- 175 / 0 1,394,029 / 0 (b)
Timothy M. Davis -- -- 88 / 0 700,997 / 0 (b)
(a) Holdings' common stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. The values
set forth in the table are based on our estimate of the fair market value
of the common stock at March 31, 2001.
(b) Holdings' preferred stock has not been registered or publicly traded and,
therefore a public market price of the stock is not available. The values
set forth in the table are based on our estimate of the fair market value
of the preferred stock at March 31, 2001.
53
Pension Plan
Graphics sponsors the American Color Graphics, Inc. Salaried Employees' Pension
Plan (the "Pension Plan"), a defined benefit pension plan covering full-time
salaried employees of Graphics who had at least one year of service as of
December 31, 1994.
In October 1994, the Board of Directors approved an amendment to the Pension
Plan that resulted in the freezing of additional defined benefits for future
services under such plan effective January 1, 1995 (see note 7 to our
consolidated financial statements appearing elsewhere in this Report).
At March 31, 2001, all of the Named Executive Officers had vested in the Pension
Plan. At March 31, 2001, the Named Executive Officers had the following amounts
of credited service (original hire date through January 1, 1995) and annual
benefit payable upon retirement at age 65 under the Pension Plan: Stephen M.
Dyott (3 years, 3 months; $8,220), Joseph M. Milano (2 years, 7 months; $5,820),
Malcolm J. Anderson (1 year, 3 months; $2,820), Timothy M. Davis (5 years, 5
months; $11,700) and Stuart R. Reeve (5 years, 4 months; $9,185).
The basic benefit payable under the Pension Plan is a five-year certain single
life annuity equivalent to (a) 1% of a participant's "final average monthly
compensation" plus (b) 0.6% of a participant's "final average monthly
compensation" in excess of 40% of the monthly maximum Social Security wage base
in the year of retirement multiplied by years of credited service (not to exceed
30 years of service). For purposes of the Pension Plan, "final average
compensation" (which, for the Named Executive Officers, is reflected in the
salary and bonus columns of the Summary Compensation Table) means the average of
a participant's five highest consecutive calendar years of total earnings (which
includes bonuses) from the last 10 years of service. The maximum monthly benefit
payable from the Pension Plan is $5,000.
The basic benefit under the Pension Plan is payable upon completion of five
years of vesting service and retirement on or after attaining age 65.
Participants may elect early retirement under the Pension Plan upon completion
of five years of vesting service and the attainment of age 55, and receive the
basic benefit reduced by 0.4167% for each month that the benefit commencement
date precedes the attainment of age 65. A deferred vested benefit is available
to those participants who separate from service before retirement provided the
participant has at least five years of vesting service.
Supplemental Executive Retirement Plan
In October 1994, the Board of Directors approved a new SERP, which is a defined
benefit plan, for the Named Executive Officers, five other current executives
and one former executive. The plan provides for a basic annual benefit payable
upon completion of five years vesting service (April 1, 1994 through March 31,
1999 for Messrs. Dyott, Milano, Anderson, and Davis and July 1, 1997 through
June 30, 2002 for Messr. Reeve) and retirement on or after attaining age 65, or
the present value of such benefit at an earlier date under certain
circumstances. The Named Executive Officers have the following basic annual
benefit payable under this plan at age 65:
Stephen M. Dyott $100,000
Joseph M. Milano $100,000
Malcolm J. Anderson $ 50,000
Timothy M. Davis $ 75,000
Stuart R. Reeve $ 50,000
Such benefits will be paid from our assets (see note 7 to our consolidated
financial statements appearing elsewhere in this Report).
Compensation of Directors
Directors of Holdings and Graphics do not receive a salary or an annual retainer
for their services but are reimbursed for expenses incurred with respect to such
services.
Employment Agreements
On October 19, 1998, Graphics entered into an employment agreement with Stephen
M. Dyott (the "Dyott Employment Agreement"), which replaced the agreement
entered into by Graphics and Mr. Dyott on April 3, 1993.
54
The Dyott Employment Agreement has an initial term of three years. The term
under the Dyott Employment Agreement is automatically extended for one-year
periods absent at least one year's written notice of an intent by either party
not to renew. The Dyott Employment Agreement provides for the payment of an
annual salary, annual bonus and all other employee benefits and perquisites made
available to Graphics' senior executives generally.
