10-K 1 f10k_061801.txt FORM 10-K ACG HOLDINGS, INC. 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 ----------- 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