Under the Dyott Employment Agreement, if the employee's employment is terminated
by Graphics "without cause" ("cause", as defined in the Dyott Employment
Agreement, means a material breach by the employee of his obligations under the
Dyott Employment Agreement; continued failure or refusal of the employee to
substantially perform his duties to Graphics; a willful and material violation
of Federal or state law applicable to Graphics or the employee's conviction of a
felony or perpetration of a common law fraud; or other willful misconduct that
is injurious to Graphics) or by the employee for "good reason" (which, as
defined in the Dyott Employment Agreement, means a decrease in base pay or a
failure by Graphics to pay material compensation due and payable; a material
diminution of the employee's responsibilities or title; a material change in the
employee's principal employment location; or a material breach by Graphics of a
material term of the Dyott Employment Agreement), the employee will be entitled
to a pro rata portion of the bonus for the year employment was terminated
payable at the time bonuses are generally paid and salary continuation payments
(and certain other benefits) for a period of three years beginning on the date
of termination. The Dyott Employment Agreement contains confidentiality
obligations that survive indefinitely, non-solicitation obligations that end on
the second anniversary of the date employment has ceased and non-competition
obligations that end on the third anniversary of the date employment has ceased.
On July 15, 1998, Graphics entered into severance agreements with Joseph M.
Milano and Timothy M. Davis which provide that in the event the employee's
employment is terminated by Graphics without "cause", as defined above (but also
including as "cause" competition with Graphics), or by the employee for "good
reason", as defined above, the employee will be entitled to a pro rata portion
of the bonus for the year employment was terminated payable at the time bonuses
are generally paid and salary and benefit continuation for three years following
termination. The severance agreements contain confidentiality obligations that
survive indefinitely and non-solicitation and non-competition obligations that
end on the third anniversary of the date employment has ceased.
Graphics is also party to an employment agreement with Malcolm J. Anderson,
which provides for an annual salary, annual bonus and all other employee
benefits and perquisites made available to Graphics' senior executives
generally. The term of Mr. Anderson's agreement shall terminate on the earlier
of (i) March 31, 2002 or (ii) termination of his employment pursuant to the
employment agreement. Such agreement also provides that in the event the
employee's employment is terminated by Graphics without "cause", as defined
above, or by the employee for "good reason", as defined above, the employee will
be entitled to a pro rata portion of the bonus for the year employment was
terminated payable at the time bonuses are generally paid and salary
continuation payments (and certain other benefits) for a period of two years
beginning on the date of termination. The employment agreement contains
confidentiality obligations that survive indefinitely and non-solicitation and
non-competition obligations that end on the second anniversary of the date
employment has ceased. Effective April 1, 2002, Mr. Anderson will be engaged as
a consultant to the Company. Under the terms of Mr. Anderson's consulting
agreement, he will be paid an annual fee of $125,000 for a two year period.
On August 1, 1999, Graphics also entered into a severance agreement with Stuart
Reeve which provides that in the event the employee's employment is terminated
by Graphics without "cause", as defined above (but also including as "cause"
competition with Graphics), or by the employee for "good reason", as defined
above, the employee will be entitled to a pro rata portion of the bonus for the
year employment was terminated payable at the time bonuses are generally paid
and salary and benefit continuation for two years following termination. Such
base salary payments will be reduced, after the first twelve months from the
date of termination, to the extent the employee receives compensation from
another employer. The severance agreement contains confidentiality obligations
that survive indefinitely and non-solicitation and non-competition obligations
that end on the second anniversary of the date employment has ceased.
Compensation Committee Interlocks and Insider Participation
We have not maintained a formal compensation committee since the 1993
Acquisition. Mr. Dyott sets compensation in conjunction with the Board of
Directors.
55
Repriced Options
During Fiscal Year 1998, certain common stock option agreements were modified to
reprice options previously granted with a $50 exercise price to a $.01 exercise
price. Based upon the Board of Directors determination, the new exercise price
was not less than the fair market value of such options. See note 9 to our
consolidated financial statements appearing elsewhere in this Report. The
following table presents information concerning all repricing of options and
SARs held by any executive officer during the last ten completed fiscal years.
Ten Year Option / SAR Repricings
Number of
Securities Market Price Exercise Length of
Underlying of Stock at Price at New Original Option
Options/SARs Time of Time of Exercise Term Remaining at
Repricing Repriced or Repricing or Repricing Price Date of Repricing
Name Date Amended (#) Amendment ($) ($) ($) or Amendment
- ------------------------------ ----------- -------------- --------------- ------------ ----------- -------------------
Stephen M. Dyott 01/16/98 1,761 -- 50 .01 8 yrs. 6 mo.
Chairman, President of 01/16/98 380 -- 50 .01 7 yrs. 6 mo.
Holdings, 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 President and 01/16/98 614 -- 50 .01 7 yrs. 6 mo.
Chief Financial Officer 01/16/98 688 -- 50 .01 6 yrs. 5 mo.
01/16/98 102 -- 50 .01 5 yrs. 0 mo.
Malcolm J. Anderson 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
President of Graphics 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
Timothy M. Davis 01/16/98 290 -- 50 .01 8 yrs. 6 mo.
Senior Vice President/ 01/16/98 535 -- 50 .01 6 yrs. 5 mo.
Administration, Secretary 01/16/98 255 -- 50 .01 5 yrs. 0 mo.
and General Counsel
Stuart R. Reeve 01/16/98 91 -- 50 .01 8 yrs. 6 mo.
Executive Vice President, 01/16/98 140 -- 50 .01 7 yrs. 6 mo.
Operations of Graphics 01/16/98 420 -- 50 .01 6 yrs. 5 mo.
Larry R. Williams 01/16/98 125 -- 50 .01 8 yrs. 6 mo.
Executive Vice President, 01/16/98 526 -- 50 .01 6 yrs. 5 mo.
Purchasing of Graphics
Patrick W. Kellick 01/16/98 257 -- 50 .01 8 yrs. 6 mo.
Senior Vice President/ 01/16/98 105 -- 50 .01 6 yrs. 5 mo.
Corporate Controller and
Assistant Secretary
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of March 31, 2001, concerning the
persons having beneficial ownership of more than five percent of the capital
stock of Holdings and the beneficial ownership thereof by each director and
Named Executive Officer of Holdings and by all directors and executive officers
of Holdings as a group. Each holder below has sole voting power and sole
investment power over the shares designated below.
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 41.5 2,727 52.2
MSCP III Entities (a)
1221 Ave. of the Americas
New York, NY 10020 23,333 16.3 1,070 20.5
First Plaza Group Trust
c/o Mellon Bank, N.A.
1 Mellon Bank Center
Pittsburgh, PA 15258 17,000 11.9 780 14.9
Ell & Co.
c/o The Northern Trust Company
40 Broad Street
New York, NY 10004 6,537 4.6 300 5.7
Directors and Named Executive Officers:
Stephen M. Dyott (b) 12,678 8.5 315 5.7
Joseph M. Milano (c) 5,967 4.1 175 3.2
Malcolm J. Anderson (d) 1,692 1.2 -- --
Timothy M. Davis (e) 2,984 2.1 88 1.7
Stuart R. Reeve (f) 1,630 1.1 -- --
James S. Hoch -- -- -- --
Eric T. Fry -- -- -- --
All current directors and executive officers
as a group (g) 27,917 18.0 578 10.0
(a) Includes Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III
892 Investors, L.P.
(b) Includes 5,025 common stock options and 292 preferred stock options exercisable within 60 days.
(c) Includes 2,726 common stock options and 175 preferred stock options exercisable within 60 days.
(d) Includes 814 common stock options exercisable within 60 days.
(e) Includes 1,342 common stock options and 88 preferred stock options exercisable within 60 days.
(f) Includes 770 common stock options exercisable within 60 days.
(g) Includes 12,106 common stock options and 555 preferred stock options exercisable within 60 days.
57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1993 Acquisition
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of
Merger dated March 12, 1993, as amended (the "Merger Agreement"), between
Communications and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition
Corp. was merged with and into Communications (the "1993 Acquisition").
Acquisition Corp. was formed by The Morgan Stanley Leveraged Equity Fund II,
L.P. ("MSLEF II"), certain institutional investors, and certain members of
management (the "Purchasing Group") for the purpose of acquiring a majority
interest in Communications. Acquisition Corp. acquired a substantial and
controlling majority interest in Communications in exchange for $40 million in
cash. In the 1993 Acquisition, Communications continued as the surviving
corporation and the separate corporate existence of Acquisition Corp. was
terminated.
Pursuant to the Merger Agreement, (i) MSLEF II and the Purchasing Group made a
$40 million equity investment in Holdings and acquired (a) 90% of the
outstanding Holdings' common stock and (b) all the outstanding shares of the
preferred stock of Holdings, with a total preference of $40 million and which,
under certain circumstances, is convertible into shares of Holdings' common
stock; and (ii) Golder, Thoma, & Cressey, an Illinois limited partnership
("GTC") and its affiliates received 4,987 shares of Holdings' common stock.
MSLEF II is an investment fund affiliated with Morgan Stanley Dean Witter and
Co. ("MSDW"). MSDW is a preeminent global financial services firm. In addition,
two of the current directors of Holdings are employees of Morgan Stanley & Co.
Incorporated, an affiliate of MSLEF II and also a subsidiary of MSDW. As a
result of these relationships, MSDW may be deemed to control the management and
policies of Graphics and Holdings. In addition, MSDW may be deemed to control
matters requiring shareholders' approval, including the election of all
directors, the adoption of amendments to the Certificates of Incorporation of
Holdings and Graphics and the approval of mergers and sales of all or
substantially all of Graphics' and Holdings' assets.
Stockholders' Agreement. In connection with the Shakopee Merger, Holdings, MSLEF
II, other entities affiliated with MSDW and the other stockholders of Holdings
entered into an amended and restated stockholders' agreement, dated as of August
14, 1995. The stockholders' agreement includes provisions requiring the delivery
of certain shares of Holdings' common stock from the "Purchasers", as defined in
the stockholders' agreement, which includes MSLEF II, certain institutional
investors and members of management, to Holdings, depending upon the return
realized by the Purchasers on their investment, and thereafter from Holdings to
the "Existing Holders", as defined in the stockholders' agreement, which
includes the stockholders' of Holdings immediately prior to the 1993
Acquisition. Depending upon the returns realized by the Purchasers on their
investment, their interest in the Holdings' common stock could be reduced and
the interest of the Existing Holders could be increased. The stockholders'
agreement gives the Existing Holders, the right to designate a director of
Holdings and the entities affiliated with MSDW also the right to designate a
director. The stockholders' agreement contains rights of first refusal with
regard to the issuance by Holdings of equity securities and sales by the
stockholders of equity securities of Holdings owned by them, specified tag along
and drag along provisions and registration rights. The stockholders' agreement
also restricts our ability to enter into affiliate transactions unless the
transaction is fair and reasonable, with terms no less favorable to us than if
the transaction was completed on an arm's length basis.
Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective July 27,
1989. Under the terms of the agreement, Graphics (whose income is consolidated
with that of Holdings for federal income tax purposes) is liable to Holdings for
amounts representing federal income taxes calculated on a "stand-alone basis".
Each year Graphics pays to Holdings the lesser of (i) Graphics' federal tax
liability computed on a stand-alone basis and (ii) its allocable share of the
federal tax liability of the consolidated group. Accordingly, Holdings is not
currently reimbursed for the separate tax liability of Graphics to the extent
Holdings' losses reduce consolidated tax liability. Reimbursement for the use of
such Holdings' losses will occur when the losses may be used to offset Holdings'
income computed on a stand-alone basis. Graphics has also agreed to reimburse
Holdings in the event of any adjustment (including interest or penalties) to
consolidated income tax returns based upon Graphics' obligations with respect
thereto. No reimbursement obligation currently exists between Graphics and
Holdings. Also under the terms of the tax sharing agreement, Holdings has agreed
to reimburse Graphics for refundable federal income tax equal to an amount which
would be refundable to Graphics had Graphics filed separate federal income tax
returns for all years under the agreement. Graphics and Holdings have also
agreed to treat foreign, state and local income and franchise taxes for which
there is consolidated or combined reporting in a manner consistent with the
treatment of federal income taxes as described above.
58
Other
MS&Co. acted as placement agent in connection with the original private
placement of the Notes and received a placement fee of $5.6 million in
connection therewith. MS&Co. is affiliated with entities that beneficially own a
substantial majority of the outstanding shares of capital stock of Holdings.
MS&Co. had a $5 million participation in the old term loan facility and received
fees of approximately $0.3 million in connection therewith. In addition, Morgan
Stanley Senior Funding, Inc. originally had a participation of approximately $35
million in the Bank Credit Agreement and received gross fees of approximately
$0.5 million in connection therewith. On June 8, 1998, Morgan Stanley Senior
Funding, Inc. reduced its participation in such credit facility to $11.5
million. Currently, Morgan Stanley Senior Funding, Inc. has a $9.6 million
participation in such credit facility.
59
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, 2001 and 2000
For the Years Ended March 31, 2001, 2000 and 1999:
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:
Condensed Financial Statements (parent company only)
for the years ended March 31, 2001, 2000 and 1999
and as of March 31, 2001 and 2000 ...................................62
II. Valuation and qualifying accounts....................................67
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be
set-forth therein is included in the Consolidated Financial Statements
or notes thereto.
3. Exhibits: The exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
Exhibit No. Description
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as amended to
date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of August 15,
1995, among Graphics, Holdings and NationsBank of Georgia,
National Association, as Trustee**
10.1 Credit Agreement, dated as of August 15, 1995 and Amended and
Restated as of May 8, 1998, among Holdings, Graphics, GE Capital
Corporation as Documentation Agent, Morgan Stanley Senior
Funding, Inc. as Syndication Agent, Bankers Trust Company as
Administrative Agent and the parties signatory thereto++++
10.1(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics, GE
Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust
Company as Administrative Agent and the parties signatory
thereto++++
10.1(b) February 3, 1999, Second Amendment to Amended and Restated
Credit Agreement dated as of May 8, 1998, among Holdings,
Graphics, GE Capital Corporation as Documentation Agent,
Morgan Stanley Senior Funding, Inc. as Syndication Agent,
Bankers Trust Company as Administrative Agent and the parties
signatory thereto****
60
10.1(c) November 9, 1999, Third Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics, GE
Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust
Company as Administrative Agent and the parties signatory
thereto+++
10.1 (d) January 26, 2001, Fourth Amendment of Amended and Restated
Credit Agreement dated as of May 8, 1998, among Holdings,
Graphics, GE Capital Corporation as Documentation Agent, Morgan
Stanley Senior Funding, Inc. as Syndication Agent, Bankers Trust
Company as Administrative Agent and the parties signatory
thereto+++++
10.2 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3 Employment Agreement, dated as of October 19, 1998, between
Graphics and Stephen M. Dyott******
10.4 Severance Letter, dated August 1, 1999, between Graphics and
Stuart Reeve******
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano+
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis+
10.7 Employment Agreement, dated as of August 1, 1999, between
Graphics and M. J. Anderson*****
10.8 Amended and Restated Stockholders' Agreement, dated as of August
14, 1995, among Holdings, the Morgan Stanley Leveraged Equity
Fund II, L.P., Morgan Stanley Capital Partners III, L.P. and the
additional parties named therein**
10.8(a) Amendment No. 1, dated January 16, 1998, to Amended and Restated
Stockholders' Agreement dated as of August 14, 1995, among
Holdings, the Morgan Stanley Leveraged Equity Fund II, L.P.,
Morgan Stanley Capital Partners III, L.P., and the additional
parties named herein++++
10.9 Stock Option Plan of Holdings++
10.10 Term Loan Agreement, dated as of June 30, 1997, among Holdings,
Graphics, BT Commercial Corporation, as Agent, Bankers Trust
Company, as Issuing Bank, and the parties signatory thereto++++
10.11 Holdings Common Stock Option Plan++++
10.12 Holdings Preferred Stock Option Plan++++
12.1 Statement Re: Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries
- ----------
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 - Commission file number 33-97090.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-97090.
+++ Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998 - Commission file number 33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 - Commission file number 33-97090.
***** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 - Commission file number 33-97090.
+++++ Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 2000 - Commission file number 33-97090.
****** Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 2000 - 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 2001:
1. Form 8-K filed with the Securities and Exchange Commission on February
2, 2001 under Item 5 to announce ACG's financial results for the
twelve month period ended December 31, 2000.
ACG did not file any other reports on Form 8-K during the three months
ended March 31, 2001.
61
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Balance Sheets
(Dollars in thousands)
March 31,
----------------------------------------
2001 2000
------------- -------------
Assets
------
Current assets:
Receivable from subsidiary $ 466 377
Income taxes receivable 41 63
------------- -------------
Total assets $ 507 440
============= =============
Liabilities and Stockholders' Deficit
-------------------------------------
Liabilities of subsidiary in excess of assets $ 86,374 109,829
------------- -------------
Total liabilities 86,374 109,829
Stockholders' deficit:
Common stock, voting, $.01 par value, 5,852,223
shares authorized, 143,399 shares issued and outstanding 1 1
Preferred stock, $.01 par value, 15,823 shares authorized,
3,617 shares Series AA convertible preferred stock issued
and outstanding, $39,442,551 liquidation preference, and
1,606 shares Series BB convertible preferred stock issued
and outstanding, $17,500,000 liquidation preference -- --
Additional paid-in capital 58,370 58,303
Accumulated deficit (141,062) (165,485)
Other accumulated comprehensive loss, net of tax (3,176) (2,208)
------------- -------------
Total stockholders' deficit (85,867) (109,389)
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' deficit $ 507 440
============= =============
See accompanying notes to condensed financial statements.
62
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Operations
(Dollars in thousands)
Year ended March 31,
----------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Equity in income (loss) of subsidiary $ 24,423 9,470 (12,468)
------------ ------------ ------------
Net income (loss) $ 24,423 9,470 (12,468)
============ ============ ============
See accompanying notes to condensed financial statements.
63
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Condensed Statements of Cash Flows
(Dollars in thousands)
Year ended March 31,
----------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
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.
64
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
Description of ACG Holdings, Inc.
Our company was formed in April 1989 under the name GBP Holdings, Inc. to effect
the purchase of all the capital stock of GBP Industries, Inc. from its
stockholders in a leveraged buyout transaction. In October 1989, GBP Holdings,
Inc. changed its name to Sullivan Holdings, Inc. and GBP Industries, Inc.
changed its name to Sullivan Graphics, Inc. Effective June 1993, Sullivan
Holdings, Inc. changed its name to Sullivan Communications, Inc. Effective July
1997, Sullivan Communications, Inc. changed its name to ACG Holdings, Inc.
("Holdings") and Sullivan Graphics, Inc. changed its name to American Color
Graphics, Inc. ("Graphics").
Holdings has no operations or significant assets other than its investment in
Graphics. Holdings is dependent upon distributions from Graphics to fund its
obligations. Under the terms of its debt agreements at March 31, 2001, Graphics'
ability to pay dividends or lend to Holdings is either restricted or prohibited,
except that Graphics may pay specified amounts to Holdings to fund the payment
of Holdings' obligations pursuant to a tax sharing agreement (see note 4).
On April 8, 1993 (the "Acquisition Date"), pursuant to an Agreement and Plan of
Merger dated as of March 12, 1993, as amended (the "Merger Agreement"), between
Holdings and SGI Acquisition Corp. ("Acquisition Corp."), Acquisition Corp. was
merged with and into Holdings (the "Acquisition"). Acquisition Corp. was formed
by The Morgan Stanley Leveraged Equity Fund II, L.P., certain institutional
investors, and certain members of management (the "Purchasing Group") for the
purpose of acquiring a majority interest in Holdings. Acquisition Corp. acquired
a substantial and controlling majority interest in Holdings in exchange for $40
million in cash. In the Acquisition, Holdings continued as the surviving
corporation and the separate corporate existence of Acquisition Corp. was
terminated.
In connection with the Acquisition, the existing consulting agreement with the
managing general partner of Holdings' majority stockholder was terminated and
the related liabilities of Holdings were canceled. The agreement required
Holdings to make minimum annual payments of $1 million for management advisory
services subject to limitations in Graphics' debt agreements. No amounts were
paid during the periods presented in these condensed financial statements.
1. Basis of Presentation
The accompanying condensed financial statements (parent company only)
include the accounts of Holdings and its investments in Graphics
accounted for in accordance with the equity method, and do not present
the financial statements of Holdings and its subsidiary on a
consolidated basis. These parent company only financial statements
should be read in conjunction with ACG's consolidated financial
statements. The Acquisition was accounted for under the purchase method
of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16").
2. Guarantees
As set forth in ACG's consolidated financial statements, a substantial
portion of Graphics' long-term obligations has been guaranteed by
Holdings.
Holdings has guaranteed Graphics' indebtedness under the Bank Credit
Agreement, which guarantee is secured by a pledge of all of Graphics'
stock. Borrowings under the Bank Credit Agreement are secured by
substantially all assets of Graphics. Holdings is restricted under its
guarantee of the Bank Credit Agreement from, among other things,
entering into mergers, acquisitions, incurring additional debt, or
paying cash dividends.
65
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACG HOLDINGS, INC.
Parent Company Only
Notes to Condensed Financial Statements
On August 15, 1995, Graphics issued $185 million of Senior Subordinated
Notes (the "Notes") bearing interest at 12 3/4% and maturing August 1,
2005. The Notes are guaranteed on a senior subordinated basis by
Holdings and are subordinate to all existing and future senior
indebtedness, as defined, of Graphics.
3. Dividends from Subsidiaries and Investees
No cash dividends were paid to Holdings from any consolidated
subsidiaries, unconsolidated subsidiaries or investees accounted for by
the equity method during the periods reflected in these condensed
financial statements.
4. Tax Sharing Agreement
Holdings and Graphics are parties to a tax sharing agreement effective
July 27, 1989. Under the terms of the agreement, Graphics (whose income
is consolidated with that of Holdings for federal income tax purposes)
is liable to Holdings for amounts representing federal income taxes
calculated on a "stand-alone basis". Each year Graphics pays to
Holdings the lesser of (i) Graphics' federal tax liability computed on
a stand-alone basis and (ii) its allocable share of the federal tax
liability of the consolidated group. Accordingly, Holdings is not
currently reimbursed for the separate tax liability of Graphics to the
extent Holdings' losses reduce consolidated tax liability.
Reimbursement for the use of such Holdings' losses will occur when the
losses may be used to offset Holdings' income computed on a stand-alone
basis. Graphics has also agreed to reimburse Holdings in the event of
any adjustment (including interest or penalties) to consolidated income
tax returns based upon Graphics' obligations with respect thereto.
Also, under the terms of the tax sharing agreement, Holdings has agreed
to reimburse Graphics for refundable federal income taxes equal to an
amount which would be refundable to Graphics had Graphics filed
separate federal income tax returns for all years under the agreement.
Graphics and Holdings have also agreed to treat foreign, state and
local income and franchise taxes for which there is consolidated or
combined reporting in a manner consistent with the treatment of federal
income taxes as described above.
5. Refinancing Transaction
ACG has a $145 million credit facility with a syndicate of lenders (the
"Bank Credit Agreement"), providing for a $70 million revolving credit
facility which is not subject to a borrowing base limitation (the
"Revolving Credit Facility") maturing on March 31, 2004, a $25 million
amortizing term loan facility maturing on March 31, 2004 (the "A Term
Loan Facility") and a $50 million amortizing term loan facility
maturing on March 31, 2005 (the "B Term Loan Facility"). In addition,
ACG recorded an extraordinary loss related to early extinguishment of
debt of $4.1 million, net of zero taxes, associated with the write-off
of deferred financing costs related to refinanced indebtedness in the
fiscal year ended March 31, 1999.
Interest under the Bank Credit Agreement is floating based upon
existing market rates plus agreed upon margin levels. In addition, ACG
is obligated to pay specific commitment and letter of credit fees. Such
margin levels and fees reduce over the term of the agreement subject to
the achievement of certain Leverage Ratio measures.
Borrowings under the Bank Credit Agreement are secured by substantially
all of ACG's assets. In addition, Holdings has guaranteed the
indebtedness under the Bank Credit Agreement, which guarantee is
secured by a pledge of all of Graphics' and its subsidiaries' stock.
The new agreement (1) requires satisfaction of certain financial
covenants including Minimum Consolidated EBITDA, Consolidated Interest
Coverage Ratio and Leverage Ratio requirements, (2) requires
prepayments in certain circumstances including excess cash flows,
proceeds from asset dispositions in excess of prescribed levels and
certain capital structure transactions and (3) contains various
restrictions and limitations on the following items: (a) the level of
capital spending, (b) the incurrence of additional indebtedness, (c)
mergers, acquisitions, investments and similar transactions and (d)
dividends and other distributions. In addition, the agreement includes
various other customary affirmative and negative covenants. Graphics'
ability to pay dividends or lend funds to Holdings is restricted.
66
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ACG HOLDINGS, INC.
Balance at Additions Balance
Beginning Charged to Other at End of
of Period Expense Write-offs Adjustments Period
---------------- ------------- ---------------- ----------------- -----------
(in thousands)
Fiscal Year ended March 31, 2001
Allowance for doubtful accounts $ 2,945 1,452 (492) -- $ 3,905
Reserve for inventory obsolescence $ 489 189 (193) -- $ 485
Income tax valuation allowance $ 36,081 -- -- (a)(12,612) $ 23,469
Fiscal Year ended March 31, 2000
Allowance for doubtful accounts $ 2,860 783 (698) -- $ 2,945
Reserve for inventory obsolescence $ 588 (99) -- -- $ 489
Income tax valuation allowance $ 41,460 -- -- (b) (5,379) $ 36,081
Fiscal Year ended March 31, 1999
Allowance for doubtful accounts $ 2,112 2,510 (1,762) -- $ 2,860
Reserve for inventory obsolescence $ 265 374 (51) -- $ 588
Income tax valuation allowance $ 37,222 -- -- (c) 4,238 $ 41,460
(a) The decrease in the valuation allowance primarily relates to current year
income for which no tax expense has been recorded and to projected future
use of net operating loss carryforwards.
(b) The decrease in the valuation allowance primarily relates to current year
income for which no tax expense has been recorded.
(c) The increase in the valuation allowance primarily relates to current year
losses for which no tax benefit has been recorded.
67
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 26, 2001
------------------------------------- -------------
Stephen M. Dyott
Chairman, President and Chief Executive Officer
ACG Holdings, Inc.
Chairman and Chief Executive Officer
American Color Graphics, Inc.
Director of ACG Holdings, Inc. and American Color Graphics, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joseph M. Milano Executive Vice President June 26, 2001
- ------------------------------------- Chief Financial Officer -------------
(Joseph M. Milano)
/s/ Patrick W. Kellick Senior Vice President/ June 26, 2001
- ------------------------------------- Corporate Controller -------------
(Patrick W. Kellick) Assistant Secretary
(Principal Accounting Officer)
/s/ James S. Hoch Director June 26, 2001
- ------------------------------------- -------------
(James S. Hoch)
/s/ Eric T. Fry Director June 26, 2001
- ------------------------------------- -------------
(Eric T. Fry)
68
ACG HOLDINGS, INC.
Annual Report on Form 10-K
Fiscal Year Ended March 31, 2001
Index to Exhibits
Exhibit No. Description
----------- ----------
3.1 Certificate of Incorporation of Graphics, as amended to date*
3.2 By-laws of Graphics, as amended to date*
3.3 Restated Certificate of Incorporation of Holdings, as amended
to date
3.4 By-laws of Holdings, as amended to date*
4.1 Indenture (including the form of Note), dated as of August 15,
1995, among Graphics, Holdings and NationsBank of Georgia,
National Association, as Trustee**
10.1 Credit Agreement, dated as of August 15, 1995 and Amended and
Restated as of May 8, 1998, among Holdings, Graphics, GE
Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust
Company as Administrative Agent and the parties signatory
thereto++++
10.1(a) June 8, 1998, First Amendment to Amended and Restated Credit
Agreement dated as of May 8, 1998, among Holdings, Graphics,
GE Capital Corporation as Documentation Agent, Morgan Stanley
Senior Funding, Inc. as Syndication Agent, Bankers Trust
Company as Administrative Agent and the parties signatory
thereto++++
10.1(b) February 3, 1999, Second Amendment to Amended and Restated
Credit Agreement dated as of May 8, 1998, among Holdings,
Graphics, GE Capital Corporation as Documentation Agent,
Morgan Stanley Senior Funding, Inc. as Syndication Agent,
Bankers Trust Company as Administrative Agent and the parties
signatory thereto****
10.1(c) November 9, 1999, Third Amendment to Amended and Restated
Credit Agreement dated as of May 8, 1998, among Holdings,
Graphics, GE Capital Corporation as Documentation Agent,
Morgan Stanley Senior Funding, Inc. as Syndication Agent,
Bankers Trust Company as Administrative Agent and the parties
signatory thereto+++
10.1(d) January 26, 2001, Fourth Amendment of Amended and Restated
Credit Agreement dated as of May 8, 1998, among Holdings,
Graphics, GE Capital Corporation as Documentation Agent,
Morgan Stanley Senior Funding, Inc. as Syndication Agent,
Bankers Trust Company as Administrative Agent and the parties
signatory thereto+++++
10.2 Resignation letter, dated as of September 18, 1996, between
Graphics and James T. Sullivan***
10.3 Employment Agreement, dated as of October 19, 1998, between
Graphics and Stephen M. Dyott******
10.4 Severance Letter, dated August 1, 1999, between Graphics and
Stuart Reeve******
10.5 Severance Letter, dated July 15, 1998, between Graphics and
Joseph M. Milano+
10.6 Severance Letter, dated July 15, 1998, between Graphics and
Timothy M. Davis+
10.7 Employment Agreement, dated as of August 1, 1999, between
Graphics and M. J. Anderson*****
10.8 Amended and Restated Stockholders' Agreement, dated as of
August 14, 1995, among Holdings, the Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III,
L.P. and the additional parties named therein**
10.8(a) Amendment No. 1, dated January 16, 1998, to Amended and
Restated Stockholders' Agreement dated as of August 14, 1995,
among Holdings, the Morgan Stanley Leveraged Equity Fund II,
L.P., Morgan Stanley Capital Partners III, L.P., and the
additional parties named herein++++
10.9 Stock Option Plan of Holdings++
10.10 Term Loan Agreement, dated as of June 30, 1997, among
Holdings, Graphics, BT Commercial Corporation, as Agent,
Bankers Trust Company, as Issuing Bank, and the parties
signatory thereto++++
10.11 Holdings Common Stock Option Plan++++
10.12 Holdings Preferred Stock Option Plan++++
12.1 Statement Re: Computation of Ratio of Earnings to Fixed
Charges
21.1 List of Subsidiaries
69
- -----------
* Incorporated by reference from Amendment No. 2 to Form S-1 filed on
October 4, 1993 - Registration number 33-65702.
+ Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 - Commission file number 33-97090.
** Incorporated by reference from Form S-4 filed on September 19, 1995 -
Registration number 33-97090.
++ Incorporated by reference from Amendment No. 2 to Form S-4 filed on
November 22, 1995 - Registration number 33-97090.
*** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 - Commission file number 33-97090.
+++ Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 - Commission file number 33-97090.
**** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998 - Commission file number 33-97090.
++++ Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 - Commission file number 33-97090.
***** Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999 - Commission file number 33-97090.
+++++ Incorporated by reference from the Quarterly Report on Form 10-Q for
the quarter ended December 31, 2000 - Commission file number 33-97090.
****** Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended March 31, 2000 - Commission file number 33-97090.
70